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LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TO?

One that doesn’t appreciate high growth, high cash flow, and a newfound propensity to distribute cash to shareholders.

 

 

LVS posted a great quarter.  We’re very happy with the Macau fundamentals, the stability in Singapore, and potential expansion of gaming in Asia.  Within that favorable industry construct, LVS is nailing it operationally.  The LVS properties yielded up their Mass tables impressively which contributed to higher margins (see the charts in the Quarterly Review section below).  And they’re not done yet.  Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market.  On the margin and from a stock perspective, we’re probably most excited about LVS’s broadening appeal, growth and dividend investors alike.

 

LVS announced yet another dividend hike – this time a 42% increase, pulling the yield up to nearly 3% and $300 million in stock buybacks during the quarter.  Meanwhile, leverage remains too low around 1x.  With over $3.6 million in free cash flow next year, LVS could up its yield to a whopping 6% without levering up.  And that cash flow will continue to grow with the opening of The Parisian in late 2015 and continued same-store EBITDA growth.  We have no feel for whether LVS will pay out a special dividend – they could easily do it – but we would prefer continued buybacks and regular dividend hikes.

 

Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13.x (excludes debt associated with Parisian)?  Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA.  Future high ROI projects in Macau (The Parisian), potential developments in Japan and South Korea are also not captured.  LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors.  We would argue that valuation concerns are of little relevance.

 

Q3 REVIEW

Per usual, we don’t want to recap the entire quarter.  As can be seen in the chart below, LVS beat us quite handily. 

 

LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TO? - LVS1

 

Our focus is on table yields, specifically at Sands Cotai Central and Four Seasons.  These are clearly the two properties with the most upside.  Operationally, LVS is pushing the underpenetrated (for them) Premium Mass segment.  Both Sands Cotai (who will have more mass tables coming in Q2 2014) and Four Seasons made significant progress as can be seen in the following table yield chart.

 

LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TO? - LVS2

 

Table yields should continue to move higher for LVS and drive market share gains in the coming months (probably through year end 2014).     


Collision Course

This note was originally published at 8am on October 04, 2013 for Hedgeye subscribers.

“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be.”

-Jose Ortega y Gasset

 

Yesterday we (Keith and I) held a conference call with former Speaker of the House Newt Gingrich.   We invited him to join us for a call because, frankly, he and former President Bill Clinton were the last two politicians to shut down the Federal Government, so he better than anyone understands the strategy of what is currently occurring in Washington, D.C.  Even though he is an admitted conservative Republican, the call was both insightful and objective.

 

A key point that Gingrich raised is that a government shutdown is not as abnormal as it is being hyped and, in fact, may be a safeguard practice intended by the founding fathers.   Certainly, government employees will be furloughed and people’s lives will be interrupted, but as the former Speaker pointed out, this has happened many times in U.S. history.  In fact, it happened 12 times while Tip O’Neill was Speaker of the House.  Overall, there have been 18 government shutdowns in U.S. history, including the current one.

 

Not surprisingly, most government shutdowns have been very short lived.   In fact, the longest shutdown was 21 days in 1995 – 1996.  The shortest government shutdown lasted only one day.  In the Chart of the Day, we look at the length of every government shutdown over time.  As the chart shows, the average government shutdown lasted 6.5 days.

 

Naturally, when we pressed Gingrich on how long he thought this shutdown would last, being the astute student of history he is, he answered 3 days to 3 weeks (which is what history shows).  His view is that neither side has anything to gain by making this protracted.  His caveat, though, was that there are currently no negotiations occurring as President Obama is unwilling to cede anything at all on the Affordable Care Act.  According to Gingrich, while he and Clinton would go at each other in the press, and certainly had their differences, they would grind out solutions at the negotiating table.

 

The current set of actors are both polarized and talking matters personally, which is much different than the mid-1990s.  There has never been much cross talk or cooperation between Boehner-Pelosi or McConnell-Reid, and it is seemingly only getting worse in this time of “crisis.”  This unwillingness to negotiate and compromise is only exacerbated by the fact that neither President Obama, nor Speaker Boehner, have any concerns of getting reelected, so they are willing to expend personal approval for what they perceive as their party’s fundamental beliefs.

 

On the last point, disapproval is definitely mounting.  As it relates to the President, his most recent approval polls are as follows:

  • Gallup – Approve 44, Disapprove 50 -> Disprove +6;
  • Rasmussen – Approve 47, Disapprove 51 -> Disapprove +4; and
  • The Economist – Approve 43, Disapprove 53 -> Disapprove +10.

Not great numbers for Obama to be sure, but the approval numbers for Congress are even worse.  According to the most recent Economist poll, a full 74% of Americans disprove of the job Congress is doing.  Clearly, our elected officials are on a collision course with the next midterm election in which the polls turn to votes.  If any of them yearn to be re-elected, they have a lot of work to do over the next year to gain back America’s trust.

 

Coming back to the government shutdown, if the politicians in Washington have any acumen, they will resolve their differences over the next few weeks before the fear mongering on the debt ceiling begins to accelerate.  The stock market has been weak due to the dysfunction in Washington, but if amateur hour continues as the debt ceiling looms, risk assets are likely to be sold even more aggressively.

 

The White House is actually starting to use the debt ceiling as a bargaining chip and the Treasury Department released a report yesterday that outlined the potential macroeconomic effects of debt ceiling brinkmanship.  According to a preview released by the Treasury Department:

 

“The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.  By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.“

 

In as much as the economy doesn’t need brinkmanship over a debt ceiling, it also doesn’t need fear mongering from the Secretary of Treasury . . . but I digress.  Ironically enough, the fiscal outlook of the U.S. has actually been improving, so in theory the rating agencies should be upgrading their outlook on U.S. debt and not considering downgrades due to partisanship in the nation’s capital.

 

Next week, we will be releasing our quarterly themes and this focus on the dysfunction in Washington will be front and center as we update our views on the U.S. economy and outlook for the U.S. dollar.  An emerging conclusion is that Europe is starting to get relatively more interesting, which is supported quantitatively by the recent move in the Euro.

 

As you head into the weekend, we’ll leave you with a quote from Gingrich:

 

“What is the primary purpose of political leader? To build a majority.  If voters care about parking lots, then talk about parking lots.”

 

Sadly, none of our leaders, whether it be in Congress, the White House, Treasury Department, or Federal Reserve, know much about building a majority as of a late.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.65%

SPX 1671-1686

USD 79.82-80.35

Euro 1.34-1.36

Brent 108.61-109.98

Gold 1291-1322

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Collision Course	 - Shutdown

Collision Course	 - Virtual Portfolio


Pity the Perma Fear Mongers

Client Talking Points

SPY

The S&P 500 is up +3.1% for October. It's up +21.5% year-to-date. The perma fear-mongers nailed it. Right? Moving on… now with a lot of hands forced to cover-and-chase, there’s a lot to do. In a Burning Bernanke Buck tape, we like being #EuroBulls more than buying more USA up here. Yes, it’s been a great year being long US growth stocks, lock more of that in.

DAX

We are not selling our long Germany (via EWG) position. We like European Equities more than USA (from this price) for the exact same reason we got bullish on USA in December 2012. #StrongEuro and #StrongPound increases European purchasing power and pulverizes the inflation tax. That is a very good thing for consumption and #GrowthAccelerating.

US DOLLAR

Shame on Ben Bernanke and Janet Yellen if they don’t put a consistent tapering expectation back on the table. And soon. On the margin, Down Dollar, Down Rates is going to slow real-inflation adjusted growth from this healthy +2.5% US GDP level. What to I do? I go out and buy Europe and China ahead of USA on that.

Asset Allocation

CASH 42% US EQUITIES 18%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Google earnings up +36% (EPS $10.74 vs $10.36) as ad volumes rip - but "earnings season is a risk", eh? @KeithMcCullough

QUOTE OF THE DAY

My goal is to get home every day in time for dinner with the family - and then we play with the kids for a while, and then I go to bed around the time they do and sleep from nine to three or nine to four. It's the same six hours everyone else gets. I'd just rather do my e-mails and my reading in the morning rather than late at night, that's all.
- David Einhorn 

STAT OF THE DAY

JPMorgan Chase has sold the One Chase Manhattan Plaza skyscraper to Fosun International for $725 million, the latest in a series of New York real estate purchases by Chinese investors.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

October 18, 2013

October 18, 2013 - dtr

 

BULLISH TRENDS

October 18, 2013 - spx

October 18, 2013 - dax

October 18, 2013 - SHCOMP

October 18, 2013 - euro

October 18, 2013 - pound

October 18, 2013 - natgas 

BEARISH TRENDS

 

October 18, 2013 - VIX

October 18, 2013 - dxy

October 18, 2013 - gold

October 18, 2013 - copper

 

 



Get Busy

"Get Busy Living or Get Busy Dying"

-Morgan Freeman, Shawshank Redemption

 

Earlier this week, I raced a 95 year old lady down the Merritt Parkway on my way home from work. 

 

Well, kinda. 

 

To review:  while driving north from our new HQ in Stamford, I watched in my rearview mirror as a navy blue Mustang darted back & forth between lanes before pulling up beside me, then speeding ahead. 

 

After racing to catch-up for a confirmatory, second look…90 is, apparently, the new 25.     

 

The age was undeniable, but there were no coke bottle glasses, no cautious, granny-fied 3 o’clock- 9 o’clock hand positioning, no squinty eyed lean forward, no Buick or Oldsmobile.

 

Just a sharp gaze and tangible life energy. 

 

The experience was a pleasant surprise and a welcomed contrast to the latest, consuming iteration of beltway brinksmanship – which, unsurprisingly, lacked both pleasantness and originality. 

 

Back to the Global Macro Grind…..

 

I don’t know granny’s life recipe for sustained physiological alacrity – but the ‘pleasant surprise’ of her apparent vitality dovetails nicely with one of our top 3 Macro Investment themes for 4Q:  #GetActive

 

Without giving away the full, institutional macro alpha thunder, our call for an increase in active investment management is predicated on a few key points:

 

1.   Big Government Intervention:  Our fiscal policy creation process remains a circus and the new golden boy in the monetary policy arsenal – the “communication tool” – remains in beta testing and breeding decidedly more market uncertainty than price stability at present.  Collectively, we expect policy intervention to continue to perpetuate Market/Currency/Economic Volatility.  Volatility breeds both opportunity and a heightened probability for an expedited drawdown in equities and …

 

2.   Active Management outperforms in down markets:  Historically, on average, the HFRX Equity Hedge index outperforms the SPX in down markets and that outperformance increases as the magnitude of negative monthly S&P500 performance increases.  At extremes of negative market performance, the HRFX has outperformed by ~800bps on a monthly basis.  Hedge funds apparently hedge after all.

 

3.   Sector Picking will Matter:  As the Chart of the Day below illustrates, the variance in sector performance this year is near a historic low Put differently, it hasn’t really mattered what sector you bought  – beta has been the new alpha and simply buying the market was the best allocation decision.  Over the intermediate term, a mean reverting breakout in the variance of sector returns is almost a guarantee.  Consider the performance delta between Financials  and Utilities in the quasi-analogous post-1994 period, after Greenspan began his rate raising campaign.  Financials returned 50%, 32%, and 45% in 1995, 1996, and 1997 respectively.  Utilities returned 25%, 0%, and 18% over that same period.  A 3Y CAGR of 42% for Financials vs 14% for Utes. 

 

In truth, #GettingActive is really just an investment euphemism for Trading.   

 

Trading generally gets a bad rap because it doesn’t fit the canonical ‘stocks for the long-term’ dictum, it doesn’t market well and, well, it’s hard – the recent multi-year trend in collective hedge fund benchmark underperformance hasn’t been a siren song for incremental actively managed AUM either. 

 

Keith has actively managed market risk in the Hedgeye portfolio for 5+ years, actively manages the Hedgeye HFT (High Frequency Tweet) machine and is probably more” active” than constrained in opining on markets, policy and policy makers.

 

To the latter point, sometimes I think the punditry of the Early Look prose occasionally belies the reality of our risk managed positioning. 

 

For instance, while we were highlighting an increased likelihood for a policy induced deceleration in domestic growth back on Oct 9th/10th, at the same time, we were taking up both our gross and net long positioning into the back end of the 4% market correction. 

 

From a process perspective, our conviction level rises and we typically get louder about an idea when both the research (fundamental) view and the quantitative risk management signal are both in agreement. 

 

But what if there is no fundamental data?

 

The gov’t shutdown the last two weeks has served as an illustrative example of how our risk management process works in practice – primarily because  there was no incremental fundamental data to inform our marginal macro view,  leaving the risk management signal as our principal signaling mechanism for driving portfolio decisions.

 

Contrasting yesterday’s price signals and subsequent allocation decisions with those made a week ago exemplifies the process.  

 

What were the market and price signal dynamics back on Oct 10th and why did we buy the dip:

  1. $USD – V-bottomed off its long-term tail line of support at 79.21
  2. VIX – was breaching its TREND support level of 18.98 on the downside
  3. SPX – recaptured TREND support at 1663
  4. 10Y Treasury – Held TREND support of 2.58%
  5. U.S. Stocks moving towards immediate term oversold, down for 11 of the prior 15 days

With all the price signals in agreement, the highest probability swing was to get longer and play for the 24 handles of immediate term upside. 

 

Yesterday’s price signals were very similar:

  1. 10Y Treasury – 10Y was back to flirting with a TREND breakdown through 2.58%
  2. $USD – The dollar was moving back towards testing TAIL support at 79.21.

Down Rates + Down Dollar + Rising Policy Uncertainty is not a factor setup we want to be long of over the intermediate term, but we kept the portfolio unchanged at 6 Longs, 3 short into the close. Why?

  1. SPX – higher highs are bullish and equities were not signaling immediate term overbought
  2. VIX – Debt Default fear remained for sale with the VIX continuing in free fall
  3. Squeezage – with  hedge fund short positions as YTD highs there’s room to let the squeeze rally breath a bit.
  4. Hilsenrath’s mid-afternoon proclamation that Oct-Taper is officially a no-go & Bernanke/Yellen risk remains acute juices the immediate term downside risk for both the dollar and interest rates. 

So, we didn’t buy the rip or tighten up net exposure. 

 

What will we do today?  I don’t know – and that’s largely the point.  As always, we’ll let the market signal tell us which way to lean.

 

Does timing matter?  Implicit in allocations to active strategies is a belief that it does.

 

As Keith queried on twitter yesterday afternoon:

 

“If timing didn't matter, why are you watching Twitter right now?”

 

Similarly, are markets efficient or irrational and reflexive? 

 

Fama won the Nobel prize for “proving” the former.  At the same time, Shiller won for proving the latter.  Seems about right. 

 

Activity/Variety is both the spice of life and nature’s most potent cerebral exfoliant. 

 

Take a different route to work in the morning, eat dinner with your left hand, simplify a few radical expressions,  invest some incremental capital in the growth inflection happening across the pond, turn down CNBC and turn on #tweetshow today at 3pm.  

 

Switch it up, Get Busy. 

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.55-2.67%

SPX 1

VIX 12.61-15.24

USD 79.21-80.31

Euro 1.35-1.37

Pound 1.60-1.62

 

Enjoy the Weekend. 

 

Christian B. Drake

Senior Analyst 

 

Get Busy - Get Active

 

Get Busy - z. vp 10 18


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