GGR came in near the middle of our projection range of HK$19.5-20.5 billion.



Gross Gaming Revenues (GGR) totaled HK$20.2 billion.  June couldn’t keep up with May (down 14% MoM) which is understandable given:  a) Golden Week in May, b) 1 fewer day in June, and c) high VIP hold percentage in May.  YoY growth was a whopping 52%, although the comparison was easier than normal.  With the World Cup in June of 2010, volumes were probably held back last year.  We won’t have the monthly detail until Tuesday or Wednesday but we think hold was fairly normal.


The biggest story of the month may be the disappointing early results at Galaxy Macau (GM).  We don’t yet have the breakdown between StarWorld and Galaxy Macau but we are hearing that StarWorld has barely missed a beat since GM opened.  If this is the case, the first full month of revenue at GM will have been viewed as highly disappointing.  We think VIP volume at GM may be only 60% of that at Starworld.  On the Mass side, GM seems to be attracting the lowest end customer on Cotai.  Busing has no doubt contributed to that.


We will certainly have more precise color in a couple of days but we think MPEL has the most EBITDA upside relative to consensus for Q2 followed by MGM Macau, Wynn Macau, and Sands China, in that order.



The Cure That Kills

This note was originally published at 8am on June 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If it ain’t broke, don’t fix it”

-Bert Lance, former OMB Director under President Carter


The current Debt Ceiling Debate ongoing in Washington, DC has largely gone unnoticed by investors.  The conventional wisdom appears to regard the daily back and forth between Democrats and Republicans with only passing interest.  As the Sector Head for Healthcare here at Hedgeye, what may be a curious side show to many, has deep implications for investment decisions today. 


Many news stories have struggled to understand Wall St.’s complacency toward the debt ceiling debate.  On the one hand, and in the face of warnings from Secretary of Treasury Geithner, who has made multiple statements regarding the “economic catastrophe” that follows if Congress fails to raise the government’s ability to borrow above $14.3T by August 2nd, there has yet to be the US equivalent of the Greek CDS chart.    Senator John Boehner, the Republican Majority Leader in the Senate, called the August 2nd deadline “an artificial date created by the Treasury secretary.”  It may just be that we’ve seen this movie before and all know the ending.


Republicans and Democrats have staked out their respective Debt Ceiling positions by centering on Medicare.  It makes sense to focus on Medicare.  Medicare spending is the fastest growing and single largest (54%) outlay within Health and Human Services (HHS), the federal department which consumes the largest percentage of federal outlays (23%).  To put this in context, Defense (16%) and Treasury (14%) are number 2 and 3, respectively.  The Congressional Budget Office (CBO), in their more reasonable ‘Alternative Fiscal Scenario’ outlined in their ‘Long Term Budget Outlook’, chart the widening gap between federal income and outlays due entirely to accelerating growth in Medicare spending.


The current Debt Ceiling debate has been decades in the making as government outlays for Medicare and Medicaid have grown substantially since 1960.  Indeed, over the life of available data (since 1960) we’ve witnessed a discrete, secular cost shift away from the individual consumer towards their employer and increasingly towards federal & state sources.    National Health Expenditure data from the Center for Medicare Studies, the agency that administers Medicare and Medicaid, show government sourced dollars have grown from ~20% of total spending to 49%, while Private sources, which include out-of-pocket and Private Health Insurance, have gradually shifted from ~75% to 51% over that same timeframe .  Moreover, Out-of-Pocket expense as a percentage of Total Private Sources has declined from 47% to 12% over the same time period. 


Despite the rapid growth in total medical spending, the Healthcare Economy in the United States by many measures and opinions is broken.  The cliché is to state that we spend far more per capita ($7,290) than any other developed nation ($3,700) yet regularly rank poorly for statistics such as life expectancy (42nd), level of health (72nd), and health system performance (37th), at least according to the World Health Organization.   The rebuttal is that the US healthcare system is better than any in the world, provided the patient carries health insurance and can pay.  But even here, Americans look unfavorably on their health insurance carriers.  According to a December 2010 Gallup survey, 56% percent of those surveyed thought the health insurers as fair or poor at providing their service.  Poor health outcomes is the routine reality for the upwards of 50M people not lucky enough to have health insurance to complain about.  For all the money spent, these statistics suggest we could do better as a country with the dollars spent.


The Affordable Care Act (ACA), also know widely as Health Reform, attempted to correct many of the issues listed above; by expanding insurance coverage, building tools to control costs, and cutting the federal deficit by $143B over ten years.  Unfortunately, the fix may actually be making the problem worse.


The ACA expands coverage by expanding Medicaid by raising the poverty limit to qualify, offering tax credits to small firms to offer health insurance, and providing subsidies to individuals and families to purchase their own insurance on an Insurance Exchange.  It saves money by encouraging the formation of Accountable Care organizations, provider groups who will share in the savings they generate while providing care audited for quality.  The ACA, according the CBO, cuts the federal deficit by lowering Medicare outlays, particularly to private insurance companies who offer Medicare Advantage.


Since President Obama signed the ACA into law many of the underlying assumptions are coming undone.  The ACA “froze” the benefit level states offered under Medicaid, but in recent months, and as states grapple with peak budget shortfalls in 2012, they are looking to cut Medicaid expenses, their second highest expense.  In the last few days, both Democrats and Republicans have publicly contemplated allowing the states to lower eligibility and provider rates under Medicaid.  ACA looks likely to expand Medicaid coverage from a much lower run rate.


Additionally, 1433 companies (representing 3.5M insured lives) have sought and received waivers from HHS to avoid complying with ACA insurance rules.  The Obama Administration has since stopped granting waivers.


Accountable Care Organizations were touted as capable of reducing costs and increasing quality, but this plan too has faltered.  After a steady stream of providers formed ACOs prior to the proposed rules offered to govern them, the concept has run up against the reality of foregoing revenue while incurring costs to comply with the rules set to govern them.  At this point, even the 5M lives estimated by the CBO to be cared for in an ACO appears aggressive.


Recently, the news has turned to a discussion of the Insurance Exchanges, slated to begin offering insurance in 2014, corporate tax credits for offering insurance and the number of people who already have insurance through their job.  McKinsey conducted a controversial survey of employers which suggests a significant percentage of employers (30%+) stop offering health insurance for their employees and pay the smaller penalty set out in the ACA.  A larger than expected coverage drop will increase the government cost of subsidizing health insurance through the planned subsidies.  The CBO currently expects 1M out of a total population of 163M to lose employer health insurance.


Douglas Holtz-Eakin went further with his estimates and calculated the penalty-insurance cost gap would induce employers to drop an additional 38M workers from employer sponsored plans and onto Insurance Exchanges.  This is in addition to the number and subsidy cost of Insurance Exchange participants the CBO estimates, 19M and $450B over 10 years.  With an additional 38M lives, the Insurance Exchange Hotltz-Eakin estimates the subsidy cost will rise to $1.4T, driving the ACA deep into the red.  We have invited Douglas Holtz-Eakin to speak on a call with our clients July 13, and I am looking forward to learning more about his analysis.


The Insurance Exchanges should not present a significant problem as long as the transfer from employer plans to the Insurance Exchanges is 100% efficient.  Similar to the corporate penalty-cost of insurance spread, the individual mandate that compels purchase of health insurance has a very low penalty that starts at $95 for individuals in 2014.  Assuming that just 5% of young healthy employees, who are high margin since they don’t incur many costs, decide to pay the penalty, this leaves a higher cost population behind.  Those that remain will have to pay higher premiums, drawing more subsidies per member, raising the deficit impact, and inducing more individuals to forego insurance, and so on.


While the Debt Ceiling debate goes largely unnoticed today, and may yet be pushed to another day, the day of reckoning approaches for the Health Economy.  Government, corporate, and individual pressures to contain costs will eventually lead to slower growth and margin pressure.  Medicare and Medicaid will need to be cut, the penalties and taxes raised to corporations and individuals, and more aggressive cost control measures put in place.  In the interconnected Health Economy, the ensuing revenue and margin pressures will pose a challenge to everyone; it’s just a question of when.


Thomas Tobin

Managing Director, Healthcare


The Cure That Kills - EL. CBO



The Cure That Kills - Debt Ceiling Intrade


The Cure That Kills - VP TT


Weekly Asia Risk Monitor: Party On or Premature Celebration?

Conclusion: Amid mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.


Below we introduce our first installment of a weekly recap of prices, economic data, relevant news, and internal analysis across the Asian geography. We’ll generally keep our prose to a minimum in this piece, only chiming in where our analysis adds value to the data (please email us if you’d like more color on a particular topic). Further, we’ll parse the data and analysis into three distinct sections for ease of interpretation: 1) Key Economic & Policy Data; 2) Price Action; and 3) Correlations. So without further adieu…





  • China’s National Audit Office published a report finding total liabilities of China’s Local Governments to be 10.7 trillion yuan ($1.7T) and flagged an overreliance on land values as collateral for credit as a major repayment risk over the long term (70% of loans mature within the next five years).
  • Chinese Premier Wen Jiabao affirmed recent government forecasts that CPI will slow in 2H.
  • PBOC liquidity injections helped China’s recent money market tightness ease throughout the course of the week, with the seven-day repo rate falling -266bps week-over-week.
  • Effective today, China will cut its import tax on refined oil products to ensure adequate supplies for domestic demand.
  • China raised its monthly personal income tax threshold +75% to 3,500 yuan ($542) in an effort to spur domestic consumption by lowering the consumer’s tax burden.
  • Manufacturing PMI fell to 50.9 in June vs. a prior reading of 52. The New Orders sub-index also declined, falling to 50.8 vs. a prior reading of 52.1. On the positive side, the Input Prices sub-index fell to an 11-month low of 56.7.
  • An unofficial index provided by property developer SouFun Holdings Ltd. showed that growth in Chinese Real Estate Prices slowed marginally to +0.4% MoM in June vs. a prior reading of +0.5%, marking the 10th consecutive month of positive growth.

Hong Kong

  • Home prices (up +70% since the start of 2009) and retail rents (up +27% over the same duration) are putting upward pressure on CPI, which, in turn, is causing increased civil unrest within the territory.
  • Burgeoning consumer prices (latest: +5.2% YoY) and a growing reputation for pandering towards the elite caused Chief Executive Donald Tsang’s approval rating to drop to 46.5% - the lowest reading since he took office in 2005.
  • The Hong Kong economy continues to overheat with Money Supply (M3) growth accelerating in May to +11.4% YoY vs. a prior reading of +6%.


  • The Central Bank of China (Taiwan) raised its discount rate +12.5bps to 1.875%.
  • HSBC Manufacturing PMI plummeted in June to 49.9 vs. a prior reading of 54.9.


  • Small Business Confidence edged up in June: 43.1 vs. a prior reading of 37.8.
  • Prime Minister Naoto Kan pledged to remain in office until the following three controversial bills are passed by the Diet: 1) a second (smaller) stimulus bill; 2) deficit financing legislation; and 3) a renewable energy bill.
  • On MoM basis, Industrial Production growth accelerated to a ~68-year high of +5.7% as factories came back online in certain areas. On a YoY basis, however, growth contracted at -5.9% rate, suggesting that the headline “growth” number is rather illusory.
  • Manufacturing PMI ticked down in June to 50.7 vs. a prior reading of 51.3.
  • Overall Household Spending growth accelerated in May to -1.9% YoY vs. a prior reading of -3%.
  • 2Q11 Tankan Survey Results:
    • Large Manufacturers Index ticked down to -9 vs. a prior reading  of 6;
    • Large Non-Manufacturers Index ticked down to -5 vs. a prior reading  of 3;
    • Large Manufacturers Outlook came in flat at 2;
    • Large Non-Manufacturers Outlook ticked down to -2 vs. a prior reading  of -1;
    • All Industry CapEx Guidance ticked up to +4.2% vs. -0.4% prior vs. consensus expectations of +2.4%.


  • The Centre for Monitoring the Indian Economy reported that due to tighter credit conditions, the number of stalled corporate projects grew +18.1% YoY in 1Q11 alongside a -9.3% YoY contraction in the number of new projects announced.
  • Food Inflation slowed to +7.8% YoY vs. a prior reading of +9.1% in the week ending June 18.
  • Energy Inflation accelerated to +13% YoY vs. a prior reading of +12.8% YoY in the week ending June 18.
  • The central government’s recent decision to remove crude oil import duties and the Finance Minister’s affirmation of his lofty growth assumptions is raising concern that the government will fail to meet its deficit reduction target.
  • HSBC Manufacturing PMI fell to the lowest level in nine months in June (55.3 vs. a prior reading of 57.5).

South Korea

  • Bank of Korea Manufacturing Business Survey declined in July to 90 vs. a prior reading of 97.
  • Bank of Korea Non-Manufacturing Business Survey declined in July to 84 vs. a prior reading of 86.
  • The Finance Ministry increased its full-year inflation forecast +100bps to +4% YoY while lowering its growth forecast -50bps to +4.5% YoY.
  • Slowing growth and accelerating inflation have caused President Lee Myung Bak’s approval rating to drop to 28.8% in June vs. 76% when he came into power in February of 2008.
  • CPI accelerated in June to +4.4% YoY vs. +4.1%.
  • Slowing Export growth (+14.5% YoY) caused South Korea’s Trade Balance to contract -$3.5 billion on a YoY basis.


  • Industrial Production growth slowed meaningfully in May: -17.5% YoY vs. a prior reading of -9.5% YoY.
  • The Monetary Authority of Singapore set capital levels for domestic banks +200bps above Basel III standards, further strengthening the health of its highly-rated banking sector (three banks in the top six globally per a June Bloomberg Markets analysis).


  • The controversial Pheu Thai, leading in the polls ahead of Sunday’s election has pledged more populism and hinted at a potential currency devaluation if elected.
  • Slowing Export growth (+17.3% YoY) and faster Import growth (+34.4% YoY) caused Thailand’s Trade Balance to contract -$2 billion on a YoY basis.
  • Headline CPI slowed in June to +4.1% YoY vs. a prior reading of +4.2%. Core CPI accelerated to +2.6% YoY vs. a prior reading of +2.5%.


  • CPI slowed in June to +5.5% YoY vs. a prior reading of +6%.
  • Accelerating Export growth (+45.3% YoY) helped Indonesia’s Trade Balance expand +$1.4 billion on a YoY basis.


  • AIG Performance of Manufacturing Index jumped to 52.9 in June vs. a prior reading of 47.7.



Amid the mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 1


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 2

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 3


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 4

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 5

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 6


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 15




The following tables showcase the outputs of multi-duration regressions with various assets throughout Asia and select key Global Macro indices (the independent variables are denoted in yellow at the top right corner of each table). A couple of key callouts are the breakdown in the positive correlations between Greek 2Y yields and Asian currencies YTD, as well as a developing trend of high inverse correlations between the CRB Raw Industrials Index and Asian CDS.


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 7


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 8


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 9


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 10


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 11


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 12


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 13


Weekly Asia Risk Monitor: Party On or Premature Celebration? - A


Happy Fourth of July weekend,


Darius Dale


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The Week Ahead

The Economic Data calendar for the week of the 4th of July through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

European Manufacturing Cools in June

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


Below we show a table of European Manufacturing PMI according to Markit’s survey. The key take-away that we’ve been noting over the last months is that both inflation and the risk of contagion is eating into both the Manufacturing and Services PMI figures across the continent. In fact, the Eurozone aggregate Manufacturing figure for June is down for the third straight month.


European Manufacturing Cools in June - PMI MH


Other data released today shows that Eurozone unemployment remains sticky, at 9.9% in May, unchanged from April. We continue to highlight the longer term tail headwinds of unemployment in Spain (20.9%); Greece (16.2%) and Ireland (14.2%), in particular. [For more, see our post from 5/20 titled The Push and Pull of Europe’s Borders and Demographics].


Finally, Italy’s Cabinet late yesterday passed legislation to push through €47 Billion in deficit-cutting measures by 2014. This is a first step toward balancing the budget in the coming years as PM Berlusconi’s credibility to govern remains in check. Interesting, some €40 Billion of the plan is back-loaded to 2013 and 2014, a threat as sovereign debt contagion fears remain front and center. From a deficit perspective, Italy is in a better position than its peripheral neighbors, at -4.6% of GDP in 2010 (and -7.7% of GDP in Q1 2011), however its debt remains the second highest in Europe (after Greece) at 119% of GDP in 2010.   


The Cabinet also approved measures to overhaul the tax system to combat tax evasion. A final vote on the package by the legislature is expected before the August recess.


The EUR-USD continues to hold up in our trade range of $1.42 to $1.45, a band we expect will hold as Troika (EU, ECB, IMF) is prepared to fund bailout packages and debt concessions to peripheral nations at all costs. Big brother backstop is a force we’ll be continuing to manage risk around.


Happy 4th!



Matthew Hedrick


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