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NUMBERS DON’T LIE

The TED spread is widening, credit risk is trading higher.  On the margin this is a bearish sign. 

 

Keith is bearish on France, the S&P 500, and Japan for a variety of reasons.  One of those reasons is that the TED spread has been expanding steadily, indicating an increase in perceived risk in the general economy.  Sovereign debt concerns in Europe are garnering a lot of attention from the investment community over recent weeks.  It is interesting to note that the correlation between the TED Spread and the EURUSD is -0.93.

 

Rory Green

Analyst

 

NUMBERS DON’T LIE    - eurusd


The Shark Line Returns: SP500 Levels, Refreshed

It’s been so long that we have put up a chart with our old mascot from 2008 (Squeezy The Shark), that the boys on our Macro Desk here in New Haven have resorted to stitching their own plush version of the deadly one from the depths. Hedrick and Dale took a picture of their creation and superimposed it on this chart – this thing looks like a minnow! We’ll work on making this thing look as concerning as the SP500 does on a breakdown through 1144.

 

We call the line that will create accelerating volatility The Shark Line (moves below/above have the propensity to get people leaning on the wrong side of the line eaten). For now, that line is the intermediate term TREND line for the SP500. Its not always the TREND line; it just is now. A lot of the bulls who missed the initial correction in this market got sucked into believing that all weakness was to be bought; expectations are what the Shark Line is built upon.

 

If this market can close at or above 1144, I’ll cover my short position in the SPY. If it can’t, there is no downside support for the SP500 to the immediate term TRADE line down at 1111.

 

If you are betting on another Monday bailout of these waters from professional politicians in Europe, all we’d recommend is to swim at your own risk.

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Shark Line Returns: SP500 Levels, Refreshed - S P


CALIFORNIA DREAMIN’ OF A RECOVERY

California is certainly not a picture of fiscal or economic health, but here is an interesting positive data point.

 

JACK management implied that their primary trouble spot is Texas rather than California.   California is a crucial market for the restaurant industry with many companies, such as JACK, CPKI, CAKE, and PEET having significant percentages of their system units located in the Golden State.   Indeed, Chairman, CEO and President, Linda Lang said that the company has seen an improvement in their California and Texas markets but “significant” improvements in underlying fundamentals at Jack in the Box are not expected until high unemployment rates in these markets for their key customer demographics begin to improve. 

 

While the typical JACK customer has not seen any recovery in California, some companies such as CPKI and CAKE have seen a pickup in their California trends.  The chart below shows the improvement seen in Retail Sales and Use Tax Receipts in California and in Knapp Track casual dining sales trends.  While it may take more time for JACK to see any improvement in its fundamentals, it is clear that that higher-end spending patterns have recovered significantly.  

 

CALIFORNIA DREAMIN’ OF A RECOVERY    - ca tax receipts

 

Howard Penney

Managing Director

 

 


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THE M3: MGM LOAN REFINANCING, LVS RISKS, MBS PROBLEMS, DSEC STATS, MACAU TRAVEL

The Macau Metro Monitor, May 14th, 2010

 

MGM GRAND MACAU TARGETS $850 MLN LOAN Reuters

MGM Grand Macau aims to refinance its existing $1.1 billion facility ahead of its IPO, according to sources.  The refinancing is expected to comprise a term loan and revolving credit, both with five-year maturities.  The $1.1 billion financing was led by Banc of America Securities Asia, Banco Nacional Ultramarino, Bank of China Macau, BNP Paribas, CCB International Finance, Hang Seng Bank, HSBC Holdings, Royal Bank of Scotland and Sumitomo Mitsui Banking Corp.  HSBC is the agent bank.  Sources said MGM was expected to favor a 10-15 bank club to complete its loan.


WHITHER THE SANDS EMPIRE NOW? Intelligence Macau

Even with the loss of Cotai architect Stephen Weaver, Sheldon Adelson is not slowing down in driving his company to capture more and more ambitious ventures.  According to IM, while Adelson is lauded for his vision and achievements in Asia, he is also known for a strong appetite for risk.  Here are some concerns: 1) How can LVS get past the government foreign labor quota?  There are only 2,000 local construction workers available for a project that requires 5,000, half of the estimated 10,000 needed for the Cotai project.  2) Because of the large loans outstanding, cash flow from MBS is not not going anywhere except back into the pockets of the Singaporean banks for the foreseeable future. 3) Risk for LVS debt-holders ballooned after the $1.75BN loan failed to sell down.  4) Using cash flow from Macau to fund other ventures such as Japan, in addition to retiring the Macau debt, could hamper fiscal management, particularly if the Chinese property market blows up.


MBS: THE WORLD'S NO.1 RESORT, JUST NOT YET Intelligence Macau

MBS is facing a number of maintenance problems right now, including power outages and water leakage.  But IM consultants are more optimistic about MBS on a bigger picture.  Consider this: all a VIP player needs to do is deposit S$100,000 in the casino account to qualify as a VIP player.  The amount he loses to the casino will be taxed at just 12%.  Compare that to Macau, where 40% goes to the government and 40-55% goes to the junket operator.  It's a no-brainer: the volumes only need to be a fraction of Macau's in order to generate similar revenues.

 

Will gross gaming revenues be anywhere near the Venetian Macao's?  Not likely, without junkets.  Is the growth trajectory going to be anything like Macau's?  No chance: the number of tables on the MBS mass gaming floor today is the same number that will be there in 2020.  But this is a true integrated resort. It should have no problem paying back its creditors with the cash flow generated by all of its components.

 

VISITOR EXPENDITURE SURVEY FOR THE 1ST QUARTER 2010 DSEC

Per-capita spending of visitors increased by 9% YoY to MOP 1,783 in the first quarter of 2010.  Analyzed by place of residence, per-capita spending of Mainland visitors took the lead, at MOP 2,826.  Although gaming expenses are not considered in the per-capita spending of visitors, about 53% of the interviewed visitors in the first quarter claimed that they had participated in gaming activities during their stay in Macao.  The average length of stay of visitors shortened by 0.1 day to 1.0 day over the first quarter of 2009, with Mainland visitors staying an average of 1.1 day.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MARCH 2010 DSEC

Visitor arrivals in package tours decreased by 7.7% YoY to 510,679 in March 2010.  Visitors from Mainland China (355,300) and Taiwan, China (25,225) dropped by 18.8% and 5.9% respectively.  At the end of March 2010, total number of available guest rooms of the hotel sector increased by 1,831 (+10.4%) YoY to 19,408 rooms.  The average occupancy rate of hotels and guest-houses increased by 4.9 percentage points year-on-year to 77.5% and that of hotels reached 78.2%, with 4-star hotels leading at 84.6%.

 

ALTHOUGH NOT YET THE HOLIDAY SEASON, BOOKINGS FOR HOLIDAYS HAVE ALREADY SOARED Macau Daily News

A manager from one of Macau's travel agencies, Li Yong Xuan indicated that holiday travel from Macau is very promising.  A 3% increase for travel bookings in May and June YoY.  Singapore remains the most popular travel destination this year.  Prices for summer tours through Southeast Air is about 1000 yuan more expensive than usual.  Macau Air has launched charter flights during this period but only up until June.


INDONESIAN AIRLINE TO SERVICE MACAU JULY 21 Macau Daily News

Indonesian low cost carrier Mandala Airlines will start flying to Macau on July 21.  Mandala Airlines Managing Director Diono Nurjadin responded to reinstate flights between Macau and Jakarta following the suspension of the Macau-Jakarta route served by Viva Macau.


STEVE LIKES ASIA BETTER. SO DO WE

The valuation disparity between WYNN and HK1128 is pretty wide.  It’s not justifiable in our opinion.

 

 

Steve is smartly considering moving corporate headquarters to Asia.  While it may happen, either way, you can bet that if the US starts taxing non-repatriated income at the US corporate rate, Wynn will make the move faster than you can say tax dodge.

 

So Steve likes Asia.  So do we.  So why is there such a huge valuation disparity between Steve’s two stocks?  On our estimates, WYNN trades at a 3x EV/EBITDA multiple premium to HK1128.  Is this reasonable?  We don’t think so but here are the pros and cons:

 

Why WYNN should have a 3x multiple premium

  • Control – The parent company has it
  • Liquidity – Bigger, more liquid US listed stocks usually command a premium
  • Depressed EBITDA in Las Vegas – More growth off the bottom, although we are valuing both stocks on 2011 EBITDA
  • Royalty stream valued at high multiple – WYNN receives a royalty stream from Wynn Macau that is more predictable than the EBITDA generated by HK1128 and should be valued a higher multiple (since it is based on the top line)

 

Why premium should be less

  • Tax differential – Profits from gaming operations are not taxed in Macau vs. US profits taxed at close to 40% (state and federal combined).  Obviously, the tax benefit of a pure play Macau operation is not factored into a straight EV/EBITDA comparison
  • Higher Macau multiple – All things held constant, Macau deserves a big premium multiple to Las Vegas operations due to higher long-term growth.  There is excess demand for the Macau product as evidenced by strict visa restrictions in place
  • Macau estimates are potentially understated – given that is likely that direct play mix should increase nicely if Encore's tables stay unencumbered by junket operators
  • Cotai option – Our 2011 estimates do not include any contribution from Wynn’s Cotai development.  Unless one thinks Cotai won’t add shareholder value, more value accrues to the HK1128 Macau pure play.

 

We come out on the side of a smaller premium, if any at all.  The Macau tax advantage is directly quantifiable and Macau offers much more growth longer term than mature Las Vegas.  We are a little cautious in general on Macau over the near-term given the tougher 2H comparisons, high expectations, and potential for government tightening both in the area of visa restrictions and liquidity/credit on the mainland.  However, we remain cautious on Las Vegas as well, but with a longer duration. 

 

STEVE LIKES ASIA BETTER. SO DO WE - wynn3  


US STRATEGY – MORE RISK AVERSION

The S&P 500 closed lower yesterday, finishing with a very ugly final hour of trading.  We also saw a contraction in volume.  On the MACRO front, there were no meaningful new directional drivers for stocks today, as the RISK AVERSION trade is still prevalent. 

 

On the MACRO calendar, there's not much to get excited about in yesterday’s jobless claims number. Initial unemployment claims came in at 444,000, unchanged from last week, although after upwardly revising last week's print by 4,000, this week's print is being cited as a 4,000 improvement sequentially. On a 4-week rolling basis, the improvement was meaningful, falling 9,000 to 450,500.  As we pointed out last week, we remain concerned that without significant improvement in claims, a leading indicator, there will be no meaningful improvement in unemployment, a lagging indicator.

 

At the time of writing, equity futures are trading lower in continuation of yesterday’s weakness, which came in the last two hours of trading.  Yesterday’s weakness was lead by Consumer Discretionary (XLY), Financials (XLF) and Industrials (XLI).  Also, every developed market is down except Denmark which is up 2.6%.  As we look at today’s set up, the range for the S&P 500 is 41 points or 1.2% (1,144) downside and 2.4% (1,185) upside.  On the MACRO calendar we have:

  • April Retail Sales
  • April Industrial Production
  • Capacity Utilization
  • May preliminary U. of Michigan Confidence
  • Mar Business Inventories

It’s important to note that the TED spread has rebounded over the past few days despite the bailout in Europe.  Yesterday, the VIX rallied 4.5% to 26.68.  The Hedgeye Risk Management models have the following levels for the VIX – buy Trade (21.01) and sell Trade (39.31).

 

The Dollar bullish TREND remains (up 0.45% yesterday) and it is trading higher again today.  The Hedgeye Risk Management models have the following levels for the DXY – buy Trade (84.24) and sell Trade (85.68).  The Euro down again and moving into the crash zone (-17.4% vs. Nov 09).  The Hedgeye target of $1.21 remains in place.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.27). 

 

Next to Consumer Discretionary, the Financials (XLF) was one of the worst performing sectors yesterday.  Increased litigation risk was the biggest headwind for the financials yesterday.   The WSJ reported that many more firms are in early-stage criminal scrutiny regarding representations they had made to investors in marketing CDOs.  In addition, the NY Times noted that NY Attorney General Cuomo has begun an investigation of eight banks to determine whether they provided misleading information to ratings agencies in an effort to inflate the ratings of certain mortgage securities.

 

On the Consumer Discretionary (XLY) side, retail sold off sharply with the S&P Retail Index down 3%.  URBN and KSS were among the notable decliners following April quarter results.   In the Restaurant space sluggish trends at WEN and JACK brought the group down.  The Homebuilders came under with the XHB down 3.6%.   

 

Despite the weakness in China, the materials (XLB) sector was a relative outperformer.  Aluminum names such as CENX +5.1% and AA +2.7% were among the standouts in the sector.  Bucking the trend steel stocks finished lower on the day, with some concerns surrounding a pullback in global steel prices.

 

Bloomberg is reporting that copper stockpiles monitored by the Shanghai Futures Exchange fell for a second week, extending a decline from the highest level since at least 2003.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.10) and Sell Trade (3.34). 

 

Crude oil fell to its lowest price in more than three months on speculation that Europe’s sovereign-debt crisis and rising supplies in the U.S. indicate that the demand recovery theme is losing momentum.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.38) and Sell Trade (74.99). 

 

Gold is in a bullish formation and is looking to extend its rally to another record as the “safe haven” is gaining momentum amid turmoil in European debt markets.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,205) and Sell Trade (1,254).

 

Howard Penney

Managing Director

 

US STRATEGY – MORE RISK AVERSION - S P

 

US STRATEGY – MORE RISK AVERSION - DOLLAR

 

US STRATEGY – MORE RISK AVERSION - VIX

 

US STRATEGY – MORE RISK AVERSION - OIL

 

US STRATEGY – MORE RISK AVERSION - GOLD

 

US STRATEGY – MORE RISK AVERSION - COPPER


Daily Trading Ranges

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