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SJM 3Q 2014 CONF CALL NOTES

Takeaway: We agree that November won't be as bad as October but December may be

Fairly negative commentary overall but a ray of hope: "October was an anomaly"

 

 

CONF CALL

  • November trends:  more normal.  Still tough but October was 'an anomaly'
  • Gaming revenue affected by changes in Mainland China regulatory policies
  • 3Q dividend:  22 cents/share; dividend policy:  pay no less than 50% of profits
  • Cutback in luxury goods and gambling budgets
  • Other factors:  Visa restrictions, increased funding costs in junkets and increased scrutiny on UnionPay transactions (cannot be in casinos)
  • October:  continuation of trends in past summer 
  • Mass market affected in October:  partial smoking ban and HK protests
  • Grand Lisboa tables:  
    • Going to reconfigure Grand Lisboa to accommodate mass market by shifting 5 tables to mass market 
    • Expect more tables from govt (have applied for 45 tables - 35 tables allocated to Legend, 10 tables to Grand Lisboa) 
    • Adding new premium mass space in January (shift VIP to mass - 15 tables in Grand Lisboa) 
  • Grand Jai-Alai will open in 2015
  • SJM Cotai on schedule to open in 2017
  • 1 item items in 3Q:  higher staff costs (14th month bonus - $43m; $5-6m incremental costs for rest of year), change in marketable securities value ($20m)
  • 3Q EBITDA margins:  have normalized;  declining VIP volumes have had high adverse impact on margins
  • Occupancy Grand Lisboa:  40 rooms being refurbished (process will take 2 yrs)
  • Smoking ban: have impacted player time on tables; saw more impact on slot side than table side
  • VIP business at old Lisboa was very soft
  • Oceanus will be impacted by Grand Prix
  • Grand Lisboa visitation:  visa restrictions had impact on premium mass segment.  October visitation was down 8%.
  • Mass reclassification:  have not reclassified any tables in October; do not have any current plans to reclassify
  • Grand Lisboa:  have placed 7 smoking areas

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, GLD, HCA, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*Please note we added HCA on Friday. We will be sending out a brief report outlining our bullish rationale in the upcoming week.

 

*We also feature two pieces of content from our research team at the bottom.

 

Investing Ideas Newsletter      - image001 

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

#BurningCurrency

Investing Ideas Newsletter      - Burning money cartoon 10.31.2014 3

This central planning currency burning party is going to get really ugly.

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

Bonds Finish a Tough Week Like Champs

Thank goodness the midterm election came and went; fortuitously for bond investors, this allowed the government to finally stop fudging the growth data. Today was the most important day in that regard, with the OCT Jobs Report being the key economic release:

 

  • Net payroll gains slowed sequentially to +214k MoM from an upwardly revised +256k in SEP… Good number, but has the trend of improvement inflected?
  • The YoY growth rate was essentially flat at +1.9% and holding at the peak level seen in the last cycle… Is this as good as it gets? Is the economic cycle cresting?
  • Private payrolls slowed sequentially to +209k MoM from an upwardly revised +244k in SEP... Much like the headline number, growth in private payrolls slowed on a 3MMA and 6MMA basis as well.

 

Investing Ideas Newsletter      - dd1

 

As it relates to the timing of an interest rate hike out of the FOMC – which we all know may never actually occur – the only thing that spooks the Fed into pushing out its “dots” more quickly than a -10% draw-down in the SPY is a deteriorating labor market. It’s important to contextualize the labor market properly in this regard (per Christian Drake, our senior U.S. economist):

 

  • The unemployment rate ticked down to 5.8% and the U-6 rate declined to 11.5%, dropping the most in 7-months.
  • Alongside the decline in the U-6 rate, the share of ST unemployed continues to rise, the trend in NFIB’s Jobs Hard to Fill and Compensation Indices remain positive, and available workers per job opening is back to pre-recession averages.
  • The employment-to-population ratio for 25-34 year olds ticked up again as employment growth for the cohort accelerated +70bps to +3.2% YoY – the fastest rate of growth since well before the start of the Great Recession.
  • Does a sequential slowdown in NFP signal a negative inflection in the domestic labor market – particularly given a negative birth-death drag, squirrely seasonals, a hard comp, declining slack and improving household survey metrics? I don’t know, but that feels like a stretched read-through on a single month of data.

 

Conclusion: The labor market, which is the most lagging of all economic indicators is pretty darn strong.

 

If for no other reason than the combination of duration (65 months into expansion) and slowing consumption growth, our work says we’re nearing the peak of the economic cycle and the Fed Funds Rate could be stuck at ZERO percent by the time the next recession rolls around.

 

So what do you do with that?

 

You buy bonds (TLT, EDV, MUB) and stocks that resemble bonds (XLP). All year, the bond market has sniffed this out and today was a continuation of that trend – after a difficult week performance-wise, nonetheless:

 

  • TLT: +1.2% DoD; -1% WoW
  • EDV: +1.3% DoD; -0.7% WoW
  • MUB: +0.2% DoD; -0.4% WoW
  • XLP: +0.4% DoD; +2.5% WoW

 

And, oh yeah, crashing oil prices aren’t exactly helping the Fed achieve its +2% “price stability” mandate either:

 

Investing Ideas Newsletter      - dd2

GLD  

 

The follow-through from Friday’s jobs report is evidence of the market’s expectation with each growth slowing data point (Bad # = Bullish because there may be more monetary "cowbell." Everybody is doing it.)

 

  • October Non-Farm Payrolls miss: +214K vs. +248K prior (+235K expected)
  • 10-Yr -7bps back down to 2.31%
  • Gold +2%
  • Energy +1.3%

 

Real-time prices moved in a short-sighted manner with one data point moving prices in QUAD#3 fashion (GROWTH SLOWING, INFLATION ACCELERATING) manner like the first half of 2014.

 

As Hedgeye's U.S. macro analyst Christian Drake pointed out in his note post-report, one data point does not make a trend, and we are still positioned in a #QUAD4 deflationary set-up despite the pop in yield chasing asset classes on Friday (bonds, energy, gold):

 

“Does a sequential slowdown in NFP signal a negative inflection in the domestic labor market – particularly given a negative birth-death drag, squirrely seasonals, a hard comp, declining slack and improving household survey metrics?

 

I don’t know, but that feels like a stretched read-through on a single month of data.”

 

With the labor market showing continued signs of modest improvement as a whole, we expect a continuation in similar trends to support the Fed’s current policy path.

 

We look at activity in every market over multiple durations, and Gold is no different. The intermediate-term deflationary environment domestically is certainly bad for commodities and bullish for the U.S. dollar, but we have no question monetary policy could turn right back down devaluation road over the intermediate and long-term if it was data-supported.

 

From a quantitative perspective gold looks exhausted to the downside and found support at the low-end of the risk range Friday. We’ll watch the follow-through into next week.

RH 

 

Restoration Hardware is on track to open the first Full Line Design Gallery in Atlanta on November 21st. At 45,000 selling sq. ft. (with an additional 20,000 sq. ft.) of outdoor selling space, it will be the biggest RH store to date. The new 6 story store will have an increased SKU count across it’s traditional categories and two dedicated floors, one to Small Spaces and the other to Baby and Child.

 

Product diversification is key to the RH story, as new categories generally experience a 50%-150% lift in sales across channels (both in stores and online) when displayed within a company’s retail locations.

 

But this isn’t just about the top line. One of the key components of the real estate transformation is the occupancy leverage the company realizes as it moves into spaces 6x-8x the size of its legacy stores at rent terms just 25% of the current rate per square foot. This is the big driver behind the Gross Margin expansion we should see over the next 5 years.

 

Investing Ideas Newsletter      - RH atlanta

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

CAT: 5 Reasons to Stay Bearish into 2015

"There are more than five reasons (on Caterpillar)," writes Hedgeye Industrials analyst Jay Van Sciver. "But we will start with these."

Investing Ideas Newsletter      - c2

Putin on the brink? Top Russia Insider Discusses developments, what may occur next in moscow

Our Macro Team hosted a special “Behind the Curtain” conference call with Michael McFaul, one of the world’s foremost experts on Russia and Vladimir Putin. Until earlier this year, McFaul was the U.S. Ambassador to Russia and held closed-door meetings with Putin and his top lieutenants before finally stepping down out of concern for his family and his own safety. 

Investing Ideas Newsletter      - 5


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 USD Correls

Commodities: Weekly Quant - chart4 S P correls

Commodities: Weekly Quant - chart5 volume

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3 mth correlws

Commodities: Weekly Quant - chart 10 6 mth correls

Commodities: Weekly Quant - chart11 1 yr correls

Commodities: Weekly Quant - chart12 3 yr correls

 

Ben Ryan 

Analyst


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.

The Week Ahead

The Economic Data calendar for the week of the 10th of November through the 14th of November is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

 

The Week Ahead - 11.07.14 Week Ahead


HCA: Adding Hospital Corporation of America to Investing Ideas

Takeaway: We are adding HCA to Investing Ideas.

Please note that we are adding HCA (Hospital Corporation of America) to Investing Ideas today.

 

We will send out a report explaining our position next week.


The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

Hedgeye’s Brian McGough Explains Why $KATE Is a Winner

Hedgeye’s Retail Team added KATE to our Best Ideas List as a long in early October. Sector Head Brian McGough hosted an institutional conference call yesterday ahead of earnings, detailing his bullish thesis and highlighting why KATE’s growth story is widely misunderstood. In the excerpt below, McGough outlines his 3 key points. 

For access to the video in its entirety, contact sales@hedgeye.com.

 

Friday's Morning Macro Call


This is a free sneak peek at Hedgeye's Morning Macro Call for institutional subscribers.

CARTOON

#CurrencyBurning

The Best of This Week From Hedgeye - Currency burning 11.3.14

This is going to get really ugly.


Whinne the Putin

The Best of This Week From Hedgeye - Russia whinnie oil 11.5.14

Deflation is pulverizing Vladimir Putin (and oil bulls). On Tuesday WTI crude was down another -2% to $77/barrel.

CHART

Not Even Putin the Great Can Stop Gravity | $RSX #Oil

The Best of This Week From Hedgeye - chart2

On Wednesday the Russian stock market is down -25% year-to-date. Coincidentally, or not, the price of Brent crude is down right around -25% year-to-date as well.

 

How Good Is Employment Really?

The Best of This Week From Hedgeye - COD 11.6.14

POLL OF THE DAY

 $70 Oil? 

As oil prices plunge to a three-year low, we wanted to know what you thought lies ahead.

 


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.

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