It’s been quite a ride but can LVS squeeze another 20% from Macau?



LVS stock may be a victim of its own success next year.  The valuation is hefty at around 16x 2012 EBITDA which implies investors think the Street’s estimates are too low.  We are pretty much in-line with the Street for Vegas and Singapore but somewhat below for Macau.  The Street 2011 Macau EBITDA estimate of $1.4 billion for LVS is a best case scenario in our opinion, and likely not enough to satisfy investors’ appetites.


Here’s why we think LVS will grow its Macau revenues by 10% rather than the 15% or so projected by the Street:

  • While we are projecting 30% market growth, table supply will be up 10% for the year with the opening of Galaxy Macau.
  • LVS has underperformed the market (on a same store basis) by 12% in 2010.  Their properties lost traction in both Mass and VIP.  In October and November, the underperformance was particularly pronounced, -24% and -35%, respectively, and it may be even worse in December.  Ex the supply impact, we are estimating that LVS will underperform by 10%.
  • In 2010, VIP hold percentage was higher than normal at both Venetian and Sands and Mass hold was high at Venetian.
  • Four Seasons faces an unrealistic comparison in Q3.
  • Perhaps the largest discrepancy between the Street's projections and our own is that the Street factors in almost no cannibalization of LVS's existing properties when sites 5 & 6 open in 2012.  History will tell us that when a company opens a second large property in Macau, its existing property(s) suffers the most. See our note "WYNN COTAI: A DONNER PARTY?" (11/11/10) for further details.

The following chart shows LVS’s massive underperformance relative to the market in terms of Mass, VIP, and relative to the market’s same store performance.




In terms of EBITDA, we are projecting approximately 5% cost inflation that we don’t think the Street is incorporating.  Inflation is real in that part of the world, and there remains a labor shortage.  Incorporating more moderate revenue growth assumptions and cost inflation, our 2011 Macau EBITDA estimate is more than $100 million below the Street and would be viewed as a disappointment.


The Macau Metro Monitor, December 29th, 2010



Macau's unemployment rate for September-November 2010 was 2.8%, down by 0.1% point over the previous period (August-October 2010).  Total labor force was 329,000 in September-November 2010 and the labor force participation rate stood at 71.2%, down by 0.5% point from the previous period.



The rediscount rate went up by 45 bp to 2.25%, the first change in two years.  The one-year bank relending rate increased 52bp to 3.85%.  On December 25, the central bank raised its benchmark deposit and lending rates by 0.25% points, representing a second rise in a short-term period in an effort to curb inflation.





Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP - December 29, 2010

As we look at today’s set up for the S&P 500, the range is 16 points or -0.68% downside to 1250 and 0.60% upside to 1266.  Equity futures remain above fair value as commodity stocks continue to benefit from investors hedging a declining dollar. In overnight news, China's central bank raised its rediscount rate 45 bps to 2.25%.

  • Groupon has filed to raise as much as $950m in funding after spurning $6b offer from Google this month, according to VCExperts; financing would value Groupon at as much as $7.8b.
  • New York and Ohio state pension funds will be lead plaintiffs in shareholder litigation against BP over Gulf of Mexico spill losses
  • Leonard Green may launch hostile bid for BJ’s Wholesale if an auction isn’t initiated in coming weeks, the N.Y. Post reports
  • Blackstone makes preliminary offer of unknown size for Australia’s Centro Properties, which owns 600 U.S. properties, WSJ reports
  • U.S. flight delays threaten to stretch into weekend after as many as 1.2m airline customers were affected by worst Dec. snowstorm to hit New York City in six decades
  • Hemispherx Biopharma (HEB) said it will restate financial statements for this year and last year
  • Sara Lee (SLE) agreed to sell White King, Janola business to Symex for EU37.9m ($49.6m)
  • Savient Pharmaceuticals (SVNT) said it initiated a search for a CEO; Paul Hamelin, co. president since 2008, will continue to lead the company until it hires new CEO.


  • One day: Dow +0.18%, S&P +0.08%, Nasdaq (0.16%), Russell (0.36%)
  • Last Week: Dow +0.72%, S&P +0.28%, Nasdaq +0.21%, Russell +0.34%
  • Month-to-date: Dow +5.17%, S&P +6.60%, Nasdaq +6.59%, Russell +8.59%
  • Quarter-to-date: Dow +7.30%, S&P +10.28%, Nasdaq +12.42%, Russell +16.76%
  • Year-to-date: Dow +11.00%, S&P +12.86%, Nasdaq +17.35%, Russell +26.23%
  • Sector Performance mixed (6 sectors up,3 down) - Energy +0.37%, Utilities +0.35%, Consumer Staples +0.27%, Materials +0.21%, Healthcare +0.06%, Financials +0.01%, Industrials -0.06%, Tech (0.12%) and Consumer Discretionary (0.21%)    


  • ADVANCE/DECLINE LINE: -125 (-445)  
  • VOLUME: NYSE 560.21 (+19.81%)
  • VIX:  17.52 -0.85% YTD PERFORMANCE: -19.19%
  • SPX PUT/CALL RATIO: 1.45 from 2.06 (-29.46%)



Treasuries sold-off sharply on Tuesday, significantly more so following a disappointing $35B 5-yr auction which yielded 2.149%, or approximately 8bps above the prior trade. 10-yr notes added nearly 16bps, most of which in response to the auction, to yield 3.49%.

  • TED SPREAD: 16.39 -0.101 (-0.615%)
  • 3-MONTH T-BILL YIELD: 0.15% -0.02%  
  • YIELD CURVE: 2.65 from 2.76


  • CRB: 331.43 +0.70%
  • Oil: 91.49 +0.54% -  Trading down 0.69% in the AM
  • Crude Falls From Near a 26-Month High on Pessimism About U.S. Stockpiles
  • COPPER: 432.80 +1.12% - Trading down -0.18% in the AM
  • Copper Advances to Record in London Trading on Speculation of More Growth
  • GOLD: 1,405.35 +1.84% - Trading up small in the AM
  • Gold Fluctuates as Concern About Europe Spurs Demand for Wealth Protector



  • Rubber Advances to Near Record as Buyers Lured by Yesterday's Price Tumble
  • Corn Drops on Speculation Investors Cash in Gains After Eight-Day Advance
  • South Korea Raises Foot-And-Mouth Alert to Highest Level to Curb Outbreak
  • Cotton Crops Washed Away by Flood Waters in Australia's Queensland State
  • QR National Coal Shipments Are Curbed by Queensland Flooding, Derailment
  • Smuggled-Diamond Revenue Flows to Robert Mugabe's Zimbabwe Before Vote
  • Anglo Will Invest $770 Million in Brazil Iron-Ore Port With Batista's LLX
  • Steel Authority India to Pay 8% More for Imported Coking Coal Next Quarter
  • Dutch Cargo Ship Runs Aground in Finland, No One Injured, Broadcaster Says


  • EURO: 1.3127 -0.06% - Trading down -0.06% in the AM
  • DOLLAR: 80.402 +0.04%% Trading down -0.16% in the AM


  • European Markets: FTSE 100: -0.52%; DAX: +0.40%; CAC 40: +0.89% (as of 07:30 EST)
  • European markets edged higher in light volumes with the UK lagging after its extended Christmas holiday. Fixed income markets were pressured by disappointing US auction results yesterday as well as China's increase in interest rates, including the rediscount rate today and ahead of supply from Italy.
  • Oil and mining sectors lead gainers, up around +0.6% as all but one sector, technology (0.1%), trades higher.
  • The region's economic and corporate news flow was very light.
  • Germany Dec Preliminary CPI due at approx 08:30ET


  • Asian Markets: Nikkei +0.5%; Hang Seng +1.5%; Shanghai Composite +0.7% (as of 04:57 ET)
  • Most Asian markets rose today.
  • Hong Kong rose +1.54% in thin trade. Car stocks recovered from early losses when China announced it will end tax incentives for small cars 1-Jan, as had been widely expected.
  • Arnhold Holdings soared 24% on announcing a takeover offer, an asset disposal, and a special dividend.
  • China Rare Earth Holdings soared 16% after China cut export quotas yesterday.
  • China’s benchmark money-market rate advanced to the highest level in three years as lenders hoard cash before the end of the year.
  • Bargain-hunting led China higher by 0.68% after five straight down days.
  • Japan opened flat but ended up 0.50% on day.
  • South Korea slid slightly at the start of ex-dividend day, though it ended up 0.50% thanks to gains by brokerages and retail stocks. High-dividend stocks including SK Telecom, KT Corp, and Korea Exchange Bank fell 4-5% each.
  • Australia was flat (-0.04%) after a four-day break. Miners fell on the December rate hike in China, and heavy rains continued to affect them. Tower Australia Group soared 42% on accepting a $1.2B takeover offer from Dai-ichi Life Insurance.


Stubborn Believers

“This stubbornness in the face of clear data is right up there with the efficient market believers.”

-Jeremy Grantham (Quarterly Letter, October 2010)


Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.


This isn’t to say that there aren’t plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.


I’m fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn’t working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.


Yesterday, I was re-reading Jeremy Grantham’s Quarterly Letter for October titled “Night of the Living Fed” and that helped me re-think my global macro positioning heading into 2011.


Before you scroll down, don’t worry – I’m not covering my short position in the SP500 (it’s -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I’ve been bearish plenty enough times on US stocks in my career with performance that’s worse than that.


Being bearish on US stocks here doesn’t mean you have to be bearish on everything – that’s a US-centric stock market investor’s risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America’s currency and hold rates of return on American savings accounts unsustainably low.


Grantham, Grant, and Hussman aren’t fans of The Ber-nank either. So, while hope is not an investment process, I’m really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.


On the politicized US central bank, here are some valuable excerpts from Grantham in the “Night of the Living Fed”: 

  1. On Evolution: “… displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.”
  2. On Quantitative Guessing (QG): “Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy.”
  3. On US Economic Growth: “… on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world.” 

The “real world” is, of course, real-time… and… as Ludwig von Mises said, “For many people, the “long run” quickly becomes the short run.” There’s no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.


On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here’s what the expectations of higher prices (inflation) have done: 

  1. Week-to-date = +0.61%
  2. Month-to-date = +9.6%!
  3. Quarter-to-date = +16.1% 

For a man who preaches “price stability”, that’s nice Heli-Ben… really nice. The 45 MILLION Americans on food stamps salute you.


On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning’s ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn’t cool for the 90% of Americans who aren’t levered-long the SPY.


Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07’ and early 08’) that stocks are “cheap” even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.


Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.


My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stubborn Believers - 1


This note was originally published at 8am on December 28, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

 -John Maynard Keynes


A Google search for quotes related to “inflation” produces quotes from Keynes in the first 10 spots.  While his radical idea that government should spend money it doesn’t have may have saved us from the brink of a financial collapse, he might not have agreed with QG (Quantitative Guessing) and the impact it is having on global inflation. 


The week in between two holidays is challenging on many fronts - personally and professionally.  Typically, there is little incremental macro data in the U.S. because politicians take time off for the holidays rather than trying to force issues when there is no audience.  In addition, most “big money” institutions are not going to make any big bets when there is no liquidity.   


We headed into the holiday lull with a bullish sentiment, an overbought market and MACRO factors that continue to keep us on the bearish side of a tightly-wound, high-risk environment.  Yesterday, on a stealth day for MACRO news, the VIX shot up 7.29%, putting a two-day move at 13.89% (but still down 18.5% YTD). 


The world is interconnected and this year’s “tweener week” is filled with interesting global macro data points, especially after China used the holiday weekend to hike interest rates in an attempt to ward off mounting inflation.


The news/rumors this week do not stop with China!  After the first of the year, Taiwan and South Korea will also be raising rates to battle domestic inflation.  How ironic that the region of the world (Asia) that is the hot bed for “deflation” for the balance of the planet is fighting a battle against domestic inflation.  If slowing growth in the emerging markets is not on your list of 10 surprises for 1Q11, it should be.  


Don’t take my word for it; the Chinese equity market is now down 9 of the last 10 days, declining 1.74% last night (down over 3% at one point).  The Chinese don’t mince words about where they think things are headed.  Overnight China’s Premier Wen Jiabao said measures to curb the country’s property market “weren’t well implemented” and reiterated his goal for home prices to return to a “reasonable level” during his term that ends in 2012. 


This is the killer statement by Wen Jiabao: “We introduced about 15 measures this year but it appears that they were not well-implemented….I believe that after some time, the home market will return to a reasonable level with our efforts.” 


If China did not get it right in 2010 (even though the Shanghai Composite is down 16.6% YTD) and they implement measures to curb property prices more effectively in 2011 and demand begins to slow as a result of a heightening cycle, we could see Industrials (XLI) and Metals (XLB) quickly come under pressure.  With the Chinese market as a leading indicator of growth and the market trading down 3.1% over the past month, those sectors and commodities with the biggest leverage to Chinese demand are likely headed lower, despite recent moves higher.


Over the past month: 


(1)    The S&P 500 is up 5.1%

(2)    The XLB is up 9.6%

(3)    The XLE is up 7.5%

(4)    The XLI is up 6.7%

(5)    The CRB is up 9.3%

(6)    Copper is up 13.8%   


In light of Wen Jiabao’s statement, it is interesting to note that the best performing sectors year-to-date are also those with the most leverage to Chinese demand.  The four best performing sectors are:


(1)    Consumer Discretionary (XLY up 26.03% YTD)

(2)    Industrials (XLI up 25.51% YTD)

(3)    Energy (XLE up 17.82% YTD)

(4)    Materials (XLB up 15.79% YTD)


While most Asian central bankers seem to see that there is an inflation problem, in the USA we still cannot see it, despite a number of “real life” examples of real inflation hitting the U.S. consumer hard.  Yes, we are going to hammer home a key theme in 2011: Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.


Of course, the components of any inflation index are up for debate.  For instance, the government and most people that disagree with our view on inflation prefer to exclude staple, non-discretionary aspects of consumer spending such as food and energy from the calculation.  One item I hope we can all agree to include is healthcare costs. 


According to the Commonwealth Fund (a non-profit fund), U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay for it.  They cited that private-insurance premiums for families rose three times faster than median household income over six years and deductibles rose almost five times faster.  In 15 states, health-insurance premiums are the equivalent of at least 20% of median household income for people under 65.


While the market has rallied on the back of the Government pumping another $800 billion into the economy to prop up the ailing consumer, the average American remains liquidity-impaired and the U.S. housing market is headed lower, not higher.  With these factors still in place, the now positive bias toward stronger-than-expected GDP growth in 2011 can certainly be questioned.


Inflation is a policy that, as Keynes said, confiscates part of the citizens’ wealth. The government’s most recent move, to implement payroll tax cuts while extending unemployment benefits, may go some way to stimulate the economy in the short term but runs a considerable risk of exacerbating the deficit.  In this interconnected global economy, as the world’s fastest-growing economies take strong measures to curb inflation, the net effect could be icy for world growth.  In the U.S. certainly, from a global and domestic perspective, the evidence is clear that inflation is here to stay on a global basis and Jobless Stagflation is going to impact the economy in 2011.


Function in disaster; finish in style.


Howard Penney





Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.