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Mega Dogma

This note was originally published at 8am on June 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The century of megacities has already begun.”

-Lawrence C. Smith (“The World In 2050”)


I’m writing the Early Look from Los Angeles, California this morning. According to Lawrence Smith’s research in an excellent book I just finished reading, “The World In 2050”, Los Angeles-Long Beach-Santa Ana is the world’s 11th largest Mega City (a city with more than 10M people). Next to New York-Newark, which I’ll be on a plane to later this afternoon, that makes LA the only US city in the global top 19.


Most of you probably knew that.


What I didn’t know (from Lawrence’s data compilation in his chapter titled “A Tale of Teeming Cities”):

  1. The world had 2 megacities in 1950
  2. The world has 19 megacities now
  3. The world will have at least 27 megacities by 2025

“Of the eight new megacities anticipated over the next fifteen years, six are in Asia, two in Africa, and just one in Europe. Zero new megacities are anticipated for the Americas. Instead this massive urbanization is happening in some of our most populous countries: Bangladesh, China, India, Indonesia, Nigeria, and Pakistan.” (Smith, page 34)


Now there are obviously plenty long-term investment implications associated with a world that continues to move East. And I assume most of you probably know that too – but what we don’t know is what this balance of population-power is going to do to our Western Dogma of ZERO percent interest rates - and the associated pillaging of our savings (Asians and Muckers like to save).


Being on the road, I get into a lot of fascinating debates with some of the world’s sharpest investing minds. This has been the most intellectually fulfilling aspects of building Hedgeye. Meeting with people who run the buy-side is infinitely more interesting than having a sell-sider beg me for a bonus, bailout, or an II vote.


One of the current debates I have been getting into with buy-siders centers on how long America can sustain Japanese and Western European monetary policies?


Good question - with answers that continue to be tattooed with partisan politics (yes, being a Keynesian is partisan):

  1. US Monetary Policy – we have two views; what Le Bernank should have done (raised rates 6 months ago) and what he will do (nothing – he hasn’t raised rates since 2006 and he won’t start now). Our Q2 Macro Theme remains that the Fed will remain “Indefinitely Dovish” (no QG3 and no rate hikes), which is why we are long a UST Flattener (FLAT) and the long-bond (TLT).
  2. Western European Monetary Policy – we have one view; Les Eurocrats will remain socialist in their leanings even though they are pretending to be chicken hawks post their most recent rate hike (ECB raised rates before the Fed for the 1st time ever). Le Trichet will be gone by year-end and replaced by a left-leaning Italian (Mario Draghi). We think he could cut rates within his first 3-6 months.
  3. Eastern European and Asian Monetary Policy – they have one view; fight inflation with the weaponry allocated to the Fiat Fools. Russia shocked me early this week with another interest rate hike and obviously the Chinese and Australians have raised interest rates 6 times respectively since this short-cycle global “recovery” began.

More objective policy makers who use the blunt fiat instrument of interest rate decisions both ways (like yesteryear’s Bundesbank or today’s Reserve Bank of Australia), have learned over the years that there is one unique advantage to having the stones to raise interest rates – THEN YOU CAN CUT THEM!


Le Bernank et Les Japanonais… not so much. They have chosen to put their countries in de penalty box for many, many, time – deh will ultimately sit dere now… and feel shame…


Or maybe they won’t feel shame. Your run of the mill central planning groupthinker from the Keynesian Kingdom tends to think they’ve saved us from all of the problems that they’ve created with ZIRPS (ZERO interest rate policies). Have you ever seen an academic “economist” win his or her Nobel prize and have a change of heart?


Not so much…


“We are now on a trajectory to add nearly 40% more population by the year 2050, raising our number to around 9.2 billion. Who will we be in 2050? In that year, for every one hundred of our future children and grandchildren born, fifty-seven will open their eyes in Asia and twenty-two in Africa, and mostly in cities.” (Smith, page 35)


A few important words in Smith’s depiction of the Global Macro Markets in which interconnected factors will continue to collide: “our number”, “our future”, and “open their eyes”…


Do we really think that conflicted, compromised, and constrained monetary policies that serve 5-10% of Western populations’ compensation desires (never mind 1% of our world’s) are going to hold their dogmatic line?


That’s a mega question that I’d love to see Le Bernank host a Global Presser Conference on and answer in Chinese and Rusky, with a straight face. Particularly after this morning’s Jobless Stagflation report, which will continue to remind the world that the Greenspan-Bernanke era of cutting savers account returns to ZERO percent has equated to a decade of ZERO net jobs created in America.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1527-1546, $98.11-102.29, and 1303-1324, respectively.


Best of luck out there today and enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Mega Dogma - Chart of the Day


Mega Dogma - Virtual Portfolio


But that doesn't mean we can't speculate, estimate, and pontificate. 



With the preliminary data we have, our best guess is that Galaxy Macau is on track for approximately $400-450MM of EBITDA in its first full year of operations.  Given the cost, that level of EBITDA translates into a 20-23% ROI.  Our calculation takes into account current revenue run rates adjusted for the “honeymoon” effect, high initial hold %, and market type margins on the property’s Mass and VIP revenues.


Galaxy Macau total gaming revenues for the first 16 days were around US$116MM ($112MM of which was table revenue). 

  • Mass table revenue of $19MM
  • VIP table revenue of $93MM with RC volume of $2.3 BN
  • Assuming no direct play, hold at Galaxy Macau was a high 4.0%
  • Roughly $4-5MM of slot revenue

We estimate that a full month in May would have generated between $163-170MM, assuming normal hold for the entire month. We assume a full month of May would have generated:

  • $35MM of Mass win
  • $8-10MM of slot win
  • Approximately $4.4BN of RC volume and $125MM of Gross VIP win




As a point of reference, we thought it would be helpful to compare Galaxy’s opening with some recent openings (City of Dreams, Venetian, and MGM Macau).  The Galaxy opening was considerably stronger than CoD or MGM and even matches up to the Venetian.

  • CoD opened on June 1st 2009 and produced a paltry $28MM of gross gaming revenues for their entire first month.  Granted hold was very low, but Junket Rolling Chip was only $1.6BN.  In July 2009 (its 2nd month), CoD did approximately $130MM of revenues on Junket RC volume of $2.36BN.  For its first full 4 quarters of operations, CoD generated $183MM of EBITDA.  All-in cost for the property was $2.1 BN (1st year ROI of 9%).
  • Venetian opened in late August 2007.  In September 2007, the property did about $145MM of gross gaming revenues on junket RC volume of $3.9BN.  Venetian generated $500MM of EBITDA in its first twelve months of operations for a 1st year ROI of 20%.
  • MGM Macau opened on December 18, 2007. We estimate that the first partial month of operations produced just $17MM of GGR.  MGM’s first full month of operations wasn’t very inspiring either, with GGR of just $93MM on junket RC of $1.8BN.  MGM Macau generated less than $120MM of EBITDA in their first full twelve months of operations for a ROI of just 10%.



TODAY’S S&P 500 SET-UP - June 8, 2011


If you don’t have, as Jaime Dimon said yesterday in Atlanta, “fear like I do”, about the final output of Le Bernank’s Keynesian monetary policies – you’re going to be on the wrong side of this global equity market selloff. When prices are falling, fear sells.


Yes, that’s a pathetic and sad statement – but this is the beggar’s bailout bed our profession asked for – and now we’re going to sleep in it. The good news is that consensus is starting to price in Growth Slowing and an Indefinitely Dovish Fed (our Macro Themes). US Stocks are down for 6 consecutive days and 6 consecutive weeks. UST Bonds (TLT) and Gold (GLD) continue to win the fear-mongering game.


As we look at today’s set up for the S&P 500, the range is 38 points or -0.77% downside to 1275 and 2.18% upside to 1313.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: 386 (+2184)  
  • VOLUME: NYSE 934.66 (-2.56%)
  • VIX:  18.07 -2.27% YTD PERFORMANCE: +1.80%
  • SPX PUT/CALL RATIO: 1.40 from 1.46 (-4.10%)



  • TED SPREAD: 21.11
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.01 from 3.01
  • YIELD CURVE: 2.62 from 2.58 



  • 7 a.m.: MBA Mortgage: Prior, (-4.0%)
  • 10:30 a.m.: DoE Inventories
  • 11:30 a.m.: Fed to sell $15b 6-day cash-management bills
  • 1 p.m.: U.S. to sell $21b 10-yr notes reopening
  • 2 p.m.: Fed Beige Book
  • 2:20 p.m.: Fed’s Hoenig speaks in Steamboat Springs, Colo.


  • Bullish sentiment decreases to 40.9% from 45.2% in the latest US Investor's Intelligence poll
  • Banks may cut thousands of Wall Street jobs within weeks - NY Post
  • Morgan Stanley to focus on cost cutting - WSJ



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • U.S. Corn-Crop Delays Signal Tightest World Supply Since 1974, Price Gains
  • Copper Falls on Concern Demand May Wane as Economies Struggle; Tin Drops
  • Oil Drops on Concern OPEC to Raise Quotas as U.S. Gasoline Demand Falters
  • Gold Falls as Some Investors Sell Following Advance to Near Record Price
  • Sugar Rises as Brazil’s Production May Miss Estimates; Coffee Prices Drop
  • Aluminum Costs to Japan Said to Gain to One-Year High on Post-Quake Demand
  • Copper Imports by China Set to Rebound on Consumption, Investment Demand
  • Australia Suspends Cattle Exports to Indonesia on Animal-Welfare Concern
  • Palm Oil Drops to Three-Week Low as Recovery Concerns Cut Commodity Appeal
  • Global Rubber Shortage to Narrow, Capping Costs for Tiremakers, Group Says
  • BHP Coal Mine Workers in Queensland Plan Strikes Next Week, Union Says
  • Cocoa Arrivals From Brazil’s Bahia Region Climb 19%, Analyst Hartmann Says
  • Oil at $100 Hurting Economy May Spur OPEC to Boost Targets: Energy Markets




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: what a mess; Germany/Sweden/Denmark (pseudo stable countries) all down 1-1.5%

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: trying to find its bottom and can't; Japan and China up for day 2, barely, as rest of Asia swoons; Hong Kong -0.9%, India -0.64% and Thailand -2.0%

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

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.

Still Bearish on India

Conclusion: Our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future.


Position: Short Indian Equities (INP)


By now, it’s pretty clear that the global economy is cooling. Be it a “transitory soft patch" or the turning of the global economic cycle, the net result is the same – earnings estimates need to come down. How deep in magnitude and far out in duration negative revisions must take place is a topic that will be ferociously debated, largely due to the levered long nature of this current “bull” market.


Shifting to India specifically, our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future. Currently, all three of India’s major liquid asset classes confirm this thesis:


Equity Market: India’s SENSEX Index is down -9.2% YTD and remains broken from a TRADE & TREND perspective in our quant models:


Still Bearish on India - 1


Currency Market: India’s Rupee is flat YTD vs. the USD (astonishing for a country that’s raised rates three times YTD in the face of the Fed’s Indefinitely Dovish policy) and it is also down -1.4% vs. the USD since peaking on April 8th:


Still Bearish on India - 2


Bond Market: While still up +36bps YTD on upwardly-revised inflation and rate hike expectations, India’s 10Y sovereign bond yields have plummeted -18bps since peaking on May 30th. India’s yield curve (10Y-2Y spread), which had been falling YTD mostly due to the advance in short-term rates, is now at 2bps wide from 14bps prior to the recent move in long-term rates. From a corporate perspective, India’s 10Y AAA-rated credit spreads have widened +32bps since May 30th:


Still Bearish on India - 3


Still Bearish on India - 4


Alongside India’s Manufacturing PMI falling in May to 57.5 from a “toppy” 58 reading, we think these markets are leading indicators for further slowing of the Indian economy. Recently, C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, cut his estimate for India’s FY12 GDP by -50bps to +8.5% YoY. We think that’s still too high.


Additionally, accelerating inflation remains a risk over at least the next 3-6 months as the recent +8.5% increase in gasoline prices, a potential diesel price hike, and an expected +20-30% increase in food prices in 2H (according to India’s Commission for Agricultural Costs and Prices) all combine to give India’s WPI enough momentum to “comp the comps” in the coming months.


From a policy perspective, we continue to affirm our once-contrarian view that India is very likely to miss its deficit reduction target in FY12 (4.6% of GDP) due to lower-than-expected tax receipts and flat-out ridiculous assumptions baked into the projections (+9.25% YoY GDP growth; a -38% reduction in energy subsidies).


Net-net, all three of the big Macro drivers (GROWTH, INFLATION, and POLICY) are going the wrong way for India. As such, we continue to see alpha on the short side of India’s equity market, bond market (particularly corporate), and her currency (INR). At a bare minimum, long-term investors should continue to remain underweight of Indian assets for the intermediate-term TREND.


Darius Dale


TBL: ...A Thousand Words

It's easy to kick yourself over missing out on a money-making opportunity -- only to realize that sometimes the best thing to do in the spirit of risk management is to do nothing.



A law firm announced today a class action lawsuit against Timberland and several of its officers for breach of the Securities Exchange Act of 1934. We won't comment on the merits of the lawsuit, other than to say that a picture tells a thousand words. See below. 


While we kicked ourselves on the day of the upside surprise in January, we held our ground despite TBL seemingly having the best momentum in the footwear space. Several things did not smell right about it, which all came to fruition in May.


While we wish we'd been on the right of the both trades -- sometimes the best thing to do in the name of capital preservation and risk management is to do nothing -- especially when management credibility is at hand.


We won't be the judge and the jury on this one. That's the SEC's job. But we can look at historical price, sell-side/buy-side sentiment, and management stock sales. The simple conclusion is that after the blowout 4Q results and bullish comments about future shipments, we saw sentiment remain near peak levels despite a 45% run in the stock. Simultaneously, we saw management stock sales kick in, with several sales over 1Q right through the 1Q blowup. 


You be the judge. Regardless of anyone's opinion, the last thing this management team needs right now is a creibility problem.



From the press release:

"...the complaint alleges that, during the Class Period, the Company disseminated overly optimistic statements about then-present sales trends, cost discipline and inventory levels and an anticipated return to a 15% operating profit, and that, as a result of these representations, Timberland share prices traded at artificially inflated prices. However, at the same time the Company was making such statements, certain of its officers and directors concealed that demand for Timberland’s key products had actually declined dramatically, its inventory levels were rising, and Timberland had significantly increased advertising spending to counter lackluster sales, thereby materially decreasing operating income. On May 5, 2011, Timberland disclosed the financial results for the Company’s first quarter 2011 that were far below its bullish Class Period public statements. As a result of this revelation, prices of the Company’s common stock plummeted."


TBL: ...A Thousand Words - tbl1

Hope: SP500 Levels, Refreshed

POSITION: No Position SPY 


Hope, as we like to say at Hedgeye, is not a risk management process.


Growth Slowing has no immediate-term catalyst to slow it being priced into consensus either. The stock market is down for 6 consecutive weeks (6% correction versus the April 29th peak) because the pricing process is in motion.


While there was an immediate-term TRADE line of support yesterday at 1285 where we covered our Energy (XLE) short, that equivalent line for the SP500 is now down at 1279. The risk now is that the bulls hope for 1314 (immediate-term TRADE resistance), and hope fails.


Across durations (TRADE, TREND, and TAIL), Mr. Macro Market is growling: 

  1. TAIL resistance = 1377 (long-term lower-high)
  2. TREND resistance = 1323 (below the Moving Monkey line (50 day) of 1330)
  3. TRADE resistance = 1314 

Our long-term TAIL support line is all the way down at 1219, so I wouldn’t get too cute with the hope stuff here. Keep your net exposure tight and manage risk (trade) aggressively.



Keith R. McCullough
Chief Executive Officer


Hope: SP500 Levels, Refreshed - SP500

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