The Macau Metro Monitor, July 5, 2011



The government approved 8,560 imported workers in May, significantly higher than the numbers in the first four months.  Over 6,600 foreign workers were hired by the construction industry in the first five months, followed by maids at 6,500. The number of approved foreign workers for hotel and dinning industry also increased.



China passed the proposal of raising the personal income tax threshold from RMB 2,000 to RMB 3,500 in end of June, making it more difficult for Macau enterprises to recruit mainland employees. As a growing number of employees are not renewing their contracts, Macau enterprises are now turning to hiring Filipinos.

Optimistic Pessimists

This note was originally published at 8am on June 30, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

-Winston Churchill


Earlier this week, I appeared on BNN, which is the Canadian equivalent of CNBC to discuss some of our key recent macro thoughts (the clip can be found here: ).  Shortly after the appearance, our COO Michael Blum emailed and said I need to smile more.  I then was told by one of our top Canadian subscribers that I could use some rose colored glasses.  These comments made me wonder: am I too pessimistic? Further, is Hedgeye too pessimistic?


Admittedly, our morning missives at times can come across with a pessimistic tone.  This is a function of the early mornings, our legitimate concerns regarding the global economic outlook, and, candidly, some disdain for the decision making and leadership currently coming out of Washington, DC.   Now some might argue we could simply ignore Washington, DC, but the reality is that we are in an economic and market environment in which Washington decision making is critical to investment decision making.


Despite our tone in the Early Look some mornings, as a firm I can ensure you we are incredibly optimistic. The simple fact that we started this firm in the middle of 2008 shortly ahead of one of the most dramatic equity sell-offs in our lifetimes is probably the best validation of our optimism.  We continue to be optimistic about the future of our business, the businesses of our subscribers, and our collective ability to continue to find interesting and alpha generating investment opportunities.  Moreover, we are also optimistic about our ability to help shape and inform economic policy.


We currently share our thoughts and research with decision makers within the Obama administration, with certain Presidential hopefuls, and with members of Congress on both sides of the aisle.  Our goal is not to someday become rich selling research to the government, but rather to do our part to get this fine country to a better fiscal, monetary, and economic place by providing input and ideas where we can.  While there are certainly economic storm clouds on the horizon, as Churchill said long ago there is “opportunity in every difficulty.”


Currently, the Hedgeye research team sees a number of interesting opportunities on the long side.   Below I’ve outlined a number of our team’s top investment ideas that were circulated in May’s version of the Hedgeye Edge on May 27th 2011:

  1. Visa (V) – We remain strongly of the view that Durbin will be softened, and that this will remove a meaningful source of overhang on the stock. While MasterCard has already had a major run, Visa has lagged considerably behind. Update: Durbin was softened and V is up +8.5% since May 27th.
  2. Buffalo Wild Wings (BWLD) - The last quarter was very difficult to poke holes in and it remains one of our favorite ideas as its primary food cost, chicken wings remain suppressed. We see sales continuing to accelerate and a focus of management on deploying further cash into the business which should fuel further growth. Update: Chicken costs have remained soft and BWLD is up +5.8% since May 27th.
  3. Nike (NKE): Over the intermediate and longer terms this is McGough’s favorite big cap long idea. He thinks that it grows from doing $20 billion in sales to $28 billion in 3 years. Update: NKE reported strong earnings earlier this week and is up +6.1% since May 27th.

Since May 27th, the SP500 is down -1.8%, so these ideas did quite well on relative basis.  Now to be fair, not all of the ideas in Hedgeye Edge fared this well (and some such as KONA fared much better), but the point is really to emphasize that even when our Macro view can sometimes be pessimistic, our research can still find interesting opportunities on the long side.  If you are an institutional subscriber and would like to connect with a Sector Head on these ideas or other stock ideas, please email


Today is both quarter end and month end for the investment management community.  The SP500 as of the close yesterday is down -2.8% for the month and -1.4% for the quarter, which is depressing even for an Optimistic Pessimist like myself.  The end of the quarter also signals the end of the Federal Reserve’s program of Quantitative Easing II, which is certainly a positive for anyone other than those still clinging to the ideology of Keynesian economics.


The key potential impact of the end of QEII is a strengthening U.S. dollar, which will perpetuate the continued deflation of commodity prices.  Far be it for me to call out too many positives this morning, but commodity prices deflating will be positive for corporate earnings (eventually) and incrementally positive for consumer spending. 


Now as for Standard & Poor’s warning this morning that it will cut the U.S. to its lowest rating of “D” if the government fails to increase the debt limit, I would recommend disregarding Standard & Poor’s with impunity.  The 10-year yield for U.S. Treasury is trading at 3.097%, which means that the U.S. is not defaulting on its obligations any time soon.  While we may not particularly like the debt ceiling resolution, a default is not imminent.


Our job as market operators is not to be pessimistic, optimistic, bearish, or bullish, but ultimately it is to be right.  Trust me, even if we sometimes sound dour, the Hedgeye Research Team is always finding nuggets of optimism somewhere.  As the famous Persian proverb goes:


“I had the blues because I had no shoes until upon the street, I met a man who had no feet.”


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Optimistic Pessimists - Chart of the Day


Optimistic Pessimists - Virtual Portfolio


TODAY’S S&P 500 SET-UP - July 5, 2011


In Global Equities, a lot changed for the positive last week, but in a Fiat Fool world that only A) shortens economic cycles and B) amplifies market volatility.  We have been focused on the Euro/USD intermediate-term TREND line of 1.42 as support (the line that needs to hold or else a lot of other asset prices - particularly stocks) will start to break. Now that line = 1.43. Time and prices change my risk management scenarios. 


Euro/USD trading down -0.55% this morn to 1.44 is nothing to stress about.  Interestingly, on another sequential slowdown in high-frequency German data (Services PMI for June was 56.7 vs 58.3 in May), the DAX held its bid (we're long EWG and Germany is up +7.8% YTD).


China is the other equity market we really like and it just moved back to positive for the YTD this morn after a bigger rally from the lows than US stocks had. If the world isn't melting down, buy China and Germany at these prices before you buy USA.  As we look at today’s set up for the S&P 500, the range is 26 points or -1.92% downside to 1340 and 0.02% upside to 1340.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: 1973 (+575)  
  • VOLUME: NYSE 865.08 (-13.15%)
  • VIX:  15.87 -3.93% YTD PERFORMANCE: -10.59%
  • SPX PUT/CALL RATIO: 1.30 from 1.38 (-5.50%)



  • TED SPREAD: 23.56
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 3.22 from 3.18
  • YIELD CURVE: 2.72 from 2.73 



  • 10 a.m.: Factory orders, est. 1.0%, prior (-1.2%)
  • 11 a.m.: Weekly export inspections
  • 11:30 a.m.: U.S. to sell $27b 3-mo. bills, $24b 6-mo. bills
  • 4 p.m.: Crop conditions: corn, cotton, soybeans, winter wheat


  • An EU-approved payout for Greece may result in a default rating, S&P said yesterday
  • Australia leaves cash rate unchanged at 4.75%, as expected
  • Eurozone May retail sales (1.9%) y/y vs consensus (0.5%) and prior revised to +0.8% from +1.1%
  • ECB will continue to accept Greek debt as collateral- FT




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Bear Market in Tin Ending as Shortages Mean PT Timah’s Profit Advances 55%
  • Crude Oil Halts Two-Day Decline in London on Speculation of Rising Demand
  • Wheat, Corn Gain on Speculation Lowest Prices of 2011 Attracted Importers
  • Copper May Slide on Report Top Consumer China Is Set to Raise Rates Again
  • Sugar Climbs as Brazil’s Output May Miss Initial Estimate; Coffee Slides
  • Gold Climbs in London Trading as China Bank Exposures May Boost Demand
  • Palm Oil Dropping to Lowest in More Than Nine Months May Reduce Food Costs
  • Copper May Reach Record High by October on ‘Bull Flag:’ Technical Analysis
  • Vale Has No Concern Iron-Ore Demand in China May Slow, CFO Cavalcanti Says
  • Soybean Oil Imports by India to Drop 40% as Premium Widens Over Palm Oil
  • India’s Farm Ministry ‘Not Pushing’ for Exports of Wheat, Rice, Pawar Says
  • Rapeseed Imports by Pakistan to Slump as Prices Climb, Buyers’ Group Says
  • Rubber Drops Most in a Week on Concern Chinese Demand May Weaken on Rates
  • Hedge Funds Reduce Natural Gas Bets by Most in Four Months: Energy Markets




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: holds up reasonably well given the German Services PMI slowed sequentially (were long $EWG); Spain remains below its TREND line


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: Chinese stocks (were long $CAF) continue higher, now back into the green for the YTD, but the Hang Seng not confirming, still below TREND


THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%

Being Able To Change

“He is able who thinks he is able.”



After taking a much needed week off, I’m back in the saddle this morning and ready to manage some risk. So let’s get at it - here’s where the Hedgeye Asset Allocation Model stands:

  1. Cash = 52% (down 6% week-over-week from 58%)
  2. Fixed Income = 33% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  3. International Equities = 9% (China and Germany – CAF and EWG)
  4. US Equities = 6% (Healthcare – XLV)
  5. International Currencies = 0%
  6. Commodities = 0%

Have we been able to change our exposures in order to reflect our Macro Themes? In some cases, yes. In others, not yet. There is a big difference between Risk Management and Research – it’s called timing.


A lot of people say you can’t time markets. We agree – by the looks of Q2 performance numbers out there, a lot of people can’t. But what if you could? Would you change?


In June we went 21 for 22 on closed positions in the Hedgeye Portfolio. That’s better than a swift kick in the Canadian bacon. That also lends credibility to the concept that timing markets within a band of probabilities is possible.


Did I get crushed on the first day of July? Big time. Do I plan on getting crushed every day this month? You tell me. Being Able To Change is critical to the Risk Management Process. Crush or be crushed.


So let’s get back to positioning…


Growth Slowing and Deflating The Inflation have been 2 big Research calls we’ve made in the last 6 months. In the Hedgeye Asset Allocation Model, that’s why I have such a large allocation to Fixed Income. Slowing growth and slowing inflation is good for bonds – and from some prices… in some countries… bad for stocks.


I’ll get back to stocks in a minute…


Fixed Income

  1. Fixed Income Exposure – on last week’s bond bombings, I took our allocation to its highest for 2011 YTD.
  2. Long-term Treasuries (TLT) – was a really good position to hold on the long side in Q2 2011. It was contrarian and it was right. To a degree, when 2-year US Treasury yields hit 0.34% during the thralls of June (and 10-year yields were trading consistently below 3%), being bullish on bonds because growth was slowing as inflation deflated was being priced in. For now, we’ll stay long TLT provided that our intermediate-term TREND line of support for 10 and 30 year yields don’t breakout above 3.24% and 4.38%, sustainably.
  3. US Treasury Flattener (FLAT) – another rock solid position for us in Q2 and we expect it to continue to be, provided that La Bernank cannot find a way to suspend gravity with another Fiat Fool Experiment to take the short end of the curve beyond the zero-bound. The all-time wide in 10s minus 2s = +293 basis points wide. The Q1 2011 average was +276 basis points wide. And this morning 10-year minus 2-year yields = +270 basis points wide. We’re looking for further compression in the 10s/2s spread over the intermediate-term TREND.

Now back to everyone’s favorite storytelling vehicle – stocks.

  1. Equities Exposure – for Hedgeye, a 15% asset allocation to Global Equities is actually relatively high for 2011! We’ve cut this exposure to a Japanese style ZERO percent more than a few times in 2011, but I doubt we’ll do it again. Why? China.
  2. China (CAF) – in the face of some borderline heated debates with the buy-side on the road for the last 6 weeks of Q2, we bought Chinese Equities on June 16th, 2011. We’re already up +9.86% on that position and while we fundamentally respect that bottoms are processes and not points, we think we may have bottom-ticked this major country market for the intermediate-term. We think Chinese Growth Fears are beyond exaggerated and that Chinese Inflation Slows in Q3/Q4 of 2011.
  3. Germany (EWG) – since the beginning of 2010, we have preferred long DAX versus long the SP500 and that’s been as right as the sun rising in the East. Like it did in 2010, the DAX continues to outperform the money honey loved SP500 (up +7.8% YTD in 2011). As it should - Germany, like most countries, has plenty of political baggage – but it isn’t long US Congress.

In terms of US Equities, people who think in boxes like to try to put Hedgeye in one. But guess what – we’re going to pop out of that box early every morning and annoy those people.

  1. Equities Exposure – having a ZERO percent asset allocation for parts of May and June was good. Why change the process if you don’t have to own something when it goes down for 7 of 8 weeks? Today, we’re at 6% and we can buy more. Yes We Can.
  2. Healthcare (XLV) – on January 3rd, 2011 when we introduced our “call” for the start of the year, we called out Healthcare and Energy as our 2 favorite S&P 500 Sectors. Those sectors are #1 and #2 for the YTD at +14.2% and +11.4%, respectively. So we do have it in us to pick the right ponies every once in a while on the long side – again, no boxes for Big Alberta please. He wears Lulu Lemon.
  3. SP500 (SPY) – obviously being short SPY isn’t an asset allocation call in our model, but people are going to hold me accountable to being short it right here and now – and they should. I was dead wrong with this position last week, and I’ll just thank my lucky Northern Lights that I covered all of our S&P Sector ETF shorts (Basic Materials, Energy, etc) a lot lower. What was intermediate-term TREND resistance in the SP500 (1314) is now support, and I have this short position on a very short leash.

From a Commodities and International Currency exposure perspective, we’ve sold everything (including Gold), so there’s nothing incremental to say about that other than to re-state the why. Our Global Macro Theme of Deflating The Inflation means there is no reason to be long The Commodity Inflation (or the currencies that back Commodity heavy countries) until we see our theme fully priced in.


Being Able To Change isn’t easy. Every day I challenge myself to consider being the change we all want to see in this profession. My immediate-term support and resistance ranges for Oil, the Shanghai Composite Index, and the SP500 are now $90.56-97.05, 2, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Being Able To Change - Chart of the Day


Being Able To Change - Virtual Portfolio


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.



Early Look

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