• run with the bulls

    get your first month

    of hedgeye free



It appears MPEL has no plans anytime soon on issuing new equity so let’s get back to the fundamentals.



MPEL shot up 14% yesterday.  Think you’re too late?  I think not.  Apparently, the company will not be diluting shareholders anytime soon with an equity offering.  With that overhang out of the way, investors can get back to the fundamentals.  The Street is 30-40% too low on EBITDA for Q3 and Macau has shown no signs of a slowdown, even through Golden Week which looks very strong for the market. 


Worried about a China slowdown next year?  Okay, but at 6x EV/EBITDA it appears that the market is even more worried than you.  As a reminder, MPEL traded at 8x EBITDA when the stock was at $4.  What’s the right multiple?  Given that Macau operators pays no income taxes on gaming profits and domestic gaming companies trade at 6-8x, we would argue for a range of 8-12x and maybe higher since valuations are depressed.


As we said on Tuesday (MPEL: COULD THE SHAREHOLDER MEETING BE A CATALYST?), we think it is unlikely MPEL raises equity anywhere close to these levels.  Our view was confirmed today by multiple press reports.  It makes sense to pull the raise – the valuation is ridiculous and the company only has required contributions to the Macau Studio City project of $25 million in September of 2012 and 2013. 


Given the negativity over the last month or so and the ugly prospect of a dilutive equity deal, we suspect there may be a number of short sellers looking to cover.


The Macau Metro Monitor, October 7, 2011




According to IFR, MPEL is considering a HK listing by way of introduction, instead of selling stock and raising capital, because of current market conditions.  MPEL's HK offering was set for 4Q 2011.



Stanley Ho reduced his stake in Melco International Development to 24.28% from 26.78%.  Also, Lawrence Ho acquired a similar amount of shares, pushing up his stake in the company to 60.57% from 59.09%.  



CEO of Sands China, Edward Tracy, said he is not worried about the 3% table growth cap starting in 2013.



The Maritime Administration (CP) said it has revoked the licence of ferry operator Macao Dragon, which suspended services abruptly on September 15.  “From September 15, 2011, Macao Dragon suspended or abandoned operations between the Taipa ferry terminal and Hong Kong, without authorisation. There is no evidence that Macao Dragon has abandoned or suspended operations due to reasons beyond its control,” the CP said.

Theory vs Practice

This note was originally published at 8am on October 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In theory there’s no difference between theory and practice, but in practice there is.”

-Yogi Berra


In theory, money printing and piling more debt-upon-debt was going to save the world’s biggest banks. In theory, Old Wall Street had Ben Bernanke’s back on +3-4% US GDP Growth for 2011. In theory, the Yankees should have beaten the Detroit Tigers last night too.


Then again, I’m a conflicted, compromised, and constrained Yankee fan – and with that theory, I may as well be a Keynesian this morning. In practice this is called marked-to-market risk management and the question this morning isn’t an ideological one – it’s, what do you do?


When I joined the hedge fund elite 12 years ago, I didn’t have to have a Global Macro view. Today, I do. In practice, this game of Globally Interconnected Risk is A) always on and B) always changing. Today, I have to play the game that’s in front of me.


Back to the Global Macro Grind


Immediate-term TRADE oversold is as oversold does. Today we’ll register the 3rdShort Covering Opportunity we’ll have called for in the last 2 months (the 1st call we made to cover shorts on August the 8th, 2011).


Here are the US Equity, Commodity, Currency, and Fixed Income factors that help me decide what we do now: 

  1. The SP500 is immediate-term TRADE oversold in the 1180-1197 range
  2. The Volatility Index (VIX) is immediate-term TRADE overbought at 47.11
  3. This is the first day in the last 6 trading days in US Equities where there’s more immediate-term upside vs downside
  4. The US Dollar Index is immediate-term TRADE overbought at $79.43
  5. The Euro/USD pair is immediate-term TRADE oversold at $1.31
  6. WTIC Oil is immediate-term TRADE oversold at $76.19
  7. Copper is immediate-term TRADE oversold at $2.95/lb
  8. US Treasury Yield Spread is putting in an oversold YTD low of 153 basis points wide
  9. US Treasury 2-year Yields are holding immediate-term TRADE support of 0.21%
  10. Goldman is cutting their Global Economic estimates across the board 

On top of the price/volume/volatility signals that help construct the 10 aforementioned factors in my model, we have a very newsy event on the tape with Deutsche Bank’s CEO (Ackerman) guiding Q3 down, big time.


In theory, this is all bad. In practice, a lot of what Goldman and Deutsche Bank are saying isn’t in the area code of what Hedgeye clients would consider new. Our Managing Director of Financials research, Josh Steiner, has been bearish on the banks since February.


The US Financials ETF (XLF) is down -29.3% for the YTD. That’s called a crash – and it’s readily apparent in the rear-view mirror. So is the SP500 having collapsed -29.8% and -19.4% from their October 2007 and April 2011 easy-money highs.


Today is a day to notice what no one will be focused on. In theory, your Risk Manager should have a process to impute everything that’s happening in the world as of last price. In practice, most money managers will be freaking out this morning making emotional decisions.


Capitalize on that.


What do I see that’s better than bad that people aren’t talking about this morning? 

  1. South Korean inflation (CPI) dropped sequentially to +4.3% for SEP versus +5.3% in AUG (on the margin that’s not bad)
  2. Chinese non-Manufacturing PMI rose sequentially to 59.3 for SEP versus 57.6 in AUG (China is not collapsing, yet)
  3. USA’s ISM report for SEP rose sequentially (month-over-month) to 51.6 versus 50.3 in AUG (Growth Slowing? not new) 

Again, I’m not calling for a new bull market. Neither am I saying that Growth Slowing has ended. I am simply suggesting that you see this for what it is in most things US Equities (and some things Asian and European Equities) this morning – a Short Covering Opportunity.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1554-1672 (Gold is now bearish TRADE and TREND), $76.19-81.09 (Oil remains in a Bearish Formation – bearish on all 3 of our risk management durations), 5091-5439 (that TRADE line break in the DAX yesterday mattered), and 1080-1130, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Theory vs Practice - Chart of the Day


Theory vs Practice - Virtual Portfolio

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.




TODAY’S S&P 500 SET-UP - October 7, 2011


Short Covering Opportunities are what they are – we had a big one this week. Now it’s time to manage the downside risk again.  Whispers were bountiful yesterday about a better than “expected” unemployment report. That will surprise me if it comes to fruition. From these levels in macro markets, that’s now a liability for the bulls if it doesn’t.  The Hedgeye S&P model is looking for jobless claims to re-accelerate in the coming weeks to 465,000-475,000 range.


As we look at today’s set up for the S&P 500, the range is 27 points or -1.71% downside to 1145 and 0.60% upside to 1172




Three days and +5.9% higher than the YTD closing low (1099), once again, the shorts have been squeezed.


But will there be follow through?


Tomorrow we have a Game Time catalyst with the employment report and there’s a gaping hole down to 1101 support, so stay tuned…


Nothing has really changed in the Sector Risk model other than seeing a continued (and healthy) rotation toward sectors that I think would benefit most from a Strong US Dollar (Consumer Discretionary and Technology – both are now bullish on our immediate-term TRADE duration).


Deflating The Inflation is good for consumption


The only sector that remains bullish from an intermediate-term TREND perspective is Utilities (XLU) and we are long that.




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +2132 (+705) 
  • VOLUME: NYSE 1117.43 (-6.45%)
  • VIX:  36.27 -4.07% YTD PERFORMANCE: +104.34%
  • SPX PUT/CALL RATIO: 1.70 from 1.91 (-11.08%)




  • TED SPREAD: 38.78
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.01 from 1.92     
  • YIELD CURVE: 1.72 from 1.67


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Non-farm payrolls, est. 55k, prior 0k
  • 9:30 a.m.: Fed’s Fisher speaks on U.S. economy in Dallas
  • 10 a.m.: Wholesale inventories, est. 0.6%, prior 0.8%
  • 10:45 a.m.: Fed’s Lockhart speaks on economy in Atlanta
  • 1 p.m.: Baker Hughes rig count
  • 3 p.m.: Consumer credit, est. $8b, prior $11.965b


  • Employment in U.S. probably gained 55k last month, economists estimate, not enough to bring down unemployment rate of 9.1%.
  • U.K. bank ratings cut by Moody’s after agency concluded government less likely to provide support.
  • Global investors like Mitt Romney better than any other U.S. presidential candidate, though cool to Republican field in general
  • President Obama hosts Prime Minister of Tunisia Beji Caid Essebsi


COMMODITY/GROWTH EXPECTATION                                                                    


COPPER – nice rally for the Doctor but, like Asian Equities, it’s simply a short squeeze from immediate-term oversold lows. Most of the manic media was running Copper charts at the bottom last week, but we have been signaling Copper’s having broken its TREND since late-July early-August. That has not changed – TRADE and TREND lines of resistance for Copper now 3.44 and 4.18.


THE HEDGEYE DAILY OUTLOOK - daily commodity view





  • China Baby-Formula Maker Buying Arsenic Debt Shows Trust Risks
  • Copper Traders Turn Most Bullish in Six Weeks on China’s Demand
  • Gazprom Extends Drought on Two-Year High Spread: Russia Credit
  • Rio, Ivanhoe Halt Mongolian Bid to Raise Oyu Tolgoi Stake
  • ‘Resilient’ Gold Set for Record Rally, Morgan Stanley Says
  • Oil Set for First Weekly Gain in Three Before U.S. Jobs Report
  • Gasoline Declining to Eight-Month Low on Economy: Energy Markets
  • Gold Heads for First Weekly Increase in Five as Equities Rally
  • Malaysia’s Export Growth Quickens on Higher Sales of Commodities
  • Oil May Fall Next Week on European ‘Downside Risks,’ Survey Says
  • Oil Trims First Weekly Advance in Three Before U.S. Jobs Report
  • Worst Oil Industry Slump Since Lehman May Herald Takeovers
  • Gold May Gain a Third Day on Economy Concern, Physical Purchases
  • Palm Oil Set for Third Weekly Loss on Rising Malaysian Inventory
  • Thai Rice Prices Unlikely to Remain High, Riceland’s Vichai Says



FX: EUR/USD bumping up against a wall of resistance 1.34-1.37


EURO – I re-shorted it yesterday into the close at my 1st line of immediate-term TRADE resistance (1.34); there is a wall of resistance overhead with the most impt line being the EUR broken TAIL of 1.39. My highest conviction Global Macro position remains long US Dollar.


THE HEDGEYE DAILY OUTLOOK - daily currency view





EUROPE: wet kleenex day across the board with no tangible bazooka timing - Belgian and Swiss stocks leading Europe lower (banks)


THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA – tail ends of the squeeze in every market that is still in crash mode (Hong Kong, Korea, Japan, etc) effectively failed at all of my immediate-term TRADE lines of resistance – for HK that’s 18,728; KOSPI 1797; and Nikkei 8777.


THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

Stupid Easy

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

-Charlie Munger


That’s one of the quotes Howard Marks uses to introduce his thought about what he calls “Second-Level Thinking” in his book that I just finished reviewing – “The Most Important Thing.”


People on Old Wall Street really don’t like being called stupid. They don’t like being called monkeys either. Both on the ice and in this Globally Interconnected Arena of risk management, I’ve been called plenty of names. It’s what gets me up in the morning.


Name calling isn’t nice. Neither is lying to people or blowing up their money. In some conflicted and compromised research report, this game looks gentlemanly. On the front lines though, this game is far from polite. It isn’t easy either.


Managing risk isn’t about getting a guy to call you with a whisper about this morning’s unemployment report. Neither is it about assuming we all know what we don’t know. It’s about embracing uncertainty, then considering scenario analyses, probabilities, and ranges. You don’t have to be a contrarian all of the time – but, some of the time, you need to play this game to win.


“Of course, it’s not that easy and clear cut … if your behavior is conventional, you are likely to get conventional results… Only if your behavior is unconventional is your performance likely to be unconventional.” (Howard Marks, The Most Important Thing)


Back to the Global Macro Grind


This morning’s setup across Global Macro is much more concerning to me than the one we were staring down the barrel of on Tuesday morning. Given that most of Asia and Europe was crashing and the S&P futures were trading at 1078 in the pre-market, that probably sounds like an unconventional thing to say.


Unconventional is as unconventional does. Covering shorts and buying that opportunity was too.


Today, after 3 consecutive days of The Pain Trade (short covering), all of Asia, Europe, and the US have rallied between +5-10% “off the lows.” The S&P futures are +5.9% from the YTD closing low (Monday, October 3rd 2011 = 1099), and if I had a Canadian Loonie for every email and tweet I’ve had that this US unemployment report is going to be “better than expected”, I’d pay myself for once.


I know. It’s unconventional for generals in this industry to eat last. It’s unconventional to be yourself instead of who you are supposed to be. It’s also been unconventional to have said Growth Slowing would be the 2011 call that needed to be made. If my behavior has sounded too “confident” or whatever it is that mediocrity calls success in this country these days, so be it.


Looking across my Global Macro factors this morning, here’s why I say start selling again today:

  1. Japan’s Nikkei’s 3-day rally failed at TRADE line resistance of 8777 and remains in crash mode
  2. Hong Kong’s rally failed at TRADE line resistance of 18,918 (Hang Sang) and remains in crash mode
  3. South Korea’s squeeze failed at TRADE line resistance of 1797 and remains in crash mode
  4. British banks are breaking down again and the FTSE remains in a Bearish Formation (bearish TRADE, TREND, TAIL)
  5. Belgium and Switzerland have taken over Europe’s negative divergences for this morning (big bank exposures for both)
  6. Russia’s Trading System Index rallied to another lower-high and is down -39% since April when US stocks peaked
  7. Oil prices remain in a Bearish Formation despite another bounce to lower-highs
  8. Copper prices remains in Bearish Formation despite a big short squeeze from a very newsy September oversold low
  9. Gold is now bearish TRADE and TREND for the 1sttime in forever with TREND line resistance up at $1673
  10. SP500’s TRADE, TREND, and TAIL lines of resistance (Bearish Formation) = 1182, 1237, and 1266, respectively

So that’s just the Top 10 unconventional calls you could have been making for the last 3-6 months. If you back this up to when we bought the Growth Slowing Trade (Long the US Treasury Flattener (FLAT) in February) you’ll see a lot of Global Equity prices put in their 2-year cycle peaks in February of 2011, not April.


And while its conventional to call out the SP500 as having “staved off a bear market” this week (because it didn’t violate the -20% crash signal; it was down -19.4% on Monday’s close), its unconventional to remind the bulls that Financials (XLF), Industrials (XLI) and Small Caps (Russell2000), have all crashed already in 2011 anyway.


Can the market rally on hope? For sure. It just did. But what do you do right now? If this unemployment number is better or worse than expected, my Stupid Easy hockey head answer will remain the unconventional one for 2011 – sell.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $75.92-85.11, and 1101-1172, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stupid Easy - bearish formation


Stupid Easy - virt. port

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.