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What Would We Do Without Charlie?

From our friends at Street Account late in the day here: "Goldman Sachs and Morgan Stanley "drawing up plans" to buy banks; notes CNBC's Gasparino"...

This reporting of what doesn't look to be public information is all just part of what was a mania. It's sad.
KM

HANDICAPPING THE CAP

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.
KM

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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.

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
Director

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.
KM

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