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Sitting Tight

“The market does not beat them.  They beat themselves because, though they have brains, they cannot sit tight.”

-Jesse Livermore

 

Waiting and watching for my SP500 level of 1076 last week wasn’t easy. Shorting Slowly into a bear market bounce never is, but I made 6 moves into Friday afternoon’s low-volume strength: 5 short sales (including shorting the SPY) and 1 sale on the long side (Baxter - BAX).

 

Five and ten years ago, I wouldn’t have been able to sit tight. I would have started shorting the SP500 on Wednesday and averaged up the entire way. The best way to learn how to manage risk is by doing it with live ammo.

 

There are 3 ways that I generally look at a market: Bullish, Bearish, or Not Enough of one or the other. Last week’s price action in the US reminded me that institutional investors are not yet Bearish Enough. Plenty of bulls still have the same catalyst – “earnings”. They are going to be “great”, allegedly…

 

Despite the SP500 rallying to where it should have, we have to give credit where credit is due. The bulls just realized their first 4-day rally since early April. From the YTD closing low established on July 2nd at 1022, the SP500 went up +5.4% in a straight line.

 

That’s bullish on a 4-day basis, but that doesn’t mean that anything has changed from a risk management perspective when you look out past 3 weeks toward our 3 core investment durations (TRADE, TREND, and TAIL). As of Friday’s close, here are my refreshed lines of resistance for the SP500:

 

1.       TRADE = 1078

2.       TREND = 1144

3.       TAIL = 1094

 

So the way I look at my risk in being short the SP500 is that a closing price greater than 1078 will continue to put pressure on me to sit tight and wait for the more influential line of resistance up at 1094. If the SP500 cannot close above 1078 and the bulls are forced to sell into week 1 of their “earnings” catalyst, the step downs in the SP500 are real. First line of support is down at 1048, then there is no support until 1005 (-6.7% downside from here).

 

We’re just past the half way mark of this 2010 game and I see no reason why I wouldn’t sit tight here. With the SP500 down -11.5% from its April 23rd high and down -3.4% YTD, the better benefit of the doubt remains in the bear camp. The question I ask myself every morning isn’t whether I should be bullish, but whether or not I am Bearish Enough?

 

This morning’s run of global macro news reminds me of three things:

 

1.       Sovereign Debt issues are here to stay

2.       American Austerity is on the way

3.       Global growth is going to continue to slow

 

On the sovereign debt side:

 

1.       Japan’s latest Prime Minister, Naoto Kan, has already lost the Upper House. Apparently the Japanese don’t like tax hikes and austerity.

2.       Spain’s stock market is less impressed with the country’s definition of a “stress test” than it is their World Cup win, trading down this morning.

3.       Russia is looking to start selling Eurobonds!

 

In terms of American Austerity:

 

1.       The US Dollar closed down for the 5th consecutive week last week and is starting to look a lot like the Euro did in December of 2009. Ominous.

2.       US Bond yields on the short end of the curve remain at record lows, reminding us that reflation by devaluing a currency isn’t economic growth.

3.       Washington Post story by Dan Balz today: “Co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked…”

 

Finally, from a global growth perspective, the intermediate term TREND lines on our Bear Market Macro model continue to hold above current prices:

 

1.       China’s Shanghai Composite Index TREND line of resistance = 2798

2.       WTIC Oil’s intermediate term TREND line of resistance = $78.71/barrel

3.       Dr. Copper’s intermediate term TREND line of resistance = $3.21/lb

 

From India to China this morning you are seeing more of the same – both year-over-year prices and growth continue to slow. India’s industrial production growth for the month of May slid to +11.5% versus +16.5% in April. At the same time, China’s white hot real estate market continued to cool for the 2nd straight month. Property prices have now dropped to +11.4% y/y (June) versus the April peak of +12.8% y/y price growth.

 

There is plenty of fresh data in this interconnected global macro world to absorb. There is also plenty of time for the bears to keep Sitting Tight.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sitting Tight - bmark


US STRATEGY – TIME WILL TELL

Last week ended on a positive tone with the S&P up 5.4%, rising every day last week.  The week’s strong performance left six sectors positive on TRADE and one that is positive on TREND in the Hedgeye Quant models.  All nine sectors closed higher on Friday and for the week. 

 

Until Friday nearly all the MACRO data points pointed to clear slowing in the economy.  May Wholesale Inventories rose 0.5% vs. consensus 0.4%; April’s number was revised to 0.2% from 0.4%.  Whether the rise is ultimately attributed to increased confidence or decreased end demand will be told in future quarters.

 

Last week also benefited from optimism for a strong earnings season from early reporting companies this week.  The first to report will be Alcoa then joined by GOOG, JPM, and GE; giving investors a preview of what's to come from a broad range of sectors.  All four of these stocks are down on average 20% over the past three months.

 

On Friday, for the third day in a row, treasuries were weaker with the dampened risk aversion in the markets and the VIX declined 2.8% yesterday. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.73) and Sell Trade (29.36).

 

The U.S. Dollar Index traded in a tight range on Friday and closed down 0.6% for the week.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (82.93) and Sell Trade (84.60).

 

 The EURO declined slightly on Friday, but closed up 0.6% for the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.28).

 

The three best performing sectors on Friday were those leveraged to a stronger economy - Materials (XLB +2.4%), Financials (XLF +1.4%) and Industrials (XLI +1.0%). 

 

The XLB benefited from the optimism surrounding Alcoa's upcoming earnings report, and also rising commodity prices; copper and gold traded up over 1% on the day.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.10).

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,227). 

 

Despite the strength in commodity prices Energy (XLE) was the worst performing sector on Friday.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.81) and Sell Trade (78.71).  

 

Ahead of some key earnings announcements this week the Financials (XLF) was the second best performing sector on the day.  The move in the XLF was driven by the BKX which was up 2.4%; regionals led the way higher on general optimism for the economic recovery and the beta shift up.

 

As we look at today’s set up for the S&P 500, the range is 42 points or 2.8% (1,048) downside and 1.1% (1,090) upside.   Equity futures are trading below fair value, as we are face with a very quiet MACRO calendar. 

 

Howard Penney

 

US STRATEGY – TIME WILL TELL - S P

 

US STRATEGY – TIME WILL TELL - DOLLAR

 

US STRATEGY – TIME WILL TELL - VIX

 

US STRATEGY – TIME WILL TELL - OIL

 

US STRATEGY – TIME WILL TELL - GOLD

 

US STRATEGY – TIME WILL TELL - COPPER



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.



SENSATIONAL SENTOSA

Genting Singapore should blow away 2010 and 2011 Street estimates.

 

 

Over the last month, consensus estimates for Genting Singapore have risen materially to S$774 and S$1,064 in EBITDA for 2010 and 2011, respectively.  It’s still not enough.  We believe RWS can produce almost S$1.1BN of EBITDA in 2010 and almost S$1.5BN of EBITDA in 2011.  Even our estimates may prove conservative.  Given the duopolistic nature - LVS is getting 13-15x for its Singapore operations - and growth profile of the Singapore market, the valuation of 10x 2011 EV/EBITDA seems low.

 

Before you dismiss our numbers as too bullish, consider this sanity check.  Starting with the S$109MM in reported EBITDA for the first 46 days of operations and adding back S$50MM of pre-opening expenses results in S$160MM in adjusted EBITDA.  Annualizing the first 46 days leaves almost S$1.3BN.  Of course, RWS was the only game in town during that period and following the opening of LVS’ Marina Bay Sands, RWS gaming volumes were hit hard for a 2-3 week period.  However, volumes subsequently improved dramatically following the quick absorption period.  Moreover, RWS did virtually no marketing with a very limited database, operated with an untrained workforce and no junkets, and had no EBITDA contribution from the hotels or the theme park.  These factors will be significant contributors over the next 12 months.

 

We’ve gone through a number of sell side initiation reports and post earnings update notes and found them short on details surrounding the performance over the first 46 days of operations.  Genting’s Malaysian roots dictate that the company will likely not divulge the details of its gaming operations.  That doesn’t relieve the analysts’ obligation to dig.  We’ve done it.  Here are some details.

 

1Q2010 Details:

  • During 1Q2010:
    • There were an average of ~800 rooms open for 70 days out of  1,300 completed rooms.
    • Universal Studios was open for 13 days and was operating at a limited capacity with a cap of 5,000 visitors vs. full capacity of 25,000 daily visitors.
    • The casino was open for 46 days.
    • 1,200 slot and electronic table game positions were open.  The property has a cap of 1,600 slot and electronic table positions.
    • 300 out of 530 total tables were operating (roughly 1/3 were “VIP”).  There is no table cap at the property, only square footage limitations based on proportionate non-gaming, open space.
  • 93% of the S$335MM revenue reported came from gaming activity.  S$312MM was net of rebates. 
  • 50% of the gross gaming revenues (“GGR”) came from VIP table win, defined as tables games that are on Rolling Chip programs – not necessarily on bets from players that qualified for the lower VIP tax rate.  The remaining 50% of GGR consisted of slot and Mass tables. 
    • If we assume a 1% rebate rate, then the implied GGR was S$375MM (S$8.2MM/day), and therefore VIP gross gaming win would be roughly S$188MM or S40.8k/day (US$29k/day).
    • Average daily slot win was $900 or S$1,260, implying revenue of S$70MM.
    • Implied Mass table was S$118MM or S$12.8k/day (US$9.1k/day)
    • Gross win per table was therefore, S$22k/table (US$15.8k/table)
  • Hotel: the average occupancy was about 55% and the ADR's were in the S$250 range.
    • 55% occupancy is also the “breakeven” occupancy rate at these 250ish rates.
  • Universal:  average ticket price is about S$65 while the average spend per visitor is S$100/day.
  • The clock on the 10 year license started in March 2007.  Therefore, LVS & Genting Singapore have at least another 6 years of operating in a duopoly and likely longer since it will take several years for new concessionaires to open properties even if licenses are granted in early 2017.  Technically, the government can allow construction to begin earlier and just issue licenses in 2017 once the agreed upon moratorium expires.  During the moratorium, the government of Singapore cannot raise the tax rate.

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