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THE M3: MORE ON SANDS INVESTIGATION; S' PORE GAMBLING CURB; BARRA TRAFFIC NEXUS; CHINA CPI & MORE

The Macau Metro Monitor, March 14, 2011

 

 

SPECIAL REPORT - THE MACAU CONNECTION www.sify.com

There was yet another article out this weekend that had more details about the current LVS investigation aparked by Steve Jacobs' allegations.  Some interesting tidbits from the latest article include:

  • Apparently, not only is the SEC and and Justice Department looking at Sands' actions, but the FBI has joined the party as well. 
  • According to a Reuter's Investigative Reporting Program  (IRP),  U.S casino executives have discussed with U.S. diplomats the pervasive influence of the triads in the junkets for years - yet nothing has changed.  Some of these allegations included:
    • Provincial officials were providing "sweetheart" land sales, business licenses, and government contracts to junket operators, in exchange for bank deposits or cash sums paid to the officials upon arrival in Macau.
    • DICJ does not enforce its own reporting requirements
    • "All of the junket operators are directly or indirectly involved with the triads"
  • Manuel Joaquim das Neves, the long-standing head of DICJ, was quoted saying that,  "I cannot say that in Macau we don't have triads, but things are under control."

MORE SAFEGUARDS TO BE INTRODUCED TO CURB GAMBLING ADDITION IF NEEDED: DR. BALAKRISHNAN www.channelnewsasia.com

 

Community Development, Youth and Sports Minister Vivian Balakrishnan has assured Singaporeans that if the need arises, that more safeguards will be introduced to identify and protect those who are most vulnerable to problem gambling, at a forum for contributors to the government feedback portal, REACH.  He added that the casino novelty amongst locals is wearing off and the number of residents at the casinos is gradually declining.

 

PLANS ON BARRA TRAFFIC NEXUS DISCLOSED Macau Daily Times

The Government will launch the open tender of the Barra Traffic Nexus project in the first half of next year.  According to the Planning Coordination Taskforce, "the Barra traffic nexus will be an important hub for arrival and departure, transfer and articulation of the traffic between Macau and Zhuhai, the Macau Peninsula and the Islands, the old neighbourhoods and the new land reclamation areas.” The project is estimated to cost MOP 1.3BN and consists of a 3 floor building which includes pedestrian and shopping facilities, bike parking, and features 9,000 SQ meters of green areas and an outdoor bus depot which will be connected to the LightRail Train System (LRT).  Construction of the Barra Traffic Nexus is expected to be concurrent with the first phase of the LRT.

 

CHINA COMPLETES CONSTRUCTION OF WORLD'S FASTEST UNDERWATER RAILWAY TUNNEL People's Daily

The construction of the Shiziqang tunnel, which commenced in Nov 2007, crossed the Pearl River in South China’s Guangdong Province with a length of 10.8 kilometers that allows trains traveling at a speed of 350 kilometers per hour, making it the fastest underwater tunnel ever built.  The Guangzhou‐Shenzhen‐Hong Kong express rail link is scheduled to be put into operation in 2012 which would slash travel time between Guangzhou and Hong Kong to 40 minutes from the current two hours and join with the country's express railway network.  This would shorten the trip between Hong Kong to Beijing to only 8 hours.

 

CHINA CPI RISES 4.9% IN FEBRUARY Xinhua News

China’s CPI rose 4.9% YoY in February, same as January’s record and above the government's 4% target.  PPI rose 7.2% YoY in February.

 

CHINA TRADE DEFICIT HIKE IN 7 YEARS Xinhua News

China's trade deficit in February was recorded at US$7.3BN, the highest in 7 years due to the CNY holidays in the month. Exports grew 2.4% YoY in February while imports grew 19.4% YoY.


Under Attack

This note was originally published at 8am on March 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Nobody ever defended anything successfully.  There is only attack and attack and attack some more.”

-General George S. Patton

 

The rose-tinted view that has driven the S&P to current levels, up 5.1% year-to-date, is becoming more and more difficult to justify.  As uncertainty around the Middle East mounts, highly significant factors behind the global economy, such as oil, are becoming more and more of a concern for investors.  The revolution sweeping through the Middle East is driving oil prices higher as the timeline, geography, and repercussions of the political turmoil remain uncertain.

 

Moody’s reminded us on Monday of the significant uncertainty surrounding the Eurozone’s sovereign debt issues.  In early trading today, Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997) and the equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.

 

With members of Ireland’s new government striking a fairly combative tone with respect to a prospective renegotiation of that country’s bailout, and other countries rolling over significant levels of debt in 2011, the media’s glare will shortly become more focused on Europe and her myriad issues.  Yesterday, the Euro fell the most in two weeks on all the uncertainty.

 

Here in the U.S., inflation is a tax on the consumer and, as such, the broader economy.  In fact, I would posit that inflation (inclusive of things people actually buy, like gasoline, food and clothes), is a more devastating drag on the consumer than allowing the Bush tax cuts to expire.  Inflation is taxation without the consent of the vast majority of those affected. 

 

With the past two years having seen the second largest upward two-year move in equities after the period from 1953 to 1955, inflation is derailing the markets to a greater or lesser extent depending on the market in question.  In the end, as in 2008, risk is always on and it is always interconnected.  As oil climbs higher, threatening growth at a time the U.S. economy can ill-afford it, the recovery scenario that has been priced into the markets starts to look less impenetrable, less defensible. 

 

Currently, my attention is firmly focused on the consumer.  The spread between consumer expectations and present situation sentiment or, as we like to call it, the Hedgeye Optimism Spread, is at peak levels.  Employment has been improving on the margin but, as I see it, two factors along the risk spectrum could spoil the U.S. equity market party that has been raging since 2010.  First, gasoline prices can keep doing what they’re doing.  Second, interest rates can go up.  The magnitude of a possibly interest rate increase is unknown but (think Volcker) there is precedent for sharp, short, expedient increases in interest rates when inflationary pressures merit it. 

 

The pressure for the USA to raise interest rates is growing by the day.  Jean-Claude Trichet is telling the world that Europe is ready to raise rates and Timothy Geithner (who met with Germany’s Finance Minister in Frankfurt yesterday), no doubt is begging them not to.  One small reason Europe needs to raise interest rates is the fact that European gasoline prices are at an all time record of $8.632 per gallon.  European Central Bank Governing Council member Axel Weber has stated that, “Inflation may be more sustained and more fundamental than the ECB’s latest projections suggest” and that he sees “considerable future price pressures.”

 

This divergence in rhetoric between the USA and EU poses an interesting dilemma for investors.  We know from experience that any faith in policymakers in Brussels or Washington being able to manage through this situation seamlessly is gravely misplaced.  We were reminded of this last week on CNBC when Alan Greenspan said, “The one thing we all pretend we can do but we can't, is forecast." 

 

Recently, a question we received from a discerning client prompted us to overlay the Hedgeye Optimism Spread against the Yield Curve in a chart.  The picture certainly tells a story; the escalation of easy money monetary policy in the United States heralded a period of high correlation between the Optimism Spread and the Yield Curve.  Apparently, rendering the country “awash with liquidity” instills a belief among consumers that economic circumstances are set to improve.  As Keith referenced in the Early Look from Monday morning, according to Jim Rohn, “For every promise there is a price to pay”.  Ultimately, a consumer facing mounting costs at the grocery store and at the pump is going to recalibrate expectations.   The U.S. consumer is now under attack as inflation squeezes like it’s 2008.

 

After losing some momentum in recent months, the recovery of new vehicle sales regained steam in February.  Having said that, GM and F stock can’t get out of their own way; GM is down 11.2% YTD and is trading below the $33 IPO price.  Is consumer pent-up demand supporting the rise in vehicle sales?  The stocks of the automobile makers are telling you a different story. 

 

Yes the labor market momentum is building, as expected payroll gains strengthened measurably in February, following the weather-induced weakness in January. The unemployment rate was a surprise at 8.9%, but it is likely an aberration as more discouraged workers than previous months did not enter the labor force.  We see an Intermediate term bottom in the unemployment rate.

 

The gradual improvement in the labor market is benefiting consumer income trends. Real disposable income growth late last year was the fastest since the fall of 2007. The rate of growth is still far from robust;  there are two factors that are limiting income: (1) the selective nature of the recovery, and (2) declining government support.

 

Despite a surge in personal income growth, real spending declined in January. Real personal consumption expenditures slipped by 0.1%, marking the first decline since April 2010. Nominal spending rose by 0.2%, which was about half of the average pace from the previous six months.

 

The inflation tax will likely erode the Hedgeye Optimism Spread as reality for the US consumer sets in.  According to the latest American Pulse™ Survey of 5,224 respondents, 80.3% of registered voters agree that the increase in gas prices is one of the worst problems affecting the United States.  The survey asked respondents to list the worst problems currently affecting the United States, and registered voters mentioned in order of frequency: unemployment (80.4%), rising gas prices (80.3%), weak economy (70.6%), national debt (69.4%) and rising food prices (61.9%).

 

The U.S. consumer is under attack and the bull case for equities to withstand escalating input costs is becoming less and less defensible.  We are expressing this view on US based consumption by being short MCD, WMT and TGT.

 

Function in disaster; finish in style

 

Howard Penney

Managing Director

 

Under Attack  - HP EL 3.9.11

 

Under Attack  - HP EL 2


WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT

This week's notable callouts include swaps widening across US and European financials and European sovereigns, while the TED spread widened to the highest level since August.  On the positive side, US Municipal swaps hit a new low.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 10 improved / 6 out of 10 worsened / 3 of 10 unchanged
  • Intermediate-term (MoM): Negative / 3 of 10 improved / 5 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Positive / 5 of 10 improved / 4 of 10 worsened / 2 of 10 unchanged

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - summary

 

1. US Financials CDS Monitor – Swaps were mostly wider across domestic financials, widening for 21 of the 28 reference entities and tightening for 7. 

Tightened the most vs last week: WFC, UNM, MMC

Widened the most vs last week: MET, XL, AIG

Tightened the most vs last month: COF, UNM, MMC

Widened the most vs last month: MET, XL, HIG

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider, widening for 32 of the 39 reference entities and tightening for 7.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - european CDS

 

3. Sovereign CDS – Sovereign CDS widened across Europe, rising 23 bps on average last week as Greece approached a new YTD high. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, ending at 7.79, 3 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell every day last week to end the week at 1605. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - lev loan

 

6. TED Spread Monitor – The TED spread hit the highest level since last August, ending the week at 23.2 versus 19.2 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index hit a high and then backed off sharply, falling 6.5 points to end the week at 28.6.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 56 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - 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, closing at 140 on Friday after hitting a new low intraweek.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - 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.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows and is now steadily climbing.  Last week it rose 216 points to 1346. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - Baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 276 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.3% upside to TRADE resistance, 1.6% downside to TRADE support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: TED SPREAD AND SWAPS WIDEN OUT - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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 80.64%
  • SHORT SIGNALS 78.57%

TALES OF THE TAPE: KNAPP, GMCR, CMG, MRT, CBRL, BJRI, BOBE, MCD

Notable recent news items and price action from Friday’s session.

  • Malcolm Knapp released preliminary same-store sales figures for casual dining in February.  Same-store sales in February gained 1.6% versus January revised -0.1%.  Guest counts in February came in at -0.4% versus a revised -2.2% in January.
  • GMCR stock declined 4.6% on accelerating volume after its massive move Thursday.  Starbucks also pared some of its Thursday gains, even following an increase in price target from $35 to $40 at R.W. Baird.
  • CMG has “lost” approximately 40 workers in two of its Washington, D.C., restaurants after an internal review showed that the former employees in question were not authorized to work in the United States.  A few months ago, it emerged that a federal immigration audit of 50 CMG restaurants in Minnesota resulted in the firing of 450 undocumented workers.
  • MRT declined on accelerating volume.  CBRL, BJRI and BOBE all gained on accelerating volume.
  • MCD Australia is looking to introduce a Big Mac Light, containing less beef and healthier ingredients, to address nutrition concerns over its menu. 

TALES OF THE TAPE: KNAPP, GMCR, CMG, MRT, CBRL, BJRI, BOBE, MCD - stocks 314

 

Howard Penney

Managing Director



Economic Fallacies

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt

 

This weekend I reviewed one of the classics in my library – Henry Hazlitt’s “Economics in One Lesson.” The aforementioned quote is the first sentence of the book. Hazlitt first wrote it in New York in 1946 then edited it 32 years later from his office in Wilton, Connecticut.

 

This is a very popular book (over 1 million copies sold) for very good reason. It’s grounded in common sense. And the lesson in 2011 (33 years after Hazlitt reiterated the lesson 32 years after 1946) is the same as it was when the Keynesian Kingdom was imploding in 1979:

 

“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.” (Hazlitt, “Economics in One Lesson”, pg 208).

 

Have no fear however, the European Financial Stability Facility is here. Or is that the 15 TRILLION in Yen being deployed by the Bank of Japan this morning? Or is that the 223 BILLION in deficit spending by the US government for the month of February? Who cares as long as it doesn’t affect me? Right? Nice moral compass.

 

Last week’s Global Macro news had plenty of international risks (Risk Management in One Lesson – risk is always on), but a lot of it is staring you right in the face here at home. This should remind you that the highest deficit spending month in the history of America isn’t working:

  1. US Deficit – despite the unanimous call of The People to govern US Government spending. Expenses ran up +5% year-over-year in February to their highest level ever (ever is a long time Mr. President)
  2. US Home Prices – despite the US Government daring Americans to take on more leverage, Corelogic’s reading on US Home Prices fell -5.7% for the month of January (y/y) and are now running at a -18% annualized pace (see our Macro Slide Presentation on Housing Headwinds)
  3. US Consumer Confidence – despite the US stock market rallying +98% in the last 2 years, the Michigan Consumer Confidence reading had its 8th largest drop since the data started getting tabulated in 1978 (falling -12% in March to 68.2 versus 77.5 in February)

“The policy of inflation, as I have said, is partly imposed for its own sake. More than forty years after the publication of John Maynard Keynes’ General Theory, and more than twenty years after that book has been thoroughly discredited by analysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce unemployment.” (Hazlitt, pg 204, 1978)

 

Last week, we learned that the tough short-term love associated with a strengthening US Dollar may not be what stock market inflation fans like The Bernank want, but it’s definitely what the other HALF of Americans who don’t own stocks need – a Deflation of The Inflation.

 

Here’s what happened to the price of things we actually need to buy (with the US Dollar Index trading up +0.5% week-over-week to $76.78):

  1. CRB Commodities Index = DOWN -3.0%
  2. Oil = DOWN -3.1%
  3. Copper = DOWN -6.3%

No, that probably didn’t make anyone who is long of The Stock Market Inflation happy, but it did give the rest of us lower prices at the pump this weekend. Contrary to manic media delusions of common sense, gas hitting $4/gallon is negative for consumer confidence (see the score).

 

The Deflation of The Inflation was also good for those of us who raised a high asset allocation to CASH when everything from US Equities to Commodities were locking in their intermediate-term cycle highs last month. In the last 3 weeks, with the SP500 deflating -2.9%, I’ve taken the CASH position in the Hedgeye Asset Allocation model down from 61% to 43% (Risk Management in Another Lesson – buy red, sell green).

 

On a week-over-week basis the Hedgeye Asset Allocation moved to the following position:

  1. Cash = 43%  (down from 49% last week)
  2. International Currencies = 27% (Chinese Yuan and Canadian Dollar  - CYB and FXC)
  3. Commodities = 15% (Gold, Oil, Corn, and Grains – GLD, OIL, CORN, and JJG)
  4. International Equities = 6% (Germany – EWG)
  5. US Equities = 6% (Energy and Healthcare – XLE and XLV)
  6. Fixed Income = 3% (US Treasury Flattener – FLAT)

I’m definitely not saying that this was the perfect setup. I am saying that managing risk proactively in a risk management environment of Heightening Price Volatility preserves capital. Alongside Price Volatility (VIX) putting on a +28.8% move to the upside since the US stock market topped on February 18th, some other crystal clear risk management signals have reminded people that they are still there:

  1. Growth expectations (measured in US stock prices or UST bond yields) are finally coming down
  2. Risk spreads (CDS, TED Spread, Sovereigns) are widening
  3. International stock markets are deflating (36 of the top 60 countries in our Global League Table are DOWN for the YTD)

Now I suppose that we can all celebrate Big Central Planning this morning as the Greek stock market moves up another +3% making it the world’s best performer for the YTD. Or maybe not…

 

What goes up, must have gone down a lot. That’s what happens to market prices that aren’t exactly as free as they used to be.

 

My immediate-term support and resistance levels for WTI crude oil are now $98.55 and $103.31, respectively. My immediate-term support and resistance lines for the SP500 are 1292 and 1313, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Economic Fallacies - Chart of the Day

 

Economic Fallacies - Virtual Portfolio


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