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SOLID WEEK IN MACAU

No change to our September forecast of HK$20-22BN.

 

 

A solid week in Macau this past week keeps our full month September forecast at HK$20-22 BN, up 35-48% YoY.  We are hearing that volumes are strong as well so no major market wide hold impact.  Hold is likely impacting the operators individually, however.  Wynn Macau’s market share was only 8.4% and while that is much improved from last week’s 5.4%, it is way down from its post Galaxy Macau (GM) opening of 13.6%.  MPEL continues to outperform with a huge 19.3% share, up from its post GM share of 15.0%.  While hold likely played a role, we are hearing that a lot of play moved over from Galaxy Macau this month.  Not sure why yet.  LVS is lagging once again, well below its recent share.  On a positive note, we are hearing that junket operators Sun City and Neptune are getting close to ramping up at The Venetian.

 

SOLID WEEK IN MACAU - macau sept


MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR

The European crisis dominates the Risk Monitor changes this week.  Sovereign CDS put in one of their worst weeks ever, and bank CDS on both sides of the Atlantic reflected the deterioration.  The TED spread hit a new high for the YTD and the 2-10 spread continued to tighten.  In all, there is little good news in today's risk monitor.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 1 of 11 improved / 7 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 3 of 11 improved / 7 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 7 of 11 worsened / 2 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - Summary

 

1. US Financials CDS Monitor – Swaps widened in 27 out of 28 major domestic financials in our table last week. 

Widened the most vs last week: C, GS, AGO

Tightened the most vs last week: PMI, AON, MMC

Widened the most vs last month: PRU, LNC, HIG

Tightened the most/widened the least vs last month: XL, GNW, MMC

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - CDS  US

 

2. European Financials CDS Monitor – Banks swaps also widened in Europe last week.  35 of the 39 swaps were wider and 4 tightened.   The average widening was 5.9%, or 25 bps, and the median widening was 21.3%.  Tightening was concentrated in the Greek banks, where swaps are already trading well over 1,000 bps. 

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps went parabolic last week.  All the countries we track, with the exception of Ireland, hit a new high as of this morning.  Greek swaps are up 56% WoW as of this morning, rocketing to 3500 bps.  French CDS rose 23% WoW to a new high of 191 bps. 

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - sov

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 13 bps last week, ending at 7.82 versus 7.69 the prior week.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - High Yield LT

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2 points last week, ending at 1538. 

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - Leveraged Loan Index

 

6. TED Spread Monitor – The TED spread made a new YTD high, ending the week at 33.3 versus 31.5 the prior week.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - TED spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell very slightly to -2.1.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - JOC LT

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields hit another new all-time high, ending Friday at 2056.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - Gr Bond LT

 

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 rose 12 bps and closed at 162 bps.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - MDDX spread

 

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 sharply off a low level, climbing 98 points to 1838.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - Baltic Dry

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 10-year yield fell 7 bps, pushing the 2-10 spread to 174 bps.   

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - 2 10 spread

 

Margin Debt Flat in July

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 July, margin debt held close to flat at $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 July.

 

MONDAY MORNING RISK MONITOR: EU SWAPS BLOWOUT REMAINS THE PRIMARY INDICATOR - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: WYNN COTAI; CHINA AUG LOANS

The Macau Metro Monitor, September 12, 2011

 

 

ACCEPTANCE OF LAND CONCESSION CONTRACT FROM THE MACAU GOVERNMENT IN RESPECT OF THE COTAI LAND Wynn Macau Limited

Palo Real Estate Company (owned by Wynn) and Wynn Macau have accepted the terms laid out by the Macau government regarding developing the ~51 acres of land on Cotai.  Palo will pay a land premium of MOP1.55 BN and rental fees of MOP6.17MM to the government.   The first payment towards the land premium will occur in the form a down payments of MOP500,000,000 (approximately HK$500,000,000 or US$62,500,000) and the balance will be paid 8 additional semi- annual payments beginning six months from the date the Land Concession Contract is published in the official gazette of Macau.

 

and Wynn Macau to develop a resort containing a five-star hotel, gaming areas, retail, entertainment, food and beverage, spa and convention offerings on Cotai.  Palo will lease the Cotai Land from the Macau Government for an initial term of 25 years from the date the Land Concession Contract is published in the official gazette of Macau with the right to successively renew the Land Concession Contract for additional periods, subject to applicable legislation.

 

NEW LOANS HIT 548.5 BILLION YUAN IN AUGUST People's Daily

China's commercial banks were more aggressive in lending in August than in July due to a temporary ease in inflation in August.  New loans reached 548.5 BN Yuan.  New lending in August, up 1.7% YoY and 11.3% MoM.  


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The Scoundrels of Consensus

This note was originally published at 8am on September 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

In financial markets, consensus is typically what astute stock market operators invest against.  That is, if the crowd has a similar view of an asset or asset class, that asset or asset class will typically be priced to perfection.   Therefore, savvy analysts and portfolio managers strive to find the nugget of non-insider information that will prove that consensus is wrong, which inevitably leads to a re-pricing of the asset and profits for those that appropriately determined where consensus views were wrong.

 

Obviously, the key variant macroeconomic view that Hedgeye held coming into 2011 versus consensus was that growth was slowing and would continue to slow.   We won’t rehash the thesis, but our view was for sub 1.5% growth in the first two quarters of 2011, while sell side consensus GDP estimates were, based on Bloomberg data, at +3.4% as of early February. 

 

As always, though, the job is to play the game in front of us and while rehashing old victories can be fun, we’ll save those opportunities after the inevitable victories of Yale over Harvard at the Yale / Harvard hockey and football games this year.  So two questions to ask into the remainder of the trading year are:

 

1)      What is consensus?

 

2)      What are your best variant views versus consensus?

 

Yesterday, I noticed a nugget of information that at first suggested to me that market consensus was leaning too far to the negative.  Specifically, negative bets on the SP500, as measured by a net outstanding 107,913 futures contract in the week August 30th, were at their highest level since September 2007.  My knee jerk reaction, as it relates to determining consensus, was to look at this statistic as a contrarian indicator. History, of course, suggests a different byline.

 

In fact, as noted above, the last time negative options bets were at this level was September 2007.  The next month, October 2007, marked the all time high in the SP500.  There are number of studies that provide an explanation as to why this seemingly contrarian indicator is actually not one, but the primary reason is that short sellers, in aggregate, typically invest with better information than market participants broadly.  One recent study by Morningstar CMPS on Canadian stocks from 2003 to 2011 showed the following:

 

“CPMS looked back to 2003 (when it started to record short interest data) and found that a portfolio of the most heavily shorted stocks indeed did poorly and underperformed the S&P/TSX composite total return index by about six percentage points annually, assuming an equal weighting of each of the 15 names and reselecting new names each month.”

 

Thus, while consensus views are important to determine when contemplating the risk / reward of positions, always be aware of The Scoundrels of Consensus.  These critters come in many forms, such as in the form of those who practice the dark art of short selling or even, gasp, in the form of statements from senior executives or government officials.

 

Typically, of course, I would give little credence to the idea that either government officials or senior company executives have much insight into the global macro environment, or that they would truthfully share their views.  At times, though, I do recommend taking the words of The Scoundrels of Consensus at fair value.  Some recent statements from European “leaders”, which I’ve outlined below, exemplify this point.  To wit:

 

1.   “Under the current structure and with the current membership, the euro does not work.  Either the current structure will have to change, or the current membership will have to change.”

-          Stephanie Deo, Paul Donovan, and Jacek Rostowski of UBS Bank

 

2.   “The Euro has never had the infrastructure it requires.”

-          Herman Van Rompuy, EU President

 

3.   “I regard the huge buy-up of bonds of individual states of the ECB as legally and politically questionable.”

-          Christian Wulff, German President

 

4.   “All this reminds one of the autumn of 2008.”

-          Josef Ackerman, Deutsche Bank CEO

 

5.   “Dealing with a banking crisis was difficult enough, but at least there were public sector balance sheets on to which the problems could be moved.  Once you move into sovereign debt, there is no answer; there’s no backstop.”

-          Mervyn King, Governor of the Bank of England

 

6.   “The euro is in danger . . . if we can’t deal with this danger, then the consequences for us in Europe are incalculable.”

-          Angela Merkel, Chancellor of Germany

 

The intention this morning is not to fear monger our subscribers into getting overly negative in the short term.  In fact, our most recent moves in the Virtual Portfolio yesterday morning were to cover two shorts : United Kingdom Equities (EWU) and Capital One Financial (COF).

 

Instead the advice this morning is simply this: be aware and wary of The Scoundrels of Consensus.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Scoundrels of Consensus - Chart of the Day

 

The Scoundrels of Consensus - Virtual Portfolio



Fiat Fool Monday

“Any fool can know. The point is to understand.”

-Albert Einstein

 

After spending some much needed time with my beautiful wife on a non-Greek island in the middle of nowhere last week, I’m feeling good this morning. I’m re-charged and ready to go after some Fiat Fools in France.

 

Actually, I’m not ready for that. That would be boring. Playing yesterday’s game all over again usually is. Being short European or US Equities is yesterday’s news. Today we are tasked with playing the game that’s in front of us.

 

Whether yesterday was 2008 in the US or 2011 in Europe is really for history to decide. Crashing market prices are what they are and I highly doubt blowing up other people’s money a second time around is going to be tolerated by at least that one core constituency – those other people. Equity market fund “outflows” and “sentiment” will be the final stage for the 2011 Equities bears to navigate.

 

Back to the Global Macro Grind

 

Even for a central planner of modern day money printing, arresting gravity is difficult. With that risk management thought in mind, here are the Top 3 things I am looking at this morning:

  1. GERMANY – the German DAX continues to tell us all we need to know about not being long anything Europe (stocks, bonds, or currency). With the healthiest fiscal situation and balance sheet of a bad Western European bunch, if Germany can’t stop going down, I don’t see why France or Italy can; DAX, CAC, and MIB Index crashes are now -33%, -30%, -39% since the end of April.
  2. EURO/USD – from The Correlation Risk perspective, this remains the most important relationship in all of Global Macro. We like to say, “get the EUR/USD pair right and you’ll get a lot of other things right.” Both the TAIL ($1.39) and TREND ($1.43) for the Euro have broken expeditiously here in September.
  3. SEPTEMBER – after going net short for the 1st time since June 23rd  at the end of August (more SHORTS than LONGS in the Hedgeye Portfolio), we showed the “Month-End Markup” factor (last 6 days of the month vs first 6 in the new month for US Equities). The average 6 day drawdown since April = -4.5%. For September to-date the SP500 is down -5.3%.

Of course, any fool can know most of these things after they have occurred. Yesterday’s score is the score. Since the 2007 and 2011 highs, the SP500 is down -26.3% and -15.3%, respectively. The point now is to understand what to do next.

 

On today’s down move, this is what I’m going to do:

  1. COVER shorts that have gone down
  2. BUY Asian Equities where the rate cycle is about to become accommodative (no more rate hikes)
  3. BUY US Equities (Utilities and Healthcare first) as we SELL more of our US Fixed Income exposure

Now before I get accused of being all horned up like a bull here, we’re in a very good position to take our time. After all, rotating your assets from one asset class to another should be a proactive process, not an emotional point.

 

Last week, on US Bond market strength and US Equity market weakness, I sold Fixed Income Exposure (TLT) and started buying some US stock market exposure (XLU and XLV). As a reminder, I moved to ZERO percent US and European Equity exposure before this morning’s episode of the Fiat Fool Monday gong show began.

 

Here’s the Hedgeye Asset Allocation Model as of Friday’s market close:

  1. CASH = 55% (down from 64% last week and down from 70% at my peak Cash position for 2011)
  2. FIXED INCOME = 18% (US Treasury Flattener, Long-term US Treasuries, and Treasury Bond ETF – FLAT, TLT, and BWX)
  3. INTERNATIONAL EQUITIES = 12% (Philippines, China, and S&P International Dividend ETF- EPHE, CAF, and DWX)
  4. US EQUITIES = 9% (Utilities and Healthcare – XLU and XLV)
  5. COMMODITIES = 6% (Silver and Corn – SLV and CORN)
  6. INTERNATIONAL FX = 0%

Cutting an exposure to ZERO percent can be considered “aggressive” by someone who doesn’t understand what we do. Most recently, I’ve opted to cut my International Currency exposure to ZERO percent. The #1 reason for that has been my being bullish on the US Dollar for the first time in a long time.

 

With Global Growth Slowing being priced in and Americans leaning more conservatively in the polls than they have in years on both fiscal and monetary policy (Fiat Fools are politicians and, yes, they follow the polls), the US Dollar has put on one heck of a move “off the lows.” Last week alone, the US Dollar Index was +3.3%. That’s very good for Americans.

 

Yes, Americans. As in the other 90% of Americans who don’t really own stocks anymore. Either by liquidation, capitulation, or californication (housing bust), that’s your New Reality of a financial system that people don’t trust. The top 10% of America’s wealthy own 98.5% of the US stock market (source: G. William Domhoff, UC Santa Cruz). And 10% of America isn’t America.

 

If I’ve said this 100x in the last 3 years, I’ve said it 1000x – the best path to American prosperity is through a strong US Dollar. This isn’t a political point. Both Reagan and Clinton got this as right in America as Bush II and Obama have had it wrong. Strong Dollar reduces inflation at the pump and creates more spending power in this brave, new, globally-interconnected world.

 

The Monday morning Fiat Fool quarterbacks of the Keynesian Kingdom don’t get that, yet. But markets have always had a not so funny way of helping them eventually understand.

 

My immediate-term TRADE ranges of support for Gold, Oil, and the SP500 are now $1, $85.81-88.09, and 1126-1177, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fiat Fool Monday - Chart of the Day

 

Fiat Fool Monday - 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 80.65%
  • SHORT SIGNALS 78.64%
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