A trip to Macau changed my mind on the prospect of a junket commission cap. I now believe the Macau government will formally institute a 1.25% cap in the coming months. Don’t think for a second that I was swayed by talking to just the operators. For obvious reasons, most of the operators favor a cap while the junkets would like the current “free market” system sustained. Opinions of these “interested” parties must be discounted. However, other, more independent sources are positive on the prospects for a formal cap.

  • As WYNN displayed with yesterday’s pre-announcement, Q3 is not likely to be a pretty one for the Macau operators. EBITDA margin for Wynn Macau declined 900 basis points sequentially. And they didn’t raise commission rates! As shown in the first chart, market wide EBITDA margin bumped up with the opening of The Venetian late in Q3 and stayed relatively stable through Q2. However, the escalation in junket rates began in Q3. Moreover, the visa tightening constricted demand in a fixed cost business.
  • Clearly, a junket commission cap would be positive for the industry. Who would benefit the most? When you take pricing out of the equation, product wins. That is why Wynn Macau would probably gain the most from a junket commission cap. Wynn Macau’s commission rate lags the market by a wide margin. He hasn’t played the pricing game. As a result, his VIP turnover market share declined 160 bps and contributed to a sequential 18% decline. We believe at least 4 operators are currently offering rates above the proposed 1.25% cap including LVS, Galaxy, SJM, and MGM. I think Starworld (Galaxy) may be offering as high as 1.5%. A return to 1.25% will surely allow Wynn Macau to recapture lost market share.

SP500 Levels Into the Close: We Trust You Sold With Us...

Thankfully, we sold our long SPY position this morning (see Hedgeye Portfolio for time stamp). No one cares about that now however. The "Question" is, what do we do from here? This is not a market to be owned. It is to be rented and traded. Here are our new levels in the SP500:

Sell "Trade" line = 1004.41
Buy "Trade" line = 862.86

Yes, you can drive a truck through the spread of this line. Hopefully your Portfolio Manager has their license. Don't forget that "Hedge Fund Inc." is going to be testifying in front of government on October 16th. We're hearing some of these gentlemen may not be enthused by Paulson's preferential treatment of "Investment Banking Inc." No, this is not a bullish macro calendar catalyst.

450: The Magic Number in Europe

Chalk up Burberry as the latest retailer to post a 400-500bp sequential slowdown in European sales. Consistency across consumer is astounding. Hi-end, low-end, sport, fashion…no one is immune.

The only region that was positive was the Americas – and that was driven in part by FX. Not good. This is happening despite what we saw today -- the UK printing a surprisingly inflationary consumer inflation report for September of +5.2% y/y. That’s the highest inflation rate they have shown us since 1997, and this has happened despite commodities melting down. Why? Well, it’s pretty straightforward… currency has been in free fall, and that imports inflation. I’m not banking on Western Europe retail getting better near-term.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Eye on Regionalism: Austria's Spreading Xenophobia

An Austrian car accident may help unite the far right.

Joerg Haider’s death in a car accident this week will no doubt fuel conspiracy theorists in Austria. More ominously, it may help unite Austria’s extreme right wing political parties.

Haider led the anti EU, anti Immigrant, Alliance for Austria’s Future Party to win 11% of last month parliamentary election with a groundswell of support from disaffected young voters. The Freedom party, which Haider split from in 2000, received 18 % of votes tallied, providing the far right parties with almost 30% of the popular vote –startling both the ruling Social Democrat party and Austria’s neighbors who have been anxious over the spread of extremism in central Europe.

Although the ruling parties were able to defend their coalitions grip on power, the exit of Haider from the scene raises the specter of a more united right wing if Freedom Party leader Heinz-Christian Strache can lure Haider’s followers back into the fold.

Austria is currently facing slowing GDP growth, rising unemployment, and equity and real estate markets crashing in sympathy with the rest of the world. This provides the right wing with powerful ammunition against their favorite scapegoat -the EU.

Andrew Barber

The Positive Yield Curve Trade: Energy and Financials

Both Energy and the Financials are leading gainers in our SP500 Sector analysis today. The XLF and XLE are trading up +5% and +3% respectively, with the SPY +1.5%. Both sectors flashed the same positive divergences yesterday (see chart). Why?

I think it might be as simple as the steepening of the yield curve, which is both inflationary and positive for financial spreads. The one thing that's occurred in the last 48 hours of global market trading is that cost of capital has risen in conjunction with the US$ weakening.

Simplicity is at the core of complexity theory. That's what we use within our multi factor risk management model here at Research Edge LLC. That’s the math, and we’re sticking to it.

Flinging Bananas

Consider the following two Bloomberg quotes/assessments of the zoo keeper, Hank Paulson, showing his stripes and bailing out his banking buddies this morning:

1. ``Distasteful'' … ``not consistent with a capitalistic system''…``But however distasteful, they are necessary to restore stability to the financial system.''
2. ``We're looking today at an absolute sea change in the global financial system in terms of liquidity,'' …``This could be the time that breaks the back of the credit crisis.''

The first quote was from a man with credibility. The second is from a man who lost his. Paul Volcker is the non-group thinking and unpopular Wall Street fighting man who understands economic cycles and how to manage them. CEO of Blackstone, Steve Schwarzman, is the man who doesn’t have a business without a re-liquefied ‘Investment Banking Inc.”, and sold stock en masse into the public after levering up American banks with rotten bananas.

As for me – as many astute and underperforming “hedgies” will ask, “who the heck are you?” Well, I’m just a slow running marathon man in training for the Icelandic snow shoe race. Given that Iceland’s stock market just opened down -76% this morning, I’m thinking that airfare and hotels should be pretty cheap, and I definitely have a better shot of not coming in last up there.

Yes, I’m smiling this morning… partly because watching this whole Paulson zoo is entertaining, and partly because we had our biggest up day in well over a year yesterday in the ‘Hedgeye Portfolio’. How can’t a man smile? All the way from New Haven, I can hear the monkeys in the Bronx zoo clanging their hands together and screaming this morning. All of them made money on the long side yesterday – I hope. It was one of the biggest up days in the history of stock markets. You should pay me the equivalent of the surcharge they tack on to bring your kids into the petting zoo to perform on a day like that, not 2 and 20!

Bring out the bananas and lets all swing from the light fixtures this morning. “The bottom is in!”… “I love fertilizer stocks”… “this is a generational opportunity”… c’mon – let’s get serious.

Intraday yesterday, my Macro Research Captain, Daryl Jones, posted a note to our RE Macro clients to “let them run”, and we put ourselves on the tape with an immediate term target on the S&P500 that was higher. This morning that sell signal immediate term “Trade” target for the S&P500 is 1025.11. We’ll be selling some of the equity exposure that we bought last week at that level. We’ll also be re-shorting a lot of the stocks that we covered, fortuitously, last week. Sell high, buy low.

Geographically, in Asia, we remain bullish on China and Hong Kong. We remain bearish on Japan and India. After the shorts were squeezed for a +12% move yesterday in the India Fund (IFN), we started to short it. This morning, Japanese stocks re-opened post Monday’s holiday, and closed up a massive +14.2%. We will likely be re-shorting Japan via the EWJ exchange traded fund that we covered when it was down. Sell high, buy low.

European stock markets are flying from the tree top branches again this morning, chirping like this is easy. We are naked long Europe via our position in Germany’s ETF, the EWG, which was yielding over 11% when we bought it. In looking at what to sell against it (yes, hedging is cool on up days), the British are front and center on our macro screens this morning. The UK printed a surprisingly inflationary consumer inflation report for September of +5.2% y/y. That’s the highest inflation rate they have shown us since 1997, and this has happened despite commodities melting down. Why? Well, it’s pretty straightforward… their currency has been in free fall, and that imports inflation. British stagflation will get them a short order from us this morning via the EWU exchange traded fund. Sell high, buy low.

Not all hedge funds have our performance year to date. Maybe that’s why I annoy some of them so much, but then again, if some of those guys actually kept on the trades that they emailed me about in Q3, they have probably been fired by now. David Einhorn, who I respect, has been a standout for nailing the Lehman short call, but (per Bloomberg) even he lost something on the order of -17% in September – some of that has to be due to the good ole boy’s up there at “Investment Banking Inc” who banned short selling in the financials (and the consumer, aerospace, etc…) stocks with that mid month changing of the rules on the fly. If Einhorn was down that much, you should be scared to see some of the banana flinger’s numbers that have yet to be released.

Back from the zoo and over to reality, the most important macro move this morning is that the US Dollar is breaking my short term momentum indicator on the downside (inflationary). That level in the US$ Index is $81.07, and it should be monitored as closely as CNBC might actually monitor the TED Spread today (barring any caricatures of Goldilocks skipping across the screen stealing the real estate). Spreads are wide. Bonds are weakening. The Paulson plan is to bail out his buddies, and that is net net negative for Americas balance sheet. Throwing $10B each over to the boys on the bench at Goldman and Morgan Stanley is what he is doing this morning. Dick Fuld must be sitting there wondering, ‘hey – where is my banana?!?’

Good luck out there today,

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.