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LVS: GRASS IS GREENER ON BOTH SIDES

Persistently low Singapore hold is frustrating, but the dual appeal of this stock continues to grow.

 

 

The value and cash return part of the LVS thesis took a major turn positive last night.  For Q4, what would’ve been considered a great quarter one month ago should now be perceived as just ok.  LVS delivered a beat but on a hold adjusted basis.  As you know, I’ve liked LVS for a long time and certainly on the recent pullback.  However, I didn’t see Q4 as necessarily a positive or negative catalyst following the Q4 run up in stock price and positive estimate revisions.  We’ll get into what we liked and didn’t like about the quarter but the LVS story certainly got a lot more interesting last night.

 

For me, LVS began its transformation from a growth to growth/value/cash flow/cash return stock 2 quarters ago with a sharp dividend hike and the start of a meaningful share repurchase program.  See our 10/28/13 note “LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TOO?”

 

Minor “issues” with Q4 notwithstanding, that transformation took a few major steps forward last night.  Another ramp in stock buybacks, a huge dividend increase, and the revelation of yet another cash/value driver crystallizes the “other” side of the LVS story.  The growth side remains intact and should continue to attract the growth

investor.

 

As a born skeptic, I’ll hit on the negatives of Q4 first and then move to the overwhelming positive takeaways:

 

What we didn’t like:

  • Marina Bay Sands hold was low again. We’re using 2.65% as our normal hold, below theoretical and management’s recommendation for normal.  But 1.92%?  Until they can post a good hold Q, investors are going to assume low hold is structural and that could continue to suppress MBS’s valuation.
  • Rolling Chip volumes were 2% below our expectation and promotional expenses were a little higher.  However, slot volumes were better, RevPAR off the charts, and Mass was in-line.
  • Expenses were higher than we thought in Macau but given the rapid growth in volumes in Q4, this isn’t that surprising

What we liked:

  • Sequential dividend hike of 43%.  Though a monster growth story, LVS now yields 2.7%, above the S&P yield.
  • For the 2nd straight Q, LVS repurchased more than $200MM in stock at an average price near yesterday’s close
  • Despite dividend increases and share repurchases, net leverage is only 1.3x. Management indicated they would be willing to go 1.5x higher.  An increase to their limit would generate an additional $7 billion cash return to shareholders.  Phenomenal.
  • Another major value enhancer, management indicated they are commencing the approval process to sell retail assets that could drive another $12-14 billion in cash.
  • Venetian and Four Seasons volumes were terrific but held below normal.  Low hold on Mass is NOT included in management’s projection for hold adjusted EBITDA.
  • Management was bullish regarding the prospect of casinos in Japan and its prospects for a license in that country.  They consider MBS’s appeal to Japanese tourists and convention planners as a major selling point to the Japanese government.

 

The usual hold concerns at MBS could weigh on the stock as usual, but the takeaways from last night are overwhelmingly positive.  Any price weakness should be seen as an opportunity.  After all, how many other stocks can offer this kind of growth and value while lining your wallet with a rapidly growing cash stream?



Moody Multiples

“Emotions are short lived.”

-John Coates

 

Whereas “a mood is slower, more like a long-term attitude, a background and slow-burning emotion which slants our view of the world” (The Hour Between Dog and Wolf, pg 107).

 

I don’t know about you, but up until a few weeks ago, my view of the being long stocks was pretty damn bullish. That’s a good thing, because the US and many European stock markets kept hitting all-time highs. Now they aren’t.

 

And while there was definitely some emotion associated with fear (VIX) ripping +45.8% last week, I’m not so sure consensus is yet in the mood to sell every bounce. Too many bear scars from 2013, and the mood of those stock market bears doesn’t matter on the margin here anyway. It’s the mood of the bears who turned bullish too late that I think matters most.

 

Back to the Global Macro Grind

 

When my man Nouriel Roubini went bullish in December, that definitely got my attention. Then the #OldWall (sell-side economists and strategists) rolled out their bullish US growth and SP500 targets for 2014, and a credible contrarian bear case for US stocks began.

 

As I pointed out in yesterday’s rant, while he may call the Barron’s Roundtable, god doesn’t call me with a super-secret market multiple for the SP500. There isn’t one. That said, #history fans will note that the stock market’s multiple:

 

A)     Goes UP with #InflationSlowing and Consumption #GrowthAccelerating

B)      Goes DOWN with #InflationAccelerating and Consumption #GrowthSlowing

 

The lowest multiples in post WWII US stock market #history go to the dogmatic Republican/Democrat Keynesian presidential duos of:

  1. Nixon/Carter
  2. Bush/Obama

Both duos had bearish US Dollar TRENDs because:

  1. FISCAL POLICY = spend, spend, spend
  2. MONETARY POLICY = print, print, print

And, with the Purchasing Power of The People burning (US Dollar DOWN) and #InflationAccelerating, the SP500 traded at 7-11x EPS. Seven times earnings? Yep. Ole Jimmy Carter was a beauty.

 

I’m not saying the SP500 is going to 7-11x earnings. I’m saying that the probability of the SP500 seeing multiple compression from 16x (instead of consensus multiple expansion) goes up as A) inflation accelerates and B) growth slows.

 

Consensus multiple Expansion? Yep, here’s where my friends wash out on this (after having a mean estimate of 1528 for the SP500 for 2013 – nice call):

  1. #OldWall mean estimate for 2014 year-end = 1946
  2. Abby Joseph Cohen = 2088 target for 2014
  3. Tom Lee = 2075 target for 2014

Then you have the funny guy at Morgan Stanley who had the SP500 target of 1434 in 2013 (Adam Parker) who takes himself very seriously with his 2,014 SP500 target for, uh, 2014. It’s a good thing the sell-side has learned from 2008 and evolved…

 

The #OldWall’s magic-multiple thing is based on a consensus estimate for SP500 earnings of around $117/share. Tom Lee is up at $120, so he slaps a 17x “multiple” on that. Meanwhile Abby goes with the 18x, and there you have it – tah-dah!

 

But what if they are wrong on growth, inflation, and the SP500 earnings numbers? That’s when the consensus poop hits the fan. So watch out for stepping in that. Bear Droppings can ruin your bullish mood.

 

What about that Hedgeye Macro Theme #1 (#InflationAccelerating)?

  1. CRB Index (19 Commodities) was up another +0.8% yesterday (with the SP500 -1%) to +1.7% YTD
  2. Natural Gas Prices (for those of you who don’t live in a government hotel) = +30.3% YTD
  3. Oats (yes, I eat Oatmeal, every day!) = +18.9% YTD

So the other Goldman guy who is running the NY Fed now (Dudley) eats iPads and I eat oatmeal. No one cares. What Mr. Macro Market cares about is the 2nd derivative move – the slope of the line – the rate of change! And the fact of the matter is that #InflationAccelerating right now alongside US Consumption #GrowthSlowing is bearish for consumer stocks.

 

That’s a big reason why US Consumer Discretionary stocks (XLY) are -6.2% YTD and why the US stock market (SPX) is -4.0% YTD vs the CRB Index +1.7%. Dollar Down, Rates Down = Stocks Down. God called me on that too – it’s called a real-time US GDP #GrowthSlowing signal, and America’s mood will be changing if it becomes a reflexive one.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.67-2.80%

SPX 1

VIX 14.91-20.39

EUR/USD 1.35-1.37

Nat Gas 4.79-5.49

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moody Multiples - Chart of the Day

 

Moody Multiples - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Where We Are

This note was originally published at 8am on January 16, 2014 for Hedgeye subscribers.

“The task of the leader is to get his people from where they are to where they have not been.”

-Henry Kissinger

 

Where we are from a US stock market perspective is not that complicated. With the SP500 and Russell 2000 closing at 1848 and 1171, respectively yesterday, we are at all-time highs.

 

Yes, all-time is a long time. And, yes, when I say “we”, I’m not talking about them. While my views might rub them the wrong way sometimes (them being the other team, or the other side of the trade), that means I’m just doing my job. I don’t play for them.

 

The aforementioned quote comes from page 59 of Unusually Excellent. The chapter is called “Being Compelling – The Commitment To Winning.” In spite of my many human flaws and countless mistakes, that is my commitment to both you and my team.

 

Back to the Global Macro Grind

 

Winning in this game (or in life for that matter) doesn’t start and end with feeling like we’re winning an argument. I personally have too many silent arguments in my head throughout a week to count – and if I’m not losing some of those, I’m not growing.

 

Arguing with the score of the game is harder to do than simply dismissing the other side of what you think. I just read an article about a hedge fund in Greenwich, CT that got smoked last year (and closed the fund). The head of the firm blamed a macro market that was “dislocated from fundamentals.” I guess that was easier than blaming himself.

 

This, of course, has been one of the best 13-14 month periods to be invested in “growth”, as an investment style factor, ever. Particularly if you are a macro guy (or gal) who was net long growth equities and short slow-growth yielding bonds (or stocks like Kinder Morgan (KMI), which missed last night, that look like bonds). #Fundamental, it was. Indeed.

 

But that is yesterday’s news…

 

Where we go today, tomorrow and the next day are places we have never been.  My job is to help both you and my firm get there without having to make excuses for wrong turns along the way

 

So let’s start with what matters most about where we are – our position:

  1. CASH = 27%
  2. Foreign Currencies = 27% (we still like the Euro, Pound, Kiwi, etc.)
  3. International Equities = 20% (we still like most of Europe, especially Germany and the UK)
  4. US Equities = 18% (Tech, Healthcare, Financials, Industrials, and Materials)
  5. Commodities = 8% (Coffee, Cattle, Copper – and maybe some Gold)
  6. Fixed Income = 0%

Explaining 1-6 in reverse is pretty straightforward:

  1. Fixed Income 0% allocation for 184 days (73% of the time in last 12 months - net short via sovereigns, long corporates)
  2. CRB Commodities Index signaled don’t short last month – still a Bernanke Bubble that popped, but one we can risk manage
  3. US Equities is where we made a Sector Style Shift away from Consumption and Into Inflation (see Q1 Macro Themes deck)
  4. International Equities is the easiest to stick with because the slope of European #GrowthAccelerating is the most obvious
  5. Foreign Currencies will only be easy to stick with if EUR/USD and GBP/USD hold $1.35 and $1.63 TREND supports
  6. Cash, when you are knowingly buying-the-damn-bubble #BTDB in US Equities, is still King at my house

In order to expand on how we think about asset allocation, country and sector/style picking, etc. we do our Global Macro Themes deep dives. If you’d like to review that slide deck, ping us at Sales@Hedgeye.Com and you’ll see us refresh our risk management themes on our disruptor (to consensus TV) video platform @HedgeyeTV.

 

One of the videos our all-star offensive line analyst, Darius Dale, and I did this week walks through why we A) like Yen Down, Nikkei Up’s intermediate-term TREND, but B) wouldn’t be aggressive in allocating capital to Japanese Equities on pullbacks until we see some of our key lines of support (for the Nikkei) and resistance (for the Yen vs USD) confirm.

 

Here’s the video link.

 

Where we are from an immediate-term TRADE perspective sometimes deviates from our intermediate-term TREND views. That’s just the way markets (and life) work. Why else would I subject myself to getting up at this un-godly hour to hand bomb immediate-term TRADE lines in my notebook?

 

The alternative to being committed to winning is accepting mediocrity. The Manifestation of Mediocrity in America is something I think I could write a book about. So I’ll end that prickly point with a period. Because, to get a certain kind of person from where they are to somewhere better, sometimes feels like just that. Capitalizing on their frustration wins too.

 

Our immediate-term Global Macro Risk Ranges are now (TREND in brackets):

 

UST 10yr Yield 2.79-2.92% (bullish)

SPX 1835-1852 (bullish)

VIX 11.84-13.35 (bearish)

USD 80.74-81.31 (neutral)

Brent 106.12-108.66 (bearish)

Gold 1233-1268 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Where We Are - Chart of the Day

 

Where We Are - Virtual Portfolio


ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines

Takeaway: Both equity mutual funds and ETFs had positive fund flow for the most recent period at the expense of fixed income again

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual funds experienced another week of strong follow through for the third week of 2014 with $6.4 billion flowing into all stock funds for the week ending January 22nd. Within the total equity fund result, domestic equity mutual funds gained $2.4 billion, double the emerging 2014 weekly average, with international equity funds posting a $3.9 billion inflow. This robust weekly inflow coupled with the strong result from the week prior has now moved the 2014 weekly average to a $4.7 billion inflow for equities to start 2014, a continuation on 2013's positive trends where $3.0 billion per week on average flowed into stock funds. 

 

Fixed income mutual funds had a slight outflow for the most recent 5 day period however the result essentially netted to a flat result. In the week ending January 22nd, total fixed income mutual funds produced a $247 million outflow, which broke out into a $375 million redemption in taxable bonds and a $128 million inflow into tax-free bonds, the second straight week of inflow for munis. The 2014 weekly average for fixed income mutual funds now stands at a $1.1 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion. This improved 2014 weekly statistic however is still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in the bond market).

 

ETFs experienced mixed trends during the week but essentially followed the direction of mutual funds with an inflow into passive equity funds and a flat result within bond ETFs. Stock ETFs gained a solid $2.0 billion for the 5 day period ending January 22nd with bond ETFs producing a $92 million inflow.  The 2014 weekly averages considering this new production are now a $389 million weekly inflow for equity ETFs and a $243 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.6 billion spread for the week ($8.5 billion of total equity inflows versus the $155 million outflow within fixed income; positive numbers imply inflows for stocks). The 52 week moving average has been $7.7 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week). 

 

Despite the slow start for equity returns in 2014 and nascent fears of global contagion from emerging markets, the continued follow through of positive equity flows is not surprising being that in analyzing 15 years of mutual fund flow versus market performance data that generally there has been a six month lag as retail investors chase performance with fund flow on the equity side and a 9 month historical lag between benchmark fixed income performance and bond fund flows. Hence the dramatic up year of 30% for the S&P 500 and the first loss in the Barclay's Aggregate Bond index in 14 years last year could create tails of up to 2-3 quarters of inflows (for equities) and outflows for bonds (although we acknowledge that the linear 12 week trend lines in fixed income flow below are improving and likely we will see substantial equity outflows next week considering the sharp drop in stocks this week). Although counter intuitive to how "performance" is actually created, this has been the historical behavioral pattern of mutual fund investors which are almost exclusively retail driven.

 

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 1

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 2

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 3

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 4

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 5

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 7

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.6 billion spread for the week ($8.5 billion of total equity inflows versus the $155 million outflow within fixed income; positive numbers imply inflows for stocks). The 52 week rolling average spread has been $7.7 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 9

 

 

Key Asset Management Stat of the Week:

 

 

Despite the slow start for equity returns in 2014 and nascent fears of global contagion from emerging markets, the continued follow through of positive equity flows is not surprising being that in analyzing 15 years of mutual fund flow versus market performance data that generally there has been a six month lag as retail investors chase performance with fund flow on the equity side and a 9 month historical lag between benchmark fixed income performance and bond fund flows. Hence the dramatic up year of 30% for the S&P 500 and the first loss in the Barclay's Aggregate Bond index in 14 years last year could create tails of up to 2-3 quarters of inflows (for equities) and outflows for bonds (although we acknowledge that the linear 12 week trend lines in fixed income flow below are improving and likely we will see substantial equity outflows next week considering the sharp drop in stocks this week). Although counter intuitive to how "performance" is actually created, this has been the historical behavioral pattern of mutual fund investors which are almost exclusively retail driven.

 

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 10

 

ICI Fund Flow Survey - Equity Fund Follow Through...Fixed Income Flat Lines - ICI chart 11

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


LVS 4Q 2013 CONF CALL NOTES

Another bad hold Q in Singapore shouldn’t overshadow a hold adjusted beat, accelerating share repurchases, 40% sequential hike in the quarterly dividend, and growing enthusiasm for retail mall monetization.

 

 

CONF CALL

  • Non-gaming also did well in Macau
  • Raised dividend to $2 for 2014
  • Led market by far in mass market and premium mass
  • More people visiting Macau and LVS properties on Cotai
  • Mainland visitation up 15% in 2013
  • Macau average length of stay still below Hong Kong's 
  • Table productivity will get better
  • 4Q:  17.4MM visits to Macau property portfolio (8MM visits to Venetian Macau)
  • MBS:  
    • Record for mass win/table/day:  $4.63MM
    • ADR: $425 occu: 97%
  • Parisian:  remain on budget and on schedule.  Target a late 2015 opening.
  • Japan:  pursuing IR opportunity
  • Korea:  increased activity in that market
  • Returned $700MM to Sands China shareholders
  • Sands China Limited 2014 dividend increased by 31% to HK$0.87; HK$0.77 special dividend will be paid in February
  • $1.4 BN repurchase program left.  Will repurchase at least $75MM per month.
  • Comfortable with 2.0x-3.5x gross leverage ratio; current leverage ratio is at 2.0x

 

Q & A

  • Hold adjusted MBS margin: little north of 47%
  • MBS:  seeing increased volume in slot and mass business especially premium portions- margin remains low 60s
  • MBS hold:  2.7% - 3.0% is achievable
  • $12-14BN- monetizable retail mall sales opportunity:  commencing process for final approval from Macau govt
  • Macau:  infrastructure improvements in Southern China
  • 3 properties opening in 2015:  Galaxy Macau (PH2), MSC and the Parisian; Parisian may open before at least one of them.
  • MPEL doing quite well in premium mass- but LVS catching up
  • Got ok for Four Seasons Co-op sale.  Got ok for sale of St. Regis tower.
  • SCC:  rooms are biggest driver of mass/VIP.  Still in the infancy stage of growth.
    • Can hit 15-16k on mass win/table/day from current 13k
  • Don't want to be in position where they owe money
  • Japan:  1st legislation has been passed; 2nd legislation should be passed in June (location/ bidding information/licensing); everyone they spoke to believe the 2nd piece of legislation will be passed.  Some major Japanese conglomerates have expressed interest. 
    • In a favored position; MBS often talked about as the IR model in Tokyo; 22% of conventions had Japan ties
  • Macau - 800 games generating $8-9k win per day
  • Been putting in more ETGs in SCC and Venetian
  • Chimelong resort on Henquin will benefit LVS 
  • S'pore VIP market:  junket structure not in discussion; pure mass play disappearing (S'pore locals); sees a flat market in the near-term, not much VIP RC growth in future; want to focus on margins; real growth resides in non-rolling chip segment
  • Vegas:  2014 convention business in good shape (rates moving up a little bit)
  • Commissions higher at Venetian.  Mix between premium direct and junket affected the number. 
  • SCC:  will see 44%-46% margins on non-rolling segment.  Pure mass margins will tick up. 
  • S'pore low hold:  not as much dollar volume as Macau; betting less in ties in baccarat; very volatile play
  • Expect $60MM VIP RC for MBS annually

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