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The Macau Metro Monitor, September 30, 2011




Grand Korea Leisure (GKL), a junket operator based in Seoul and runs Seven Luck casino, has stopped extending credit to mainland Chinese high rollers.  GKL, which has a small Macao operation, said the move was temporary and a repeat of a “credit clearing” exercise that saw it halting VIP credit for two months last year.  It did not give a specific reason for the latest move.


A junket operator in Macao said he was not aware of rivals experiencing a credit crunch. However, he had heard of mainland Chinese investors pulling capital from their investments because of monetary tightening at home.  “There are many wealthy factory owners from the east coast of China who have been making good returns from Macao simply by lending money to junket operators in return for 1-1.5 per cent in monthly interest. They have seen Macao as a profitable sideshow to their real business, which is experiencing a slowdown. However, some of them are in need of cash at home and have trouble borrowing from banks. So they are cashing out from Macao,” he said. So far, this only had a limited impact on the junket operators, he added, as they were still seeing strong growth in business.

Get Ready

“The readiness is all.”

-William Shakespeare


You have to give it to William Shakespeare, he had a way with words.  Just as Canadian hockey players have a way with understatement.   When it comes to the daily global macro market grind, Shakespeare’s quote above about says it all.  You are either ready; or you are not ready.  It is really that simple.


I’ve recently been reading, “How Markets Fail”, by John Cassidy.  I wouldn’t say I agree with all of Cassidy’s observations in the book, but he does offer some interesting anecdotes regarding markets and prevailing wisdom.  Near the end of the book, Cassidy takes a break from analyzing markets and describes the origin and construction of the Millennium Bridge in London.


As background, in 1996, the London Borough of Soutwark, the Royal Institute of British Architects, and the Financial Times newspaper held a competition to build a new footbridge from the Tate Modern Art Gallery to St. Paul’s Cathedral, which, of course, would cross the Thames.  The winning bid ultimately came from sculptor Sir Anthony Caro, architect Sir Norman Foster, and the engineering firm of Ove Arup. 


The winning entry was a spectacular design “with steel balustrades projecting out at obtuse angles from a narrow aluminum roadway.”  The designers insisted that the unique looking bridge could support at least five thousand pedestrians.  So, on June 10, 2000, just in time for the Millennial, the bridge was opened up by Queen Elizabeth II with much fanfare and thousands of pedestrians started to walk across the bridge.


The bridge began to immediately sway causing pedestrians to cling to the sides of the bridge and created what has been described as a sea sick feeling amongst those who traversed it.  Two days later, London authorities quickly shut the bridge down for an indefinite period, concerned about the stability of the bridge and safety of pedestrians utilizing it.


After studying the issue, the engineers at Ove Arup concluded that the issue was with the pedestrians and not due to the actual design of the bridge.  In part, the engineers were correct.  The bridge had been designed to gently swing to and fro, but what the designers didn’t account for was that pedestrians would exaggerate these movements in unison as they walked across the bridge.  Arguably, the engineers’ design was not ready.


The natural movement of walking produces a slight sideways force.  Thus as hundreds, even thousands of pedestrians walked across the bridge, they unwittingly created a unified sideways force that amplified the movement of the bridge.  In effect, the natural wobble of the bridge became self-reinforcing and fed on itself.  The savvy engineers at Ove Arup even came up for a name for this action, called “synchronous lateral excitation”. 


In preparing you for the market action in the coming quarter, one of our Q4 themes will be related to this idea of “synchronous lateral excitation”.  In global markets, currently, this concept is increasingly related to heightening correlations across asset classes.  In some instances, this heightened correlation applies to even seemingly unrelated asset classes.  Simply put, investors are increasingly acting in unison, which is amplifying price movements across markets and amplifying future risk. We’ve termed this, the “Correlation Risk” in previous notes.


Interestingly, though, even as cross-asset correlations are heightening globally, there are seemingly outlier markets that remain less correlated.  According to recent report from Bloomberg:


“The 30-day correlation coefficient between the S&P 500 Financials Index and the banking group in the Stoxx Europe 600 Index has averaged 0.65 in 2011, according to data compiled by Bloomberg. The figure for European banks and Japan's Topix Banks Index is 0.25.”


Yes, you read that correctly.  Japanese banks are becoming a global safe haven.  Were you ready for that? 


My colleague, and Hedgeye Asian analyst, Darius Dale recently updated his thoughts on Japan in a presentation.  A key takeaway is that in the last three years U.S. policy makers have been much more Japanese than the Japanese in terms of monetary policy.  In fact, not only did Chairman Bernanke and his associates cut rates more aggressively from the outset of the financial crisis, they have also leaned more heavily on the balance sheet of the central bank than their Japanese counterparts.


Interestingly, and related to the topic of global banking risk, this morning credit default swaps on Morgan Stanley reached a new cycle high of 455 basis points from 275 basis points at the end of August.  In effect, Morgan Stanley is now seen to be as risky a credit as the Italian banks.  Are you ready for that?


Part of increasing correlation between global markets is and has been the advent of increasing economic globalization and integration.  In 2011, it is truly a global economy.  This morning, the Chinese HSBC manufacturing PMI came in at 49.9, which is sub 50 for the third straight month.  The immediate reaction to this tepid manufacturing number from China can be seen in European equities off 1.5 – 3.0% across the board.  The German Dax is leading the way to the downside as a German lawmaker spoke out against an expanded EFSF.


The Hedgeye team has certainly tried to do our best to alert our subscribers as to the dismal outlook for equities this year and this quarter.  To that point, with the last trading day for Q3 2011 today, the SP500 is down -12.1% quarter-to-date. Based on the performance of the SP500 and some broad hedge fund return numbers we have seen, there is another risk to be ready for: fund redemptions.  Redemptions are never fun to talk about, but they are an unfortunate reality in this business that can impact asset prices.


Hopefully this note isn’t too somber heading into the weekend, but as Shakespeare also said:


“Better three hours too soon than a minute too late.”


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Get Ready - Chart of the Day


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


As we look at today’s set up for the S&P 500, the range is 64 points or -3.83% downside to 1116 and 1.60% upside to 1179.











  • ADVANCE/DECLINE LINE: 1295 (+3374) 
  • VOLUME: NYSE 1120.96 (+6.86%)
  • VIX:  38.84 -5.45% YTD PERFORMANCE: +118.82%
  • SPX PUT/CALL RATIO: 2.20 from 2.45 (-10.19%)



  • TED SPREAD: 36.70
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.99 from 2.03     
  • YIELD CURVE: 1.72 from 1.76


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: USDA Quarterly
  • 8:30 a.m.: Personal income, est. 0.1%, prior 0.3%
  • 8:30 a.m.: Personal spending, est. 0.2%, prior 0.8%
  • 9:45 a.m.: Chicago Purchasing, est. 55.0, prior 56.5
  • 9:55 a.m.: UMich Confidence, Sept. F, est. 57.8, prior 57.8
  • 10 a.m.: NAPM-Milwaukee, est. 57.2, est. 58.3
  • 11 a.m.: Fed’s Bullard to speak in San Diego
  • 1 p.m.: Baker Hughes rig count


  • Italy softens blow of falling government bond prices for insurers - FT
  • Alderney Gambling Control Commission pulls Full Tilt Poker's gambling license - WSJ
  • Strategic bidders look like current favorites in EMI auction - Billboard
  • FAA to propose higher minimum-experience standard for co-pilots - WSJ
  • Workers at Chrysler's Global Engine Manufacturing Alliance plant approve joining with UAW contract - WSJ
  • Global investors say Operation Twist will fail to reduce unemployment as the U.S. economy slows: Bloomberg poll
  • September quarter ends: Watch for portfolio shuffling as fund managers adjust holdings
  • Strategic bidders look like current favorites in EMI auction - Billboard
  • Invesco, Square Mile Capital, Canyon combine to acquire $880M loan portfolio from BAC

COMMODITY/GROWTH EXPECTATION                                                                    






  • Copper Rout Outpaces Analysts Focused on Shortages: Commodities
  • Gold Gains as Rout Spurs Purchases, Central Banks Boost Reserves
  • Korea Shipyards’ LNG Skill Beats China Bulk Focus: Freight
  • Diesel Rally on Shell Fire Set to End on Formosa: Energy Markets
  • Oil Gains in New York; Set for Biggest Quarterly Drop Since 2008
  • Copper Gains, Paring Biggest Quarterly Decline Since 2008
  • Commodities Pare Quarterly Drop on German Vote, U.S. Outlook
  • Zinc Output May Rise in Japan to Meet Post-Quake Demand
  • Rare Earths Fall as Toyota Develops Alternatives: Commodities
  • Thailand, Bolivia, Tajikistan Boost Gold Reserves in August
  • SGX, LSE in Joint Bid for London Metal Exchange, Reuters Says
  • Oil Heads for Biggest Quarterly Decline in New York Since 2008
  • Fifty-Year Drop in Asian Monsoons Linked to Fossil-Fuel Use
  • Farm Subsidies May Face Supercommittee Cuts Amid Record Profits
  • Gold May Gain as Price-Rout Spurs Physical Demand, Survey Shows
  • Sugar May Decline on Large Crops in Europe, Asia, Survey Shows
  • Crude Oil Rises on U.S. Economy, German Passage of Bailout Bill
  • Chaoda Chairman, Fidelity Manager Accused of Insider Trading






  • Eurozone August unemployment +10.0% vs consensus +10.0% and prior +10.0%
  • Eurozone Sep CPI +3.0% y/y vs consensus +2.5% and prior +2.5%
  • Germany August retail sales -2.9% MoM; +2.2% y/y vs consensus (0.6%) and prior revised to (1.8%) from (1.6%)
  • France August consumer spending +0.2% m/m vs consensus +0.3% and prior (1.60%)
  • France July producer prices +0.5% m/m vs consensus +0.3% and prior (0.3%)





  • Japan August core CPI +0.2% y/y vs cons +0.1%. Jobless rate 4.3% vs cons 4.7%.
  • Preliminary industrial output +0.8% m/m vs cons +1.5%.
  • September manufacturing PMI 49.3 vs 51.9 seq.
  • Tokyo September core CPI (0.1%) y/y, matching expectations.
  • HSBC China September PMI 49.9 vs preliminary 49.4, month-ago 49.9.







Howard Penney

Managing Director

Early Look

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