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LVS: INTERNAL SQUABBLES IN MACAU?

Steve Jacobs and Sheldon might be at odds over the design and operations of Lots 5 and 6.  Could this explain why "real" construction hasn't yet resumed?

 

 

Steve Jacobs is Chief Executive Officer of Sands China Ltd and President of Macau operations for LVS.  Mr. Jacobs is very highly regarded in Macau and the investment community.  That is why it is disconcerting to hear that he and Sheldon Adelson may have very different views on the design and direction of Lots 5 and 6.  We don't know the details but the contrasting views are apparently sharp, so much so that Jacobs could be on his way out.  The disagreement could explain the construction delays.  Sure, dirt is being moved from one pile to another but the reason why serious work has not resumed remains a mystery.


US STRATEGY - BEAR MARKET MACRO

TODAY’S SET UP

 

As we look at today’s set up for the S&P 500, the range is 46 points or 3.1% (1,032) downside and 1.2% (1,078) upside.  Equity futures are trading above fair value, with little MACRO data points today. 

 

Consistent with our BEAR MARKET MACRO theme, the potential for a "double-dip" recession gained momentum last week.  Weaker than expected reports on retail sales, industrial production and trade activity this week all showed that economic activity has slowed in the second quarter, suggesting not only a slowing of GDP growth in 2Q10, the but the potential for quarterly GDP contraction in 3Q10 or 4Q10.  Consensus expectations are for stronger second-quarter numbers, with continuing growth for the balance of the year.

 

The EURO is trading higher (the EURO traded higher 4 out of 5 days last week) despite Moody’s downgrade of Ireland.   The Euro continues to confound the "parity" parrots; now breaking out above our TREND line of 1.27 with the US Dollar in a bearish formation.

 

Starting out this week there are only two sectors positive on TRADE - Utilities (XLU) and Consumer Staples (XLP) - and the XLU is the only sector positive on TREND.  

 

THE EARNINGS SEASON

 

According to Street Account, last week there were 23 companies in the S&P 500 that reported earnings. 86% of those companies beat on earnings and 75% beat on revenue.  For the earnings season-to-date, there have been 50 companies report earnings; 84% beat on EPS and 70% beat on revenue.  The EPS trends are only slightly better than the 82% seen in 1Q10.  Historically, it is generally believed that the portion of companies that beat EPS expectations tends to be in the mid 60-70%, with 1Q10 seeing a better than average showing. 

 

With the exception of the Financials, the takeaways from the first week of earnings are largely positive, with most companies talking up the trends for 3Q10 and the 2H10.  On Friday, the BKX was down 5.7% and declined 4.7% for the week.  This week we will hear from GS and MS.

 

Last week, Technology (XLK) declined only slightly on the heels of strong earnings from INTC and AMD.  INTC reported a blowout, with revenue and earnings well ahead of expectations and solid top line outlook that comes with a margin expansion story.  AMD followed suit with a similarly upbeat report and commentary.  GOOG kicked off internet earnings with a mixed report - revenue trends remand strong, but increased spending which pressured margins. 

 

THE HEDGEYE MACRO TRADE RANGES FOR 7/19/10

 

 US STRATEGY - BEAR MARKET MACRO - spxsetup

 

US STRATEGY - BEAR MARKET MACRO - equities 719

 

US STRATEGY - BEAR MARKET MACRO - dollar 719

 

US STRATEGY - BEAR MARKET MACRO - vix 719

 

US STRATEGY - BEAR MARKET MACRO - oil 719

 

US STRATEGY - BEAR MARKET MACRO - gold 719

 

US STRATEGY - BEAR MARKET MACRO - copper 719


WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE

Last week, 3 of the 8 risk measures registered positive readings on a week-over-week basis, while the remaining five were neutral.

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit MCDX

8. AAII Bulls/Bears Sentiment Survey

 

1. Financials CDS Monitor – Swaps were mixed this week.  Twelve of the 30 CDS readings contracted, while 17 widened.  Conclusion: Neutral.

Contracted the most vs last week: MBI, MS, AGO

Widened the most vs last week: AON, ALL, TRV

Contracted the most vs last month: MBI, XL, AXP

Widened the most vs last month: AON, ALL, TRV

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - cds

 

2. High Yield (YTM) Monitor – High Yield rates fell 21 bps last week. Rates closed the week at 8.74% down from 8.95% the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - high yield

 

3. Leveraged Loan Index Monitor - Leveraged loans rose by 10 points last week, closing at 1466 versus 1456 the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - leveraged loans

 

4. TED Spread Monitor - The TED Spread is a great canary. Last week it remained flat, closing at 38 bps. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - 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 slightly, closing on Thursday at 7.19, down just over 1 point versus last week’s close at 8.59.  Pricing data was not available for Friday. Conclusion: Neutral. 

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - joc cpi

 

6. Greek Bond Yields Monitor – Greek bonds yields and CDS show that concerns over debt have not waned.  Last week yields declined very slightly, ending the week at 1025 bps versus 1033 bps the prior week. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - greek bond

 

7. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index will be a useful indicator of pressure in state and local governments.  Each index is a basket of 50 bonds, both revenue and GO, and the chart displayed is the average of four indices.  A volatile week ended up largely flat, as spreads closed at 221 versus 228 a week ago.  Conclusion: Netural.

 

WEEKLY RISK MONITOR FOR FINANCIALS - NEUTRAL TO POSITIVE - markit mcdx

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey ripped back to the bullish side last week. Bulls rose  by 18.5% to 39.4% while Bears fell 19.3% to 37.8%, pushing the spread to 2% bullish, versus 36% bearish the prior week.  Conclusion: Positive.

 

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 - NEUTRAL TO POSITIVE - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur


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.

THE M3: ESUN SUIT DISMISSED; GGR 2Q DETAIL; MELCOLOT; PHILIPPINES; CHINA TRANSACTION TAX

The Macau Metro Monitor, July 19th, 2010


COURT BLOCKS eSUN'S MACAU CLAIM WSJ, macaubusiness.com

High Court Judge A.T. Reyes ruled that East Asia Satellite Television (Holdings) Ltd.'s $2.39 bililion lawsuit against New Cotai LL-- accusing New Cotai of deliberating delaying the development of their Macao Studio City project in order to force a renegotiation of the terms of their JV--was "untenable" under Macau and HK laws.  He allowed a separate claim for $88.6 million against Oaktree and Silver Point for “inducing breach” of an agreement to proceed.  East Asia is a joint venture company through which eSun Holdings Limited and CapitaLand Limited have invested in Macao Studio City.  New Cotai, owned by Silver Point, Oaktree and former Las Vegas Sands Corp. executive David Friedman, became an investor in Macao Studio City in December 2006.

 

David Friedman, CEO of New Cotai, said in a statement: "We are pleased that the High Court dismissed so many of East Asia's claims at this early stage of the proceedings... New Cotai remains well positioned to complete Macao Studio City once the impediments to doing so, including the litigation initiated by East Asia, are resolved."

 

The court ruling reiterated that the Macau government will reclaim the 6 million sq ft project site if plans don't proceed in the "near future."


CASINO'S GROSS REVENUES FROM BACCARAT NEARLY DOUBLES IN 2ND QUARTER MacauNews, Macau Daily News

According to the DICJ, VIP baccarat increased 98.7% YoY to MOP 32.368 BN in 2Q.  VIP baccarat represented 72.1% of the total GGR, MOP 44.902 BN, in 2Q.  VIP+Mass revenues accounted for 90.6% of the total GGR in 2Q (last year, their share was 87.1%).  Slot revenues rose 32.3% YoY to MOP 2.028 BN in 2Q.

 

The traditional Chinese game of dice known as Cussec or Big & Small reached MOP 856 MN in 2Q ( 34.2% YoY). Blackjack accounted for MOP 541 MN (25.3% YoY growth), stud poker for MOP 266 MN (16% YoY growth), and roulette for MOP 161 MN (28.8% YoY growth).  In other betting arenas--greyhound and horse races, lotteries, and soccer and basketball bets--, gross receipts totaled MOP 317 MN (50.2% YoY growth).

 

For 2Q, the number of gaming tables increased to 4,828 (up 17 QoQ) and the number of slot machines increased 156 units QoQ to 14,659.  According to Macau Daily News, industry experts believe GGR of MOP 130-140 MN for 2010 is an "acceptable level".


CHINA WELFARE LOTTERY DEAL FOR MELCOLOT AND INTRALOT Inside Asian Gaming, Yogonet.com

MelcoLot Ltd has reached a deal to supply INTRALOT's LOTOS Horizon hardware and software to the China Welfare Lottery operation in the city of Chongqing on the Chinese mainland.  MelcoLot is part of the HK-listed Melco Group, under Lawrence Ho.  The contract is for five years with a five-year renewal option by mutual consent.

 

PHILIPPINES MAY PRIVATIZE CASINO INDUSTRY Yogonet.com

President Benigno Aquino is considering privatizing the 41-casino chain of PAGCOR.  He stressed that the government will need to determine any irregularities within PAGCOR and come up with steps to remedy them.  "If at some point in time we can do away with having the government be the operator and the regulator, that will be a good direction," said Aquino.

 

TRANSACTION TAX MAY COOL CHINA HOUSING: PBOC ADVISER Reuters

Xia Bin, one of three academic advisers on the PBoC monetary policy committee, believes a higher tax on property transaction would do more than a property tax to cool China's housing market.


Don't Mind Expectations

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss

 

I got a lot of feedback early last week that I was being too hard on myself. I don’t think I was. For a few trading days the Thunder Bay Bear was getting beaten up by the bulls. I like to call it for what it is that everyone out there sees. There is no hiding from the real-time score.

 

After Friday’s smack-down close, the US stock market is right back in the fetal position, down -12.7% from its April 23rd cycle-peak and down -32% from its 2007 Levered-Long high. Friday’s earnings out of Google, Bank of America, and General Electric looked nothing like those that we saw from Intel earlier in the week. Across the board, all of these stocks look a lot like the SP500 does from and intermediate term TREND perspective – bearish.

 

Earnings are cool. They are catalysts that everyone stares at and they can get you paid on both the long and short side. Getting stocks and earnings right are two completely different risk management exercises however - the difference is usually explained by expectations.

 

At the heart of our American Austerity theme for Q3 of 2010 are the following forecasts about expectations:

  1. US economic growth expectations for the back half of 2010 are too high.
  2. US Dollar weakness (from debt and deficit spending) is a leading indicator for US stock market weakness.
  3. Consensus about US growth, the US Dollar, and US stocks is not yet Bearish Enough.

As of Friday’s closing price of 1064, the SP500 is broken again across all 3 of our core risk management durations (TRADE, TREND, and TAIL):

  1. Long term TAIL resistance = 1096
  2. Intermediate term TREND line resistance = 1144
  3. Immediate term TRADE resistance = 1078

What’s most interesting about this risk management setup is that last week’s closing highs were right at the long term TAIL line (1096). When considered within the framework of longer term expectations, we don’t think earnings season is going to trump the intermediate term slowdown in US growth. Don’t forget that as you get deeper into US earnings season, the earnings get more consumer discretionary (they report last). And as the US consumer goes…

 

By all measures of consensus expectations, Friday’s Michigan Consumer Confidence reading was a bomb (66.5 vs. 74.5E). For the bears however, it was very much consistent with the continuing intermediate term TREND story line that Americans aren’t as dumb as their government expects them to be.

 

Dumb? Yes, that’s what Professional Politicians in Washington must think Americans are when they expect consumers to run out and lever themselves up with another mortgage loan. Every day that the Krugman Empire fear-mongers the citizenry into believing we’re going to have another “great depression” is another day when Americans might actually adjust their spending in anticipation of one!

 

This week’s macro catalyst calendar isn’t going to make Americans any more confident:

  1. Wednesday – Ben Bernanke will issue his semi-annual report to the Senate Banking Committee and likely downgrade his forecast.
  2. Thursday – Bernanke will repeat the same doom and gloom forecast (that doesn’t match up with his GDP forecast) to the House.
  3. Thursday – Existing US Home Sales for the month of June will continue to rattle the cages of the housing bulls (see our 101 slide presentation).

On Friday, European politicians will be trumpeting the results of a made-up “stress test” that already had a prescribed outcome. That could be a positive catalyst, but maybe more so for Europeans than Americans…

 

You see, the Europeans are doing exactly what American politicians taught them to – make up some healthy “test” results for their banks and hope that the market buys into it. This will continue to provide a bullish intermediate term tailwind for the Euro (bullish intermediate term TREND support = 1.27) and a bearish intermediate term headwind for the US Dollar (bearish intermediate term TREND resistance = 84.74).

 

Having been a Euro bear for the first 6 months of 2010, I don’t mind consensus expectations for “Euro Parity.” The Parity Parrots all came to the risk management party just in time for us to cover our Euro and European stock market short positions and shift to shorting the currency and equity markets with more relative downside – those in the USA.

 

We remain short both the US Dollar (UUP) and SP500 (SPY) in the Hedgeye Virtual Portfolio. My immediate term support and resistance lines for the SP500 are now 1032 and 1078, respectively.  

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Don't Mind Expectations - bear


The Week Ahead

The Economic Data calendar for the week of the 19th of July through the 23rd 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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