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Napoleon Complex

This note was originally published at 8am on October 15, 2014 for Hedgeye subscribers.

“Pretend inferiority and encourage his arrogance.”

-Sun Tzu

 

On this day in 1815, Napoleon Bonaparte began his exile on the island of St. Helena.  For the next six years, mostly in isolation, Napoleon would write his memoirs before eventually succumbing to what most physicians now believe was stomach cancer.  Despite an ending that was less than triumphant, Napoleon had a pretty stellar career for a short guy.

 

At the age of 29, when most of us were just finishing with our MBA studies, or just finishing the third level of the CFA if we were really contrarian and didn’t get an MBA, Napoleon took control of France via a coup d’etat and named himself First Consul.  Four short (no pun intended) years later, Napoleon named himself Napoleon I, Emperor of the French.

 

Over the next decade he would lead France in the Napoleonic wars and eventually conquer most of continental Europe.   It is believed that Napoleon fought 60 battles and lost only seven, a record of conquest that is almost unprecedented.  So much so that the great English General Wellington, when asked who the greatest general of the time was, he responded:

 

                “In this age, in past ages, in any age, Napoleon.”

 

But, alas, even the great Napoleon eventually had an off day of performance.  While he was eventually and finally defeated at the famous battle of Waterloo, his off performance actually came a few years earlier in the Invasion of Russia.  Although French troops were able to beat back the Russians past Moscow, by the time Napoleon’s army returned to France its numbers had dwindled down to some 40,000, despite starting at more than 400,000.

 

Speaking of performance, Blackrock recently published a report that showed in aggregate the hedge fund industry has produced negative alpha for the first half of the year.  Similar to this, a recent report by eVestment showed “in the first seven months of the year, 79.58% of the overall portfolio volatility within the 30 largest hedge funds in its data universe could be explained by systemic or market risk.” Levered beta anyone?

 

If there is a moral of the story it is that even the best generals have off days. So if this year has been challenging from a performance perspective . . . channel your inner inferiority complex, go back to your contrarian roots, and fight on!

 

Back to the Global Macro Grind

 

We’ve obviously been tooting our revolutionary horns fairly loudly on the concept that the economy is, or has, entered #Quad4, which is characterized by slowing growth and decelerating inflation.  For those that are holding out that the economic growth may be better than expected, they point to the U.S. employment picture, which, admittedly, has been strong.

 

In the Chart of the Day, which is titled “Payroll Growth That Would Even Make Napoleon Proud”, we highlight the dramatic improvement in the labor market, but the caveat of course is that the labor market is unlikely to get much better from here.  As my colleague Christian Drake (@HedgeyeUSA ) wrote when posting the note with this chart in it:

 

“At +1.93% YoY, Nonfarm payrolls in September recorded their fastest rate of improvement since April 2006.  The current pace of improvement is inline with peak growth in the last cycle and may be as good as it gets given the demographic and labor supply headwinds and the secular slowdown in employment growth over the last 30 years.”

 

Indeed.

 

In terms of global growth, the Bank of Korea this morning lowered their domestic growth forecast for 2015 and cut rates to a four year low.  While Korea certainly doesn’t yield the economic power of the U.S., it is still one of the largest 15 economies on the planet and this is just another sign that growth expectations are being lowered globally.

 

With global growth continuing to decelerate and U.S. growth and employment likely peaking at best, the only risk to the Fed not getting incremental dovish is inflation.  Unfortunately, signs of inflation are benign at best.  One of the best commodity proxies for inflation, oil, is down more than 10% in a straight line over the past two weeks (making our MLP Short thesis even juicier!).  As well, 10-year break evens shrank to 1.9%, the narrowest spread since June 2013. #Quad4 anyone?

 

The question, as always, of course is where to find the alpha even if we are right on the economy.   One area that we believe continues to be ripe with short ideas, as noted above, is the Upstream MLP Sector.  Our Energy Sector head Kevin Kaiser will be doing a conference call this coming Wednesday to provide his updated thoughts on the sector.  With oil in free fall and likely to decline further due to U.S. production growing and global demand at five year lows, cash flow coverage will be very, very tight for MLPs. If you’d like to join the call, please ping sales@hedgeye.com.

 

The other area we’ve been pounding the table on in terms of finding shorts is the small cap space in general.   Interestingly, according to a Bloomberg article this morning the most shorted stocks in the Russell 2000 have fallen 15% in the last month, which is almost three times the underling gauge. 

 

Even as the Russell 2000 has underperformed dramatically in the year-to-date, it is important to note that stocks in the Russell are trading at 24.8x P/E versus 15.6x for the SP500.  Given that valuation dichotomy, the Russell may well still be the Waterloo of small cap growth investors this year who try to buy the dip.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.19-2.36%

SPX 1860-1928

RUT 1037-1077

VIX 18.33-25.44

USD 85.03-86.64

WTI Oil 80.07-86.20

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Napoleon Complex - NFP NB


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 29, 2014


As we look at today's setup for the S&P 500, the range is 151 points or 6.50% downside to 1856 and 1.11% upside to 2007.                                                   

                                                                            

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.86 from 1.90
  • VIX closed at 14.39 1 day percent change of -10.29%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 24 (prior 11.6%)
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $35b 5Y notes
  • 2pm: Fed seen maintaining overnight bank lending rate 0%-0.25%; seen ending QE program

 

GOVERNMENT:

    • Senate, House out of session
    • Deadline for replies to FCC on $45.2b Comcast-Time Warner Cable deal
    • 9am: Iraqi Ambassador to U.S. Luqman Abd al-Rahim Fayli delivers remarks on “Iraq-U.S. Relations: A View from Baghdad” at Arab-U.S. Policymakers Conf.
    • U.S. ELECTION WRAP: Senate Races; Alaska Polls; McConnell Humor

 

WHAT TO WATCH:

  • Fed Decision Day Guide: FOMC Seen Focusing on Too-Low Inflation
  • Sanofi Chief Ousted After Tensions With Board Members
  • Facebook Projects ‘More Difficult’ Quarter as CEO Spends
  • Gilead Misses Profit Est. on Obamacare Fee, Lower Drug Sales
  • Aflac Profit Climbs on Japan Bets in Dollar-Denominated Assets
  • Tesla Owners Get $12,000 License Plates in Shanghai for Free
  • Deutsche Bank Sinks to 3Q Loss on Provisions for Legal Costs
  • Ares-Backed Floor & Decor Outlets Said to Plan $100 Million IPO
  • Pimco Is Replaced by BlackRock at $6.16 Billion Prudential Fund
  • Prudential Takes Stake in AFP Habitat After MetLife’s Chile Bet
  • NASA Vows to Continue Commercial Rocket Program After Explosion
  • Medicare Agency Said Focus of Insider Trading Probe: WSJ
  • Obama Warns of Fear Hindering Ebola Fight as Quarantines Stick

 

AM EARNS:

    • Alkermes (ALKS) 7am, $0.02
    • Arrow Electronics (ARW) 8am, $1.31
    • Automatic Data Processing (ADP) 7:30am, $0.60
    • Booz Allen Hamilton (BAH) 7am, $0.41
    • Cameco (CCO CN) 8:30am, C$0.21 - Preview
    • Capitol Federal Finl (CFFN) 9am, $0.14
    • Carlyle (CG) 6:30am, $0.52
    • Commercial Metals (CMC) 7am, $0.25
    • Dentsply Intl (XRAY) 7am, $0.60
    • Eaton (ETN) 6:30am, $1.24
    • Exelon (EXC) 7am, $0.72
    • Garmin (GRMN) 7am, $0.71
    • Goodyear Tire & Rubber (GT) 8:30am, $0.70
    • Hershey (HSY) 7am, $1.08
    • Hess (HES) 7:30am, $1.07 - Preview
    • Hyatt Hotels (H) 7:30am, $0.26
    • IAC (IACI) 7:30am, $0.66
    • McGraw Hill (MHFI) 7:15am, $0.94
    • Phillips 66 (PSX) 8am, $1.75 - Preview
    • Praxair (PX) 6:02am, $1.62
    • Prosperity Bancshares (PB) 6:04am, $1.07
    • Ralph Lauren (RL) 8am, $2.05 - Preview
    • Revlon (REV) 7:30am, $0.45
    • Sealed Air (SEE) 7am, $0.45
    • Sherritt (S CN) 7am, (C$0.07) - Preview
    • SodaStream (SODA) 7:30am, $0.35
    • Southern Co (SO) 7:30am, $1.07
    • SPX (SPW) 6:30am, $1.38
    • TE Connectivity (TEL) 6am, $1.00
    • Valley National (VLY) 7:30am, $0.14
    • Waste Management (WM) 7:30am, $0.68
    • WellPoint (WLP) 6am, $2.26 - Preview
    • Wisconsin Energy (WEC) 7am, $0.52

 

PM EARNS:

    • Agnico Eagle Mines (AEM CN) 5:15pm, $0.15
    • Akamai Technologies (AKAM) 4:01pm, $0.57
    • Allstate (ALL) 4:05pm, $1.34
    • Arch Capital (ACGL) 4:11pm, $0.98
    • Arris (ARRS) 4:01pm, $0.72
    • Assurant (AIZ) 4:05pm, $1.61 - Preview
    • Atmel (ATML) 4:05pm, $0.12
    • Avis Budget (CAR) 4:30pm, $1.80
    • Axis Capital (AXS) 4:32pm, $1.21
    • Baidu (BIDU) 4:30pm, $10.37
    • Barrick Gold (ABX CN) 5pm, $0.17
    • CBRE (CBG) 4:05pm, $0.35
    • Cirrus Logic (CRUS) 4pm, $0.56
    • Cloud Peak Energy (CLD) 4:10pm, $0.03
    • DreamWorks Animation (DWA) 4:02pm, $0.05
    • Duke Realty (DRE) 4:07pm, ($0.02)
    • Equinix (EQIX) 4:01pm, $0.90
    • F5 Networks (FFIV) 4:05pm, $1.48
    • Flextronics Intl (FLEX) 4:01pm, $0.24
    • FMC (FMC) 4:30pm, $0.96
    • FNF (FNF) 4:04pm, $0.54
    • Fortune Brands (FBHS) 4:01pm, $0.56
    • Hanesbrands (HBI) 4:01pm, $1.68
    • HudBay Minerals (HBM CN) 5:11pm, C$0.06
    • Intersil (ISIL) 4:05pm, $0.20
    • JDS Uniphase (JDSU) 4:05pm, $0.10
    • KapStone Paper (KS) 4:15pm, $0.66
    • Kraft Foods (KRFT) 4pm, $0.74 - Preview
    • LifeLock (LOCK) 4:05pm, $0.15
    • Lincoln National (LNC) 4:10pm, $1.43 - Preview
    • Lundin Mining (LUN CN) 5:30pm, $0.07 - Preview
    • MetLife (MET) 4:05pm, $1.38 - Preview
    • Moelis (MC) 4:05pm, $0.39
    • Murphy Oil (MUR) 5:32pm, $0.99
    • Noble (NE) 5pm, $0.55
    • Norwegian Cruise Line (NCLH) 4pm, $1.08
    • Oceaneering Intl (OII) 5:02pm, $1.13
    • Penn Virginia (PVA) 4:10pm, ($0.09)
    • Pilgrim’s Pride (PPC) 4:45pm, $0.79
    • Qiagen (QGEN) 4pm, $0.27
    • Questar (STR) 4:14pm, $0.18
    • Range Resources (RRC) 5:01pm, $0.33
    • Raymond James Finl (RJF) 4:16pm, $0.85
    • Realty Income (O) Aft-mkt, $0.23
    • RF Micro Devices (RFMD) 4pm, $0.27
    • Service Intl (SCI) 4:05pm, $0.24
    • Suncor Energy (SU CN) 10pm, C$0.77 - Preview
    • SunPower (SPWR) 4:05pm, $0.23 - Preview
    • Superior Energy Services (SPN) 4:15pm, $0.54
    • Take-Two Interactive (TTWO) 4:05pm, ($0.59)
    • Terex (TEX) 5:17pm, $0.61
    • Trulia (TRLA) 4:01pm, ($0.09)
    • Unum (UNM) 4:05pm, $0.90 - Preview
    • US Silica (SLCA) 5:31pm, $0.69
    • Validus (VR) 4:15pm, $1.12
    • Visa (V) 4:05pm, $2.10 - Preview
    • Weight Watchers (WTW) 4:05pm, $0.48
    • Whiting Petroleum (WLL) 4pm, $1.21
    • Williams Cos (WMB) 4:15pm, $0.19
    • Yamana Gold (YRI CN) 4:20pm, $0.06

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Pirates Target Oil Tankers in Asia Trade Route as Attacks Climb
  • OPEC Says Shale Producers First to Suffer From Oil-Price Plunge
  • Mistry Predicts Palm Oil Rally as ‘Worst Over’ on Falling Output
  • ADM Investing $3 Billion to Make Food Taste Better: Commodities
  • Russia Adds Gold to Reserves in Sept. as Mexico Cuts: IMF Data
  • MORE: Indonesia Seeks to Mediate Freeport, Labor Union Meeting
  • Palm Area in Indonesia Seen Jumping 18% to 11m Hectares by 2020
  • Soybeans Gain on Brazil Drought as Wheat Rises on Russia Concern
  • OPEC Discounts Shunned by Algeria as Crude Goes to Venezuela
  • China Oil Trader in Record Mideast Crude Haul as Prices Drop
  • Breathing Cleaner Air Has Cost as Utility Bills to Surge in U.S.
  • Shanghai Rebar Rises as Mills Seen Cutting Output During APEC
  • Freeport Copper Output Falls at Grasberg After Workers Protest
  • WTI Crude Rises to Four-Day High as Fuel Demand Seen Expanding

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


October 29, 2014

October 29, 2014 - Slide1 

BULLISH TRENDS

October 29, 2014 - Slide2

October 29, 2014 - Slide3

BEARISH TRENDS

October 29, 2014 - Slide4

October 29, 2014 - Slide5

October 29, 2014 - Slide6 

October 29, 2014 - Slide7

October 29, 2014 - Slide8

October 29, 2014 - Slide9

October 29, 2014 - Slide10

October 29, 2014 - Slide11


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REAL COST OF PRODUCING TIGHT OIL AND SHALE GAS: FACT VS. FICTION W/ SPECIALIST LEONARDO MAUGERI

REAL COST OF PRODUCING TIGHT OIL AND SHALE GAS: FACT VS. FICTION W/ SPECIALIST LEONARDO MAUGERI - Marketing Image vF

 

We hosted a call with Dr. Leonardo Maugeri , former executive of Eni S.p.A., Italy's largest energy company. Dr. Maugeri is currently an associate with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School's Belfer Center for Science and International Affairs. He is also executive director of the board of Vitale&Associati, an Italian investment bank, and chairman of Ironbark Investments, a U.S. based investment fund.

 

Replay Link

 

On a high level, Leonardo covered two major topics which are broadly misunderstood yet heated topics in the energy space currently:

  1. The underestimated technological advancement in oil and gas extraction from shale resources and its impact on the marginal cost of tight oil and shale gas production
  2. The opportunities and obstacles for U.S. participation in global LNG trade

Summary

 

1.       Technological Advancement of Extraction From Shale Resources

  • Most analysis has underestimated technological advancement in production and recovery efficiency
  • Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts

The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.

At the end of the day the lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.

Current break-even costs (full-cycle) calculated as capital cost + operating cost + 10% hurdle rate (IRR) yielded the following breakeven prices:

  • Lowest cost plays in Bakken (46% of total) have a break-even cost of less than $29/barrel
  • 80% of Bakken plays have a break-even below $42/barrel
  • Just 7% have a break-even price higher than $70/barrel

 

2.       U.S. Position in Global LNG Trade

  • There are many LNG projects underway globally that will bring an excess of supply online
  • LNG additions that are expected to materialize have assumed much higher global LNG prices at the onset of the projects
  • Australian, Canadian, and Mozambique production costs range between $15-$18/MMbtu, and this is higher than the market prices for LNG in Japan and China which are the highest priced regions in the world ($14-$16/MMbtu on average)
  • The only LNG export additions that will contribute to the liquidity in the LNG global trade arena will be in the United States
  • U.S. plays are the lowest cost opportunities. However, current new projects even seem uneconomical at current European and domestic prices:
    • For example,  the marginal cost of the Cheniere Energy LNG export terminal (first one to be approved) is approximately $3.5/MBTU
    • Russia and Nigeria are still more economic and they will be able to wage a price war on the U.S., hindering our ability to tap traditional European markets.

What is OPEC’s likely reaction in the near future?

In short, formal production cuts from OPEC and/or individual production cuts from OPEC members next month at the November 27th meeting (or prior) are highly unlikely.

  • OPEC countries at large underestimate the technological advancement and longevity of the non-traditional, North American plays (which would relieve incremental stress for a production cut near-term).
  • The issue of overcapacity both currently and moving forward in a global slowdown has at least sparked the conversation of production cuts within OPEC negotiations, but collective agreement near-term (and at these non-threatening price levels) among member countries as to who will cut production.

 

Macro Team 


FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS

Takeaway: For OCT-to-date, the “buy-the-dip” crowd is winning. Who wins from here will be increasingly dependent on the data – which continues to sour

Congratulations Are In Order

Kudos to anyone who bought (or told you to buy) the October 15th lows around 1820 on the S&P 500 and 1040 on the Russell 2000; “off the lows” though today’s closing prices, those indices are up +9% and +10.5%, respectively.

 

Double-kudos to anyone who sold (or told you to sell) the BABA-bubble highs around 2019 on the SPX and/or who told you to be out of domestic small cap equity style factor all year; from the S&P 500’s all-time high through today’s closing price, the market is down -1.7% and the Russell 2000 remains down for the YTD at -1.2%.

 

Triple-kudos to anyone who nailed both of those moves – if for no other reason than they fact that they possess superior talent at playing the “game of chess” that is institutional investing.

 

Enough With the Celebrating... Where To From Here?

Going forward, the directional outlook for U.S. equity market appears increasingly tough:

 

  1. Weak hands have likely been both shaken out of and enticed back into the market from a gross and net exposure perspective.
  2. Meanwhile, domestic high-frequency growth data is readily deteriorating, at the margins.
  3. On top of all this, falling inflation expectations are begetting rising expectations of an increasingly accommodative Fed.

 

In the context of these three factors, our bearish bias on the U.S. equity market hasn’t changed. If anything, Consensus Macro remains oddly convinced of a pollyannaish economic outlook:

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - Conensus GDP Estimates

 

Unfortunately, the data is becoming increasingly unsupportive of that narrative. Specifically regarding point #2, the two drivers of any U.S. economic expansion (i.e. household consumption and CapEx) appear to have lost considerable amount of steam of late. 

 

Let’s ignore the horrible SEP Retail Sales print (falling gas prices, anyone?) and focus specifically on today’s SEP Durable Goods and OCT Conference Board Consumer Confidence numbers.

 

Brutal Durable Goods and CapEx Demand
Core Capital Goods dropped the most in 8M (-1.7% MoM) and Durables ex-Defense & Aircraft – i.e. the stuff the average household purchases – was down for a second consecutive month at -0.3% MoM; this was the 1st such instance of back-to-back contraction since the weather-induced weakness we saw in the first quarter.

 

MAJOR Consumer Confidence Head-Fake
At face value, the OCT Consumer Confidence print was a huge win for anyone who doesn’t really do macro. Specifically, the headline figure inflated to 94.5, which was the highest reading since a 95.2 reading back in OCT ’07.

 

Recall that this index peaked back in JUL ’07 at 111.9 – or right at the 61.8% Fibonacci retracement level relative to the JAN ’00 peak and MAR ’03 tough. Assuming this trend of lower-highs in consumer confidence continues alongside the structural marginalization of the median-to-low-end consumer, we’re just shy of that key 61.8% retracement level relative to that same peak and the FEB ’09 trough.

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - Consumer Confidence Retracement

 

Buying stocks at/near the cycle peak in consumer confidence – or at/near cycle peaks in other late-cycle economic indicators (e.g. labor market, corporate earnings and investor sentiment) – has proven to be a VERY unprofitable exercise for the consensus “buy-the-dip” community (think: U.S. equity returns during 2000-02 and 2007-09).

 

Underneath the hood, results of the Conference Board’s “Plans to Buy Within 6M” sub-survey portends further weakness in household purchases of durable goods: 

 

  • Automobile Purchase “Yes”: slowed to 10.8 in OCT versus 12.1 in SEP
  • Home Purchase “Yes”: flat at 5.1 in OCT
  • Major Appliances Purchase Total Plans: slowed to 49.1 in OCT versus 51.5 in SEP

 

Headwinds Developing at the Micro Level as Well

For those bottom-up investors that prefer to “speak with management” in formulating their top-down views, let’s look at the Q3 earnings season-to-date, which is showing a VERY key component of both the market and the economy sucking wind of late – i.e. Consumer Discretionary.

 

Specifically, 998 of the 2,989 stocks comprising the Russell 3000 Index (~98% of investable U.S. equity market cap) have reported thus far, showing aggregate sales growth of +6.0% and aggregate earnings growth of +13.8%. Heading up the rear in both categories is the Consumer Discretionary sector, where 126 of the 448 index constituents have reported thus far for aggregate sales and earnings growth of +3.2% and -2.2%, respectively.

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - 2

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - 3

 

Janet's Out to Lunch

Regarding point #3, one would assume the Fed can’t go from lacing investors with QE3 drugs straight to plugging them QE4 baggies in such a short order – especially not with the “data-dependent” Janet Yellen at the helm. And since most economic data points come out on a monthly basis, it could be at least ~3M before the Fed has enough political cover to do anything – even though we’ve all agreed to agree whatever policy prescription they eventually decide upon will have little-to-no impact as it relates to stimulating economic growth.

 

On that note, our proprietary models are indeed supportive of rising expectations for easier monetary policy in the U.S., but only marginally. Stock prices, consensus expectations for growth, reported economic data and the labor market all need to decline/slow further and/or deteriorate for the Fed to be able to use “the data” to support introducing an incremental Policy To Inflate.

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - MONETARY POLICY MODEL

 

Remember Late-2007?

To top it all off, the current stock market trajectory overlays almost perfectly with its late-2007 analog – which is the last time consensus was as wrong on the outlook for domestic economic growth as they are today:

 

FIBONACCI RETRACEMENTS, ANALOGS AND OTHER ANALYSES TO HIDE FROM THE BULLS - 5

 

All told, such analyses are indeed frightening in the context of near-universal bullishness on U.S. equities...

 

Trick or treat!

 

DD

 

Darius Dale

Associate: Macro Team


WYNN Q3 CONFERENCE CALL NOTES

Takeaway: Q3 margins were solid but Wynn highlights mass margin pressures beyond Q3. Estimates for most of the Macau operators need to be reduced.

Q3 a beat but conference call downbeat

 

 

WYNN Q3 CONFERENCE CALL NOTES - w2

 

STEVE WYNN COMMENTS

  • Mass gains offset VIP losses
  • Central govt very aggressive on corruption and misconduct
  • Still very bullish on Macau
  • Wynn Palace:  on target, on budget
  • Non-gaming offerings on new Cotai properties will be much better
  • Massachusetts: just finished casino design

Q&A

  • Disappointed with market
  • HK protests disrupting business community
  • October 2014:  had perfect storm; lowest hold ever (had held 0.9% at one point)
  • Mass hold % was really high: have no clue on normalized hold - Hedgeye thinks the high Mass hold contributed to the better Macau margins and drove most of the beat
  • Smoking ban:  do have an impact but not major with respective to revenues
  • Mass increasing because of pressure to VIP? Yes.
  • Margin pressure in Macau? Yes. Competition is very intense resulting in either market share loss or margin loss.
  • Very dramatic capacity coming at Wynn Macau hotel: 2 new VIP areas in January 2015.
  • Mass market margins have been constant over last 3 quarters (+/- 100 bps) Have seen premium mass margins stabilize.
  • October:  more margin pressure going forward. 
  • $56mm incremental spend on Phase II Cotai:  1/2 of it due to pre-opening expense (incremental payroll/HR programs). Have protected contingency on construction budget.
  • VIP:  October is clearly worse than in the past
  • WYNN shares Adelson's thinking (LVS):  if they increase promotional allowances and it can add to the bottom line, he will do it even at the expense of lower margins.
  • Last month, WYNN raised Las Vegas rates by 18% to OTAs
  • Las Vegas:  hoping 2014 EBITDA  will be above >$500; want to have the most profitable hotel in Las Vegas
  • Japan:  not sure what will happen. Thinks the Japanese government wants a domestic operator.
  • Direct VIP Turnover was relatively flat YoY in 3Q; VIP collection has been steady.
  • Junkets are cautious and being conservative. People are not spending lavishly. High-end brands (e.g. Louis Vuitton, Chanel) reporting declines. 

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