Jefferies initiated coverage on LVS with a buy rating.  Fair enough.  Using the correct share count drops the price target by 20%. Still a buy?



As we pointed out in our 09/14/09 post, “Check Your Models”, many analysts continue to use the wrong share count in calculating earnings and price targets.  This isn’t a minor error.  In Q1, LVS reported a loss, so ordinary shares of 660 million were used as the share count.  However, going forward, we expect LVS to be continually profitable so fully diluted shares must be used.  Since LVS has a convertible outstanding and significant common stock warrants, the share count will be much higher – 815 million per our math.


Jefferies price target is $30 based on 660 million shares, implying an equity target value of $19.8 billion.  If the analyst was using an appropriate fully diluted share count close to our estimate, the price target would only be $24.  Since the stock closed yesterday over $24, this stock can hardly be rated a Buy with that price target.


Will Jefferies downgrade the stock upon recognition of their error?  Unlikely.  Look for a subtle model and valuation revision magically resulting in the same $30 price target.


Position: Long Chinese Yuan via the etf CYB.


Conclusion: Slowing economic data supports sequentially slowing growth in China, and policy actions suggest more slowing is to come. Despite this, China's organic growth story is right on track. Eventually, investors will pay a premium for it again.


Like we’ve been saying since our January 15th  Chinese Ox in the Box theme, China’s 6-9 month economic outlook looks bearish. As bearish as that may be, the long term economic outlook for China is equally bullish and at a point, investors will again pay a premium for that growth. The whole concept of premium is hinged upon relative economic health and that will begin to matter a great deal more than it did in 1H10, as investors begin to rightfully get long those nations with strong balance sheets.


China has been tightening its economy to cool its white hot growth and inflationary pressures. Those methods have included: targeting a reduction in loan growth, raising lender’s reserve requirements, selling bills to soak up excess liquidly, and tightening controls on the expansion of businesses that are heavy energy users (i.e. manufacturing). As a result of these actions, we have seen Chinese economic growth slow as verified by the following data points: 

  • GDP slowed sequentially: 10.3% y/y in 2Q vs. 11.9% y/y in 1Q;
  • Money supply growth (M2) continues to slow: 18.5% y/y in June vs. 21% y/y in May – June marks the slowest growth since Dec. 2008 and has slowed each month since November;
  • Loan growth continues to slow: 603B Yuan ($89B) in June vs. 639.4B Yuan ($94B) in May vs. 774B Yuan in April;
  • Property Prices continue to slow: 11.4% y/y in June vs. 12.4% y/y in May vs. 12.8% y/y in April;
  • CPI slowed sequentially: 2.9% y/y in June vs. 3.3% y/y in May
  • Commercial Real Estate sales growth slowing – Floor Space sold declining: 15.4% y/y Jan-June vs. 22.5% y/y Jan-May; Sales Volume slowing: 25.4% y/y Jan-June vs. 38.4% y/y Jan-May;
  • Fixed Assets Investment continuing to slow: 25.5% y/y Jan-June vs. 25.9% y/y Jan-May;
  • Funds In Place for Investment continuing to slow: 29.2% y/y Jan-June vs. 33.8% y/y Jan-May;
  • Investment in Construction Projects slowing: 27% y/y Jan-June vs. 28.7% y/y Jan-May. 





As suggested by the data above, China’s tightening measures are producing the desired results and China has no plans to loosen the reins anytime soon. On Tuesday, The Ministry of Housing and Urban-Rural Development reiterated that it will maintain curbs on speculative purchases and increase market supply. Furthermore, China’s banking regulator said it has made no changes to policies on home loans, calling on commercial banks to strictly enforce home loan rules.


The momentum associated with these declining statistics and the government’s resolve to maintain tightening policies towards the Chinese property market suggest that the easy money in China has likely moderated for now. As a result, the Chinese equity markets have suffered (the Shanghai Composite is down 27% YTD and is underperformed by only Greece since the start of the year). Chinese entrepreneur confidence followed suit, down 2.5% Q/Q in 2Q, alongside slowing imports, slowing PMI, and slowing industrial production. Furthermore, weakening commodity prices in the face of a dollar decline are all sings that the Chinese demand side of the REFLATION trade is diminishing.






CHINA: SETTING UP TO OUTPERFORM - China Growth Commodites Index


All is not cause for alarm, however. As I pointed out in a note last Tuesday, the Chinese government has been busy making moves to position itself to better weather a slowdown in international trade. Those measures include increasing minimum wages by as much as a third in more than 21  provinces and municipalities this year, and, of course, relaxing the Yuan peg. Those measures, combined with further appreciation of the Yuan from here, will help stimulate domestic consumption, which has fallen from 46.4% of GDP in 2000 to 35.6% of GDP in 2009. Domestic consumption in China, much like Singapore, has a very bullish long term outlook and recent developments are further enhancing those prospects.




Those prospects are exactly the reason the international community is pouring capital into the country. Foreign Direct Investment in China just hit its second-highest reading on record in June. Investment sequentially accelerated to 39.6% Y/Y in June to $12.5 billion, the Ministry of Commerce said in Beijing yesterday – the most since December 2007. For the first six months of the year, Foreign Direct Investment rose 19.6% Y/Y to $51.4 billion, after a 14.3% Y/Y increase in the first five months. Foreign Direct Investment in China has shifted on the margin towards investing in China’s growing urbanization. Tesco, the U.K’s biggest retailer, said in April it will spend 2.5 billion pounds ($3.7 billion) over five years to open shopping malls and hypermarkets in China. For China this is a step in the right direction vs. last year when nearly 52 percent of foreign investment went to manufacturing and another 19 percent to real estate (National Bureau of Statistics). Furthermore, China could see even higher foreign investment if it opened up more industries, including telecommunications, transport, and resources to overseas companies. Any policy shifts in that direction will only accelerate the amount of capital flowing into the economy.


Rising incomes and the likely urbanization of hundreds of millions of people has also attracted private equity funds flows into the economy. At only 40%, China’s urbanization has a great deal of headway to grow, which is one of the reasons China attracted $10.5 billion (275% Y/Y) of private-equity capital in the first half of this year, accounting for 68 percent of the $15.4 billion raised in Asia in the period (Centre for Asia Private Equity Research). Following in the footsteps of Blackstone Group LP and Carlyle Group, KKR is seeking to raise $800 million to invest in China.


All told, China’s organic growth story will matter more when consensus finally comprehends the downside risk associated with the U.S.’s 12-18 month forward economic outlook. As easy money brought on by REFLATION, accelerating trade, and industrial production slows globally, organic growth stories will move to the forefront of investment opportunities. Governments worldwide will have to think twice about levering up and implementing further stimulus, so those economies that have proactively prepared themselves to grow organically will see their equity markets and currencies strengthen in 2H10 and 2011, and beyond.


Darius Dale



The Macau Metro Monitor, July 16th, 2010


SANDS, GALAXY TO HIRE 22,000 Macau Daily Times

According to MSS Recruitment’s Macau Job Market 2010 overview, Galaxy Macau and Sands' sites 5 & 6 need 7k and 15k more workers, respectively.  Sands China's senior vice president of human resources, António Ramirez, stressed, “Even though these projects offer more job openings to the local population, it does not necessarily mean that everyone will be suitable... Non-residents will play a crucial role in transferring their expertise and knowledge to local talents."  Trevor Martin, Galaxy’s senior vice president for human resources and administration, mentioned that the vast majority of the Galaxy Macau personnel would be locals, found through local initiatives and educational sources.


When it comes to local human resources, casinos are “the main competitors” of SME, the Macau Small and Medium Enterprises Association said.  According to the association, most of the 9,600 unemployed have “low education and skills, and some are out of work construction workers.”



IM believes Frank McFadden, Ian Coughlan, and Grant Bowie are the top candidates for the CoD CEO position.  McFadden, SJM’s President of Joint Ventures and Business Developments and the Grand Lisboa boss, has had experience in developing and redeveloping new and struggling properties and played a critical role in SJM's IPO but buying out his SJM stock options might be expensive. Even though Coughlan, president of Wynn Macau, runs the best and most profitable property in Macau and would be highly qualified for the position, it would be difficult to get Coughlan given his relationship with Steve Wynn and he may have golden handcuffs.  The most likely candidate is Grant Bowie, president of MGM Grand Paradise.  Bowie's contract is up for renewal soon and IM believes he would fit in well with the Anglo-Aussie-American-Chinese management team at CoD.  Other candidates include younger guys such as Ciaran Carruthers and Pete Wu.

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For the past three days the S&P 500 has treaded water as continued concerns surrounding the momentum behind the global economic recovery are offset by the largely upbeat June quarter earnings and corporate commentary.


Yesterday the concern on the MACRO front was focused on the slowing momentum in the manufacturing sector following the release of the New York and Philadelphia-area manufacturing surveys for July.  These concerns were offset by initial jobless claims which fell 29K to 429K in the week-ended July 10th, the lowest level thus far this year (the improvement was driven by seasonal factors). 


Treasuries fared well again today on the back of the weaker-than-expected regional manufacturing surveys.  The VIX has risen for the past three days, as the S&P 500 has treaded water.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (22.15) and Sell Trade (28.15).


The dollar index continues to get smoked, trading down 1% yesterday and it is trading down again today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (82.56) and Sell Trade (83.79).


The euro is breaking out above our intermediate term TREND line of 1.28; we are long the Pound Sterling.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.29).


As I said before, the MACRO calendar remained a headwind for equities, particularly those levered to the RECOVERY trade.  For a second straight session, the Financials (XLF) was the worst performer, weighed down by the banks. The group failed to garner much support from the Q2 beat out of JPM, which was driven by significantly better-than-expected credit quality.


The three best performing sectors yesterday were Utilities (XLU), Consumer Discretionary (XLY) and Technology (XLK).


Copper traded higher despite concerns for a slowing economy.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.97) and Sell Trade (3.19).


Gold continues to trade higher as the dollar hit a two month low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,191) and Sell Trade (1,218). 


Crude oil declined yesterday on continued concern that the U.S. economic recovery will slow.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (76.02) and Sell Trade (78.44).  


As we look at today’s set up for the S&P 500, the range is 44 points or 1.8% (1,077) downside and 2.2% (1,121) upside.   Equity futures are trading above fair value, despite a miss from GOOG.  On the MACRO calendar today:

  • US CPI m/m June SA  - consensus (0.1%)
  • US CPI m/m ex-food & energy June - consensus 0.1%
  • US CPI Index Level June SA - consensus 218.18
  • TIC Flows (May)
  • U. of Michigan Confidence (July-Prelim) - Consensus 74.5

Howard Penney













3D Risk

“People are nervous about the long term outlook, and they should be.” 

-Paul Volcker


I had a great day of meetings in New York City yesterday. It’s always additive to get the City’s pulse on risk management matters. The biggest risk that I found myself talking about was one that I haven’t spent enough time writing about – the risk associated with the world’s largest current bubble imploding – short term US Treasuries.


This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.


Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.


I could go off this morning on the credit quality of US Treasuries, but Jim Grant has done a much better job than anyone else on this topic and I’ll point you to his most recent “prospectus” for US Treasury bonds as required reading. His conclusions weren’t bullish.


Back to the tail risks embedded in the lowest Fed Funds and Treasury yields ever, I’ve started to frame this up using 3 D’s – The Disguise, The Dare, and The Delay.


What risks are implied when the US government is setting unsustainable and unreasonable expectations that rates will stay at ZERO percent forever?

  1. The Disguise – considering an ever forever disguises financial risk and unintended consequences.
  2. The Dare – both the Fed and Treasury are effectively daring you to get out there and lever yourself up with either “cheap” liabilities or chase “higher yielding” asset classes than the “risk free” rate of zero percent.
  3. The Delay – bad actors who are bad stewards of capital get their bad capital allocation decisions (losses) socialized and this delays much needed restructuring of their balance sheets.

When US interest rates push higher – and they will when you least expect them to – you are going to see a 3D version of massive global asset management blowups. This time, no one can say “no one saw this coming.”


Getting the timing right on this is what it is – difficult. That’s why we call this a tail risk. There is a less than a 3% probability of US Treasuries imploding today, or next week. But… every day that 2-year yields hit their lowest level ever, creates a higher probability over the intermediate to long term that Treasury rates go up.


In terms of immediate term leading indicators for interest rate risk, I think the best one for a country’s fiscal and balance sheet health is its currency. Watching the US Dollar hit lower-immediate-term lows yesterday hopefully got President Obama’s attention.


The US Dollar Index is down for the 6th consecutive week and has lost -6.7% of its value since the beginning of June. For the world’s alleged “reserve” fiat currency, that’s a lot and we, as your Risk Manager, think you should be paying acute attention to this.


As a reminder, our Q3 Macro Theme of American Austerity submits a very straightforward thesis – the US Dollar is going to become what the Euro has been for the last 3-6 months as both the US and the world come to grips with the reality that both the US deficit and debt to GDP ratios are going to look a lot like Spain’s in 2011.


Put another way, assuming that the US Dollar is going to be an American entitlement that we can use and abuse as the world’s reserve currency forever, and that short term US Treasury Bonds will trade at their highest prices ever and forever, is no longer reasonable.


My immediate term support and resistance levels for the SP500 are now 1077 and 1121, respectively. We shorted the US Dollar on June 7th via the UUP etf and remain bearish on both the US’s fiscal position and its balance sheet health.


We’ll be doing a full slide presentation and conference call on American Sovereign Debt and the implications of the aforementioned tail risk that’s mounting on the short end of the Treasury curve in a few weeks.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


3D Risk - 2Y


The only surprise will be if HOT doesn’t surprise on the upside and raise full year guidance when it reports next Thursday. 



We’re not sure that there are a lot of mysteries to HOT’s Q2 earnings and outlook, although margins are more uncertain than for MAR.  Like Marriott, we expect HOT to beat the quarter and raise guidance for 2010.  Consistent with history, the company will likely provide pretty conservative guidance for next quarter, in this case Q3.  Our Q2 projection is $217MM of EBITDA and $0.27 in EPS versus the Street at $209MM and $0.25, respectively.  For the full year, we anticipate the company will raise guidance from $810MM and $0.88 closer to our estimate of $847MM and $0.99 in EBITDA and EPS, respectively.


Now more than ever, the macro environment will drive revenues and lodging profits, and investors’ views of the future macro environment will drive stock prices.  Current RevPAR trends are strong but the reported quarterly results and weekly RevPAR numbers just give investors a glimpse into the rear view of the mirror.  We find it amusing listening to the sell-side repeatedly asking questions on 2011 trends and beyond.  Face it, there is very limited visibility in this space and hotels only have pricing power when occupancies exceed 70%.  Lodging trends have historically been lagging indicators, since what’s on the books today was booked at some point in the past.  If sentiment changes or things begin to deteriorate, future bookings are impacted, and by the time the numbers show a slowing trend, it would be already too late.  No matter what these companies report, how they trade depends on people’s outlook. The issue today is that investors’ collective view of the future is dimming and comps get much tougher in 2H 2010.    


Here are the details of our projections:


2Q2010 Detail


Owned, leased & other revenue of $416MM and gross margin of 17.9%

  • We expect room revenue to grow 7%.  Starwood owned room based has shrunken roughly 5% since 2Q09.
  • Non-room revenue growth of 4%, less lost NOI from the sale of the retail space at the NY St. Regis.
  • CostPAR growth of 2.9%.

Management, franchise, and other income of $175MM; $136MM (14% YoY growth) of which comes from real fees with the balance coming from “other stuff”.

  • Base management fees of $68MM, up 13% YoY.
  • Incentive fees of $29MM, up 13% YoY.
  • $39MM of franchise fees, growing 15.5% YoY.
  • $30MM of amortization of deferred gains, termination fees and other one time items.
  • $8MM of miscellaneous other revenues.

$132MM of VOI revenues and $30MM of gross margin

  • Originated sales revenues up 3% YoY with gross margins of 35%.
  • $61MM of other sales and services revenues, which includes $21MM of interest income on securitized and unsecuritized loans with $45MM of associated expenses (27% margin).
  • $8MM of deferred revenues and $6MM of deferred expenses.

Other stuff:

  • $80MM of SG&A.
  • $77MM of D&A.
  • $61MM of net interest expense.
  • 22% tax rate.

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