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THE M3: MACAU VIPs; HO FAMILY DISPUTE

The Macau Metro Monitor, January 25, 2011

 

DOWNSIZING FOR SOME MACAU 'VIPs' DURING 2011 Asian Gaming Intelligence

An industry insider suggested that if the Macau market continues its high-growth trajectory without a significant new supply of live VIP tables, then some of the lower high rollers could effectively be bumped into the mass market.  In this scenario, AGI believes a new segment would be formed, along the lines of the junkets found on mass floors in some properties and some jurisdictions in Asia.  This bump down might result in those players losing some of their existing privileges with retail banks.

 

A full utilization of the VIP tables is unlikely as operators have pointed out that giving their VIP customers the flexibility to move from table to table within the same room is very important.  In addition, given that many junket operators run rooms in several properties, they want to be able to offer players different venue options.

 

FAMILY SEIZED STANLEY HO'S STDM SHARES WITHOUT HIS CONSENT, SAYS LAWYER: REPORT macaubusiness.com

Gordon Oldham, Stanley Ho's lawyer, said Dr. Ho might take legal action against his family for seizing his stake in STDM, without his consent.  Brunswick Group, representing some of the family members, said that Mr Ho provided written authorization of the share transfer.  SJM Holdings suspended trading pending the release of an announcement.



The Last Entitlement

“When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind.”

-Pat Riley

 

It’s Game Time. And tonight, America’s currency needs a big win. So, as a little pre-game prep for President Barack Obama’s State of the Union speech, I thought I’d toss him a little love from 5-time NBA Championship Coach, Pat Riley.

 

On the pre-game wire (US Dollar Index trading $78.16 as of 7AM EST), across durations, world currency markets are betting against America’s credibility and fiscal resolve:

  1. US Dollar Index immediate-term TRADE line resistance remains overhead at $80.05
  2. US Dollar Index intermediate-term TREND line of support ($78.66) is broken
  3. US Dollar Index long-term TAIL line of resistance remains firmly entrenched up at $81.62

Sure, some privileged Americans are willing to turn a blind eye to their sovereign currency, employment, and inflation levels. Some, like The Ber-nank, still fundamentally believe that America’s stock market is the barometer of her long-term health. All the while some “Wall Street Bankers”, according to the #1 headline on Bloomberg this morning, are “partying in Davos.” Ah, the storytelling about the depression and the deflation – nice.

 

The only problem with all of this is the other HALF of Americans who have $2,000 or less in some form of a stock and bond market account. For them, America’s leadership needs to stand ready to sacrifice tonight or else their team, to borrow another thought from Pat Riley, will continue to regard their “former greatness as a trait and a right.” Then, “half hearted effort becomes habit” … and “the champion is sapped.”

 

The world’s history of great Empires sides with me on this. From the Roman and British Empires of political entitlements past, I can only hope we’ve learned something. We’ve already crossed the proverbial Rubicon of senatorial deficit and debt spending. Time is no longer on this entitled state’s side.

 

The Last Entitlement in this country isn’t Social Security or Medicare – it’s cheap capital. And if the US Dollar is abused any further, “subtle erosion” of America’s global economic power will continue its “consuming grind.”

 

If there’s one picture that shows this most obviously (see the chart below), it’s the series of lower-highs and lower-lows that Presidents Bush and Obama have chosen to oversee with their Big Government Intervention, Spending, and Dollar Devaluation policies.

 

Yes, inflation is a policy. And no, it doesn’t have to be this way. It wasn’t this way under Reagan; it wasn’t this way under Clinton either. Both of these Presidents had an explicit strong US Dollar policy that led to two of the most productive decades of job growth in US history. Whereas, under Presidents Bush and Obama, America witnessed a decade (2000-2010) of net ZERO American jobs created and now we’re staring down the pike of American style Jobless Stagflation that we haven’t seen since Jimmy Carter blessed the Fed’s Arthur Burns “monetization” of US debt.

 

The Last Entitlement is perpetuated by a completely politicized US Federal Reserve. It prints the moneys. It prints the asset inflation. It justifies its actions with politicized fear mongering that permeates the American psyche.

 

It also shortens economic cycles. It amplifies asset price volatility. And, if you haven’t noticed, it doesn’t work.

 

All of this can be conquered if America holding the world’s reserve currency in the palm of her hand is respected again. We also need to respect the cost of capital or continue to run the risk of handing it out to these Bankers of America who continue to hoard it and destroy it via the Piggy Banker Spread.

 

Respect, unlike entitlements, is earned. And God help us all if we don’t have it within us to recognize this after the last 3 years.

 

In case you didn’t get the message from China’s President last week, the rest of the world is starting to bet against America’s currency too:

  1.  President Hu called the US Dollar reserve system “a product of the past”
  2.  President Hu warned that Americans need to keep the USD at “stable levels given implications to global liquidity and capital flows”

What he meant by that, Mr. Ber-nank, is global inflation being priced in US Dollars.

 

This morning you are seeing Global Inflation Accelerating continue to have its impact on major Emerging Markets:

  1. China was down another -0.68% overnight, taking it to -4.7% already for the YTD
  2. India was down another -0.95% overnight, taking it to -7.5% already for the YTD
  3. Brazil remains flat for the YTD and broken from an intermediate term TREND perspective.

Meanwhile, it’s not just emerging stock and bond markets telling you that US government sponsored Dollar Debauchery perpetuates inflation. India’s central bank Governor Subbarao just said at a ceremony in Mumbai that he is quote-un-quote “desperate” to cool inflation.

 

All the while, just to highlight the divide between our myopic Keynesian Consensus (that’s somehow patting itself on the back in Washington for “saving” us again) and Free Market Libertarians who are getting ready to move to Canada, consider these 2 American quotes from the last few days:

 

1.  “A more active government also attracts opportunists, who perceive that a national emergency can serve as a useful pretext for achieving their own objective.” –Steve Hanke (“On Democracy versus Liberty, GlobeAsia, February 2011)

 

2.  “Oh, and what evidence is there that the economy’s capacity is damaged during booms?” –Paul Krugman

 

Sadly, the unaccountable Big Government Intervention Bubble Making Machine of the Krugman camp dominates both the President and the Chairman of the US Federal Reserve’s craws. Before you know it, they’ll be asking to regulate food inflation in commodity markets. At least that’s what France’s Nicolas Sarkozy said he wants to do this morning. C’est la regulated socialist market vie!

 

Dear Mr. President, it’s Game Time, and this Burning Buck stops with you.

 

My immediate term support and resistance lines for the SP500 are now 1285 and 1295, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Last Entitlement - respect


Tales from Tunisia

This note was originally published at 8am on January 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The darkest thing about Africa has been our ignorance of it.”

-George Kimble

 

Tunisia is the northernmost nation in Africa.  This African outpost of some 64,000 square miles and 10.3 million people is bordered by Algeria to the west, Libya to the southeast, and the Mediterranean Sea to the north and east.  While religious freedom is widely practiced in Algeria, the Tunisian Constitution declares Islam as the official state religion.

 

By global economic standards, Tunisia’s economy is not meaningful.  The nation’s GDP is ~$43.8BN (official exchange rate), which is about 1/8th of the market cap of Apple (currently there are no Apple stores in Tunisia).   The Tunisian labor force is split by occupation as follows: 18% agriculture, 32% industry, 50% services.  Currently that labor force is unemployed to a tune of 14%.  Coincident with this unemployment is rising inflation (CPI from 2009 to 2010 accelerated from 3.5% to 4.5%) and slowing growth (GDP from 2008 to 2010 slowed from 4.6% to 3.4%).  At Hedgeye, we call this Jobless Stagflation.

 

In the West, endemic Jobless Stagflation is fought by the populous at the polls, as we saw in our most recent midterms in the United States.  In nations like Tunisia, the populous often uses other methods:    most recently it was massive rioting and protests, which began on December 17th with the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand) and ended on January 14th with current President Ben Ali fleeing the country for Saudi Arabia.

 

It seems that the people have spoken in Tunisia.  Now this could just be a Tale from Tunisia, or it could be an emerging Tail Risk from TunisiaOnly time will tell whether the so-called Jasmine Revolution becomes a key export of Tunisia, but there are many nations in the Middle East and Africa with similar characteristics - primarily Muslim, governed by a dictatorial family, slowing growth, rising inflation, high unemployment, and a young population. 

 

The last point on age is likely a key one.  In Tunisia, over half of the population is younger than 25 years of age.  Across the Middle East and North Africa, we see similar demographic patterns.  In demographic circles, this is called the “youth bulge”.  As healthcare broadly improved in these regions in the late 1960s, birth rates went up dramatically.  Currently, it is estimated that around 65% of the regional population is under the age of 30.  This is not a cohort that likes to be unemployed, appreciates costs of living rising exponentially, and, as evidenced by The Jasmine Revolution, is willing to stand idle while their leaders do them harm.

 

Ultimately, this revolution could start and end in Tunisia, and be of no greater impact, but there is certainly potential for much more, and as risk managers “the darkest” thing we could do is show “ignorance” of these facts. 

 

In the United States last night, we saw evidence of our most recent Democratic revolution.   In winning more than 60 seats in the recent midterms, the Republicans have certainly been acting like they have a mandate (even though we view that election as a repudiation of incumbency as much as anything).  Last night, as Keith noted in an email, “it began” with a vote on healthcare.  The House voted 245 – 189 to pass a bill to repeal President Obama’s health care plan.  Not surprisingly, the vote was unanimously supported by Republicans and the backlash from Democratic lawmakers was instant and aggressive.  The most noteworthy comment was from Representative Steve Cohen (D-Tenn), who said:

 

“They say it’s a government takeover of health care, a big lie just like Goebbels.”

 

It is likely no surprise that the US dollar is trading down on this news, with comments like Cohen’s, but also more broadly, as my colleague Tom Tobin noted this morning, “talking doesn’t get the job done.”  The new Republican majority in the House has aggressively gone after the Obama agenda, but in order for the dollar to respond favorably our elected representatives will have to do more than talk on the key economic issues facing the nation (namely the debt and deficit). 

 

On a more positive note, today at 1pm EST our Energy Sector Head Lou Gagliardi will be hosting a conference call on one of our most favorite long term investment regions, the Canadian Oil Sands.  His discussion is titled, “Digging Deep and Powering through the Canadian Oil Sands.”  Lou and his team have put together a 60+ page presentation that highlights the key attributes of the incredibly long term asset in Canada, with a focus on some of his best ideas in the region.  If you are looking for cheap ways to play energy and are a qualified institutional prospect, please email us at sales@hedgeye.com to join the call today.

 

Yours in risk management,

Daryl G. Jones

 

Tales from Tunisia - 3


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

TALES OF THE TAPE: KKD, BAGL, MCD, SBUX, RRGB, EAT, PNRA, YUM, DRI

Notable news items/price action moves over the past twenty-four hours.

  • KKD gained 6.5% on strong volume, outperforming the space on news that Robert Stiller, GMCR chairman and founder, was disclosing a 5% stake in the company.
  • BAGL gained 5.2% on accelerating volume yesterday.  News also hit the tape that CEO Jeffrey O’Neill filed to sell 8,200 shares on 1/18/2011.
  • MCD UK President and CEO, Jill McDonald, told the Daily Mail that the company is looking at expanding the range of hot drinks on offer at MCD stores.  She says that 90% of the firms increase in sales has been due to traffic rather than any increase in average check.   She stressed that there are savings MCD can make in their operational processes, but conceded that prices may have to be a “tiny little bit” more expensive due to higher food prices.
  • MCD estimates at Goldman Sachs cut today.
  • SBUX estimates cut at Janney Montgomery.
  • RRGB refuted Oak Street Capital Management’s demand for new board appointees and more shareholder-friendly management practices yesterday, stating, “We…have been working to incorporate the views of multiple key constituencies including our shareholders and franchisees”.
  • EAT reports today and investors will eager to hear how the company’s sales have performed during the most recent quarter and how its cost-cutting initiatives have been working.
  • PNRA underperformed on strong volume.
  • YUM stock performance has slowed slightly over the past month.   I was interested to observe the company’s 5 YR CDS blow out over the past couple of days (chart below).
  • DRI have opened a combination Red Lobster/Olive Garden in Flagler County, Florida (picture below).  The county has the highest unemployment rate in Florida, at 15.7%.

TALES OF THE TAPE: KKD, BAGL, MCD, SBUX, RRGB, EAT, PNRA, YUM, DRI - yum cds

 

TALES OF THE TAPE: KKD, BAGL, MCD, SBUX, RRGB, EAT, PNRA, YUM, DRI - RLOG

 

TALES OF THE TAPE: KKD, BAGL, MCD, SBUX, RRGB, EAT, PNRA, YUM, DRI - stocks 125

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 25, 2011


Equity futures are trading below fair value in reaction to an unexpected decline in UK Q4 GDP, which has knocked down some European markets. Today's calendar shows a marked pick up in data releases with S&P/Case-Shiller House price index, Consumer Confidence, Richmond Fed Manufacturing index due out ahead of President Obama's State of the Union address tonight. As we look at today’s set up for the S&P 500, the range is 10 points or -0.45% downside to 1285 and +0.32% upside to 1295.

 

 MACRO DATA POINTS:

  • ICSC-Goldman Chain Store
  • Redbook Chain Store
  • Nov Case-Shiller Home Price Index
  • Jan Consumer Confidence
  • Nov FHFA House Price Index
  • API Crude Inventories
  • US ABC Consumer Comfort
  • President Obama delivers State of the Union Address

EARNINGS:

  • Companies due to report before the open: AKS, BHI, BTU, COH, DD, DGX, EMC, GLW, GWW, HOG, JNJ, KEY, KMB, MDD, 3M, NEE, RE, SHW, TLAB, TRV, VZ, WAT, X
  • Companies due to report after the close: ALTR, BXP, CA, DV, GILD, JNPR, MOLX, NSC, SYK, TSS, YHOO

PERFORMANCE:


The XLB remains the only sector that is broken on the Hedgeye TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.92%, S&P +0.58%, Nasdaq +1.04%, Russell +0.79%
  • Last Week: Dow +0.72%, S&P -0.76%, Nasdaq -2.39%, Russell -4.26%
  • Year-to-date: Dow +3.48%, S&P +2.64%, Nasdaq +2.44%, Russell (0.56%)
  • Sector Performance - (7 sectors up and 2 down): - Tech +1.40%, Materials +1.07%, Industrials +0.95%, Consumer Discretionary +0.40%, Utilities +0.56%, Consumer Staples +0.17%, Energy +0.37%, Healthcare (0.11%), and Financials (0.12%)

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1220 (+1609)  
  • VOLUME: NYSE 961.93 (-24.01%)
  • VIX:  17.65 -4.44% YTD PERFORMANCE: -0.56%
  • SPX PUT/CALL RATIO: 2.06 from 1.57 (+31.50%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were little changed.

  • TED SPREAD: 16.11 +0.811 (5.303%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.78 from 2.81

COMMODITY/GROWTH EXPECTATION:

  • CRB: 332.70 -0.39%  
  • Oil: 87.87 -1.39% - trading -1.58% in the AM
  • COPPER: 434.85 +0.92% - trading -2.50% in the AM  
  • GOLD: 1,343.68 +0.02% - trading -1.41% in the AM  

COMMODITY HEADLINES:

  • Gold falls to a 2 month low
  • Coca tests the 1979 peak on Ivory Coast political unrest
  • Oil fell to the lowest level in five weeks as Saudi Arabian Oil Minister Ali al-Naimi signaled OPEC may bolster production to meet increasing fuel demand. 
  • French President Nicolas Sarkozy said regulation of commodity markets will be a priority as he leads the Group of 20 nations this year, and inaction may cause food rioting in the world’s poorest countries.
  • Natural gas producers increased bearish bets to the highest in almost three years, joining hedge funds amid forecasts that near-record output will swell a fuel surplus.
  • Hedge funds are unloading bullish bets on gold as a slide in prices sends the metal to its worst start to a year since 1997.
  • Copper output in Zambia, Africa’s biggest producer of the metal, jumped 17 percent in 2010, beating government forecasts, said Kanguya Mayondi, head of public relations at the Lusaka-based central bank.  The preliminary estimate showed production climbed to 819,159 metric tons compared with 697,700 tons in 2009, Mayondi said in an e-mailed response to questions on Jan. 21.
  • CORN - This past Friday the legacy (three-line) report showed commercials net-short 396,212 corn contracts, a 52-week low. 
  • Cotton prices have risen to a record as mills face extremely low supplies.  ICE March cotton, the US benchmark, rose by the 5 cent daily allowable limit to $1.6194 per pound on Monday, the highest in the 141-year history of the New York exchange and its predecessors. 

CURRENCIES:

  • EURO: 1.3642 +0.15% - trading -0.18% in the AM
  • DOLLAR: 78.050 -0.21% - trading +0.16% in the AM 

EUROPEAN MARKETS:

  • FTSE 100: -0.62%; DAX: +0.29%; CAC 40: +0.05% (AS OF 6:30 AM EST)
  • European markets are mixed and in the case of the FTSE100 reversing gains after an unexpected contraction in UK economic growth in Q4.
  • The regions corporate results were broadly well received led by Siemens and Ericsson.
  • Declining sectors lead advances 10-8. Banks (2.3%) and insurers (1.0%) led fallers, with autos +1.2% and industrials +1.1% leading gainers.
  • UK Q4 preliminary GDP +1.7% y/y vs con +2.6% and prior +2.7%, (0.5%) q/q vs consensus +0.5% and prior +0.7%
  • Germany Feb GfK 5.7 vs con 5.4
  • France Dec consumer spending +0.6% vs con +0.4%

ASIAN MARKTES:

  • Nikkei +1.2%; Hang Seng (0.1%); Shanghai Composite (0.68%)
  • Asian markets are mixed after India raised interest rates, although the move had been expected.
  • Exporters, consumers rally on overseas demand outlook.
  • Techs climb after Texas Instruments earnings beat estimates.
  • Materials gained as metal prices rose earlier.
  • All 33 sectors went up in Japan +1.15%, with the mining sector performing best. Japan leaves overnight call rate at 0.0-0.1%.
  • Australia rose +0.46% when inflation came in below expectations, reducing the chance for a rate hike. Australia Q4 CPI +0.4% seq vs 0.7% consensus, +2.7% y/y vs 3.0% consensus.
  • South Korea rose +0.22%, with financial firms higher on bargain-hunting.
  • Hong Kong ended flat despite the fact that Tencent Holdings rose 5% on reports it will launch a CNY5B fund to invest in games.
  • China fell (0.68%) again on worries about a rate hike. Sinopec lost 1% and was the biggest drag on the market. Most banks rose in reaction to the central bank’s trying to put some liquidity into the system.

THE HEDGEYE DAILY OUTLOOK - setup


MCD: A CULTURE OF NO BAD NEWS?

McDonald’s is a great company but, alas, it is still a company – subject to the same factors as other restaurant companies.


I did not learn anything on the earnings call that alters my bearish thesis on MCD.  There was some noise in the quarter, but EPS was reported at $1.16 versus consensus of $1.16.  Global comparable restaurant sales came in at +5.0% versus consensus +5.1%.


MCD reported global comparable restaurant sales growth of 5% for the fourth quarter.  A more detailed breakout of the comparable restaurant sales results is shown in the table below.  The December numbers posed some as Global +3.7% vs. consensus of +3.9%.  US +2.6% vs. consensus of +3.8%, Europe (0.5%) vs. consensus of +3.0% and APMEA +8.9% vs. consensus of 5.6%.

 

MCD: A CULTURE OF NO BAD NEWS? - mcd comps

 

Europe trends were adversely affected by weather in the month of December, as were trends in the U.S.  Management estimates that the impact of weather was 5% and 2% on the Europe and U.S. markets, respectively.  While restaurant level margins increased year-over-year, the trend is certainly not favorable heading into 2011 and what I believe will be a difficult inflationary environment for MCD.  From a sales perspective, comp compares will become progressively more difficult in 1Q, 2Q, and 3Q10.  Margin comparisons also step up next quarter, and remain difficult for the first three quarters of the year.  The quadrant chart below shows where we expect the company to trend operationally over the next four quarters. 

 

MCD: A CULTURE OF NO BAD NEWS? - mcd quadrant

 

Management is acutely aware of the current trend in input costs that several Hedgeye teams have been highlighting for months.  As such, they have raised their commodity inflation outlook.   For the full year 2011, the total basket of goods cost is expected to increase 2-2.5% in the U.S. and to increase 3.5-4.5% in Europe.  Prior guidance was for inflation of 2% in the U.S. and 3% in Europe.   On the earnings call, management expressed their capacity to raise prices as commodity and other cost pressures become more pronounced throughout the year.   Given how important value has been for MCD traffic growth, raising prices enough to significantly offset increases in input costs may be detrimental to comps.  MCD has obsessed over driving guest counts and maintaining 2010’s momentum while passing on inflation may be difficult.

 

Another measure that management presented to help buttress margins was 24 hour openings.  While the rolling out of 24 hour operations in some markets may have coincided with increase in margin previously, I am unconvinced that this initiative is fail-safe given the disparate results quick service restaurant operators have experienced through 24/7 opening hours. 

 

The beverage business can be a high margin business and much of MCD’s margin success in 2010 was due to the sales of frappes and smoothies in 2Q and 3Q along with commodity cost favorability.   Lapping these benefits in 2011 will prove difficult, in my view.  While management underlined the growth in coffee sales as a percentage of total sales, from 2% “a few years ago” to 6% today, it is important to remember, as I illustrated in the Hedgeye MCD Black Book earlier this month, that beverage marketing as a percentage of total marketing spend has increased to 43% in 2010 from 3% in 2008.   That is an unsustainable trend.

 

Variable labor costs increased in the fourth quarter and I believe that the company’s ever-expanding menu and focus on beverages and other small check items (dollar menu) are significant parts of the problem. 

 

Much of the sentiment around this stock continues to purport that MCD can defy gravity.  I would argue that the year-over-year margin compares, compounded by last year’s leverage to beverage sales and parabolic commodity price increases, together with slowing sales in the U.S. will eventually convince the investment community that a culture of “no bad news” is generally misleading!

 

MCD: A CULTURE OF NO BAD NEWS? - MCD ratings chart

 

Howard Penney

Managing Director


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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