Peak market growth or seasonality?



The numbers are in for the Singapore casino gaming market in Q2 and it ain’t pretty.  For a quarter-on-quarter comparison in Q2, Gross Gaming Revenues fell 5.6% to S$1.8BN, (5.4% on a net basis), EBITDA dropped 5.2% to S$855MM, mass revenues slipped 0.3% to S$584MM and VIP Rolling Chip Volume was 0.6% lower to S$31.6BN.  The decelerating growth in Singapore could be a sign of a maturing market or is it seasonality?


By contrast, Macau GGR grew 12% sequentially in Q2.  Moreover, Q3 is on pace to grow another 7% on top of Q2.  While Macau and Singapore are two different markets and the opening of Galaxy Macau in mid May did boost growth, we would guess the seasonality profiles of each wouldn’t vary too much.  Given the newness of Singapore, one would expect sequential growth to be even higher than Macau.  Obviously, that is not happening.  We need more quarters to fully assess the seasonality vs peaking growth situation but signs certainly seem to point to a market that has already seen its best growth.


Poor hold of 2.8% in the quarter negatively impacted results, especially compared to 1Q11 which held high at 3.3%.  Average hold for the 2 IR’s since 1Q10 has been close to 3%.  If we adjust Q2 hold using the average hold rate of 3%, Q2 GGR would have actually increased QoQ but at a slower rate.  The chart below shows how the Singapore market would have trended on a hold-adjusted basis.  Sequential revenue growth have been falling since 3Q 2010.




In terms of Q2 market share, MBS, helped by higher hold and higher mix of non-gaming revenues, became the market leader for the 1st time in terms of net gaming revenue.  MBS also wrestled the lead back from RWS in EBITDA and Mass revenue share, and closed the gap with RWS in RC share.


No matter how you slice it though, Singapore slowed in Q2 and the outlook for significant further growth, particularly from the Mass market, remains cloudy.  According to Genting, the Mass market is constrained due to an insufficient supply of hotel rooms in Singapore, limited ‘local’ population, and inability to promote gaming to locals.  High hotel occupancy rates in Singapore imply that the market is in fact short of room supply.  From Jan-May 2011, Singapore hotel occupancy averaged 85%, 1% lower than 2010’s occupancy rate.  Therefore, MBS has a clear advantage in that it has twice as many hotel rooms as RWS.


It is still uncertain how 3Q will play out as a seasonally slow August - “Ghost” month - will be offset by a strong September, propelled by Formula One Racing and a strong convention calendar.  Nevertheless, we believe growth has peaked in the near-term and wouldn’t be surprised to see unimpressive growth for the rest of the year.  Obviously, the wild card is the licensing of the junkets before year-end, which would boost VIP RC volumes.


SINGAPORE Q2 REVIEW - singapore3


SINGAPORE Q2 REVIEW - net revenue







Big Water

This note was originally published at 8am on August 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1713-1817, $78.09-86.06, and 1093-1186, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Bullish Babble

“I can forecast confidently that it will vary.”

-Lord John Browne


That was a quote from the former CEO of British Petroleum on forecasting the price of oil. It’s the opening line in Chapter 2 of a must-read book that’s in my summer pile titled “BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway.” Good thing our Keynesian overlords in Washington and the manic media that fawns on them don’t consider me an “expert”…


I was on what we affectionately refer to as a Hedgeye Client Roady in New York City with our all-star European analyst Matt Hedrick yesterday. It was hot. We were sweaty. And, oh, were we all beared up (to be “beared up” means to be Bearish Enough).


Is the Sell-Side Bearish Enough?


Given that most of the Bullish Babble I have been reading from Wall Street’s “Sell-Side” (investment banks and brokers who market the Perma-Bull) in 2011 has not yet turned bearish (never mind Bearish Enough), the answer to that question is unequivocally no.


Is the Buy Side Bearish Enough?


The “Buy-Side” (asset managers) is definitely not bullish like the Sell-Side. But I don’t think they are Bearish Enough yet either. There’s certainly a qualitative element to that conclusion (my gut), but there’s also quantitative evidence (S&P Futures down -23 handles this morning and yesterday’s Institutional Investor Sentiment survey showed only 23.7% of people admitting they are bearish.


Back to the Global Macro Grind


Wall Street/Washington “blue chip” forecasts on US GDP Growth continue to be so far away from the area code of reality that S&P actually looks accurate (S&P cut its Q4 US GDP estimate to 1.8% yesterday – Hedgeye’s Q4 GDP range is 0.6%-1.3% for Q4).


From a risk management modeling process perspective, we use a range because we aren’t yet dumb enough to take the government’s word for it when they can revise the GDP number down by 81% in 3 months (Q1 2011).


In terms of Global GDP Growth, Morgan Stanley is snagging the #1 “Most Read” headline on Bloomberg Economic News this morning by “Lowering Global Growth Forecast” by a whole 30 basis points to 3.9%. Oooh, lah, lah… the bearishness of it all.


Meanwhile, the Global Macro Economic Data continues to confirm our baseline case for Global Equities – that stocks will be assigned a lower multiple because A) the Street is using the wrong GDP and earnings numbers and B) The Stagflation earns a much lower multiple.


Around the world this morning, Gentlemen and Ladies of Hedgeye, here are your real-time economic taps:

  1. SINGAPORE (ASIA) EXPORT SLOWDOWN – exports down -2.8% in July (that’s a year-over-year number!) and if you didn’t know that the Singaporeans A) advise the Chinese and B) were dead serious about what they said on growth when I signaled it last week… now you know.
  2. BRITISH STAGFLATION – after reporting a whopper of a Consumer Price Inflation (CPI) number for July on Tuesday (+4.4% y/y), the Brits printed a 0.00% Retail Sales growth number for July this morning. ZERO growth + inflation = The Stagflation.
  3. AMERICAN STAGFLATION – yesterday’s Producer Price Index (PPI) for July came in at +7.2% year-over-year growth and this morning’s Consumer Price Inflation (CPI) print should be close to +3.5% y/y. ZERO point 36 percent Q1 GDP Growth + 1.3% Q2 GDP Growth + Inflation readings that are orders of magnitude higher than real-growth = Le Stagflation, Monsieur Bernank.

So what do you do with that this morning? Hopefully the answer to that question resides in what you’ve already done to preserve and protect your family’s capital. We’ve already made the “call” to go to ZERO percent asset allocation to both US and European Equities and on Monday we cut our asset allocation to Chinese Equities in half (from 6% to 3%) in the Hedgeye Asset Allocation Model.


Q (on yesterday’s Client Roady): “what would change your mind?”



  1. Global Macro Economic Data
  2. Sentiment/Expectations
  3. Market Prices

While plenty of Fed Heads have changed their tunes to a more passive-aggressive Rick Perry sounding country song in the last 24 hours (Bullard, Fisher, Plosser, etc), I have not changed mine.


I am forecasting, confidently, that market prices will vary – and that managing risk starts with accepting uncertainty.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $80.07-89.87, and 1172-1207, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bullish Babble - Chart of the Day


Bullish Babble - Virtual Portfolio


I think this is the first time I've posted on HOTT. The print was not remarkable. But the SIGMA just overtook TGT as the best one so far this quarter.


HOTT? - 8 17 2011 7 41 09 PM

Spreading Yuan and Selling Inflation

Conclusion: Recent changes to China’s convoluted system of capital controls are structurally bullish for the Chiense yuan and may serve to provide some reprieve for washed-out Chinese financials. Moreover, Thailand’s decision to implement a rice price-fixing scheme later in the year is yet another inflationary headwind for the region.


Positions in Asia: Long Chinese equities (CAF); Short Japanese equities (EWJ).


China’s Ever-Relaxing Capital Controls

Overnight, Chinese officials announced three measures to spur cross-border yuan investment. Though not wholly original or earth-shattering, the cumulative impact of each additional measure inches the Chinese yuan one step closer to becoming a dominant currency in the international FX market. The measures include: a Hong Kong equity ETF vehicle for mainland investors, a $3.1B extension of the Qualified Foreign Institutional Investor Program (QFII), and a general relaxation of controls in the dim-sum bond market.


The ETF vehicle is designed to give mainland investors access to stocks listed in Hong Kong. The scheme resembles to the 2007 “through train” plan, which would’ve allowed investors direct access to Hong Kong equities (scrapped for a less aggressive plan in Jan ’10). Back then, the announcement combined with a global love interest with all things “Chinerr” help push the Hang Seng Index to a record high. We don’t see a similar effect occurring this time around, as the gap in valuation between the traditionally cheaper Hang Seng stocks and Shanghai Composite stocks is rather minimal today (1.1x) vs. a 2007 peak of (17.9x), limiting the cross-border appeal based on the potential for arbitrage.


Spreading Yuan and Selling Inflation - 1


The QFII extension grants foreign institutional investors a quota of up to 20B yuan ($3.1B) to make initial investments in mainland Chinese securities. The program was initially introduced in 2002 as a way to grant foreign institutional investors greater access to Chinese domestic stock markets in a bid to secure funds amid a major recapitalization of the Chinese banking system. Should Chinese banks ultimately require recapitalization within the backdrop of property market worries and local government financing vehicle debt, this makes the process a bit more liquid in our opinion. We expect demand for Chinese bank assets to grow from current trough levels as the liabilities associated with BAC, U.S. Housing Headwinds, and Europe’s Sovereign Debt Dichotomy come home to roost.


Lastly, China’s decision to expand the scope of mainland corporations’ offshore yuan-denominated debt (“dim-sum bonds”) issuance is another method by which foreign investors can gain incremental access to China’s closed capital structure. Moreover, we see it as another avenue by which Chinese banks could tap previously limited pools of capital. For instance, the 554B yuan ($85.3B) in Hong Kong based yuan deposits has been limited to collecting negative real deposit rates (nominal short-term rates are roughly 25bps on average) due to limits on cross-border yuan transactions. Now, foreign investors can take increasing advantage of dim-sum bond issuance, like today’s Ministry of Finance 20B yuan issue – the third-largest offering on record. As more and more companies issue debt in this market, we expect cross-border yield differentials to converge from distorted spreads like the current 157bps gap on 10yr Chinese sovereign debt.


Net-net, we continue to see structural upward pressure on the Chinese yuan as China continues to open up its capital markets. While our belief that the Chinese yuan will eventually take major share of global FX reserves has many years to run its course, we do like such incremental efforts, as they remind us that China is indeed committed to strengthening its currency over the long term. Though Chuck Schumer (D-NY) may not be around long enough to see this play out, we can assure you that it’s better for the global economy he doesn’t have his way too quickly. The +14% YoY rate of U.S. import price growth is a painful reminder that China accounts for 10.1% of global exports – i.e. the faster the yuan appreciates vs. the USD, the more U.S. consumers and corporations have to take The Inflation in the margin over the short-to-intermediate term.


Spreading Yuan and Selling Inflation - 2


All told, we strongly maintain our bullish bias for countries that maintain a strong “handshake” via policies that support currency strength, as opposed to the debt, deficit, and devaluation strategies currently being implemented from Washington D.C. to Brussels.


Thailand’s Going to Strong-Arm the Global Rice Market – Inflationary for the Region

Today, Thailand’s newly elected prime minister Yingluck Shinawatra confirmed that her government will fulfill a campaign promise to purchase (and hoard) unmilled rice at 15,000 ($502) baht per ton in the November harvest – an increase of +51.5% from the current market rate of 9,900 baht per ton.


The scheme is designed explicitly to sustainably push up global rice prices by reducing supply on the global rice market (per the USDA, Thailand is the world’s number one rice supplier at roughly 32.2% of total exports).  This confirmed by recent comments out of Pheu Thai politician Pichai Naripthaphan, former deputy finance minister for Yingluck’s older brother, Thaksin Shinawatra – the former prime minister of Thailand: “It makes no sense that every agricultural product in the world has gone up except for rice… This is our key policy to win votes, not only this time but in every election.” The Pheu Thai party is indeed serious about buying votes from the agricultural base and there are many for sale in Thailand, with a total of 23.5 million farmers or 35% of the population, per Thailand’s Office of Agricultural Economics.


Asia, which accounts for roughly 87% of global rice consumption, is particularly at risk from a food inflation perspective. Initially, countries may elect to cancel Thai orders and curb exports of their own production, but seeing how rice is the staple of Asian diets, we don’t see much of a way around this over the long term – rice prices are going up as global supply is constrained as a result of the Thai government’s policy to first stockpile the grain and then negotiate export quantities on a country-by-country basis. It’s worth noting that food has an average weighting of over 30% of inflation indexes throughout Asia, with rice obviously being a large component of that (per Rabobank Groep NV).


Back in 2008, a similar scheme was introduced by Thaksin, which ultimately saw the purchase of 5.4 million tons of the grain by the Thai government from over 700,000 domestic farmers, leading to record domestic stockpiles (6.1 million tons) and record prices in Thailand's domestic and export markets (17,000 baht and $1,038 per ton, respectively). According to Thailand’s Rice Exporters Association, current Thai export prices are roughly $582 per ton (up +22% YoY), so an increase to levels reached under the previous scheme would imply a near doubling of export prices from today’s levels.


Such an occurrence would obviously have an inflationary impact across the region due to Thailand’s sheer weight in the global rice market. This is an incremental risk to Asian inflation readings as we look forward into 2012 and beyond, and may ultimately limit the amount of monetary easing Asian central banks can pursue in the event the current global economic slowdown takes a turn for the worse. Asian central banks have hiked rates 44 times since March of 2010 and Thai’s rice price-fixing scheme is likely to make it difficult, on the margin, for them to unwind these tightening measures when they perhaps need to.


Darius Dale



Spreading Yuan and Selling Inflation - 3

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