The Macau Metro Monitor, June 2, 2011




Preliminary market shares for May:

  • GALAXY: a little over 13%
  • WYNN: less than 13%
  • SJM: slightly below 34%
  • LVS: 15%
  • MPEL: 14%
  • MGM: 11%


Singapore welcomed 1.07MM visitors in March 2011, up 25% YoY.  The two largest visitor segments--Indonesia and China--increased 16% and 47% respectively in March.




TODAY’S S&P 500 SET-UP - June 2, 2011


Nothing in the last week has changed our Global Macro risk management view.

  1. Growth is slowing
  2. Inflation (reported) is sticky
  3. Stagflation is bad for asset prices (commodities and equities in particular)

Growth Slowing is bullish for UST bonds (TLT) and Compression in the Yield Curve (FLAT). Those 2 positions remain Hedgeye’s highest conviction macro longs alongside Gold (GLD).  Although, all 3 of them are getting overbought in the immediate-term.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.73% downside to 1305 and 0.64% upside to 1323.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1943 (-3520)  
  • VOLUME: NYSE 1189.94 (-21.46%)
  • VIX:  18.30 +18.45% YTD PERFORMANCE: +3.10%
  • SPX PUT/CALL RATIO: 2.19 from 1.61 (+35.79%)



  • TED SPREAD: 21.22
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2.96 from 3.05
  • YIELD CURVE: 2.52 from 2.60 



  • 8:30 a.m.: Jobless claims, est. 417k, prior 424k
  • 8:30 a.m.: Nonfarm Productivity, 1Q final, est. 1.7% from 1.6%
  • 9:45 a.m. Bloomberg consumer comfort, est. (-47.0), prior (-48.4)
  • 10 a.m.: Factory orders, est. (-1.0%)
  • 10:30 a.m.: Natural gas storage change, est. 93
  • 11 a.m.: DOE Inventories  


  • Japan Prime Minister Naoto Kan survives no-confidence vote - Nikkei
  • European bank stress test results to be delayed until July - WSJ
  • Greece’s risk of default was raised to 50% by Moody’s as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region. 




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Billionaire Deripaska Joins Russia Grain Rush as Export Sales Ban Ends
  • Rice Soaring 50% in Thailand as Thaksin Seeks Votes in World’s Top Shipper
  • Wool Rallies to Highest Since 1995 as Flock Shrinks, Stockpile Replenished
  • Drought in China’s Yangtze May Be Relieved by Rains, Helping Rice, Cotton
  • Wheat Gains in Chicago on Speculation of Increased Livestock Feeder Demand
  • Copper, Aluminum Drop as Weaker Data Drive Speculation Recovery May Falter
  • Gold May Advance as Economic Slowdown, Greece’s Debt Turmoil Spur Demand
  • Cooking Oil Imports May Climb as Indian Farmers Dump Soybeans for Cotton
  • Japan Steel Works to Target Non-Atomic Energy Sales After Nuclear Disaster
  • Rubber Declines to One-Week Low as U.S. Data Raises Concern Demand to Slow
  • Oil Falls to Lowest in Week as Manufacturing Slows; U.S. Supplies Increase
  • BHP Facing First Strike in 10 Years at World’s Biggest Steel Coal Supplier
  • N.Z. Proposes Agency to Regulate Exploration, Mining in Its Offshore Zone
  • Goldman, Major Banks See 55% Average Rise in Commodities Income, WSJ Says




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Spain's treasury sells €2.75B of 2014 bond, bid-to-cover ratio 2.5 vs 1.8 at previous auction, bond average yield 4.037% vs 3.568% at previous auction

THE HEDGEYE DAILY OUTLOOK - euro performance




  • Indonesia was closed for Ascension Day.
  • Will China raise rates over the weekend?
  • Japan Q1 manufacturing capex +27.7% y/y, corporate capex +3.3% y/y. Monetary base +16.2% y/y vs +23.9% seq.
  • Australia April trade surplus A$1.60 vs A$1.69B seq. April retail sales +1.1% m/m vs revised (0.3%) seq

THE HEDGEYE DAILY OUTLOOK - asia performance







Howard Penney

Managing Director

Early Look

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Borrowing Deceit

“Nothing is easier than self deceit.”

-Demosthenes (circa 340 BC)


I’m borrowing that quote from Howard Marks, who borrowed it from Charlie Munger, who borrowed it from Demothesnes (Greek orator from ancient Athens). Borrowing ideas is what people in this business do.


What if I woke up every morning for the last 6 months borrowing the idea that US “growth” was “back” and that there was really nothing in this interconnected world to worry about?


Well, that idea would have been a really bad one to have borrowed. Nothing is easier than borrowing ideas – you have to do a lot less work. Nothing is going to protect your returns when those borrowed ideas turn out to be wrong either.


Howard Marks is a successful Risk Manager who runs $82 Billion (as of December 31, 2010) at Oaktree Capital Management. He borrowed that quote for his recent investment memo to Oaktree clients that was titled “How Quickly They Forget.”


Since Marks’ letter is marked “confidential”, I’ll have to stop on his ideas there, and get back to my own:

  1. GROWTH: US and Global Growth are slowing
  2. INFLATION: reported Global Inflation readings remain sticky and elevated because they are lagging indicators
  3. POLICY: Chinese policy (hawkish) continues to diverge from Fiat Fool policy (USA, Japan) which remains Indefinitely Dovish

Being on the road from Boston to Denver to Kansas City to New York to San Francisco in the last 4 weeks has been very interesting. The further I move in time, the more people seem to be agreeing with me on these Global Macro matters (prices going down do that). I’m in Santa Barbara, CA this morning and I’ll be in LA tonight. I don’t expect this bearish progression to lose momentum.


The #1 question Risk Managers want to know is “how do I make money with that?”


Hedgeye Risk Management’s answer remains:

  1. Don’t lose money (we went into yesterday’s meltdown with 10 LONGS and 12 shorts in the Hedgeye Portfolio)
  2. Buy Long-term US Treasuries (TLT) and a US Treasury Flattener (FLAT)
  3. Buy Gold (GLD)

Oh, did I borrow the only rule Buffett and Munger have signed off on before the 2011 version of buy-the-damn-dips? I think I did. Not losing money is indeed a risk management strategy worth borrowing. Try it at home – or with your client’s money.


The #2 question Risk Managers want to know is “where could your ideas be wrong?”


Hedgeye Risk Management’s answer remains:

  1. The Data – if our scenario analysis on growth and/or inflation change, we will
  2. The Market – if TREND line prices hold, we’ll cover shorts
  3. The Fed – if they legitimately move to QG3, we will resort to prayer

While Borrowing Deceit from the Fed on A) full employment and B) price stability can remain fashionable – it can also become, as Le Bernank likes to say, “transitory.” If the price of your homes and portfolios start going down, that is…


Of course, nothing is easier than waking up telling yourself that earnings were “good” and Le Bernank has your back. Sounds a little too much like Q2 of 2008 for me. “How Quickly They Forget.” (Howard Marks, May 25, 2011)


As for what to do in the very immediate-term, here are some key immediate-term TRADE ranges across Global Macro that we’re rolling with this morning:

  1. SP-1323 (bearish)
  2. Russell2000 801-828 (bearish)
  3. Nikkei 9 (bearish)
  4. Shanghai Composite 2 (bearish)
  5. FTSE 5 (bearish)
  6. DAX 7067-7344 (bearish)
  7. VIX 16.65-19.04 (bullish)
  8. USD 74.41-75.80 (bullish)
  9. Euro 1.41-1.44 (bearish)
  10. Oil 97.75-102.03 (bearish)
  11. Gold 1 (bullish)
  12. Copper 4.09-4.29 (bearish)

Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Borrowing Deceit - Chart of the Day


Borrowing Deceit - Virtual Portfolio


Notable news items and price action from the restaurant space including our fundamental view on select names.

  • DRI - Red Lobster is focusing on value this summer with the limited-time offer of a $15 four-course meal.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs through July 25th
  • SBUX signed a deal with Chinese joint-venture partner Maxim’s Caterers Ltd., which gives the coffee company full ownership of Starbucks retail outlets in six Chinese regions. 
  • CMG was reiterated “Buy” with the headline “CMG: A $1,000+ Stock by Decade’s End?”  This is based on CMG’s strong comps and unit growth continuing to approximately 6,000 worldwide.
  • YUM CEO David Novak, speaking at an investor conference, says that the company’s acquisition strategy is focused on China.  The company, he says, is not interested in U.S. brands.  Food costs and labor inflation were also highlighted as challenges in China.
  • YUM supporting the use of food stamps in KY.  Under the federal food-stamp program, states may authorize that elderly, disabled or homeless people, who often have difficulty preparing meals, can use food stamps in restaurants. Three other states — Michigan, Arizona and California — already allow such purchases.
  • Also speaking yesterday was MCD CEO Jim Skinner. He said that MCD will open 175-200 stores in China this year with a focus on more drive-thrus.
  • McDonald’s Issuing Coffee Apology in Australia for serving bad coffee.  It should be noted that the McCafé concept originated in Australia in 1993 
  • A new strain of E coli is causing fears in Europe.  17 people have died due to infection and hundreds, primarily in Germany, have fallen ill due to the bacteria. 
  • The vast majority of restaurant names declined yesterday.  JACK, AFCE, PZZA, BOBE, and MSSR traded down on strong volume.
  • RRGB and DIN were the only names that we monitor to gain yesterday.  DIN was up 30 bps while RRGB gained 3.2%.




Howard Penney

Managing Director

Asia’s Power Struggles Part I

Conclusion: A potential record power outage looks to incrementally slow growth and marginally quicken inflation in China. Even still, we welcome these developments to the extent we may eventually be able to buy one of our favorite long ideas on sale when our models signal to us that it’s once again “safe” to significantly increase our exposure to equities in the Hedgeye Asset Allocation.


In yet another manifestation of our once out-of-consensus call that Growth Slows as Inflation Accelerates, China faces a power shortage that may incrementally slow economic growth and marginally quicken inflation. Multi-year high coal prices (+36% since Jan. ’10) driven largely by a significant pullback in Australian supply (the world’s largest producer) is causing Chinese utilities to slow electricity production, in addition to causing them to demand and receive higher prices.


Furthermore, the worst drought in a half a century is threatening to exacerbate the current reductions in aggregate power generation by limiting the capacity of China’s hydropower stations – particularly the Three Gorges Dam in the Hubei province (the world’s largest). Anecdotally, silicon makers and aluminum & copper smelters in the region are slowly suspending activity due to a lack of electricity on the margin.


The decline in hydropower output (22% of total power generation) in Hunan and Hubei is placing incremental pressure under coal prices (70% of total power generation) and exacerbating the energy supply situation across the country broadly.  At an 11-month low of 8.6M metric tons, coal inventories in China are around nine days’ supply vs. a normal range of two weeks. In an attempt to incentivize utilities to reaccelerate electricity production amid rising costs, China just raised electricity prices for industrial, agricultural, and commercial users in 15 provinces for the first time in over a year by +2.2%, with further increases not being specifically ruled out. This is following a +2.7% increase to power tariffs in 12 provinces on April 10. Interestingly, in a bid to limit consumer price inflation, the National Development and Reform Commission held residential rates flat.


Still, we feel the recent hike has the potential to be passed through the supply chain to Chinese consumers and could put upward incremental upward pressure on China’s CPI – a sharp fundamental reversal (recall that we had been and continue to be bearish on the slope of Chinese inflation over the intermediate-term TREND). The NDRC believes the recent increase could indirectly add +5bps to headline CPI. Obviously any further increases in producer’s energy costs will skew the surprise risk here to the upside.


All in, the combination of lower coal-fired and lower hydropower electricity output is estimated to leave China 30-40 gigawatts short of its energy supply needs this summer (down roughly 4-5% from the full-year total) according to the State Grid Corporation of China. From a glass-half-full perspective, a government-imposed energy use reduction plan implemented last summer that helped slow YoY GDP growth -230bps from 1Q10 to 3Q10 should limit any potential YoY drop-off in economic output some. That said, however, should the current blackout target be hit or breached, this summer’s electricity shortfall will surpass the previous record set back in 2004 when YoY GDP growth slowed -130bps from 1Q to 3Q as the chart below indicates. With Chinese equities demonstrably broken from a TREND perspective, the risks to growth appear to be indeed significant. On a marginally positive note, charting the Shanghai Composite’s 2004 performance vs. 2011 YTD, we don’t see much of a difference in trajectory mid-way through the year, which suggests the magnitude of the slowdown could be similar.


Asia’s Power Struggles Part I - 1


Asia’s Power Struggles Part I - 2


Asia’s Power Struggles Part I - 3


All told, we prefer to continue waiting and watching before re-exercising our bullish thesis on China in the Virtual Portfolio. As the data behind the research call we made continues to play out in spades (China’s May Input Prices PMI ticked down overnight to a 10-month low of 60.3 vs. a prior reading of 66.2), we maintain our conviction that China will once again present itself as one of the best markets to invest in across the globe – particularly as consensus unwinds the incredible cognitive dissonance associated with being levered-long of US equities amid 1970’s-style Jobless Stagflation.


Asia’s Power Struggles Part I - 4


For now we’ll continue to ride the bullish wave in the bond market over the nearer term until our models signal to us that it’s “safe” to significantly increase our exposure to equities in the Hedgeye Asset Allocation. And as consensus slowly figures out that the US has a structural growth problem, we think the multiples paid for unlevered, elevated Chinese growth rates will expand on both an absolute and relative basis going forward.


Darius Dale


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