“The future belongs to people who see possibilities before they become obvious.”  
-Ted Levitt
I’m guest-writing the Early Look this morning for Keith, and he asked me to give a glimpse into why I’m so focused on Mobility for the next few years, with our new Mobility Black Book, and the conference call we’re hosting for Tech subscribers tomorrow afternoon. Here goes, and feel free to ping me with any feedback/questions at .
The Mobile Internet has the power to pull us out of the current economic downturn.  That’s how powerful this innovation cycle is and will be over the coming years.  It will impact every consumer with an Internet-enabled mobile phone (meaning everyone) and it will alter the way every business does business.
If that sounds a bit crazy, take a second to put away your Blackberry or your iPhone – these devices aren’t what I am talking about.  Far from being well underway, mobility – especially the Mobile Internet – is just beginning.  This isn’t about packaging desktop applications into smaller form factors.  The Mobile Internet is a different animal altogether.
Mobile devices will increasingly be connected to the cloud and able to leverage all information – in real time.  Simply put, the ability to marry ubiquitous information with location-based, personal productivity, and social-networking services will lead to magical outcomes.  Yes. I said “magical.” Mobile ecosystems are just now beginning to grasp what can be built to take advantage of connected mobile devices.  Apple and the iPhone showed the world a teeny slice of what’s possible, but thinking the iPhone is our final destination is like thinking the telegraph was the crowning achievement in telecommunications.
Currently, just 20% of mobile devices worldwide use 3G networks, which is the minimum required for modern smartphones, and the inflection point for 3G and smartphone growth will be in 2010. And, as a sublimely smart colleague of mine told me this morning, 2010 is a mere 6 ½ weeks away.
Over the last two years, Apple and the iPhone have shown the world what is possible, and we are on the cusp of an explosion that will leverage mobile platforms to drive new services, then the new services drive new demand, then new demand drives new devices. Rinse and repeat. For the end user, the handset maker and the application/service developer, this is a self-perpetuating, virtuous cycle.
So what? As the Mobile Internet matures, the economics will go towards online commerce, paid services, and advertising, while data will get proportionately less revenue, just as with Web 1.0.  Make no mistake, data revenue growth will still be substantial, as more data flows to more devices more often, but other segments of the market will grow faster.  At the same time, new marketing, advertising and customer experiences will arise from the combination of local, social, and mobile which allows businesses to efficiently hit their targeted demographics. The companies that ‘get’ this will leapfrog the competition.  
It’s been a decade since we’ve seen this sort of sea change, and it won’t hit every name the same. Some tech companies have used the recession to invest and position themselves (GOOG, ADBE, MOT), and some have been fighting a rear-guard action in last year’s war (RIMM, ERIC, NOK). More importantly, and harder to predict, a whole generation of lesser-known infrastructure players will win big here, and with Switzerland plays that leave them immune to the vagaries of product cycles. Think Levi Strauss selling pickaxes to the gold rush.
Imagine a world with five billion mobile devices.  Data will be real-time, around the world, instantly.  
Imagine getting into your car and having the latest traffic information, music and news that’s most relevant to your exact location and plans for the day fed to you via the cloud.  
Imagine your wife’s birthday combining with her social network’s comments and your e-commerce platform to suggest, order, inscribe, and deliver (ahead of time!) the right gift at the right time.  
Imagine being able to leverage your Mobile Internet, camera, location and search to get the best deal available, real-time, on anything.
Imagine knowing what Americans are worried about this week.
Imagine knowing when your father’s insulin shot is late, and when your daughter has gotten an A.
Keep on imagining…

Rebecca F. Runkle
Managing Director



FXE – CurrencyShares Euro Trust
We bought the Euro on 11/12 on a down move against our short position in the British Pound. A bullish formation in the Euro remains and we think the ECB could hike before the Fed does.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16 and 11/16.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Here are our MGM notes from the Las Vegas meetings.



LVCVA announced that they got six new conventions.  Aria is pricing above Bellagio 80% of the time over the next few months – not what we’ve heard.


For Aria - will room revenue as a % of total be smaller than their other properties?

Probably, given all the condo hotels.   We will start with a block of rooms on December 16th and then scale up the opening through January 1st.  Vdara – 1,500 rooms,1/2 condo 1/2 hotel, of that amount open by January.  Booked 45% of the 750 condos that are available.  They prefer to walk those condo customers over to Veer.  Veer has 750 units - 65% have been contracted out.  Will not offer financing to condo hotel buyers.  Condo owner can't contractually rent those units for less than 6 months at a time. Don't know how many of their buyers will be able to close.


Rough start to marketing Aria's convention business.


High end has the biggest swing between week and weekend rates.


Crystals will open with 30% of the 500 salable square feet. 85% is contracted out. $130 per square foot rates - $30mm in EBITDA initially and then scale. 


Funding gap post opening - $244mm is the gap.  Next $490mm goes to DB, next goes to them, and the next gets split 50/50.  Another unsecured deal - have $2bn of maturities - Macau IPO, leveraging up City Center next year, secured is cheapest option but that option is small.  MGM would still look at asset sales.  Equity linked products are a painful way to go.


They would rather shutter floors than drop pricing on Aria.  Pre-opening will flow through the income statement not through the equity and affiliates line.  $5bn new cost base over 20-25 years.


Plan to recap City Center and dividend back the proceeds.


“No way” to PNK acquisition.


Think they can get $800mm- $1bn out of MGM macau - 50% to them. Think they can do $300mm next year in ebitda.  Secured basket is a little under a $1bn now.  Convert is a last option. Haven't had deep discussions with the banks on rollover.


Didn't comment on the $150 ADR we had been hearing for Aria. 


A lot of the conventions for 4Q09 were canceled and it is still hurting the city.


Think that they will be able to hold rate next year/raise rates in 2010 given their occupancy. Pretty significant portion of rooms booked through OTAs.


AC not super excited about that market for next year. IPO in Macau may make them more comfortable.


This past weekend was very good.



The Macau Metro Monitor.  November 18th, 2009



Mainland tourists outspend and outstay most foreign tourists, according to new information from the Statistics and Census Service.  The per-capita spend of Mainland visitors in the third quarter was MOP 3,268, almost twice the average spend of other visitors.  Overall per-capita spend of visitors declined year-over-year by 9%. 


In the third quarter of 2009, per-capita non-shopping spending (excluding gaming expenses) of visitors fell by 12 percent year-on-year to MOP 931, of which expenses on Accommodation and Food & Beverage accounted for 47% and 31%, respectively.

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.

TJX: The Street Knows It

With TJX results out today, we revisit a debate we had on October 20th.  Not a whole lot has changed (stock price or expectations) with today’s solid results and outlook.  The reality is, for the past few quarters the process with TJX is almost like clockwork.  Issue conservative guidance, beat sales month after month, pre-announce upside, exceed earnings by a penny, and reissue conservative guidance.  Underlying all of this of course, is strong demand for TJX’s value offering and commensurate customer traffic gains.  Along the way, we have been quick to point out that the benefits of the “perfect storm” of quality inventory supply coupled with unprecedented consumer demand for “value” have not yet been exhausted.   Today’s results support our prior conclusion, but also make us ask the question “how much better can things really get.”


As a reminder, our October 20th 2009 comments:


Our internal process is one that openly encourages debate when we disagree. That’s when our hit ratio goes up… Here’s our take on TJX.  The bottom line is that big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts -- at least at this price.


Keith: Stock looking to be way overbought now fyi… on the news… I like shorting these for a TRADE.


Brian: Yes, TJX gets put in the ‘quality’ bucket in retail. But let’s not forget that margins are at peak, and we’re coming off an 18-month period that helped off-price retailers like TJX and ROST materially. The preannounced comp was a definite positive, but in looking at the 2 and 3-year trend, there is really no change in trend. If anything, it is slightly negative. The gross margin story here will be short-lived, with one more quarter before the financial profile looks less favorable. I’m not going to get too excited about the company’s announcement about an increase in long term unit growth to 4-5% as we’re already looking at a mature company with 2,700 big box stores.  There are other names I’d short before this one, but there will be a time over the next 1-2 quarters where this will make a lot of sense. If it is overbought on this news, then I won’t argue to stay away.


Levine: Recognizing that the incremental data points on TJX are likely to remain positive, I wanted to make a few points before putting the short TRADE on. 


Key factors to look out for over the next 3 months:  1) EPS guidance way too low, but the Street is obviously tuned in to this, 2) they took up the square footage growth rate for next year to 5% from 4%, which is fairly respectable for a company of this size.  I can’t knock them for investing into strength. And 3) the gross margin compares in Q4 are a joke (last year they got caught like the rest of retail with too much inventory).


On the flip side, the 2 year comp is holding steady but not accelerating.  With that said, this is still one of a few retailers with positive 2 year trends. 


Final note here, is that there may be support from other retail/apparel earnings as they begin to trickle out.  We’re now seeing a handful of positive pre-announcements as well which is likely to build momentum.  To the extent you view this is as a negative to being short, it is probably one of the biggest risk factors in the near-term.


Team Conclusion: Hold off at this price. Big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts.



Fast forward to today and management remains bullish (perhaps increasingly so) and expectations are high.  We are now at the point where the Street simply doesn’t believe guidance and its embedded conservatism.  Let’s use 4Q same store sales guidance as an example.  Management would like the Street to consider that even with the positive commentary on traffic gains and the company’s ability to “keep” its new customers, same store sales are going to decelerate sequentially by 100-300 bps on a two-year basis.  While the math doesn’t tell the whole story, the disconnect between the bullish commentary and the company’s forecast for $0.66 to $0.71 in 4Q does.  Our model is shaking out at $0.89 for 4Q, and we would not be surprised to see the consensus trickling higher as the rest of the Street goes through the same exercise.  Holding the two year trend out of 3Q constant,  we’re expecting comps in the 8-9% range (vs. guidance of 5%-7%) and operating margin expansion of 370 bps (guidance is for +170bps). Recall that last year even TJX got caught with excess inventories (and subsequent clearance) as the overall retail environment went through a dramatic transformation.


Calling the top is a dangerous game, but we continue to inch closer to a time when increasingly elevated expectations can no longer be exceeded.  Earnings are going higher and the Street knows it.  Comparisons remain easy until the Spring and the Street knows it.  Management is stepping up its reinvestment (store growth, marketing, share repurchase, and bonuses) and the Street knows it.  So, while there is still no doubt that 4Q will likely be another quarter of substantial upside, we can’t help but wonder what happens as the same-store sales revert back to “normal” and new peak margins become harder to achieve.


TJX: The Street Knows It - 1


TJX: The Street Knows It - 2


UK Inflation Pops, Note the Compare

A report from the UK Office for National Statistics today showed the country’s Consumer Price Index for October rose 1.5% year-over-year, from 1.1% in the previous month.  This seemingly large jump is better understood within the context of the precipitous fall in energy prices last Fall from manic highs in the summer of 2008 (see chart).


In fact, prices from fuels and lubricants in the UK fell by 0.7% between September and October this year versus a fall of 6.1% a year ago, which was a major contributor to October’s inflationary print. Month-over-month CPI rose 0.2%.


In 2009 we’ve stayed away from (or shorted) countries with financial leverage.  We continue to see headwinds in the UK into 2010 including rising unemployment, ballooning government debt, and a weak Pound for the import-heavy economy (for more see our post “Pounded Pound Breeds Inflation” on 11/6).  The government’s recent decision to bailout RBS and Lloyds for a second time to the tune of 31.3 Billion Pounds and the extension of the BOE’s bond purchasing program by 25 Billion Pounds after printing a contracting Q3 GDP report (-0.4% Q/Q) add support to our bearish conviction.


In our virtual portfolio we remain short the UK via the etf EWU and short the Pound via FXB. 


Matthew Hedrick



UK Inflation Pops, Note the Compare - UK CPI


Could be attractive at the lower end of the range.  Risky but attractive long-term growth profile and we love the tax efficiency.



Sands China will price Thursday on the Hong Kong Stock exchange.  Here are the offering details:


SANDS CHINA VALUATION - sands china offering details


The valuation range looks reasonable, although only attractive at the $1.34 low end of the range in our opinion.  Based on our numbers, the range on 2010 EV/EBITDA is 13.5-16.0x.  That may look expensive but there are two major considerations.  First, the net debt includes about $2 billion of capitalized costs for Lots 5&6 development without any real EBITDA contribution until 2012.  We believe the initial ROI on this development will struggle to reach 10% but it does have some incremental value.  Second, as we discussed in our notes on the Wynn Macau IPO, Macau does not impose a corporate income tax on gaming profits.  Thus, a 16x taxed equivalent multiple is close to 10x.


To address the first point, we think it is appropriate to look out to 2012 when the first and major phase of the Lots 5&6 development will be open for a full year.  The EV/EBITDA valuation on 2012 is a much more reasonable 9.5-11.0x.  Relative to Wynn Macau (1128.HK), there is very little discount on 2010 and 2011.  However, after giving credit for Lots 5&6 (2012 EBITDA), the Sands China discount is almost 15% from the midpoint of the offering range to Wynn Macau’s 2012 valuation.  We believe that this discount is appropriate. 


Here are the valuation metrics for Sands China:


SANDS CHINA VALUATION - Sands China valuation summary


The following table outlines our view of the value of Sands China.  We think 2012 EBITDA deserves a 14x multiple which would take the taxed-equivalent multiple below 10x.  Fair in our opinion.  Discounting that back three years gives Sands China a current value of $1.51, right in the middle of the offering range of $1.34-1.79 and 13% higher than the low end of the range.



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.