Aussie Dollar: Dancing ‘til the Music Stops

Conclusion: We expect the Aussie dollar to correct over the intermediate term as consensus expectations for an RBA rate hike(s) over the next 3-6 months are irrational due to a pending slowdown in domestic growth. Additionally, our 2Q Macro Theme of Deflating the Inflation is incrementally negative for the AUD as the Inflation Trade unwinds.


Position: Bearish on the AUD for the intermediate-term TREND; bullish for the long-term TAIL. (ETF: FXA)


If your fund is able to take positions in currencies and you’ve been long The Great Inflation Trade, chances are you have some long exposure to the Aussie dollar. We too have dabbled over the past couple of years, going long the AUD in the Virtual Portfolio as early as June ’09 – a few months after we turned bullish on global equities and the associated Reflation Trade.


While the AUD remains one of our favorite currencies on the long side over the long-term TAIL, we cannot ignore the mounting risks associated with being long at this juncture. As such, we continue to expect a measured correction in the coming months.


Below we update our bearish thesis on the Aussie dollar. For our introductory analysis, refer to our April 6 deep-dive report titled, “Aussie Dollar Getting Long in the Tooth”.


To start let’s quickly outline the bull case, which has indeed been supportive of the Aussie dollar’s +25.6% performance over the last 12 months (second best among all currencies worldwide vs. the USD over that duration):


Hawkish central bank: Since the Great Recession, the Reserve Bank of Australia has been far and away the most hawkish central bank in the developed world, raising interest rates seven times (+175bps) to the current 4.75% - a rate advantage that has contributed to widening interest rate differentials and has made the AUD among the most attractive carry trade options on the long side. Additionally, earlier this month, the RBA increased its full-year inflation expectation +25bps to +3.25% YoY, fueling speculation about further interest rate hikes over the intermediate term. For reference, the RBA has been hold since November.


Fiscal austerity: One of the primary reasons we remain bullish on the Aussie dollar over the long-term TAIL is due to the fiscal conservatism we continue to see out of the Australian parliament. Just last week, Treasurer Wayne Swan introduced a budget that calls for an end to 23 consecutive years of spending growth, which will put them on target to deliver an A$3.5B surplus in FY13. In FY12 alone, the budget reduces the current A$49.4B deficit by a whopping (-51%)!


The Inflation Trade: One of the differentiating core tenets of our Global Macro risk management model is our acute measurement and risk-weighting of cross-asset correlation. In the case of the AUDUSD currency pair, we are measuring a positive 0.93 correlation (r² = 0.86) vs. the CRB Index on a 1Y basis. Versus the S&P 500, the positive correlation remains substantially elevated at 0.92 (r² = 0.85). While it’s true that correlations are neither causal nor perpetual, we do point out the market-positioning risk associated with r² readings in or above the 0.7-0.8 range. That is to say when the math is this high, investors are generally looking to the same global macro fundamentals to dictate the prices of the two assets in question.


As we pointed out prior, we think the support for the bull case is eroding on multiple fronts, and, as such, we expect to see a decent sized correction in Aussie dollar in the coming months. The AUDUSD currency pair is already down (-2.7%) from its 30Y-high closing price established on April 29th and we think there is more weakness to be recorded.


To recap, our bearish thesis is two-fold:


1. Our models have Australian GDP growth slowing in the near term and accelerating in the back half of the year – an acceleration that is likely to come in (-75bps) to (-100bps) shy of current consensus expectations. The slowdown in growth both on an absolute and relative basis will cause Australian interest rates to drift downward, lessening the Aussie dollar’s interest rate advantage over other currencies.  Whether or not growth slows enough for the RBA to consider loosening policy over the next six months remains to be seen at this juncture. It is, however, a very contrarian risk we are flagging and we will continue to monitor it real-time.


2. Our 2Q Macro Theme of Deflating the Inflation remains a substantial risk to the Aussie dollar, as falling commodity prices are both implicitly and explicitly bearish for the AUD. Implicitly because we expect lower inflation expectations within the Aussie fixed income market to translate into lower rate hike speculation. Explicitly because commodities account for over 60% of Australia’s total exports; thus, additional weakness across the commodity complex will reduce Australia’s terms of trade (currently at a 140yr high) and create a drag on Australian GDP growth via lower Net Exports.


Regarding component #1 specifically, recent Aussie economic data has been unsupportive of market expectations of an RBA rate hike(s) over the next 3-6 months and declining consumer and business confidence is pointing to even slower growth ahead: 

  • TD Securities Unofficial CPI Index slowed in April: +3.6% YoY vs. a prior reading of +3.8%;
  • Melbourne Institute Consumer Inflation Expectation slowed in May: +3.3% YoY vs. a prior reading of +3.5%;
  • ABS House Price Index decelerated in 1Q: (-0.2%) YoY vs. a prior reading of +5% and consensus expectations of +1.6%; the QoQ decline of (-1.7%) was the steepest decline since 3Q08;
  • Retail Sales growth slowed in March: (-0.5%) MoM vs. a prior reading of +0.8% and consensus expectations of +0.5%; higher interest rates are definitely slowing Household Consumption growth (54% of GDP), as 90% of Aussie homeowners have floating-rate mortgages and the aggregate consumer debt burden is 150% of their combined gross income;
  • Home Loan growth dropped -1.5% MoM in March to the lowest absolute level in over a decade;
  • Westpac Consumer Confidence Index fell in May to the lowest reading since June ‘10: 103.9 vs. a prior reading of 105.3;
  • Employment growth slowed in April: (-22.1k) MoM vs. a prior reading of +43.3k and consensus expectations of +17k; YTD employment growth of +26.3k is the weakest Jan-Apr pace since 1999; anecdotally, mining continues to be a bright spot, while the larger retail and manufacturing sectors continue to show weakness;
  • NAB Business Confidence Index fell in April: 5 vs. a prior reading of 9; and
  • NAB Business Conditions Index fell in April: 7 vs. a prior reading of 9. 

The Australian bond market agrees with our go-forward assessment of slowing growth, with the long end of the curve declining (-33bps) since peaking on April 11th. The short end of the Aussie interest rate curve, which is more influenced by monetary policy expectations than the long end, also declined (-13bps) over that duration, compressing the 10Y-2Y spread (-20bps) to 41bps. To be frank, Aussie bond yields breaking down across the curve alongside a compression in the maturity spread is an explicit signal of slowing growth ahead and/or lower future inflation expectations – neither of which is supportive of the RBA increasing rates anytime soon.


Aussie Dollar: Dancing ‘til the Music Stops - 1


Aussie Dollar: Dancing ‘til the Music Stops - 2


Regarding the Deflating the Inflation component, the following two charts are all you really need to see. While it would be incorrectly premature to say the Great Inflation Trade is over, the quantitative setups for the CRB and US Dollar Indexes suggest we are perhaps in the early innings of the Great Unwind.


Aussie Dollar: Dancing ‘til the Music Stops - 3


Aussie Dollar: Dancing ‘til the Music Stops - 4


While QE3 remains a definite possibility in our models (US Treasury bonds continue to trade bullish TREND across the curve), we think the mounting political pressure facing The Bernank, combined with the fact that CPI is set to accelerate, will keep him from reaching further into his bag of monetary policy tricks at the expiration of QE2 – at least temporarily. US consumers don’t buy “transient” when prices at the pump are spitting distance from $4.00/gal. Additionally, our models have US Headline CPI accelerating on a YoY basis over at least the next quarter or so, meaning that market expectations for QE3 could conceivably come down on the releases. Time will tell on whether or not this scenario plays out.


All told, the music is still playing and the Aussie dollar is still dancing – above parity with the US dollar I might add. If you’re long the Aussie dollar, don’t be caught without a chair when the music stops.


Darius Dale



We expected a miss but the hold impact was much greater. With this hurdle out of the way, the catalysts are lining up positive beginning with MGM’s pricing next week.


While we remained positive on the intermediate and long term MPEL story, we had expected a bigger blip from the earnings miss.  With earnings out of the way, the catalysts are lining up positive. 

  • MGM will price its deal next week – we expect at the high end of the range and a premium to MPEL.  This should highlight how cheap MPEL is – under 10x 2012 EV/EBITDA
  • April was a great month for Macau and MPEL’s share went up significantly.  MPEL had hold issues in the first 2 weeks of May but that will normalize.  We are looking for strong, consensus beating estimates for Q2.
  • Galaxy not having much of a negative impact so far despite the market’s concern
  • There may be an announcement soon regarding Studio City which upon completion should provide MPEL with a sizable concession and management fee.

As we expected, MPEL reported strong volumes and top line, but missed consensus expectations due to low hold.  Compared to our estimates, MPEL’s 1Q11 revenues came in 2.4% above our estimate while EBITDA was 7.4% below our estimate.  Management claims that the low hold and playing especially unlucky in their rolling chip commission programs (vs the revenue share programs) impacted their EBITDA by $53MM.  Of course, investors have no way of knowing the exact magnitude of the ‘mix’ impact but we think it may have been less than what management estimated.  If we take management’s assertion of unlucky mix impacted EBITDA of $12-13MM, our math says that the actual hold impact on EBITDA was closer to $35-40MM than $53MM.  Still, absent low hold, this would’ve been a very strong quarter.



City of Dreams

  • Net revenues of $500MM were 3% above our estimate while EBITDA of $86MM was $9MM below our estimate or 9%.
  • Gross VIP win of $470MM was $7MM above our estimate
    • RC volume was $1.1BN lower than we estimated since direct play was only 13.7% in the quarter compared to 18.9% in 4Q10 and 16.4% in 2010. The decrease in the direct play mix could have also decreased EBITDA flow through since direct play has theoretical margins that are roughly 8% higher than junket VIP play.  However, this is not something that you would normalize for.
    • Hold of 2.5% was 17bps higher than we estimated, given our higher RC estimate
    • We estimate that low hold negatively impacted revenues by $66MM, however, we have a hard time getting close to the $53MM impact that company claims hold had on EBITDA.   If hold was 2.5% across both revenue share and rolling chip play, assuming 2.85% hold, and a 50/50 RevShare/RC commission mix, hold would have negatively impacted EBITDA at CoD by $25MM.  The company stated that $40MM of the EBITDA adjustment was due to just low hold, but that would be the math if you just removed gaming taxes.  Since they have 50/50 mix, higher hold also means higher commissions to the junkets on revenue share deals.
    • Mass win of $146MM was 2% higher than we estimated
      • Drop grew 35% YoY vs. our estimate of 42%.  However, hold was 1.5% higher than we estimated.   Using the 2010 average win % of 21.3%, mass win would have been $8MM lower and we estimate that EBITDA would have been $5MM lower.
    • Slot win of $32MM was $6MM lower than we estimated
      • Handle only grew by 16% YoY, materially lower than our estimate of 45% growth. However, slot hold of 6.3% was 70bps higher than slot win in 2010 and 1.1% higher than 2009.
      • We estimate that elevated slot hold % boosted revenues by $2MM and EBITDA by $1M
    • We estimate that fixed expenses were $74MM for the quarter, although some of what looks like higher expenses is likely attributed to unlikely mix in the quarter.


  • Net revenues and EBITDA missed our estimates by 1% and 8% respectively.
  • VIP gross win of $356MM came in $6MM below our estimate
    • RC volumes were in-line with our estimate but hold was 5bps lower
    • If hold was 2.85%, we estimate that gross revenues would have been $6MM higher and EBITDA would have been $3MM higher
  • Mass win of $25MM was $4MM better than we estimated
    • Table volume grew 96% YoY vs. our estimate of 65%
  • Implied fixed cost were $32MM - $10MM above our estimate, although as the company mentioned on the call there were some hold/mix issues that impacted the property which would show up in implied fixed costs in our model

Retail Earnings – A Bird in the Hand…


There’s a important callout to note between the quality of beat and raises we’re seeing in retail this morning. Let’s look at three specifically – WSM, DLTR, and ROST. Sales of the later were already reported on sales day, but both WSM and DLTR reported significantly stronger than expected top-line results, which drove SG&A leverage and earnings upside in Q1. Interestingly, despite more robust sales growth gross margins came in largely as expected – a trend that we’ve been seeing from many retailers with earnings out so far this quarter. Therein lies the callout. On the contrary, ROST reported gross margins up +60bps while growing SG&A relative to Street expectations. All three took up full-year guidance. WSM by the amount of its Q1 beat, DLTR by twice the amount of its beat, and ROST by an incremental 4% on a $0.01 beat in the quarter.


With all three companies guiding next quarter to earnings in-line or below consensus, results are becoming increasingly back-end loaded. The primary difference here is that WSM and DLTR are banking on some level of pricing to get there. ROST on the other hand has greater visibility due to its pack-a-away strategy that ensures lower costs product regardless whether or not the consumer decides to accept higher prices in the 2H. As the saying goes, a bird in the hand is worth two in the bush – for that reason we continue to like how ROST is positioned relative to most retailers heading in the 2H.



                EPS: 0.30 vs. 0.28E

                Revs: +7.4%

                Inv: +6%

-          Beat driven by leveraging SG&A on stronger sales

-          Comps +6.7% vs. 4.3%E (Guid of +3-5%)

-          Increased FY Guidance by amount of beat


Retail Earnings – A Bird in the Hand… - WSM S 5 11



                EPS: 0.82 vs. 0.75E

                Revs: +14%

                Inv: +9%

-          Increasing FY guidance by $0.14 vs. $0.07 beat > taking up FY

-          Took up low end of revs outlook

-          Increased EPS range implying stronger profitability

-          Reaffirming FY comps up LSD-MSD

-          Comps +7.1% vs. +4.9%E

-          Also beat by leveraging SG&A on stronger sales


Retail Earnings – A Bird in the Hand… - DLTR S 5 11



                EPS: $1.48 vs. $1.47E

-          Guiding to Q2 below Street

-          Taking FY outlook up $0.20-$0.25 to $5.16-$5.31

-          GM expansion driven by pack-a-way driving results and earnings upside


Retail Earnings – A Bird in the Hand… - ROST S 5 11


Casey Flavin



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Retail: Contain Yourself


This week's retail container traffic begs some questions as to how our call for a 4.5 point margin squeeze will play out in 2H.



Yesterday we commented on how retail container traffic begged a few questions – from us included. Here are some further thoughts.


Specifically, Retail Container Traffic rolled over after trending up for 18 months. The NRF came out with the following bland comment "After nearly a year and a half of volume increases, it's not surprising to see some leveling off," NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. "Retailers are being cautious with how much merchandise they import due to economic pressures such as higher commodity prices, but overall consumer demand remains strong." U.S. ports followed by Global Port Tracker handled 1.08 million Twenty-foot Equivalent Units in March, a gain of only 0.3 percent over the same month a year ago.


The NRF might not have been surprised, but we were.  After 2-years of pulling inventories down to borderline-unhealthy levels, shipments should be on the upswing.


There's no two ways about it...the relationship between retail sales and container traffic is very very real. Though keep in mind that this is very much the tail wagging the dog. Traffic does not pick up because demand is strong this month. Unit sales in the coming months will be impacted by the level of product coming into the country today. In other words, the units will sell -- it's just a question of what margin the retailers will get for the goods.


There are a few other possible explanations…


1)      Our bearish thesis about a supply/demand imbalance is wrong, and the entire retail industry is acting uniformly to take down units.


2)      In the first quarter, it was clear that retailers/brands pulled product forward ahead of COGS increases – so perhaps volume took a breather.


3)      Another consideration is that volume is tracked in TEUs, or twenty-foot-equivalent units. This says nothing about how full the containers are. As oil prices rise, we tend to see logistics teams maximize space inside the container to mitigate the need for additional TEUs. Remember that in filling a container, you either a) leave free space, b) fill it perfectly, c) ‘cube out’ (run out of space), or d) ‘weight out’ (don’t fill the visible space, but hit weight limit). Apparel and shoes don’t ever ‘weight out’, so this is all about cube optimization. We know we’re seeing some of that today.  Hard times make people work harder and/or smarter.


The dotted white line in the chart below represents the ASP yy change on input costs. Again, this is the cost that is pushed into the US -- and one that needs to be eaten by the brand, retailer, consumer -- or any combination therin.


Although we’re already starting to see a crack in the industry’s attempt to pass through pricing (ie Gap – 4.5% of US apparel sales), we’ve got to stay vigilant on both side of this (especially given the severity of our ‘4.5 below’ margin call for 2H.). If we see a consistent downtick in unit volume, it will test our negative assertion that unit shipments will not be down meaningfully for the year despite higher costs.


Retail: Contain Yourself - ContainerTraffic 5 11




We expected a miss but hold had a much bigger impact than we thought.



“With the growth in our mass market operations, as well as our ability to capture the ongoing strong growth in the rolling chip segment, our outlook remains positive, particularly as we focus on various cost control initiatives, improving margins and bottom line results.”

- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment



  • MPEL reported net revenues of $806.6MM and Adjusted EBITDA of $121.3MM, missing consensus estimates
  • “Our non-gaming entertainment amenities, including The House of Dancing Water and Cubic Nightclub, which opened on April 1, 2011, continue to generate incremental visitation, consistent with our objective of developing the highly profitable premium mass market operations at City of Dreams. We also continue to make headway in the development of our customer database, allowing us to strategically target profitable customers now and in the future."
  • CoD:
    • Net revenue of $500MM and Adj EBITDA $86MM
    • RC volume of $18.8BN and hold of 2.5%
    • We estimate that direct play as a % of RC volume fell to 13.7% from 18.9% in 4Q10 and 16.4% in 2010
  • Altira:
    • Net revenue of $265.5MM and Adj. EBITDA $22MM
    • RC volume of $12.7MM and hold of 2.8%


  • Believe that the opening of Galaxy Macau will have a beneficial impact on the market and will continue to shift growth from the penninsula to Cotai
  • Assuming they held at 2.85% their EBITDA would have been $174MM this quarter
    • They also held well in revenue share agreements and poorly in their RC programs which exaggerated their hold impact
  • Their refinancing and RMB note issuiance
  • 2Q11 guidance:
    • D&A: $85MM
    • Corporate: $20-22MM
    • Interest expense: $30MM
    • No meaningful pre-opening or capitalized interest expense


  • They are interested in expanding to other Asian markets
  • Their traffic has held up fine so far in the face of the Galaxy opening
  • Commission split between Revenue Share and RC: 50/50 at CoD.  At Altira is now 1/3 RevShare and 2/3 RC
  • They are still in discussions with the two shareholders at Macau Studio City... there is nothing to report yet
  • Have dusted off the plans on their excess land at CoD - ie the hotel tower.  Thinks its unlikely that the government will approve apartment hotel. They have looked at added more hotels.  They may also also add more gaming space subject to government approval
  • May is off to a good start, April was back end heavy. May is in line with the growth rate for the rest of the year so far
  • The bulk of the cost increase is around the show.
  • The 3 Cotai properties are sharing shuttles that go between the properties
  • Think that marketing expenses will remain rational
  • Why did Altira EBITDA decline QoQ despite topline growth?
    • Mix issues between hold at RC and RevShare segments. Normalized hold would have been about 9MM higher
  • CoD fixed cost ramp QoQ?
    • They were largely stable and other than a small increase from Cubic they are stable going into the 2nd quarter
  • Had high hold in the RevShare and low hold in the RC segments
    • $40MM of the EBITDA impact was from the just hold and then $12-13MM was a mix issue
  • CoD is much more contemporary and sophisticated than Galaxy - thinks that they will get a more high end customer than Galaxy Macau will attract. Thinks that Galaxy will compete more with Grand Lisboa
  • VIP vs. Mass market tables
    • 167 VIP 40 Mass at Altira
    • 227Mass at CoD. They will be hardpressed to move any more Mass tables to VIP at this point
  • Are they adding more junkets? Yes - they are planning on adding one more junket
  • Focus a lot more on the premium Mass segment. They comp about 400 rooms/day for the premium mass customers.  Almost all the VIP rooms are comped
  • Cotai now has the majority of the quality hotel rooms
  • Slot parlors rules in Macau have been in discussion for 2 years. They believe that if those rules go into effect than only one of their parlors with only 150 slots would have to close and they are exploring 2 additional sites.


The Macau Metro Monitor, May 19, 2011



LVS COO Michael Leven said Sands China is considering opening the entire site 5 all at once, which would be in the middle of 1Q 2012.  “There are 300 workers coming out of Galaxy. They are going to the Labour Affairs Bureau and we hope to pick them up and get closer to our goal,” said Leven.  Sands China has 5,500 workers on site but will need 1,600 more.  Leven acknowledged that opening the new resort later would be “an advantage”. “It’s better to have graduated growth and at the same time it allows for the market to grow....When we finish site 6, some time in late 2012 or early 2013, there will be a two-year respite before any other resort is ready to open," Leven stressed.  “I think in the next few weeks we will be able to determine exactly when and what will open," Leven said. “By the middle of June we will make that decision.”


Sands China also decided to manage the hotel tower on site 5 that was supposed to be operated by Shangri-La. “We will be licensing names from two major international brands but we will manage those facilities ourselves,” he said.  “We’re in final negotiations now and we hope to announce those brands, hopefully in two weeks,” Leven disclosed.


Sands China is still awaiting a decision from the Court of Second Instance over an appeal of the government’s decision to reject its application for Sites 7 & 8.  Leven commented, “We are now beginning to work seriously on site 3 and our plan is to continue that work and then we will see what happens with sites 7 & 8.”

NON-RESIDENT WORKERS SOAR BY 5,600 IN 2011 Macau Daily Times

The number of non-resident workers with a work permit (blue card) has increased by 5,603 in 1Q 2011.  In March, Sands China was the biggest employer of non-resident staff with 3,075 workers at its hotel management subsidiary Venetian Cotai and 2,395 at Venetian Macau.  Galaxy came in second with 2,739 imported labour in March.  In March, the GRH received 2,688 requests for the issuance of 9,572 blue cards. Only a little over half, 5,019, were authorized.


Ministry of Trade and Industry (MTI) has revised upward the growth of the  Singapore economy from 4-6% to 5-7% for 2011. MTI attributes this to the advanced economies remaining on a path of modest recovery, particularly the US, EU, and emerging Asia.  MTI added that a tight labour market will add to business cost pressures.


Inflation has probably peaked and will average between 3%-4% this year, according to Monetary Authority of Singapore (MAS) managing director Ravi Menon.  "Allowing the Singapore dollar to strengthen has had a dampening effect on inflation in Singapore, which would otherwise have been much higher," noted Mr Menon.

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