Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.
- March 26: Macau Legend 4Q conf call 8:30-9:30pm (EST)
- March 27: CCL F1Q, 10am -
GGR forecast lowered - Macau CEO Chui lowered his monthly GGR forecast for 2015 from MOP 27.5 billion to only MOP 20 billion, representing a 32% YoY decline for the year. Chui said in the first policy of his second-term. Macau has entered an “adjustment” period of slower growth and needed to develop a broader range of attractions to draw tourists from around the world, he said.
Chui’s tourism panel would draft a five-year plan for stable casino growth while expanding the city’s tourist offerings, the chief executive said.
According to the median estimate of nine analysts surveyed by Bloomberg News in January, gaming revenues would probably drop another 8% drop this year. The most pessimistic expected a 21% decline.
Greater oversight and adjustments - Chui stated that the Macau government plans to “enhance gaming-related laws and regulations, strengthen supervision of the gaming industry, regulate gaming businesses’ operation and continue to push for responsible gaming”.
The policy address added that the review of the gaming industry would analyse how each of the six gaming concessionaires have conducted their business since the liberalisation of the industry in 2002. The analysis would include the development of non-gaming elements, the creation of jobs and the promotion of Macau residents within each company.
But the Chief Executive warned of the possibility of job losses arising from the “adjustments” to the casino industry, saying the government would keep a close eye and take the necessary meaures to prevent the problem from affecting other industries.
New smoking rules - The policy address, as announced on Monday, confirmed the government would propose a full ban on smoking inside public areas, including casinos. It is expected that the ban would impact VIP rooms and mean that smoking lounges on mass floors would no longer be allowed.
New smoking rules are likely to be proposed in the second half of 2015.
Takeaway: Chui's even more bearish than even us. The casino 'adjustments and further regulation' will be costly to the operators.
PENN - Plainridge Park will open on June 24th with over 1,200 slots/ETGs.
MGM - will break ground on its Springfield casino this Tuesday.
MGM - MGM Grand, which hosts the big fight, said 98% of rooms are already sold out for the weekend of May 1-2. MGM Grand President Scott Sibella said room prices immediately shot up to $900-$1,000 a night once the bout was announced and now the going rate is more than $1,600 with still six weeks to go. This contrasts with a regular weekend price of $338 at this time of year.
Other Strip hotels such as the Venetian and Palazzo are sold out but vacancies still exist at some hotels with four-star properties going for an average $716 and five-stars for $1,033 according to a quick search online at Expedia.com.
Coveted ringside seats are rumored to be changing hands for a mind boggling $100,000.
Takeaway: May 1-2 will set records in Vegas
BYD/MGM - Borgata sued Friday to block Atlantic City from borrowing $43 million in the bond market to repay a state loan due March 31. The lawsuit, filed in Superior Court of New Jersey in Atlantic County, claims that the borrowing plan, endorsed by Atlantic City Council on March 4, violates a September ordinance allowing the city to borrow up to $140 million to pay property-tax refunds, such as $88.25 million owed to Borgata.
The Borgata lawsuit came just days before the emergency manager appointed Jan. 22. by Gov. Christie is expected to issue recommendations on stabilizing Atlantic City's finances, and it sets up a three-way fight between the state, the city and Borgata.
Borgata said it had to file its complaint Friday to beat a legal deadline to appeal Atlantic City's plan to repay the state, but not casinos owed tax refunds, which is what City Council authorized last year.
Takeaway: It will be an intense legal battle to get the $88 million
IVS capacity report (Nomura) - the key points in the report include: “1) balance between tourism capacity and local resident life quality, 2) potential free arrival and departure in Macau and Hengqin within the seven days granted by the Individual Visit Scheme (IVS), and 3) potential tightening of the IVS via four measures.”
Possible IVS restrictions include: spreading to other provinces a practice of Macau’s neighbouring province Guangdong – whereby visitors can only apply for the IVS to Macau every two months; extending the interval on Guangdong residents’ applications to once every three months; blocking approval of any new cities for the IVS, or reducing the number of existing cities covered; limiting IVS approval numbers during peak seasons.
Takeaway: IVS changes are coming and they are likely negative for mass gaming. We continue to believe the sell side is overestimating mass gaming revenues for 2015 and overestimating margins
Mississippi FEB GGR - Gulf Coast: +7%, River Counties -13%; statewide: -4%
- The Guangzhou Daily cited authoritative sources who said that more government relief for the property market was coming, including measures to relax tax burdens and purchasing limits.
- The bulk of the article discussed the government lowering the threshold to access the public housing fund, including increasing its lending quota. The paper said that the fund will play a larger role to support housing.
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.
Takeaway: The worst case scenario isn’t effectively managing content costs to 55% of revenue; it’s the fallout if P can’t do so (insolvency)
- WORST CASE SCENARIO? We recently learned of a research report suggesting that P could weather SoundExchange (SX) proposed rates by managing content costs to the 55% revenue floor through a listener cap. The analysis appears encouraging, but it's extremely sensitive to its rather optimistic underlying assumptions (e.g. revenues that are above street estimates). Small variances in either revenue growth or listener hours would be the difference between treading water and insolvency.
- THERE’S NO SILVER BULLET: If SX proposed rates prevail, P would be in a precarious situation. There wouldn't be much room to cut costs since the majority of its costs are tied to content & S&M, and any material cuts to the latter would put its revenues at risk. The only real option is cutting hours, and while a listener cap seems like the natural option, it may not be enough, especially if revenues fall short. We suspect management would take more drastic measures to proactively preserve its cash, potentially exiting unprofitable US markets altogether (both users and its local sales reps).
- WEBCASTER IV = POWDER KEG: If Web IV settles somewhere in the middle, P remains in a precarious setup. P’s prospects would still be tied to its ability to maximize revenue while limiting listener hours, which essentially means taking price and/or increasing per-user ad load (sell-through). The latter may prove more challenging given a growing wave of competitive threats for listener hours. We’re not sure how Web IV unfolds, but ultimately a compromise may not be good enough.
WORST CASE SCENARIO?
We recently learned of a research report suggesting that P could weather SoundExchange (SX) proposed rates by managing content costs to the 55% revenue floor through a listener cap. While the analysis appears encouraging, it’s extremely sensitive to its underlying assumptions, which are rather optimistic (particularly revenues, which are above street estimates).
The key thing to consider is the trigger. Under SX’s proposal, P will pay the greater of 55% of revenue or the per-track royalty rate. So if revenues are too light, or listener hours are too high, the higher per-track rate would apply. Assuming P could seemingly manage those two dynamics to trigger the 55% floor is not the worst-case scenario under SX’s proposal, it’s the best case.
For example, if revenue growth is off by only 2-3 percentage points and/or the listener cap doesn’t curb usage to the magnitude expected, then the 55% floor wouldn't apply.
Below are a two charts illustrating P’s cash burn under small changes in revenue and listener hour assumptions; the takeaway is that very small changes in either metric paint drastically different pictures, and the underlying assumptions in each are still fairly optimistic.
THERE’S NO SILVER BULLET
If SX rates prevail, P’s cash flows would become very sensitive to small variances in revenue growth or listener hours. There won’t be much room to cut costs since the majority of which are tied to content, and any material cuts to its next largest line item (sales & marketing) would put its revenues at risk.
The only real option is cutting hours. While a listener cap would be the most likely option, it may not be enough if revenue growth falls short. Below is an scenario analysis for total EBITDA through 2017. We’re flexing revenue and listener hours (both on a 3-yr CAGR) under SX proposed rates. Note consensus is calling for 23.5% revenue CAGR through 2017.
The takeaway from above analysis is that P could face an escalated level of cash burn over, which could ultimately lead to insolvency within 2-3 years. Note that P still isn't generating positive FCF, has only $355 million in cash, with a $60M revolver.
That said, we suspect management would take more drastic measures to proactively preserve its cash if SX rates prevail, regardless of its internal expectations for revenue growth or listener hours. The risk of getting it wrong would be too severe. We suspect that means exiting unprofitable US markets altogether (both users and its local sales reps).
WEBCASTER IV = POWDER KEG
If SX gets there way, P will need to drastically alter its model (see point 2). If P’s proposed rates prevail, P would see a massive reprieve in content costs over the next two years that would drive considerable ramp in cash flow growth.
If Web IV settles somewhere in the middle, P still remains in a precarious setup. Below are two additional scenario analyses. The first is the midpoint between the two proposals, the next the midpoint between P's current rates and SX proposed rates. We believe the variance between the two seemingly-similar situations illustrates how sensitive the situation is.
Ultimately, P’s prospects would still be tied to its ability to maximize revenue while limiting listener hours, which essentially means taking price and/or increasing per-user ad load (sell-through). The latter may prove more challenging given a growing wave of competitive threats for listener hours.
We’re not sure how Web IV will unfold, but ultimately a compromise may not be good enough.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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Takeaway: The first 10 weeks of 2015 have seen a drastic decline in U.S. stock fund flows which impacts several managers disproportionately
This note was originally published March 19, 2015 at 08:11 in Financials. Click here for more information on how you can become a subscriber to Hedgeye.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Domestic equity flows continue to be soft, coming in at a relatively low +$326 million this week and most importantly comping down a drastic 90% from trends in 2014. The first 10 weeks of 2015 have put up a marginal +$114 million weekly average inflow, this compares to the same two and a half month period in '14 which experienced a +$1.8 billion weekly subscription. This 93% decline year-over-year continues to relay the share losses for active funds to ETFs and also a rotation out of the U.S. stock market.
International equity fund flows are picking up some of the slack but are also comping down. In the most recent weekly survey, International stock funds put up a solid +$3.9 billion subscription, however even this week's decent number is only blending to a +$1.7 billion weekly average inflow year-to-date. The first 10 weeks in 2014 averaged a +$2.9 billion inflow, so while not as drastic a negative year-over-year comp, a -58% year-over-year decline for international equity funds is hard to get excited about. We continue to flag that shares of T. Rowe Price will bear the brunt of these weak equity trends and the stock continues on our Best Ideas list as a Short (or avoid - see our latest TROW research).
In the most recent 5 day period ending March 11th, total equity mutual funds put up net inflows of +$4.2 billion according to the Investment Company Institute, exceeding the year-to-date weekly average inflow of +$1.9 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.9 billion and domestic stock fund contributions of +$326 million. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 15 weeks of positive flows over the same time period.
Fixed income mutual funds put up inflows of +$1.3 billion, trailing their year-to-date weekly average inflow of +$3.0 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.0 billion of contributions to taxable funds and +$278 million of contributions to tax-free or municipal bond funds. Munis have had a solid run with subscriptions in 51 of the last 52 weeks.
Equity ETFs lost -$190 million, trailing the year-to-date weekly average inflow of +$83 million and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs gave up -$3.5 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 weekly average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:
Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: Sector SPDR call-outs are similar to last week. The consumer discretionary XLY ETF experienced a +$579 million inflow (6% of its market cap) while the utilities XLU and long Treasury TLT saw outflows of -$438 (-6%) and -$664 (-9%) respectively.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$6.3 billion spread for the week (+$4.1 billion of total equity inflow net of the -$2.2 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.1 billion (more positive money flow to equities), with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Takeaway: Still trending about -40% for March GGR
CALL TO ACTION
Following the slight uptick the week prior, table revenues took another dive down. However, the downturn was anticipated in our model so no change to our -39-40% YoY growth forecast. Looking ahead, the last week of March is typically stronger but the comparison (+28%) is the most difficult of the month.
No change to our cautious investment thesis. Street GGR forecasts have come down and are not far from ours (HE estimate at -24% for 2015). However, we fear the Street is underestimating the Mass revenue deterioration which will adversely impact margins. Consensus EBITDA estimates remain well above Hedgeye.
Please see our detailed note: http://docs.hedgeye.com/HE_Macau_3.23.15.pdf
This note was originally published at 8am on March 09, 2015 for Hedgeye subscribers.
“When Gronk scores, he spikes the ball and deflates the ball.”
That’s what Brady said about his tight-end, Ron Gronkowski, in a now infamous interview from 2011. He went on to explain that he loves that “because I like the deflated ball, but I feel bad for that football.”
That’s an appropriate metaphor for how the masters of the central planning universe must have felt after Friday’s strong US jobs report. Touchdown! Bloomberg/CNBC celebrated - and markets got smoked. I feel bad for anyone who was long anything.
It wasn’t just the US stock market that deflated. It was the FX market, Commodities market, and Bond Market. Oh, and Emerging markets got crushed too. An inverse-correlation spiking of the US Dollar it was, indeed.
Back to the Global Macro Grind…
Get the US Dollar right, you tend to get a lot of other things right. While I definitely didn’t get the long-end of the US Treasury bond market right last week, our #StrongDollar Global #Deflation Theme remains firmly intact.
With the US Dollar Index up another +2.5% on the week to +8.3% YTD, here’s what else happened across Global Macro:
- Burning Euros were devalued by another -3.1% to -10.4% YTD
- Canadian Loonies lost another -0.9% of their value to -7.9% YTD
- Commodities (CRB Index) deflated another -1.8% to -4.3% YTD
- Oil slid another -0.3% (WTI) to -8.6% YTD
- Gold got crushed -4.0% to now down for 2015 at -1.7% YTD
- Copper resumed its #deflation, -3.1% to -7.6% YTD
- Wheat #deflation of another -5.9% puts it at -18.8% YTD
- Oranje Juice got sacked for another -4.3% at -17.7% YTD
Wheat and OJ? Really? Yes, some of us Gen-X guys pound both for breakfast (every morning) and quite like the Gronk action in those prices. It’s kind of like a tax-cut (even though most companies aren’t get cutting those end market prices)!
And in terms of what most people care on (unless their asset allocator has Gold, Commodities, FX, etc. in their pie chart portfolio), which are stocks and bonds, the week-over-week wasn’t pretty either:
- Latin American Equities led losers, -7.2% on the week to -9.7% YTD
- Chinese stocks dropped -2.1% week-over-week to +0.2% YTD
- US stocks (SPY) were down for the 2nd straight week, -1.6% to +0.6% YTD
- US Energy stocks (XLE) deflated another -2.8% on the week to -3.0% YTD
- US REITS dropped -3.7% week-over-week to -1.2% YTD
- US 10yr Yield ramped +25bps on the week to close at 2.24%
Yep, it’s been a while since REITS (VNQ), the Long Bond (TLT), and the SP500 (SPY) were anywhere close to flat-to-down for the YTD… but no matter where you go this morning, there those returns are (the UST 10yr Yield started 2015 at 2.17%).
Clearly the market is a little freaked out that the Fed might make a policy mistake and go for what John, the Wild Thing, Williams in San Francisco calls “liftoff.” Forget spiking the ball, for some of these non-athlete central planners, this is as intense as it gets!
So now it’s game time for the Fed. At their March 18th meeting, they’ll need to either confirm or fade on the obvious market expectation of a June rate hike. But they’ll also have to outline the data “dependence” plan between now and June.
- What if the March or April jobs reports are as bad as February was good?
- What if February was literally as good as a late-cycle jobs report is going to get?
- What happens if the stock market does what it did Friday, every Friday?
Lots of questions. Lots of non-linear and interconnected risks. It’s not like the late-cycle recovery in the US employment data is either new or going parabolic like the US Dollar is.
To put the Non-Farm Payroll print in rate-of-change context, it was +2.39% year-over-year vs. +2.32% in the prior month. That was the 6th consecutive month of what we’ve called “acceleration”, but 6 months ago the rate-of-change was 2.04%. #nothingness
And, most importantly, as you can see in the Chart of The Day, the payroll numbers are the most lagging of late-cycle employment numbers there are. Most of the time they peak, AFTER the economic cycle does.
Sorry football fans, this makes for a macro market that I think will make for a lot of what hockey players call “read and react.” Other than risk managing levels and calendar catalysts, until the Fed clarifies, what else would you do other than stay flexible?
While I had some big immediate-term oversold signals in things I like right now (on Friday in Real-Time Alerts I signaled buys in IWM, XLV, and EDV – Russell, Healthcare, and Long-term strips), a hawked up Fed can #deflate my confidence in those positions, in a hurry.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.91-2.28%
Oil (WTI) 48.05-51.95
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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