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THE M3: MPEL; S'PORE HOUSING PRICES SLOW DOWN

The Macau Metro Monitor, June 24th, 2010

 

MELCO CROWN FOCUSES ON MACAU macaubusiness.com

CEO Lawrence Ho reiterated his focus on the Macau market, in particular CoD and investment opportunities in Macau.  Stressing management efficiency can increase profitability, even with fewer tables, Ho supports the government's decision to cap gaming tables. Melco currently has 100 tables less than it initially did. 

 

RATE OF INCREASE IN S'PORE HOUSING PRICES SLOWS DOWN channelnewsasia.com

The rate of increase in housing prices in Singapore slowed down in 2Q 2010, according to property consultancy firm DTZ.  DTZ attributes this to high asking prices and poor stock market performance.  The only exception was in the mass market segment where prices of secondary condominiums and apartments went up further compared to the previous quarter.  DTZ said the comparatively higher prices of new developments and aggressive bids for government land sales (GLS) sites in the suburban areas had a cumulative effect on raising the prices of homes in the secondary market.


Ms Chua Chor Hoon, Head of DTZ South-east Asia Research, noted that developers are likely to tone down their land bids in view of the unprecedented high number of suburban sites to be sold in the GLS in the second half. She said this will keep a check on prices of mass market homes going forward.


CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

Jobless Claims Better Week Over Week, But Remain at a Level Inconsistent with Material Improvement

Initial claims fell week over week by 19k after upwardly revising the prior week by 4k, suggesting the actual improvement was 15k. More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range. As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

Below we chart the raw claims data. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

In the table below, we show the correlations of initial claims to U.S. equities. Consumer Discretionary (XLY) and Consumer Staples (XLP) have the highest inverse correlation on a one-year basis (r-squared = 0.76 and 0.75, respectively). Surprisingly, the Financials have the second lowest inverse correlation to initial claims on a one-year basis (r-squared = 0.40).

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - 1

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

Jobless Claims Better Week Over Week, But Remain at a Level Inconsistent with Material Improvement

Initial claims fell week over week by 19k after upwardly revising the prior week by 4k, suggesting the actual improvement was 15k. More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range. As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - subsector correlation analysis

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - company correlation analysis

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

Below we chart the raw claims data. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

The table below shows the stock performance of each subsector over four durations. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - price perf table

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

DRI – FIRST LOOK

DRI reported fiscal 4Q10 EPS of $0.86, or $0.87 when you exclude the $2 million pre-tax asset impairment charge, below both the street’s $0.88 per share estimate and my $0.90 per share estimate.  Relative to my estimates, the shortfall was largely due to lower same-store sales growth and higher SG&A and interest expenses. 

 

On a same-store sales basis, I was expecting sequential two-year average trends to hold steady to get slightly better in the fourth quarter, but instead, trends at the three major brands slowed when you adjust for all of the reported holiday and weather impacts in 3Q10.  Although Red Lobster’s trends looked the worst on a one-year basis (-4.6%), Olive Garden’s -1.5% result implies the biggest sequential falloff in two-year numbers.  On a positive note, comparable sales growth at both Capital Grill and Bahama Breeze came in better than I was expecting with 2-year average trends getting significantly better since the prior quarter.

 

Looking at monthly trends during the quarter for Red Lobster, Olive Garden and LongHorn, April appeared to be the roughest month on a one-year basis, but two-year trends slowed the most in May for both Red Lobster and Olive Garden (as shown in the charts below).

 

Even with the 2.3% decline in blended same-store sales growth, which fell short of management’s implied -1% guidance, EBIT margin continues to be strong at 10.5% (flat with last year), before the $12.7 million pre-tax reduction in sales related to gift card redemptions and the $2 million pre-tax asset impairment charge.  Margins have benefited from lower YOY food and beverage costs as a percentage of sales for the last six quarters, and with seafood costs potentially moving higher, this line item may prove to be a headwind in FY11.  As of February, the company was only locked in on 23% of its seafood costs through December 2010 or about halfway through fiscal 2011.  Seafood costs represent DRI’s largest ticket food item, accounting for 30% of total food costs.

 

Despite the slowdown in trends, Darden guided to 2% to 3% blended same-store growth in FY11.  Going into the quarter, I said this level of growth could be a stretch because it implies continued improvement in two-year trends.  Seeing that the company’s two-year average same-store sales growth already slowed during the fiscal fourth quarter with trends, for the most part, decelerating more in May , this full-year guidance seems aggressive. 

 

Although Darden’s same-store sales outperformance narrowed during the fourth quarter relative to the Knapp-Track benchmark to 0.5% from nearly 5% in the prior quarter, I continue to believe that Darden is one of the best positioned companies to navigate through this difficult economic period.  To that end, the company proved its financial strength by raising its annual dividend by 28% and buying back nearly $70 million in shares during the fourth quarter.

 

DRI – FIRST LOOK - RL May 2010

 

DRI – FIRST LOOK - OG May 2010

 

DRI – FIRST LOOK - LH May 2010

 

Howard Penney

Managing Director

 


Squirming Bulls

“When you’re finished changing, you’re finished.”

-Benjamin Franklin

 

My citing a Thomas Jefferson quote yesterday certainly stirred the pot. I haven’t had that many responses to an Early Look note since I took the other side of Barton Biggs (on May 27, 2010 after Biggs suggested that the Thunder Bay Bear was going to “squirm”). I appreciate all the feedback.

 

After getting plugged chasing a made for Manic TV CNBC “China” rally on Monday morning, and then seeing the SP500 close down for 3 consecutive days, the bulls are the ones doing the squirming now. The US stock market hasn’t had 3 consecutive up days since April.

 

Jefferson, like most politicians, was a professional storyteller, prone to hypocrisy, and subject to squirming. We know that markets don’t lie; politicians do. What we don’t know is why the Modern Day Roman Empire that is America’s financial system continues to believe that the rest of the world isn’t watching?

 

From a financial forecasting perspective, the Fiat Fools in Washington have proven that they are finished changing. So, in this brave new political era where the President of the United States is telling stories about “holding people accountable”, we’re going to tag along Benjamin Franklin’s aforementioned quote and assume the current US monetary policy experiment is “finished.”

 

Sadly, in what has become a proactively predictable statement of politically conflicted US Federal Reserve policy, in yesterday’s FOMC statement Ben Bernanke opted to pander to the political wind that has amplified both the volatility of markets and the cyclicality of growth since he took his lead from Alan Greenspan.

 

Our advice yesterday (for the US government to become Rigorously Frugal) was born out of the respect we have for both the cost and access to capital. Promising a “risk free” rate of return of ZERO percent to both domestic and foreign investors will not inspire investment. We live in an interconnected world where capital seeks yield. Ask the Brazilians and Chinese what they think about that…

 

Whatever you do, don’t ask Ben Bernanke and his Troubadour of the Willfully Blind at the Federal Reserve for an economic forecast. If he didn’t see economic growth and inflation in the last 12 months he’s definitely not going to see it now. Like a broken clock, he’ll eventually get it right – the double dip we are forecasting for both the US economy and US housing will be here come Q4. By then, Bernanke will be formally cutting his economic forecasts.

 

As a reminder, Bernanke’s forecasts on US economic growth are about as far out in the stratosphere of nod as we have seen in some time. That said, given his outlook, he should have the Fed Funds Rate at least 100 basis points higher than where it stands today (he is looking for upwards of 4% GDP growth in the US in 2011). So it’s time he either raises rates in line with his forecast or just takes a chainsaw to his forecasts.

 

Let’s think about those two options for a second:

 

1. Raising Rates – since he couldn’t raise them when he should have, now he won’t be able to cut them when he needs to. The yield on 2-year US Treasuries is hitting all time lows this morning of 0.64%. If one of the brave economists in Washington wants to tell me a story about how the US Treasury market is forecasting anything other than a double dip, please send me an email.

 

2. Cutting Forecasts – since Bernanke’s forecasts are turning into THE lagging global economic indicator, it is very probable that he cuts his economic forecasts in the coming quarters. By the time he does that, most of the Squirming Bulls are going to be looking back in the rear-view mirror at a US “growth and earnings” story that slowed (most recent sales updates from BBY, TOL, FDX, BBBY, etc are on the tape – they weren’t good).

 

If you are finished learning, you’re definitely finished thinking. How does Heli-Ben think about the interconnectedness of global markets? Where does the most relevant mathematical consideration since relativity (chaos/complexity theory) fit within his forecasting model? Do real-time market moves register on his radar or is he still busy marking-his-estimates-to-the-broken-Greenspan-model?

 

Don’t ask Timmy Geithner for a bone on these answers either – he’ll be the first to tell you that he is “not an economist.” He’s simply a professional politician advising the President of the United States on global economic matters.

 

Since the Chinese signaled that they’ll continue to wear the pants in this Global Creditor/Debtor relationship earlier this week, we have seen the three pillars of US economic growth hopes crumble: Industrials, Financials, and Consumer Discretionary (XLI, XLF, and XLY are the ETFs).

 

After holding their breath barely below this bear market’s water for the last 3 weeks, these 3 critical sectors (XLI, XLF, and XLY) in our S&P Sector Risk Management Model have broken on both an immediate term TRADE and intermediate term TREND perspective. These are called leading indicators, Mr. Bernanke. If you want some help, please send us an email at .

 

Other than collapsing US bond yields and US stock prices, what other global macro leading indicators have us forecasting double dips in both US housing and US economic growth?

  1. Chinese equities are down -21.7% YTD and have closed down the last 2 days
  2. Dr. Copper (a proxy for Chinese demand and US Industrial growth) remains broken from a long term TAIL perspective
  3. European equities continue to sell off this morning after rallying to lower-long-term highs in the last 2 weeks

Now if you don’t believe in the interconnectivity of global markets, complexity theory, or that the US growth engine isn’t tied to both, you won’t believe any of my storytelling this morning. If you’re finished reading, you’re not finished figuring this out yet.

 

My immediate term support and resistance levels for the SP500 are now 1081 and 1105 respectively. I sold 1/2 of our position in TIPs in the Hedgeye Asset Allocation Model yesterday, taking our allocation to Bonds back down to 6% from 9%, because a negative growth outlook is deflationary, in theory. Our allocation to cash bumped back up to 64% from 61% day-over-day.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Squirming Bulls - Pic of the Day


US STRATEGY – LESS SUPPORTIVE

The S&P 500 finished lower by 0.3% on a largely uneventful Wednesday.  Day-over-day not much has changed globally and the markets are settling into the current pattern of events.  In the US the FED remains conflicted and compromised, European sovereign debt issues are not going away (but part of the consensus thinking), and China is strong but slowing.  What is the next catalyst up or down?  We will be hosting our 3Q THEME call next Thursday, July 1st at 11am.

 

The market rallied slightly on the fact that the FED’s continued free money policy was a sign of strength, and the slightly more downbeat assessment of the US economic economy was nothing to worry about. The FOMC noted that the "economic recovery is proceeding," while its prior statement argued that "economic activity has continued to strengthen." In addition, it pointed out that "financial conditions have become less supportive of economic growth," after noting in late-April that "financial markets remain supportive of economic growth."

 

Europe is trading lower today, as a more pronounced shift towards fiscal tightening is gaining momentum ahead of the G-20 meeting, particularly with countries such as Germany, which announced a new austerity package in early June.  Germany is also coming under some pressure for not doing more to underpin domestic demand.

 

In the US the string of disappointing May housing data continued, as new home sales plunged 33% month-to-month to a 300,000 unit annualized pace, the lowest on record. In addition, new home sales for March and April both saw double-digit downward revisions; months' supply jumped to 8.5 in May from 5.8 in April.  After five days of underperforming, housing-related stocks bounced with the XHB +1.2%. 

 

The RISK trade failed to garner any meaningful momentum, as treasuries rallied again today.  The dollar index was down 0.42% and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.06) and Sell Trade (86.66).  The VIX traded flat on the day; the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.65) and Sell Trade (31.76).

 

The Euro is starting to stabilize on the immediate term risk management model; 1.22 is an important support that needs to hold.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).

 

Leading the market lower yesterday was the Utilities (XLU -0.9%), Energy (XLE -0.8%) and Financials (XLF -0.4%), while the only two sectors up on the day were Materials (XLB +0.2%) and Consumer Staples (XLP +0.6%).  The XLP is now positive on TRADE, putting a total of six sectors positive on TRADE.

 

The energy sector was one of the worst performers again today, as energy commodities were weaker on the day.  Outside of natural gas, Copper and oil declined over 1% on the day.  August crude declined 1.9%, suffering its biggest one-day pullback in almost two weeks.  Crude stockpiles rose by just over 2M barrels to 365.1M last week, the highest level for the period since 1990. In addition, regulatory headwinds remained in focus with Interior Secretary Ken Salazar expected to reissue a deepwater drilling moratorium that was recently blocked by a federal judge in Louisiana. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.96) and Sell Trade (79.63).  

 

So far in 2010, copper is down 11%, but the recent weakness in the dollar is helping to provide some support.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.87) and Sell Trade (3.05).

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,216) and Sell Trade (1,256).  

 

As we look at today’s set up for the S&P 500, the range is 24 points or 1.0% (1,081) downside and 1.2% (1,105) upside.  Equity futures are trading below fair value following the weakness in Europe and Asia.  Today’s focus will be on a handful of company earnings reports and initial jobless claims and durable good numbers. 

 

Howard Penney

 

US STRATEGY – LESS SUPPORTIVE - S P

 

US STRATEGY – LESS SUPPORTIVE - DOLLAR

 

US STRATEGY – LESS SUPPORTIVE - VIX

 

US STRATEGY – LESS SUPPORTIVE - OIL

 

US STRATEGY – LESS SUPPORTIVE - GOLD

 

US STRATEGY – LESS SUPPORTIVE - COPPER


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