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WYNN: FROM USA TO MACAU POLITICS

Takeaway: WYNN’s Q3 EBITDA was in line with our estimate, that is to say, below the Street. But Wynn’s commentary was decidedly negative.

CALL TO ACTION

The Q3 earnings call was decidedly negative, even to the point where Steve Wynn called out the Macau government for the first time, at least in our collective memories. The likelihood of continued, rapid deterioration in the junket business is increasing and Wynn did nothing to dispel that notion. We see the investor focus continuing to shift back to Mass and for that reason we continue to prefer LVS as the top pick in our long Macau trade call. Please see our presentation from last week: 

 

Wynn’s Q3 was weaker than expected at the property level but in line with our corporate EBITDA estimate, due to lower corporate expenses. However, as outlined last week in our presentation, we were 7% below the Street. Wynn management provided no comfort regarding a turnaround in Macau fundamentals although Mass commentary was relatively positive. Indeed, Mass revenues at Wynn Macau exceeded our estimate and gives us comfort that investors will increasingly focus on that segment which finally faces easy comps in October. Look for near term LVS outperformance fundamentally and from a sentiment perspective.

Q3:  LIKES AND DISLIKES

As can be seen by the table below, WYNN managed to eke out a slight beat, driven by the 2nd consecutive quarter of corporate expense reduction. However, at the property level, Wynn was a disappointment all around, even relative to our below the Street projections.

 

WYNN: FROM USA TO MACAU POLITICS - wynn

 

WHAT WE LIKED:

  • Mass performance in Macau – Sure it was down 28% YoY but it was up sharply QoQ and both volumes and revenue exceeded our estimate. Mass may or not have stabilized, but with the first easy Mass comp in October for the market, stabilization will likely be the narrative for investors and that should be good for the stocks over the near term, particularly LVS.
  • Corporate expense reductions – For the 2nd straight quarter, WYNN vastly improved (reduced) its corporate cost structure, pushing corporate expenses down 40% YoY. The company is tightening the belts where it can, because it can’t do much at the property level in Macau. WYNN has always been kind to the executive suite but we think investor pressure is having an impact.
  • Core table drop in Las Vegas – I know, the high end is struggling on the Strip. But that is well known and Wynn Las Vegas actually beat our estimate despite a 50% YoY decline in their high end gaming volumes in Q3. Base Mass in Vegas actually looked good

 WHAT WE DIDN’T LIKE:

  • Steve Wynn’s tone toward the Macau government – Sure he’s spot on. The government’s obsession with table caps makes little sense. Worse, the “late in the game” table allocations makes it impossible to design the casino floor and do any sort of labor planning. However, we wonder whether these discussions are better had outside the public forum? Until now, Steve Wynn has been the model citizen, always speaking highly of the Macanese and Chinese governments.
  • Non-gaming across the properties – Despite the sell side cheerleading, non-gaming didn’t look that great in Las Vegas nor Macau, at least not to us. Every non-gaming category at each property fell short of our estimate. We realize that non-gaming is outperforming gaming but that’s not much of a reference point. In fact, F&B in Las Vegas was the only segment posting a material YoY gain. Macau was a disaster.
  • Property level margins – Property revenues were actually higher than we projected in both LV and Macau, driven by more casino activity than our dire prediction. However, margins missed at both, despite better Mass revenues.
  • Promotional activity – Higher than expected at both properties and much higher as a % of revenues. It’s a competitive environment in both markets and that’s hurting margins.
  • Management very negative on the junkets – Steve Wynn’s comments on the junkets are probably what’s spooking investors. Mr. Wynn intimated that more junkets may go out of business and that Wynn will be pulling some credit from the junkets. The junket business is still deteriorating and WYNN maintains a lot of exposure still.
  • Slots in Las Vegas – The slot segment is very high margin and a good proxy for the overall health of the Strip. Slot handle was worse than expected and without that segment performing well, it’s difficult to corroborate the U shaped Las Vegas recovery thesis

CONCLUSION

Yet another weak quarter at the property level, but it’s Steve Wynn’s comments that may be the problem for the stock today. WYNN has had a nice recovery off the bottom but LVS looks like the better long play over the near term. Investor focus should shift to the Mass segment which is obviously performing much better. Importantly, Mass faces the first negative comp here in October and while we’ll hold off on proclaiming that the segment has stabilized, mass stabilization should be the investor narrative and that will be good for LVS’s stock. Buy LVS on weakenss.


REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

Yesterday we spoke with James Robb a Director at the Livestock Marketing Information Center (LMIC) regarding the looming crash in beef prices. Below please find the materials and associated audio from our conversation:

 

AUDIO: CLICK HERE

MATERIALS: CLICK HERE

 

A 50% decline in beef prices back to historical averages is well within the realm of possibilities. Below is a 30 year look at Feeder Cattle CME $/lb., current levels are greater than two standard deviations above the average. The information that James Robb provided supports the potential decline down to historical levels.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 6

 

CORN

Corn, a core component of feed has been volatile, and is projected to stay that way when looking short-term. When looking longer term prices have leveled off and are projected by LMIC to remain stagnant to slightly down.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 1

 

CATTLE

Heifers can either go to feed lots to be slaughtered or to breeding herds for beef cow replacement. In the chart below you see that heifers being held for beef cow replacement ticked up +6.5% in 2015. In simple terms that means for the time being the herd is growing and less cows are being slaughtered.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 2

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 3

 

The decrease in slaughtered cattle is because you simple don’t need as many cows, because they weigh more than ever.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 4

 

Cattle cycles typically run anywhere from  seven to ten years. We are at about the two year mark and LMIC predicts that we are still 2-3 years away from the peak. This means declining prices for longer, providing a tailwind for restaurant companies until 2018. Cattle inventory is projected to rise sharply as shown by the brown line in the chart below.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 5  

 

What event(s) could lead to significantly lower prices?

  • Macroeconomic factors, if the U.S. economy goes into a recession in 2017, prices will fall.
  • Mother nature, if we get another drought in the southern plains, we will have a herd liquidation that will have a short term impact on supply.

 

Will the lower for longer corn market lead to lower beef prices?

  • Yes, cost of production eventually works through the system after a certain period of lag. If corn stays stable or trends lower that will be supportive of continued herd growth and lower prices.

 

Lower beef price will benefit many companies across both the quick service and casual dining sectors. We want to highlight a couple of our core LONG positions, McDonald’s (MCD) and Del Frisco’s Restaurant Group (DFRG). MCD buys roughly $1bn of beef per year for its burgers and with prices set to drop considerably over the coming years, this will continue to be a strong tailwind for the company as it navigates its turnaround. DFRG’s Double Eagle franchise is a dominant player in the high-end steak industry, lower beef prices will be a major tailwind for this company as it is currently battling traffic issues.

 

Other companies that benefit are SHAK, QSR, SONC, JACK, BLMN, HABT, WEN and RRGB. SONC, JACK and WEN remain on our SHORT list due to a more challenging sales environment and aggressive street expectations.  In addition, valuations for all three companies remain extended, but have come in due to the decline in the stock prices over the past 6 months.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Cartoon of the Day: One Big Joke

Cartoon of the Day: One Big Joke - rate hike cartoon 10.15.2015

 This one speaks for itself... 

 


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Why The Russell Is Getting Whacked

Poor economic data out of Germany and Japan continues to weigh on the DAX and Nikkei which are down -17% and -13% respectively from their recent highs. You can add the Russell 2000, here at home, to the list of market dogs. “The Russell looks like hell,” Hedgeye CEO Keith McCullough said on The Macro Show earlier this morning.

Why The Russell Is Getting Whacked - Small cap canaries 09.23.2014

For the record, the small-cap index is down over -10% from its recent high hit earlier this summer. As McCullough notes, “The drawdown from the all-time high is currently two times the drawdown in the S&P.”

 

Why The Russell Is Getting Whacked - russell 2000

 

Why?

 

According to McCullough, the hedge fund community continues to use S&P futures as their short-selling mechanism, not the Russell, which does not have that same amount of short interest. So small-caps tend to fall much faster.

 

In addition, the Russell is anchored to a slowdown in U.S. growth to a greater degree than the S&P 500. In other words, it’s a pure play on flagging U.S. growth expectations (which happens to be our house view).

 

Got #GrowthSlowing?

 

Our take: With the continual implosion of U.S. economic data – from PPI to Retail Sales – setting up an increasingly nasty-looking Holiday season, shorting domestic growth should continue to work out. 

***

Editor's Note: Interested in getting a step ahead of consensus? Take a look at our suite of contrarian investment products.


Is That Dennis Lockhart's Tail Between His Legs?

Perhaps you missed it.


This summer offered investors an epic buying opportunity to get long Long Bonds.

Is That Dennis Lockhart's Tail Between His Legs? - 10YR TREASURY CARTOON 08.19.2015

As our subscribers are well aware, we've been warning on global growth slowing and urging investors to get long via TLT and other related vehicles for some time now. It was a non-consenus call when we first made it and we’re sticking with it.

 

Check out the chart below. What a difference a few months can make.

 

Is That Dennis Lockhart's Tail Between His Legs? - keith twitter 10yr

 

Make no mistake, our recent macro calls — #Deflation, #GrowthSlowing, #LowerForLonger and one of our newest ... #SuperLateCycle — have been spot on. Is it possible that Old Wall consensus is warming up to our thinking?

 

Look no further than a slew of media stories yesterday. CNBC, Bloomberg, and a host of others are featuring front-page stories on themes our macro team has been warning about for some time now.

 

Is That Dennis Lockhart's Tail Between His Legs? - deflation

 

The icing on the cake? In this morning's paper Wall Street Journal Fed watcher Jon Hilsenrath delivered a beauty of a headline

 

Is That Dennis Lockhart's Tail Between His Legs? - hilsenrath 3

 

Just. Beautiful.

 

Hopefully you recall that just two months or so ago in a WSJ interview with Atlanta Fed President Dennis Lockhart, Lockhart suggested that the Fed was "close" to a rate hike in September. See headline below.

 

Is That Dennis Lockhart's Tail Between His Legs? - hilsenrath 2

 

Close? Weeeell...not so much.

 

But thanks for the update Jon.

 

As for us, we'll stick with our #LowerForLonger call.


INITIAL JOBLESS CLAIMS | 42-YEAR LOWS

Takeaway: Mixed messages on the state of the labor market abound. NFP data signals slowing while claims signal full steam ahead.

There's growing consternation around the strength of the labor market in the wake of consecutive disappointing NFP reports for August and September. The weekly initial jobless claims series, however, continues to show strength exemplified by this latest weekly reading -- the lowest reading in 42-years. What's an investor to do?

 

Our framework for thinking about late cycle risk is to start by looking at recent cycles. The last three cycles saw claims stay below 330k for 24, 45 and 31 months before the economy entered recession. The average duration of those three cycles was 33 months (max: 45, min: 24). With claims having just finished their 19th month of strong, sub-330k claims, we are 5 months from the min, 14 months from the average and 26 months from the max. While it's always possible that this cycle could exceed that of the 90s, we think that's a low probability scenario as the 90s cycle represented a near-perfect goldilocks confluence of tailwinds from demographics, technology, peace and government. In other words, we'd put our left tail/right tail boundaries at 5 and 24 months before the start of the next recession and we'll continue to watch the claims data for signals of deterioration. So far, it continues to print lower. 

 

In energy states, indexed claims rose in the week ending October 3 while falling for the country as a whole. The chart below shows that the spread between the two series increased from 18 to 19 week over week.

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims18

 

The Data

Prior to revision, initial jobless claims fell 8k to 255k from 263k WoW, as the prior week's number was revised down by -1k to 262k.

 

The headline (unrevised) number shows claims were lower by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 265k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.0% 

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims2

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims3

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims4

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims5

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims6

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims7

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims8

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims9

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims10

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims11

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims19

 

Yield Spreads

The 2-10 spread fell -2 basis points WoW to 142 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims15

 

INITIAL JOBLESS CLAIMS | 42-YEAR LOWS - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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