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WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH

Last week, 6 of the 8 risk measures registered negative readings on a week-over-week basis, while one was neutral and one was positive

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey

 

1. Financials CDS Monitor – Moves in swaps were more modest last week than typical over the last few months, but nevertheless worsened week-over-week.  Spanish banks saw the greatest improvement.  On the domestic side, only MMC came in (by a single basis point) while all other companies increased.  Conclusion: Negative.

Contracted the most vs last week: SAN-ES, BBVA-ES, SAB-ES, POP-ES

Widened the most vs last week: CB, TRV, AIG, SLM

Contracted the most vs last month: AXP, COF, ALL, SAN-ES

Widened the most vs last month: MS, LNC, ACE, AGO

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - cds

 

2. High Yield (YTM) Monitor – After improving significantly earlier in the month, High Yield rates rose 17 bps last week. Rates closed the week at 9.06% up from 8.89% the week prior. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - high yield

 

3. Leveraged Loan Index Monitor - Leveraged loans fell by 10 bp last week, closing at 1454 versus 1464 the week prior. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - leveraged loan

 

4. TED Spread Monitor - The TED Spread is a great canary. Last week, it diverged from the rest of the risk monitor, making it the only positive reading of our eight indicators.   The TED spread fell, closing at 37 bps, down from 41 bps in the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - ted spread

 

5. Journal of Commerce Commodity Price Index – The  JOC smoothed commodity price index is a useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index fell from 15.21 the prior week to 9.84 on last Friday. Conclusion: Negative. 

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - joc cpi

 

6. Greek Bond Yields Monitor – Greek bonds yields and CDS continue to show turmoil in the Aegean.  Last week yields fell modestly, ending the week at 1021 bps versus 1042 bps the prior week. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - greek bond

 

7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. The AAA fell sharply versus last week, while the other tranches were flat/slightly up. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - markit

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week. Bulls decreased by 9.8% to 24.7% while Bears rose 9.6% to 42%, pushing the spread to 17% bearish, versus 2% bullish the prior week.  Conclusion: Negative.

 

One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - PREDOMINANTLY BEARISH - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur


US STRATEGY – DISCOURAGING WEEK

The S&P 500 closed down 0.5% on Friday, finishing a week of daily declines and 9 down days out of the last 10 trading days.  As expected the nonfarm payrolls data was the highlight of the day, as the data declined for the first time this year as 225K temporary census workers were let go.  The unemployment rate fell to 9.5% from 9.7%, consensus 9.8%, as discouraged jobseekers (650K) left the labor pool.  The private payroll data was the biggest disappointment out of the jobs data on Friday.

 

Last week’s MACRO news flow is now overwhelmingly pointing towards a stalling domestic recovery story.  In summary, the Chicago PMI, May housing and the domestic ISM all pointed to a slowing growth.  China PMI and Global ISM data suggest the slowing growth story is not isolated to the USA.    

 

The slowing global growth story is not yet showing up in the preannouncement earnings season.  According to Street account, 13 companies provided earnings updates last week, 7 of which represented an increase from prior guidance or were above consensus compared to 3 declines; this is the first week in which positive announcements outnumbered negative ones since the week ended June 11th.  More important will be the commentary about trends for 2H10.  According to S&P, the estimate for Q2 operating EPS growth from S&P 500 companies is 42%; the calendar 2010 earnings estimate stands at $82.

 

Treasuries were mostly weaker last Friday.  The dollar index was down and the 10-year traded below 2.90%, before rising again to 2.94% at the end of the day.  The dollar index closed slightly higher on Friday, closing at $84.60, up 0.21%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.31) and Sell Trade (85.37).  The VIX moved lower by 8.3% on Friday, but closed up by 5.5% for the week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (24.76) and Sell Trade (35.75). 

 

The EURO was down slightly on Friday but closed up 1.6% on the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.26); the range for the EURO improved by $0.01 to the upside from Friday. 

 

Only two sectors were in the green on Friday - Healthcare (XLV) and Utilities (XLU).  The relative strength in the XLV was in Pharma (IHE up 0.5%) and Biotech (BTK up 0.6%), on increasing M&A speculation in the sector. 

 

The three worst performing sectors were Industrials (XLI down 1.2%), Financials (XLF down 1.2%) and Consumer Discretionary (XLY down 1.1%).  The XLI was lead lower the Transports (Air/Rails) and the Machinery names.  The S&P 500 machinery index was down 1.1%. 

 

Last week copper traded down 6.2% in support of the slowing global growth story.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (2.96).

 

Last week gold saw its biggest decline since the week of April 16th.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,201) and Sell Trade (1,229). 

 

Oil declined 8.5% last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.82) and Sell Trade (75.27).  

 

As we look at today’s set up for the S&P 500, the range is 54 points or 1.7% (1,005) downside and 3.6% (1,059) upside.  Equity futures are trading higher ahead of the ISM non manufacturing data. 

 

Howard Penney

 

US STRATEGY – DISCOURAGING WEEK - S P

 

US STRATEGY – DISCOURAGING WEEK - DOLLAR

 

US STRATEGY – DISCOURAGING WEEK - VIX

 

US STRATEGY – DISCOURAGING WEEK - OIL

 

US STRATEGY – DISCOURAGING WEEK - GOLD

 

US STRATEGY – DISCOURAGING WEEK - COPPER


THE M3: CHINESE PROPERTY PRICES TO FALL; JUNKETS, VIP, and EGMs; MACAO DRAGON BOATS

The Macau Metro Monitor, July 6th, 2010

 


CHINA MINISTER: PROPERTY PRICES TO FALL IN NEXT FEW MONTHS-XINHUA  WSJ

According to Xinhua News Agency, Minister of Land and Resources Xu Shaoshi said, "Home transaction volumes have declined and prices have stagnated.  In about a quarter's time, the property market will probably reach a full correction and prices will fall, but it's hard to predict the extent of the price falls."  The June property price data is released next week.

 

ELECTRIC DREAMS Inside Asian Gaming

Despite the public's aversion to electronic table games in Macau, Aruze's Lucky Sic Bo has been quite popular on the mass floors.  In Singapore, electronic table games seem to have more success as suppliers such as TCS JOHNHUXLEY and Spielo reported close to 100% occupancy at its roulette terminals.  According to IAG, the suppliers also noted that the Singaporean casino operators have replaced some baccarat tables with either blackjack tables, slots, or electronic gaming terminals, particularly roulette.

 

GAME CHANGER Inside Asian Gaming

There have been reports that suggest RWS continues to attract more VIP players than MBS.  Whether this stems from loyal relationships from Genting's Malaysian property or better incentives, it remains to be seen.

 

TOUGH LOVE Inside Asian Gaming

According to a Macau junket source, the high GGR growth in May may be attributed to a small group of established VIP customers rolling greater amounts on the strength of a strong economy rather than new VIP customers.  The source also said that junkets are very careful about which customers get credit and lending only a fraction (e.g. 25%) of what the player wants.  The source said, in contrast to past times, a customer who is denied credit at one property would not be allowed credit at another property, as junkets would share information through a "Rumor Control". 

 

MACAO DRAGON TO LAUNCH BIG BOATS; NO WORRIES FOR VENETIAN Intelligence Macau

Macao Dragon will launch two ferry boats this weekend--servicing between Hong Kong Macau Ferry Terminal and Taipa Temporary Ferry Terminal.  IM believes the new ferries' competitive prices for tour groups would allow Venetian to be more flexible in subsidizing its CotaiJet ferries. IM said CoD would also benefit from these new boats.


Early Look

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Americans Get It

“It is hard enough luck being a monarch, without being a target also.”

-Mark Twain

 

The monarchy of Keynesian Spending has finally fallen from its saddle – and the citizenry is hungry. Welcome back from your long weekend.

 

Away from Harvard historian Niall Ferguson pitching a version of our American Austerity theme in Aspen at the “Ideas Conference” yesterday, the most important consensus builder coming out of this long weekend came from a WSJ/NBC Poll that asked Americans what the President should worry about:

  1. Keeping the US Deficit down = 63%
  2. Boosting the US Economy = 34%

Once again, whether they are getting the message from Canadian or Scottish strategists makes no difference – Americans get it. “Boosting the economy” with government spending dollars that have no multiplier effect isn’t working. It’s time to save America’s balance sheet and get austere.

 

The current leadership on the economic side of the US Administration doesn’t get this yet. That’s marked-to-market by a simple 3 factor model every day:

  1. Currency Market: US Dollar was down for the 4th consecutive week last week, trading down another -1% to $84.61 (we are short the UUP).
  2. Stock Market: SP500 was down -5% last week and has closed in the red in 9 out of the last 10 trading days, making lower-YTD-lows.
  3. Jobs Market: US unemployment remains nauseatingly high and jobless claims jumped higher again last week to 472,000 (+13,000 wk/wk).

If this reality check doesn’t make you feel all red, white, and blue after some of the best weather Americans have had in decades, maybe it’s best to close your eyes, buy, and hope.

 

Maybe not.

 

Hope is not an investment process…

 

The good news here is that reality is starting to get priced into the market. As we like to say at Hedgeye, everything has a time and price. Now that we have had a -16% correction in the SP500 since April 23rd and China finally stopped making lower-lows for the YTD overnight, the US stock market should bounce.

 

Before I get you all bulled up and carried away here, let’s remind ourselves that bouncing to lower-highs before we make lower-lows isn’t cool – Americans get that too. We call this a bear market, and the bulls are finally starting to agree:

 

“I’m worried that we could have not just a soft patch but a double dip which lasts two or three quarters and where nominal GDP is only up 2 or 3 percent and that’ll have a big effect on profits… It’ll scare everybody and I’m afraid the market goes down another 10 or 15 percent if that happens.” (Barton Biggs July 2, 2010)

 

But don’t be scared – this was, after all, proactively predictable. As American investors, we are starting to get this too. Using the institutional leanings of perma- bulls and perma-bears always provides us a backboard of consensus to play against. The only “perma” we want to be is permanently managing risk.

 

Taking a step back before we have the conviction to make another market call is always critical. The institutionalization of asset management in America is something that everyone in this country needs to get.

 

Per the Federal Reserve’s flow of funds data, in the early 1990’s less than 40% of the US stock market was controlled by institutions and the “cash levels” of US Equity mutual funds were north of 12%. Today, over 60% of the market is controlled by institutions and cash levels of US Equity mutual funds is below 4%. That’s going to change.

 

If you get that the Perceived Wisdoms of the Buy-And-Hope institutional investor community is going by the way of the horse and buggy whip, you are definitely putting yourself in a position to get it right here in 2010 and beyond. The US government doesn’t “have to spend” to make this economy right and the institutional investor class doesn’t “have to be fully invested” to save their clients from losing their hard earned capital.

 

In the face of finding lower prices, the Hedgeye Asset Allocation Model has dropped its “cash” position from a YTD high of 79% to 58%. We aren’t asset managers, so we aren’t going to proclaim that maintaining a high and dynamically managed allocation to cash in a bear market is working for our fund – by design, we don’t have one. That said, our clients do  - and its working for them.

 

As a practical rather than theoretical matter, we go through the positioning of our asset allocation every morning at 830AM EST on the Hedgeye Morning Call (if you’d like to trial the call please email ). Our goal is to continue to move away from the lip service Washington and Wall Street give to “transparency and accountability” and give our clients a measurable tool that they can use to augment their respective investment processes every day.

 

We confidently submit that if you provide investors with the right risk management “call” on markets every day, they’ll get that too.

 

My immediate term support and resistance levels for the SP500 are now 1005 and 1059, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Americans Get It - cash


JUNE WAS STRONG BUT...

After a strong start to the month, growth tapered off.  Digging below the headline +65%, we find that volumes were not as strong.

 

 

June table revenues came in at $1.62BN, increasing 66% YoY, while total gaming revenues increased 65%.  June's number should be no surprise to our readers as we had projected 67% last week.  Mass revenues increased 39% YoY while VIP revenues grew 77% YoY, compared to only 53% growth in Junket RC volumes.  Similar to May, easy hold comparison contributed to some of the big growth we saw this month.  Adjusting for direct play levels, we estimate that VIP hold was 2.83% in June vs. 2.45% last year.  If we normalize for hold, table revenues would have been only up 50% YoY this month.

 

The gods of luck smiled on WYNN and LVS but frowned upon SJM and Galaxy.  Luck (and Encore) explain most of the share shifts this month. 

 

Remember that July faces the first positive YoY monthly comparison of the year.  Additionally, World Cup betting should continue to steal volumes from the Macau tables.  For more details, keep reading.

 

YoY Table Revenue Observations

 

LVS table revenues increased 38%, with growth coming from a 53% increase in VIP revenues and only a 15% increase in Mass revenues.

  • Sands grew 20%.
    • 28% increase in VIP revenues.
    • 8% increase in Mass revenues.
    • Junket RC increased 34%.
  • Venetian was up 21%, driven by a 21% increase in VIP revenues and a 20% increase in Mass revenues
    • Junket RC decreased 1% YoY, however, hold more than made up the difference.  Assuming 20% direct VIP play volume, we estimate that hold for June was 3.2%.  Last June, assuming 16% direct play, the hold percentage was 2.75%.
    • Venetian VIP turnover growth was negative for the 3rd straight month.
    • Lowest mass share for LVS since pre-Venetian.
  • Four Seasons was up 283% YoY driven by 542% VIP growth and Mass growing a relatively small 11%.
    • Junket VIP RC increased 263% to $781MM.
    • If we assume over 40% VIP turnover came from direct play, hold still looks very high at north of 4%.

Wynn Macau/Encore table revenues were up 108%, primarily driven by a 138% increase in VIP revenues and a 20% increase in Mass revenues.

  • Junket RC volume increased only 59%.  Junket RC volumes grew a lot less than VIP revenues since the majority of the Encore addition was dedicated to direct play tables; the disparity implies that it's likely that Wynn played very lucky in June and that the percentage of total play coming from direct VIP increased nicely. 
  • In 2Q09, direct play volumes at Wynn were roughly 11% of total VIP.  Assuming June was in line with the quarter, hold was a low 2.4%.  If we assume that direct play volumes increased to 16%, implied hold for June is 3.5%.  2Q2010 will show a reversal of luck for Mr. Wynn - who hasn't had a "lucky" quarter in Macau since 1Q2009.

MPEL table revenues grew 138% with the growth fueled by 124% growth in Mass and 142% growth in VIP.

  • Altira was up 42%, due to a 41% increase in VIP revenues and a 56% increase in Mass.
    • VIP RC was flat YoY, but hold comparisons were favorable. Altira seems to have held high at 3.1%, compared to low hold of 2.1% last June.
    • 2Q2010 should be the property's first quarter of hold north of 3% since 1Q2009.  Perhaps that will put a temporary end to the annoying sell side questions regarding hold.
  • CoD table revenue decreased 22% sequentially to $119MM due to a 28% decrease in VIP win and a 5% decrease in Mass revenues.
    • Mass was $35MM.
    • Junket VIP RC increased 21% sequentially.
    • If we assume 15% direct play at CoD, then this is the 3rd month in a row where hold is low.  We estimate June hold of only 2.4% and hold of only 2.3% for the quarter.
    • We have heard consistently that CoD is spending a lot to "buy" its business, so margins could disappoint.

SJM table revenues grew 63%.

  • Mass was up 53% and VIP was up 70%.
  • Junket RC volumes increased 92%.

Galaxy table revenue was up 38%, driven by a 40% increase in VIP win and a 30% increase in Mass.

  • Starworld's table revenue was up 58%, driven by 59% growth in VIP revenues and 51% growth in Mass.
  • The group RC volumes were up 78% while Starworld RC volumes increased 105%.  Starworld's June hold was low - roughly 2.5% vs. 3.2% in June 2009.

MGM table revenue was up 48%.

  • Mass revenue growth was 39%, while VIP grew 52%.
  • VIP RC grew 7%.
  • We estimate that MGM suffered from low hold in June, roughly 2.5%, and in the entire quarter (2.6%).  However, last June's hold appears to have been even worse at sub 2%.

 

Table Market Share

 

LVS table share increased 230bps sequentially to 21.2%, entirely driven by good luck on the VIP business.

  • LVS's share of VIP revenues increased to 19.7% from 16.5% in May.  LVS's share of Junket RC increased 170 bps to 13.9%.
  • Mass share decreased by 110 bps to 25.5%, which is the lowest share LVS has had of the Mass business in Macau since August 2007.
  • Sands market share continued to make new lows at 6.2%, down 10bps sequentially. June sequential share loss was driven by the Mass business.
  • Venetian gained 110bps to 11% sequentially.
    • Venetian's share gain was entirely driven by a 140bps increase in VIP, while Mass share declined by 80bps.
  • FS share increased by 130bps to 4.0% - an all-time high for the property driven by good luck and strong VIP play.

WYNN's table share increased to 17.2% from 15.6% in May.

  • VIP revenue share increased 260bps to 19.9% sequentially while Mass revenue share decreased 20bps to 9.7%.
  • Wynn's VIP share is second only to SJM at 26.3%, followed by LVS at 19.7%.
  • Some of Wynn's market share gains in VIP seem to be driven by luck.  Wynn Junket RC share decreased 120bps to 15%.

Crown's market share decreased by 60bps to 13.1% in June, with both properties contributing to the loss of share.

  • CoD's share decreased 20bps to 7.3% due to losses in VIP share which were partly offset by gains in Mass share.
  • Altira's share decreased to 5.8% from 6.3% in May.

SJM's share slipped by 280 bps to 30.3%, its lowest share since August 2009.

  • SJM's share loss was entirely driven by their loss of 450bps of share in VIP to 26.3%.  Part of this loss is due to lower hold YoY.  SJM held at 2.8% in June 2009 vs 2.5% this June.  July's hold comp is very easy though (last year was only 1.84%), so we expect to see large sequential share gains for SJM next month.
  • Mass share increased 60bps to 41.7% sequentially.

Galaxy's share fell 1% to 10.7%, driven by poor hold.

  • Starworld's market share decreased 60bps sequentially to 8.6%, due to a 60bps hold driven decline in VIP share which was somewhat offset by a gain of 30bps in Mass.
  • Junket RC share increased 20 bps sequentially to 13.3% for Starworld.

MGM's share increased by 50bps to 7.4%.

  • MGM's share gain can be attributed to a 70bps increase in VIP, which was somewhat offset by a 20bps decrease in Mass share.

 

JUNE WAS STRONG BUT... - macau table

 

JUNE WAS STRONG BUT... - macau mm

 

JUNE WAS STRONG BUT... - macau rolling


The Week Ahead

The Economic Data calendar for the week of the 5th of July through the 9th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - c1

The Week Ahead - c2


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