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US STRATEGY – DOWN BUT NOT OUT

Yesterday, all of the major indexes posted their biggest one-day losses for 2010 on accelerating volume.  The Hedgeye Risk Management models are still showing that the TRADE and TREND for the S&P 500 is BULLISH, while the Utilities (XLU) is the only sector to be broken on TRADE.

 

We woke up to another round of the Chinese withdrawing stimulus yesterday, which contributed to markets posting their biggest one-day losses in 2010.  Also, the People’s Bank of China raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan. 18.

 

THE CHINESE OX IS IN A BOX!

 

On the MACRO front it was another quiet day which means there are no vapors to help push the RECOVERY trade higher.  The VIX also had its biggest one day move in 2010 rising 3.9%.  With the VIX down 15.8% so far in 2010, investor complacency has crept into the market.  The Chinese can clear that up quickly if you are not paying attention. 

 

The best performing sector yesterday was the Consumer Staples (XLP).  The grocers and food stocks were the bright spot in the staples after the Q3 earnings beat and upwardly revised guidance from SVU and KFT.   HSY was the best performing packaged food stock on reports that Ferrero ended talks with the company regarding a rival bid for Cadbury.

 

Yesterday in the US the Materials (XLB) was the worst performer.  The XLB is one of the sectors with the most leverage to the recovery trade, as the CHINESE OX IN A BOX theme will work against the XLB.  In addition, aluminum stocks were hit hard in the wake of the earnings miss from AA.  The fertilizer, steel and precious metals stocks all finished lower on the day. 

 

The Financials have seemed to run into a brick wall on the back of increased regulatory concerns.  The renewed regulatory concerns were grounded amid reports that the Obama administration is considering assessing some kind of tax on banks to help close the budget deficit and recoup TARP losses.  The banking group finished lower for just the second time this year, with the BKX down 1.7% on the day.  Within the XLF, the large-cap names BAC, C, WFC and JPM were among the worst performers.  The weakness in the XLF also included the brokers, with MS down 2.84% and GS down 2.18%, the latter of which finished down for a third straight day.

 

The Technology (XLK) underperformed the S&P 500 by 20bps, as the SEMI stocks weighed heavily on the sector with the SOX down 3.59%.  The SOX suffered its biggest one-day pullback since 10/1/09. 

 

As we wrote about yesterday, living up to expectation is difficult to do.  The selloff in the SOX might be discounting that the stocks are already pricing in upside to current December quarter earnings season.  Outside of the semis, ERTS declined 7.8% after the company's disappointing Q3 pre-announcement and decreased full-year guidance.

 

The range for the S&P 500 is 35 points or 1.5% (1,153) upside and 1.5% (1,118) downside.  At the time of writing the major market futures are trading up slightly.    

 

Yesterday the CRB declined 1.68% on the back of the Grains and Energy.  The soft commodities Orange juice, Sugar and Coffee were the best performing on the day.   

 

In early trading today Copper is trading near a two week low on the back of the news out of China.    The Hedgeye Quant models have the following levels for COPPER – buy Trade (3.26) and Sell Trade (3.49).

 

Yesterday, gold declined by 1.9%, its biggest drop since 12/17/09.     The Hedgeye Quant models have the following levels for GOLD – buy Trade (1,123) and Sell Trade (1,160).

 

In early trading Crude oil is trading down for the third day in a row.   The Hedgeye Quant models have the following levels for OIL – buy Trade (78.88) and Sell Trade (84.28).

 

Howard Penney

Managing Director

 

US STRATEGY – DOWN BUT NOT OUT - spx1

 

US STRATEGY – DOWN BUT NOT OUT - usdx2

 

US STRATEGY – DOWN BUT NOT OUT - vix3

 

US STRATEGY – DOWN BUT NOT OUT - oil4

 

US STRATEGY – DOWN BUT NOT OUT - gold5

 

US STRATEGY – DOWN BUT NOT OUT - copper6

 


THE M3: AIR CHINA WUHAN-MACAU SERVICE

The Macau Metro Monitor.  January 13th 2009.

 

 

NON-STOP WUHAN-MACAU SERVICE chinaeconomicreview.com

Air China will fly between Wuhan and Macau four times a week, starting January 15th.  It will operate an Airbus A320 aircraft on the route.


BACCARAT SAVING THE STRIP ONE GAMBLER AT A TIME

Yeah the hold percentage was a touch higher than last year and some of October’s slot revenue were included in November, but this was a pretty good month for the Strip.

 

 

The state of Nevada released a shocker today.  Strip gaming revenues increased 8.3%.  Digging deeper into the numbers, it is clear that the quality of the numbers was less than the headline would indicate.  Nevertheless, November was a pretty good month for the Strip considering the environment and recent trends. 

 

The Baccarat business continues to shine.  Despite a huge Macau market in their backyard, the Asians keep coming to Las Vegas.  Strip Baccarat revenue increased 136% y-o-y in November.  A higher hold percentage certainly contributed but Baccarat drop still increased 84%.  The following chart shows the fairly consistent outperformance of the Baccarat segment.

 

BACCARAT SAVING THE STRIP ONE GAMBLER AT A TIME - LV Strip volume growth

 

Pardon the pessimism – this was a good month after all – but there is still plenty of evidence of softness.  The following chart shows year-over-year growth a few different ways.  As we indicated, total Strip revenue increased 8.3%.  However, the casinos played a little luckier so if you use a constant hold percentage, Strip revenues would’ve only increased 2.5%.  Since Baccarat was so strong and can be very volatile month to month, we show revenue excluding that segment which actually declined 4.3%.  Finally, excluding Baccarat and adjusting the hold percentage yields a revenue decline of 10.7%. 

 

BACCARAT SAVING THE STRIP ONE GAMBLER AT A TIME - nov strip revs

 

The Baccarat performance is encouraging but we’d feel better if the improving trend was more broad based.


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BYD: WEAK EARNINGS AND MACRO HEADWINDS

We are below the Street for Q4 and now also for 2010.  The offsetting variable in our LV Locals Macro Model had been population growth and now that variable looks like a non-factor at best.

 

 

Q4 Preview

Q4 looks like it was tough one for a lot of the regionals, including BYD.  BYD’s exposure to the difficult Las Vegas Locals, Atlantic City and Louisiana (lately) markets probably positions the company to miss near and intermediate term estimates.  For Q4, we are projecting net adjusted EBITDA of $92.5 million which includes half of Borgata’s EBITDA.  On a consolidated EBITDA basis, EBITDA is estimated to be $82.6 million versus the Street at $88.0 million.  Our EPS estimate is $0.01, lower than the Street at $0.04.

 

 

2010

The ace in the hole of our Las Vegas Locals Macro Model was always population growth.  With continued population growth, the model spat out positive gaming revenue growth for 2010.  Now however, population and the labor force are flat at best and may even be declining.  Combine flattish population growth with stagnant unemployment and housing prices, the locals LV gaming market may struggle to expand in 2010, better than expected November numbers notwithstanding.

 

With the macro backdrop in place, we are now projecting adjusted EBITDA of $432 million and consolidated EBITDA of $392 million, essentially flat with 2009.  Our EPS estimate is $0.45 versus the Street at $0.49.

 

The Long-Term

Beyond 2010, the locals LV outlook is bright.  Given Nevada's low tax structure, the favorable climate, and cheap housing, we believe the market has significant long-term growth potential.  We may be one of the few in the investment community to view a potential acquisition of some or all of the Station Casinos assets favorably.  2010 should be the trough and could be the right time to double down on the LV locals market. 


Inflation Chart of The Day

Please don’t submit this chart to He Who Sees No Inflation (Bernanke). He’s about to be re-confirmed by the Senate, and he doesn’t want these 1970’s style y/y price charts messing with this 1930’s gig. Gotta keep your politics local Ben. No need for this global macro stuff.

 

The chart below outlines the recent run-up in India’s weekly Wholesale Food Inflation to +18.2% y/y.

 

This morning we also saw India’s industrial production growth rate hit +11.7% y/y. That was up +140 basis points from October and also a 25 month high. While Bernanke pretends this country is some form of a depressed 1990’s Japan, the rest of the world’s economic leaders seemed poised to continue raising rates.

 

China has raised rates twice in the last 2 weeks. Altogether, Chinese + Indian growth combined with these recent inflation reports provide plenty of support for those who aren’t being paid to be willfully blind to real-time data.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Inflation Chart of The Day - india


Red Alert Redo: Greece On Watch

Greece continues to make headlines this morning—the European Commission said in a report today that “severe irregularities” exist in the nation’s statistical data, which put into question the reliability of the previously released government deficit figure of 12.7% of GDP.

 

As the credibility in Prime Minister George Papandreou’s government continues to crumble, we’re seeing (and as expected) CDS run up, and the equity market tick down, while Greek bonds fall as investor demand increased yield. The spread between the Greek 10-year Bond and the German Bund blew out another 17bps today to 233bps (see charts below).

 

As Keith noted in his Early Look “Roll On” this morning, we’re seeing massive amounts of sovereign debt being rolled out globally. As countries refinance their debt, we’ll have our EYE on those that are simply finding near-term solutions rather than practical longer-term ones to repair their financing cracks and, in some cases, craters. Certainly, the inability of governments to pay off debt obligations is a credible threat, one we could see in the near term if supply outstrips demand despite compelling yields.

 

Matthew Hedrick

Analyst

 

Red Alert Redo: Greece On Watch - gr1

 

Red Alert Redo: Greece On Watch - gr2


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