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THE M3:S'PORE FOREIGNER BACKLASH, S'PORE SLOTS CLUBS LOSE; MACAU TOURS; SJM PROBE; AND MORE...

The Macau Metro Monitor, August 8, 2011

 

 

SINGAPORE TO EXPAND BENEFITS, TIGHTEN FOREIGN CURBS AFTER POLL BACKLASH Bloomberg

After a backlash over the cost of living led to record opposition gains in the May elections, Prime Minister Lee Hsien Loong will expand public housing and medical benefits while tightening curbs on foreign workers.  Changes will include higher salary thresholds and better educational qualification for some foreign workers.  More than a third of Singapore’s 5.1 million population is made up of foreigners and permanent residents. According to the Ministry of Manpower, companies added about 116,000 jobs last year, of which 59,700 went to foreigners.

 

HOTELS EXPECT FULL BOOKINGS FOR FORMULA ONE RACE WEEKEND The Business Times

Hoteliers are expecting strong room demand during 2011 Formula One Grand Prix (Sept 23-25) with many trackside hotels projecting full occupancy. 'So far, we have seen a positive response from the public and there has been a healthy take-up of the room packages. We are expecting the hotel to be running at high occupancy,' said an MBS spokesperson. 'We are expecting a strong mix of both corporate and leisure guests as there are several large events at MBS that lead up to the F1 weekend.'

 

SLOT CLUBS LOSING THE JINGLE OF COINS TO IRs The Business Times

To date, the Singapore Indian Association, Singapore Mariners' Club and SAF Yacht Club (Changi) have closed their jackpot operations as the high costs of upgrading and buying new machines amid declining jackpot revenues didn't justify reinvestment for some of them.  After the opening of the 2 IRs, Singapore's slot clubs saw revenues fall by 35-40% according to an independent gaming consultant.   Many slot players have been trading in their social club privileges for $2,000 annual memberships at the casinos because they offer better returns to players and hefty progressive and mystery jackpot wins of at least $1 million, plus attractive incentives including new cars.  

 

In contrast to casinos which are taxed at 15% of net gaming revenues, slot clubs are taxed 9.5% of gross turnover of jackpot machines - which is roughly equivalent to a 54% tax rate on net win.  In addition to the higher tax burden, Clubs are also barred from offering promotions that encourage higher turnover.

 

TOURS SOAR macaubusiness.com

According to the Statistics and Census Service, visitor arrivals on package tours increased by 20.9% YoY to 591,000 in June. Visitors from the mainland (435,000) and Taiwan (33,000) grew by 29% and 50.1%, respectively.

 

WINNIE HO CALLS FOR HKEx PROBE OF SJM DIRECTORS,  Macau Daily Times

In a letter dated June 14, Winnie (Stanley Ho's estranged sister) asked the HK Securities and Futures Commission and the HK and Clearing Commission to investigate the conduct of Stanley Ho, Pansy Ho,  Angela Leong and Ambrose So.  Winnie Ho accuses the SJM directors of failing to fulfil their duties “competently, honestly and fairly” and questions their “reputation, character, reliability and financial integrity”.  She has filed more than 30 lawsuits against her brother in both Macau and HK.

 

MACAU: POLICY TO PROTECT EMPLOYMENT OF LOCAL WORKERS Jornal San Wa

Chief Executive Fernando Chui says that the government will put more employment policies and safeguards protecting the rights of local workers into place.  Authorities will offer training and continuing education opportunities, and negotiate with large enterprises on pay adjustment, adding employers should also share the returns with employees. Chui also stressed that the government would ensure imported labors will not weaken the benefits of local residents.

 

BANK NEW LOANS LENDING GO SLOW People's Daily

China's lending dropped to yuan $141.3BN in July - a seven month low since the government imposed tighter monetary policy in an effort to curb inflation.  July's figure was down MoM and $25.2BN lower YoY.  Despite tightening measures, certain sectors will continue to receive plenty of capital flow including agriculture, SMEs, subsidized housing, strategic industries and green development. 

 

HENGQUIN ISLAND TO ENJOY FREE TRADE Guangdong News

Beijing has agreed to give make Hengquin Island a free trade zone which should provide Zhuhai with more economic opportunities to accelerate its economic growth. Imported goods to Hengquin will enjoy import duty exemption, but will be subject to tariffs if the good's final destination is another part of the PRC.

 

 



MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR

This week's notable callouts include US and EU financial CDS spiking in conjunction with extraordinary volatility in the market last week. 


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 8 out of 11 worsened / 2 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 9 of 11 worsened / 0 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - SUMMARY TABLE

 

1. US Financials CDS Monitor – Swaps widened across all domestic financials last week (27 of 28 issuers widening).  On a month-over-month basis, not one issuer was tighter.  The largest moves were at BAC, MS and LNC.

Widened the most vs last week: BAC, MS, LNC

Widened the least vs last week: PMI, ACE, TRV

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

Tightened the most/widened the least vs last month: ACE, CB, MMC

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  34 of the 38 swaps were wider and 4 tightened.   

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - EU CDS

 

3. European Sovereign CDS – European sovereign swaps were tighter week over week in Spain, Italy, Ireland and Portugal and wider in Greece. For reference, France was wider by 2 bps (to 147 bp) week over week while Germany was wider by 4 bps (to 77 bp). We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency.  Judging by the Greek bailout, regulators are making a concerted effort to design a bailout that does not trigger CDS.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - SOV CDS

 

4. High Yield (YTM) Monitor – High Yield rates were up significantly last week, ending at 8.27 versus 7.67 the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 65 points last week, ending at 1509. 

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - LLI

 

6. TED Spread Monitor – The TED spread rose slightly, ending the week at 28 versus 26.7 the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - TED

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell further to -3.6 from +2.6.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - JOCS

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 30 bps, ending the week at 1554.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - GREECE

 

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.  After bottoming in April, the index has been moving higher.  Last Friday, spreads closed at 159 bps.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - 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.  Last week the index rose slightly, rising 19 points to 1287.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - BALTIC

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened a further 19 bps to 207 bps.   

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - 2 10

 

Margin Debt Continues to Fall

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 $9.5B to $306B.  On a standard deviation basis, margin debt fell to 1.21 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 June.

 

MONDAY MORNING RISK MONITOR: CREDIT SWAPS REMAIN THE KEY INDICATOR - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 11, 2011

 

As we look at today’s set up for the S&P 500, the range is 93 points or -7.28% downside to 1093 and 0.61% upside to 1186.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 815

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 850 (-1752)  
  • VOLUME: NYSE 1256.14 (-33.25%)
  • VIX:  36.36 -6.77% YTD PERFORMANCE: +104.85%
  • SPX PUT/CALL RATIO: 1.79 from 1.38 (+29.50%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 28.50
  • 3-MONTH T-BILL YIELD: 0.02% -0.01%
  • 10-Year: 2.24 from 2.34    
  • YIELD CURVE: 2.04 from 2.15

MACRO DATA POINTS:

  • 8:30 a.m.: NOPA oil, soybean data
  • 8:30 a.m.: Empire Manufacturing, est. 0, prior -3.76
  • 9 a.m.: Net Long-term TIC Flows, est. $30.1b, prior $23.6b
  • 10 a.m.: NAHB Housing Market Index, est. 15, prior 15
  • 11 a.m.: Corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 1:25 p.m.: Fed’s Lockhart speaks in Alabama
  • 4 p.m.: Crop conditions: corn, cotton, soybeans, winter wheat

WHAT TO WATCH:

  • Transocean offered to buy Norway’s Aker Drilling for $1.4b
  • Paulson & Co., Berkshire Hathaway, Pershing Square among those scheduled to release holdings as of June 30 by end of day today
  • ConAgra Foods said that Ralcorp Holdings rejected a $5.18b takeover offer within 24 hours and without discussion
  • Apple, Google and rival handset and software makers are competing for top patent lawyers as litigation floods courtrooms worldwide.
  • Rise of the Planet of the Apes” remained top movie in U.S. and Canadian theaters for second weekend as predicted, totaling $27.5m in ticket sales for News Corp.’s Twentieth Century Fox.

COMMODITY/GROWTH EXPECTATION

                               

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Hedge Fund Oil Bets Tumble to Eight-Month Low: Energy Markets
  • Rice Set to Climb as Thailand Plans Curbs, U.S. Crop Drops
  • Funds Slash Commodity Bets by Most in 18 Months on Economy
  • Mushrooms Join List of Radiation Threats to Japan’s Food Chain
  • Gold Drops for Third Day as Equities Rebound Trims Haven Demand
  • Oil Stems Three-Week Decline as Japan Counters Growth Concern
  • Ditching Nuclear Risks Third Lost Decade in Japan on Oil
  • Sugar to Stay High as China, Indonesia Buy More, ISO Says
  • Copper Advances as U.S., Japanese Data Boost Outlook for Demand
  • Aluminum Demand in China Set to Double Over Decade, XinRen Says
  • Recent Commodities Volatility ‘Unsustainable:’ Citigroup’s Morse
  • ConAgra Says Ralcorp Took Less Than a Day to Reject Revised Bid
  • Newcrest Has Record Full-Year Profit, Pays Special Dividend
  • Crude Climbs as Japanese Economy Contracts Less Than Forecast
  • Thai Sugar Production May Fall From a Record in 2011-2012
  •  Gold May Fall a Third Day in London on Reduced Investor Demand

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Low quality rally in Europe with the important markets like Germany are underperforming.
  • UK Aug house price index (2.1%) m/m, (0.3%) y/y the first annual fall since Sep 2009 -- Rightmove

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: India and Korea are closed - generally rally was on low volume to lower highs; China +1.3%; Japan +1.4%; Singapore +0.82%

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST 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.

Market Memory

This note was originally published at 8am on August 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Memory is a process, albeit a faulty one.”

-Jane Leavy

 

That quote comes from the Preface of Jane Leavy’s recent Bestseller “The Last Boy – Mickey Mantle and The End of America’s Childhood.” I just started reading it last night and it helped me reconcile some of the conflicting thoughts in my head.

 

If you open your mind, you can always learn something from someone. Even if that’s learning what not to do. Mr. Macro Market teaches us something each and every market day. Yesterday it taught me that career risk management is as relevant as risk management itself.

 

At 2:45PM yesterday, the SP500 was testing the 1101 level, making a credible threat to move into what we call the crash zone (down -20% from its YTD peak of 1364 on April 29, 2011). Seventy five minutes later, the SP500 closed the day at 1172 – up 6.4% in 75 minutes of trading! La Bernank calls this le “price stability.”

 

That wasn’t a bounce. That wasn’t an intraday rally. That was career risk management buttons being pushed (BUY), in size, at the 1100 line – at the intraday and YTD low. Remember, the art of money management is having money to manage.

 

Market bottoms are processes, not points. And the entire construct of American finance (a large construct) is finally engaging, emotionally, in the process of jogging their 2008 Market Memory.

 

Many a perma-bull would have you believe yesterday’s intraday rally was based on the “yield differential between stocks and bonds.” Others continue to tell you that stocks went up because they are “cheap.” Right.

 

To borrow a much more reasonable explanation of what the market does and when, here’s Jane Leavy’s (using America’s treasured pastime as a metaphor for how Americans remember things they are supposed to love): “…like the sweater in my office, Mickey Mantle is a blend of memory and distortion, fact and fiction, repetition and exaggeration.”

 

Back to this morning’s Global Macro Grind

 

As levered long hedge funds deal with their 2011 performance problems in America (they’re down more than mutual funds who don’t use leverage), the rest of the world, shockingly, didn’t cease to exist yesterday.

 

Across countries, currencies, and commodities, there’s a lot going on this morning:

 

1.   ASIA – China’s most trusted economic advisor (Singapore) CUT its export forecast for 2011 last night. That’s a big deal as it’s a pseudo honest representation about what Asia really should be thinking when considering all of the money printing by Fiat Fools. Deficits, Debt, and Zero Percent Interest Rate Policies STRUCTURALLY DEPRESS ECONOMIC GROWTH (Princeton Economics Department, take notes).

 

Singapore’s stock market sold off on that “news” closing down a full -1.9% overnight and really put a large wet Kleenex on what the buy-and-hope crowd in America was looking for this morning - a follow through on yesterday’s bull charge, with a big overnight session in Asia, and big UP futures to story-tell about. Didn’t happen.

 

2.   EUROPE – Evidently, arresting a US stock market crash into yesterday’s close didn’t stop gravity. Economic growth in Europe continues to slow and that’s why German stocks have crashed alongside all of the Europig nations. In bear markets (all of European Equities are in one, fyi), I learn a lot more from the complexion of the bounces than I do the selloffs.

 

Anyone with a calculator knows that Greece, Italy, and Spain have crashed. But do people realize that German stocks are crashing? Inclusive of this morning’s low-volume +1.6% “bounce” in Germany’s DAX Index, the market is still down -20% from its May 2011 peak. That’s a problem. Germany’s TAIL is broken.

 

3.   USA – Our cerebral Director of Research, Daryl Jones, wrote an outstanding note yesterday titled “Is There Cheap Valuation Blood In The Water” (if you’d like the note email sales@hedgeye.com) and without recapping the entire historical data series, here’s the bottom line on US stocks: they aren’t expensive anymore; they aren’t cheap either – they are perfectly priced for storytelling.

 

For the sake of a bear’s storytelling purposes, let’s assume the duration of the countless marketing machines out there who are still pitching Jeremy Siegel’s “Stocks For The Long Run” – and let’s use the longest of long-runs. At a closing price of 1172, the SP500 continues to make LOWER long-term LOWS, down -25.1% versus their long-term peak (2007) and down -14.0% from their LOWER-HIGHS established in April of 2011.

 

Now if we want to throw away our Market Memory for another second and assume the Keynesian Textbook position that ‘low bond yields means buy stocks’, we humbly submit that you still need to get the timing right.

 

With 2-year US Treasury Yields hitting all-time lows today at 0.17% (all-time is still a very long time) and 10-year yields collapsing toward their all-time lows established in 2008, again, we humbly submit that buying a stock because “it’s cheap” in 2008 should inspire bad memories about what’s left of your 401k. Fictionally “cheap” can get cheaper and repeating the same mistakes gets people run over.

 

My immediate-term ranges of support and resistance for Gold (bullish), Oil (bearish), and the SP500 (bearish) are now $1664-1766, $78.58-89.97, and 1114-1231, respectively. Our Global Macro team will host a conference call at 11AM EST to go through what to do next.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Market Memory - Chart of the Day

 

Market Memory - Virtual Portfolio



Big Water

“Pain + Reflection = Progress.”

-Ray Dalio

 

That’s a quote from what I thought was one of the best asset management articles of the year – “Mastering The Machine – How Ray Dalio built the world’s richest and strangest hedge fund”, by John Cassidy at The New Yorker.

 

What was fascinating to me about Dalio’s Global Macro Risk Mangement Process is that there was nothing that was strange to me about it at all. It made perfect sense. Maybe that’s why he’s been one of the few major Hedge Fund managers who has been able to navigate the Big Water of both 2008 and 2011, generating positive absolute returns. Evidently, his process is repeatable.

 

Ray Dalio’s Bridgewater and Big Water are two very different things. Big Water is what some of my closest friends and I just spent the last 3 days conquering in Hells Canyon – America’s deepest river gorge.

 

No roads cross Hells Canyon. There are no government people on the shores to bail you out. You are either listening very carefully to your guide or you aren’t coming out.

 

“Who Is John Gault?” Maybe a better question for me over the course of the weekend was, “Who Is Jeff Smith?” The man who called it “River Time”, was constantly reminding us that “safety is no accident.” Evidently, he was right.

 

I’ll be flying home, safely, from Boise, Idaho this morning.

 

Back to the Global Macro Grind

 

Learning from mistakes (PAIN) and rethinking those mistakes (REFLECTION) = PROGRESS.

 

With all of the lessons learned about Growth Slowing in 2008 and how politicians and central planners are infused into your said “free” markets to arrest gravity (“shock and awe” interest rate cuts demanded then; Quantitative Easing begged for now), we are reminded of the 2 things that Big Government Interventions do to our markets and economies:

  1. They shorten economic cycles
  2. They amplify market volatility

Whoever didn’t pick up on that second point last week obviously wasn’t in the water. There was amplified volatility in The Price Volatility itself. From leftist French ideas about banning short selling to the whatever we have coming down river this week, all of this is reminding investors that markets that can’t see their rules change in the middle of the game are not markets they should trust.

 

Like staring down the belly of a Class IV white water rapid, when people see this kind of volatility in their retirement accounts they typically opt to get out. While that may be an inconvenient truth for those of us who are brave (or dumb) enough to try our luck trading Big Water volatility, history has proven that markets that lose people’s trust lose fund flows.

 

When the flows stop, bigger rocks appear…

 

With our own money at least, we don’t like volunteering to be “fully invested” when GDP Growth is heading towards big rocks (PAIN). History (REFLECTION) may not be precise in helping you navigate the price volatility associated with economic slowdowns – and sometimes the biggest rocks are the last ones you’ll ever see – but the rhythm of this globally interconnected marketplace is a constant reminder.

 

Going under water can be avoided. Accepting uncertainty = PROGRESS.

 

I’ve expressed my acceptance of uncertainty in 2011 by getting out of the water. Last Monday I had a 67% Cash position in the Hedgeye Asset Allocation Model. This morning that Cash position is sitting at 64% and here’s where the rest of my Cash has been allocated:

  1. Cash = 64%
  2. Fixed Income = 21% (Long-term Treasuries, Treasury Flattener, Corporate Bonds – TLT, FLAT, LQD)
  3. International Equities = 9% (China and S&P International Dividend ETF – CAF and DWX)
  4. International Currencies = 6% (Canadian Dollar – FXC)
  5. Commodities = 0%
  6. US Equities = 0%

The only move I made last week was allocating 3% of assets in the model to Corporate Bonds (LQD). They were down hard on the week when I bought them - and I like to buy things when they are red.

 

The biggest mistake I’ve made in the last few weeks is not being long Gold (GLD). That’s why I have Commodities listed ahead of US Equities this morning. I’d like to buy Gold and/or Silver back on a pullback. Immediate-term TRADE support lines for Gold and Silver are now $1713 and $38.15, respectively. I have intermediate-term TREND upside for Gold and Silver at $1817 and $41.69, respectively.

 

US stocks were immediate-term TRADE oversold into the close last Monday (see my intraday note from last Monday titled “Short Covering Opportunity”, April 8, 2011), but they are far from oversold this morning. I have immediate-term downside support at a lower-low of 1093 and less than 1% of immediate-term upside from Friday’s closing price, making the risk-reward highly skewed to the downside.

 

According to Cassidy’s article, Ray Dalio likes to ask his analysts for opinions – but those opinions better be well thought out. “Are you going to answer me knowledgeably or are you going to give me a guess?” he said to his analyst in a meeting.

 

When at Hedgeye or in The Big Water, we like to be specific on levels – we don’t guess.

 

My immediate-term support and resistance ranges for the Gold, Oil, and the SP500 are now $1, $78.09-86.06, and 1093-1186, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Big Water - Chart of the Day

 

Big Water - Virtual Portfolio


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 80.64%
  • SHORT SIGNALS 78.61%
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