Defend Yourself

This note was originally published at 8am this morning, October 11, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Defense is superior to opulence.”

-Adam Smith


Thankfully, I didn’t waste much of my time this weekend listening to professional politicians at the IMF meetings in Washington make their proactively predictable protectionist comments about global currencies. As the aforementioned Scottish moral philosopher aptly put it, “all money is a matter of belief.”


Neither Adam Smith’s ideas about free market capitalism, nor his citations from “The Wealth of Nations” get much air time in the manic media these days. US stock market cheerleaders are much more focused on “New Keynesian” economic theories of Big Government Intervention that  are allegedly going to help policy makers save themselves from adhering to the laws of gravity.


Rather than engage in a philosophical or ethical debate about ideas coming out of the Scottish Enlightenment this morning, I’m going to give you some advice in modern day plain English – Defend Yourself. That’s right and that’s it – defend yourself because, unless you have a legitimate Global Risk Manager managing your money, no one else will.


Notwithstanding the obvious protectionist commentary coming out of the world’s top 3 economies this morning (USA, China, and Japan), here are a few other representative central banker quotes that came out of the IMF meetings:

  1. Brazil: “Brazil won’t pay the price for several countries’ imbalances. Our position is: Brazil will protect its economy regardless.”
  2. Philippines: “In the face of possible further weakness in the US Dollar, the central bank continues to assess investment diversification options.”

At the end of the day, the world is still too long of the US Dollar and the broken promises that back it. This isn’t new (we’ve been short the US Dollar since June 7th). It’s simply becoming consensus. And, unlike stock market consensus, global political consensus is much more difficult to reverse.


The “consensus” 2-2.5 month direction of the US stock market has been often reversed in 2010. Students of the Real-Time Market Enlightenment get this. As a result, they will likely continue to profit from the Mathematical Enlightenment called mean-reversion.


Since we made our call for May Showers on April 16th, I haven’t seen such obvious signals to suggest you defend yourself from a US stock market exposure perspective. Never mind what the dude at Citi thinks about our levels, Newton and Einstein would most likely love this call as our Hedgeyes are intensely focused on measuring both time and space.


Time (duration) and price (space) aren’t very useful for economic theoreticians who have never traded a market in their life. Today’s selling opportunity is really amplified by the Academic Dogma that is driving US political consensus that QE2 is going to end well. As your local professional politician Burns the Buck, global politicians are becoming increasingly protectionist about what it means for their constituencies.


Admittedly, we were a little early with the April Flowers/May Showers macro call by about a week (the SP500 topped for 2010 YTD at 1217 on April 23rd). But early is as early does – seeing something coming before it actually occurs and having the patience to wait for your entry point (or in this case, selling point) is easily the most challenging aspect of my risk management day.


In the spirit of keeping the accountability pants on, as a reminder here are the market factors I’ve been looking for since the morning of September 29th when I wrote a note titled “A Heavier Crash”:

  1. We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.
  2. We need to see volatility (VIX) get oversold towards 20.
  3. We need to continue to see the world’s said “reserve currency” lose its credibility.

And no matter where we go this morning, here we are. Check, check, and check on the levels. Fellow Risk Managers, ‘tis time to defend yourself.


I started buying protection by investing in volatility (VXX) on Friday. I get that it’s not a perfect instrument when considered alongside the volatility index (VIX), so we model the risk/reward and probability in the VXX from the bottom-up on its own historical price, volume, and volatility merits.


I have not yet shorted the SP500 (SPY) as my risk management model was flashing amber lights on Friday to wait and watch for the 1169 line in terms of the US stock market being immediate term overbought.


Yes, Dear Theoretical Dogmatists, Hedgeye reserves the unalienable right to change our game-plan as the game changes. Defending ourselves against your Ivory Tower economics is our advice as we drift ominously higher toward 3 more Fridays in October.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Defend Yourself - EL heute

Retail: Looking Through The Cotton Trade

The fact that cotton prices are at record highs is not new, but then why is the market looking right through it as it relates to retail? The chart below shows the spread between the MVR (Morgan Stanley Retail Index) and the S&P500 matched against a cotton price index. Without fail, over the six notable periods from 2000-2008, retail zigged when connot prices zagged. But since early 2009, there was only zigging to be found across the board. That was easily explainable by post-recession earnings revisions that took retail up through 1Q10. But that is O-V-E-R.


We'll dive into this, as well as other salient issues on Friday at 10am est when we release our next Retail Blackbook called Consumption Cannonball: The Retail Aftermath. Please contact for details.


Retail: Looking Through The Cotton Trade - 11


Data from StreetAccount clearly shows that the big upside in preannounced earnings we have seen in previous quarters is slowing dramatically. 


We are now getting into the thick of the 3Q10 earnings season and much rests on continued improvement in corporate earnings.

With all the noise around QE and M&A rumors, it is possible that the market is being less attentive to companies’ financial performance than it has in prior quarters.  While to me it appears there is a disconnect between the top-down Macro headwinds and market sentiment, eventually corporate earnings will reflect the reality of the current economic environment.  Given the run that stocks have had over the past few weeks, a downside disappointment in corporate earnings could have serious ramifications. 


The data provided by Street account showed that the 3Q10 preannouncement season was a quiet one with only 143 revisions compared to the 165 and 169 seen in the 1Q10 and 2Q10, respectively.  The ratio of positive to negative announcements for 3Q10 is at 1.1-to-1.  As is evident in the chart below, 3Q’s current ratio is part of a continuing decline from the peak of 2.9-to-1 seen in 4Q09.


Along with the slowdown in the preannouncement season, we are seeing analysts being to get more cautious on 2011.  According to Bloomberg, estimates for 2011 S&P 500 profit fell to $95.17 last month, from an August high of $96.16, and posted the first quarterly reduction since the three months ended June 2009.  The decline came as the S&P 500 rose 8.8% in September (the biggest advance since 1939).


Howard Penney

Managing Director



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

WMT's Bentonville Pilgramage

Note:  This post was originally published on 10/2. We are re-publishing in advance of this week's WMT analyst event taking place 10/12-10/13.


Wal-Mart’s analyst day is likely to yield less information about merchandising strategy and vendor pricing than in years past – at the precise time it’s needed most.  Furthermore, a smaller format urban location is likely to be more of a test than anything else- at least for now. There are simply too many new executives in new roles to have made any tangible progress in the effort to reverse the negative same store sales trend. 



Wal-Mart is set to host its 17th annual investor/analyst meeting in Bentonville on October 12th and 13th and this year is no different than year’s past. There’s much speculation brewing about what the world’s largest retailer is going to say and reveal.  This year’s topic du jour likely centers around two main areas, domestic store growth in the form a smaller, urban concept and a revamped merchandising strategy.  The former speculation arises out of ominous comments made from newly appointed Wal-Mart U.S CEO Bill Simon at a recent investor conference. 


Recall that Simon was quoted as saying, “We have lots of learnings around the world from Wal-Mart in small formats. Our group in Mexico and Central America, Latin America operates small formats very well and very profitably, and we are going to beg, borrow, steal and learn from them as quickly as we can, because it is important for our urban strategy.”   This in turn has led the media and some on the Street to expect a multi-hundred unit rollout of some convenience/grocery/dollar store hybrid in urban centers across the country.  We do not believe this will be the case.  While it possible that some new, smaller format (i.e 20k feet or less) will be announced, we believe it will only be in the context of a test or prototype.  History reminds us that both the Supercenter and Neighborhood Market were tested for several years before Wal-Mart made a full commitment to the format.  In fact, the Neighborhood Market is still more of a test than a viable growth contributor for the company.  We believe it is overly optimistic to expect an acceleration in U.S square footage growth in the near-term driven by a new and yet unnamed small store format.


Secondly on the topic of merchandising.  There is no question that Wal-Mart’s negative same store sales are in some part suffering from its unsuccessful efforts to drive purchases of non-consumable goods.  The leadership at the company has been in flux since June and has still yet to settle into their new roles.  Just this week alone, a CFO transition was announced, replacing a 10 year veteran with an internal promotion.  The names and faces of the executives coming and going is largely irrelevant in the near-term.  It’s not who is moving up and who is moving out, but rather that the world’s largest retailer is seemingly scrambling to make leadership changes in an effort to reverse the negative trend.  Change can be good, but it can also be unsettling in the near-term.  We do not believe that WMT will show (or convince) the Street that its merchandising strategy is fully baked and working at its meeting in Arkansas.  There are simply too many new faces in new roles for one to put forth a credible and cohesive strategy on such short notice.  Furthermore, it is highly unlikely that the suppliers and manufacturers could even produce enough product to meet WMT’s demands in such a short time before the holiday shopping season approaches.  If there is one thing we know, retailers of all sizes do not use the November/December time frame for taking big risks or making big, unproven changes.  Therefore, we’d expect the meeting to be centered on the “long-term”. Changes made in the next six months will impact the subsequent year.  We anticipate that this will be a long, drawn out process and one that still remains unproven.


Take a look at the following major management changes that have taken place since June alone:


  • 9/29- CFO promotion announced.  Former CFO, Tom Schowe, leaving company after 10 years.
  • 9/3- U.S CEO Bill Simon announces Chief Merchant position will not be filled.  Instead the company will operate with four merchants reporting to Simon.  Each one is responsible for a particular category.
  • 7/3- Chief Merchant John Fleming resigns a few days after new U.S. leadership is announced.  Role initially filled by two merchants on an interim basis.  Eventually each of these merchants is named to the team of four that replace Fleming on a permanent basis.
  • 6/29- Bill Simon, former COO of U.S, named to U.S. CEO role.  Replaces Eduardo Castro Wright who remains Vice Chairman and becomes head of and supply chain.  Castro Wright relocates to California.  COO role remains vacant.
  • 6/9- EVP/Corporate Secretary retires.  Position is filled by General Counsel, who assumes the additional role.   Ethics and global security responsibilities attached to Secretary role are reassigned within the organization.


The chronology above does not even scratch the surface of all the tertiary role changes within the U.S organization.  The bottom line here is that change is surely underway led primarily by people in new roles and an underlying approach which leaves nothing sacred.  For those expecting any major changes in top or bottom line results in the near to intermediate term, we caution that this is highly unlikely.  There simply has not been enough time yet for which the new team could have crafted and executed a revised merchandising strategy.  At best we believe this is 6 months out – but even then we need flawless execution.  So the many people that will attend the meeting looking for derivative plays out of suppliers will be also be disappointed. The same goes for insight on Wal Mart’s stance on passing through raw materials costs to customers and vendors. Expect less information than in the past (at the precise time when it is needed most). In the near-term those expecting some major announcements out of the investment meeting are also likely to be disappointed.  The strategy is still not defined, nor are the architects fully in place.


Eric Levine



We've seen this before (1970's).  The current administration is running out of time.


Health insurance premiums are rising, poverty is up, and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.


Just one more check mark in the notebook to support a significant deceleration in consumer spending over the next three to six months.  Not to mention the political back lash from this move.


As a point of reference, social security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.


The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on social security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.


While the government may not see inflation, the average American is experiencing inflation.  Just look at the chart below for a broad measure of inflation -  the CRB Foodstuffs Index. 


The economy is also running out of time as it relates the waning impact of stimulus on the economy; the stimulus life lines that have supported consumer spending for the past 24 months are coming to an end.

  • Health care: The Recovery Act set aside $87 billion to assist states covering their soaring Medicaid costs.
  • Tax credits: The Recovery Act boosted the Earned Income Tax Credit and Child Tax Credit, as well as put more money in the pockets of low-income workers with the Making Work Pay credit of $400 a person. These tax benefits end this year.
  • Needy children: The stimulus program also gave $2 billion for child care subsidies and another $2.1 billion for Head Start, an early learning program for needy children, both of which end after September 30.  
  • Homeless: The act provided $1.5 billion over three years to prevent homelessness and find places to live for those without a roof over their heads. It increased the maximum food stamps benefit by more than 13% for several years and also sent $150 million to the states for emergency food assistance in 2009.
  • Unemployed: The Recovery Act pushed back the deadline to apply for extended unemployment insurance, which is now set to run out at the end of November.  Jobless benefits alone are credited with keeping 3.3 million people out of poverty last year, according to the Center on Budget and Policy Priorities.

Howard Penney

Managing Director


TIME IS RUNNING OUT - crb foodstuffs



A surprisingly strong month with mostly hold driven market share moves.



For what's supposed to be a seasonally slow month, September came in quite strong with total gaming revenues growing 39% to $1.9BN - just below August's numbers.  MGM stole the show in September growing 83% YoY. This shouldn't be a surprise given MGM's pending IPO, new property management and aggressive credit extensions. MPEL enjoyed its second month in the top 3. Wynn lost the most share in September due to a combination of factors - including difficult hold comparisons and low hold.


That being said, September is history as all eyes are now on October's record pace to break HK$20BN.  Below is the detail for September.



YoY Table Revenue Observations


LVS table revenues increased 35% with growth coming from a 42% increase in VIP revenues and a 23% increase in Mass revenues.

  • Sands grew 3%
    • VIP revenues declined 2% despite only a 1% decline in Junket RC volume
    • 13% increase in Mass revenues
  • Venetian was up 43%
    • VIP revenues increased 54%
    • Mass revenues increased 29%
    • Junket RC increased 15% YoY.  Assuming 22% direct VIP play volume, we estimate that hold for September was 2.6%.  However, last September, assuming 17% direct play, the hold percentage was even worse at 2.0%.
  • Four Seasons was up 130%
    • Mass revenues grew 28%
    • VIP revenues increases 158%, in-line with growth in Junket VIP RC volumes
    • If we assume over 50% VIP turnover came from direct play, hold was 3%, compared to estimated hold of 2.3% in September 2009.

Wynn Macau/Encore table revenues were up 21%, driven by a 16% increase in VIP revenues and a 44% increase in Mass revenues

  • Junket RC volume increased 43% compared to a market increase of 42%, so it does appear that if not for hold issues, Wynn would have held their own
  • Assuming direct play volumes at Wynn were roughly 12%,  Wynn's hold was 2.6% in September compared to 3.1% hold assuming the same direct play volume ratio in September 2009.

MPEL table revenues grew 29% with the growth fueled by 98% growth in Mass and 21% growth in VIP

  • Altira was up 19%, due to a 15% increase in VIP revenues and a 105% increase in Mass
    • VIP revenue growth was entirely due to favorable YoY hold comparisons.  VIP RC was down 16% YoY. 
    • We estimate that hold in September was 3.5% vs. 2.5% in September 2009
  • CoD table revenue increased 35% YoY, driven by 97% growth in Mass and 26% growth in VIP revenues
    • Mass revenues were $36MM
    • Junket VIP RC increased 41%
    • CoD played lucky in September, but they also played lucky last year.  If we assume 18% direct play at CoD, hold was 3.2% in September vs. an estimated hold of 3.6% last year.

SJM table revenues grew 37%

  • Mass was up 31% and VIP was up 40%
  • Junket RC volumes increased 71%
  • SJM's hold was only 2.7%, compared to a very low hold 3.3% in September 2009.  October will have an easy hold comparison since last October's hold rate was only 2.55%.

Galaxy table revenue was up 59%, driven by a 68% increase in VIP win and a 7% increase in Mass

  • Starworld's table revenue soared 103%, driven by 112% growth in VIP revenues and 30% growth in Mass
  • The Group RC volumes were up 30% while Starworld RC volumes increased 39%.  VIP revenues for the Group and Starworld benefited from strong hold.  September hold for the Group and Starworld was 3.2% and 3.46%, respectively, compared to low holds of 2.5% and 2.3% last year.  October 2009 hold rates were normal.

Not surprisingly, MGM reported the strongest growth in the month of September, with growth of 86%

  • Mass revenue growth was 56%, while VIP revenues grew 97%
  • VIP RC grew 85%
  • Hold appears to have been normal in September at roughly 2.9%


Table Market Share


LVS table share dropped 20bps sequentially to 19.1%

  • LVS's share of VIP revenues increased 20 bps in October, along with a 20 bps increase in LVS's share of Junket RC
  • Mass share increased by 100 bps to 26.3%
  • Sands market share increased by 35bps off of a 63bps increase in VIP share
  • Venetian lost 209bps to 9.5% sequentially, their lowest share in 12 months
    • Venetian's share loss was mostly driven by a 210bps decrease in VIP, while Mass share lost 53bps.
  • FS share gained 150bps of share to 3.4% due to a 218bps increase in VIP share

WYNN's table share decreased to 12.0%, its lowest share in 10 months; it was also below the TTM average pre-Encore opening market share of 13.8%.

  • Mass market increased 115bps to 10.2%
  • VIP revenue share decreased 2.9% to 12.6% sequentially. Part of the decrease was attributed to low hold, as Wynn's VIP RC share only decreased 90bps to 13.9%
  • Wynn's VIP share fell to 5th place behind SJM, MPEL, LVS and Galaxy

Crown's market share was flat sequentially at 16.3% in September

  • Both CoD's and Altira's share were also flat sequentially at 10.7% and 5.6%, respectively

SJM's share increased by 125bps to 31%

  • SJM's share gain was entirely driven by a 220bps of share in VIP to 28%
  • Mass share dropped 100bps to 40.2% sequentially

Galaxy's share slipped 1% to 12.1%, driven by a 150bps decrease in VIP share

  • Starworld's market share decreased 39bps sequentially to 10.5%, due to a 64bps decrease in VIP share
  • Junket RC share decreased 100bps to 12% for Starworld and decreased 80bps for the Group

MGM's share increased by 192bps to 9.6% - MGM's best share month since August 2009

  • MGM's share gain can be attributed to a 63bps increase in Mass and a 235bps increase in VIP share
  • RC share increased 95bps


September Slot Revenue Observations

Slot revenue grew 33% YoY in September reaching $94MM, the second best month in slots following August 2010

  • Wynn experienced the largest growth of 60% to $18MM
  • SJM, MPEL and Galaxy's slot revenue all grew around 55% YoY
  • MGM's slot revenue increased 38% to $11MM
  • LVS having the largest base also had the slowest slot growth of 33%, which is nothing to complain about






get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.