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INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION

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 - 1

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - 2

 

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.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - 3

 

Joshua Steiner, CFA

 

Allison Kaptur


PENN: ITS ALL ABOUT NEW MARKETS

PENN posted a great quarter in a tough environment, exhibiting strong operations but also the importance of exposure to new markets. 

 

 

PENN’s new markets were table games in both PA and WV where the numbers are off the charts.  And there is more of that on the horizon.  While we remain concerned with domestic gaming demand in existing markets, consistent with history, ROIC in new markets will continue to outpace cost of capital by a wide margin.  Maryland had little impact on Q3 due to the late September opening but initial results suggest a 25% ROI.  Up next:  Toledo then Columbus, both 20%+ ROI opportunities.  In fact, as we wrote about in our 06/07/10 note, “COLUMBUS WILL DISCOVER THE AMERICAN CASINO”, Columbus could be the highest EBITDA-producing regional casino (non-Indian) in the country.  Both these properties and their Kansas casino are scheduled to open in 2012 but PENN won’t be done then.  The company recently positioned itself to own and operate three racetracks in Texas where there is a decent probability that slots at racetracks will be legalized sometime in the next five years.

 

New markets are great for most operators fortunate enough to get a license.  But that’s only part of it.  As demonstrated in Pennsylvania most recently, PENN seems to generate outsized ROIs.  Hollywood Casino is generating a 26% ROI on its $310 MM investment in PA.  Preliminary results in MD imply a 25% ROI on PENN’s newly opened casino there.  PENN keeps construction costs low – MD cost only $98 million – stays on budget, and operates efficiently.  Virtually every property/expansion PENN does comes in on time and on budget.  We expect the same from Ohio, Kansas, and Texas.  They also don’t overspend on their stock.  PENN bought back over a million shares at an average cost of $23.21 during the quarter.  The stock closed last night at $31.18.

 

PENN’s results this morning came in largely as we expected but much better than consensus – EBITDA of $162MM was actually $1MM better than our estimate while revenues were $4MM lower primarily due to our modeling of the newly acquired tracks.  Generally speaking, cost controls were better across the board, and flow through on the newly introduced table games in WV and PA was also stronger.

 

Here are the details of the quarter: 

  • At Charles Town, tables games lifting total property revenues by $32MM sequentially, while only increasing non-gaming tax related expenses by $6MM QoQ, resulting in 318bps of margin lift sequentially and a 373bps lift in margins YoY.
  • In Pennsylvania, table games lifted sequential revenues by $5MM but only increased non-gaming tax related expenses by $1MM, which resulted in EBITDA margins expanding 560bps YoY and 220bps sequentially.
  • Hollywood Aurora, Argosy Alton, Hollywood Bay St. Louis, Hollywood Slots & Raceway Bangor beat our EBITDA estimates handily  
    • At Aurora, net revenues came in $0.2MM ahead of our estimate, while costs (ex-taxes) were almost $1MM lower sequentially, despite flat revenues.
    • At Alton, revenues were $0.5MM better than we estimated and costs (ex-taxes) decreased QoQ despite revenue growth.
    • Despite more difficult cost comps, Hollywood Bay St. Louis continued to bring down expenses by 9% YoY
    • At Bangor, margins were almost 100bps better than we estimated driven by an 8% YoY reduction in expenses
  • Empress and Hollywood Tunica missed our EBITDA estimate by more than 10%
    • Empress reported net revenues that were $1MM higher than we estimated but margins were worse.  Despite revenues decreasing QoQ, operating expenses (ex –taxes) actually increased by $1MM.
    • Hollywood lost some share in Tunica, coming in at 6.5% vs. 7.2% last year and 6.9% in 2Q2010
  • The loss at Maryland Jockey Club was almost $3MM larger than we forecasted
  • Other stuff:
    • Corporate expense was $17MM, $2MM lower than we estimated
    • Net interest expense was $3MM higher
    • Bought back over 1m shares at an average cost of $23.21

 

PENN: ITS ALL ABOUT NEW MARKETS - PENN22


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


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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.




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


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