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THE M3: IM/CITI REPORT; LESS TABLES; CHINA LOAN TARGET CUT; IMPORTED WORKERS; BELLE

The Macau Metro Monitor, January 18, 2011


TRAIN TALK MISSES THE STATION Intelligence Macau

IM disagrees with Citigroup's report on the positive effects of the upcoming Guangzhou-Zhuhai intercity railway.  IM says the buses from Guangzhou to Zhuhai will continue to be the main avenue of transportation since 1) It is cheaper; 2) Direct route to Gongbei vs. the multiple stops and transfers on the railway; 3) Railway terminates 45 minutes away from the Gongbei.

 

IM also disagress with Citi's forecast that SJM will lose market share in 2011 and 2012.  IM stresses that 1) SJM has the stickiest customers in Macau, mostly because of the clan-based associations of its 3rd-party casinos; 2) Grand Lisboa is expanding space for more tables; and 3) In contrast to the 5-star rooms being developed for Galaxy Macau and Lots 5&6, SJM has some of the most affordable hotels.

 

VIP BACCARAT ACCOUNTED FOR 72% OF MACAU'S GAMING REVENUES IN 2010 macaubusiness.com

For Q4, Macau had 4,791 gaming tables, a decrease of 47 from Q3.  Slots also fell to 14,050 from 14,316.  For 2010, VIP baccarat grew 69.91% YoY to MOP135.65BN; mass market baccarat rose 36.94% YoY to MOP34.92BN; and slots jumped 32.52% YoY to MOP8.62BN.

 

CHINA CUTS LOAN TARGET; FOREIGN INVESTMENT HITS RECORD Reuters, China Daily

According to sources, China's central bank has reportedly cut its 2011 lending target by 10% to between 7.2 trillion and 7.5 trillion yuan.  New yuan‐denominated lending in China reached 7.95 trillion yuan in 2010. The figure surpassed the central bank's target of 7.5 trillion yuan. 

 

OVER 75,000 IMPORTED WORKERS IN MSAR Macau Daily Times

In November, the number of non-resident workers totaled 75,098, an increase of 318 compared to the previous month.  Mainland China continued to be the main source of imported labor; however, there was a slight decrease of 79 Mainland workers from 41,516 in October to 41,437 in November.


BELLE, LR KEEN ON PAGCOR ASSETS Philippine Daily Inquirer

On the much-anticipated Pagcor privatization, Belle's group leader Willy Ocier said: “We don’t know when that will be, but if and when they do, Belle and LR will obviously be interested in bidding for the casinos outside of Metro Manila and we are eagerly awaiting Pagcor’s terms of reference.”


WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 8 of 10 improved / 1 out of 10 worsened / 2 of 10 unchanged
  • Intermediate-term (MoM): Neutral / 5 of 10 improved / 5 of 10 worsened / 2 of 10 unchanged
  • Long-term (150 DMA): Neutral / 3 of 10 improved / 3 of 10 worsened / 4 of 10 unchanged / 1 of 10 n/a

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - summary

 

1. US Financials CDS Monitor – Swaps were positive across domestic financials, tightening for 27 of the 28 reference entities and widening for only one. 

Widened the most/tightened the least vs last week: AXP, AIG, HIG

Tightened the most vs last week: MET, TRV, MBI

Widened the most vs last month: C, AXP, ACE

Tightened the most vs last month: LNC, MET, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 1 US cds

 

2. European Financials CDS Monitor – After backing up sharply last week, banks swaps in Europe was mixed.  Swaps tightened for 24 of the 39 reference entities.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 2 euro cds

 

3. Sovereign CDS – Sovereign CDS fell sharply last week on the Portuguese bailout and entry of Japanese buyers before rising slightly on Monday. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 3 sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, closing at 7.91 on Friday.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 3 high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to charge higher, closing at 1598, 8 points higher than the previous week.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 4 lev loan

 

6. TED Spread Monitor – The TED spread fell to 15.8 from 16.8 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 5 ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 3.7 points, closing at 35.5 on Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 7 JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 150 points.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, dropping 7 bps to 219.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 8 mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  The index fell to a new low of 144 amid Australian flooding. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 9 baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread held flat at 273 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 10 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: zero upside to TRADE resistance, 2.0% downside to TRADE support. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 18, 2011


Equity futures are trading mixed with the Nasdaq set to open lower following yesterday's news that Steve Jobs will take a medical leave of absence as the company is set to report earnings after the close.  As we look at today’s set up for the S&P 500, the range is 22 points or -1.26% downside to 1277 and +0.45% upside to 1299.

 

 MACRO DATA POINTS:

  • 7:45 a.m.: ICSC weekly sales
  • 8:30 a.m.: Empire Manufacturing, est. 13.00, prior 10.57
  • 9 a.m.: Net long-term TIC Flows, est. $40.0b, prior $27.6b
  • 10 a.m.: NAHB Housing market index, est. 17, prior 16
  • 11 a.m.: Export inspections (grains)
  • 11:30 a.m.: U.S. to see $29b in 3-mo., $28b in 6-mo. bills
  • 5 p.m.: ABC consumer confidence

TODAY’S EARNINGS TO WATCH:

  • Delta Air Lines (DAL) 7:30 a.m., $0.24
  • TD Ameritrade Holding (AMTD) 7:30 a.m., $0.25
  • Fastenal (FAST) 7:50 a.m., $0.45
  • Citigroup (C) 8 a.m., $0.08
  • Forest Laboratories (FRX) 8 a.m., $0.98
  • McMoRan Exploration Co (MMR) 8 a.m., $(0.28)
  • Charles Schwab (SCHW) 8:45 a.m., $0.11 (tentative)
  • Cree (CREE) 4 p.m., $0.58
  • International Business Machines (IBM) 4:08 p.m., $4.08
  • Western Digital (WDC) 4:15 p.m., $0.58
  • Apple (AAPL) 4:30 p.m., $5.39
  • Fulton Financial (FULT) 4:30 a.m., $0.16
  • Linear Technology (LLTC) 5 p.m., $0.58

PERFORMANCE:

  • One day: Dow +0.47%, S&P +0.74%, Nasdaq +0.73%, Russell +0.86%
  • Last Week: Dow +0.96%, S&P +1.71%, Nasdaq 1.93%, Russell +2.51%
  • Year-to-date: Dow +1.81%, S&P +2.83%, Nasdaq +3.86%, Russell +3.05%
  • Sector Performance - (8 sectors positive and 1 flat) - Financials +1.61%, Energy +1.08%, Tech +0.89%, Consumer Discretionary +0.61%, Industrials +0.47%, Utilities +0.41%, Materials +0.23%, Healthcare +0.12% and Consumer Staples (0.00%).

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 461 (+732)  
  • VOLUME: NYSE 1059.74 (14.61%)
  • VIX:  15.46 +5.67% YTD PERFORMANCE: -12.90%
  • SPX PUT/CALL RATIO: 1.46 from 1.39 (+4.97%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were little changed, but tempered slightly weaker as equities rose

  • TED SPREAD: 15.81
  • 3-MONTH T-BILL YIELD: 0.15%     
  • YIELD CURVE: 2.76 from 2.75

COMMODITY/GROWTH EXPECTATION:

  • CRB: 333.06 +0.02% (last week: +2.82%)  
  • Oil: 91.02 -0.57% - trading +0.56% in the AM (last week: +3.99)
  • Crude Oil Trades Near a 27-Month High After IEA Increases Demand Forecast
  • COPPER: 438.45 -0.62% - trading +1.20% in the AM (last week: +3.02%)
  • Copper rally on supply shortfall
  • GOLD: 1,360.97 +0.14% - trading +0.55% in the AM (last week: -0.65%)
  • Gold Advances as Europe Debt Concern, Price Decline Spur Investor Demand

OTHER COMMODITY NEWS:

  • Food Prices Causing Riots in Africa Stoke Record U.S. Farm Economy Growth
  • Wheat Advances, Corn Reaches 18-Month High on Rising Demand, Lower Stocks
  • Nickel Rises to Eight-Month High on Stronger Chinese Usage; Copper Gains
  • Cocoa Rises After EU Imposes Ivory Coast Sanctions; Sugar, Coffee Advance
  • Hedge-Fund Bets on Costlier Feeder Cattle Increase to Highest Since 2006
  • Soybeans, Palm Oil to Extend Rally on Tight Supply, India's Top Buyer Says
  • Coal Prices Reach Two-Year High as Flooding in Australia Curbs Production
  • Rubber Futures Decline From Record as China May Raise Rates to Cool Prices
  • Mitsui Mining to Cut Zinc Output on Maintenance Shutdown at Top Smelter
  • Coal's China-Australia Discount at 8-Month High on Floods: Energy Markets
  • Gold Sold in Tokyo Vending Machines Competes with Drinks, Sweets, Lingerie
  • Europe Commodity Day Ahead: First Gold Vending Machines Installed in Tokyo

CURRENCIES:

  • EURO: 1.3295 -0.69% - trading +0.90% in the AM
  • DOLLAR: 79.337 +0.22% - trading -0.61% in the AM

EUROPEAN MARKETS:

  • European Markets: FTSE 100: +1.08%; DAX: +0.95%; CAC 40: +0.81% (as of 07:30 ET)
  • European markets opened higher as positive corporate earnings helped sentiment.
  • The periphery remained in focus as European Finance Minister meet today with uncertainty remaining as to whether there will be any agreement to increase the EuroZone rescue fund.
  • Reports Russia may resume buying Spanish debt and a constructive Spanish bill auction lead to indices extending gains, though the UK lagged after disappointing UK inflation data pared gains.
  • All sectors other than healthcare (0.3%) trade higher led by banks +2.6%, media +2.0% and autos +1.6%.

ECONOMICS:

  • UK Dec CPI +3.7% y/y vs consensus +3.3% and prior +3.3%
  • UK Dec RPI +4.8% y/y vs consensus +4.8% and prior 4.7%
  • Germany Jan ZEW Index +15.4 vs consensus +6.8 and prior +4.3 - German Jan ZEW current situation 82.8 vs consensus 83.8 and prior 82.6

ASIAN MARKTES:

  • Asian Markets: Nikkei +0.15%; Hang Seng (0.01%); Shanghai Composite +0.09%
  • Asian stocks were mixed today, as investors waited to see Wall Street’s reaction to Apple (AAPL) CEO Steve Jobs’s taking a medical leave of absence.
  • Australia rose +0.81, with banks and retail stocks finding favor.
  • Japan erased early losses to close slightly higher.
  • China finished flat, with strong earnings from Industrial Bank and China Everbright Bank despite downward pressure resulting from a report that the country has cut banks’ lending targets 10% for the year.
  • Chalco jumped 5% in active trading on forecasting a return to profit for last year, but Hong Kong finished flat. Local property developers extended yesterday’s gains. Hutchison Whampoa fell 2% on announcing a plan to spin off its ports business.
  • Tech stocks advanced, but could not bring South Korea closed down 0.16%
  • Japan revised November industrial output +1.0% m/m, matching preliminary figure. November capacity utilization index +1.6% m/m to 86.7. December department-store sales (1.5%) y/y. Tokyo December department-store sales (0.3%) y/y..

THE HEDGEYE DAILY OUTLOOK - 1 18 2011 8 25 29 AM


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MACRO ICEBERGS

This note was originally published at 8am on January 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It's been 84 years, and I can still smell the fresh paint. The china had never been used. The sheets had never been slept in. Titanic was called the Ship of Dreams, and it was. It really was.”
-Old Rose

 

In the quote above from the blockbuster film “Titanic”, an elderly Rose DeWitt Bukater reminisces on the grandeur and splendor of a vessel once described as “unsinkable” – even by God. More deeply, her allusion to the Titanic’s former nickname triggers feelings of grief as she turns to the memories of a lost life that could’ve been so many years ago.

 

Unfortunately global risk managers don’t have the luxury of dwelling on the past like Old Rose here. We must constantly be playing the game in front of us; this week global markets are tuned squarely to Europe’s bond auctions and statement’s from the region’s leaders on its sovereign debt issues as a proxy for market performance.

 

Over the short term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.

 

With this kind of support, it’s no surprise that investors cheered, markets boomed, and the European auctions have found plenty of demand. Yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; Italy’s FTSE +3.8%, as credit markets have improved over the last 3 days.

 

As we head in to earnings season, MACRO seemed to return to the forefront as the high-profile upside driver to global equity prices as concerns over sovereign debt auctions diminish.  The dampened European sovereign contagion concerns fueled a pickup in risk appetite on the back of a better-than-expected Portuguese bond auction yesterday and Spain’s auction today.  This is leading to outsized gains in the financials around the world.

 

Yesterday in the US, financials extended their 2011 outperformance with the leadership coming from the banking sector, with the BKX +1.5% and the broader XLF up 1.7%.  Despite disappointing Machinery orders out of the Japan, the Japanese megabanks followed their American peers higher, leading Japan to +0.73%.  Like in the US, the potential for increased dividends is driving equity prices higher as both Sumitomo Trust & Banking and Chuo Mitsui Trust Holdings rose 5% overnight on the potential of higher dividends. 

 

Macro Icebergs

 

As we’ve seen throughout market history, it’s typically when everyone is expecting smooth sailing ahead that certain “icebergs” tend to derail things. If we’ve learned anything from the movie “Titanic”, it’s that hubris about our top ideas (the ship) and a disregard for risk (not having enough lifeboats on board) can get us into trouble.

 

Certainly a few Macro Icebergs are scattered across our domestic waters. How we navigate them individually will be the key to getting paid in 2011; currently, the collective is “full speed ahead”.

 

Below we’ll highlight one of the largest Macro Icebergs that a) has the potential to capsize our ship; and b) is out of consensus – at least for now:

 

Municipal Debt Dichotomy

 

Yesterday we published an intraday report titled: “The Municipal Bond Market: Silent But Deadly” (email sales@hedgeye.com if you want to see our work on muni bonds). In it, we took a deep dive at the headwinds affecting this sector of our financial markets and the systemic risk therein. The key takeaways from the article were:

  • Fiscal austerity at the State and Federal Government level and a strong political will in D.C. to avoid bailing out States and municipalities will perpetuate budget woes at the municipal level (together, State and Federal support account for ~34% of municipal budgets);
  • Local governments are running out of room with their accounting “tricks” and are staring at potentially 2-5 years of declining property tax receipts, which are ~26% of their budget;
  • Calls for State defaults are overblown; the real issues lie within the municipalities and municipal authorities across the nation; the States that have the most severe fiscal issues will see a disproportionate number of their municipalities go bust (though bankruptcy is not permitted in 23 States, defaulting on payments to vendors and creditors will be the more likely outcome in many cases); and
  • The equity markets are misinterpreting the recent back up in yields as “growth” and not “risk” and this risk isn’t going away any time soon.

While still largely ignored by consensus, it was certainly interesting to see some big names in our industry come out on both sides of this debate yesterday:

 

PIMCO’s Bill Gross: “Ultimately, municipal bankruptcies will be at a lower level. I don’t subscribe to the theory that there will be lots of them.” 

 

JPMorgan’s Jamie Diamond: “There have been six or seven municipal bankruptcies already. I think unfortunately you will see more… If you are an investor in municipals you should be very, very careful.”

 

“Smooth Sailing Ahead” vs. “Icebergs A’Cometh”.

 

We certainly aren’t crying wolf for the sake of attention like some analysts with ulterior motives. We don’t do ratings, banking, trading or manage assets; we only get paid for being right. Considering that we’re still in business after three of the most volatile years in the history of financial markets, we’ve been blessed to be more right than wrong over this duration.

 

For the sake of our economy (yes we are patriots), we hope we are not right on this one. The last thing America needs right now is another financial crisis on its hands perpetuated by blow-ups in the $2.9 trillion dollar muni bond market and Housing Headwinds Part II (not mentioned here; email us for more details). Unfortunately, hope is not an investment process. That’s why we’ll continue to help you navigate these murky waters as Global risk managers.

 

We’ll discuss these risks and how to play them on the long and short side on our Q1 Quarterly Themes Conference Call tomorrow at 1:00pm. Qualified prospective institutional subscribers please email sales@hedgeye.com for more details.

 

Keep your head on a swivel.

 

Howard Penney

Managing Director

 

Matthew Hedrick

Analyst

 

Darius Dale

Analyst

 

MACRO ICEBERGS - MUNI



STRONG START TO YEAR IN MACAU

Expectations for a HK$20 BN+ month as some analysts are suggesting may be high but January should still be a record month.

 

 

Gross table gaming revenues were HK$10.08 billion in the first half of January.  Based on this data we are projecting full month gaming revenues (including slots) will come in at HK$18.5-19.0 billion.  Activity should slow in the last week given the proximity to the February 3rd start of the Chinese New Year celebration.  Still, anywhere in this range would represent a monthly record and generate YoY growth of 36-40%.

 

Market shares shifted significantly in the last month, at least between the two big US operators.  Wynn gave up 300bps compared to its share last week, mostly to LVS which gained 250bps.  Our intelligence in Macau tells us the shift was entirely hold related.  We will note that Wynn’s share remains above its 12 month average although below its recent elevated levels.  LVS is now right in-line with its depressed 3 month average.  We continue to be impressed with MGM and we believe they have been successful in driving bottom line results at the property as well.  Here are the shares:

 

STRONG START TO YEAR IN MACAU - macau


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