prev

Ugly Chart of the Day: Greece

In our Ugly Chart of the Day we refresh both Greece’s Consumer Price Index and 5YR sovereign CDS.  Both charts are heading in the wrong direction and both help confirm that neither the European led Greek bailout fund (€110 Billion) nor the €750 Billion loan facility will be a near or long-term solution to all of Europe’s economic ails.

 

Today, Spanish workers are on strike against the government’s decision to cut wages 5%. While the strikers may make a fine case that they were not responsible for the government’s mismanagement of the budget, someone has to bite the bullet—cutting the bloated wage inflation of many government positions in Spain (and largely across much of Europe) is a sensible move in our opinion.

 

Germany also picked up the austerity ball, announcing yesterday a €81.6 Billion package of tax increases and spending cuts, including levies on banks, air travel and nuclear-power plants from 2011 to 2014. For Germany, which has much lower levels of total debt and deficit spending as a percentage of GDP, the move underlines the country’s fiscal discipline and aversion to debt.

 

Matthew Hedrick

Analyst

 

Ugly Chart of the Day: Greece - Greece Ugly


THE M3: NEW SMOKING BAN PROPOSAL; MBS PUSHED BACK; AIRPORT DATA; EASTERN GUANGDONG; RE

The Macau Metro Monitor, June 8th, 2010

 

MACAU GOVERNMENT PROPOSES SMOKING BAN IN CASINOS AFTER 3 YEARS Macau News

"The government has agreed to impose a smoking ban in casinos in three years' time," quoted the Macau Post Daily.  Although the general outline of the anti-tobacco bill was unanimously passed by the legislature in January, a new version of the bill proclaims that the entire casino, including sauna parlours, massage parlours, and ballrooms should be non-smoking.  The Second Standing Committee of the Legislative Assembly is expected to receive the revised bill as soon as next week.  The three-year transition period would start after the anti-tobacco law's promulgation in the Official Gazette.


MARINA BAY SANDS PROJECT TO BE COMPLETED 1ST QUARTER 2011-EXECUTIVE WSJ.com

MBS CEO Thomas Arasi said at GGE Asia that the MBS project will be completed by the 1st Quarter of 2011.  Arasi mentioned the good balance of mass market gamblers and high-rollers so far. He also said the average length of stay for visitors at MBS' hotel was 4.5 nights, compared with the average 3.8 nights in the Singapore market.

 

AIRPORT LOSING PASSENGERS macaubusiness.com

Macau International Airport (MIA) handled a total of 330,407 passengers in May, a YoY decrease of 1.65%.  This was the third month in a row in which the airport lost passengers on a YoY comparison basis.


CHUI WIDENS MACAU'S NET Intelligence Macau

CEO Chui recently announced he was working on setting up flights from cities in Eastern Guangdong such as the coastal city, Shantou. If flight connections are established, IM believes this would be a positive for VIP rooms and premium-mass tables.

 

RIVIERA ALMOST SOLD OUT: SPEYMILL macaubusiness.com

Speymill Macau Property Company plc announced it has almost sold out all its units at the Riviera complex. Of the 259 units it owns, Speymill Macau still has 27 unsold apartments in its two Riviera towers.  As of June 5, 2010, the actual total net proceeds received, after deduction for discounts and commissions, from the sale of the units including deposits and final payments amounted to HK$687.0 million—equating to ~$380,000 USD per unit.


Courage That Counts

“Success is never final, failure is never fatal. It's courage that counts.”

-John Wooden

 

John Wooden has been widely celebrated as a great leader both on and off the courts, and rightfully so.  He was a champion that was dedicated to teaching others to be the best they could be.  In one of the most interesting articles I read about him over the past couple of days, it noted that one of his greatest character traits was listening. 

 

In the world of investing, listening is comparable to reading and thinking.  While we can all pontificate and get on our soap boxes to express our opinions, what we do in the quiet hours of the morning when our competitors are still sleeping is what will give us the “courage that counts”.

 

We recently had the opportunity to listen to Professor Charles Hill, a political science professor from Yale University who came by our office to lead a discussion with our clients on the emerging risks in the Korean peninsula.

 

Charlie’s ultimate conclusion was that despite saber rattling, the North Koreans would continue to be rational actors.  While the recent sinking of a South Korean warship was an act of war, it was a well thought out action, with expected responses.  North Korea pushed the envelope, and while the response has been negative, the likely expected outcome will be some sort of appeasement of the North Koreans by the world community. 

 

After walking us through the history of the Korean conflict and probabilities of increased conflict between the two Koreas (which according to Charlie is less than 10% and would only occur in a scenario where an action was grossly misunderstood), Professor Hill began describing an emerging Geopolitical Risk Zone in the waters of Asia.  He described a scenario in which the U.S. would have to reassert itself and its domination of the global shipping lanes to protect its allies against rogue attacks such as the North Korean submarine attack, but also reassert its strength vis-à-vis China in the Asian waters.

 

Obviously this type of new strategy would not come without a cost for the United States, and could require a massive build up and redeployment of the Navy.  As George Friedman from Stratfor noted in his recent book, “The Next 100 Years”:

 

“The U.S. only emerged as the decisive global power after World War II and is still immature. The U.S.'s power is based on its Navy and ability to control both

oceans, the Atlantic and the Pacific, which no other power has been able to do."

 

Over the coming year, we will be contemplating more of these Geopolitical Risk Zones as war, historically, has been a great way to outgrow sovereign debt burdens.

 

Changing gears slightly, and in the Golf Clap of the Day Award, according to a Bloomberg article this morning investors prefer the United States as the market with the best opportunities versus the BRICs.  According to the survey, 4 out of 10 investors surveyed prefer the opportunities in the United States versus only 2 out of 10 when the survey was last taken in October 2009.  In that time period, the equity markets in the U.S. are down ~-0.6%, while the BRICs on average are down ~-3.0%. So much for Professional Prognostication . . .

 

Larry Summers noted in an official response to this survey: “This attests to Obama’s efforts at restoring the United States to strong economic fundamentals.  While there remains much to do, the U.S. economy is growing.” 

 

While our Macro Team isn’t paid to be permanent bears, even if that is how we sound as of late, we all need to be realistic about these supposed “strong fundamentals”.   When I look at the U.S. economy, there are three issues that concern me most directly.

 

1. Domestic Debt – We have discussed this ad nauseam, but with the United States entering into the danger zones of 90%+ debt-to-GDP and 10% deficit-to-GDP, we need to keep this risk front and center. (As such, we have noted this long term trend in the chart of the day attached below.)  We are in unprecedented territory in terms of sovereign debt in this country.  On the State level, the cracks are already starting to show as evidenced by Fitch downgrading Connecticut bonds yesterday despite it being “one of the wealthiest states per capita.” 

 

2. Housing Inventory – Josh Steiner discussed this on the Morning Call yesterday, but with the tax credit in the rear view mirror and no talk of an additional credit, mortgage applications have dropped off meaningfully.  Even Bob Toll had to admit such when he revealed on a recent conference call that year-over-year growth in buyer traffic - traffic is among the best leading indicators for housing - actually declined by two-thirds in May vs April.  If these data points continue, housing inventory is set to ramp back up quickly, which will be very bearish for home prices.

 

3. Unemployment – While Friday’s employment report is in the rear view mirror, its forward looking implications need to remain in the foreground.  The report was abysmal, and if we normalize for census hiring private payrolls added for the month of May was reported at an anemic 41,000 – the first marginal deceleration since December of 2009.  Scarily, the massive stimulus had a very limited impact on employment, although the debt associated with it lives on.

 

Collectively, these issues make us bearish of U.S. equities, but as John Wooden also said, “A coach is someone who can give correction without causing resentment.” In our case, we hope that a Risk Manager is someone that can call corrections without causing resentment. 

 

After all, we have no dog in this Global Market Fight, other than to help our subscribers punch, counter punch, and ensure that their “failures are never fatal.”

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Courage That Counts - US Debt to GDP


the macro show

what smart investors watch to win

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.

US STRATEGY – DELEVERAGING

The S&P 500 finished lower on Monday after a late afternoon collapse, which coincided with the release of the consumer credit data.  After showing a glimmer of hope last month, the most recent data continued to show a sharp contraction in credit.   Revolving consumer credit (card debt) declined in April at a rate consistent with the fastest rates we've seen since the start of the crisis. On balance, this is a negative for the Financials (XLF), though a net positive for the balance sheet of the American consumer.  The flight to safety continues as the only sector that ended the in positive territory was the Utilities (XLU - up 0.6%).  

 

There was more evidence of the safety trade with Treasuries stronger yesterday and the Dollar Index closed up 0.19%.   The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (87.14) and Sell Trade (88.51).  The VIX rose another 3% yesterday on back of a 20% up move last Friday.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (33.18) and Sell Trade (38.52).

 

The EURO has now declined for the past six days, trading down 0.12% yesterday.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.19) and Sell Trade (1.22).  The European MACRO data points focused on the Hungarian government, as it tried to play down previous comparisons to Greece and committing to meeting deficit targets.  The most recent comments were more about politics than a different assessment of the countries financials.  Hungarian CDS have come off recent highs, but remain elevated. 

 

There was some positive news out of Europe as a better than expected April Factory Orders was reported in Germany up 2.8% month-to-month vs. consensus (0.4%).  Greece continues to struggle as the market declined 5.45% to a 12-yr low (in early trading today the market is up 1%).  The UK market is currently trading down 1.2% as Fitch Ratings said that “the scale of the U.K.'s fiscal challenge is formidable and warrants a strong medium term consolidation strategy.”

 

The second best performing sector yesterday was Healthcare (XLV).   Bristol-Myers Squibb (BMY) rose 6.3% (the most of any company in the S&P 500 yesterday) after positive drug data showed two of its cancer drugs (ipilimumab and sprycell) could change the standard of care for patients with deadly skin and blood malignancies. 

 

The Industrials (XLI) has now been the worst performing sector for the past two days.  Yesterday, machinery names were weaker – DE down 3.7%, CAT down 3.3% and CNH down 4.2%.  Airlines, rails and shipping were also weaker - FDX and UPS declined 3.6% and 3.5%, respectively. 

 

Rounding out the bottom three performing sectors were Financials (XLF) and Consumer Discretionary (XLY) - the XLY is now the only sector positive for the year-to-date.  Both groups were negatively impacted by the continued decline in consumer credit trends.  Homebuilders and related equities were under considerable pressure, down 4.3% and 13.6% over the past week.  The much anticipated introduction of the new iPhone was not enough to lift AAPL and GOOG is facing an investigation by CT AG Blumenthal regarding data collection and privacy concerns.

 

In early trading, crude reversed a gain of as much as 1% as European stock markets are declining.  According to a Bloomberg, U.S. oil supplies probably dropped by 1 million barrels last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (69.03) and Sell Trade (75.31).

 

In early trading, copper is trading down for the seventh day in a row.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.75) and Sell Trade (3.03). 

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,217) and Sell Trade (1,248).   

 

As we look at today’s set up for the S&P 500, the range is 36 points or 0.6% (1,044) downside and 2.8% (1,080) upside.  Equity futures are trading mixed to fair value in the wake of yesterdays late day slide.  The MACO calendar is light again today.    

 

Howard Penney

 

US STRATEGY – DELEVERAGING - S P

 

US STRATEGY – DELEVERAGING - DOLLAR

 

US STRATEGY – DELEVERAGING - VIX

 

US STRATEGY – DELEVERAGING - OIL

 

US STRATEGY – DELEVERAGING - GOLD

 

US STRATEGY – DELEVERAGING - COPPER



COLUMBUS WILL DISCOVER THE AMERICAN CASINO

The more work we do on PENN’s Ohio opportunity, the higher our estimates go. Net return – even after Cincinnati’s impact on Lawrenceburg – will be very strong, at a minimum.

 

 

Even if Columbus’s 1.5 million adults spend less than the lowest comparable existing gaming market per capita, PENN’s casino will blow our $191 million EBITDA estimate out of the water over time.  Although it won’t be out of the water since Columbus will be land-based and not a riverboat casino like most of the rest of the Midwestern casinos.  Our estimate for Toledo EBITDA of $60 million may also prove low, again given the performance of comparable markets.

 

We analyzed the most comparable markets of Columbus and Toledo: Cincinnati, Kansas City, St. Louis, and Omaha (Council Bluffs). Those are all Midwestern markets with fairly similar income demographics.  Chicago was excluded since there is a gaming position cap which distorts the data.  The following chart shows annual gaming revenue per capita (adult) for each of the markets.

 

COLUMBUS WILL DISCOVER THE AMERICAN CASINO - metro1

 

Omaha/Council Bluffs generates the highest spend per capita and Cincinnati the least.  It is somewhat encouraging for PENN's Lawrenceburg property that Cincinnati seems to be under-penetrated.  Lawrenceburg will be competing with a new Cincinnati casino across the river in Ohio in late 2012.  In terms of median household income, Columbus falls right in the middle of the pack – a little above Kansas City – while Toledo would be the lowest.  The following chart projects gaming revenue for Columbus and Toledo based on the high, low, and average per capita gaming spend of the other markets. 

 

COLUMBUS WILL DISCOVER THE AMERICAN CASINO - metro2

 

What’s pretty clear is that our gaming revenue estimate for Columbus could potentially be very low over time, while Toledo looks reasonable.  More importantly, EBITDA could be off the charts for Columbus relative to our estimate of $191 million using the gaming revenue figures from the previous chart as shown below.  We’ve also added in estimated lost profits from the opening of a competing Cincinnati casino across the river from Lawrenceburg.

 

COLUMBUS WILL DISCOVER THE AMERICAN CASINO - metro3

 

According to the math, Columbus has the capability to generate nearly $500 million in EBITDA.  However, we don’t want to mislead anyone into thinking that is within the realm of near-term possibility.  If Columbus ended up generating that level of revenue per adult (unlikely), it would take years to fully penetrate the market.  But significant potential remains.  Despite opening up with 3,000 slots and 100 tables, PENN can legally expand to 5,000 slots and an unlimited number of tables.  We think this market will support a 60%+ increase in both.  $400-500 million is certainly a stretch but our current EBITDA estimate falls almost 20% below even the lowest estimate derived from per adult capita spend of $439 (Cincinnati).

 

In our opinion, the returns on Ohio promise to be excellent and are not reflected in the stock price.  If PENN’s Ohio casinos can attain only a Cincinnati type market penetration, ROI on the combined $700 million investment would be a whopping 37%.  That ROI is a net number that reflects the Lawrenceburg EBITDA decline following the opening of a competing casino in Cincinnati - a 26% drop per our model.  If Columbus can reach the average Midwestern market penetration or higher, the returns will be through the ceiling:  50-83% by our math at maturity.

 

So what would limit the Columbus returns and why is our estimate below the low projection for market penetration?  For one, it will take some time for PENN to fully penetrate the market.  Our Columbus estimate is probably a reasonable start but years of same store EBITDA gains should ensue.  The property would need to expand its slot and table base from the initial 3,000 and 100, respectively.  However, there is another reason to believe our estimates will prove very low.  Our operating expense levels are much higher than PENN’s other properties.  For instance, Lawrenceburg has more slots and tables, yet our projected Columbus expenses are 33% higher.

 

We generally see only upside to our current Ohio estimates for PENN.  Even with conservative estimates in place, our current 2013 EPS projection contemplates 26% CAGR growth.


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.

next