The conf call discussion conveniently omitted high hold and market share decline in the Macau Mass segment.



We found the quarter somewhat disappointing.  Not so much Las Vegas, which was a disaster, but more Macau and more specifically, Wynn Macau’s Mass performance.  Wynn Las Vegas/Encore was legitimately bitten by the low hold bug and normalizing hold would’ve resulted in EBITDA in-line with our projection.


Wynn Macau EBITDA of $142 million was right in-line with our estimate so why are we disappointed?  Well, we knew Mass revenues were going to be north of $500 million but we didn’t know that the property played as lucky as it did.  Indeed, Mass volume at Wynn Macau was only up 5% in Q4, which means the property lost a lot of market share in Q4.  Hold percentage was 290bps above the midpoint of the normal range which benefited the property by about $8 million in EBITDA.


The high Mass hold was not discussed on the conference call.  Rather, management pointed out that low hold cost Las Vegas $14 million in EBITDA, and VIP hold in Macau was at the low end of the range (resulting in only a $3 million EBITDA hit per our calculation).


Back to the Mass market share issue:  in Q4, Mass revenue for the Macau market increased 35%.  We don’t know what the overall hold was for the market but the law of big numbers tells us it was probably closer to normal than Wynn Macau's.  Wynn only grew its Mass volume by 5% while overall Macau Mass revenue increased 35%.  That’s a pretty big drop. In January, we know that the overall Mass business grew 42%, but Wynn Macau only generated a 2% increase.  We don’t know what Wynn’s hold % was in January but it would have to be extremely low to fully explain the loss of market share. It does look like Wynn’s overall market share will bounce back a bit in February but we don’t have the details yet.


In the following chart, we’ve normalized Wynn’s Mass revenue for variances in hold percentages – 20% is assumed normal.  The market share degradation can be clearly seen.


WYNN LOSING A LITTLE MASS APPEAL - wynn macau normalized mass market share


Why do we care so much about Mass market share?  Wynn does very well in VIP but the profit margins are so much higher in Mass.  Moreover, we are expecting a pretty sharp deceleration in VIP volumes for the market, consistent with past tightening of liquidity and sequential economic slowdowns in China.  Also, comparisons get more difficult in 2H 2010. 


In the interest of objectivity, we would point out that management’s Q1 commentary was very positive regarding Macau.  However, we already know that Macau revenues ytd are up about 60% so this should not be a surprise.  What may surprise people is that Wynn Macau’s revenues are likely up less than that of the market.  Due to low hold and Mass volume share declines, Wynn Macau was able to generate a revenue increase of only 27% in January vs. the market at 66%.


The Macau Metro Monitor, February 26th, 2010


Macau's unemployment rate for November 2009 - January 2010 was 3.0%, a gradual improvement from 3.1% from October-December 2009 period and a 0.4% improvement YoY. The underemployment rate was 1.7%, lower than the 1.9% from the previous period and a decrease of 0.1% YoY. Labor force participation rate stood at 70.8%, a 2.1% drop YoY. Analyzed by industry, employment of the Manufacturing Sector and Restaurants & Similar Activities increased from the previous period, while that of Wholesale & Retail Trade registered a decrease. The number of the unemployed decreased by about 400 from the previous period to 9,500.

Fashionable Fear

“There is nothing new except what is forgotten.”

-Rose Bertin


Marie-Jeanne Rose Bertin was the first fashion designer of consequence in Europe’s 18th century. Some argue that she deserves to be credited with bringing “haute couture” to our lives.  Bertin’s success story is an inspiring one. She didn’t come from much. She didn’t do group-think.


As our in house fashionistas, Eric Levine and Mick Malisic, often remind me, popular culture finds its way into and out of our wardrobes. Fashion, like investing, is cyclical. The faces and the names may change, but inspirations are often born out of “what is forgotten.” This is a great metaphor for measuring the amplitudes and durations of market risk.


On Wednesday, I titled my strategy note, “Selling Fear” – and that’s exactly what the manic media delivered to you yesterday. This was proactively predictable. Selling Fear is currently very fashionable and I think that you should continue to capitalize on understanding that.


Let’s start with what’s become the most consensus fear in the Federal League – sovereign debt default in Greece. Yesterday was unique in that you saw two huge contra-indicators permeate the market’s early morning trading at the same time:

  1. Fears of Moody’s and S&P downgrading Greece’s debt rating
  2. Fears of 3 million Greeks striking in the streets

So, let’s consider the second fear first, because the groupthink associated with it is the most glaring. Anyone with a college education knows that Greece is not a large country. There are only 11.3 million people in Greece, so when you see 3 million of them on strike, it’s neither a positive event or a unique thought to consider it one. Both the Greek stock and bond markets have been discounting this national strike for weeks. Mr. Macro Market looks forward.


The first fear is what Harvard’s Ken Rogoff himself labeled the “worst early warning indicator of banking and currency crises” (for those of you who have the reference material for Sovereign Debt For Dummies on your desk, Reinhart & Roggoff have Moody’s sovereign ratings outlined in a nice table for us on page 280).


Now any real player knows that Moody’s and S&P are contra-indicators in this global macro game of risk management. What’s most frightening about this week is that the peak in fears about Greek debt defaults were, in fact, partly driven by Ken Rogoff himself! (The #1 Bloomberg headline on Tuesday morning was “Harvard’s Roggoff Sees Bunch of Sovereign Defaults”).


David Einhorn at Greenlight Capital recently gave a speech where he too outlined the implied value of Moody’s as a contra-indicator. In his speech at the Value Investing Congress on October 19, 2009, he captured the reality of Moody’s Perceived Wisdoms with this:


“My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody’s does not have a long term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth.”


Canadian hockey knucks to Mr. Einhorn for backing up the risk management point that both we and Ken Rogoff have signed off on. Marked-to-market prices are the best leading indicator of risk. Moody’s remains a lagging groupthink indicator, at best.


So what do we see this morning from a real-time price perspective that’s bullish?

  1. Greek credit default swaps (CDS) are making lower-highs
  2. Greek bond yields are making lower-highs
  3. Greek stocks are making higher-lows

Hmmm… I wonder what those who were dressed up like Marie Antoinette talking about their revisionist risk management process on CNBC yesterday have to say about that? Risk management works on both sides of the puck folks. Backcheck – Forecheck – Paycheck! Beware of those one way players Selling Fear.


I have taken this week’s global fear factor as an opportunity to invest 12% of the cash in the Asset Allocation Model into global equities and currencies. Our cash position has dropped from 67% at the beginning of the week to 55% this morning. I now have a 9% and 3% asset allocation to US and International Equities, respectively.


My immediate term support and resistance lines for the SP500 are now 1093 and 1119, respectively.


Best of luck out there today and go Canada and USA hockey tonight!





FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.


TUR – iShares Turkey — Turkey has been pounded in the last week and fears were delivered upon with the inside information of 40 retired military officers arrested on 2/24/10. We'll buy the fear for a trade. The long term TAIL for Turkey is bullish, from a price.


XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The S&P 500 finished down 0.21% yesterday, but well off their worst levels of the day.  Thursday’s decline is largely a function of global MACRO headwinds, as the earnings season is in the rear view.   


Yesterday in the USA, initial claims rose 22,000 to 496,000 for the week ended February 20th, significantly above the 460,000 consensus.  Consequently, the 4-week rolling claims number rose 6,000 to 473,800 from 467,800.  This latest print pushes claims squarely outside our 3 standard deviation channel. For reference, our channel reflects the trajectory that's been in place since the March 2009 peak in claims. While we had been hesitant to call a reversal in the underlying improvement trajectory, the fact is that six weeks of data do make for a trend.  See our post on from yesterday for more details. 


On a global MACRO front, sovereign credit concerns were exacerbated after Moody's, the only ratings agency that still has an A-level rating on Greece, said that it may lower its A2 rating within months.   With the Moody’s data point a lagging indicator, the VIX was down 0.84% yesterday and has declined 2.6% over the past week and 20.9% over the past month.  The VIX is currently broken on all three durations (TRADE TREND and TAIL) and today’s Hedgeye Risk Management models have levels for the VIX—buy Trade (19.03) and sell Trade (22.82).


Yesterday, durable goods orders jumped a better-than-expected 3% in January, though upside was largely a function of stronger aircraft bookings, as orders excluding transportation declined 0.6%.  The Industrials (XLI), which is one of four sectors that is positive on both TRADE and TREND, was one of the three worst performing sectors.  Rounding out the bottom three performing sectors were Technology (XLK) and Financials (XLF). 


Yesterday, Technology (XLK) was the worst performing sector on the day.   Semiconductors were under pressure for much of the day; the SOX down just 0.3% on the day.  Since the beginning of the earnings season the semis seem to get out from underneath concerns about inventories and order cancellations. Additionally, the MOBILITY space took it on the chin with PALM down 19.3% after guiding Q3 revenue below consensus and catching multiple downgrades.


The two best performing sectors were Consumer Discretionary (XLY) and Consumer Staples (XLP).  The S&P Retail index gained 0.37% yesterday, following a 1.96% move on Wednesday.  Within the XLP, soft-drink stocks were in focus today after KO announced that it would purchase the North American operations of CCE, which was up 32.9%.  DPS also was up on M&A speculation and after the company boosted the size of its buyback and better than expected earnings and guidance.


On the MACRO calendar today we will see the first revision to Q4 GDP, February Chicago PMI, February final U. of Michigan Confidence, February NAPM Milwaukee and January existing homes sales.  Equity futures are trading above fair value in a continuation of the late rally yesterday which saw a majority of the session's losses erased by the close. The Q4 GDP report will be the main highlight of a number of economic reports today.  As we look at today’s set up the range for the S&P 500 is 26 points or 1% (1,093) downside and 1.5% (1,119) upside. 


Copper rose in London, paring its first weekly drop in three weeks, as the dollar declined and stronger Japanese industrial production fueled speculation that demand will remain strong.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.40).


India, the world’s biggest consumer of gold, raised import duties on gold, silver and platinum to reflect higher global prices for the precious metals.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,124).


Crude oil is in position for the biggest monthly advance since October, amid speculation OPEC won’t increase output quotas and as the dollar is slightly weaker.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.10) and Sell Trade (81.95).


Howard Penney

Managing Director














Nike (NKE): Black Book - Call Tomorrow


   Conference Call TOMORROW, Friday February 26th. 11 a.m. EST


We've been vocal over the last year about warming up to Nike as a key idea for 2010. Specifically, there are several developments masking the magnitude and duration of an earnings recovery.

Since we announced this conference call last week, Nike is now seeing an intermediate term TREND (3 months or more) breakout at $64.18, not to mention Goldman Sachs playing follow-the-Hedgeye and adding NKE to their sooper-dooper conviction buy list this morning.
We'll be releasing a Black Book and hosting a conference call for subscribers of Hedgeye's Institutional Retail vertical -- and for qualified prospective institutional subscribers -- tomorrow, Friday February 26, at 11 a.m. EST.
We will go through why, in detail, we think Nike deserves a closer look, focusing on the severe lack of context in how actions over the past three years are coming together today to re-accelerate earnings growth, specifically:


  • A strong catalyst calendar (analyst day in May, World Cup in June/July)
  • Increased product flow - as a result of enhanced productivity after last year's re-organization
  • Magnitude and duration of an earnings recovery - after 2 years of flattish earnings

Contact or reply to this email to request access to the conference call.




Nike (NKE): Black Book - Call Tomorrow - NKE BB 2 10 Cover








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