The Macau Metro Monitor, December 16th, 2010




Secretary Tam said Sands' application for sites 7 & 8 was submitted after the Macau Government announced in 2008 that it would not accept any new land requests for the development of gaming projects.  Tam also revealed that since Wynn Macau, MGM Macau, and SJM submitted their Cotai applications before that policy was stated, it’s likely their requests will be approved.


When asked about the approval of 2,000 imported workers for Galaxy Macau, he explained that it was needed to make sure the property has sufficient workers for the property opening early next year.  He added that Galaxy must hire at least 4,000 locals in order to receive the 2,000 foreign laborers quota.  Galaxy has said that it needs 8,000 workers to open its new resort. 


As for why Sands' plots 5 & 6 have not received the green light to hire foreign construction workers, Tam responded, "The Government has to ensure the growth of the gaming industry is happening in an orderly fashion."


Muni Bonds Are On Sale: Time To Buy Now?

“A bargain is not a bargain if it remains a bargain.”

-Martin J. Whitman


Conclusion: Muni bonds are cheap again. They’re likely to get a lot cheaper. Don’t buy the dip or the storytelling that this is a “great buying opportunity because 2011 will be a great year for muni bonds”.


Position: We remain bearish on muni bonds and have traded the etf MUB in the Hedgeye Virtual Portfolio.


The quick answer is a resounding “NO”. Just ask anyone who bought U.S. equities during late-2007 if they got a great deal.


We have been quite vocal YTD regarding our bearish stance on Municipal Bonds and we foresee the proverbial “X” hitting the fan in 2011. This note is more of a strategy update, however. For a complete listing of relevant reports regarding the 2011 outlook for muni bond fundamentals, please refer to the bottom of this note (email us if you’d like to see a copy of any/all of the reports).


This view is in stark contrast to the recommendations of a quite a few large sell-side firms, who think now is great time to buy muni bonds, as they are on sale. Inconsequently, they also happen to be some of the largest underwriters of muni bond issuance, whose motivations for making recommendations are questionable at best.


Moving back to the meat of this report, I can’t help but find similarities to the current state of the muni bond market to the S&P 500 in late 2007. Muni bonds have been routed since early November and yields and credit risk have backed up materially:


Muni Bonds Are On Sale: Time To Buy Now? - 1


Muni Bonds Are On Sale: Time To Buy Now? - 2


Muni Bonds Are On Sale: Time To Buy Now? - 3


Credit risk, as measured by the Markit MCDX Spread (a measure of muni bond CDS) backed up 35bps week-over-week, closing at 208bps.


Muni Bonds Are On Sale: Time To Buy Now? - 4


The recent rout in the $2.9 trillion muni bond market is the direct result of a confluence of three factors: 

  1. Inflation, inflation expectations and bond yields (all on a global basis) dragging U.S. Treasury yields higher (we have no one to blame other than The Ber-nank);
  2. Oversupply from a glut of year-end issuance ahead of the potential Build America Bond Program expiration (scheduled for 12/31); and
  3. Accelerating muni bond fund redemptions as retail investors who have been stuffed with bond allocations in their 201(k)’s rush to avoid more red ink on their monthly statements. 

The latest moves in the muni bond market have many nervous investors and underwriters coming out of the woodwork touting things like, “Muni bonds are an excellent source of yield in a low-yield environment”, and my personal favorite: “The current weakness in muni bonds presents an excellent buying opportunity as the year-end supply glut will shrink heading into 2011.”


Below we tackle each of the aforementioned factors for muni bond weakness individually:


Bond Risk (inflation, sovereign debt, etc.) and Yields:


We see that U.S. Treasury yields have indeed been dragged up alongside global bond yields and yields across the entire curve are in a Bullish Formation (i.e. U.S. Treasury prices are in a Bearish Formation):


Muni Bonds Are On Sale: Time To Buy Now? - 5


Apparently bond market risk doesn’t occur in a U.S.-centric vacuum filled with conflicted and compromised U.S. CPI reports.


Year-end Oversupply:


In trying to get ahead of a potential expiration of the BAB program, States and municipalities borrowed roughly $55.6 billion in November – the most since at least 2003 – and another $53.7 billion in October – the second most on record. While 30-Day visible supply has backed off its five-year high reached on November 16th of $26.3B, the average 30-day visible supply for 4Q10-to-date remains well above historic averages for the fourth quarter:


Muni Bonds Are On Sale: Time To Buy Now? - 6


Currently, it appears unlikely that the Federally-subsidized BAB program will be extended, as it has not been included in the recent comprise President Obama struck with Republicans over extending the Bush Tax Cuts in exchange for spending concessions for the hardest-hit American families. Amendments may be added to the bill in a vote today, but it grows increasingly unlikely that any amendments will receive support from the two-thirds supermajority needed to be passed.


The outlook for extending the BAB program grows even dimmer if the debate carries on into 2011, as the new Republican leadership is expected to continue party’s opposition towards extending the program. Since their April ’09 inception, BABs have accounted for ~23% of municipal bond issuance ($181 billion), so the removal of this program (beloved by issuers, investors and underwriters alike) will likely force an acceleration tax-exempt bond supply in 2011.


Investor Redemptions:


Lastly, muni bond fund redemptions have created a self-perpetuating cycle of price declines, as investors withdraw funds and fund managers are forced to sell assets to cover redemptions. In November, Municipal Bond funds suffered their first net outflow in 22 months – a whopping $7.6B!


By comparison, November’s $7.6B withdrawal is 7.2% of the $105B of net inflows added from January 2009 through October 2008. Moreover, the $7.6B redemption is roughly 4x the amount retail investors withdrew from stock funds and 5x the amount withdrawn from bond funds during the month.


Even Bill Gross saw his Total Return Fund suffer its first withdrawals in two years (-$1.9B) in November. By the looks of it, his plea for investors to load up on “Big Apple” debt won’t be enough to stop redemptions from leaking through the crack in the bond fund reservoir. On Monday, muni bond holders sought buyers for $1.1 billion in debt – the second highest single day total since December 9, 2008.


If mean reversion has its way, there’s a potential $97.4B of withdrawals waiting to be reported over the next couple of years. The timing of which is particularly important to note, as the likely extension of the Bush Tax Cuts over that duration does indeed reduce some near-to-intermediate term demand for tax-exempt muni bonds.


Conclusion & Recommendation:


When it comes to muni bonds, institutional investors are the “Odd Lot” with respect to behavioral finance. Retail investors own 70% of the total amount of muni bonds in circulation through direct and indirect holdings (mutual funds, etc.). Keep that in mind the next time you hear a sell-side recommendation to buy muni bonds right here and now. Perhaps we institutions should follow them into cash (retail investors added a net $24.7B into money funds in November – the most since January 2009).


 All told, we are making an explicit recommendation with regard to muni bonds: don’t buy the dip; don’t buy the hype; don’t buy the storytelling around how cheap bonds suddenly are. They are likely to get a lot cheaper before we find real value – a lesson well-taught by Marty Whitman. That, however, doesn’t mean there will be an absence of head-faking rallies along the way.


Darius Dale



Getting Up To Speed


With the struggles of State & local governments making more and more news of late, we’ll continue to remain diligent in keeping you appraised on this topic. We’ve written extensively on State & local government fiscal headwinds YTD; email us if you’d like to receive copies of any/all of the following reports:


February 24: DOMESTIC PIGS – A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them. While we are not calling for the U.S. to default on its sovereign debt, the likelihood of a State and/or local government defaults may potentially lead to a downgrade in the U.S.’s credit rating.


April 20: GOVERNMENT’S MARKING TO MODEL – Property tax rates and property tax receipts continue to rise in the face of a weak domestic housing market, showing just how much the government marks their “assets” to model. We break down the convoluted municipal property value appraisal system and highlight the oncoming headwinds to local government property tax collections in the coming years.


July 21: IN A SORRY STATE INDEED - Waning federal funding, slowing tax receipts, and declining home prices will put additional strain on State and local government budgets, which have an incremental negative effect on the U.S. economy at large.


September 13: BREAKING DOWN MUNI BONDS – We firmly disagree with the relative “safety” of muni bonds, as current yields are at a disconnect with the underlying negative fundamentals that will begin to reveal themselves over the next 2-4 quarters.


October 13: CONTRACT FOR AMERICA: EVEN SLOWER GROWTH AHEAD? - Careful analysis of State & Local Government fiscal headwinds suggests that a Republican takeover of Congress may lead to decisive spending cuts, which could negatively impact U.S. economic growth in the intermediate term. Furthermore, State and Local Government’s FY11 revenue projections are very out of line with economic reality, which suggests further cuts are on the way. In this report, we analyze this divergence in great depth.


November 16: REPUBLICAN HEADWINDS FOR STATE & LOCAL GOVERNMENTS - The Republican landslide in the recent election all but guarantees State & local government fiscal headwinds will continue to materialize in 2011. These headwinds will likely result in material spending cuts and tax hikes going forward, which will create a drag on the economy going forward and increased risk for State and local bond defaults.

The Ber-nank's Pig

This note was originally published at 8am on December 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“For many people the “long run” quickly becomes the short run.”

-Ludwig von Mises


It’s both amazing and frightening that some US-centric investors can call rising European bond yields “pigs” and, at the same time, call the current breakout in US sovereign bond yields bullish because it’s all about US “growth.” If you are being forced to chase your “long run” stock ideas here into the short run of year-end, be forewarned – feeding The Ber-nank’s Pig comes with globally interconnected risk.


In hedge fund speak, we call a position that goes straight down a pig. Although I have never managed risk on a long only desk, I’m hearing that they call charts that look like Spanish Equities (EWP) and short-term Treasury Bonds (SHY) iggy little piggies too.


Obviously there is a confirmation bias embedded in US markets to lean bullish. As a result, not being wrong 82.6% of the time on the short side (Hedgeye’s batting average on shorts since 2008) isn’t easy to do. Sometimes however, the perma-bulls start to trip all over themselves painting every bearish and bullish data point as, well, bullish. This little piggy has a funny way of making its way to the market AFTER stocks have moved.


This morning’s Institutional Investor Bullish to Bearish Survey marked a new cycle-high in terms of the spread between de Bulls and da Bears:

  1. Bullish sentiment ramped to 56.8%
  2. Bearish sentiment dropped to 20.5%
  3. The spread (bulls minus bears) = +36.3%

In the short-run, we have finally bumped up against the widest bullish bias the US stock market has seen since April 2010. This may or may not matter to the “buy stocks for the long run” bulls, but we think the April peak to July trough drop of -15% left a mark.


In the long-run, the Bullish/Bearish Spread has never sustained a level north of 40. Historically speaking, never is a long time. The last time we saw the +40 handle raid the bears to the upside was at the beginning of 2008. Not exactly the best buy-and-hope signal that was…


Last night on Kudlow, I attempted to remind one of the 2008 bulls (Don Luskin) what the confluence of a pending slowdown in global growth and rising global inflation means for stocks in the intermediate term. He didn’t like that reminder.


This morning, in hopes of not being labeled one of the “world is awash with liquidity” 2008 dudes, I’m going to make sure that I am crystal clear on this – the rise in sovereign bond yields from Portugal (who printed 3 MONTH bills this morning at 3.4% versus 1.81% in the last auction!) to California is NOT a bullish leading indicator for 2011 “growth.”


No, that doesn’t mean I’m suggesting that last month’s US Retail Sales number wasn’t good. Neither am I saying that last month’s breakdown in domestic and emerging bond markets was either. We, as risk managers, aren’t tasked with trumpeting the +83.6% US stock market move that’s already behind us. We need to play the risk management game that’s in front of us.


So let’s strap on the multi-factor, multi-duration, global macro pants and take a walk down the path of what’s new out there this morning other than Portuguese pigs getting plugged:

  1. China and Hong Kong equities closed down another -0.54% and -1.95% overnight, respectively. Both remain broken on our immediate term TRADE duration. Growth in Asia will slow, sequentially, until Q2 of 2011.
  2. Indian equities closed down another -0.76% and remain bearish on both our immediate and intermediate-term TRADE and TREND durations.  The trajectory of India’s 2011 growth could slow materially against very tough 2010 compares.
  3. Spanish and Italian stocks markets are getting crushed again after rallying to lower intermediate-term highs as European bond yields continue to rise in the face of sovereign debt and inflation risks.
  4. Sweden’s Riksbank raised interest rates on its 7-day repo rate to 1.25% in order to proactively protect against inflation.
  5. Turkish equities (a hot spot in the buy everything emerging markets land of nod) continue to underperform and are down another -1.3% this morning as local inflation pushes towards the double digit zone (yes, inflation is bad for emerging markets – it starves their people).
  6. Brazil was down another -0.55% yesterday and traded back below its intermediate-term TREND line of support for the Bovespa = 69,005. Brazil’s GDP growth slowed to 6.7% in Q3 vs. +9.2% in Q2 and inflation just ticked up again, sequentially, to +5.6% in November.

Notwithstanding that everything that I just wrote equates to a real-time read through on Global Growth Slowing in the in the next 3-6 months, what’s most interesting here is that every US centric stock market news service hasn’t mentioned any of them!


US tax cuts are good for short-run spending and political popularity (unless you are long Best Buy), but what have they done to the world’s long run expectations of American fiscal resolve? Have we learned nothing about the short-termism associated with begging for “shock and awe” easing in early 2008? Or are we, sadly, just feeding the pig until we get to year-end and collect our high/low society bonuses?


My immediate term lines of support and resistance for the SP500 are now 1230 and 1246, respectively. I’m early in being short the US stock market here – I get that. I was in late 2007, too. But don’t forget that I was also early buying the US Dollar (UUP) in November and shorting US Treasuries (SHY) and Munis (MUB). This globally interconnected game of risk is no longer all about buying US stocks for the “long run.”


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Ber-nank's Pig - 1

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McDonalds is certainly not afraid of competition and some news items over the past couple of days underscore this fact.  However, if you were an executive from MCD - the world quick service leader - and you were listening to YUM's presentation last week, you would have been embarrassed at YUM's dominance in the Chinese market.  MCD is now moving into China more aggressively, seemingly picking a fight with YUM as it has with some other competitors this year. 


MCD has outperformed its competitors on a top-line basis by providing compelling value and also offering innovative product which drives incremental sales.  Often this involves stepping into the domain of competitors but MCD has done this with some success of late.

  • Frappes and smoothies were a homerun for MCD during the summer months and were a significant reason why the rest of QSR struggled to keep up in 3Q
  • As I wrote in a note entitled “CMG: IN MCD’S CROSSHAIRS?” in September, MCD has been testing a larger burrito-like version of its Chicken Snack Wrap which could take share from CMG as a more affordable alternative
  • News emerging last night of MCD’s increasing growth in China by 40% next year.  YUM has a formidable system established in China but MCD clearly is seeking a share of the growth that YUM is touting in China
  • This morning news hit the tape that MCD will launch delivery on a trial basis in Tokyo and expand if the test succeeds.  The service will initially be rolled out in Japan.  Globally, McDonalds delivers in just 18 countries and this could indicate the beginning of a broader expansion.  YUM highlighted the success of their delivery service in China during their recent Analyst Day in New York.

This past month MCD's same-store sales growth held up in the U.S. but trends slowed in Europe and seemingly fell off a cliff in APMEA.  I think it is only a matter of time before trends slow in the U.S. as well, particularly as comparisons get more difficult come March 2011.  While we are refining the model it continues to look like MCD could fall out of "Nirvana" (same-store sales positive and margins expanding) in 1Q11, for the first time since 1Q09.


So far in December, MCD's USA same-store sales have slowed sequentially from the levels seen in November.




Howard Penney

Managing Director

Retail Sales: The Mother of Rear-View Indicators

Using Government-reported Retail Sales has never been core to my investment process.  Why? It’s old, and offers little to no insight above and beyond the NRF sales report two weeks ago, and leaves out the ICSC, NPD, and SSI reports that have already come in for the first 2 weeks of December.


Check out the definition on the Commerce Department’s web site; “Estimates are based on data from the Monthly Retail Trade Survey, Annual Retail Trade Survey, and administrative records.” So basically, they are taking the monthly SSS reports, synching with historicals that we cannot see, and using whatever ‘administrative records’ means, to come up with a monthly proxy for spending behavior for a third of US GDP.  Not too comforting, eh?


Translation = it’s a partially accurate lagging indicator at best.  Just ask holders of Best Buy.


But one thing that was interesting on the margin is that the chain store sales decline moderated, while gov’t sales accelerated in its recovery.  It also begs the question about how and where sales on-line are showing up.  Do you think Amazon’s numbers are showing up here? Probably, but I wouldn’t  be surprised if they found a way around it while tax structures remain loose for e-commerce retailers. While that will likely change, the allocating of these business is something to consider. After all, it’s tough to blow off $74bn in sales taking share from – well, everybody.


On the flip side, I’m surprised to see that the share of online sales is up by 1% to 4% over the past decade. Again, multi-channel retailers likely report as consolidated retail, while others do not.



Retail Sales: The Mother of Rear-View Indicators - pces1


Retail Sales: The Mother of Rear-View Indicators - p2


We know demand will be there but can the people get there? 




December 2010-January 2011

Guangzhou-Zhuhai intercity rail line (MRT)

  • Will reduce the non-stop travel time between the two cities from 90 minutes to 46 minutes. Also, travel time between Zhuhai (Gongbei Checkpoint) and Zhuhai Airport will be 25 minutes rather than the current 50 minutes via auto transportation.
  • In the future, the rail line may be linked to the Macau Light Rapid Transit (LRT) at the Hengqin (Cotai Checkpoint) stop.
  • Should bring around 400,000 people a day.

August 2011

Expansion of Gongbei Border Gate (GBG)

  • Will extend its customs building in order to handle 350K to 500K daily movements. 
  • Over 150 new immigration counters will be built. 
  • A 24-hour border crossing will be implemented in 2011
  • Gongbei/Barrier Border Gateways:
    • The GBG is the land immigration and customs checkpoint between Guangdong and Macau. It is located in Zhuhai City, Guangdong. Directly across from GBG is its counterpart, the Barrier Gate of Macau, which has already expanded to handle 500k visitors daily. Currently, the hours of operation are from 7am to 12am. These checkpoints have handled roughly half of all of the visitors to Macau this year. In October 2010, 1,050,390 (50.2% of total) visitors passed through.
    • Currently has over 170 immigration counters, both manual and electronic (self-processing)
    • 8 and 10 vehicle lanes for entry and exit into Macau, respectively. Previously, they had 10 entry lanes and 11 exit lanes.


Macau International Airport (MIA)

  • Plans to double the current capacity to 12 million and target to complete the upgrade work in stages between 2011-2017
  • Year to date, ~6.7% of visitors come through MIA, down from 7.2% in 2009.
  • Handled 4.25 million passengers in 2009. From Jan-Aug 2010, 2.80 million passengers arrived at MIA, roughly unchanged from the same period in 2009.
  • Has routes to key cities in China, Taiwan, Japan, South Korea, Thailand, Malaysia, Indonesia, Philippines and Singapore


The New Taipa (Pac On) Ferry Terminal Redesign

  • Plans to extend number of berths from 8 to 19; 16 berths for 400-passenger ferry, 3 berths for 1,000-passenger super ferry
  • Currently handles 14% of Macau visitors this year, up from 11% in 2009. This year, visitors through this point have increased by 45% YoY.
  • Provides ferry services to Hong Kong and Shenzhen


Macau Light Rail Transit (LRT)

  • Expected completion at end of 2014
  • Will connect Macau, Taipa and Cotai.
  • Capacity will be up to 8,000 passengers per hour in either direction
  • Will operate 19 hours every day with an average speed of 33km/h
  • First phase: spans 20 kilometers, comprising 23 stations


Hong Kong-Zhuhai-Macau Bridge

  • A total span of nearly 50km, with a distance over water of 29.6 kilometers
  • A 6.7 km tunnel will be built between 2 artificial islands
  • Will reduce the estimated driving time from Hong Kong to Macau to 15-20 minutes from the current 4.5 hours of travel time
  • The estimated to cost USD940 million will be shared by Guangdong central government, Hong Kong government and Macau government
  • Toll of RMB100-150 each way
  • The Zhuhai government chose Nanping, a town near Hengqin Island, as the landing point for the bridge after examining concerns about the rise in traffic in the Gongbei area, which was initially chosen as the landing point in 2005.





Guangzhou-Zhuhai Super Highway

  • Phase II (from Shunde to Zhongshan) and Phase III (from Zhongshan to Zhuhai)
  • Phase I (Guangzhou to Shunde) was completed in April 2004
  • Travel time will be 50 minutes on the highway when all phases are completed


4 Longitude and 4 Latitude High Speed Railway

  • 16,000 kilometers long connecting 9 cities in 6 provinces
    • Longitude lines:
      • Beijing-Harbin (Dalian) High-speed Railway
      • Beijing-Shanghai High-Speed Railway
      • Beijing-Guangzhou (Hong Kong, Shenzhen)
      • Shanghai-Shenzhen
    • Latitude lines:
      • Taiyuan to Qingdao/Lanzhou to Xuzhou/Chengdu to Shanghai Kunming to Shanghai
    • Speed will exceed 200 km/h and can go up to 350km/h
    • Reduce Beijing-Guangzhou and Guangzhou-HK train travel times to 7 hours and 48 minutes, respectively from 20 hours and 2 hours, respectively.

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