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The Macau Metro Monitor, August 30, 2011




No decision has been made by the Court of Second Instance regarding Sands China's appeal of Macau govt's rejection of its application for Sites 7 & 8.  Meanwhile, the Nevada Supreme Court has ordered Judge Gonzalez to take another look at whether Sands China is subject to being sued in Nevada.  The court ordered that proceedings in Jacobs’ lawsuit against Las Vegas Sands and Sands China be put on hold until that matter is resolved.  That process is likely to take months.


The Supreme Court order states, "The District Court’s order … does not state that it has reviewed the matter on a limited basis to determine whether prima facie (presumed to be true) grounds for personal jurisdiction exist; it simply denies petitioner’s (Sands China’s) motion to dismiss, with no mention of a later determination after consideration of evidence, whether at a hearing before trial or at trial. While the order refers to the District Court’s comments at oral argument on the motion, the transcript reflects only that the District Court concluded there were 'pervasive contacts' between petitioner (Sands China) and Nevada, without specifying any of those contacts."



According to a leaked 2009 US diplomatic cable titled ‘The Macau SAR economy at 10: Even jackpots have consequences,’ the dependence on junkets is known as "a formula that facilitates if not encourages money laundering."  The report also says “oversights of both casinos and junket operators is limited and remains a serious weakness in Macau’s AML [Anti-Money Laundering] regime”.


Big week raises our August revenue projection to HK$24 billion



There was a big surge in Macau this past week with average daily revenues increasing to HK$891 million vs HK$705 million for the rest of August.  This past week generated the highest revenue since Golden Week in May – pretty astonishing.  High hold probably played a role but we are clearly not seeing any signs of a slowdown in volumes.  We are now expecting around HK$24 billion for the full month,  including slots, which would represent YoY growth of 56%.


There was very little movement in market share from last week.  In August, LVS, WYNN and SJM continue to track below recent trends while Galaxy and MGM are above.  MPEL at 14.7% is slightly higher than its post Galaxy Macau share.  For Q3 MPEL continues to have the most upside in EBITDA from consensus estimates (20% per our projection).  



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Feeling Good

“Feeling good about a judgment is a prerequisite to acting upon it.”

-Dan Gardner (Future Babble, 2010)


I moved the Hedgeye Portfolio to net short (more shorts than longs) for the first time since June 23rd yesterday.


Did I feel good about it? Did I feel as good as I felt about running net short in June of 2011? How good did I feel moving to one of my most net long positions (more longs than shorts) on August 8th, 2011?


The answers to these questions are uncertain. I never feel good about any position until it’s working. And there is usually a huge difference between what I am feeling versus what I am actually doing with my longs and shorts.


“Confirmation bias” is a term that was coined by cognitive psychologist and Master Chess player, Peter Wason, in the 1960s. Per Wikipedia, the simple definition of confirmation bias is the “tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.”


Confirmation bias, as Dan Gardner astutely calls out on page 84 of “Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”, “is as simple as it is dangerous.” As Global Macro Risk Managers, we need to be thinking long and hard about that.


“In Peter Wason’s seminal experiment, he provided people with feedback so that when they sought out confirming evidence and came to a false conclusion, they were told clearly and unmistakably, that it was incorrect. Then they were asked to try again. Incredibly, half of those who had been told their belief was false continued to search for confirmation that it was right.” (Future Babble, page 85)


Can you imagine if Wason’s sample study was today’s short-term performance chasing hedge fund community? Never mind half – that number would be a lot higher than 50%. After all, we hedge fund people were born on this good earth to be able to judge sales, margins, and “valuations” light-years beyond our contemporaries who are still caged up in the Bronx Zoo.


Back to the Global Macro Grind


While I was right in my call for a “Short Covering Opportunity” (time stamped 10:47AM August 8th, 2011) in early August, I was wrong last week in suggesting that the SP500 could breakdown to lower-YTD-lows.


Being wrong happens. Most people just don’t like to admit it does. The key in this profession is being right a lot more than you are wrong. And not being really wrong when you aren’t right.


When I decided to move the Hedgeye Portfolio to net short yesterday, it was a conscious decision based on my multi-factor, multi-duration, Global Macro Model – not solely on what the SP500 was doing.


That’s not to say what the SP500 is doing doesn’t matter. What it has been doing does too (SP500 returns):

  1. DOWN -22.7% from its October 2007 top
  2. DOWN -11.2% from its lower-long-term high established in April 2011
  3. UP +8.1% from its higher-immediate-term low established in August 2011

Now a Perma-Bull will quickly snort … but but but, “we’re up huge from the 2009 low.” And we all get where that is coming from – what the bull means is that the US stock market is up +78% from the 2009 low. His client’s money isn’t.


Math doesn’t uphold the principles of storytelling or confirmation bias:

  1. The SP500 lost 57% from October 2007 to March of 2009
  2. In order to “break even” on that loss, your buy-the-dip bull would need to be up +131% off the bottom
  3. That, of course, assumes he nailed every move along the way (for 3 years)

So when the manic media is hammering you with “Greek stocks are having their best day ever” yesterday (they did on a percentage basis), remember that on Friday Greek stocks had crashed (down -48% since February 2011) and they’d need to “rally” +92% “off the lows” to get you back to break even versus only 6 months ago.


Or how about Bank of America? How good am I “feeling” about shorting that stock again yesterday in the Hedgeye Portfolio?

  1. Early September 2010 when we were shorting BAC, the stock was at $13.21
  2. By August 23, 2011, BAC had lost 52% of its “value” in less than a year
  3. BAC needs to rally +110% “off the lows” to get back to a 1 year break even return

I didn’t feel good about shorting BAC yesterday. I felt as uncertain as I should feel when a short position is -11.28% against me. While our Financials Managing Director, Josh Steiner, and I have shorted this stock 10x since 2010 (and been right 10x), that and a case of Molson Canadians will maybe make us prolific horseshoe players down at the lake tonight – nothing more.


If I was being paid what I used to be overpaid working at hedge funds and I said that in a morning meeting, everyone who wanted me to fail would be whispering “uh, it doesn’t sound like Keith has conviction anymore does it”…


That’s Wall Street. They want everyone to be “Feeling Good” about their “best ideas”, all of the time.


My immediate-term TRADE ranges of support and resistance for Gold, Oil, and the SP500 are now $1, $85.03-88.62, and 1163-1219, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Feeling Good - Chart of the Day


Feeling Good - Virtual Portfolio




TODAY’S S&P 500 SET-UP - August 30, 2011


With the S&P 500 up +7.7% in a week, the bulls are back and plenty of pundits have once again claimed to have nailed it calling another bottom.   As we look at today’s set up for the S&P 500, the range is 56 points or -3.89% downside to 1163 and 0.74% upside to 1219.




Two other Sectors closed marginally above their TRADE lines yesterday for the first time in 6 weeks – Consumer Staples (XLP) and Healthcare (XLV). While this is a very defensive setup, it tells you everything you need to know after the fact. Top 3 Sectors 2011: XLU, XLP, and XLV.


With 8 of 9 Sectors bearish TREND and 6 of 9 bearish TRADE, the next few days of price/volume/volatility data will be critical. From a volume perspective, we’ve registered 22%-31% lower volumes studies in the last week of trading than we did during the thralls of August selling. Volatility (VIX) remains in a Bullish Formation (bullish TRADE, TREND, and TAIL).




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +2824 (+455)  
  • VOLUME: NYSE 912.20 (-18.51%)
  • VIX:  35.59 -10.49% YTD PERFORMANCE: +100.51%
  • SPX PUT/CALL RATIO: 2.26 from 1.65 +36.92%


  • TED SPREAD: 32.05
  • 3-MONTH T-BILL YIELD: 0.02% +0.01%
  • 10-Year: 2.28 from 2.19    
  • YIELD CURVE: 2.08 from 1.99

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 8 a.m.: Chicago Fed president Charles Evans on CNBC
  • 9 a.m.: S&P/Case Shiller, est. M/m 0.0%, Y/y, (-4.6%)
  • 10 a.m.: Consumer Confidence, est. 52.0, prior 59.5
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills, $30b 14-day cash- mgmt bills
  • 12:15 p.m.: Minneapolis Fed President Narayana Kocherlakota to speak in Bismarck, N.D.
  • 2 p.m.: FOMC Minutes released
  • 4:30 p.m.: API inventories



  • The FDIC filed an objection to Bank of America’s proposed $8.5b mortgage-bond settlement with investors
  • FDA Advisory panel on post marketing issues for silicone gel- filled breast implants
  • Tropical Storm Katia forms in Atlantic
  • Italy PM Berlusconi agreed to overhaul the EU45b austerity plan that persuaded the ECB to support Italy’s bonds



COMMODITIES: Gold back below a hyper momentum line of support ($1809) this morning.  The immediate-term TRADE support now $1733/oz.


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Chan Exits Sino-Forest 22 Years After Tiananmen ‘Nightmare’
  • Northgate Takeover Proving Cheapest With Record Gold: Real M&A
  • Gold May Gain in London After Decline Spurs Demand by Investors
  • Oil Near 2-Week High as Spending Counters Forecast Supply Gain
  • Copper Climbs Fifth Day on Optimism U.S. Economy Will Recover
  • Wheat Declines on Speculation Rain May Help U.S. Winter Sowing
  • Disruptions to Food Supply to ‘Ratchet Up Prices,’ Olam Says
  • Sugar May Drop as Europe, India Boost Supplies, Kingsman Says
  • Monsanto Says 100,000 Acres of Corn May Have Resistant Bugs
  • Oil Falls From Near Three-Week High on U.S. Supply Forecasts
  • China Pork Prices Have ‘No Room’ to Climb, China Agri Says
  • China’s Jiangxi Rare Earth Mines to Halt Output, Xinhua Says
  • Oil Erases Gain in New York on Concern Crude Supplies to Climb
  • Copper Climbs a Fifth Day on U.S. Recovery Optimism: LME Preview
  • Rubber Climbs to Three-Week High on Improved Spending in U.S.



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • GERMANY – as Germany goes so does the entire European continental market system and the German market continues to tell us that mid-late September isn’t going to be an enjoyable period for the bulls (vote on EFSF date); DAX was the 1st major market to turn red this morning and continues to crash – down -24.8% since May!
  • GREECE – it’s a good thing most in the media doesn’t do geometric math. On Friday Cyprus and Greece were down -59% and -38% for the YTD respectively. Greece “rallies the most in forever” yesterday, then goes straight back down this morning (-3%) and obviously remains down -43% since the February YTD high and would need to “rally” another 75% to recover that -43% loss.
  • ITALY  - business confidence unexpectedly rose in August as manufacturers become more optimistic about demand; the manufacturing-sentiment index rose to 99.9 from a revised 98.8 in July; est 97.1


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: oddly mixed again overnight with Japan strong +1.2% and China down for 2nd consecutive day (-0.38%); Thailand down -0.2%; Korea +0.8%

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Weekly Latin America Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.



All is not well under the hood.



On the whole, Latin American equity markets had a great week, closing up +1.9% on a median basis. The gains were led by Mexico’s IPC Index (+2.7% wk/wk) and Chile’s Stock Market Select was the only market to close down (-0.2% wk/wk). Mexico’s gains are being supplemented by growing speculation of a rate cut as the country’s economic growth slows, and that was reflected in the FX market (MXN/USD down -1.3% wk/wk), the bond market (Mexico’s 2yr sovereign debt yields -12bps wk/wk), and the interest rate swaps market (Mexico’s 1yr on-shore interest rate swap spread declined -27bps wk/wk).


From a credit quality perspective, the broad-based backup in 5yr CDS is definitely noteworthy and could imply that last week’s gains in Latin American equity markets were more short-covering oriented or speculation around QE3, rather than actual investing.


Weekly Latin America Risk Monitor - 1


Weekly Latin America Risk Monitor - 2


Weekly Latin America Risk Monitor - 3


Weekly Latin America Risk Monitor - 4


Weekly Latin America Risk Monitor - 5


Weekly Latin America Risk Monitor - 6



Brazil: The big news out of Brazil last week centered on fiscal policy. First, it was announced that the manufactured-product tax on cigarettes will be increasing by +40% on Dec. 1, with an additional +23% in both 2013 and 2014, and a final +18% by 2015. The move is expected to increase the retail price of cigarettes by +20% this December, and by +55% through 2015. We’re not ones for higher taxes or big government, but we welcome Brazil’s resolve to chip away at its deficit, as increasing the country’s gross national savings rate is a major need ahead of Brazil’s lofty infrastructure initiatives over the next ~3 years.


YTD, Brazil has been delivering on the fiscal side regarding its primary surplus (July’s R$11.2 billion was the best ever for that month), but, as we point out in our Brazil Black Book, the government’s insistence on spending for large regulatory agencies and social welfare projects limits their ability to run an actual surplus due to elevated interest rates as a result of inflation. A meaningful down-shift in Brazilian government expenditures would be very bullish for the Brazilian economy over the long-term TAIL.


Nearer term, credit growth in Brazil continues on its white-hot pace in July, growing +19.8% YoY and +1.1% MoM (vs. June readings of +19.9% and +1.5%, respectively). As we also point out in our Brazil Black Book, interest rates are simply too low to contain credit growth in Brazil and the central bank is likely to be on hold for much longer than the Brazilian bond and interest rate markets believe, as it targets +15% YoY credit growth in 2011 vs. the current YTD pace of +20.4%. Interestingly, consumer credit continues to grow at breakneck speeds (+17.9% YoY in July vs. +18.1% in June) while consumer credit metrics continue to deteriorate (default rate accelerated to +6.6%; delinquency rate accelerated to +13.5%) – despite the unemployment rate hitting a YTD low in the same month (6%)! If the August consumer confidence reading is any indication (118.7 vs. 124.4 in July), we should expect to see further deterioration (on the margin) in Brazil’s consumer credit story.


Mexico: Banco de Mexico held its benchmark interest rate at a record low 4.5% for the 21st straight meeting, amid “growing uncertainty over the European and U.S. economic outlooks.” The move was also supported by the data: CPI rose a mere +9bps MoM in the first half of August (a two-month low) and Mexico’s trade balance fell -148.5 million pesos YoY (vs. +444.4 million YoY in June). As the Indefinitely Dovish theme continues to dominate Mexican monetary policy, we continue to own the bearish intermediate-term outlook for Mexico’s currency, the peso (MXN).


Chile: The big news out of Chile last week came in the form of massive, and sometimes violent, demonstrations in central Santiago. Over 80 unions and social organizations sent members and supporters to the Central Workers Union’s planned two-day work stoppage, which is estimated by the government to have cost the country around $400 million total.  In a similar theme to the driving force behind Ollanta Humala recently being elected president of Peru, the Chilean lower-middle class is upset that the country’s record growth rates are not adequately benefiting the lower level of society. As such, the government is in a process of renegotiating wage agreements and labor laws with Chilean social organizations, such as the recent wage settlement with a prominent public health union. Despite aggressive speech out of Finance Minister Filipe Larrain, recent activity would suggest the billionaire president Sebastian Pinera continues come to the table ready to negotiate.


From an economic data perspective, Chile’s central bank president Jose De Gregorio continues to walk down his 2011 economic growth estimates closer to our own, saying, “[We are] seeing signs of a deceleration in demand growth that might accelerate in the rest of the year.” He also suggested that the central bank might change the “trajectory” of Chilean monetary policy, should the global economy decelerate enough to warrant it – a statement which received a major “duh” from the market. In a sign that Gregorio’s statement wasn’t “news”, Chile’s 1yr interest rate swaps spreads actually increased +6bps wk/wk.


Peru: The key developments out of Peru last week centered largely on the role of the state within the economy and how that would affect international relations. The “dreaded” mining windfall tax was officially announced and the aggregate burden of $1.1 billion per year for the industry actually came in perhaps much lighter than many were expecting earlier in the year. Humala continues to lead from the center and, thus far, he has not announced anything overly punitive for the private sector. In fact, Prime Minister Salomon Lerner has officially stated that Peru’s economic policy priorities are “integration” and “international cooperation”, with the specific intent on broadening regional ties and strategic partnerships with Asia. If they are successful in doing this over the next 3-5 years, we’ll gladly admit to having been wrong on Humala, because this would likely mean he’s serious about his claims to engage the private sector from the center, rather than the far-left of the political spectrum.


Regarding fiscal policy, Humala continues to be a socialist and it will be interesting to see if the recently announced national employment program (“Trabaja Peru”), which is designed to create one million new jobs by 2016 and +200k in the “short term”, is ultimately financed with higher corporate tax rates later on down the road. Finance Minister Miguel Castilla also said that the country is readying a countercyclical public spending plan – should one prove necessary. Again, with Peruvian policymakers quick to fire the spending gun, it will be interesting to see how they plan to finance such initiatives over the coming years. On one hand, they could tax the private sector directly. On the other, they could tax them indirectly by allowing inflation and interest rates to back up as the sovereign’s fiscal metrics deteriorate. Either way, a tax is a tax and socialism remains socialism – despite its many forms of obfuscation.


Argentina: The alarm bells continue to ring very, very loud in Argentina. As capital flight continues near its record pace ($9.8 billion through June and $18 billion projected for the year by former deputy economy minister Jorge Todesca), the central bank is stepping up its sale of FX reserves to the most in two years ($700 million MTD – the highest since June ’09). This is done to minimize peso (ARS) devaluation in the spot market. Interestingly, the government’s recent move to consolidate banking data is actually facilitating the capital flight, with the gap between the USD/ARS spot exchange rate and the USD/ARS unregulated exchange rate widening to over 25 centavos.  Argentina’s unregulated FX market is key to keep an eye on in times of heightened risk aversion, as it typically correlates well with a global flight to safety trade (speed counts).


The broad-based rush out of Argentinean assets is being perpetuated by the likelihood that President Cristina Fernandez de Kirchner wins a second term in the upcoming presidential elections (scheduled for October). She’s already secured 50.1% of the votes in the most recent primary, meaning she’s well on her way to pursuing more deficit and devaluation strategies in 2012. Interestingly, newspaper El Cronista reported that the government plans to increase government spending by +20% next year, meaning that either a large upcoming tax increase or currency devaluation is in order. The latter is due to the fact that Fernandez likes to use Argentina’s “free and available” FX reserves on fiscal spending and the pile of reserves deemed “free and available” have fallen to lowest level in over a year – likely necessitating a currency devaluation, lest the Argentinean government decides to tap international debt markets for the first time since its record $95 billion default in 2001.


Obviously, currency devaluation and using FX reserves to fund public expenditures is extremely inflationary. Yet, the Argentinean government insists inflation is only running at +9.7% YoY – so much so that they continue to punish private economists who suggest inflation is much higher at rates around +25% YoY. They’ve even modeled in CPI to be “less than +10%” in 2012, which we find interesting, given their recent decision to grant Argentinean labor unions a +25% increase in minimum wage. In most economies, minimum wage growth is typically only slightly north of the rate of inflation. Perhaps the government is not as adept at hiding the truth from the reported numbers as they believe themselves to be…


Venezuela: The key developments to highlight out of the Venezuelan economy last week were slowing growth and a sovereign debt downgrade. Real GDP growth slowed in 2Q to +2.5% YoY vs. a +4.8% rate in 1Q. Interestingly, Venezuelan economic growth had only been positive for two quarters over the last two years prior to this current slowdown, suggesting Chavez’s big spending on housing and agricultural projects ahead of next year’s elections aren’t helping the economy grow much beyond the budgeted +2% run rate. Perhaps if he refocused government efforts to rein in the country’s +26.1% YoY consumer price inflation instead of increasing social spending, Venezuela might actually have a great deal more real economic growth to report. On the credit rating front, S&P downgraded the sovereign’s debt rating to B+ (four notches below investment grade), citing regulatory instability via “changing and arbitrary laws” – such as Chavez’s recent decision to nationalize the country’s gold mining industry.


Darius Dale


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