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INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION

*** Our Updated FIG Earnings Scorecard is Included Below ***

 

Initial Claims Drop, Yes, But Odds Are They'll Be Revised Higher Next Week

The headline initial claims number fell 23k last week to 452k.  There was a significant revision to last week’s number, increasing it by 13k.  If the revised number had been printed last week, it would have represented one of the top five largest increases in reported initial claims for the year to date.  The prior week’s revision has now been upward for 25 of the last 26 weeks.  If upward and downward revisions were equally likely, the odds of this occurring by chance would be 1 in 2,684,355 (or  1/(26/2^25)). Rolling claims came in at 458k, a decline of 4.25k over the previous week. All told, claims remain in the same band they’ve occupied for the year, and we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

We don't want to go out on a limb here, but it strikes us that the market is focused mainly on whatever the current print is. Based on chronic upward revision, the illusion can, and is, being created for those who look only at the current print that the jobs environment is improving. In reality, as our charts below show, however, unemployment claims have remained flat as a pancake this entire year. There is no improvement in the data. We just want to make that crystal clear.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - rolling

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - raw

 

Hedgeye Earnings Scorecard

Below we show our rolling earnings scorecard which includes all financials that have reported thus far in the earnings season, along with subsector averages and our proprietary Hedgeye Earnings Score. The score evaluates company performance across ten measures, looking for either sequential improvement or decline and performance relative to expectations. A "perfect" score would be 10 while the worst possible score is negative 10. Over the course of an earnings cycle, it can get confusing trying to gauge how both individual companies and whole subsectors are faring relative to the group. It is our intention to simplify that process with this product, which we will be publishing each morning over the course of the earnings season as an embedded table in our regular morning posts.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - earnings score

 

 

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 NIM) has been collapsing in the past two quarters.  Yesterday’s closing value of 211 bps is up from 206 bps last week.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - spreads

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - spreads QoQ

 

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

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 21, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.44% downside to 1173 and 0.66% upside to 1186.  Equity futures are trading above fair value in a continuation of Wednesday's rally.

 

Chinese Q3 GDP came in above forecasts and there have also been some strong services and manufacturing PMI data out of Germany.  The dollar spiked in early Asian trading after the WSJ reported that Treasury Secretary Geithner believed there was no reason for the dollar to fall further.  Since then the dollar index has fallen back to trade close to its 10-month low of 76.15.

 

Earnings remain a focus, including results from LUV, FCX, AXP, MCD , CMG and CAT.  Jobless Claims and the Philadelphia Fed will be key economic reports.

  • Alliance Data Systems (ADS) forecast earnings below est.
  • Covanta Holding (CVA) 2010 EPS may beat est.
  • EBay (EBAY) 4Q sales, EPS forecast ahead of est.
  • Fidelity National Financial (FNF) 3Q EPS beat est. 
  • Netflix (NFLX) 3Q EPS, rev. beat est., raised FY view
  • Raymond James Financial (RJF) 4Q rev. beat ests.
  • Xilinx (XLNX) forecast 3Q rev. below est.  

 PERFORMANCE

  • One day: Dow +1.18%, S&P +1.05%, Nasdaq +0.84%, Russell 2000 +1.15%
  • Month/Quarter-to-date: Dow +2.97%, S&P +3.24%, Nasdaq +3.75%, Russell +3.84%
  • Year-to-date: Dow +6.52%, S&P +5.66%, Nasdaq +8.30%, Russell +12.27%
  • Sector Performance: Material +2%, Telecom +1.4%, Energy +1.4%, Industrials +1.3%, Consumer Disc +1.2%, Financials +1.1%, Healthcare +0.8%, Utilities +0.8%, Tech +0.8%, Consumer Spls +0.6%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1566 (+3543)
  • VOLUME: NYSE - 1100.94 (-13.42%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Monster WW +6.53%, Boston Scientific +5.53% and Micron Tech +5.49%/Marshall & Ilsley -10.22%, Intuitive Surgical -7.02% and Comerica -6.38%.
  • VIX: 19.79 -4.70% - YTD PERFORMANCE: (-8.72%)
  • SPX PUT/CALL RATIO: 1.93 from 1.46 +32.18%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.86 0.203 (1.296%)
  • 3-MONTH T-BILL YIELD: 0.14%  
  • YIELD CURVE: 2.16 from 2.13

COMMODITY/GROWTH EXPECTATION:

  • CRB: 299.00 +2.05%
  • Oil: 82.54 +2.97% - BULLISH
  • COPPER: 379.35 +0.96% - OVERBOUGHT
  • GOLD: 1,346.32 +0.40% - BULLISH

CURRENCIES:

  • EURO: 1.3961 +1.08% - BULLISH
  • DOLLAR: 77.171 -1.30%  - BEARISH

OVERSEAS MARKETS:

 

European markets

  • FTSE 100: +0.64%; DAX +0.57%; CAC 40 +0.71%
  • Major indices were firmer in response to some strong manufacturing and services PMI data out of Germany and a slew of earnings from the region which generally met or surpassed expectations.
  • Food & Beverage, P&HG and Auto names are pacing gainers amid another sluggish performance by banks
  • Novartis Q3 EPS $1.36 ex-items vs Rtrs $1.24
  • Credit Suisse Q3 net CHF 609M vs Rtrs CHF 857.5M
  • France Oct Preliminary Services PMI +55.3 vs consensus +57.5; Manufacturing PMI +55.2 vs consensus +55.3
  • Germany Oct Preliminary Services PMI +56.6 vs consensus +54.8; Manufacturing PMI +56.1 vs consensus +54.6
  • EuroZone Oct advance Services PMI 53.2 vs consensus 53.7; Manufacturing PMI 54.1 vs consensus 53.2
  • UK Sep Retail Sales +0.5% y/y vs consensus +1.0% and prior revised to +0.8%

 

Asian markets

  • Nikkei (0.05%); Hang Seng +0.39%; Shanghai Composite (0.68%)
  • Asian markets were mixed in a tight range today as China’s growth slowed, though the pace was expected.
  • Hong Kong rose, but China Mobile lost 2% as its nine-month results missed expectations.
  • South Korea rose slightly. Samsung Electronics rose 3% after revealing it is bidding for a controlling stake in Medison.
  • Taiwan finished flat
  • Australia finished flat, with miners leading a recovery in cyclical stocks.
  • Japan was flat as the effects of a strong yen fought with a better mood inspired by the rebound in the US.
  • Banks fell on profit-taking, leading China down.
  • China Q3 GDP +9.6% y/y vs survey +9.5% weakest in a year
  • China - September CPI +3.6% y/y, matching expectations - fastest increase in two years
  • China - September PPI +4.3% y/y vs survey +4.1%.
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



THE M3: MGM IPO; CHINA GDP/CPI; CHANGI TRAFFIC; CPI; GENTING AVIATION; CONSUMER CONFIDENCE

The Macau Metro Monitor, October 21st 2010

 

 

PANSY HO: IPO TO FINALIZE BY THE END OF THIS YEAR Macau Daily News

According to Pansy Ho, MGM Macau is still reviewing the IPO status and anticipates a final decision by the end of 2010 or early 2011.  Regarding the Cotai development project, the company has already submitted all the necessary documentation to the government and looks forward to receive the application outcome shortly.

 

CHINA'S ECONOMC GROWTH COOLS AS INFLATION ACCELERATES Bloomberg

China 3Q GDP grew 9.6% YoY, beating estimates of 9.5% growth but slower than the 10.3% growth in Q2.  Consumer prices jumped 3.6% YoY; inflation is higher than the government’s full-year target of 3%.

 

CHANGI TRAFFIC SOARS 15.3% Strait Times

CHANGI Airport handled 3.39 million passengers in September, up 10.8% YoY.  YTD traffic has been up 15.3%.

 

CONSUMER PRICE INDEX FOR SEPTEMBER 2010 DSEC

Macau's Sept CPI increased 3.83% YoY. Month-over-month, CPI increased by 0.27% but the price index of Recreation & Culture fell by 2.07% due to lower charges for outbound package tours after the Summer Holidays.

 

AVIATION ARM ON THE CARDS Strait Times

Gaming giant Genting Singapore has set up Genting Singapore Aviation, an aviation firm that could be used to fly high-rollers to RWS.  Genting Singapore said the unit provides air transportation services to the Genting Singapore group of companies.




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Scorching The Snake

“We have scorched the snake, no killed it.”

-Shakespeare (Macbeth)

 

The proverbial snake in the common man’s wallet is inflation. In this day and age of globally interconnected prices, governments can scorch it, but they can’t kill it - not when Western Fiat Fools wake up every morning trying to debauch their currencies for short-term stock market pops.

 

China scorched the serpent on Tuesday when it raised interest rates. The way that this works is very simple. Use monetary policy as a blow-torch on the way up (rate hikes) like Greenspan and Bernanke have used it as a blunt instrument on the way down (rate cuts). Glenn Stevens at the Reserve Bank of Australia is a modern day king cobra killer in this regard. He doesn’t get paid to be willfully blind. That’s why his citizenry trusts him.

 

Sadly, one day of snake scorching this week doesn’t a TRADE or TREND make. As soon as bad US economic data rolled through the leg hump machine yesterday, US stock market cheerleaders were right back at it begging Bernanke for more Quantitative Guessing. The Burning Buck went straight back down and commodity and stock prices went straight back up.

 

For all of you “deflation” fans out there, here’s a New Hedgeye Economics equation to jot down in your notebooks:

 

QG = i

 

That’s it. It’s that simple. Quantitative Guessing = global inflation.

 

Score this like you would scrabble points and mark-your-score-to-market at the end of every day by measuring what asset prices do on an inverse basis to the Burning Buck.

  1. Tuesday: US Dollar UP +1.7% = CRB Commodities Index DOWN -2.0%
  2. Wednesday: US Dollar DOWN -1.4% = CRB Commodities Index UP +2.4%

Cool, eh?

 

Not so much if you are part of the starving people in this world who the perma-bulls are quick to point out demand a lot of what their favorite companies in their portfolios make. But very cool for Wall Street and Washington types who really could give a damn about anything other than where the US stock market closes at month-end ahead of a mid-term election. It’s all about the short-term bonus baby.

 

Enough about the Fiat Fools who have mortgaged America, let’s go back to the leader in this global macro game of Monopoly: China.

 

Last night, the Chinese reported more of what our Hedgeyes have been calling for since Q1 of this year – a Chinese Ox In A Box (economic growth slowing as the Chinese focus on proactively tightening the screws on speculative lending and price inflation).

 

Here’s a Chinese data check:

  1. GDP growth slowed sequentially (quarter-over-quarter) to 9.6% in Q3 versus 10.3% in Q2 (versus +11,9% in Q1)
  2. Industrial Production growth slowed sequentially (month-over-month) in September to +13.3% from +13.9% in August
  3. Consumer Price Inflation accelerated again sequentially (month-over-month) in September to +3.6% from +3.5% in August

Net, net, what this means is that both economic lines in our model (Revenues = GDP and Cost of Goods Sold = inflation) continue to go the wrong way. Chinese economic growth has slowed to a 1-year low as inflation has accelerated to a 2-year high.

 

Ok. So what do you do with that?

  1. Realize that it’s not new “news” – Chinese growth has been slowing and inflation accelerating since Q1.
  2. Respect that, despite the slowdown, the Chinese government still has the political backbone to fight inflation and raise interest rates
  3. Stay long the Chinese currency because it, unlike America’s currency, has credibility (we have a 12% long position in Chinese Yuan, CYB)

Can you imagine Ben Bernanke raising interest rates as GDP growth is slowing and inflation accelerating? Can you imagine anyone in Congress understanding that a strong currency and positive rate of return on a citizenry’s savings gives more spending dollars to those conservative savers? Can you imagine anyone in a position of power on Wall Street or in Washington Scorching The Snake?

 

Here’s a brain Teaser for Timmy Geithner for his plane ride to Seoul, Korea and this weekend’s G-20 meetings:

 

If China has 1-year interest rates at 2.50% and the US has 1-year interest rates at 0.21%, which country has the higher probability of empowering their citizenry of savers with more money in 1 year?

 

I’m in Maine at a non-Groupthink Inc. conference for the next few days. This morning’s 9AM session is called “Thinking Wrong” … At a bare minimum, America’s snake oil salesman “economists” can’t accuse me of thinking inside the economic box they’ve put their people in.

 

My immediate term support and resistance lines for the SP500 are now 1173 and 1186, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Scorching The Snake - snake


CMG - A SHORT AHEAD OF THE QUARTER?

Conclusion: All of the channel checks and analyst calls about how great things are and I still come out that the stock has gone parabolic (as Keith said, the chart looks like Sri Lanka - this has nothing to do with anything other than the charts look alike).  While expectations are lofty, CMG is not giving away gold.

 

Keith asked me in our morning meeting if he should short CMG ahead of the quarter.  While we have traded around the CMG short, we covered it last at $140, for a small profit.  

 

With the stock now over $180, trading at 14.5x NTM EV/EBITDA and 32x NTM EPS, the million dollar question is - where is it going from here?

 

I told Keith that CMG could be the restaurant industry version of insane expectations – à la AAPL, but is probably not a GOOG (in terms of post earnings performance).

  1. Quarterly and annual estimates have been creeping higher - expectations are lofty! The stock is up 35% in the past three months. 
  2. In 1Q10 the EPS surprise factor was 25% and comparable sales came in +4.3% versus expectations of +1%; the stock increased 14% the day after results were reported.  The company reported on 4/22; from 4/20 to 4/26, the stock price rose 14.4%.
  3. In 2Q10 the EPS surprise factor was 5% and same-store sales were up 8.7% versus the street’s 5.4% estimate; the stock was up 9.0% the day after results were reported.  The company reported on 7/23; from 7/21 to 7/27, the stock price rose 14.4% (again).
  4. Expectations are now for an 8% comp (implies relatively flat two-year average trends with the prior quarter) with some estimates approaching 10%. The chance of again beating the same-store sales consensus estimate by 300 bps is small; business is good but not that good.
  5. Higher YOY labor and marketing costs, along with modest food cost inflation, will put increased pressure on restaurant level margin in 2H10, but this seems to be a high quality problem and also a function of tough comparisons.
  6. CMG is expected to provide some guide posts for 2011 and incremental margin pressure is inevitable - commodity exposure!
  7. Unit growth is on track but I don’t seen an acceleration
  8. This is the last quarter of easy traffic comparisons
  9. Upside/Downside is $6/$37.50

Surprisingly, the short interest on CMG is only 12.9% of the float versus 18.8% back in December 2009 and only up slightly since the beginning of the quarter.

 

Obviously, CMG is on a roll and is loved by “growth” investors.  Yes, the trends are strong, but at some point we need to realize that it’s just a restaurant company and this growth will inevitably slow.

 

As I said earlier, estimates have been moving higher and at this point, expectations seem to have caught up with this name.  The company’s stock has move higher following the prior two quarters’ earnings reports, but with estimates increasing, I think it will be difficult for the company to maintain its recent magnitude of both same-store sales and earnings surprises when it reports 3Q10 numbers tomorrow after the close. 

 

I would not be surprised to see CMG report a +8% to +9% comp, which would be impressive, although also relatively in line with consensus.  To that end, I am not expecting a repeat of the 300 to 400 bp upside comp surprise like we saw in 1Q10 and 2Q10.  This 8% to 9% comp would imply flat to slightly stronger two-year average trends, rather than the nearly 200 bp acceleration the company experienced during the second quarter.  That being said, I don’t expect the same level of earnings upside relative to the 25% surprise in 1Q10 and the 5% surprise in 2Q10.  Although the street’s comp estimate seems reasonable, the 3Q10 consensus EPS estimate of $1.31 will be more difficult to achieve, or at the very least, more difficult to surpass by a meaningful amount.

 

CMG - A SHORT AHEAD OF THE QUARTER? - cmg stock chart train

 

CMG - A SHORT AHEAD OF THE QUARTER? - sri lanka stock chart flag

 

Howard Penney

Managing Director


LVS: WHAT WILL BE GOOD ENOUGH?

Business is great and expectations are high.

 

 

Hopefully, non-recurring expenses won’t be large enough to pull net income into the red again, so LVS will finally show fully diluted shares on the income statement.  Maybe then all of the analysts will finally get the share count right going forward instead of using the much lower number of ordinary shares.  It is extremely unlikely that “non-recurring” items will exceed our forecast of $280 million in pre-tax income.  With Singapore open for a full quarter, it will be interesting to see how much of charges LVS will take.  There were a total of $88 million in Q2.

 

One time charges notwithstanding, we’re pretty sure LVS will put up an outstanding quarter.  Will it be enough?  Probably not.  Whisper expectations are very high and the sentiment surrounding the upside in Singapore almost seems limitless. 

 

We think that LVS will report $1,856MM of revenues and $558MM of EBITDA for Q3, beating consensus by 5.5% and 9.5% respectively.  Given the 41% run up in the stock since late August, we think expectations are high – especially on Singapore.   We’re basically in-line with the street on Macau, 7% above on Vegas and 30% higher on Singapore. However, we’re pretty sure that buy side expectations – especially on Singapore – are far ahead of consensus estimates.  Sheldon's recent speech mentioning how MBS was on a run rate of $90-100MM in EBITDA per month probably has something to do with the divergence in expectations and consensus.

 

 

3Q2010 Detail:

We expect Venetian & Palazzo to report $64MM of EBITDA on $272MM of revenues.

  • Slot handle growth of 2.3% and slot win of $53MM
  • Table drop growth of 8% and win of $82MM. As a reminder, last quarter hold was only 13.8% in Vegas and was only 12.2% in 3Q09.  So assuming normal hold, we expect to see a huge improvement in EBITDA this quarter both sequentially and YoY.
  • $135MM of casino revenues, net of $11MM in rebates
  • $189MM of non-gaming revenues less promotions & discounts of $41MM (30.5% of gross gaming revenue)
  • We expect total operating expenses to increase 5% YoY to $203MM (compared to $210MM 2Q2010)

We estimate that excluding the $6.5MM loss on “ferry and other Asian expenses”, LVS’s 3 Macau properties will report $295MM of EBITDA on $1,032MM of revenue.  We’re roughly in-line with the street on our EBITDA estimate for the combined Macau properties.

  • We estimate that Sands will report $287.5MM of revenues and $74.5MM of EBITDA (6% below the street)
    • $23MM of slot win and Mass revenue of $132MM
    • RC volume of $6.15BN with a hold rate of 3.03%, producing gross win of $186MM
    • We assume a 97bps rebate rate and a 1.33% commission rate
    • Net casino revenue of $281MM and net non-gaming revenue of $6MM
    • $164MM of variable expenses comprised of taxes, junket commissions, gaming premiums, and estimated bad debt expense
    • $45MM of fixed expenses and $3MM on non-gaming related expenses
  • We have Venetian reporting $606MM of revenues and $196MM of EBITDA (6% above the street)
    • $56MM of slot win and Mass revenue of $245MM
    • RC volume of $10.8BN with a hold rate of 3.05%, producing gross win of $330MM
    • We assume a 92bps rebate rate , a 1.24% commission rate and 23% direct play
    • Net casino revenue of $532MM and net non-gaming revenue of $74MM
    • $296MM of variable expenses comprised of taxes, junket commissions, gaming premiums, and estimated bad debt expense
    • $95MM of fixed expenses and $19MM on non-gaming related expenses
  • We estimate that Four Seasons will report $139MM of revenues and $25MM of EBITDA (6% above the street)
    • $8MM of slot win and Mass revenue of $27MM
    • RC volume of $5.5BN, assuming 50% direct play, and a low hold rate of 2.56% producing gross win of $141MM
    • We assume a 90bps rebate rate , a 1.11% commission rate
    • Net casino revenue of $126MM and net non-gaming revenue of $12MM
    • $84MM of variable expenses comprised of taxes, junket commissions, gaming premiums, and estimated bad debt expense
    • $25MM of fixed expenses and $5MM on non-gaming related expenses

We expect Marina Bay Sands to report $464MM of revenues on $236MM of EBITDA compared to the street estimate of $180MM.  As a reminder, MBS reported $94MM of EBITDA in 2Q2010 despite a 2.18% hold and only a partially open hotel.

  • $425 win per slot, $834MM handle, and $63MM of slot win
  • RC volume of $9.5BN and gross win of $266MM
  • We assume a 1.2% commission/rebate rate
  • Net casino revenue of $397MM and $67MM of net non-gaming revenue
  • $88MM of variable expenses comprised of taxes and estimated bad debt expense
  • $140MM of fixed expenses

Other stuff:

  • We expect Sands Bethlehem to report $82MM of revenues and $14MM of EBITDA (5% above the street)
  • D&A of $188MM

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