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MACAU UPDATE

No change to June revenue forecast of HK$19.5-20.5BN

 

 

Last week, Macau slowed down a tad with average daily gaming revenues decreasing to HK$664MM per day from HK$705MM per day the prior week.  This is still in-line with the 3-week average daily gaming revenues.   Our June GGR forecast of HK$19.5-20.5BN (+50% YoY) remains unchanged. 

 

Market share continues to be volatile as Galaxy Macau and MGM were the biggest losers last week compared with the previous week, while LVS and WYNN gained the most share.  Galaxy Macau’s big weekly drop was likely due to soft VIP volumes.  We’re also hearing StarWorld appears to be maintaining most, if not all, of its previous volumes.  MPEL also gained share last week as CoD continues to do well despite Galaxy Macau next door.

 

MACAU UPDATE - macau update


TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT

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

 

 

MACRO

 

The health of the consumer is a key question right now as chains pass on price in an effort to protect margins due to elevated input costs.  Chipotle is the latest concept to make headlines for raising prices (see below).  Of course, unless commodities prices decline, we can expect price increases across the industry. 

 

Food costs have declined somewhat but, as the chart below indicates, the CRB Foodstuffs Index remains far above historical norms.  

 

TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT - crb foodstuffs

 

 

QSR

  • CMG is raising prices regionally after saying on its February 20th earnings call that no price increase would be considered until the third quarter. A few days shy of the third quarter rolling around, the company has decided that it will raise menu prices in the Northeast and Southeast over the next few weeks with changes in other markets to follow.  According to The Wall Street Journal, NYC Chipotle restaurants increased prices by 50 cents last week, but lines were still “out the door”.
  • MCD has expanded its smoothie line with a mango pineapple flavor as it looks to emulate its success of 2010 in selling beverages.
  • MCD earned the title of “Most Effective Brand” in the inaugural Effie Effectiveness Index, which ranks brands by measuring the results of 40 worldwide marketing and advertising competitions.
  • WEN Chief Operating Officer, Andrew Skehan, was surprised to learn of the scantily clad models hired to greet reports at the first Wendy’s restaurant in Russia last week.  The Russian initiative was somewhat of a departure from the wholesome, pig-tailed, red-haired icon usually used to promote Wendy’s.
  • THI was restated “Buy” at BofA with a price target of C$55.

 

CASUAL DINING

  • EAT was mentioned on a list of potential M&A candidates by UBS.
  • DRI will report a solid 4QFY11 on June 30th, according to JPM, based on recent industry sales trends and company-specific cost savings. 

TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT - stocks 627

 

 

Howard Penney

Managing Director


THE M3: SLOTS; UNEMPLOYMENT; IMPORTED WORKERS; GAMING TAXES

The Macau Metro Monitor, June 27, 2011

 


MACAU'S GAMING REGULATOR ADVISES CASINOS TO DROP ULTRA-LOW DENOMINATION SLOT GAMES IAG

Several of Macau’s gaming concessionaires have been advised by the Gaming Inspection and Coordination Bureau (DICJ) that slot games with denominations of less than 10HK cents per line are non-compliant and raises problem gambling issues.  IAG says the regulator has not gone as far as to issue a formal directive to ban the 2HK cent and 5HK cent games, but is currently issuing informal guidance that it would like to see their use discontinued. 

 

Several industry sources say currently, a small number of slot players using high denomination machines are providing the majority of the revenues, thus suggesting that the revenue implications of banning ultra-low denomination machines may be minimal.

 

EMPLOYMENT SURVEY FOR MARCH-MAY 2011 DSEC

Unemployment rate for the March-May 2011 period was 2.6%, down 0.1% point from Feb-April period and the lowest since the Handover of Macau to China.  DSEC said this was due to opening of Galaxy Macau.  Total labor force was 337,000 in March-May 2011 and the labor force participation rate stood at 71.6%, up by 0.4% point from the Feb-April period.

 

IMPORTED WORKERS ON THE RISE Macau Business

In May 2011, the number of non-resident workers in Macau reached 84,000, +1.6% MoM.

 

BUDGET SURPLUS RECORDS NEW INCREASE Macau Daily Times

According to provisional data released by the Macau Finance Services Bureau (DSF), direct taxes from gaming totaled MOP 35.17BN, up 46.2% YoY, from January to May 2011.


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WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN

Margin Debt Backs Off of Recent Highs - Still at Elevated Level

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through May.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - margin debt

 

This week's notable callouts include widening spreads in MS, AXP, and municipal bonds.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 6 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative / 0 of 11 improved / 9 of 11 worsened / 2 of 11 unchanged
  • Long-term (150 DMA): Neutral / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - summary

 

1. US Financials CDS Monitor – Swaps widened across domestic financials last week, tightening for only 1 of the 28 reference entities and widening for 27.

Widened the most vs last week: MS, AXP, ALL

Tightened the most vs last week/widened the least: PMI, RDN, AGO

Widened the most vs last month: WFC, PMI, MTG

Widened the least vs last month: GS, AON, MMC

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 39 swaps were wider and only 4 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - Euro cds

 

3. European Sovereign CDS – European sovereign swaps continue to move higher.  Notably, Ireland and Portugal swaps are now at the level that Greek swaps were just a few months ago, with both countries in the high 800s. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged lower last week, ending at 7.57 versus 7.62 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to slide, moving to its lowest level since mid-March, closing at 1598 versus 1602 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - lev loan

 

6. TED Spread Monitor – The TED spread rose 2 bps to its highest level since early May, ending the week at 24.1 versus 22.1 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 4 points, dropping to 8.4. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields remained close to flat, ending the week at 1678.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  Last week spreads rose 7 bps to 122. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows.  Last week the series remained flat versus the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 254 bps.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  3.3% upside to TRADE resistance, 1.0% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur



Weather Forecasting

“When one door closes another door opens; but we so often look so long and so regretfully upon the closed door, that we do not see the ones which open for us.”

-Alexander Graham Bell

 

Keith is both back home in Canada this week.  He is taking some family vacation time at his cottage on Lake Superior and I’ll be back in Alberta with my family later this week as well.  For the first few days, it will be Uncle Duty for me as I apply my risk management skills to babysitting my two nieces and nephew (ages 9, 7 and 5, respectively).  After that I will be headed to my hometown of Bassano, Alberta to celebrate its one hundredth birthday.  That’s also a long winded way of saying I thought it was apropos to start this morning’s Early Look with a quote from one of Canada’s most famous sons, Alexander Graham Bell.

 

While Bell received many patents during his long career, the most famous by far was patent 174,465.  This patent was issued by the U.S. Patent Office on March 7th, 1876 and covered:

 

“. . . the method of and apparatus for, transmitting vocal and other sounds telegraphically . . . by causing undulations, similar in form to the vibrations of the air accompanying the said vocal or other sound.”

 

This was, of course, the patent for the telephone.   The majority of us would consider this the second most important communication related invention after the iPad (that was a joke.)

 

The basis of Bell’s invention was that he replicated sound waves electronically.  The precursor to this was discovering the nature of sound and how it travelled.  Like many discoveries related to the physical sciences, the foundation of the telephone is based on certain immutable laws of physics. 

 

The physical sciences of course stand in stark contrast to social sciences, in particular economics.  While generally agreed frameworks exist for studying economics, immutable laws are much more difficult to come by.  This is an important point to consider when studying statements from preeminent economists, especially those tasked with setting monetary policy.

 

As the Federal Reserve provides us more transparency with press conferences and in releasing their internal projections, the fallibility of economics has become increasingly obvious. 

 

Our research team has spent the last few weeks meeting with some of our top subscribers around North America.  As usual, the discussions were lively and thoughtful. One of the key ideas that we've been floating, which has generated a significant amount of debate, is the idea that the next move by the European Central Bank could be to lower interest rates, instead of increasing them.  This view is actually in contrast to the most recent statements by the ECB.

 

On June 9, 2011 the ECB stated the following in their monthly statement prior to Q&A with ECB President Trichet:

 

“On balance, risks to the outlook for price stability are on the upside. Accordingly, strong vigilance is warranted. On the basis of our assessment, we will act in a firm and timely manner. We will do all that is needed to prevent recent price developments giving rise to broad-based inflationary pressures. We remain strongly determined to secure a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term.”

 

While this is only an excerpt, the gist of the statement overall is that the main risk to the European economy is in not being diligent on inflation.  Therefore, the general consensus is that the ECB will continue leading the Federal Reserve in tightening monetary policy.  The Hedgeye Consensus is slightly different.

 

While the Federal Reserve has continued to ease in 2011 via Quantitative Easing, in contrast, the ECB has both raised its benchmark interest rates by 25 basis points in April of 2011 to 1.25% and, as outlined above, continued to talk hawkish as it relates to future policy.  From our perspective, there are a number of factors that will likely cause the ECB to alter their rhetoric and potentially cut rates this year.  These are:

 

1)      Accelerating sovereign debt issues – We’ve been early on global sovereign debt issues and continue to remain pessimistic on an orderly resolution, particularly in Europe.  A Greek debt restructuring seems all but a foregone conclusion.  Meanwhile, Spain and Italian yields continue to widen versus benchmark rates, specifically 10-year Spanish yields are now at 5.7% versus 4.5% a year ago and Italian 10-year yields are at 5.0% versus 4.1% a year ago.  As it relates to Spain, the impact of the collapse of its real estate bubble continues to be felt and El Confidencial is reporting this morning that Spanish banks may have $50BN in unrecognized problematic real estate loans. 

 

2)      Inflation in Europe may be close to peaking for the cycle - Eurozone CPI was at +2.7% in May year-over-year, which was a sequential deceleration from +2.8% in April.  While certainly only one data point, this sequential decline in inflation will be increasingly driven by a Deflation of the Inflation, as evidenced by the CRB Index now being down -0.8% for the year, and tough compares in late 2011 / early 2012.  Collectively, CPI should gradually decline over the next couple quarters, and perhaps even start to look like deflation.

 

3)      Economic growth set to sequentially slow – Similar to the Federal Reserve, the ECB provides economic growth projections for the Euro area.  Also similar to the Federal Reserve, those projections have proven to be inaccurate and often backward looking.  Currently, the ECB’s GDP projections for the euro area are for 1.5% - 2.3% in 2011 and 0.6% - 2.8% for 2012.  From our perspective, these growth projections will likely have downward bias.

 

Collectively, we believe these factors will make it difficult for the ECB to raise rates in the short term and, if anything, we see bias to easing emerging.  Of course, this does stand in stark contrast to ECB President Trichet’s recent statements, but as it’s famously been said about economists:

 

“The economy depends about as much on economists as the weather does on weather forecasters.”

 

Indeed.

 

Daryl G. Jones

Director of Research

 

Weather Forecasting - Chart of the Day

 

Weather Forecasting - Virtual Portfolio


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