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MPEL Q32010 PREVIEW

Market share gains drove the recent strong appreciation in the stock but delivering on the bottom line could drive the next leg.

 

 

As we wrote about on September 29th in “MPEL: COULD THEY FINALLY BEAT A QUARTER?”, we think that MPEL, indeed, should beat the quarter - finally.  Despite the recent move up – more due to market share gains – negative sentiment persists on “the guys that can’t shoot straight”.  We think that changes this quarter.  Now that we have our hands on the property level detail of September in Macau, here’s how MPEL can produce a $117MM EBITDA quarter versus the Street at $100MM.

 

3Q2010 Detail:

 

Our EBITDA estimate for City of Dreams (CoD) of $105MM is 21% ahead of the consensus

  • CoD’s table revenue share increased to 10.6% this quarter compared to 7.1% in 2Q2010 and 10.0% in 3Q09.
  • Opened 3 additional junket rooms in July; reallocated tables from Mass
  • We estimate net casino revenues of $485MM and total net revenues of $496MM
    • Assuming 18% of VIP play is direct, we estimate that Rolling Chip (RC) volume increased to $15BN, and at a 3.2% hold, we estimate that gross VIP table win was $480MM
    • We assume a 90bp rebate rate and a 1.33% commission rate (due to a greater percentage of CoD’s business coming from revenue share deals – roughly 40%)
    • Mass table win of $110MM and slot win of $30MM
  • Total variable expenses (taxes, gaming premium, junket commission in excess of rebate, and bad debt) of $313MM
  • Total fixed costs of $60MM compared to $55MM last quarter
  • The opening of the Dragone show added a few million dollars of expenses to the quarter. 
    • The incremental cost of the show is $125/day which will hit expenses in the 4th quarter.  
    • The theatre has 2,000 seats, 8 shows a week and tickets are going for $75-80 (before comps and discounts)

We estimate that Altira will report $21MM of EBITDA compared to consensus of $25MM

  • Altira should report net revenues of $197MM – basically all from the casino
    • RC volume of $9.4BN at a 2.8% hold should produce gross VIP table win of $263MM
    • We assume a rebate rate of 87.5bps and a 1.3% total commission rate
    • Mass table win of $17MM
    • Variable expenses totaling $152MM and fixed costs of $21MM compared to $26.6MM last quarter

We estimate that Mocha slots will report $25MM of revenue and $6MM of EBITDA, in-line with consensus.

 

Other stuff:

  • $15MM of corporate expense
  • $62MM of D&A or $81MM when you include amortization of the gaming subconcession and land use rights
  • $20MM of net interest expense
  • EPS of $0.03

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK

Initial Claims Rise 13k (17k After Revision)

Initial claims rose 13k last week to 462k (rising 17k before the upward revision of last week’s data).  Rolling claims came in at 459k, an increase of 2.25k over the previous week and the first increase in the series in seven weeks. All told, claims remain in the same band they’ve occupied since the start of the year. It bears worth repeating that claims need to be in the 375-400k range before unemployment can start to fall. For reference, we pointed out last week the curious fact that of the claims revisions over the past 24 weeks, 23 were revised higher (more claims) the week after. We calculated that the odds of that happening randomly were one in 699,000. This week, claims from last were ("surprisingly") revised higher by 4k bringing the running count to 24 upward revisions out of 25 instances. For those curious, the odds of 24 in 25 going higher are one in 1.34 million.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - 1

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - 2

 

Our firm continues to expect a further economic slowdown relative to the first half of the year and into 2011 that will keep a lid on new hiring activity as management teams focus on cost control. We're seeing anecdotal signs of this in the Financials recently.

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

<chart3>

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 14, 2010

As we look at today’s set up for the S&P 500, the range is 29 points or -2% downside to 1155 and 0.5% upside to 1184. Equity futures are trading above fair value but below earlier peaks as the market attempts to build upon a four day long rally. The dollar remains under pressure on QE2 speculation and after Singapore widened its currency trading band to combat inflation. September PPI and weekly jobless claims are the main macro focus, while quarterly earnings from Google after the close.

  • Apollo (APOL) withdrew its financial forecast for 2011, citing fewer new students and regulatory scrutiny.
  • Cash America (CSH) 3Q EPS beat est.
  • Constellation Energy (CEG). EDF may develop new U.S. nuclear plant on its own following a dispute with Constellation.
  • Everest Re (RE) sees 3Q adj. EPS below ests. Due to losses from catastrophe.
  • Lennar (LEN) had its credit rating cut to B+ from BB- by S&P.
  • Universal Forest Products Inc. (UFPI) 3Q EPS ex. items missed ests.
  • Yahoo! (YHOO).  Yahoo! working with Goldman Sachs to help defend against possible takeover approaches, said three people familiar with the matter. AOL has talked with private-equity funds including Silver Lake about a possible bid, two people familiar with the matter said.
  • ZAG (ZAGG) lifted 2010 rev. growth forecast to 70% from 30%.

 PERFORMANCE

  • One day: Dow +0.69%, S&P +0.71%, Nasdaq 0.96%, Russell 2000 +1.50%
  • Month/Quarter-to-date: Dow +2.86%, S&P +3.23%, Nasdaq +3.07%, Russell +4.49%
  • Year-to-date: Dow +6.41%, S&P +5.65%, Nasdaq +7.58%, Russell +12.96%
  • SECTOR PERFORMANCE: Industrials +1.65%, Materials +1.60%, Energy +1.22%, Tech +0.81%, Consumer Staples +0.85%, Healthcare +0.71%, Utilities +0.38%,Consumer Disc +0.15%, Financials 0.09%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +1532 (+1175) - breadth expanded for the past three days
  • VOLUME: NYSE - 1270.40 (+37.62%)  - accelerating for the past  two days  
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Williams Cos +9.79%, Yahoo +5.54% and Monsanto +4.67%/Marshall & Isley -4.20%, Intuitive Surgical -3.86% and Analog Devices -3.50%.
  • VIX: - 19.07 +0.74%% - YTD PERFORMANCE - (-12.04%)
  • SPX PUT/CALL RATIO: - 1.27 from 1.79 -29.19%%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD - 16.43 -0.304 (-1.818%)
  • 3-MONTH T-BILL YIELD 0.13%
  • YIELD CURVE - 2.09 from 2.07

COMMODITY/GROWTH EXPECTATION:

  • CRB: 299.74 +0.64% - up 6 of the last 8 days
  • Oil: 83.01 +1.64% - BULLISH
  • COPPER: 382.05 +0.82% - OVERBOUGHT - a 27 month high
  • GOLD: 1,369.85 +1.67% - BULLISH

CURRENCIES:

  • EURO: 1.3949 +0.59% - BULLISH
  • DOLLAR: 77.071 -0.38%  - BEARISH

OVERSEAS MARKETS:

 

Europe

  • European Markets: FTSE 100: +0.02%; DAX: +0.51%; CAC 40: (0.01%)
  • European markets extended yesterday's gains following Asian markets higher with major indices attaining 3-week highs.
  • Mining shares started on a strong note as metal prices traded higher helped by a weaker US dollar with gold touching a record high, however market gains were tempered by mixed corporate results as heavy-weights Roche and LVMH disappointed.
  • Sovereign bonds eased as equities moved higher and ahead of supply from Italy.

Asia

  • Asian Markets: Nikkei +1.9%; Hang Seng +1.7%; Shanghai Composite +0.6%
  • Asian markets followed Wall Street up today.
  • Resource shares led Japan up; all 33 sectors rose, but major banking stocks lagged the market in light of JPMorgan Chase’s (JPM) doing the same yesterday.
  • Yahoo Japan and Alibaba.com rose 6% and 1%, respectively, on talk of a buyout of Yahoo (YHOO).
  • Chinese banks and resource stocks led Hong Kong higher.
  • South Korea went up after the central bank kept interest rates unchanged; roughly half of economists had expected a 25-bp increase.
  • Tech stocks rose after Intel (INTC) beat expectations.
  • Early gains were pared, but banks and property stocks were strong in China as the central bank injected money into the country’s money market.
  • Singapore lagged the region on news that the city-state’s Q3 GDP fell (20%) q/q vs consensus (18%). The Monetary Authority of Singapore also surprised the market by tightening policy, saying it will slightly increase the slope of and widen the trading band of the Singapore dollar.
Howard Penney
Managing Director

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INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK

Initial Claims Rise 13k (17k After Revision)

Initial claims rose 13k last week to 462k (rising 17k before the upward revision of last week’s data).  Rolling claims came in at 459k, an increase of 2.25k over the previous week and the first increase in the series in seven weeks. All told, claims remain in the same band they’ve occupied since the start of the year. It bears worth repeating that claims need to be in the 375-400k range before unemployment can start to fall. For reference, we pointed out last week the curious fact that of the claims revisions over the past 24 weeks, 23 were revised higher (more claims) the week after. We calculated that the odds of that happening randomly were one in 699,000. This week, claims from last were, surprisingly, revised higher by 4k bringing the running count to 24 upward revisions out of 25 instances. For those curious, the odds of 24 in 25 going higher are one in 1.34 million.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - rolling

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - raw

 

Our firm continues to expect a further economic slowdown relative to the first half of the year and into 2011 that will keep a lid on new hiring activity as management teams focus on cost control. We're seeing anecdotal signs of this in the Financials recently.

 

Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for industry NIM) has been collapsing in the past two quarters.  Yesterday’s closing value of 206 bps is up from 201 bps last week.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - spreads

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - spreads qoq

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: S'PORE GDP SLOWS; MAS WIDENS S'PORE $ BAND; NEW CHINA LOANS SOAR; AERL; PACKAGE STATS

The Macau Metro Monitor, October 14th 2010


SINGAPORE'S GDP EXPANDS BY 10.3% ON-YEAR, CONTRACTS BY 19.8% ON-QUARTER IN Q3 Channel News Asia

S'pore's GDP contracted by 19.8% QoQ, missing estimates of -17.5%.  However, the Ministry of Trade and Industry (MTI) stated the S'pore economy remains on track to grow 13-15% YoY.  The decline was largely attributed to a 57% drop in the manufacturing sector.

 

SINGAPORE TIGHTENS MONETARY POLICY; CURRENCY SOARS WSJ.com

In a surprise move, the Monetary Authority of Singapore said it will "increase slightly" the slope of its policy band for the Singapore dollar and also widen the band in which it allows the currency to trade against an undisclosed, trade-weighted basket of currencies.  It maintained the level at which the band is centered.  This move is an effort to combat the predicted 4% inflation by the end of the year.  MAS did not change its stance of "modest and gradual appreciation of the S'pore dollar".  The US Dollar dropped to a record-low of 1.2886 S$ shortly after the central bank move.

 

NEW LENDING LOANS IN MAINLAND CHINA ON SURGING GROWTH Macau Daily News

September new RMB loans increased RMB 50.3BN to RMB 595.5BN (US$89BN).  The strong lending market has forced China's four major banks to increase the deposit reserve ratio by 50 basis points.


LOCAL VIP PROMOTER ACQUIRES COMPETITOR Macau Daily TImes

VIP promoter Asia Entertainment & Resources (AERL) has acquired a 100% profit interest in King's Gaming Promotion, a VIP promoter that currently operates one room with five tables at The Venetian Macau.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2010 DSEC

Visitor arrivals in package tours increased by 23.1% YoY to 477,072 in August 2010.  Tour visitors from Mainland China, HK, Japan, and Korea increased by 28.4%, 8.3%, 3.9%, and 152.6% YoY respectively.  Taiwanese tour visitors decreased 16.5% YoY.

 

 


HOPE, PROCESS AND MUSIC

“As long as the music is playing, you’ve got to get up and dance.  We’re still dancing.”

-Charles O. Prince (Citigroup CEO) July 10th, 2007

 

If Chuck were in the game today he would be dancing as the S&P finished higher for the fourth straight day while the already-elevated quantitative easing expectations continue to weigh on the dollar (down 1% this morning and -8.5% in 3Q10) and put a bid under the riskiest assets.  It’s just a matter of time before the music stops playing and the consequences of a debased currency are brought to bear on this economy.

 

If you listen to our morning call, just about once a week Keith says “hope is not an investment process.”  Typically, this phrase is used in response to hopeful rhetoric surrounding the markets.  More and more people seem to disagree with Keith, turning to hope for more QE, more time, more bonuses… Hope is becoming part of some people’s process.

 

While I try to leave hope out of it, and remain as objective as possible, it is difficult to suppress the hope I have that the market does not step on one of the many landmines that are scattered from New York to Beijing and back again. 

 

One major landmine in DC is the lack of competence of the Federal Reserve Board and the Administration.  Hopefully Ben Bernanke knows what he is doing, but he is clearly not abiding by the dual mandate of the FED: full employment and price stability.  The unlimited supply of money created by the Fiat Fools can dwarf the limited supply of some commodities.  Thus, the FED policies are inciting increased speculative risk, thereby creating a commodity bubble.  This is what we are seeing occur real time:

 

(1)   Gold trading at a record high for the second straight day

(2)   Tin trading at a record high

(3)   Cotton at a record high

(4)   Copper at a 27-month high

(5)   Rubber at a 27-month high

(6)   Soybean, Corn and Wheat all approaching 2008 record highs

 

Inflation is becoming a problem across the globe, as the Serbian central bank is telling us this morning.  With India, Australia and Canada having raised rates this year, some voices in China are also calling for a move in rates to address inflation in their economy.  As one of our clients across the pond pointed out, what if the US and China struck a deal - the Chinese will let the YUAN appreciate in exchange for less QE?  That would certainly put a pin prick in the commodity bubble and the reflation trade!

 

With the market trading at 12x NTM EPS, hopefully we can keep dancing and get it to 13x.  That would be another 5% from here – easy money which would be handy going into the holidays.  Wall Street and Main Street are not two streets on the same block anymore; they are on different planets.  A cursory glance at the headlines will spell out the increasing gulf between the Haves and the Have Nots in this High-Low Society.  Hoping to be eligible for the food stamps program is very different than hoping for a record bonus.

 

It is my view that a decoupling from reality has occurred in many areas of the American economy over the past twenty years.  Salaries paid to twenty-something’s to carve up mortgages and sell them were completely unrelated to the actual utility these workers were adding to the economy.  At some point, such disconnects are forced to come back to reality.

 

The “exorbitant privilege” the United States holds as the world reserve currency holder is clearly being challenged by China, Russia, Germany and most importantly, by the markets.  While it is ingrained in many people’s minds to take for granted that the dollar will always be king, I would much rather be cognizant of two facts.  Firstly, it has not always been the world reserve currency.  Secondly, economically buoyant rivals across the globe are calling for a new system.  Far from playing a hand in bringing us back to reality – the government is doing everything it can to keep the music going in the markets, only further irritating our Client and Chief Creditor and other trade partners.  If that sounds like a bad movie to anyone, you’re not alone.

 

The financial crisis has played out like a bad movie in many respects and nothing ruins a movie like cheesy quotes.  While this morning’s Early Look quote is about as cheesy as cheesy gets, Chuck certainly contributed his part to the Crisis in Leadership that persists today.  Our process at Hedgeye is not to listen to the self-proclaimed leaders, but rather, focus on what real-time market prices are telling us.  The bull-bear battlefield is becoming a minefield and lines are being drawn around the data points below.

 

LANDMINES THE BULLS ARE HOPING TO DODGE:

 

1)      Stimulus tailwinds are now becoming headwinds

2)      Consumer deleveraging - a household sector that is fearful of taking on debt

3)      Declining home prices and the foreclosure fiasco (which got worse last night)

4)      Bankrupt states and dry pension funds - ongoing spending cutbacks at the state and local government levels; these are structural issues that the Fed is not equipped to deal with

5)      Currency wars

6)      Sovereign debt crisis

7)      Slowing earnings growth

8)      Commodity and Energy inflation

9)      No job growth and the employment-to-population ratio of 58.5% that remains stuck near 30-year lows. Over 40% of the unemployed have been so for over six months; 30% for at least a year

10)  Health care reform that has frozen small business hiring

11)  Cash hoarding by banks and corporations alike because of the lingering uncertainty over the economic outlook

12)  Consumer confidence vs. Y/Y PCE growth spread is unsustainable

13)  The yield curve is compressing

 

 

THE NEXT SMASH HITS TO KEEP THE MUSIC PLAYING:

 

1)      The Republicans take over Washington - gridlock prevails

2)      Quantitative easing will be “better than expected.”  Ben does know what he is doing!

3)      Uncle Sam has plenty of crutches to keep propping up consumer spending

4)      Corporate America will print good earnings numbers

5)      M&A cycle reaching pre-crisis level

6)      Corporations are sitting on a $1.6 trillion stash of cash on their balance sheets

7)      There is $2.6 trillion of cash sitting in money market mutual funds

8)      Oh yeah; Dubai is “back”

 

Risk management is not about going with the crowd.  One thing we are accountable to here at Hedgeye is our process.  Doing something (dancing or making an investment decision) because everyone else is doing it is not our approach.  Bad music is as bad music does and we will continue to ignore the dancers until the DJ puts on our song.

 

Yesterday, Keith shorted the S&P 500 via the SPY.  As he said yesterday “We watched. We waited. We are now shorting the SP500.”

 

As the classic Don McLean song goes:

 

A long, long time ago...
I can still remember
How that music used to make me smile.
And I knew if I had my chance
That I could make those people dance
And, maybe, they’d be happy for a while.

 

You know the words!

 

Function in disaster; finish in style

 

Howard Penney

 

HOPE, PROCESS AND MUSIC - HPEL


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