Growl . . . Oil Demand Data Is Bearish

Conclusion: Recent demand data points from two of the world’s largest importers of oil, China (third largest importer) and the United States (largest importer), are meaningfully bearish for price.


We want to highlight a couple of recent data points related to oil demand globally that are solidly on the bearish side of the ledger.  While oil has had a good move over the last couple months based on U.S. dollar weakness, its move has been somewhat muted versus other periods of U.S. dollar weakness.  This is likely primarily related to a realization that future economic growth in the U.S. is slowing, and based on emerging negative demand data points.


The first point to highlight on the demand side is related to distillate stocks in the United States. In the chart immediately below, we show that distillate stocks are currently at a 27-year high in the United States.  Distillate stocks are primarily comprised of heating oil and diesel fuel. The massive build in distillate stocks obviously reflects very weak end market demand.


Diesel, specifically, accounts for ~18% of all petroleum demand in the United States (second only to gasoline) and 95% of all goods transported in the United States are done so via diesel engines.  A drop off in demand for diesel is therefore meaningful to overall oil demand in the U.S., but also an indicator for economic activity in the U.S.  On both fronts, this increase in distillate stocks seems to be a bearish indicator.


Growl . . . Oil Demand Data Is Bearish - 1


The second data point to highlight is from China and relates to Chinese imports of oil in July, which fell off somewhat precipitously from June.  Specifically, oil imports were down 3.2% year-over-year and down 14.7% month-over-month.  While we aren’t ready to take one month and extrapolate, it is in the short term, bearish for price.


Growl . . . Oil Demand Data Is Bearish - China Crude Oil Imports


As we wrote in late July:


“U.S. dollar correlation - In 2009, the key macro factor driving the re-flation trade was U.S. dollar down, and everything priced in U.S. dollars up.  Simply, the decline in value of the U.S. dollar versus other currencies increased the inherent value of those global commodities that were priced in U.S. dollars.  Oil was a primary beneficiary as its price increased by almost 80%.  The correlation, or at least the strength of it, is no longer intact.  In fact, since late June we have seen a dramatic decline in the U.S. dollar versus other major currencies, north of 7%, but have not seen a similar move in oil.  In 2009, oil moved inversely to the dollar with a factor of more than 4:1.  As noted, recently that correlation has gone away, so despite being bearish on the dollar, we are not seeing a corresponding correlation that makes us bullish on oil.”


The fact that oil is not inflating with the same vigor as in 2009 combined with the fact the bearish data point continue to pile up, makes us bearish of oil from a supply / demand perspective.


Daryl G. Jones
Managing Director

Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up

Conclusion: U.S. Federal budget deficit numbers continue to be alarming with expenses running up more than 10% on a normalized basis year-over-year. Suffice it say, we remain short the U.S. dollar via the UUP.


The U.S. Treasury Department reported budget deficit numbers for July and year-to-date earlier today.  We’ve outlined the trend in the chart below, but we now have our 22nd consecutive month of running a deficit as nation.  On a reported basis, the July 2010 deficit came in at $165 billion, which is an improvement on a reported basis versus July 2009.  The story, as always, is in the fine print.


In the table immediately below we have normalized numbers for the fiscal year-to-date (July is the 10th month in the government’s fiscal year), so we excluded TARP and payments to GSE, and added back a 1-time FDIC payment. To say the results are scary is an understatement.  For the first ten months of the fiscal year, government spending is up 10.4% on a year-over-year basis, or $288 billion.


Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up - 1


As the table above shows, every single line item is up on year-over-year basis!


On the revenue side of the ledger, the results are equally discouraging with revenue up an anemic 0.8% on a year-over-year basis. The notable detractor was personal income tax receipts (41% of total government revenue), which were down 4% year-over-year.


In aggregate, the deficit was up 27% after normalizing for TARP and payments to GSEs.  Needless to say, so much for a better economy benefitting deficit reduction.


As we contemplate this release and think about the coming fiscal year, we are beginning to believe that we are too low on our deficit projections for fiscal 2011E, which we have growing to 10.6% of GDP in 2011E from our 2010E of 10.4%.  Given that we believe GDP growth in 2011 will be in a best case scenario 1.7%, the denominator will not move much (which will also negatively impact tax revenues).  So, the outstanding question is on the numerator.


Obviously, if deficit growth were to stay on the same trajectory it is on now, of 27% growth, it would be an unmitigated disaster and come in well above our projection of 10.6% as a percentage of GDP.  In fact, we could be looking at a number closer to 13%.


The wild card will be taxes and what happens with the Bush tax cuts.  Do they expire, or do they get extended?  Obviously, if they expire tax revenue will go up dramatically.  The larger problem though is the growth trajectory of spending.


In a scenario where the Bush taxes cuts expire and taxes for corporations and individuals go up 30% in aggregate, but expenditures grow at the same rate, the deficit would still grow on a year-over-year basis.  (The 30% growth in tax revenues is a plug number, which represents an aggressive scenario in our opinion.  It is likely that aggregate tax revenue does not increase nearly that much.)


The simple conclusion from the report today is that absent a dramatic policy shift in terms of spending, our deficit projections will be going up, and with that the U.S. balance sheet will continue to degrade.


We remain short the U.S. dollar via the UUP.


Daryl G. Jones

Managing Director


Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up - US Federal Budget

The Duopoly Fade

The Duopoly Fade


As more and more players enter the toning category, pricing pressure and market share loss are beginning to rear their head in what was once a two horse race.


The latest weekly scan data confirms a growing trend in the toning category.  This is no longer a two horse race, dominated by Skechers and EasyTones.  The data below shows the emergence of “other” brands in the category as well as declining ASP trends.  There’s no question that increased competition was imminent in the category.  After all, toning has enjoyed one of the most spectacular category innovations we have seen in a long time.  However, success breeds imitators.  Which in this case means competition for shelf space, new players/brands/SKU’s at sub-$100 price points, and ultimately price/margin compression. 


One caveat to note.  Skechers recently noted that it is in the midst of a transition towards new styles and lines, which is resulting in clearance of some older SKU’s.  We do believe that this is in some part a reason for pricing pressure on the category.  We’ll be watching closely as product transitions towards fall, to see if ASP’s will (ever) rise again, or if competitive factors become the dominant force in impacting pricing.


Take a look at the charts below to see the changes underway as “toning” appears to be transitioning from a duopoly to a much broader range of players.


The Duopoly Fade - 1


The Duopoly Fade - 2


The Duopoly Fade - 3


The Duopoly Fade - 4


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Genting blew out numbers this quarter.  Even when adjusting for high hold the reported EBITDA number would have still been almost 50% above consensus.



Resorts World Sentosa reported revenue of S$860.8MM (US$618 MM) and EBITDA of S$503MM (US$362MM).  Part of the massive EBITDA beat was due to high hold on their premium play business.  While the company didn’t quantify the impact of high hold, they did say that normal margins would have been between 48-58%.  Using an average of the “normal range”, we estimate that high hold benefited them to the tune of S$45-55MM in the quarter.  Still S$450MM of EBITDA is nothing to get disappointed over.  While the release was short on details and haven’t spoken to the company yet, below are our preliminary takeaways.


2Q2010 Preliminary Details

  • We estimate that net casino revenues were approximately 87% of reported net revenues or S$753MM
    • We estimate that gross casino revenue per day increased to S$10.3MM in 2Q2010 from S$8.2 in 1Q2010
    • 64% of the gross win came from the VIP segment, with the balance coming from Mass table play and slots
    • Given the high contribution from VIP and the estimated hold impact, the implications is that total RC was pretty massive – around S$16.5BN  and that hold was about 3.65%.  We’ll get more details after we speak to the company.
    • While Genting made a useless comment that slot win was north of US$200/day, we estimate that slot & EGT win per day was approx S$1,000/day (US$737)
    • We estimate that Mass table revenues were approx S$220MM
    • Implied average rebates are about 1.1%
  • Hotel room revenues were approx S$17MM (1,000 rooms, ADR: S$263MM, OCC: 70%)
  • Universal revenues of $53.5MM (7,000 daily visitors / S$84 spend per visitor)
  • Estimated fixed expenses were about S$20MM lower than we estimated
  • Normalized taxes were around $80MM when you add back the impact of the impairment on the UK operations


2010 & 2011 outlook:

  • 2010:  We estimate that RWS can produce revenues of S$2.84BN and EBITDA of S$1.53BN for 2010.  Treating the UK operations as discontinued starting 3Q2010, we assume the Genting Singapore can do S$3.1BN in revenues and S$1.27BN of EBITDA.
  • 2011:  We project that RWS can produce revenues of S$3.6BN and EBITDA of S$1.9BN.  After corporate overhead, our 2011 EBITDA estimate is S$1.6BN.

Bear Market Macro: SP500 Levels, Refreshed...

It’s about lunch time but this Thunder Bay Bear has had enough to eat on the short side for this week. Below the 1080 line in the SP500 is the immediate term TRADE bear trap that we call 3 standard deviations oversold (on a short term duration).


I covered our short position in the US Consumer Discretionary (XLY) this morning, not because I’m not bearish on consumer spending – that jobless claims # was a bomb (biggest weekly jump in rolling claims for 2010) – I covered because the XLY, like the SP500, is immediate term oversold.


Oversold is as oversold does, so we’ll see if I’m right with my refreshed immediate term risk management range for the SP500 (1080 to 1097). I think you can manage your gross/net exposures around this range for now. The Bear Market Macro TREND line of resistance remains overhead at 1144.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - 1

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