The Macau Metro Monitor, September 23, 2011




Caesars Global Life, the non-casino division owned by Caesars, plans to build a $470MM, 1,000 room non-gambling luxury resort--Caesars Palace Longmu Bay--on the southern Chinese island of Hainan.  Caesars Palace Longmu Bay is designed by Australia-based PTW Architects.  It is a partnership between Caesars and with Guoxin Longmu Bay Investment Holding Co. Ltd., a subsidiary of the Chinese investment and development company Jiangsu Guoxin Investment Group Limited.


The resort is scheduled to open in 2014 with two entertainment venues offering high-profile shows, a 36-hole championship golf course, a marina, spa, shopping and restaurants.  CEO Gary Loveman said his goal is to develop 25 hotels and resorts in China over the next five years.  There are other hotels on the island, but Loveman said he saw demand for a number of competing brands. MGM plans to open a resort dubbed MGM Grand Sanya on Hainan Island later this year.



Visitor arrivals for August 2011 marked a new record of 2,698,003, up 14.4% YoY.  Visitors from Mainland China surged by 24.3% YoY to 1,571,015 (58.2% of total), mostly coming from Guangdong Province (820,743), Fujian Province (92,976) and Zhejiang Province (61,218); while those traveling to Macau under the Individual Visit Scheme totaled 698,625, up by 18.4% YoY.  Visitors from Taiwan (116,152); the Republic of Korea (45,132) and Japan (38,853) increased by 0.3%, 25.1% and 4.4% respectively.  However, those from Hong Kong (754,636) decreased slightly by 0.5%.





S'pore CPI rose 5.7% YoY in August, an acceleration from July's growth of 5.4%. Compared with July's, August CPI was 0.7% higher.  The Monetary Authority of Singapore core inflation measure (which excludes the costs of accommodation and private road transport) was up 0.4% in August MoM and 2.2% YoY.



Macau CEO Chui said his government would continue to adopt measures to control the inflation rate in Macau.  “It is close to October. We hope the inflation will become stable or drop,” Chui added.  Macau government has been trying to open new sources of food supply in the Mainland to stabilize prices, while also subsidizing public utilities.


Angry Shorts

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“Habit will be your champion.”



I covered some shorts and got longer again yesterday (14 LONGS, 8 SHORTS in the Hedgeye Portfolio) because that’s what my process was telling me to do. Coming into the day we were long the US Dollar and effectively long the American Consumption that’s associated with a strong US Dollar.


Strong Dollar Deflates The Inflation. Period.


Habit, discipline, process – these things matter. Since I am a hockey head, our competition likes to think that they can work less hard than us because they are smarter. Smart is as smart does. And as the great Spartan officer Dienekes went on to say in Gates of Fire, “habit is a mighty ally.”


The habit of fear and anger, or the habit of self-composure and courage” (Gates of Fire, page 139). As a professional Risk Manager, what are your habits?


Self-composure in a down market is as critical as not getting angry about getting squeezed on the short side in an up one. This morning’s headline “news” is that Italy is being “downgraded” by one of the most lagging of lagging indicators – a ratings agency. Italian stocks are down -39% since February. S&P’s view is not new “news.” Stocks rallying on the “news” is…


Courage is building a team and a risk management process that includes people other than yourself. In a globally interconnected marketplace, you have to be able to trust and depend on both your teammates and sources – or just get new teammates and new sources. Collaboration of experience is the only path to victory. Individualism dies young in this market’s battlefield.


Back to the Global Macro Grind


Let’s start with what we’ve called The Correlation Risk. That’s the risk that QE2 would inflate asset prices and that a policy to inflate would perpetuate Growth Slowing. Check, check, check. That’s your 2011 Global Growth Slowdown. It’s old news.


What happens if we reverse the causal mechanism in inflating commodity prices? What happens if we strengthen the US Dollar? Bottoms are processes, not points, but yesterday was a very good day not only for American Consumers but for Global ones: 

  1. US Dollar Index held its long-term TAIL of support = $76.45
  2. CRB Commodities Index (asset inflation) got blasted for a -1.8% drop on the day
  3. WTI Crude Oil prices broke my immediate-term TRADE line of support ($86.96) and moved back into a Bearish Formation 

Despite the SP500 being down -1% yesterday, the Consumer Discretionary Sector (XLY) closed up +0.24% on the day (the Energy Sector was down -0.88%). That, and Chinese/Indian equities rallying on the Italy “news”, made perfect sense to me. New “news” to the 95% of this world that couldn’t care less about Ben Bernanke is that prices at the pump are going down.


Is that good for Energy, Financials, or Basic Materials stocks? No. Is it good for Consumer and Healthcare stocks? Yes. What’s best for Americans, Indians, and Chinese? Policies to inflate? Or a strong US Dollar that Deflates The Inflation?


Don’t ask your local Washington/Wall Street revisionist “economist” about that. Ask The People.


From a sentiment perspective, and I highlighted this in last week’s Early Look, the other people (Wall Street consensus) are getting really bearish after global market prices have melted down. This shouldn’t be a surprise. This is the habit of fear and anger that you want to avoid in both your professional and family life.


Last week’s Institutional Investor Sentiment Survey showed the nastiest bear growl that we have seen in 2011. For the first time this year, the Bears outnumbered the Bulls. And not by a little – by a lot: 

  1. Bulls dropped from 39% in the week prior to a fresh YTD low of 35.5%
  2. Bears ramped from 38% in the week prior to 41%
  3. The Bull/Bear Spread flashed a Buy Fear signal at -550 basis points wide (Bulls minus Bears) 

At the same time, both the Volatility Index for US stocks (VIX) broke its TRADE line of support (34.67) and the SP500 rallied above its TRADE line of resistance (1180).  On the margin, that’s more bullish than it is bearish. It would take a 2011 Bear to know.


To be clear, these are immediate-term TRADE signals (3 weeks or less in duration). But every risk management point should have a but, and every TREND is born out of a TRADE. If the US Dollar Index continues to hold TREND line support ($74.62), I’ll continue to have the courage to buy and cover on red days. Selling on green is the easy part.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1769-1819 (Gold’s immediate-term TRADE line of $1819 is broken), $86.03-86.98, 5029-5527, and 1187-11228, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Price of Winning

“Nothing good in life comes but at a price.”



In the darkest hours before his death at The Battle of Thermopylae, King Leonidas of Sparta provided a light that would last forever. It wasn’t about him or his valor – it was about leadership  - and the ultimate price leaders have to pay to prove they are selfless.


Whether you are American, Canadian, or Polish, the ultimate price your parents and grand-parents have paid for you is that which we all cherish, but sometimes forget to take the time to respect. Liberty.


“Sweetest of all is liberty. This we have chosen and this we pay for.”

-Leonidas, Gates of Fire (page 212)


If what you have seen unfold in the last 3-5 years in our said “free markets” makes you proud, confident, or trustworthy of our said liberties and freedoms, I will call you the contrarian this morning.


It’s one thing to have the courage to stand up to ideological tyrants. It’s entirely another thing to seize the moment when they’ve been revealed for who they really are. Losers. And there has never been a more pressing time in modern American history where this country needs winners to start leading them into daily battle again.


Being called a loser is hard. In our profession it’s actually harder to read than it is to accept. Most people aren’t forced to accept responsibility in recommendation. That’s because we have created a culture in Washington and on Wall Street where losers don’t lose.


They win.


All the while, we sweat equity capitalists who are winning have to keep putting up with their losing ideas. This devastates confidence. That’s the bad and old news.


The good and new news is that the US Dollar strengthening. I think the market is sending us a tremendous opportunity to be the change we all want to see in our markets.


We don’t need policy. We need to pay the price to get rid of its broken promise.


Back to the Global Macro Grind


I’m just going to give you what you need this morning. My positioning and the risk management levels that matter across this Globally Interconnect battlefield of risk.


Hedgeye Asset Allocation Model: 

  1. CASH = I raised our Cash position from 64% to 70% yesterday by selling my long-term US Treasuries. I have zero appetite for Ben Bernanke’s last asset bubble.
  2. INTERNATIONAL FX = 9% and next to Cash, being long the US Dollar Index outright is my highest conviction Global Macro position. Get the US Dollar right (we’ve made 24 calls on the USD since 2008 and been right 23 times), you’ll get a lot of other things right.
  3. INTERNATIONAL EQUITIES = 9% (long China and the Philippines) and this has been dead wrong not only this week, but for all of September. I am not a buyer of more of this mistake on weakness. I am a seller on strength.
  4. FIXED INCOME = 6% (US Treasury Flattener) and I sold 3% of that FLAT long position yesterday on strength alongside selling the rest of our exposure to long-term Treasuries (TLT). Everything has a price, and I’ve been making the Growth Slowing call since February (when we bought FLAT) – so, to a degree, we need to be booking the Growth Slowing trade gains up here.
  5. US EQUITIES = 6% (long Utilities) and this continues to be the only place I would commit capital from a S&P Sector perspective. Utilities (XLU) is the only Sector ETF in our model that is bullish on both the TRADE and TREND durations. The other 8 of 9 Sector ETF’s in our model are in what we call a Bearish Formation (bearish on all 3 durations – TRADE, TREND, and TAIL).
  6. COMMODITIES = 0%. 

That’s not a typo. ZERO percent means 0%. I’ve made my fair share of mistakes this year, but one of them has not been telling you to get out of asset classes (we went to 0% US and European Equities in June; we went to 0% International FX in July). One of the critical things about winning in this business is that it’s a lot easier to do when you remove your potential losers, entirely, from the field. Cash is king.


Dollar UP is pulverizing International FX and Commodity markets again this morning. Here are some critical Global Macro factors to consider that remind me that “valuation” is not a catalyst: 

  1. South Korea’s KOSPI Index and the Hang Sang in Hong Kong continued to crash overnight (down -5.7% and -1.4%, respectively).
  2. Germany, France, and Greece all reversed, hard, from their “bounce” and are continuing to crash on the downside.
  3. Russia, Oil, Copper didn’t have a bounce at all – this is called the Deflating The Inflation (our call since April) with USD strength. 

Here’s what the US stock market has done across our 3 core risk management durations: down 4 consecutive days; down 7 of the last 9 weeks; and down -27.8% since 2007’s free money leverage-cycle peak. Do we need more Big Government Intervention in our markets?


We are entering the darkest hours of American leadership. Let winners win. Let losers lose. And give me my liberty to lead from the front in these markets, or give my firm’s vision death.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $81.09-86.90, and 1119-1166, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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TODAY’S S&P 500 SET-UP - September 23, 2011


As we look at today’s set up for the S&P 500, the range is 47 points or -0.93% downside to 1119 and 3.23% upside to 1166.











  • ADVANCE/DECLINE LINE: -2395 (-243) 
  • VOLUME: NYSE 1716.20 (+41.80%)
  • VIX:  41.35 +10.80% YTD PERFORMANCE: +132.96%
  • SPX PUT/CALL RATIO: 2.75 from 2.66 (+3.62%)




UST YIELD CURVE: heavy and compressing if dropped on your head; 152bps wide, new low for the cycle; very bad for banks


10YR UST Yields hitting record lows as academics refer to chapter 2 on buy stocks when bond yields are?

  • TED SPREAD: 35.80
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 1.72 from 1.88     
  • YIELD CURVE: 1.52 from 1.67

 MACRO DATA POINTS (Bloomberg Estimates):

  • 1 p.m.: Baker Hughes rig count
  • 1:30 p.m.: Fed’s Dudley to speak on panel in Washington D.C.
  • 2:45 p.m.: Fed’s Williams on unconventional monetary policy in Zurich
  • 4:30 p.m.: ECB’s Trichet speaks in Washington


  • IMF/World Bank meetings take place and go over the weekend. Today, watch for comments from IMF Managing Director Lagarde, Fed President Dudley, Citigroup CEO Pandit, ECB President Trichet
  • Reliance Industries said to be studying possible purchases of shale-gas assets in Canada; may also invest in clean- energy ventures
  • Solyndra CEO Brian Harrison and CFO W.G. Stover appear before the House Energy and Commerce Committee
  • Hewlett-Packard CEO Meg Whitman plans to stick by strategies set in motion by her predecessor
  • Napster founder Sean Parker, Ron Burkle may partner on bid for EMI, N.Y. Post says
  • Liberty Media’s spinoffs of Liberty Capital, Liberty Starz tracking stocks may be completed
  • Bank of America said to be in talks to sell its stake in the biggest U.S. Pizza Hut franchisee for more than $800m



COMMODITIES: disaster continues for hedge funds (Hedgeye has a 0% asset allocation to Commodities and reiterate that call this morning, long USD)





  • Copper, Nickel, Tin Slump on European Debt, Global Growth Risk
  • Commodities Set for Worst Week in Four Months as Metals Tumble
  • China Coal Outage to Spur Imports as Prices Rise: Energy Markets
  • Gold Set for Worst Week in More Than 4 Months on Global Selloff
  • Oil Rises After Sliding to Six-Week Low; Heads for Weekly Drop
  • Record Harvest Cooling Inflation Checks Yield Rise: India Credit
  • Goldman Sticks With ‘Resilient’ Commodities on Supply Risks
  • Gold May Gain on Fed Measures, Europe Concerns, Survey Shows
  • Copper Extends Drop to Lowest Since August 2010: LME Preview
  • Deere CEO Won’t Let Asia Rice Paddy Sink $50 Billion Sales Goal
  • Peruvian Congress Approves Law Setting Mining Tax on Profits
  • Copper, Nickel, Tin Tumble on Debt, Growth Concerns
  • Iron Ore’s Four-Year Slide Hitting Mining Earnings: Commodities
  • Palm Oil Declines as Growing Recession Concerns Reduce Demand
  • Soybeans Set for Worst Weekly Loss in 2 Years on Demand Concern
  • Gold May Drop as Investors Sell to Cover Losses in Other Assets
  • Europe Central Banks’ Gold Sales Set for Least Since 1999 Accord
  • Oil Erases Gain in New York as Finance Heads Discuss Growth Risk







EUROPE: contagion spreading to Russia (crashing -36% since May), Poland, and Austria (both markets down -1% this morning, never mind "bounce")


EUROPE: only "bounces" are in the largest hedge fund short position markets (Italy and Spain); DAX and CAC can barely sustain bids.






ASIA: there was no bounce; crashing in Korea and Hong Kong continue making the S&P 500 hostage to crash (-20% drawdown from April) mean reversion


KOREA: KOSPI smoked for another -5.7% drop, taking the crash since May 2 to -24%; Korean bank exec jumped out of his window last night; sad








Howard Penney

Managing Director

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