Shorting Greenbacks

Position: We shorted the USD today via the etf UUP.


Call us lucky or good, but we’ve had a pretty good run trading the U.S. dollar in the Virtual Portfolio.  Prior to our initiation of another short position in the UUP earlier today (the etf for the U.S. dollar index), we were 19 for 19 in trading the dollar.  In our Q2 theme presentation this past Friday, we outlined the negative case for the dollar over the coming months.  Today, we got our price. 


The first, and likely most important factor when contemplating the dollar, is simply the calendar.  Over the course of the next two months, we have a series of catalysts that are all set up to be negative for the U.S. dollar. These are as follows:

  1. May 16th – Treasury Secretary Geithner gave this as the date that the debt ceiling needs to be extended by to keep the government operating;
  2. June – In his deficit speech last week, President Obama outlined this as the time frame in which he wants to have the deficit debate finalized; and
  3. July 1st  – Not only is this Canada Day, but it is also the end of Quantitative Easing II. 

Notwithstanding the 1% intraday increase in the UUP, which really does nothing more than give us a price from which to reenter on the short side, the calendar events above provide ample opportunity for the global investment community to vote negatively against U.S. fiscal and monetary policy.


Longer term, we have grave concern over the federal government to reach any  workable solution on the deficit.  The inability to reach a real  solution means that we are likely faced with more stop gap solutions ahead of the election next fall.   The reality of these stop gap bills, versus real structural reform, is that they are typically more fiction than fact.  As the Washington Post reported late last week, based on analysis from Congressional Budget Office (CBO):


“A federal budget compromise that was hailed as historic for proposing to cut about $38 billion would reduce federal spending by only $352 million this fiscal year, less than 1 percent of the bill’s advertised amount, according to the Congressional Budget Office.”


Given the wide divergence between President Obama’s budget and the one proposed by Congressman Ryan, it is increasingly unlikely that a real solution is reached before the 2012 elections.  Ratings agency Standard & Poor’s, in an attempt to overcome their status as a lagging indicator, downgraded the outlook for U.S. debt earlier today primarily based on this likely political impasse.  If no compromise on a deficit reduction bill is reached, the outlook is exceedingly ugly for the U.S. deficit.  According to CBO estimates, which are rosy in terms of certain economic assumptions, the United States is on course for more than $8 trillion in deficit spending over the next decade. This is not positive for the U.S. dollar.


The other key factor for the U.S. dollar is interest rates, and interest rate expectations.  Globally, interest rates are going up, while domestically it is becoming increasingly likely that the Federal Reserve will not hike rates until the end of the calendar year, if not later into 2012.   The ECB hiked its benchmark rate by 0.25% on April 7th and has signaled its intention to hike further.  Conversely, while the U.S. Federal Reserve may not extend its policy of Quantitative Easing come July 1st, it does seem unlikely that the Federal Reserve will raise rates.  The implication of this is that the New Carry Trade of borrowing lower yielding U.S. dollars and buying higher yielding Euros is set to continue.


Our levels on the U.S. dollar are attached below.


Daryl G. Jones
Managing Director


Shorting Greenbacks - 1

R3: COH, ADI, MAT, Groupon, RL



April 18, 2011






  • Effective April 1, toymaker Mattel implemented a high single-digit price increase globally in an effort to offset inflationary input costs that can’t be mitigated through internal cost reductions. In a sign that discussions between product manufacturers and retailers are starting to get increasingly more stressed, the company highlighted that while they would not categorize retailers as “receptive” they have been “understanding” of the cost-justified increases as many make their own private label toys and are therefore intimately aware of the pressures at play.
  • Despite a mid-to-high teen price increase for its fall merchandise, Christopher & Banks expects average ticket prices to remain below other peer specialty stores. In an effort to offset declining average transaction values, the company noted after a successful initial test of its three outlet stores in fiscal 2011, it will be opening 22 new outlets in F12 in order to drive higher traffic and productivity.
  • A recent study on the most popular brands in China from Bejing-based consultancy firm R3 revealed that most of the Top 50 brands were imported. Two notable callouts among the Top 10 were Nike and Li-Ning coming in at #3 and #5 respectively. On the contrary, the absence of apparel brands at the top reflects the lack of popular Western brands impact among Chinese consumers.



Coach mulls listing in HK - US-based fashion accessories brand Coach Inc is considering listing on the Hong Kong Stock Exchange to help the company boost its brand awareness in the mainland Chinese market, sources reported. The company is currently in initial talks with investment banks on the deal. Currently, Coach operates 56 stores in the Chinese market, which contributes about 5% of the company's total revenue. The company expects the figure to rise to 10% in 2014. It was reported that the New York-headquartered company plans to open 25 stores in China during fiscal year ended June 2011. <FashionNetAsia>  

Hedgeye Retail’s Take: This would be an unorthodox move. We’ve seen plenty of foreign-based companies listing on U.S. exchanges to broaden investor exposure, but a U.S. based company listing on the Hong Kong exchange seems a bit premature. With only 5% of sales derived in China there’s little to gain here from a tax perspective (even at 10%) and with net cash on the balance sheet the opportunity for cheap financing is certainly not driving the decision here. Building brand awareness is waaay down on the a long list of reasons for why company’s decide on a dual listing – in fact, it’s the first time we’ve seen it.


Adidas Unveils Extra-Light Basketball Shoe - Adidas is gearing up for the grand finale of the NBA season. The Herzogenaurach, Germany-based athletic company launched its newest and lightest basketball shoe, called the Adizero Crazy Light, in New York on Thursday. Debuting nationally this weekend, the sneaker will be worn by brand endorsers Derrick Rose and Dwight Howard during round one of the NBA playoffs, and it will hit retail stores on June 3. Four colorways — in bright-blue, red, black and tonal gray — debut first, and six more come out throughout September. The retail price is $130. “We’ve been planning this for 12 to 18 months, and we thought about it carefully,” Lawrence Norman, VP of global basketball for Adidas, said about the timing of the launch. “So leading into the NBA finals, what better time to launch a basketball shoe than when all eyes are on basketball.” Weighing in at 9.8 ounces, the Crazy Light is touted as the lightest shoe in the category, which is a major selling point for the target consumer: 14- to 19-year-olds. “The shoe speaks to lightweight, the colors are graphically loud and completely young and relevant,” said product marketing manager Jack Gray. <WWD>

Hedgeye Retail’s Take: The lightweight trend continues to gain momentum and not just in running. A win-win for both manufacturers (lower cost and shorter lead timed) and consumers (comfort, cost, and ‘social responsibility’), brands are now in a stiff competition to raise the bar by reducing fractional ounces. This trend is clearly a key driver of the latest innovation to hit the space – expect much more to come in this regard.


R3: COH, ADI, MAT, Groupon, RL - R3 4 18 14


Groupon IPO may Value Company at $15-$20Bn - Groupon could raise as much as $1 billion in the IPO, which could come in the second half of 2011, although the exact size had not yet been determined, said the source, who was not authorized to speak to the media.The source cautioned that the size of the IPO and the market value of the company were not final and could change.The possible market value was first reported by the Wall Street Journal, which also said that JPMorgan Chase & Co was expected to have a co-manager role. Groupon was not immediately available for comment.The multibillion-dollar valuation is the latest in a string of high valuations for hot Internet companies including Facebook and Twitter, and raises questions about how these companies, albeit fast-growing, could ever justify the sky-high valuations. Groupon said it has been profitable since June 2009, but does not disclose financial information.<Reuters>

Hedgeye Retail’s Take: Like all good young  growing companies, Groupon has succeeded so far in making Google’s reported $6Bn bid back in the summer of ’10 look undervalued. As for all these high profile internet companies looking to go public around the same time – who said there isn’t power in numbers? That said, the underwriters could leak out any number they please at this point – and they’re probably not lowballing. Making us all talk about a $20bn valuation is the best way to make it happen. Nothing attracts a crowd like a crowd.


Victoria’s Secret is Winning the Popularity Contest for e-Commerce - Engaging shoppers with videos, photos and special offers seems to be enticing consumers to Like Victoria’s Secret and its Pink brand for young women. The two were the most Liked retail brands on Facebook in March with 12.1 million and 8.4 million followers, respectively, according to the ChannelAdvisor Facebook Commerce Index. The index tracks the number of Likes gained by each of more than 500 brands at the end of each month. “Victoria’s Secret is a popular brand that does a lot with Facebook at all its different touch points—catalog, online and in store,” says Scot Wingo, CEO of ChannelAdvisor, a firm that helps retailers sell through online marketplaces such as Amazon and eBay as well as comparison shopping sites. “They’re clearly focused on it.” <InternetRetailer>

Hedgeye Retail’s Take: We’d venture a guess that the demographic study here isn’t nearly as female centric as many would assume. That said, with over 8% of revenues derived from e-commerce, The Limited continues to boast one of higher rates in retail reflecting its focus on the channel.


Strategizes to Battle Inflation - The squeeze is definitely coming. Retail apparel prices may have fallen last month, according to the U.S. Labor Department’s Consumer Price Index, but that’s only a temporary lull. The real crunch is expected to begin in back-to-school and fall merchandise, when the pressure from rising raw material and fuel costs is expected to become too much to bear and retailers will at last have to pass on some of those increases to consumers. But retailers aren’t taking those inflationary pressures lying down. According to a study by AlixPartners, stores can mitigate the effects of higher prices for everything from cotton to gasoline by increasing long-range booking of materials and reducing product complexity, among other tools, as they look to minimize the negative impact of sticker shock when consumers start looking to spruce up their wardrobes for fall. According to the AlixPartners study, apparel inflation is averaging 17.4 percent for most retailers, with some seeing increases as high as 30 percent. Even employing some of the strategies available, more than 40 percent of firms could put themselves at a competitive disadvantage later this year. <WWD>

Hedgeye Retail’s Take: Consistent with some of the anecdotes above, the ‘value’ proposition will become an increasingly popular topic over the coming quarters for retailers – one that smaller players will struggle to keep pace with.


Will Higher Gas Prices Curb Spending? - As the spring season kicks into high gear, retailers are facing a new roadblock: significantly higher gas prices. In a Deloitte survey released last week, 71 percent of consumers said the uptick could cause them to curtail spending in the coming months, leaving storeowners uncertain about how business will play out this summer.  “People are aware of it and that it will change shopping patterns in regard to how often we may see a customer,” said Mark Waldman, president of St. Louis-based Laurie’s Shoe Center. “They may come in less often, but hopefully they’ll be buying more.” With gas prices in St. Louis averaging $3.67 at press time and expected to escalate, Waldman predicted the crunch will hit his middle-class shoppers the hardest.  “If a customer is spending so much on gas each week, there’s going to be an immediate emotional response,” he said. “But the consumer who’s used to better-grade products will probably continue to buy them, just not at the same frequency.”Higher costs at the pump — and rising fuel prices in general — are an added worry for footwear firms in an inflationary environment. <WWD>

Hedgeye Retail’s Take:  Note that consumers plan their spending on a sequential basis, not year/year. The slightest downward tick sequentially is magnified when compared to last year – which, of course, are the numbers we see in companies’ financials.


E-mail Security Breach Ensnares Polo, Others - Polo Ralph Lauren Corp. was among numerous companies affected by a massive e-mail breach at Epsilon, the Irving, Tex.-based multichannel marketing services firm. Epsilon, which sends 40 billion e-mails annually on behalf of more than 2,500 clients, said customer information from 2 percent of its clients was compromised in a data breach, which was detected March 30. The information that was obtained was limited to e-mail addresses and/or customer names only. An assessment showed that no other personal identifiable information was at risk. A spokeswoman for Epsilon said she couldn’t comment further while the company conducts an investigation and cooperates with authorities. According to security experts, the breach could result in an onslaught of phishing attacks — e-mails that purport to be from a legitimate business but are used to steal information such as passwords, account numbers and credit card information. <WWD>

Hedgeye Retail’s Take: Be careful who you hop in bed with. This is why RL took its ecommerce business in-house – to control its direction and grow it profitably. But in staying partnered with someone for email distribution the risk remained.  If you want it done right, do it yourself…


Wal-Mart Settles Slur Suit - Wal-Mart Stores Inc. has agreed to pay $440,000 to settle a lawsuit by the U.S. Equal Employment Opportunity Commission on behalf of Mexican immigrant workers at a California Sam's Club who claimed they were harassed about their national origin by a Mexican-American colleague. The EEOC lawsuit claimed that at least nine employees of Mexican descent, along with another worker married to a Mexican, endured ethnic slurs and derogatory remarks by a colleague. The agency said the "near daily" insults included remarks that Mexicans were only good for cleaning homes. It said they were reported to superiors at the Sam's Club near Fresno in April 2006 yet went unchecked for months. <WallStreetJournal>

Hedgeye Retail’s Take: This suit is small potatoes to the pending class action suit regarding Women being underrepresented in Management roles at Wal*Mart stores. If you see anything hit the tape about that one, then it means 2 things 1) there will be a cash flow event, and 2) the company will avoid a public precedent that will require it to change its human resource practices.




Chinese Exposition

Conclusion: Below we’ve compiled our take on several key discussion points which have arisen in the wake of our 2Q Key Macro Themes Call, specifically as it relates to our Year of the Chinese Bull theme (email us if you need the replay podcast and presentation materials). 

Position: Long Chinese equities (CAF); Long Chinese yuan (CYB)


Q: In the U.S. a tightening cycle is usually not great for equities.  Why are you not more concerned about Chinese equities given that the Chinese government is tightening in an effort to deal with inflationary pressures? 


A: The point we we’re attempting to make on slide 16 in the presentation is that the bulk of the Shanghai Composite’s earnings either benefit from, or are insulated from tightening. In fact, if you look back to the last period of Chinese tightening back in 2006-07, we saw that China’s equity market put on an over +200% move to the upside. Obviously no two periods of time are the same and we certainly aren’t making the case for a similar move, but, as the graph below shows, Chinese equities can indeed work amid a tightening cycle.


Chinese Exposition - 1


One of the key tenets to the call we are making now is for Chinese CPI to top out and decelerate in the coming months – and Friday’s +5.4% CPI reading could indeed be a cycle top. That would potentially allow the PBOC to ease off the brakes and allow the growth premium to return to China’s long-term interest rates. A widening yield spread is explicitly bullish for nearly one-third of the index’s earnings and higher growth expectations are good for the majority of the rest of the market. Further, China’s yield curve is now at/near pre-financial crisis, pre-recovery levels. A higher spread from here would be bullish for Chinese bank earnings, while a lower spread would likely be an ominous signal for the global economy.


Chinese Exposition - 2


If we’re wrong and China’s CPI continues to rip to the upside like it did in early ’08, we still have mean reversion (bear case is a known-known), accelerating relative growth vs. slowing US/EU growth, and cheap valuations relative to their own historical range. This three-factor setup alone makes Chinese equities interesting from an institutional fund flow perspective –remember Chinese equities went no-bid for nearly 2/3rds of last year.


If we’re really wrong on the slope of Chinese inflation and it causes the PBOC to either: a) significantly tighten far beyond any current expectations, or b) revalue the yuan significantly in an expedited manner, the resultant effects of scenario “a)” would be very negative for global growth and a significant, expedited appreciation of the yuan as outlined in scenario “b)” would bring about many unwelcome consequences for the global supply chain – particularly from an import price perspective in China’s export markets. Such a scenario would be bad for anything equity-related, in our opinion.


As we pointed out in a research note on 2/16/11 titled “China: Stuck Between a Rock and a Hard Place”, political consensus’ demands for China to quickly revalue the yuan are misguided at best. It would likely take most companies 2-3 years to offset the resultant lack of price competitiveness from a higher FX rate by installing manufacturing capacity in other markets. Near to intermediate-term, a major yuan revaluation would likely result in an import price shock in China’s export markets.


Addressing the “relative” aspect of the question, with regard to the U.S., China is not nearly as sensitive to interest rates in one direction or the other. China’s gross national savings rate is north of 50% of GDP and consumption still hovers around 35-38% of GDP – about half of what it is in the U.S. What this means is that as interest rates increase, Chinese consumers and corporations actually have more income from which to consume given their already high savings rate.


Chinese Exposition - 3


From a investment perspective, rising interest rates don’t have quite the same impact in China because the hurdle rate for capital expenditures is much lower than in the U.S., given China’s historically elevated economic growth rates. Essentially, China’s robust growth profile creates a wide spread between expected returns on capital projects and the project’s weighted average cost of capital. Therefore, China has a lot of hay to bale from an interest rate hike perspective if they are going to have a meaningful impact on slowing the growth of capital expenditures.


In China, a great deal of household wealth sits in a shoebox in the family plot (not kidding). Relative to the massive oversupply of savings, China’s bond market (~$3T) isn’t quite liquid enough to accommodate that kind of an influx of funds out of its ~$6T equity market or the ~$6T economy, so net-net, more attractive rates of return don’t have nearly the same flow of funds impact in China than they do in a more advanced economy such as the U.S. Moreover, with China’s household consumption as a percent of the overall economy at about half of the U.S. rate and with Chinese consumers being significantly less levered than their U.S. counterparts, rate hikes simply don’t have the same impact of slowing aggregate growth by deterring consumption in China as they do in the U.S.


Q: What is your call on falling inflation in China predicated on? I guess the argument could be made that as the government allows the currency to appreciate quicker, that will naturally put the brakes on inflation, but does that fully offset rising labor costs associated with urbanization and normalization of salaries or commodity pressures (esp. oil) which when combined make up more than 1/3 of headline inflation?


A: The projections on slide 14 are the outputs of a quantitative model we use to forecast the slope and amplitude of a YoY economic data series. While it back-tests with an r² greater than 0.8-0.85, we do understand that it is purely a mathematical exercise and not to be fully trusted without quantifiable catalysts. Understanding that, our confidence in the slopes of those lines is derived from on a confluence of factors that stem from China’s proactive response to inflationary pressures.


While much of the media has been focused on China’s four rate hikes since October, the reality is that China’s been tightening since last January and recent moves by the PBOC to force banks to bring off-balance sheet assets back onto their balance sheets will make China’s ten reserve requirement ratios since Jan. ’10 start to actually have some measurable effects. In all, Chinese banks’ reserve requirements have increased +500bps in the last 15 months. We’re already seeing the effects of that in the form of slower Money Supply growth, slower Credit growth, and negative YoY Total National Financing growth in 1Q11.


Chinese Exposition - 4


The yuan has and will continue to be used as a tool to combat inflation – perhaps even more so than before, judging by PBOC governor Zho Xiaochuan’s commentary this past weekend. The yuan has risen +4.5% vs. the USD since it was de-pegged last June and his latest commentary was that the PBOC has grown increasingly concerned about the spread of Chinese rates vs. U.S./global rates. The spread between China’s 1Y Deposit Rate and the Fed Funds Target Rate and the ECB Main Policy Rate is now at levels last seen since just before the Asian Financial Crisis of 1997-98. They are legitimately concerned about the potential for destabilizing capital inflows and that will likely shift their policy stance towards favoring additional yuan appreciation and reserve requirement hikes for now – at least on the margin.


Chinese Exposition - 5


Lastly, to the extent the confluence of China’s tightening measures fully offset recent and anticipated wage growth does indeed remain to be seen. At this point, that remains one of the key risks to the thesis – accelerating inflation perpetuated by consumer demand – and no longer just monetary expansion. That would, however, be bullish for China’s near-term consumption figures and incrementally positive for overall Chinese growth in the near-term. And, as we’ve seen with WMT recently, China has the power to limit and/or outright deny price hikes for finished goods. It’s food and energy prices that makes the PBOC’s fight difficult; so to the extent we continue to see higher-highs in food and oil prices, we’ll likely see elevated levels of Chinese CPI and incremental yuan strength.


At the end of the day, it is important to remember that Chinese CPI itself is a mathematical series that is subject to: a) the Chinese government making up the number (like we do domestically); and b) its own base of comparison. We’d have to see an acceleration in the velocity of food and energy price increases for Chinese CPI to “comp the comps” and that’s not something we have in our forecasts for 2H11 – the dollar can and will be burnt only to a point before it snaps fervently off its lows. For now, that’s something we see as a 2Q/ early 3Q phenomenon.


Q: Also as a follow-up, we have seen more and more automation in China as more of a LT solution to rising wages. In 2011, I think more and more companies will be taking that route. The break-even point between manual and automation may be 3 years, but the first year or so the cash costs from implementing automation is much greater than running the business on manual labor. Is there a possibility this may serve as a ST positive inflation shock, as these costs have to get passed through somehow?


A: Great point and to be honest, we haven’t done the work here specifically so we’ll hold off for now. The only thing we’d say is that from a probability weighting perspective, this would rest more on the tails rather than in the heart of the bell curve of probable scenarios. From our vantage point, there’s more lower-hanging fruit to analyze when attempting to forecast Chinese CPI over the next 6-9 months.


Darius Dale


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European Risk Monitor: Peripheral Risk Pops as Finnish Elections Inflect

Position in Europe: Long British Pound (FXB)


As is typical for Mondays, we release our weekly European Risk Monitor. This morning peripheral risk premiums have popped dramatically in response to 1.) ongoing concerns that Greece must restructure its debt, 2.) Finnish elections over the weekend that saw the anti-bailout/euro-skeptic True Finns party gain significant share, 3.) widening yields from a Spanish bond issuance, and 4.) Moody’s decision to downgrade long-term deposit ratings of five Irish banks to junk.


As we’ve seen over recent weeks, European sovereign debt contagion fears have accelerated.  While Greek leadership continues to deny that its public debt needs restructuring (a position also held by French finance minister Christine Lagarde), the Germans under finance minister Wolfgang Schaeuble continue to press in opposition. As the debate heightens, the market is sending a clear signal, with Greek sovereign CDS jumping a full 112bps day-over-day to 1262bps as the Greek 10YR bond yield gained 65bps to an all-time high of 14.5% today! (see chart below)


European Risk Monitor: Peripheral Risk Pops as Finnish Elections Inflect - CDS11


European Risk Monitor: Peripheral Risk Pops as Finnish Elections Inflect - yields22


Finnish parliamentary elections on Sunday further weighed on the region as the True Finns more than quadrupled its share of the vote to 19% (to place third) under a platform opposed to Eurozone bailouts.  According to exit polls, the conservative National Coalition Party of current finance minister Jyrki Katainen leads with 20.2%, followed by the opposition Social Democratic Party (which also opposes further bailouts unless private investors and lenders are forced to take financial losses) with 19.4%. While the weeks ahead will bear out the structure of a coalition government, the True Finns’ gain under the leadership of Timo Soini puts into play an inflection in Finland’s traditional pro-Europe stance, and complicates a potential bailout for Portugal assuming a new Finnish government rejects further bailouts and unanimous approval must be reached by all Eurozone member states to grant new rescue loans.


Rounding out a thick flow of European news this AM, Spain sold €3.51 Billion of 12M bonds at an average yield of 2.770%, far outpacing the previous issue a month ago of 2.128%, and €1.15 Billion of 18M bills at 3.364% versus 2.436%.  Additionally, Moody’s downgrade the long-term deposit ratings of Allied Irish Banks, EBS Building Society, and Irish Life & Permanent Group Holdings by two notches to Ba2, and ICS Building Society and Bank of Ireland (one and two steps respectively) to Ba1, the highest junk rating. This follows Moody's decision last Friday to downgrade Ireland's debt two notches to Baa3.


In response, Spanish CDS jumped 13bps to 246bps and Irish CDS rose 30bps day-over-day to 589bps. Our weekly European Financial CDS monitor indicates that bank swaps in Europe were wider week-over-week, widening for 34 of the 39 reference entities and tightening for 5 (see chart below).


As yields push up and credit ratings deteriorate, it will be more and more difficult for Europe’s periphery to (re)finance its debt. This should spell underperformance, in particular from the peripheral capital markets, yet associated weakness could also spill over to the region’s most stable countries, and in particular the common currency that up until this week was pushing against $1.45 versus the USD on higher benchmark interest rates form the ECB and a continued drag on the USD from weak US fiscal and monetary policy.


We covered our position in Spain today in the Hedgeye Virtual Portfolio with the country getting hammered down to our immediate-term TRADE support level. Our long-term TAIL view of Spain remains bearish.


Matthew Hedrick



European Risk Monitor: Peripheral Risk Pops as Finnish Elections Inflect - banks333


As we wrote in our preview on 4/7/2011, we believe WYNN had a big Q1 in Vegas and Macau.  In preparation for WYNN’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from WYNN’s Q4 earnings call. 





  • “We’ve been adding junket operators, and we’ve got one or two more coming this spring [2Q].”
  • “With two additional junkets, you could see that ratio [10-15% direct] go to the lower side, for sure. But the direct business is still up, well over 50% for the year, and is continuing to grow. But Linda grows them one customer at a time.”
  • “In Macau, the credit balances outstanding with our associates in the junket business are very large. We, on our own account, reserve 3% or 4% for bad debt.”
    • “Our reserve as a percentage of receivables is 47% right now in Macau, which is very, very comfortable.”
      • Q: How does that compare to the other operators?
        • A: Much higher
  • “And I’m hoping that we can get started in March, or April, at the latest. It’s a landfill, as you know, at Cotai, and so there’s remediation that takes place for the foundation work that adds six or seven months to normal construction time.”
  • [Cotai opening] “I think late ‘14, early ‘15 would be my best guess.”
  • [2011] “Somewhere between 20% and 22% of our room nights will be convention this year.”
  • [Wynn Encore Macau] “There’s actually still room to grow there. So, especially on the weekends, we were always capacity-constrained with our rooms, so adding the 414 rooms and suites really helped us out. Another thing that we’ve done is, as everybody’s mentioned, we’ve added some junkets. And, in fact, we continue to modify our floor, to increase capacity with both our VIP and, especially, also our high-limit mass areas. That’s been extremely well received.”
  • “We actually built spaces [in Wynn Encore Macau] that were smaller on purpose. And you just heard what Matt said, what’s the multiple?....Three-and-a-half times for fourth quarter and two-and-a-half times for the year…. Also, there’s a lot of opportunity in our slot revenue. We’ve restructured our slot operation for 2011. It will be completed here in a few days, and we’re going to have a jump there.”
  • [Cotai] Well, now that the plans are finished, it’s in the hands of Wynn Design & Development to create a construction budget, and that process has just begun, and I’m not quite ready to say, but I think $2.5 billion is a comfortable number for us. We’d have no compunction about spending that kind of money on the facility, with all of its entertainment potential. And so – and as far as I mentioned a few minutes ago, as far as when we get started, that’s up to the government. They’ll tell us. And I expect that it’s not very far away.” 
  • “I would not tell you that our credit has loosened. I would say that our business volumes have increased. We’ve kept our reserve methodology the same throughout, and we’ll continue to do so in the future. We continue to be very prudent about junket partnerships. We have more people interested than we require, and we add very organically. We’re very careful in our due diligence, and the relationships we have with our junket partners are true partnerships.” 
  • “I think if you look at the very peak times that happen in the city over the Golden Week holidays, everybody manages to get in. We’re able handle incredibly high volumes. I think the infrastructure side of things is a bit over talked about. There are good things happening in the next 18 to 24 months. We have the Pac-On Ferry Terminal goes through a considerable expansion. The Gongbei border gate is increasing capacity of daily arrivals by up to 60%. And there’s more ferry services being put online to Macau. So the market seems to be able to handle the additional customer arrivals, so I don’t foresee an imminent problem. And the beauty of Cotai coming on stream in late ‘14, early ‘15, is the monorail system will be up and running from the Pac-On Ferry Terminal around our property on two sides. So the government has reacted. There’s more taxis in the marketplace. Macau is a small city. When it’s very busy, it does get a little bit choked at key times, but that’s the same everywhere in the world.” 
  • [Galaxy Macau impact] “It should be good for the market, too, because the market does not have enough hotel rooms to accommodate the people on the weekends. So I think it will be good for Cotai and good for the market overall.” 



  • “Our room rates are up a little. Our occupancy is okay. Our convention bookings are ahead of last year. I’m saying that these indicators are pointing up. Slots are still weak, but the indicators about visitation and room rate and convention bookings, which are very important for the mid-week period, are pointing up.”
  • “In terms of areas of opportunity for growth in 2011, we’re continuing to see improvements in domestic business, and so we’re seeing lots of opportunity there. Obviously, Matt already talked about the convention opportunities that we have here in Las Vegas. We’re expecting that to really help us on the room side this year.”
  •  “We raised rates – we have just remodeled the entire Wynn facility.  We have between 2% and 3% of our rooms still under remodel. We finish by April, the end of April. And the amount of rooms that are out of order – suites and villas – is down to 2% or 3% now, so it really doesn’t matter a lot.”
  • “We are running at around 9,300 FTEs right now, and we think that is a good run rate, even if business volumes do increase. So our fixed costs right now, we feel pretty comfortable with, and any increase in cost should really be more on the variable side. So that’s the beauty of these hotels with operating leverage, as things get better, your margins get better.” 



  • [Corporate expense] “Better run rate is closer to the third quarter – which was, excluding stock-based comp, around $18 million – as a run rate going forward.”
  • “So at 12/31, about half of the cash is at the parent – a little more than half – and the rest is at subsidiaries, mainly Wynn Macau, which was $1.3 billion.”
  • [Q] “I believe you said that it would be a very long time before you would develop anything in the United States again, and I wondered if you still think that’s true.”
    • [A]I don’t still think it’s true. I changed my mind.”

Breakdown: SP500 Levels, Refreshed...



Life is good. Risk management is hard.


Given the heightening probability of a US Currency Crisis (see slides and replay from our Q2 Global Macro Themes call we hosted on Friday), it shouldn’t be a conceptual surprise to see the SP500 slicing through both our immediate and intermediate-term levels of risk management support: 

  1. TRADE = 1319
  2. TREND = 1302 

As I wrote on Friday, citing Baupost’s Seth Klarman, “There’s an invisible tipping point – when we get there, it’s far too late.”


We didn’t need a ratings agency to remind us of that.


The long-term TAIL of support for the SP500 is still intact, but it’s a lot lower – down at 1186.



Keith R. McCullough
Chief Executive Officer


Breakdown: SP500 Levels, Refreshed... - 1

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