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WYNN: LOWER MARKET SHARE MAY LEAD TO STORY TELLING

July Macau market share was subpar which could give legs to the bear call that Encore hasn’t been additive enough.

 

 

Encore had a high ROI out of the box in Q2 but that won’t change the bear view that Encore isn’t incremental.  We think this negative thesis will actually gain momentum as the July market share numbers are digested.  As we reported today, we think Wynn’s July Table GGR Macau market share fell to 14.6%, down from May and June (both post Encore opening) of 15.6% and 17.2%, respectively.  Obviously, hold percentage is volatile – May and especially June were high – and July was probably low at the Wynn Macau properties.

 

At least for the short term – a lifetime for Macau stocks – this negative Encore narrative may dominate the discussion.  After a nice recovery, the stock could be under pressure.  We reserve the right to get positive again down the road at lower levels.


WMS: PLAYING THE EXPECTATIONS GAME

WMS reports tomorrow night and while FY2011 revenue guidance could fall below the Street, the contrarian in me thinks that may be ok.

 

 

Given the poor investor sentiment surrounding the gaming equipment suppliers – thanks in part to IGT – we think expectations are already pricing in lower FY2011 revenue guidance.  FQ4 should be fine and in-line with our $0.57 estimate although investors may be expecting a miss.  The long-term story is very powerful both from an industry and company specific perspective and the now low valuation provides a unique entry point.  We believe there are a significant number of interested investors on the sidelines because they fear the lower guidance. 

 

WMS may indeed provide revenue guidance modestly below the Street’s $852MM – we’re at $834MM – but expectations are low and the stock has underperformed.  WMS could see a relief rally due to short covering and the sidelined investors jumping in with the theory that projections will be once again beatable and the long term story remains intact.

 

If we were WMS, we would certainly capitalize on the opportunity to provide very conservative FY2011 guidance.  Investors seem to be expecting it and IGT has laid the groundwork.  Guidance will be back end loaded given the uncertainty surrounding the timing and type (for sale vs lease) of the Illinois business and well as timing issues surrounding Italy. 

 

Investor expectations may be even lower following IGT’s weak FQ3 performance and guidance.  However, we would caution investors that IGT’s slot ship share was dreadful in FQ3 and actually in the March quarter as well, so the industry overall is probably performing better.  As we’ve written about, IGT had a big one-time shipment into Canada in its FQ2 which inflated market share.  IGT is now tracking in the mid 20s% of total ship share.  In fact, WMS may surpass IGT’s ship share in the quarter for the first time in history.

 

So we’re does that leave WMS? 

  • Highest quality player in an industry at the trough of a 5 year bull slot market
  • Well positioned to steal participation revenue share from an unsustainably high level at IGT
  • Built-in growth from entering Mexico and Australia
  • Near term new markets of Italy, Illinois, and Ohio
  • The sky’s the limit on additional new state and international markets given the thirst for additional tax dollars
  • A now low valuation

THE DAILY OUTLOOK - JUST CHARTS

As we look at today’s set up for the S&P 500, the range is 42 points or 2.3% (1,076) downside and 1.5% (1,118) upside. 

 

THE DAILY OUTLOOK - JUST CHARTS - S P

 

THE DAILY OUTLOOK - JUST CHARTS - DOLLAR

 

THE DAILY OUTLOOK - JUST CHARTS - VIX

 

THE DAILY OUTLOOK - JUST CHARTS - OIL

 

THE DAILY OUTLOOK - JUST CHARTS - GOLD

 

THE DAILY OUTLOOK - JUST CHARTS - COPPER


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END OF JULY SLOWDOWN IN MACAU

July table revenues rose to HK$14.8 billion. Adding in slots should yield full month revenues of around HK$15.5 billion, up 67% YoY, but down from the 75% pace we had expected just last week.

 

 

The last week of the month slowed markedly since through the first 25 days. July’s revenues were tracking up 76% as we noted in our 7/26 post but will end up "only" 67%.  Whether the slowdown was volume or hold related, we won’t know until we get the full details.

 

The only meaningful changes in market share from our 7/26 post is that Wynn lost another 100bps and MGM dropped below 7% again.  MPEL actually increased share 20bps from an already strong 14.4% through the 25th. 

 

Here are the table revenues for the full month of July in Macau in HK$.

 

END OF JULY SLOWDOWN IN MACAU - chart1


WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE

All Indicators Improved Last Week

In spite of a modest 1% rise in the XLF last week, all 8 of the 8 risk measures we track registered positive readings on a week-over-week basis.  

 

Our risk monitor looks at the following metrics weekly:

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

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX

 

1. Financials CDS Monitor – Swaps were mostly positive last week.  Swaps for 17 of the 29 CDS reference entities tightened, while 12 widened, with an average change of -1.7%.  Conclusion: Positive.

 

Tightened the most vs last week: MBI, AXP, XL

Widened the most vs last week: PGR, AON, MTG

Tightened the most vs last month: MBI, MS, AXP

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

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - us cds

 

2. European CDS Monitor – We include a look at European swaps to gauge risk perception across the Atlantic. Swaps for 37 of the 39 reference entities tightened, while only 2 widened, with an average tightening of almost 10%.   Conclusion: Positive.

 

Tightened the most vs last week: Aviva PLC, Assicurazioni Generali, Banco Espirito Santo S/A

Widened the most/tightened the least vs last week: Sberbank, Caja de Ahorros del Mediterraneo, Investor AB

Tightened the most vs last month: Assicurazioni Generali, Credit Suisse, Aviva

Widened the most vs last month: Banco Pastor, Investor AB, IKB Deutsche Industriebank AG

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - euro cds

 

3. High Yield (YTM) Monitor –High Yield rates fell 16 bps last week. Rates closed the week at 8.44% down from 8.60% the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - high yield

 

4. Leveraged Loan Index Monitor - Leveraged loans rose steadily last week, closing at 1489 versus 1475 the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - leveraged loan

 

5. TED Spread Monitor – Last week the TED spread fell 4 bps, closing at 31 bps versus 35 bps last week. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - ted spread

 

6. Journal of Commerce Commodity Price Index – Last week, the JOC index rose slightly, closing at 12.6, up just over 3 points versus last week’s close at 9.5.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - joc cpi

 

7. Greek Bond Yields Monitor – Greek bonds yields and CDS continued to plateau at a high level.  Last week yields fell 8 bps, ending the week at 1030 bps versus 1038 bps the prior week. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - greek bonds

 

8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads continued to fall last week, closing at 204 versus 214 the prior week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - VERY POSITIVE - markit

 

Joshua Steiner, CFA

 

Allison Kaptur


Discounting The Obvious

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

-George Soros

 

Before I went to bed last night, China reported another sequential deceleration in its manufacturing PMI Index for the month of July. I thought to myself – wow, that explains absolutely nothing in terms of how both oil and copper have been trading for the last 3 weeks (UP). However, it explains everything in terms of why Chinese stocks have underperformed global equities for the last 7 months (DOWN). China has slowed.

 

In Q1 we called this the Chinese Ox In A Box. In our Q1 slide presentation we even had a fancy looking Hedgeye Macro Theme chart that outlined the forecast that PMI readings in the high 50’s were unsustainable given that the Chinese were going to tighten.

 

So China tightened… and now the PMI reading has dropped -12% over the course of 6 months into the low 50’s (July’s reading was 51.2% versus 52.1% in June)… and next to Slovakia and Greece, the Chinese stock market is the worst performing in the world for the year-to-date.

 

That, however, doesn’t mean that in the face of a monster 2-month rally in European equities (i.e. the other worst performing stock markets for the YTD – Greece, Spain, etc.) that Chinese stocks don’t have every opportunity to A) mean-revert to the upside alongside global equities or B) show you that they have already Discounted The Obvious.

 

On the heels of this “bearish” economic data last night, China closed up another +1.3% to 2672 on the Shanghai Composite Exchange, taking its rally from its YTD low established on July 5, 2010 to +13.5%. Chinese equities are up basically in a straight line – closing up on 9 out of its last 11 trading days.

 

So what do you do with that? Inclusive of this rally, the Shanghai Composite Index is still -18.5% YTD. Economic growth is still slowing, but everything that slows finds a time and a price where it gets baked into the Mr. Macro’s cake. Should you chase it here? Should you short it? Should you do nothing?

 

Whenever I miss a big move like this, I tend to try my best to do nothing. Particularly if the math in my TRADE versus TREND model isn’t yet clarifying the risk management decision for me. Here are our TRADE, TREND, and TAIL lines for the Shanghai Composite Exchange:

  1. TRADE = bullish, with 2491 support
  2. TREND = bearish, with 2693, resistance
  3. TAIL = bearish, with 2988, resistance

Since the Shanghai Composite closed at 2672 last night, you’ll notice that it’s game time now for the intermediate term TREND in Chinese equities. We’re either at an inflection point where price momentum is making the turn from bearish to bullish, or we’re right where the long term bearish case for Chinese stocks fortifies itself.

 

Since I don’t have a long or short position in China right now other than long the Chinese Yuan (CYB), I don’t feel compelled to make a “call” on which way this is going to go. I’m much more comfortable letting the macro math tell me what to do. Chinese growth has every opportunity to re-accelerate from here, but it could just as easily continue to slow. The big money on the short side has already been made.

 

Looking at a multi-factor global macro model for the answer is also going to be critical here. Let’s consider some critical signals relative to the summer of 2008:

  1. Dr. Copper
  2. US Dollar
  3. Gold

Both the prices of copper and gold are all of a sudden doing what they did at the end of July and early August of 2008. Much like it is doing now, the US Dollar was getting creamed (down for the 8th consecutive week last week, taking the USD down -8% since early June) and all of a sudden the “reflation” trade in gold decoupled from that in copper (DOLLAR DOWN equaled copper up, but gold down and a lot of people couldn’t figure out why).

 

Chinese equities also based and rallied in July of 2008, but that was a sucker’s rally in as much as it was in Copper. Gold and the US Dollar were actually leading indicators for almost everything else going down back then. I don’t see that same setup right here and now, but “betting on the unexpected” can pay the bills. Food for thought on a Monday while we’re all Discounting The Obvious of the China slowdown that’s in our rear-view.

 

My immediate term support and resistance levels for the SP500 are now 1076 and 1118, respectively. The SP500 hasn’t had an up day in the last 4, so we took midday weakness in US equity trading on Friday as a buying opportunity, moving our allocation to US Equities from zero up to 3%.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Discounting The Obvious - cHH


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