The Macau Metro Monitor, March 22, 2011



Packer said he disagrees with analysts who claimed that City of Dreams has not differentiated itself well enough from its rivals such as The Venetian.  “I disagree with the Macquarie analyst. Steve Wynn, whom I know a little bit and respect enormously, gave me a piece of advice once. It was: ‘Just build things as good as you can and quality will beat out gimmicks over time.' And that is not to say that The Venetian is not high quality or a gimmick-based hotel, but I am very proud of what we have got up there. Time will be its friend,” Packer said.  Packer added that the House of Dancing Water was drawing a "new breed of clientèle” to the property.


In February, 3,390,264 passengers passed through Singapore's Changi Airport, representing 9% growth YoY.  Growth in Southeast and Northeast Asia visitors increased by double digits.  The number of flights also rose by 12.2%.

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The Nike/Street historical expectations pattern is unique to say the least. It crumbled down in Nike’s 3Q. Two consecutive broken quarters isn’t probable.



Beat, temper, beat, temper, beat… We see this day in, day out – especially in retail. The worst offenders are the junky companies that guide to declining y/y EPS, and then come out, beat it and beat their chest. For example, a company that earned $1.00 last year will guide toward $0.60. Then they come out and actually report $0.80. Still a gnarly quarter with earnings down 20%, and yet there’s no shortage of analysts who will hop on the conference call and congratulate the management team for beating numbers as if they just won the Stanley Cup.


Nike is interestingly different. First off, they don’t give guidance. They give us the info and let us do our jobs. That said, there is a clear precedent for managing expectations – these are two very different things. Clearly, the consensus (including us) got it wrong this quarter. Very wrong.  Ironically, management’s tone hadn’t really changed over the course of the year.  But this quarter was clearly the exception. Check out this analysis…


It looks at each of the past 10 earnings periods and on a rolling 2-quarter basis shows, a) where estimates were 2-quarters out before a print, b) how that estimate changed after the print, and c) where the actual number came in. Sounds confusing, but the chart below should help visualize.


In Nike’s case, there’s a pretty clear trend of Consensus expectations being at a given level, then coming down after management’s comments.  There are two things that makes it different from many other companies. 1) Its earnings actually grow, and 2) More often than not, Actual EPS comes in ahead of where estimates were 4-months prior.


The Street landed at $1.16 for 4Q vs. original expectations of $1.27. Is Nike going to come in ahead of the prior expectation? Probably not. But we don’t think it will miss our $1.20.



Shorting Sugar - Risk Management Update

Position: Short Sugar via the ETN SGG

We added a short position in sugar via the ETN SGG in the Hedgeye Virtual Portfolio. This move may seem surprising as we have been frequent buyers of sugar, which is up +28.6% over the last six months.  We have entered five long positions in SGG since June of last year, with our cumulative performance netting a +22.14% gain while riding an inverse correlation to a weakening dollar.


However, that correlation has changed quickly.  Although sugar has a -0.79 inverse correlation to the US Dollar over the past year, it has a +0.24 positive correlation to the dollar over the last six weeks.  As a reminder, we remain bearish on the US Dollar over all three of our durations: TRADE, TREND, and TAIL. While sugar’s inverse correlation to the US Dollar is broken, we see this as a nice opportunity to be short the soft commodity.


This comes against a bearish supply backdrop in which the world is well-stocked with sugar – one of the few soft commodities that we can currently say that about.  The USDA recently projected world sugar production in the 2010-2011 growing season to be 8% greater than the 2009-2010 season, totaling 164 million tonnes.


A short position in SGG was added into the portfolio at $84.63. From a quantitative perspective, sugar is broken and bearish on the immediate term TRADE and intermediate term TREND durations, with upside resistance at $90.92 and no downside support.


Daryl Jones

Managing Director


Shorting Sugar - Risk Management Update - suga suga

Buying China

Conclusion: It’s increasingly likely that slowing growth and additional tightening may be priced in, thus Chinese equities look poised to benefit in an inflationary or disinflationary environment.


Position: Long Chinese equities via the etf CAF.


On Friday, we opened a position in Chinese equities within the Hedgeye Virtual Portfolio for the first time since closing a long position in late September of last year. The recent weakness in the wake of Japan’s crisis provided a buying opportunity, as the Shanghai Composite remains bullish from an intermediate-term TREND perspective:


Buying China - 1


“Why buy China?” one might ask, given our outlook for the Chinese economy remains “growth slowing as inflation accelerates”.  Simply, put, the answer to that question is a question in and of itself: “What price does one pay for slowing growth?”


With a handful of sell-side firms following the Chinese government in revising down their 1H11 Chinese growth assumptions, we are inclined to believe the bear case on China is getting increasingly priced in. In fact, we were among the few to be appropriately bearish on Chinese equities in early 2010 and since we introduced our bearish Chinese Ox in a Box thesis on Jan 16, 2010, China’s Shanghai Composite Index is down nearly ten percent (-9.8%), including a peak-to-trough decline of (-26.7%) recorded on July 5th.


We get the bear case on China, so naturally, our next risk management tasks are to figure out whether that’s fully priced in and if the market is leading us to a reacceleration in Chinese growth. Addressing the latter point specifically, there are signs that China is indeed entering a bottoming process from a growth perspective.


YoY growth in Chinese Exports, Retail Sales, and Money Supply (M2) all slowed to multi-year lows in February (in part due to the timing of the Lunar New Year). While there may be further downside in these series in the coming months, the intermediate-term risk/reward setup is skewed to the upside for the first time in several quarters.


Buying China - 2


From a financial market perspective, we see that China’s 12-month interest rate swap contract (which exchanges fixed payments for the seven-day repurchase rate) backed off its high of 4.04% on Feb 21 to 3.4% today. The key takeaway here is that the Chinese bond market’s expectations for additional tightening have receded. While still elevated relative to the 1.99% we saw on Aug 25, the slope of this trend remains positive for Chinese growth expectations on the margin. Whether today’s +18bps gain is the start of a newfound trend of expectations for incremental tightening relative to current projections remains to be seen. For now, the trend is moving in the right direction.


Buying China - 3


We’d be remiss to not mention the impact of inflation on Chinese equities. Prior to the current rally which began on Jan 25, Chinese equities had sold off from their Nov 8 cyclical peak on fears of accelerating inflation leading to aggressive tightening of monetary policy. With three interest rate hikes and six announced reserve requirement hikes since late October, a great deal of tightening may indeed be in the rear view. This opens the door for those Chinese stocks which benefit from higher levels of inflation to outperform. An analysis of industry contributions to the Shanghai Composite’s current +8.7% rally confirms this: 

  1. Coal (+1.2%) – energy inflation;
  2. Mining (+0.9%) – precious metals reflation;
  3. Chemicals (+0.6%) – energy inflation pass-through;
  4. Banks (+0.5%) – widening yield curve; and
  5. Oil & Gas (+0.5%) – energy inflation; 

Buying China - 4


Buying China here is certainly not without risk, however. Given that the current rally is highly levered to accelerating inflation, any disinflation in real-time commodity prices (via USD strength) may prove detrimental. Consider the following correlations to the Shanghai Composite Index over the past two months: 

  • Brent Crude Oil: r = +0.86, r² = 0.74;
  • Gold: r = +0.89, r² = 0.79;
  • Silver: r = +0.93, r² = 0.87;
  • Chinese Yield Spread (10Y sovereign yield less 1Y Benchmark Lending Rate): r = +0.82, r² = 0.67; and
  • US Dollar Index: r = (-0.66), r² = 0.43. 

What could also happen in a disinflationary scenario, however, is that the outperformance shifts from inflation-positive names to consumer and industrial stocks, keeping a bid under the market at large – particularly because many investors have likely chosen to remain on the sidelines due to the current round of tightening. At any rate, given that it’s increasingly likely that slowing growth and additional tightening may be priced in, Chinese equities look poised to benefit in an inflationary or disinflationary environment.


Darius Dale


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