From The "Bond Guy"...

Our chief correspondent in bond land continues to provide us proactive insights when it matters most... Here's what he had to say today:

"mortgages are now wider than they were pre-GSE taking over by governement...
remember they wanted to make mortgages "affordable and available" to home owners? 6.55 30yr mortgage rate right now. And that's for <80 ltv, >720 fico guys, full doc."

Access to capital continues to tighten, as cost of capital continues to rise, globally.


We shorted EWU this morning

Today’s CPI number for the UK came in at an unexpected increase of 5.25% over the same month last year –a decade high. Despite the commodity sell off British consumers are still feeling the pain of the Pound’s decline in their wallets.

This increase in CPI has left the Bank of England caught in a in a tug of war between near term inflationary concerns and the capital markets liquidity draught. Last week’s 50 basis point rate cut has not yet created the desired market stability; meanwhile the UK public pension system is pegged to the inflation index, meaning that the government faces billions in additional state payments if inflation rises. In theory the potential exists for a vicious cycle -rising inflation levels contribute to increasing public liabilities, potentially further weakening the Pound against the Euro, Dollar and Yen and contributing to more inflation. This worst case scenario seems unlikely. In fact, most economists are counting on decreasing food and fuel costs to get inflation levels back below the government’s target rate of 2% rapidly, but the prospect of any further weakness for the Pound is still sobering.

Even if inflation does recede quickly, national debt is still on the rise. The first bank bailout linked bond issuance, 30 Billion Gilts and 7 Billion in Treasury bills, has been announced with an additional 70 billion+ expected to come to market over the next several quarters.

We sold EWU into this morning’s knee jerk rally in response the US bank bailout announcements. This is a significantly damaged economy that will take time and pain to right itself, making the decision to sell into near-term wishful thinking a lot easier.

Andrew Barber

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.


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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.

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