The data is in.



Despite the rhetoric, total commissions have not been rising in Macau.  Maybe they will if LVS turns aggressive next year (see our 08/29/11 note “LVS: SHOWING AGGRESSION”), but overall commission rates were down in 1H of 2011 both on a percentage of revenue and rolling chip basis.  The following chart shows the junket commission trends.  Note that hold percentage was below normal in 2009 which caused the spike in the blue line in that year since the junkets structured on a percentage of rolling chip still get paid the same amount regardless of hold.




The charts below show the composition, by company, of all-in commissions between the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  Two main takeaways:  Wynn remains the least aggressive – no surprise here – and higher commissions have not been the driver of the strong growth we’ve seen at City of Dreams. 


Here are our observations:

  • Wynn maintained the most profitable VIP business on the Street by the least to acquire it
    • Rebate rate of 85bps of RC or 30.5% of win in 1H11 (88bps/29.3% in 2010)
    • Junket commission of 20bps of RC or 7.1% of win in 1H11 (20bps/6.8% in 2010)
    • All-in rate including comps  of 118bps of RC or 42.35% in 1H11 (122bps/40.6% in 2010)
  • MPEL and MGM were tied in 1H11 for paying the most for their VIP business.  MGM had the highest on a RC basis, while MPEL got the top prize on a % of win basis. 
    • MGM paid the highest rebate rate of 106bps of RC or 35% of win in 1H11. MGM has actually had the highest rebates since 2008 (103bps/35% in 2010)
    • MPEL paid the highest junket commission of 30bps of RC or 10.8% of win in 1H11. MPEL has consistently had the highest junket commissions since 2008 (36bps/12.25% in 2010)
    • MGM had the highest all-in rate including comps of 140bps of RC in 1H11 (137 in 2010) while MPEL has the highest all-in rate including comps as a % of win of 46.7% (46.9% in 2010)
  • LVS hold the prize for deriving the largest % of its revenues from non-casino revenues, however, given the scope of their business they also have the largest non-gaming comps.
    • LVS non-casino comps were 16bps of RC volume or 5.3% of win in 1H11 (18bps/6.2% in 2010). LVS has consistently been the highest non-casino comper since 2008, however, comps as a % of win and RC have been steadily declining since 2008.
  • MPEL’s non-casino promotional expenses as a % of RC and win are the lowest on the street
    • Comps were 7bps of RC or 2.6% of win in 1H11 (9bp/3.1% in 2010)






The Macau Metro Monitor, August 31, 2011




MPEL plans to launch its HK IPO in October.  Rumors indicate up to US$500MM may be raised.



Border crossing at the Gongbei border reached 600,000 in the last weekend of the summer holiday. The Gongbei port has accumulated up to 16MM passengers during the summer holiday.  Expansion plans for the Gongbei border will be sped up to improve the border crossing experience of travelers.



DICJ director Manuel Joaquim das Neves forecast 2011 Macau GGR growth above 35%.  In April, Neves had said 2011 growth would be between 20-30%.  Neves also stressed that, as Macau’s gaming regulator, he is inevitably inclined to have “a conservative outlook”.


The forecast proposed by Neves would place casino revenue for the final four months of this year at less than MOP 83BN, up by only 17.5% from the same period of 2010.



DICJ director Manuel Joaquim rejected yesterday's leaked US diplomatic cable saying, “It’s not impossible but it is very difficult to conduct money laundering in local casinos. We have had no such problem so far. People might think it’s possible to simply buy some chips at a casino and then trade them at another counter but it’s not. Gamblers must prove they played and that they won that amount and casinos have to write a check with the winner’s identification."

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“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter.  But now I would like to come back as the bond market.  You can intimidate everybody”.

-James Carville


Markets are intimidating and they don’t wait for anyone. Nor do they owe anyone a return, as Keith likes to say.   


When James Carville made the above quote, he was referencing the melt up in 10-year yields in the early stages of Bill Clinton’s first term as president.  Bond investors, at the time, were concerned about federal spending.  Subsequent efforts by the Clinton administration to control the deficit, which helped to strengthen the dollar, led to the bond investors’ fears being assuaged: yields trended lower and stocks surged, for the most part, during the remainder of Clinton’s stint as Commander in Chief. 


Markets are at least as intimidating today as they were in the early 1990’s, when real-time prices forced the government to sober up.  In the age of social media, where information is more accessible than ever, anyone can be a part of the debate.  In general, I would argue, this is good for the country as it allows a broader range of views to be heard by a broader range of people.  Popular consensus, in a way, is changing on a tick like real-time market prices, thanks to the democratization of information.  For the political players in Washington, this is intimidating.


Although real-time communication is becoming the norm, certain members of the financial community will likely resist that move and, like others before them across industries that have resisted positive change, they will be left behind.  The Federal Reserve’s inability to prop up equity prices in perpetuity has set alarm bells ringing in Washington this year as Hedgeye’s call for Jobless Stagflation, induced by ineffective Keynesian policies, has manifested itself.  For now, it appears that policy-makers are sticking to their guns, but to the extent that real-time prices and economic data continue to weigh on sentiment, the time for the incumbent players to act could be limited.


Despite Charles Evans’ best attempts, yesterday on CNBC he ignored the fact that markets discount future events (like the cessation of QE), and equity markets have declined globally on expectations that the global economy is slowing.  In the U.S., the primary source of pessimism (and ultimately the primary potential for renewed growth) is the consumer.  Despite trillions of dollars of government spending, consumer’s expectations for an improved economy have not changed significantly over the past three years.   


Yesterday’s bomb of a consumer confidence number from the Conference Board came as no surprise to anyone.  In an effort to look for a positive in what was a decidedly negative report, the stat that stood out the most to me was that more than half of consumers expect the stock market to be lower in a year, the first time that has been true since March 2009.  However, this is not March 2009, this is 2011.


In my view, there are four primary ailments that need to be addressed for a consumer recovery to take place.


(1)    The political machine in Washington, D.C. is broken.


This one is obvious.  The debt and deficit debate put the spot light on everything that is wrong with Washington politics.  Dylan Ratigan recently expressed the frustration many Americans are feeling during his rant on MSNBC during which he accused legislators of being “bought”.  Howard Schultz, the CEO of Starbucks, seemingly agrees as he is encouraging business leaders to just say no and stop funding the madness via political donations.  Ratigan, for his part, has shown no mercy for either side of the aisle.  During his now famous rant, Ratigan accused Democrats of “kicking the can down the road until 2017” and “screwing” future generations by not offering long-term solutions for extractions from the economy.  Turning to Republicans, he stated that they simply want to “burn the place down” and pursue a negative agenda.


(2)    Perpetually low rates is killing confidence


Easy money creates bubbles which have a severe impact on consumer confidence given that consumers are usually the last to the party.


(3)    The Keynesian policies of the FED is slowing GDP growth


Quantitative Easing is inflationary!  While Mr. Evans was on CNBC, refusing to admit that QE2 was inflationary, it was obvious that he was ignoring inconvenient facts while admitting only those that suited his stance.  Markets are discounting mechanisms and hinge on expectations; the longer-term view of QE2 is highly conclusive; the result was a weakened dollar and a 29% surge in the CRB index over the past twelve months.  Stagflation is back and it is scaring the public.


(4)    The Government inflates the data to build up expectations only to be shot down with constant downward revisions


The most glaring example of this is seen in the BEA's use of "deflators." The BEA is telling us that they believe that inflation over the prior two quarters has been running at annualized rates of 2.5% and 2.7% respectively and the annualized inflation rate for the prior four quarters was just barely over 2%.  You tell me!!  Is it really plausible that over the last 12 months we saw net inflation of barely over 2%? 


On Monday, the government reported that personal spending increased 0.8% in July.  This was a 100 basis point improvement from the month prior.  Consumption is accelerating despite numerous headwinds.  I have become very cynical about government data and it does require a leap of faith to assume that the government has accurately captured what is happening in the real economy.


Despite a significant downturn in equity prices during August, the S&P 500 is now 10% “off the lows” into month-end.  The market faces a difficult macro calendar in September including another attempt from the Obama administration to jump-start the economy.  One thing Obama knows is that markets are ready-and-able to tell him if he is not doing the right thing.  Coming up to the election, the incumbent president needs a win, but solutions to the problem of Jobless Stagflation and ideological dogma in Washington, D.C. are what the market of popular consensus is demanding. 


Function in disaster; finish in style,

Howard Penney





The Club

This note was originally published at 8am on August 26, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Stop fighting us and play ball.”

-The Club (1998)


I am writing this morning’s Early Look from my favorite place on earth – from my office on Lake Superior.


There are no central planners here. There are no Keynesians. There is no one who can even attempt to give me a wink and a nod as to what today’s speech from the Almighty Federal Reserve Chairman may bring…


And I like that. I don’t ever aspire to ever be in the area code of The Washington/Wall Street Club.


Any pro who has played this game for real knows what The Club is all about. It can make you laugh. It can make you cry. It’s where a good ole boy by the name of Warren Buffett gets his wheels greased. It’s where former Fed Heads whisper sweet nothings into privileged ears. It’s where the heart of most of America’s leadership and credibility problems in global financial markets resides.


The aforementioned quote comes from a Complexity Theorist by the name of Martin A. Armstrong. Like me, he has his own models that include fractal math. Like me, his macro forecasts are better than the government’s. Unlike me, he went to jail.


Whether or not he was innocent of alleged Japanese bond fraud isn’t the point of this morning’s note. The point is about The Club. If you’ve studied economic history as closely as I have, you’ll at a bare minimum respect not only the generational contributions Armstrong has made to the risk management field, but also his tabulation of the history of The Club’s market manipulations.


“On February 4th, 1998, Warren E. Buffett was forced to come out and state that he purchased in London $910 million worth of silver. Buffett added: “Berkshire has no knowledge of the actions or positions of any other market participant…” (Martin A. Armstrong)


Right Mr. Buffett. You and Mr. Sokol never know anything about nothing. Right.


According to Armstrong, after the Buffett disclosure, the then journalistically relevant WSJ called demanding an answer: “How did you know”? (as in how did you know the large premium price paid for Silver in London instead of buying it cheaper in New York during the silver panic was Buffett’s order before it was news?). Armstrong replied, “It was my job to know!”


Indeed, Mr. Armstrong. Indeed. It is our job to know that someone always knows something.


Who knew Warren Buffett was going to get another sweetheart deal on Bank of America before it was announced yesterday morning? Was the stock up +11% the day prior on huge volume by happenstance? Or did someone in The Club know?


If you didn’t know this is how Old Wall Street operates, now you know…


Back to the Global Macro Grind


Despite Buffett making an investment that puts him in a preferred position ahead of every single common stock holder in BAC, the US Financials ETF (XLF) closed down on the day yesterday. For 2011 YTD, the Financials are now down -20.63%. Since their YTD hopeful highs established in February 2011, the Financials have once again crashed (down -26.1% since FEB 17).


If you were carrying some orange jump suit risk into the day (long the Financials on the pending “news” at the open), you couldn’t have been happy with the day’s ultimate outcome. I guess The Club’s perpetually preferred returns aren’t what they used to be.


Ahead of The Club’s next move in Jackson Hole today, here are some other globally interconnected realities associated with a global market place that doesn’t trade on what Joe Kennedy’s friends know anymore:

  1. US stocks (SP500) = down -15.0% since Bernanke’s 1stever Global Press Conference on Money Printing (April 2011)
  2. German stocks (DAX) = down hard this morning (-1.8%) and continue to crash (down -27% since late April)
  3. Greek stocks (Athex Index) = gone – down another -1.2% this morning and down -48% from their 2011 high
  4. UK Stagflation = reported this morning with Q211 GDP growth only 0.7% y/y and headline inflation running at +4.4% y/y
  5. US Stagflation = to be reported at 830AM EST (ie GDP somewhere around 1%, but subject to 81% downside revisions)
  6. Gold = rallies, big time, off of the Hedgeye TRADE line of support that we gave you yesterday ($1705/oz)

To a large extent, Gold’s 2011 performance reflects a repudiation of Keynesian Economics. The Club’s heavy hand of Big Government Intervention in financial markets is running out of bullets.


The People of the United States of America don’t like ZERO percent interest rates of return on their hard earning savings accounts inasmuch as they don’t like being gamed by an old man giving Bank of America a buzz from his bathtub.


Americans want Transparency, Accountability, and Trust.


Armstrong’s open attacks on The Club probably have something to do with him being put in the slammer. So I better end my morning missive here today or plan on being in Thunder Bay, Ontario for an extended stay.


Armstrong’s view is that “the Crash of 2007 has been an accumulation of this trend that finds coordinated trading to seek that guaranteed perfect riskless trade with political backing…”


Before we get all warmed up by Buffett’s storytelling that Bank of America has a “great management team” and whatever else he had to say yesterday to get printed on his preferreds – just remember Buffett’s #1 reason for buying the same preferred stock position in Goldman Sachs in 2008. He said it was because he knew his old boys in Washington would bail them out.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1705-1811, $81.21-85.20, and 1107-1182, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Club - Chart of the Day


The Club - Virtual Portfolio




TODAY’S S&P 500 SET-UP - August 31, 2011


Despite a significant downturn in equity prices during August, the S&P 500 is now 10% “off the lows” into month-end.  The market faces a difficult macro calendar in September including another attempt from the Obama administration to jump-start the economy.  As we look at today’s set up for the S&P 500, the range is 62 points or -3.95% downside to 1165 and 1.16% upside to 1227.











  • ADVANCE/DECLINE LINE: +762 (-1722)  
  • VOLUME: NYSE 1017.24 (+11.51%)
  • VIX:  32.89 +1.89% YTD PERFORMANCE: +85.30%
  • SPX PUT/CALL RATIO: 1.84 from 2.26 -18.61%


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

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage Applications, prior (-2.4%)
  • 7:30 a.m.: Challenger Job Cuts, prior 59.4%
  • 8:15 a.m.: ADP Employment, est. 100k, prior 114k
  • 9:45 a.m.: Chicago Purchasing, est. 53.3, prior 58.8
  • 10 a.m.: Factory orders, est. 2%, prior (-0.8%)
  • 10 a.m.: NAPM Milwaukee, est. 52.7, prior 57.6
  • 10:30 a.m.: DoE inventories
  • 12:30 p.m.: Fed’s Lockhart speaks on economy in Lafayette, La.



  • Tropical Storm Katia may become hurricane later today, National Hurricane Center says; path uncertain
  • Lions Gate (LGF): Carl Icahn agreed to sell his Lions Gate shares for $7 each to end battle for control over the studio. Parties agreed to end all litigation






  • Containers Slump to 50-Year Low as Sales Slow: Freight Markets
  • Mongolia Said to Plan Three-City IPO for Tolgoi Next Year
  • Oil Heads for Monthly Decline as Slower Growth Curbs Demand
  • Coal Discount Shrinking in Asia on Japan Rebound: Energy Markets
  • Copper Set for First Monthly Drop in Three on Growth Concern
  •  Colombia Raises Gold Reserves by 2.3 Tons in July, IMF Data Show
  •  Oil at 4-Week High as Stimulus Speculation Counters Supply Gain
  •  Chan Exits Sino-Forest 22 Years After Tiananmen ‘Nightmare’
  •  Oil Rises to Highest Level in Almost Four Weeks as Fuels Climb
  •  Vietnam Coffee Said to Be Trading at Discount on Record Harvest
  •  U.S. Natural Gas Output Rises to Highest Since January 2005
  •  Gold Rises in New York on Expectations Fed Will Continue to Ease
  •  Sugar to Drop as Europe, India Boost Supplies, Kingsman Says
  •  Commodity Shipping Costs Fall as China Ore Stockpiles at Record
  •  Coffee Rallies as World Supply May Tighten; Cocoa, Sugar Decline
  •  Rubber Drops From Three-Week High on Concern Economy to Slow
  •  Wheat Drops on Speculation Demand for U.S. Exports May Shrink
  •  Copper Rises to Three-Week High on U.S. Economic-Growth Outlook.






  • Germany Jul retail sales (1.6%) y/y vs consensus (1.9%), prior revised (2.1%) from (1.0%)
  • Germany Aug unemployment change (8K) vs consensus (10K), unemployment rate +7.0% vs consensus +7.0%
  • Greece is burning down 4%





  • Most Asian markets traded higher this morning despite weak US consumer confidence; China’s performance  was uninspiring +0.03%







Howard Penney

Managing Director

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