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GALAXY 2Q 2013 CONFERENCE CALL NOTES

Galaxy beat our 2Q EBITDA estimate and we were high on the Street.  High mass hold and controlled corporate costs were the driving factors. 

 

 

"We are very pleased to report improving financial results across the business and that Phase 2 of Galaxy Macau remains on schedule. The Group also expanded its existing Cotai landbank with the strategic purchase of the Grand Waldo Complex.  We also strengthened our balance sheet by prepaying a significant portion of our bank borrowings. I am particularly delighted that the half year culminated in the Group being included as a constituent of the Hang Seng Index. Looking into the future, Macau's prospects for the remainder of 2013 and beyond continue to be bright. We believe that our development pipeline for Phases 2, 3 and 4 plus the Grand Waldo Complex on Cotai position us well for continued growth." 

 

- Dr. Lui Che-woo, Chairman of GEG 

 

CONF CALL 

  • Galaxy Macau:  opened new premium mass Pavilion club, will open new VIP room in late Q3
  • Starworld:  all-time record in mass; opened new premium mass room, made some shifting in VIP rooms 

 

Q & A

  • Sands Cotai Central competition:  all operators have benefited from SCC opening, including Galaxy Macau
  • Galaxy Macau revenue growth:  visitation has grown especially in mass segment
  • Galaxy Macau Phase 2 capex:  YTD over a billion dollars; have spent $2.8 BN of $19.6BN budget; significant ramp-up in capital outflow at the end of this year and 2014.
  • Henquin Island:  Galaxy looking at it
  • 2Q Hold adjusted EBITDA:  refused to give it given 'no standardized definition'; wants analysts to focus on the volume growth
  • GM Phase 3/4:  combined capex HK$60-80BN -start the project out with the arena and construction could start at end of year/ early 2014.
  • Net cash $5 billion before Waldo acquisition
  • Took Waldo tables and employed them at other properties
  • Table mix:  1/3 VIP, 2/3 MASS; 3Q 2013 will have a little more VIP tables
  • GM Phase 2 table count:  working closely with govt 
  • GM Phase 3/4: some gaming
  • Starworld:  VIP RC - tables yielding better, redesigned new VIP room, more rewards, 16 VIP operators down from 17; Q3TD is very positive
  • Non-gaming revenue decline:  accounting adjustment - reclassification of travel-related revenue; Starworld disruption at L16
  • No fees with prepayment of loan


Macro Tricks

“We were forever inventing new tricks.”

-Hans Bethe

 

From a strategy and teamwork perspective, one of the most fascinating aspects of reading American Prometheus (The Triumph and Tragedy of Robert Oppenheimer) has been how well these to-be-famous scientists collaborated with one another.

 

Hans Bethe, who eventually won the Nobel Prize in Physics in 1967, said “the intellectual experience was unforgettable.” (page 182). Since he was working alongside Oppenheimer, Feynman, and Bohr, I don’t doubt that for one second!

 

I’m not making a political statement on nuclear. I’m simply pointing out how a culture of trust and collaboration can incubate innovation. While the powers that be will likely never acknowledge the Global Macro models we are building here @Hedgeye, we are getting more and more respect from you, the practitioners, every day. On behalf of my team, thank you for this experience.

 

Back to the Global Macro Grind

 

One of the most interesting realities embedded in our independent research process is that we don’t know where we are going to end up next. Our Global Macro Themes are born out of intermediate-term market signals and then contextualized by long-cycle research. If it feels like we’re forever inventing new themes, that’s because the market’s ecosystem is forever reinventing itself.

 

Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.

 

Reviewing the risks of #AsianContagion:

  1. Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
  2. Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
  3. When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad

From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:

  • Indonesia -5.6% DoD vs. a regional median delta of -0.2%
  • Thailand -3.3% DoD vs. a regional median delta of -0.2%
  • India -9.1% MoM vs. a regional median delta of -1.2%

Then, on Indonesia in particular, he called out yesterday’s key economic data point:

  • 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP

And finally, we get this morning’s Bloomberg headlines (under Economy):

 

A)     “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”

B)      “Rupee Drops To Record on Fed Tapering Concern”

 

These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.

 

Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).

 

Again, to review in the most simplest of complexity’s terms:

  1. Currency Burns, then local  
  2. Inflation Accelerates and Growth Slows; and finally          
  3. Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)

If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.70-2.91%

SPX 1

VIX 13.51-15.36

USD 80.91-81.96

Yen 97.11-98.26

Copper 3.25-3.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Tricks - Chart of the Day

 

Macro Tricks - Virtual Portfolio


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Asian Contagion? Exactly.

Client Talking Points

UST 10YR

Evidently #RatesRising too fast makes consensus very nervous; especially those poor souls who still remain levered long the slow-growth, yield-chasing asset allocation the Fed had them in. The 10-year Treasury yield is backing off its immediate-term TRADE overbought zone of 2.86-2.91%. So this morning should provide a de-stresser on that front; Utilities (XLU) are already down -5.2% already for the month!

INDONESIA

Boom! Indonesia is down -11% in just three days as the Rupiah hits a 4-year low and #DebtDeflation takes hold. This is how the ball bounces in our #AsianContagion Q3 Macro Theme. It is both interesting and sad to see it playing out in India (Rupee broke 64 vs US Dollar this morning... new lows) and Indonesia, but not at all surprising. We called this.

COPPER

Sneaky 1-month squeeze to watch as the net short position in Copper went away last week (CFTC futures/options contracts). The question now becomes whether copper will be able to overcome the @Hedgeye TREND line of $3.39/lb? Not today. This is an important commodity to watch as a proxy for the entire commodity complex which has reflated this month.

Asset Allocation

CASH 26% US EQUITIES 28%
INTL EQUITIES 24% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road

TWEET OF THE DAY

Hedgeye's #AsianContagion Theme taking hold (when a country’s debt and currency values deflate at an accelerating rate) #Rupiah

@KeithMcCullough

QUOTE OF THE DAY

“I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.” -Jesse Livermore

STAT OF THE DAY

Hubris? Herbalife and J.C. Penney have cost Bill Ackman's Pershing Square an estimated $1 billion or so (The Economist)


No Clear Tracks

This note was originally published at 8am on August 06, 2013 for Hedgeye subscribers.

“The notion that I was travelling down a clear track would be wrong.”

-Robert Oppenheimer

 

Today in 1945, the US dropped the bomb on Hiroshima. At least 130,000 were killed and 90% of the city was eviscerated. To say that this weighed heavily on the conscience of the “father” of the atomic bomb would be the understatement of my writing career.

 

The aforementioned quote comes from Chapter 2 (“His Separate Prison”, page 29) of a book I have long waited to crack open: American Prometheus - The Triumph and Tragedy of Robert Oppenheimer.

 

When it comes to both markets and my life, the notion that I know where things are going isn’t the truth. The reality is that people and circumstances change inasmuch as markets do. Sometimes it happens fast; sometimes it’s slow. Yes, there are patterns of behavior that provide probabilities of direction. But there is no clear path. I’m learning to embrace that uncertainty.

 

Back to the Global Macro Grind

 

Einstein said that “the only reason for time is so that everything doesn’t happen at once.” And I like that. For the past 8 months we’ve seen a very simple US market pattern develop:

  1. US economic #GrowthAccelerates
  2. US interest #RatesRising challenge the Fed to taper
  3. Gold Bonds fall, Growth Stocks rise

Now that 1st bullet is the one that provokes the most bitterness from bears. I still don’t think they can believe that A) it’s August and B) both the employment and economic data (NSA rolling jobless claims hit another YTD low last wk) continue to improve.

 

On top of last Thursday’s #GrowthAccelerating July ISM print of 55.4 (vs 51.9 in June), here’s what the bitterness of it all looked like in the only economic data point that mattered yesterday:

  1. ISM non-Manufacturing (i.e. the highest % of the US economy) = 56.0 in JUL vs 52.2 in JUN
  2. New Orders (within the ISM report) = 57.7 JUL vs 50.8 JUN
  3. “Business Activity” (within the same report) = 60.4! JUL vs 51.7 JUN

Sorry #GrowthSlowing fans, that wasn’t what you were looking for.

 

It wasn’t what I was looking for either! I thought there was a developing probability that the higher-frequency (weekly and monthly) US economic data points could slow sequentially here in Q313 vs Q213. Evidently, I thought wrong.

 

It’s ok to say you are wrong. It’s ok to say you made a mistake. Heck, it’s even ok to say you are sorry once in a while too (this morning’s marriage tips are brought to you by your Broda).

 

The bottom line is that in literally every “Style Factor” we score, #GrowthAccelerating is winning, big time, YTD:

  1. Top25% EPS Growth Stocks (in the SP500) = +7.3% m/m and +26.8% YTD
  2. Low Dividend Yield (growth) Stocks = +6.7% m/m and +28.8% YTD
  3. High Short Interest Stocks (high multiple, high beta too) = +6.9% m/m and +25.4% YTD

Yes, despite the Russell 2000 (another US growth investor proxy) pinning yet another closing all-time high yesterday at 1063 (+25.2% YTD), all 3 of those Style Factors are still beating the Russell!

 

#awesome

 

But what is awesome? “inspiring an overwhelming feeling of” (Dictionary.com):

  1. Reverence
  2. Admiration
  3. Or Fear?

It’s a great word because, whether we want to admit it or not, we are all human and there are a lot of feelings that start to overwhelm us during phase changes in both markets and our lives.

 

From a macro market perspective, fear itself is now re-testing its YTD low (Gold and VIX are down -23% and -35%). Growth investors admire that. But they shouldn’t straight-line this as the new normal. Nothing is normal. Everything is always changing.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr 2.56-2.72%

SPX 1674-1714

Nikkei 13644-14898

VIX 11.69-12.97

USD 81.41-82.47

Gold 1289-1311

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Clear Tracks - Chart of the Day

 

No Clear Tracks - Virtual Portfolio


August 20, 2013

August 20, 2013 - dtr

 

BULLISH TRENDS

August 20, 2013 - 10yr

August 20, 2013 - spx

August 20, 2013 - nik

August 20, 2013 - dax

August 20, 2013 - dxy

August 20, 2013 - euro

August 20, 2013 - oil

 

BEARISH TRENDS

August 20, 2013 - VIX

August 20, 2013 - yen

August 20, 2013 - natgas
August 20, 2013 - gold

August 20, 2013 - copper

 


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