LIVING ON A PRAYER
CLIENT TALKING POINTS
GET A JOB (REPORT)
Friday’s jobs report was basically a can of hope for market participants that were, to quote Jon Bon Jovi, “living on a prayer.” In an election year, this was basically “good enough” for most people to buy. This, despite unemployment rising to 8.3%, revised non-farm payrolls down to 64,000 vs 80,000 prior (for June), and a birth/death adjustment (for July) of +52,000 jobs – the highest on record since July 2000. You can only keep “killing it” for so long, remember. Especially when considering…
REMEMBER THE VIX?
We certainly do, and right now, it’s hovering at 15. You aren’t going to have rallies like Friday’s going on all the time with the VIX at this level. Every time people start buying between 14-15, in the last 5 years, they get killed. It’s just a matter of fact at this point. Never mind the lack of inflows into US equities on the buyside. A short squeeze is fun for the bulls until it’s not.
The commodity players have to love the recent melt up in commodities; corn and gold are really something these days. Net long contracts (read: bets on agriculture) were up +3% week-over-week at a new high of 884,477 contracts. There is the inherent correlation risk between the US Dollar and stock and commodity prices. Again, it is an election year and an overinflated market looks good for the incumbent. Bernanke and Geithner definitely have your back on this one.
Cash: UP U.S. Equities: DOWN
Int'l Equities: Flat Commodities: Flat
Fixed Income: Flat Int'l Currencies: DOWN
TOP LONG IDEAS
JACK IN THE BOX (JACK)
This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.
- TRADE: LONG
- TREND: LONG
- TAIL: LONG
FIFTH & PACIFIC COMPANIES (FNP)
The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.
- TRADE: LONG
- TREND: LONG
- TAIL: LONG
LIFEPOINT HOSPITALS (LPNT)
We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.
- TRADE: NEUTRAL
- TREND: LONG
- TAIL: LONG
THREE FOR THE ROAD
TWEET OF THE DAY
“$BBY gets best bailout” -@Commodity_Bull
QUOTE OF THE DAY
“Study without desire spoils the memory, and it retains nothing that it takes in.” – Leonardo da Vinci
STAT OF THE DAY
The Bank of Portugal said on its website on Monday that cumulative borrowing at the end of last month stood at 56.8 billion euros ($70.22 billion) – down 6% for July. An all-time record of 60.5 billion euros was set in June.
In preparation for MPEL's 2Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary
YOUTUBE FROM 1Q CONFERENCE CALL
- "We recently opened three new fixed junket rooms at City of Dreams, which we believe will start to contribute to our results [higher rolling chip volume] from the second quarter of 2012."
- "We add totally about 23 tables for these three new junket operator, which means about 10% more on the VIP tables allocated in VIP in COD compared to last quarter last year."
- "Earlier this month [May], we opened our new Premium Mass gaming and entertainment area at City of Dreams."
- [Studio City] "We remain optimistic that we can restart construction towards the end of this quarter, subject, of course, to government approval."
- "We now expect our mass hold percentage at City of Dreams to be in the 25% to 30% range."
- 2Q guidance:
- D&A: $90-95MM
- Corp expense: $18-20MM
- Net interest expense: $23-25MM
- "Our $1.9 billion budget for Studio City remains."
- "We are in active discussion with the Venetian about building the skywalk between City of Dreams and Venetian and that is progressing along."
- [SCC impact] "And even with the limited offering, we have seen an uplift in terms of visitation into City of Dreams."
- "We align more Grand Hyatt rooms to our high end Premium Mass segment. So continuing doing to do so, we anticipate an improvement in
hold percentage and also result from the length of stay for this segment customers."
- "In terms of construction schedule, we're not concerned. And obviously, with Studio City, the previous owners had put in significant foundation of piling work, which does give us quite a few months of head-start from that phase. The government has told us....when there's a need for workers, they will do the right thing and allow more foreign labor to come in to help out in the development of the city."
- "We actually had a sequential and year-over-year decline in our receivables and our provision was roughly flat with where it's been trending for the last few quarters. We're not seeing in our Premium Direct business any change in collection cycles and we're not hearing about any change from our junket partners."
- [Mass/VIP breakdown] "We remain our expectation on the existing ratio."
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The Macau Metro Monitor, August 6, 2012
SANDS PROBED IN MONEY MOVES WSJ
The U.S. attorney's office in Los Angeles is examining LVS's handling of money received several years ago from a Chinese-born Mexican drug trafficker, Zhenli Ye Gon, and Ausaf Umar Siddiqui, a former vice president at retail chain Fry's Electronics.
It isn't clear whether prosecutors suspect Mr. Ye Gon was trying to launder money through the casinos to make it appear clean, or was simply transferring money there for gambling purposes. Either way, if the money was illicit, it could be considered money laundering, according to lawyers involved in the case.
Sands received more than $100 million from Mr. Siddiqui through a circuitous route, according to court filings in a later criminal case against him for taking kickbacks from Fry's vendors. Filings in that case indicate that Mr. Siddiqui created a company called PC International LLC to receive kickbacks, then wired more than $100 million to two Sands companies, Venetian Marketing Inc. and WDR LLC, over a three-year period ending in 2008. That company also wired about $20 million to Destron, an MGM Resorts subsidiary, according to the filings.
Federal agents arrested Mr. Siddiqui in 2009 on charges of taking illegal kickbacks. He pleaded guilty and now is serving a six-year prison term. That same year, the government's case against Mr. Ye Gon was dismissed after prosecutors found problems with evidence and witnesses. He still is being held in custody pending extradition to Mexico, where authorities want to put him on trial for drug trafficking and money laundering, according to court records filed in the extradition case.
POLICE ARREST 150 IN MACAU CASINO RAIDS Financial Times
Macau police raided casinos and hotels and detained 150 people over the weekend as part of an effort to curtail violent crime in Macau. Steve Vickers, a former head of the Hong Kong police’s criminal intelligence bureau, said the recent killings were not comparable to the triad killings Macau became notorious for in the 1990s. “It’s a completely different situation, but I do see increased pressure at the lower end of the junket operators and increased difficulties for them,” said Vickers. Hong Kong police – who took part in the crackdown with mainland Chinese police – said the arrests were part of an annual exercise to combat crime in southern China.
SEVEN COMPANIES TAKE FAR EAST INVESTMENT GAMBLE RT.com
Seven companies are to invest over $625 million in building a gambling area in Russia’s Primorsky Territory in the Far East. The area includes the city of Vladivostok. Russia’s “First Eastern Gambling Company” says it will invest $30 million in building an entertainment and casino complex, and another company from Cyprus will invest $200 million to build a five-star hotel and casino the Primorsky region.
The area is looking to build 12 casinos by 2016 in the first phase of its development as a gambling centre, and by 2022 Russia plans to spend $2 billion constructing 16 hotels of varying classes with casinos, a yacht club, shopping malls and sporting venues for skiing and golf. Revenues from the tourism are estimated between $2 billion-$7 billion once it is complete. Russian nationals will be able to legally gamble in the zone.
Russia has offered effectively zero taxes on gross gambling revenues, in return for job creation and developing the area's tourism.
* Last week was interesting as rising confidence around an ECB-led bailout gave way to disappointment, only to be followed by an extraordinary rally on better than expected US econ data. All told, both Sovereign and company-specific default swaps were broadly tighter last week.
*The average rate on high yield corporate debt dropped 20 bps last week, another sign that the market thinks risk is off the table in the short-term.
* The MCDX index fell significantly last week. We remain puzzled by this considering the recent spate of muni bankruptcy filings.
* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TREND resistance of $14.89 and 1.8% downside to TRADE support of $14.56. The XLF is currently bullish TRADE, bearish TREND.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 7 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
• Long-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged
1. US Financials CDS Monitor – The money center banks (JPM, BAC, C, WFC) and the large U.S. brokers (GS, MS) all saw credit default swaps tighten again last week.
Tightened the most WoW: RDN, AIG, MMC
Widened the mos WoW: COF, MTG, GNW
Tightened the most MoM: MET, ALL, XL
Widened the most MoM: MTG, MBI, GNW
2. European Financial CDS - Spanish, German, French, Italian and Greek banks tightened. Overall, 37 of the 39 European financial reference entities we track saw spreads tighten last week.
3. Asian Financial CDS - China and India posted notable tightening, while Japanese financials were largely flat.
4. Sovereign CDS – European Sovereign Swaps tightened across the board last week. In Europe, French sovereign swaps tightened the most: -18 bps to 154 bps while Portuguese sovereign swaps tightened the least: -4 bps to 852 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 20 bps last week, ending the week at 7.09 versus 7.29 the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.15 points last week, ending at 1689.
7. TED Spread Monitor – The TED spread rose 1.8 points last week, ending the week at 36.1 this week versus last week’s print of 34.3.
8. Journal of Commerce Commodity Price Index – The JOC index was flat, ending the week at -9.8.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by 6 bps to 29 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
11. Markit MCDX Index Monitor – Last week, MCDX spreads tightened by 12 bps, the index ended the week at 151 bps. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure at the state and local government level. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states.
12. Chinese Steel – Steel prices in China were flat last week at 3,666 yuan/ton, though in the last few months Chinese construction steel prices are down ~10%. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened 2 bps week-over-week to 132 bps. We use the 2-10 yield spread as a broad measure of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TREND resistance of $14.89 and 1.8% downside to TRADE support of $14.56. The XLF is currently bullish TRADE, bearish TREND.
Margin Debt - June: +0.72 standard deviations
NYSE Margin debt rose in June to $285 billion from $279 billion in May. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at it margin debt levels in standard deviation terms over the period 1. Our analysis shows that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of extreme risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through June.
Joshua Steiner, CFA
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This note was originally published at 8am on July 23, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Comanches adapted to the horse earlier and more completely than any other plains tribe.”
Man is competitive. So am I. As a team, we wake up to this world every risk management morning looking for a better way. That’s progressive. That’s how we evolve as a people. Anyone in this profession who does not get this will be left behind.
The aforementioned quote comes from the American Indian history book I have recently cited, Empire of The Summer Moon. It’s a stiff reminder of how harsh life has been. Not every man who attempted to settle in 18th century Texas was given a sticker.
Since launching our Q3 Global Macro Themes in early July, we’ve been riding the same horse that has had us calling for #GrowthSlowing since March. Our horse uses modern day math and machines. We don’t ask the Old Wall for permission to make calls on the direction of Growth Slowing’s Slope. We let Mr. Macro Market tell us which way our horse needs to ride next.
Back to the Global Macro Grind…
Evidently, shorting the SP500 at its 1375 TREND level was a better than bad risk management decision to make. Friday’s -1% selloff in the US stock market came on the heels of both Spain and Italy closing down -6.3% and -4.7%, respectively, week-over-week.
Not to be confused with the fictional storytelling that global growth is “decoupling”, one of our most stealth front-running horses of Global Economic Growth, South Korea’s KOSPI index, told us the same story as structurally impaired Western Europe did. The KOSPI was down -4.3% week-over-week, testing its YTD lows.
This morning, neither Asian nor European Equities are telling you that anything about #GrowthSlowing has changed. Neither is the US bond market. Nor are corporate revenues. Neither are the prices of oil and copper.
Before I come back to touching dogmatic taboo of “growth is fine and earnings are great”, let’s grind through some of the aforementioned risk management signals:
- US Equity Futures down 14 handles
- Japanese Stocks (Nikkei 225) = -1.9% (down -17% since March, remaining in a Bearish Formation)
- Chinese Stocks (Shanghai Comp) = -1.3% (down -13% since May, remaining in a Bearish Formation)
- Hang Seng -3.0%, KOSPI -1.8%, and India’s Sensex -1.4% (all Bearish Formations)
- European Stocks (EuroStoxx50) = -2.2% (down -16% since March, breaking TREND again)
- Spanish Stocks (IBEX) = -4.3% (crashing, down -33% since March)
- Italian Stocks (MIB) = -3.3% (crashing, down -26% since March)
- Russian Stocks (RTSI) = -3.2% (crashing, down -23% since March)
- Oil (Brent) = -3.2% (backing off hard from where we shorted it on Thursday)
- Copper = -2.7% (backing off at its intermediate-term TREND line of 3.64/lb, much like the SP500 did)
- Treasuries (UST 10yr) = down another -5bps this morning to 1.41% (new lows)
- Yield Spread (10s minus 2s) = down another -6bps this morning to 120bps wide (narrowest YTD)
- Euro (vs USD) = down, again, testing $1.20 (after snapping its 2010 lows last week and now confirming)
I’ll stop there, at lucky thirteen.
How about that beloved “earnings season”? With almost 200 of 500 companies in the SP500 having reported, at least 50% of them have already missed on revenue expectations (worst quarter since 2008). Two of the key Sectors in the SP500 (Financials and Industrials) look nothing like the “SP500 is flat for July” as they are down -1.8% (XLF) and -1.4% (XLI) for the month-to-date.
Oh, but never mind the revenues, ‘earnings are good.’ Really?
- Earnings are lagging indicator (not a leading one) anyway
- Revenues are leading indicators for Growth Slowing’s Slope
As our everything Financials guru, Josh Steiner, wrote in his research note to clients on Friday afternoon, the expectations mismatch between “reported” earnings and revenues is widening to the bearish side of Growth’s Slope:
1. EPS: 17 out of 33 companies (52%) have beat consensus EPS estimates, while 11 were in line, and 5 have missed. Keep in mind that we are looking at the optical (unadjusted) numbers.
2. Revenues: 6 out of 33 companies (18%) have beat consensus revenue estimates, while 20 were in line and 7 missed. For reference, we consider 2% or greater above the estimate a beat.
In other words, whether it’s GDP in Spain or the top line revenues of a company, get Growth’s Slope right, and you’ll get a lot of other things less wrong.
Oh, and if you’re in a performance foot race and want to be right instead of less wrong, ride a Global Macro horse.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1556-1578, $103.01-108.16, $83.18-83.99, $1.20-1.22, 5965-6558, and 1347-1376, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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