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WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER?

Takeaway: The Indian rupee may finally catch a bid in a way that is negative for Indian equities and INR-denominated fixed income (HINT: rate hikes).

SUMMARY BULLETS:

 

  • We believe future RBI Governor Dr. Raghuram Rajan will be more committed to arresting the rupee’s decline(s) to new all-time lows given that he helped architect a government push to combat rupee weakness largely through deregulation-induced FDI flows over the TTM.
  • No doubt, the new RBI leadership will have the same reservations about aggressively hiking rates as was consistently noted under Subbarao’s leadership: in the most recently reported quarter (1Q and 2Q, respectively), India’s real GDP growth came in at a full standard deviation below the trailing 3Y average; India’s benchmark WPI inflation reading came in at -2.3x standard deviations below its 3Y mean.  A blasphemous time to hike rates indeed…
  • Still it would appear to us that Indian policymakers are increasingly cognizant of the dangers to future growth posed by an increasingly-hawkish cost-push inflation outlook (via wholesale prices AND the cost of foreign debt capital). Thus, we think the probability of rate hikes in 2H13 is rising at an accelerating pace, which, if materialized, should continue to weigh on India’s beleaguered equity market (down -3.9% MoM vs. a regional median delta of +1.6%) and its local currency fixed income markets over the intermediate term.
  • All told, a counter-trend rebound in the rupee appears increasingly likely, though nothing sustainable enough to get excited about as a core long idea – especially in the context of our top-down #EmergingOutflows and #AsianContagion theses (email us if you'd like to get up to speed on either view).

 

DR. RAJAN TO THE [RUPEE'S] RESCUE?

Today it was announced that the current chief economic advisor to India’s Finance Ministry, Raghuram Rajan, will succeed Governor Duvvuri Subbarao atop the RBI when the latter steps down next month.

 

Dr. Rajan (MIT PhD), who is a former chief economist with the IMF and a former professor at the University of Chicago Booth School of Business, will no doubt further the Western academic economist bent at the RBI. That said, however, we do believe he will be more committed to arresting the rupee’s decline(s) to new all-time lows given that he helped architect a government push to combat pervasive rupee weakness (down -10.9% over the past 3M; 2nd worst among all EMs) largely through deregulation-induced FDI flows over the TTM.

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 1

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 2

 

To accomplish what are likely to be his stated goals on the currency front, Dr. Rajan must be committed to using the RBI’s monetary policy toolkit more aggressively than the outgoing Subbarao has been willing to do thus far. To date, the RBI has favored capital account tinkering in the form of regulating banks’ FX positions and current account tinkering in the form of gold import reductions – both in lieu of hiking interest rates.

 

In fact, the RBI has been on a clear easing bias since APR ’12, having lowered its benchmark repo rate a cumulative 175bps since then, with 75bps of the aforementioned sum coming in calendar 2013. We’d argue that their easy monetary policy, in large part, perpetuated India’s bloated current account deficit, which has recently widened to record levels and weighed on the rupee.

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 3

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 4

 

SHORT-TERM PAIN FOR LONG-TERM GAIN?

No doubt, the new RBI leadership will have the same reservations about aggressively hiking rates as was consistently noted under Subbarao’s leadership: in the most recently reported quarter (1Q and 2Q, respectively), India’s real GDP growth came in at a full standard deviation below the trailing 3Y average; India’s benchmark WPI inflation reading came in at -2.3x standard deviations below its 3Y mean.  A blasphemous time to hike rates indeed…

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 5

 

Still it would appear to us that Indian policymakers are increasingly cognizant of the dangers to future growth posed by an increasingly-hawkish cost-push inflation outlook (via wholesale prices AND the cost of foreign debt capital). Thus, we think the probability of rate hikes in 2H13 is rising at an accelerating pace, which, if materialized, should continue to weigh on India’s beleaguered equity market (down -3.9% MoM vs. a regional median delta of +1.6%) and its local currency fixed income markets over the intermediate term.

 

WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER? - 6

 

All told, a counter-trend rebound in the rupee appears increasingly likely, though nothing sustainable enough to get excited about as a core long idea – especially in the context of our top-down #EmergingOutflows and #AsianContagion theses (email us if you'd like to get up to speed on either view).

 

The reflexive interplay between growth, inflation, policy and macro market prices continues...

 

Darius Dale

Senior Analyst


[PODCAST] KEITH ON "THE LARRY KUDLOW SHOW"

Hedgeye Risk Management CEO Keith McCullough joined Larry Kudlow on his nationally syndicated radio show this past weekend to discuss his latest thoughts on the market and the economy. Click below to listen to the interview.

 


MGM 2Q 2013 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL

  • BETTER:  While MGM missed our Street high estimates, the company beat consensus even before considering low hold.  We estimate low hold cost the wholly owned properties $20-25 million in EBITDA and Aria $10-15 million. Forward commentary was positive.

 

MGM COTAI OPENING

  • BETTER:  Nicely ahead of schedule with excavation largely completed. Target opening date of early 2016.
  • PREVIOUSLY:  "Remains on schedule for opening in the first half of 2016."

MD/MA/TORONTO

  • SAME:  Public presentation of the Prince George casino will be in late Sept/Oct.  The final decision for MD will be given by year end.  The final decision for Massachusetts will be April 2014.
  • PREVIOUSLY:  
    • "In Maryland, we have been preparing our RFP for Prince George's County, which we will submit by the end of next week." 
    • "In Massachusetts, we are honored by Mayor Sarno's confidence in selecting MGM to bring a world-class urban resort to Springfield. This is an important milestone in the process as the project now seeks City Council approval after which a referendum is possible as early as July, and then ultimately, we will compete at the state level for the Western Region license."
    • "In Toronto, we and our partner, Cadillac Fairview, believe in our vision for an integrated resort in Toronto and we continue to work towards that development opportunity."

STRIP TRENDS

  • BETTER:  Las Vegas recovery continues, led by the luxury properties.  Monte Carlo also had a good quarter. 
  • PREVIOUSLY:
    • "Visitation to Las Vegas remained strong and macro trends are improving here helping to drive the recovery."
    • "It appears to us that Las Vegas, the market hit hardest by the recession, is nicely recovering and that its performance will likely outstrip the existing regional markets for the foreseeable future."
    • "Our luxury properties continue to lead the way in the market, driven by increased convention room nights and the continued success of the high-end casino business."
    • "Organizational changes were made to streamline international and national marketing teams to better service our customers and drive profitability."

STRIP REVPAR

  • BETTER:  2Q REVPAR came in at 2.5%.  3Q REVPAR guidance is 3%. Aria had the best REVPAR in its history at $194. 
  • PREVIOUSLY:  
    • "We expect a strong convention calendar, which will drive RevPAR to be up approximately 2% year over year."
    • "Room revenues and ADRs increased by about 2% in the quarter. While occupancy was down slightly, occupied room nights increased by 1% at our Strip properties as the remodeled rooms at the MGM Grand are now on line."
    • "We are seeing strong returns on our room remodel investments as evidenced by Bellagio and MGM Grand where we were able to maintain high occupancy levels and drive increased room rates."
    • "We always knew the second quarter would be a little bit easier comp."

CONVENTION OUTLOOK

  • BETTER:  2013 convention room nights ADR is up YoY.  ADR pace for 2014 is up mid single digits.  Mgmt mentioned that 51% of forward bookings have been in the corporate/incentive segment, which has higher margins - double the pace historically. 
  • PREVIOUSLY:  
    • "The convention business in Las Vegas this year will be okay. It won't be great citywide, but next year is a big year citywide. So, when you have the kind of citywides we're predicting in 2014, that will accrue to the benefit of, of course, Mandalay, but also to the properties that need Mandalay to have that business Luxor, Excalibur and also because of the LVCBA Circus Circus. So the cores this year are doing well, but I would expect next year with a better convention business citywide that they will do better."
    • "On the convention side, of course, our leisure properties with significant convention space mainly sold out in peak season have a much easier time at raising rates."

MGM CHINA DIVIDENDS

  • SAME:  Board will continue to consider a special dividend from time to time.
  • PREVIOUSLY:  "MGM China also put in place a regular dividend distribution policy for up to 35% of its annual profits to be paid semi-annually. The board will also consider, going forward, special dividends from time to time."

ARIA

  • WORSE:  Low table hold (-$10MM EBITDA impact) hurt results.  2Q also had a difficult comp. 
  • PREVIOUSLY:  "We continue to see growth in the food and beverage with a very strong quarter in catering and banquets driven by growth in the convention segment and recent dining enhancements to the property such as Javier's Mexican restaurant."

MANDARIN

  • BETTER:  Sold 45 units in June and 21 units in July. Currently, they have 89 units left in their inventory.
  • PREVIOUSLY:  "We've actually seen in the last few months some pickup particularly in the remaining Mandarin inventory in terms of sales."

MGM CHINA MASS

  • SAME:  Mass segment performed well across all customer classes.
  • PREVIOUSLY:  "We're encouraged to see not only our premium area such as our supreme and platinum lounges continue to perform well but also our general main floor product produced record results."

LV SEAT CAPACITY

  • SAME:  Flight capacities are trending higher. Mgmt hopes this will bring more international visitors.
  • PREVIOUSLY:  "The seat capacities and especially in the summer is going to be up a few percent, which is very positive for us. Anything looking beyond two to three months, it's really hard to look at since the airlines are constantly changing their programs."

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    MGM 2Q 2013 CONFERENCE CALL

    Strong quarter even stronger considering low hold likely reduced wholly owned EBITDA by $20-25 million and Aria EBITDA by $10-15 million.

     

     

    "We continue to see broad-based Las Vegas improvement as our Strip EBITDA increased 15%, driven by a 7% increase in casino revenues and a 5% increase in hotel revenues. A strong performance at MGM China led to another quarter of record results, driven by higher volumes in both mass market and VIP."

     

    -Jim Murren, MGM Resorts International Chairman and CEO. 

     

    CONF CALL

    • Continuation of the LV recovery
    • MGM and Bellagio yielding high cash flows; Mandalay Bay will be the next beneficiary with new nightclubs and shows
    • Next year, New York New York and Monte Carlo will benefit from new retail offerings
    • Significant growth in database; higher bookings 
    • MGM Cotai - well underway; excavation largely completed; nicely ahead of schedule
    • Will develop an Asian Mansion at MGM Cotai
    • Prince George casino:  date for public presentation will be in late Sept/Oct; final decision by year end.
    • Massachusetts:  final decision in April 2014
    • Very active in Japan; growing consensus that gaming will be expanded there
    • Korea:  view is becoming more favorable
    • Regional:  highly competitive, increasingly crowded
    • Believes Vegas will outperform regional markets
    • Convention remain in-line; mix grew slightly rate grew mid single digits
    • 3Q LV REVPAR guidance:  +3%
    • 2Q Strip convention bookings:  2nd highest in history for future bookings
    • 2014 and beyond bookings are getting stronger; 2014 pace remains up double digits
    • Up at least high single digits each quarter next year when you're looking at the non-CON/AGG piece of the business.
    • MGM China Board will consider special dividend from time to time
    • CityCenter:  $1.85 BN in senior notes; $365MM cash; $72MM cash remaining from condo units
    • 2Q corp expense:  above guidance due to ongoing developments 
    • 3Q Corp expense guidance:  $45-50MM
    • 3Q stock comp:  $6-7MM
    • 3Q depreciation will be consistent with 2Q
    • 3Q gross interest expense:  $210MM ($5MM- MGM China, $9MM non-cash amortization)
    • Aria:  -$10MM EBITDA impact by low hold; best REVPAR ever at $194
    • Crystals:  up 21% YoY, best quarter ever
    • LV real estate market improving; 45 units at Mandarin Oriental, 7 units at Veer; sold another 21 units at Mandarin Oriental
    • MGM China:  New VIP operator in April and new 2nd floor benefiting results
      • Slot handle up 11%
      • Capex: $80MM ($78MM - MGM Cotai); 2013 forecast of $290MM for Cotai
        • Expect early 2016 opening
    • Airlines are adding more seats to Las Vegas 
    • Trying to increase international visitation
    • Growing Las Vegas market share
    • Mayweather/Alvarez fight in September
    • Watching costs very aggressively
    • Reduced debt by $500MM in Q2 

     

    Q & A

    • Vegas vs other markets for 2014 bookings:  Las Vegas (80-90% contracted room nights before coming into the year; in other words, do not rely much on in the year for the year room bookings)
    • 51% bookings booked have been in the corporate/incentive segment (higher margin segment) - historically, it was around 25%; had lost 30% of business from peak and starting to recover
    • Interest is high on potentially selling Crystals; cap rates are still pretty low
    • Margins:  smarter on promotions; M-Life helping with marketing strategy; room remodels have been generating cash flow; FTEs flat YoY
    • Lot of FIT/leisure international customers are bookings through Expedia and Bookings.com
    • International customers:  are spending more on F&B, entertainment venues; worth 15% more than domestic leisure customer
    • CityCenter:  trailing 12-month cash flow $300MM
    • MGM Grand:  expects better performance; Sleeping Lion exhibit will be redone; 
    • Vegas Smoking bill?  Govt process ongoing
    • 2013 convention room nights mix:  14.5%-15%, ADR up YoY
    • 2014 ADR pace:  mid single digits
    • MGM China:  strong across all mass segments; 
    • Strip core/retail properties:  minimal growth; few of the properties had nice shocks of excitement e.g. Monte Carlo (new show), Luxor (new show); not expecting too much growth in 2013
      • But a significant increase in cash flow in 2H 2014 (New York, New York, Monte Carlo, Citywides)
    • Hold
      • Mirage:  poor hold (10%)
      • Bellagio:  down YoY, below normal range
      • Grand:  up YoY
    • Disruptions at MGM China:  not signifcant but may move some business from 3Q to 4Q
    • M-Life helped MGM build slot share
    • Strong domestic table play hints signs of US recovery
    • Cotai budget:  $2.6BN - includes pre-opening, excludes land concession and cap interest
    • Baccarat margins are flat/ slightly up
    • Ex Aria, more table win on international side;  Aria was challenging because of difficult comps
    • LV baccarat volume was slightly down but win was up
    • Post-July:  Unsold condos - 4 units at Veer and 89 units at Mandarin
    • Detroit bankruptcy:  have not seen any impact
    • Relicensing in NJ:  9-12 month process
    • Macau EBITDA margins:  revenue mix impacted results; lower hold in direct play; branding fee up YoY
    • FTEs:  expect to remain flat 
    • Few million impact from union wage inflation
    • Healthcare costs:  flat YoY; expect little inflation on healthcare costs

    Morning Reads on Our Radar Screen

    Takeaway: A quick look at stories on Hedgeye's radar screen.

    Keith McCullough – CEO

    Americans With Best Credit in Decades Drive U.S. Economy (via Bloomberg)

    Investors Turn Hong Kong’s Red Taxis Into New Bubble Market (via Bloomberg)

    Study Links TV Viewership and Twitter Conversations (via New York Times)

    Amazon boss Jeff Bezos buys Washington Post for $250m (via BBC)

     

    Morning Reads on Our Radar Screen - earth2

     

    Daryl Jones – Macro

    Hidden Billionaire Cohen Hauls Fortune in Unmarked Trucks (via Bloomberg)

     

    Josh Steiner – Financials

    Nationstar Mortgage's 2nd-Quarter Net Surges on Fee Income, Gains (via WSJ)

     

    Jonathan Casteleyn – Financials

    Jefferson County Investors Seek Plan Vote as Exit Nears (via Bloomberg … JC note: This is why Munis have had outflows...this would be the first principal reduction of a Muni bond since the '30's)

     

    Todd Jordan – Gaming

    MGM Resorts Profit Beats Estimates as Strip Gambling Rises (via Bloomberg)

     

    Matt Hedrick – Macro

    HSBC may raise banker pay to overcome bonus cap (via the guardian)

     

    Jay Van Sciver – Industrials

    Deutsche Post (DHL) outlook improves as Asia strategy pays off (via Reuters)


    August 6, 2013

    August 6, 2013 - dtr

     

    BULLISH TRENDS

    August 6, 2013 - 10yr

    August 6, 2013 - spx

    August 6, 2013 - nik

    August 6, 2013 - ftse

    August 6, 2013 - dxy

    August 6, 2013 - euro

    August 6, 2013 - oil

    BEARISH TRENDS

    August 6, 2013 - VIX

    August 6, 2013 - yen

    August 6, 2013 - natgas
    August 6, 2013 - gold

    August 6, 2013 - copper


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