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No Excuses

“He that is good for making excuses is seldom good for anything else.”

-Benjamin Franklin

 

I’m in the midst of finishing one of the more calming books that I’ve read in a while – “Benjamin Franklin: An American Life.” That’s a good thing, because there has been nothing calm about being short the SP500 for the last few days. Franklin’s wisdom is giving me some much needed balance.

 

In a prior life, if I was short an equity market that was going straight up I’d have compounded my mistakes by making up stories that fit my positioning.  Clearly, I didn’t know what I was doing. Note to self: if you want to find data in this business that supports your positioning, you will.

 

Franklin endowed this world with many practical lessons. Learning by doing and not making excuses while you are making mistakes are two of the critical ones. I’ve been bearish on US Equities and I recently re-shorted the SP500 on Friday July 9 at $107.47. As of last night’s close, the position is -2.04% against me. That makes me wrong right now. The score doesn’t lie; excuse makers do.

 

In terms of moving to a zero percent asset allocation to US Equities last week, 3 major mistakes I have made this week have been revealed:

  1. Not thinking that Alcoa (AA) barely beating estimates (that had been coming down) would be seen positively by the market.
  2. Not knowing Intel (INTC) would crush the quarter on one of the best earning’s releases I have seen relative to expectations in a while.
  3. Not agreeing that Earnings Season was going to be the bullish catalyst that the bulls have been talking about for months.

Now, to be fair, these are all US stock market mistakes. In terms of currencies and fixed income I’ve been short the US Dollar (UUP) and short term US Treasuries (SHY) this week and those have been wins.

 

Not thinking; not knowing; and not agreeing – whether I like it or not, these are mistakes that can add up to cumulative losses. A lot of excuse makers will point fingers at their analysts and blame their teammates for “not knowing” – but that speaks to the sad state of how leadership and accountability are currently defined in this modern day CYA culture. If you are wearing the ‘C’ on your jersey, act like a Captain.

 

As always, after making mistakes, my risk management process has evolved to a point where I take a step back before I take the next step forward. Most of you who have been following my performance for the last 3 years probably recognize this as me slowing down my decision making. All of my risk management moves are time stamped, so I don’t need to give lip service to what I am doing versus what I say I think you should be doing.

 

From a top down level, our risk management process is designed so that I can always take a step back and review the 3 highest conviction Macro Themes that I’d like to express with every asset allocation and long/short security position.

 

To review, our current Q3 Macro Themes are as follows:

  1. American Austerity (short the US Dollar and intermediate term bearish on US Equities)
  2. Housing Headwinds (short single stocks like BKD, TOL, and HCBK that are levered to housing’s double dip)
  3. Bear Market Macro (slide 25 of our 35 slide presentation outlines all of the intermediate term TREND lines that we see as bearish)

Zeroing in on the American Austerity theme is where I think we make or break ourselves this quarter. A solid argument can be made that yesterday’s appointment of Jack Lew to replace Peter Orszag as the new OMB budget director was a positive. 

 

Lew is actually an experienced hand in the budget area and has spent seven years in the OMB. He was lastly OMB director under President Clinton until 2001, and produced a budget SURPLUS. Since I think that the broken intermediate term TREND in both the SP500 and the US Dollar are reminiscent of what we saw emerging in Europe 3-6 months ago, this is progress. It’s Spending, Stupid.

 

Back to the bearish side of American Austerity, yesterday’s budget deficit for June was reported intraday and a quantified argument can be made that nothing has changed the intermediate term TREND of lower tax receipts and higher spending.

 

Per my defense partner Daryl Jones’ math in a note he sent to our macro clients last night titled “The Deficit Still Looks Ugly, Normalize For Tarp And It Looks Uglier”, the June headline improvement in deficit can be attributed primarily to timing of revenues.  Due to the Memorial Day shift, a large amount of tax revenue was pushed into June. 

 

In aggregate for the year-to-date, overall revenues are only up 0.5%, with corporate income tax contributing all of this increase growing 33% year-over-year.  Personal income tax, on the other hand, is down -4.4% in the year-to-date.  So despite the “economic recovery”, tax receipts from individuals are still lagging on a year-over-year basis (jobless recovery sound familiar?).

 

Additionally, while reported outlays were $73 billion, or -3%, lower for the first three quarters of the fiscal year, this decline included a reduction in nearly $350 billion from a combination of TARP, Treasury payments to Fannie Mae and Freddie Mac, and net outlays for FDIC insurance.  If normalized for TARP, so removing the $350 billion from last year’s numbers, then spending ex-Tarp is up 10.6% on a year-over-year basis!  Not good.

 

All the while, I was tweeted last night by the President of the United states with the following storytelling:

 

“Wall St. reform helps families, businesses, and the entire economy. I urge the Senate to act quickly, so I can sign it into law next week.”

 

And then, this morning, in a Bloomberg National Poll, “More than 7 out of 10 Americans say the economy is mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit.”

 

So the people get it, but Washington doesn’t. And, unfortunately, the next leg down in both the US Dollar and US Equities will be a direct function of a Duration Mismatch between political change in this country and the gravity associated with debts and deficits as a percentage of US GDP not changing.

 

My immediate term support and resistance lines for the SP500 are now 1074 and 1106, respectively. The Bear Market Macro TREND line of resistance for the SP500 remains 1144.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Excuses - Frank


THE M3: SINGAPORE GDP UP; MBS LAWSUIT; LVS VIETNAM; CHEAPER GOODS

The Macau Metro Monitor, July 14th, 2010

 

SINGAPORE GDP SURGES, FORECASTS LIFTED WSJ, SCMP, Channel News Asia,

GDP rose 19.3% YoY in 2Q, accelerating from 1Q's 16.9%.  On an annualized and seasonally adjusted basis, GDP grew 26% in 2Q, higher than the 17.4% forecast in a Dow Jones Newswires survey.  Strong manufactured exports and positive trade data boosted GDP.  The bullish data sent the US$/Singapore exchange rate up to 1.3741.  The Monetary Authority of Singapore won't stand in the way of the local dollar's subsequent rise, a person familiar with the central bank's thinking told Dow Jones Newswires.

 

But Singapore's Ministry of Trade and Industry is more cautious about growth going forward, stating "The sluggish final demand in the US and EU has moderated industrial activities and lowered expectations for manufacturing output in the Asian economies. The momentum of the global economic recovery has thus moderated, although a double-dip recession remains unlikely at this juncture."  Nevertheless, the government raised its full-year growth forecast for nominal GDP to 13%-15% from its May estimate of 7%-9%.

 

Meanwhile, Prime Minister Lee Hsien Loong said the government will be mindful of the economy overheating with the strong growth - which will also mean having more foreign workers.  Mr Lee said: "I believe this year foreign worker numbers will go up in Singapore. It cannot be helped because with the market so tight, if we don't allow the foreign workers in you are going to have overheating."

 

MBS FILES 2ND LAWSUIT The Strait Times

Marina Bay Sands has filed a second lawsuit against lawyers' group Inter Pacific Bar Association (IPBA) for not paying for their May conference.  This comes despite Adelson recently saying he wants to "make love, not war at MBS".  In this second suit filed on June 28th, MBS is asking for full outstanding amount $641,245.57 owed, or $341,245.57 if it managed to claim the $300,000 it had sued for earlier on May 14.

 

LAS VEGAS SANDS EYES HO CHI MINH CITY macubusiness.com

Adelson recently said, “I will go visit Vietnam, maybe at the end of July. I have met Vietnamese officials many times in Singapore.  We want to build the same thing as Marina Bay Sands in Vietnam, in the south and in an urban area.... I can only do it on the condition that Vietnamese people are allowed to come in. The problem is that Vietnam does not allow its citizens to get access to the casino. We want to invest in Saigon, but we cannot do that if the government does not allow people to gamble."

 

Vietnam currently has one casino in Hai Phong City--for foreign tourists only.

 

SUPERMARKET GOODS CHEAPER macaubusiness.com

According to the Consumer Council’s monthly “Supermarket Price Survey Report”, 44% of 200 supermarket goods were cheaper in July, relative to June.


PENN YOUTUBE

In preparation for PENN's Q2 earnings release on July 22, we've put together some forward looking commentary from the company's Q1 and subsequent conferences.

  

 

Commentary From Q1:

  • “The one area in the country that we're seeing the most softness is in Southern Mississippi-Southern Louisiana. And in the first quarter in '09, it was one of the stronger markets we had. So we think it's got a bit of a lag effect and we have not seen any material signs of recovery from what's being reported by the state so far. In addition, the level of promotional activity especially in Southern Mississippi remains -- is probably the one market in the United States or markets in the United States that continues to show the most softness.”
  • “There's clearly a little bit of little better margins reflected in the rest of the year but also reflecting that as we get a little more cost conscious on our marketing programs; we're going to have some negative impact on our revenue as we pull out from possible customers... So I think what you're seeing is slightly improved margins for the rest of the year, but I wouldn't say that we meaningfully moved our EBITDA guidance at the end of the day.”
  • “We're seeing…customers coming but their spend per visit has been down and that's been a trend now for about three or four quarters. So we've gone back in our businesses and looked on a customer-by-customer basis the profitability we have against these customers given our past marketing practices and in certain segments of our business--we found certain groups of customers were spending less. We're redefining the terms of what they're going to get in terms of their rewards and incentives, and pulling back to make them more profitable for us to continue the relationship going forward, and it's really just as simple as that. Going in program by program down to the customer level and determining what margins we want to operate these programs against, and then making tough decisions on customers, where they got an offer before they're going to get either a lower offer or no offer going forward. And that's what you saw in the first quarter and that's what we're working on as we continue into the second quarter and the balance of the year.”
  • “Second quarter we're projecting about $1.8 million in cap interest and then $7.1 million for the year.”
  • Q: “And then corporate overhead, it's ran, what $16 million or so in the quarter? Is that a decent run rate?”
    • A:  We're projecting a little higher than that. We're on a normalized run rate looking at probably about $58 million for the year.”
  • “We're going to certainly have some increased marketing spends in advertising and creating awareness for these two properties now that table games is being offered.  For West Virginia, we're expecting sometime in July to get up and running. So probably in June, July and maybe partially in August and then it will start to burn off after that. At Penn National, it's probably going to be later in the third quarter, we're anticipating. So it would probably be a third quarter kind of effort to create the awareness that table games is there as well.  Once the awareness is created and we start driving the trial, then you'll see the pullback of those advertising efforts.”
  • “Second quarter, we're projecting project CapEx of roughly $85.7 million and maintenance CapEx of $23.6 million. For the year, these numbers are highly dependent on -- or expect the inclusion of--paying $100 million in license fees for Columbus and Toledo.  We're looking at project CapEx for the year of roughly $439.8 million; maintenance CapEx is now looking closer to $94 million for a total of $533.8 million.”

 

Post Earnings Conference Commentary:

  • “In terms of visitation, we’re flat across most of our properties, and it’s been flat for a long time, actually in the gaming industry in general and at our properties specifically. Where we’ve seen the decline obviously is in the spend per visit; that was down pretty significantly in ‘09….I think that is sort of portfolio-wide; it’s steady as she goes and I think April and May have been sort of the same as what we’ve seen in the first quarter as well.”
  • “I think on the Gulf Coast, we’ve seen a little bit of weakness there primarily because of the lagged effect of the hurricanes in 2005; there was obviously a big boom period there in that part of  the country and that’s starting to obviously recede now and so that’s sort of what we’re seeing there.  On the other hand, there are some markets that are doing pretty well, primarily due to capital that we put into those properties, primarily Lawrenceburg and Penn National.”

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YUM – DELIVERING, BUT THE BAR WAS SET HIGH

U.S. and China in Nirvana.

 

YUM reported 2Q10 numbers that were much better than I was modeling from a profit standpoint, with the biggest upside to my estimates coming in the U.S.  Relative to my estimates, U.S. same-store sales were basically in line, a little better at Pizza Hut and KFC but a little light at Taco Bell.  In the U.S., there was more leverage than I was expecting across most of the P&L (particularly on the labor line).   In total, restaurant level margin increased 140 bps YOY.  The improved margin performance at KFC stands out as an anomaly given the 7% decline in same-store sales, although KFC’s two-year average same-store sales trends improved 350 bps sequentially from 1Q10.  Also, management commentary about “lower insurance expense” in the U.S. speaks to managing the P&L around a difficult sales environment.   

 

YUM’s stronger-than-expected results in the U.S. enabled the company to move out of what we call the “Deep Hole” (negative same-store sales and YOY decline in restaurant operating profit margin) earlier than I had anticipated.  I had expected this segment to begin to recover in the second half of the year as the company lapped easier comparisons, but as of 2Q10, the company is now straddling the line between “Life-line” (negative same-store sales and positive restaurant operating profit margin growth) and “Nirvana” (positive same-store sales and positive restaurant operating profit margin growth).

 

Going into the quarter, I also said that I would not be surprised if YUM fell short of its 5% operating profit goal in the U.S. but this 2Q10 upside makes this guidance more achievable, particularly as the company laps 4Q09’s 23% decline in operating profit.

 

YUM – DELIVERING, BUT THE BAR WAS SET HIGH - YUM US

 

Same-store sales in China were in line with expectations, implying a 300 bp deceleration in two-year average trends, but again, the bottom line came in slightly better than expected.  Restaurant level margin improved 170 bps as food costs as a percentage of sales were down 240 bps YOY, more than I had anticipated.  That being said, the company continues to expect to face labor and commodity inflation in the second half of the year.  Overall, as expected, China continued to operate in “Nirvana” during the second quarter, but will likely move into the “Trouble Brewing” quadrant (positive same-store sales and YOY decline in restaurant operating profit margin), and potentially, into the “Deep Hole”, during the back half of the year as the higher food and labor costs materialize.

 

YUM – DELIVERING, BUT THE BAR WAS SET HIGH - YUM CHINA sigma

 

YUM increased its FY10 EPS guidance to $2.43, from $2.39, but this guidance still falls short of the street’s $2.47 estimate.  YUM has a record of beating expectations but management will likely get a lot of questions tomorrow on its earnings call about whether this new guidance is conservative.

 

Howard Penney

Managing Director

 

 


The Deficit Still Looks Ugly, Normalize For Tarp And It Looks Uglier

Conclusion: While June was an improvement for the deficit due to timing related to Memorial Day, the year-to-date numbers remain concerning.  On the other hand, the appointment of Jack Lew to OMB Director is a marginal positive.

 

The U.S. government reported a smaller monthly budget in June versus June 2009 with a deficit of $68.4 billion versus $94.3 billion last June.  In the year-to-date, the budget deficit is $1 trillion versus $1.1 trillion over the same period in 2009.  On a year-to-date basis, the budget deficit as a percent of GDP is 9.2% versus 10.2% in the same period in 2010.  While this high level summary suggests marginal improvement, the underlying facts still suggest dire fiscal issues in the United States on a number of fronts.

 

First, the June improvement in deficit can be attributed primarily to timing of revenues.  Due to the Memorial Day, a large amount of tax revenue was pushed into June.  In aggregate for the year-to-date, overall revenues are only up 0.5%, with corporate income tax contributing all of this increase growing 33% y-o-y.  Personal income tax, on the other hand, is down -4.4% in the year-to-date.  So despite the “economic recovery”, tax receipts from individuals are still lagging on a year-over-year basis (jobless recovery sound familiar?).

 

Second, while reported outlays were $73 billion, or 3%, lower for the first three quarters of the fiscal year, this decline included a reduction in nearly $350 billion from a combination of TARP, Treasury payments to Fannie Mae and Freddie Mac, and net outlays for FDIC insurance.  If normalized for TARP, so removing the $350 billion from last year’s numbers, then spending ex-Tarp is up 10.6% on a year-over-year basis!  Not a good trend.

 

While a large proportion of this was driven by unemployment insurance, every major line item showed a meaningful increase year-over-year.  Specifically,

  • Defense spending was up 5.8%;
  • Social security was up 6.0%;
  • Medicare was up 4.3%;
  • Medicaid was up 8.9%; and
  • And Other was up 9.1%.

Line item spending dramatically outpaced the economy vis-à-vis GDP growth and tax revenue growth.

 

In conjunction with this release, President Obama also named Jack Lew the new budget director.  While Orzag has a following amongst the paparazzis in Washington, Lew is actually an experienced hand in the budget area and has spent seven years in the OMB. He was lastly OMB director under President Clinton until 2001, and produced a budget, with the help of a healthy economy, that resulted in a surplus of $236 billion. 

 

Given his prior experience, prior success, and proven ability to work across bi-partisan lines, President Obama seems to have made a solid choice in Lew.  Even though he spent some time as Chief Operating Officer at Citi Alternative Investments, we will still give him a free pass on that job choice for now.  He certainly has the wherewithal to take a tough stance on the budget, but the next few months will actually show how serious the Obama administration is about narrowing the deficit.

 

Daryl G. Jones

Managing Director

 

The Deficit Still Looks Ugly, Normalize For Tarp And It Looks Uglier - US Federal Budget


Bear Market Macro: SP500 Levels, Refreshed...

We are in the 6th day here of a bear market bounce. At 1096 in the SP500 this easily makes me feel as uneasy as I have felt… well… in 6 days.

 

From an intermediate term TREND perspective, unless the SP500 closes above 1131, this will remain a bear market by Hedgeye’s definition. That doesn’t mean that the bulls can’t annoy me and/or test the validity of either of our American Austerity of Housing Headwind Q3 Macro Themes in the meantime.

 

Quantified, a close above 1096 puts the probability of a move to 1131 in play. That’s why I have been doing a lot of waiting and watching today. The long term TAIL line of resistance for the SP500 is 1096 and the long term TAIL line of support for the Volatility Index (VIX) is 23.69. As of 3PM EST, we are trading right at these lines.

 

What was TRADE line resistance is now immediate term TRADE support at 1074. While the 1004 level of downside support is still what we would consider probable on a 3-day probability model basis, its also what we would call less probable than what we called it yesterday.

 

As the markets change we will continue to, but we need these SP500 and VIX levels to confirm for at least 3 days on a closing basis to change our positioning.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - S P


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