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Adding XLU to Investing Ideas | Stock Report: Utilities Select Sector SPDR Fund

Takeaway: We are adding Utilities Select Sector SPDR Fund (XLU) to Investing Ideas.

Adding XLU to Investing Ideas | Stock Report: Utilities Select Sector SPDR Fund - xlu box

THE HEDGEYE EDGE

Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities remains the canonical go-to sector for growth slowing, defensive yield exposure.  

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

In the globally coordinated central-banking game of rotate-the-QE, ECB President Mario Draghi et al hold the policy ball currently with the next main event calendar catalyst being Jackson Hole on August 27-29th. Relative strength in the domestic economy and expectations for divergent monetary policy paths in the U.S. and EU have and should continue to support dollar strength in the nearer-term  – with the stronger $USD, in turn, perpetuating the deflationary environment via declining import prices, declining business investment and ongoing declines in things priced in those dollars (namely commodities). 

 

Away from Deflation’s Dominos, we also expect domestic growth to decelerate in 2H15 – a reality that should further extend the prevailing outperformance in low-beta, low-short interest style factors. In other words, being long “boring”, relative inelastic cash-flows with yield worked in July and should continue to work from here. 

 

LONG-TERM (TAIL) (the next 3 years or less)

In a global Macroeconomy constrained by secular demographic headwinds, ongoing over-indebtedness, top-heavy income distributions and pervasive liquidity trap conditions, lower-and-slower-for-longer remains our baseline expectation for  growth, inflation and the level and path of interest rates. 

 

We don’t want to hold everything at every price but the reality of slower-for-longer is that re-rotation into Utilities, REITS and the like will be recurrent whenever the slope of (cyclical) growth turns negative and the quantitative setup is favorable. 

ONE-YEAR TRAILING CHART

Adding XLU to Investing Ideas | Stock Report: Utilities Select Sector SPDR Fund - XLU chartfinal


MACAU CONFERENCE CALL TOMORROW AT 11AM

We will host a conference call on Friday, August 7th at 11am ET to discuss the latest Macau data, our outlook on the market and the stocks, and the implications of the recent earnings season. As always, we will entertain questions at the end of the presentation.

 

RELEVANT TICKERS INCLUDE:

LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

DISCUSSION POINTS

  • Q2 earnings implications
  • Hedgeye company EBITDA estimates vs the Street for Q3, 2015, and 2016
  • Revised 2015/2016 monthly market projections
  • The promotional environment
  • "True" Mass trends
  • The increasing importance of non-gaming segments

CALL DETAILS

Attendance on this call is limited. Ping  for more information


RTA Live: August 6, 2015

Watch a replay of today's edition below.

 


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JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES

Takeaway: Challenger data showed a surge in July layoffs driven by military restructuring. Meanwhile, Energy appear poised for another round of pain.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

 

Army Woes & Energy Waves 

This morning's labor data doubleheader (July Challenger & Weekly Claims) featured weakness stemming from both the Army and the Energy industry. As the chart below shows, large troop reductions caused a ~50-60k surge in announced layoffs in July.

 

Meanwhile, Energy sector cuts rose to 9k from 0k in June. While we expect the troop count reduction was one-time in nature, our expectations on the energy front are the opposite. In speaking with our Energy Sector Head, Kevin Kaiser, many energy companies are hedged through year-end 2015, implying that later this year/early next year (assuming no bounce in energy) we'll see a second wave of job cuts from Energy.

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Challenger

 

On the claims side, rolling SA claims bounced nominally W/W (+3k to 270k) but remain at/near frictional lows. Recall that a few weeks ago, claims put in a 42-year low. 

 

The Data

Prior to revision, initial jobless claims rose 3k to 270k from 267k WoW, as the prior week's number was unchanged. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.5k WoW to 268.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.8%

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims2 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims3 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims4 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims5 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims6 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims7 normal  1

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims9 normal

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 



JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES

Takeaway: Challenger data showed a surge in July layoffs driven by military restructuring. Meanwhile, Energy appear poised for another round of pain.

This morning's labor data doubleheader (July Challenger & Weekly Claims) featured weakness stemming from both the Army and the Energy industry. As the chart below (Hat tip to Christian Drake of our Macro Team) shows, large troop reductions caused a ~50-60k surge in announced layoffs in July. Meanwhile, Energy sector cuts rose to 9k from 0k in June. While we expect the troop count reduction was one-time in nature, our expectations on the energy front are the opposite. In speaking with our Energy Sector Head, Kevin Kaiser, many energy companies are hedged through year-end 2015, implying that later this year/early next year (assuming no bounce in energy) we'll see a second wave of job cuts from Energy.

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - July Challenger

 

On the claims side, rolling SA claims bounced nominally W/W (+3k to 270k) but remain at/near frictional lows. Recall that a few weeks ago, claims put in a 42-year low. 

 

The Data

Prior to revision, initial jobless claims rose 3k to 270k from 267k WoW, as the prior week's number was unchanged. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.5k WoW to 268.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.8%

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims2

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims3

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims4

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims5

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims6

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims7

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims8

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims9

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims10

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims11

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims19

 

Yield Spreads

The 2-10 spread fell -5 basis points WoW to 154 bps. 3Q15TD, the 2-10 spread is averaging 164 bps, which is higher by 6 bps relative to 2Q15.

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims15

 

JOB CUTS & JOBLESS CLAIMS | ARMY WOES & ENERGY WAVES - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MPEL Q2 2015 CONFERENCE CALL NOTES

Takeaway: Weaker than expected in Macau due in part to Mass hold. Manila an emerging bright spot.

conF CALL 

  • Net revenue Q2 2015 was $916.8 million, (24%) YoY from US$1,199.5 million 
  • Despite Low hold in premium mass, they are happy with their ability to hold their share. 
  • July is showing stronger signs relative to recent trends. Especially on the mass side
  • Hotel occ has remained at nearly 100%, relative to the market that is very strong
  • Cost control has been very consistent, and has aided margins
  • Studio city continues to create job opportunities for the local community and has been very well received.
  • Integrated resort will serve as a growth catalyst. 
  • Location of Studio city is prime, with close proximity to the lotus bridge. 
  • Ex. gaming operations continues to serve as a great compliment for customers. 
  • Studio city will include a number of attractions never before seen in Macau.
  • 1,600 rooms, 350k sq/ft of retail space, and 30 fnb options
  • Manila continues to expand across all segments 
  • Leads Philippines in visitation and occ
  • Rolling chips segment generated 2.5x the prior period as junket efforts start to ramp up
  • The decline in net revenue was primarily attributable to lower rolling chip revenues and mass market table games revenues in Macau
  • Offset by the net revenue generated by City of Dreams Manila, which started operations in December 2014.
  • Q2 2015 Adjusted property EBITDA $204.9 million vs. Adjusted property EBITDA of $313.6 million Q2 2014. 
    • Adjusted property EBITDA (35%) YoY  
  • GAAP net income $24.3 million, $0.05 p/s vs. $0.26 p/s in 2014 
  • CoD Macau
    • Net revenue of $654.2 million vs. $967.5 million in 2014 
    • City of Dreams generated Adjusted EBITDA of US$179.0 million (38%) YoY
    • Rolling chip volume totaled $11.1 billion vs. $22.1 billion in the second quarter of 2014. The rolling chip win rate was 2.7% in both quarters ended June 30, 2015 and 2014. 
    • Handle of $1,116.7 million vs. $1,511.4 million Q2 2014.
    • Non gaming revenues of $28.6 million 
    • low hold impact of $20 million in EBITDA 
    • 50 mm in costs expect to realize 
    • Corp expenses to remain flat with prior q. 

Q3 guidance

  • d&a = $110-$115 million
  • corp expense - $20 million -$25 million

CoD Manilla - building lease payment = $7 million 

q & a 

Utilization capacity for tables? 

  • Not a real meaningful way to look at it at this point. Due to their contribution to Macau they would be very upset to receive 150 table allocations. But do not expect it. 

Optimistic about their contribution of non gaming attractions as a factor for the govt. to be generous?

  • Yes we are, see themselves as a model citizen and this should help them with the govt going forward. 

Given assumptions on tables, how do you plan to allocate the tables? Will it be similar to CoD? 

  • Table number to drive the decisions. But the shift in VIP tables to the Mass side plays a factor. The floor set up is very flexible to shift their lay out. 
  • As of now it's tough to say since they do not 
  • Look to bring over the high end premium feel to Studio City from CoD 

CoD more table shifting?

  • See the level as quite optimum right now at CoD and Altira. Not looking to make more changes in terms of floor lay out 

Macau at a bottom?

  • July looking stronger. Transit visa is a huge sentiment shift. Prior to that there had been only negatives surrounding Macau. 
  • VIP, structurally, will never be what it once was. 
  • Lower comps going into 2H and 2016, should be very helpful. 

Focus of Studio City? Lots of foot traffic will mean a shift towards mostly mass and premium mass clientele?

  • Studio City offers far more flexibility because of the other attractions and the experience we will offer. 
  • Efficiency and experience they gained from Cod and Altira will assist the opening of Studio City.

$50 million in savings? How?

  • Combo of a number of initiatives. Will not be split evenly. Could see more at CoD than Altira. But the savings will be widespread. Savings should be more back end loaded. 

Market shifting to mass? what makes mass successful? what are the drivers?

  • MPEL has a been a pioneer for premium mass. 
  • Lots of hotel rooms helps. but that's mostly for grind mass. 
  • Service combined with rooms really assists the premium mass, extra restaurants, bars, etc. 
  • Premium mass client is very sophisticated and needs the additional amenities 

Seeing other competitors extending credit for premium mass players and comped rooms? 

  • Have heard some things in the past. but for the most part them and all the competitors have been very rational 

Number of tables you can operate at Altira?

  • Reduced tables for VIP. Altira should be more resilient in terms of rolling chip volume, relative to mkt 
  • Key is more on the optimization of the small junket operators

 

How can you ramp up CoD Mannilla? 

  • Being careful with who they choose as Junket operators. Bring on another Junket operator in late summer. Must be cautious about credit. 

Beyond VIP, what should we think of the rest of the market in Manila?

  • Very happy with the product they have built so far. The trick is the same. Grow the database and continue to monetize the database and visitation. Lots of work to be done but the early signs are great. 

 

 

 

 

 

 

 

 

 

 

 

 


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