It's been 6 years, 3 months, 22 days since the zero interest-rate policy began.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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Takeaway: March volumes a little worse than GGR indicates as market played lucky. Trends in grind Mass should be the focus on Q1 earnings calls.
CALL TO ACTION
The Macau stocks appear to be in a trading range with March coming in essentially in line with expectations. While we definitely picked up on some potential bright spots while in Macau, 2015 EBITDA estimates look high to us, particularly LVS which maintains more exposure to the grind Mass segment. While exposure there should prove beneficial over the long-term, we fear the Street is overestimating growth in that segment this year. Disappointing results in the highest margin segment will impact profits disproportionately. We believe this is the major driver of the disparity between the Street and us, despite similar GGR forecasts (-25%).
We will be hosting a call on Friday morning at 11am to discuss our Macau outlook and to provide an in-depth look into the Direct VIP segment.
MACAU MARKET OBSERVATIONS
- GGR fell 39% and 41% on a hold adjusted basis – the casinos played a little lucky
- Unadjusted Mass and VIP revenue fell 29% and 45%, respectively
- Adjusted for the reclassification of certain tables from Mass to Direct VIP to circumvent the Mass smoking ban, VIP and Mass revenue fell 48-50% and 16-20%, respectively
- Junket volume dropped 54% - the 2nd worst decline behind February’s 60% drop
- We estimate Direct VIP accounted for 8.5% of VIP volume in March compared to 8.3% over the past 3 months and 7.0% in March 2014
- Slot revenue tumbled 25% YoY
Sands China (LVS)
- GGR share at 21.4%, in line with its 3 month average but 100bps below the 12 month average. The discontinuance of phone proxy betting in October has caused the share decline. As of now, the Sands China properties are the only ones that will not accept phone proxy betting.
- Eliminating phone proxy betting likely contributed to the market leading 62% decline in junket volume.
- On a YoY basis, GGR fell 41%, the 3rd worst in the market
- We estimate adjusted Mass revenues declined 22-24%, the 2nd worse decline ever behind February’s -26-28%
- Adjusted for mass reclass, hold was normal in March
- We remain concerned with Street estimates given the worse than expected performance in the grind Mass segment and slots (down 32% YoY in March)
- The new junkets at Wynn Macau appear to favorably impacting market share – Wynn’s GGR market share grew 150bps versus its 3 month average driven by a 220bp increase in Junket volume share
- Wynn also resumed its phone proxy betting operation which also contributed to the Junket and GGR share improvement
- However, on a YoY basis, Wynn is fighting an uphill battle. GGR fell 43% from March 2014, the worst in the market, despite higher hold compared to normal and last year.
- The precipitous drop in VIP has certainly freed up some hotel rooms for Mass customers. Wynn’s Mass business was the best performing in the market with only a 5% decline
- Wynn Macau should continue to be a market share gainer in the coming months
- GGR fell “only” 34%, the 2nd best performance in the market driven by very high VIP hold (3.4%)
- During the month, MGM converted its reclassed Direct VIP tables back to Mass so going forward the comparisons will be apples to apples for Mass and VIP
- Market share was solid, 40bps and 60bps higher than its 3 and 12 month averages.
- Junket volume dropped 57%, slightly worse than the market
- For the 2nd straight month, MPEL’s GGR fell the least in the market, despite the lowest hold in the market
- Adjusted VIP hold was only 2.6%, so volumes appear to be “relatively” healthy
- Junket volumes led the market on a YoY change basis
- While market share came in below recent trend, hold was the likely culprit. Junket volume share actually improved markedly in March
- GGR declined in line with the market but market share was well below trend
- Lower VIP hold percentage was the likely culprit for the lost share as Junket volume share actually increased sequentially
- Junket volume declined 44% YoY, better than the market. However, in previous months, Galaxy had been significantly outperforming in VIP.
Here are the relevant market shares:
Please note that these hold percentages are estimated for 2 reasons. First, total VIP revenues included direct VIP while Rolling Chip volume only includes junket volume. Thus, direct VIP volume needs to be estimated. Second, the revenues reclassified from premium mass to direct VIP need to be estimated and subtracted out of reported VIP revenues.
Our 2015 GGR forecast of -24% YoY change remains unchanged.
While a little less negative than we’ve been in a long time, this coming earnings season could shine a light on the deterioration of the high margin grind Mass segment. The Street still appears to be projecting decent growth in this segment in 2015, despite recent monthly declines. The weekly and monthly data do not break out grind Mass and premium Mass but table minimum bet levels and anecdotal evidence suggests a negative trend. Looking ahead, we’re encouraged by some recent trends in Direct VIP and some stability in the grind Mass segment, albeit at levels likely lower than Street expectations.
Client Talking Points
After a 2-day drop, then straight back up overnight as EUR/USD backs off from $1.10 to $1.08 and the Yen failed @Hedgeye resistance too – US currency doesn’t operate in a vacuum – TRADE and TREND support for USD Index intact.
The CRB Index was +1.8% yesterday to close at 220 + +5.3% off multi-year lows but now at the top-end of its 209-221 risk range with Oil and Gold backing off the top-ends of theirs too; USD is holding its ground keeps #deflation risks on.
Epic ramp for the Chinese stock market (up another +2.5% overnight to +22.5% year to date for the Shanghai Comp = 7 year high as A) both growth and inflation data slows and B) stimulus hopes run rampant) – We just had a Real Conversation @HedgeyeTV w/ Steve Roach where we focus the 1st part on China here: https://app.hedgeye.com/feed_items/43360-real-conversations-stephen-roach-on-global-imbalances-risks-and-how
|FIXED INCOME||30%||INTL CURRENCIES||11%|
Top Long Ideas
Manitowoc (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007. We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.
While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market. All else equal, we’d view improving demand as a net positive. On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.
Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.
Three for the Road
TWEET OF THE DAY
EVENT: Hedgeye's Q2 Global Macro Themes Call 11AM EST @KeithMcCullough
QUOTE OF THE DAY
“I played the game one way. I gave it everything I had. It doesn’t take any ability to hustle.”
STAT OF THE DAY
Once again, ZERO perfect NCAA March Madness brackets were submitted.
Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye Director of Research, Daryl Jones. Click here to subscribe.
In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s. The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough. More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does.
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