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MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE?

Takeaway: Long-term investors must prepare to defend their positions as shorter-term investors are forced to consolidate over the intermediate term.

CONCLUSIONS:

 

  1. While we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.
  2. The USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.
  3. In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18: http://docs.hedgeye.com/InflationAccelerating_GrowthDivergences_FEB2014Update.pdf.

 

Please note that the analyses below build upon the views we introduced last week in our FEB 12 strategy note titled, “KURODA VS. YELLEN: WHO BLINKS FIRST?”. To the extent you have yet to review that piece, we strongly encourage you to do so prior to digging into the analytics below.

 

Yesterday we returned back from holiday with two major pieces of GIP-related news out of Japan: the 4Q13 GDP report and the BoJ’s monetary policy decision. In our view, both are supportive of incremental consolidation in the Abenomics Trade (i.e. short JPY/long Nikkei). We purposefully wanted to give the foreign markets some time to absorb the news, given their dominance in determining the direction of this now ultra-consensus trade:

 

  • The JPY has declined -19% vs. the USD since Abe came into power in DEC ’12 in overseas trading while gaining +3.4% vs. the USD in Tokyo trading… it has declined a cumulative -15.3% on a correlation-weighted basis in aggregate
  • Foreigners acquired a net ¥15.1T of Japanese equities in 2013 (new record) vs. a net -¥8.8 of sales by Japanese individual investors (also a new record)… the Nikkei 225 and TOPIX indices finished 2013 up +56.7% and +51.5%, respectively
  • Foreigners sold a net -¥1.2T of Japanese equities in JAN ’14… the Nikkei 225 and TOPIX indices finished JAN -8.5% and -6.3%, respectively

 

If recent price trends weren’t enough confirming evidence, you’re actually seeing increasing foreign jitters reflected in a widening divergence between FX forecasts (banks) and FX forwards (investors and corporations). Note the respective deltas in these figures from when consensus [likely] piled into the world-beating Abenomics Trade at the end of last year (portfolio window dressing, anyone?), as evidenced by the net short position of speculators (futures + options) dropping from -56.8k in early OCT ’13 to -143k in late DEC ’13. The latter figure was the largest net short position since JUL ’07 and represented a -3.1x standard deviation move on a trailing 1Y basis (vs. +0.7x for the former print).

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - FX Forecasts

 

Fast forward to today, the USD/JPY cross is now broken on our intermediate-term TREND duration and is making lower-highs below the TREND line, which we generate using dynamic price, volume and volatility data. This is really bad for any of the now-underwater Johnny-come-latelys that waited far too long to participate in one of the best Global Macro trades in recent memory.

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - USDJPY

 

As we outlined in the aforementioned strategy update, we don’t really have a ton of conviction in the direction of this trade with respect to the intermediate term (~3-6M). That being said, however, we are increasingly of the view that we’re likely to see incremental consolidation as consensus is forced by data to converge towards our view that:

 

  1. Japanese growth is slowing (see 4Q13 GDP report highlights below)
  2. The BoJ is likely to be slow to respond with a material degree of incremental easing – specifically relative to the Federal Reserve

 

Highlights of the 4Q13 GDP Report:

 

  • 4Q Real GDP: 1% QoQ SAAR from 1.1% prior vs. a Bloomberg consensus estimate of 2.8%
    • YoY: 2.7% YoY from 2.3%
    • Domestic Demand: 3.2% YoY from 2.3%
      • Private: 2.3% YoY from 1.5%; 3% QoQ SAAR from 2%
        • C: 2.4% YoY from 2.3%; 2% QoQ SAAR from 0.9%
          • Durable Goods: 15.1% YoY from 4.9%; 17% QoQ SAAR from 15%... can you spot the pre-consumption tax hike pull forward?
          • Semi-Durable Goods: 4.1% YoY from 5.7%; flat QoQ SAAR from -0.3%
          • Nondurable Goods: -0.1% from 2.3%; -1.4% QoQ SAAR from -1.8%
          • Services: 1.9% YoY from 2%; 1.5% QoQ SAAR from 0.4%
        • I-Residential: 10.5% YoY from 8.6%; 17.8% QoQ SAAR from 13.9%
        • I-Nonresidential: 1.8% YoY from -0.8%; 5.3% QoQ SAAR from 0.8%
      • Public: 5.8% YoY from 4.9%; 3.6% QoQ SAAR from 6.3%
        • G: 2.1% YoY from 2.2%; 2% QoQ SAAR from 0.9%
        • Public Investment: 20.9% YoY from 19%; 9.3% QoQ SAAR from 31.9%
      • Net Exports: -18.6% YoY from 3.3%
      • Nominal: 2.4% YoY from 1.9%
  • GDP Deflator: flat at -0.4%
    • QoQ SAAR: 0.4% from -0.4%

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - JAPAN

 

Highlights of the BoJ’s decision to expand its loan facility:

 

  • The BOJ doubled the core portion of the growth funding facility, which was established in 2010 to provide banks with funds at an interest rate of 0.1 percent, to 7 trillion yen ($68 billion)… Bloomberg
  • The loan facility is nearing its ceiling, with about 4 trillion yen dispersed so far, according to the BOJ. Banks use the funds to lend to industries from environmental technology to tourism and disaster prevention that are seen by the BOJ as having growth potential… Bloomberg
  • Borrowing costs for the nation’s lenders averaged 0.97 percent in the six months ended September, according to the latest data by the Japanese Bankers Association… Bloomberg
  • The three-month euro-yen Tokyo interbank offered rate, the price at which banks in the country’s capital are willing to lend to each other, held at about 0.22 percent in the past four months… Bloomberg
  • The BoJ maintained its outlook and assessment of the economy, saying that it "has continued to recover moderately."… StreetAccount

 

While Japanese credit growth has certainly benefitted from the BoJ’s easy monetary policy in recent quarters (as evidenced by Japanese banks’ holdings of JGBs shrinking -17% from the pre-Kuroda’s Casino era), the “Yotai Gap” (i.e. spread between bank deposits and loans) remains just shy of an all-time peak of ¥189.1T. Indeed, as we’ve been saying all along, it’s going to take a lot more than monetary policy cocaine for Japanese corporations and consumers to believe in the sustainability of the LDP’s economic agenda.

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - Credit Growth

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - Tankan Yen

 

All told, while we continue to believe in the sustainability of the Abenomics Trade over the long-term, we are increasingly of the view that investors will suffer through increased volatility over the intermediate term – especially as weak hands and fickle foreigners are shaken out of the markets.

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - Breakevens

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - 5 Percent MM

 

MORE CONSOLIDATION ON THE WAY FOR THE ABENOMICS TRADE? - Current Account Deficit

 

In short, our #GrowthDivergences theme lives on. For our latest thoughts on this theme, as well as our decidedly contrarian #InflationAccelerating theme, please review the following presentation, dated FEB 18: http://docs.hedgeye.com/InflationAccelerating_GrowthDivergences_FEB2014Update.pdf.

 

Keep the questions coming,

 

DD

 

Darius Dale

Associate: Macro Team



MGM 4Q 2013 REPORT CARD

In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:  

  • BETTER - MGM China was a bit better than projected and much better than expected when the quarter began.  Las Vegas performed in-line.  Q1 commentary was, as expected, positive with RevPAR guidance at +10%.  We did sense some uncertainty with regards to trends for the remaining 3 quarters of the year and limited visibility.

 

 

MGM 4Q 2013 REPORT CARD - mgm

 

MGM COTAI

  • WORSE:  Project cost increased to $2.9 billion due to redesign of entertainment options.  Remains on track for early 2016 opening.
  • PREVIOUSLY:  Remain on track for an early 2016 opening...budget is still standing at $2.6 billion.

LV STRIP REVPAR/CONVENTION TRENDS

  • BETTER:  4Q Strip REVPAR was 1% - slightly higher than projected.  1Q REVPAR growth expected at 10%.  1Q convention mix: 22% (near peak levels).  For FY 2014, 15.5%-16% mix (near peak levels).
  • PREVIOUSLY:  4Q room revenue to be up slightly year-over-year on relatively flat RevPAR with accelerating trends in the first quarter. In fact, looking into next year, 1Q convention trends are looking exceptionally strong. Are approaching peak convention mix in 1Q with an expected 21% convention room mix and beyond 1Q, expect an increase in convention room mix for all quarters throughout the year.

MGM CHINA VIP

  • BETTER:  VIP RC increased 32% YoY.  MGM continues to maximize table productivity.
  • PREVIOUSLY:  
    • Still see opportunities for continued improvement in yield on the VIP tables to maximize profitability from this segment
    • In the process of upgrading main floor and enhancing our product offerings to drive future growth. Remodeling includes renovation and expansion of the Supreme Lounge which has been very successful...expect this to be completed in 2014. The Supreme Lounge is an exclusive area dedicated to high-margin premium mass market customers. 

MGM CHINA SLOTS

  • BETTER:  Slot volumes grew 16% in 4Q 2013, compared with 10% growth in 3Q.
  • PREVIOUSLY:  Slot business, overall, has seen some flattening in the market. Even though there's good growth across the market, the growth rates have slowed a little bit.

LV FLOWTHROUGH

  • SAME:  Strip flow-through hit 70% in 4Q.  But if you adjust out certain one-time items (e.g. vacation accrual policy), it is within that 50%-60% range.
  • PREVIOUSLY:  
    • Goal has been in the 60% range on a long-term basis. And that's extremely achievable.
    • Any ADR increase obviously will always go to the bottom line. And then in general, as the convention mix improves and the catering improves, that's a higher-margin business than normal food and beverage business. Hopefully, with the increased visitation, it will increase the occupancy in the shows, which also goes all to bottom line because those are just empty seats if they're not being filled right now. So the flow-through next year should be as strong if not stronger than what we've seen this year.

 

BORGATA RELICENSE

  • SAME:  Dialogue continuing.  In 1H 2014, MGM will be back in front of NJ DGE commission. 
  • PREVIOUSLY:  First goal is to be relicensed in the state. No reason to expect MGM won't be relicensed there.

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MAR 4Q 2013 YOUTUBE

In preparation for MAR's FQ4 2013 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.

 

 

2014 GUIDANCE

  • Occupancy rates at MAR hotels are nearly at record levels in North America, well ahead of industry averages.

TRANSIENT

  • Transient business benefited from improving mix as high-rated retail business was very strong.
  • Looking to shift more and more of that transient business towards higher-rated segments in the hotels

GROUP

  • North America Group revenue pace for the Marriott brand for the fourth quarter is up nearly 7% due to a strong short-term booking.
  • 2014 group booking pace for the North American company-operated Marriott-branded hotels is currently up 4% to 5%
    • 4% or plus 4.5% for next year is overwhelmingly volume, not rate. Rate is up very modestly, 1-ish% or 0% to 1%.
  • Seeing more corporate business such as training meetings and new product launches.
  • 60% of 2014 group business is already on the books
  • Expect system-wide RevPAR at North American hotels will likely increase at a 4% to 6% rate in 2014, with the improvement largely coming from rate.
  • Smaller the group, probably the stronger, but seeing improvements really in all segments

DC

  • Weak government demand. RevPAR in downtown D.C. declined about 1.5% while RevPAR at MAR hotels across the greater Washington market declined 6%.

EUROPE

  • In Europe, 4Q RevPAR growth should improve as comparisons get easier in the U.K.
  • In Europe, strong performance in Eastern Europe offset declines in London, enabling +2% RevPAR. 
  • Constant-dollar RevPAR to increase at a low single-digit rate at our European hotels in 2014

ME/AFRICA

  • Modeling a mid-single digit RevPAR growth for 2014 on easy comps
  • Constant-dollar RevPAR in the Middle East will likely remain challenged. 
  • Unrest in Egypt reduced RevPAR in the Middle East by 3%.

CARIBBEAN/LATIN AMERICA

  • 2014 constant-dollar RevPAR in the Caribbean and Latin America market to grow at a mid-single-digit rate.
  • Favorable leisure demand drove RevPAR up 7% as greater numbers of groups and leisure travelers enjoyed the resorts in Cancun.

ASIA PACIFIC 

  • Expect mid-single-digit constant-dollar REVPAR in 2014, constrained a bit by recent supply growth

WORLDWIDE HOUSE MARGINS 

  • Expect roughly 100 basis points of margin improvement for the full year.

4Q REVPAR

  • 4Q North America RevPAR to increase 4.5% to 5.5%.

FY 2013 INCENTIVE FEES

  • Expect very strong performance at our hotels in New York, Boston, San Antonio, and New Orleans and expect more hotels globally will be paying incentive fees during the year.

G&A

  • Expect G&A spending to grow more slowly in 2014.

CAPITAL ALLOCATION

  • Expect to return roughly $1 billion to shareholders through share repurchases and dividends in 2013 and expect to continue to repurchase shares in 2014.

ATTRITIONS/CANCELLATIONS

  • There's no real change in trend lines on attritions or cancellations. Obviously, in the Washington market the whole government shutdown had some impact.

MGM 4Q 2013 CONFERENCE CALL NOTES

Still a lot of post Q1 uncertainty

 

 

CONF CALL NOTES

  • Signficant operating leverage in the recovering economy
  • 2013 was a 'new era'
  • US wholly owned EBITDA:  best EBITDA in 5 years
  • Arena will be completed in 1H 2016, could be used for additional convention space
  • Hotel Delano remodel will be completed in Sept 2014
  • 80,000 players visited a MGM property in 2013
  • Completed deep piling on MGM Cotai; have been working on basement substructure; will increase scope/complexity on entertainment options; increased project cost from $2.6BN to $2.9BN; will open in early 2016
  • PG County:  will open in 2016
  • Will seek opportunities in S Korea and Japan
  • Very strong LV convention business in 1Q
  • Strip flow-through 70% (above 50-60% target) - if you adjust certain items, it is within that 50-60 range.
  • Strip REVPAR: +1%, slightly better than guidance; booked more in the quarter for the quarter 
  • 1Q convention mix:  22% (peak levels for any 1Q), almost fully occupied at convention space
  • 1Q:  expect REVPAR +10% YoY
  • 2014 convention mix: 15.5%-16% (approaching peak levels)
  • Aria:  $6MM higher hold benefited EBITDA; F&B increased 11% (higher banquet/buffet revenue)
  • Sold 11 units at Mandarin Oriental ($22MM revenues); 18 units closed in January
  • $1.2BN available liquidity RC; $1.45 BN at MGM China RC
  • 4Q $127MM domestic capex 
  • FY 2013 domestic capex: $324MM - in-line with guidance
  • 4Q other capex:  $4MM MGM Macau, $51MM MGM CHINA 
  • FY 2013 other capex:  $35MM MGM Macau; $204MM MGM Cotai
  • 2014 domestic capex:  $350MM ($75MM LV arena, $170MM PG MD) 
  • 2014 other capex:  $70MM (MGM MACAU) $500MM (MGM cotai)
  • MGM CHINA:  mass volume +12% YoY;  slot handle increased 16% YoY; continued remodel/refurbishments; 
  • CNY was very successful in Macau and Las Vegas
  • Great CES show; very strong month of conventions in January, another strong month in February, successful Super Bowl and March is looking good
  • Continue to focus on FCF

 

Q & A

  • Quality of convention mix is improving in 2014 - higher banquet/catering/restaurant spending
  • Are more comfortable for 2014 LV REVPAR than they did before; strong in the year, for the year business
  • 2014:  50-60% flow through target 
  • Domestic hold was down a touch in 4Q except for Aria
  • Casino license renewal process for 5 yrs?  Misunderstanding of the issue.  Gov't always had the power to review after 5 yrs.  Govt is comfortable with system in place.
  • Most of 2014 REVPAR growth will come from rate
  • 2015 REVPAR will be better than 2014
  • 2015/2016/2017 convention pace is higher than previous 5 years
  • Airlift also higher; McCarran passengers increased 2%
  • Westjet increased 18 flights to Las Vegas
  • Confident Group business in 2014 will be better than in 2013
  • Lower provisions in 4Q?  Yes.  Some reversals.  Does not expect changes in 2014.
  • Luxury properties had pretty good strength; core properties continue to be challenged by consumer spend.  Correlation between ADR and spend is there.
  • Mandalay Bay/Luxor will have renovations
  • Monte Carlo/NYNY will be positively impacted by Arena and Linq projects
  • MGM China dividend policy:  up to 35% of profits
  • MD/MA:  will own a substantial portion; will use corporate facility for construction spending; try to keep balance sheet relatively neutral
  • Asset sales?  Recently sold some land on outskirts of Strip.  May consider further sales.
  • Borgata license:  dialogue continuing. In 1H 2014, will be back in front of NJ DGE commission.  
  • Vacation accrual reversal:  $4MM
  • LV Strip slot business:  up when the market is actually down
  • Overall slot business down due to the regional properties

$PBPB: Potbelly Goes Boom!

Takeaway: It pays to listen to Penney.

Potbelly is being taken back behind the woodshed today.

 

Shares of the sandwich maker are currently down well over 10%. Hedgeye Restaurants analyst Howard Penney added PBPB to our Best Idea List as a SHORT on 11/19/13. As he wrote then:

 

To be clear, we believe Potbelly is a solid company with a strong management team, but it should not be trading at a premium multiple to its aforementioned peers. With that being said, we would not be surprised to see PBPB decline by 30-40% over the next twelve months.

 

Meanwhile, Hedgeye CEO Keith McCullough shorted it in Real-Time Alerts last Thursday bringing an 11% gain to RTA subscribers.

 

$PBPB: Potbelly Goes Boom! - pb

 

Once again, it pays to listen to Penney.

 


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