The Macau Metro Monitor, December 2, 2011




November GGR Share: SJM (27%), GALAXY (20%), LVS (16%), MPEL & WYNN (13%, with WYNN slightly ahead), MGM (11%).



Secretary Tam said the Macau government has still not received any application from MPEL to include gaming elements in the Macau Studio City project.  Tam said that if an application is filed, the DICJ would consider it according to the relevant legislation.  He also stressed again that the 5,500 table limit on live gaming tables will not be lifted before 2013.  He added the remaining number of table licenses should be enough for Sands Cotai Central to operate successfully.


The first phase of Sands Cotai Central is set to open in March and will include a 9,850 square-metre casino and VIP gaming areas.  The company expects to open a second casino there by 3Q 2012.



Singapore visitation hit 1,033,013 in September 2011, up 9.1% YoY, the lowest growth rate since November 2009.  Mainland China visitors accounted for 10% of total visitation.




Just when the sell side warms up to the idea of a recovery, Q4 replacement sales are likely to disappoint.



The sell side finally seems to be on the replacement recovery bandwagon, even though the bandwagon has been moving forward for a number of consecutive quarters and years.  BYI and IGT put up solid September quarters and the stocks took off.  The sell side followed up with enthusiasm about replacement demand returning and all is well.  Or not. 


We hate to rain on the parade but calendar Q4 replacements are likely to fall sequentially and, yikes, YoY.  IGT could see the biggest drop since they appeared to pull sales forward into the September quarter.  A significant market share decline in CYQ4 may be disappointing, considering IGT's long thesis of “continued share gains”. 


BYI should still gain share in CYQ4 and we continue to believe they are the best positioned supplier over the intermediate and long-term (trend and tail).  However, this stock has been a rocket ship since our positive call during G2E.  A disappointing industry wide replacement quarter will likely not be a positive for the stock with maybe the most bullish sentiment. 


At this juncture, we think both IGT and BYI can make consensus estimates but the quality would be low and transparent.  IGT does a better job of managing earnings – lower than expected revenues, higher margins and vice versa – so it may be a little safer from an earnings perspective but the market share drop would hurt.  WMS is likely to miss in our opinion but we can’t believe there are still people out there who think WMS is going to have a decent quarter any time soon. 


So why do we think replacements will fall in CYQ4?

  • IGT which had a 40% share of replacements last quarter at 5,100 is likely to see about a 1,500 sequential drop in replacements – partly due to seasonality and partly due to what we believe was pulling forward of demand.  September is IGT’s fiscal year end, so that quarter tends to be their best.
  • WMS should be up sequentially but definitely still down YoY so they won’t be making up the difference.  WMS also appeared to pull forward some units into the September quarter.
  • We believe that with all the uncertainty in 2010, there was some flushing of capital budgets in the December quarter
  • Bottom line, we think that there will be a modest YoY decline between 1-5% in replacement demand – the first YoY decline since 3Q of calendar 2010.

We still think 2012 will be a good year for the slot suppliers: resumption of replacement demand growth, huge growth in slot sales to new and expanded casinos, and a more visible and growing systems business (mostly BYI).  But we may have to take a step back this quarter to move forward.  However, we’re not sure the Street is ready for the step back just yet.

Free Lunches

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“The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”

-Frédéric Bastiat


In Frédéric Bastiat’s 1950 essay, “That Which Is Seen and That Which Is Unseen”, he describes the impact of opportunity costs on economic activity.   In his essay, a small boy breaks a window in a store.  The glazier comes to repair the window and is paid six francs for the job.  Some observers would suggest this is a positive economic event as it increases the money circulating in the community.


There is, of course, no free lunch.  In the case of Bastiat’s essay, the unintended consequence is that the store owner with the broken window must pay for the repair of the window.  In using six francs to pay for the repair of the window, the shopkeeper no longer has six francs to expand his inventory, advertise for the shop, or purchase personal goods.  In effect, the transaction has two sides and it is not even certain to be a zero sum transaction, especially if the glazier does not spend his incremental six francs within the local community.


In modern economic theory, the key current debate relates to the role of the government in transactions.  The Allowance Rebate System (more commonly known as Cash for Clunkers) program is a prime example of this dilemma.   Under this program, car buyers were incentivized to purchase new cars by being given a $4,500 rebate for their old cars, which then had to be scrapped.  Practically, this was a transfer of money from tax payers to car buyers.  In the short term, new car sales skyrocketed. Meanwhile, older vehicles, which admittedly produced more pollution, were taken out of the national car population.


Akin to Bastiat’s essay, the question in the case of Cash for Clunkers Car is whether destroying an otherwise productive asset, such as a working car, actually benefits the economy.   In looking at some key results of Cash for Clunkers, the implication is at best inconclusive.  Specifically,

  • The program led to market share gains for Japanese and Korean car manufacturers at the expense of U.S. manufacturers. (Incidentally, the equivalent Japanese program did not include U.S. produced cars.);
  • A study by the University of Delaware concluded that for each vehicle trade, the net cost was $2,000, with total costs exceeding benefits by $1.4 billion; and
  • A study by economists Atif Mian and Amir Sufi indicated that the 360,000 additional purchases in July and August 2009 were pull forwards that were completely reversed by March 2010.

So, once again, no free lunch.


On the back of rumors of an IMF bailout of Italy, global equity markets rallied in a big way yesterday.  Not surprisingly, the Italian equity market was one of the global leaders yesterday up an impressive +4.6%.  While we would suggest this was more of a short squeeze than anything, there is perhaps a fundamental case to be made if the IMF rumors finally come to fruition . . . or is there?


Our trusty research intern Josefine Allain pulled together some detail around the rumored IMF plan.  According to the rumors, the IMF would provide €400-€600B to Italy at a rate of 4-5%, which would allow Italy up to 18-months to implement reforms without having to refinance. 


Setting aside the fact that the IMF denied it is in discussions with Italy, the plan has two main issues.  First, the IMF only has $285 billion currently available.  Second, an expansion of the IMF, or an explicit Italian bailout fund, would require a substantial contribution from the United States (likely more than $100 billion).  Clearly, given the current political environment in D.C. and on the back of another tacit U.S. debt downgrade this morning from Fitch, the likelihood of the United States stepping up to bailout out Italy is slim to none, absent a global financial crisis.


Indeed, European credit markets continue to signal that no free lunch from either the ECB or IMF is imminent.  Specifically, the Italians “successfully” sold €7.5 billion of bonds this morning versus a maximum target of €8.0 billion.  The 3-year yield was 7.89% versus 4.93% on October 28thand the 10-year average yield was 7.56% versus 6.06% on October 28th.  Success is a relative term.


In the Chart of the Day today, we’ve highlighted the Euribor-OIS 3-month spread, which measures the spread between what banks charge each other for an overnight loan of their excess reserves versus what they could earn by lending it risk free to the central bank.  The key take away is simply that risk, not surprisingly, has accelerated dramatically in the last three months in the European banking system.   In early July this spread was less than 0.20 and it is now at 0.94.  No free lunch there, to be sure.


This afternoon Keith and I are going to take a much needed break from the grind and go across the street to play a quick game of hockey at Yale’s Ingalls Rink.   Ironically, it will cost us $10 each, so there isn’t even free lunch time hockey.

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


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Merkel's Marathon

“I thought about running a marathon a long time ago, but I’m just not a runner.”

-Shannon Miller


I’ve woken up to some pretty ambitious central plans this week, but this morning’s caught my attention most – Angela Merkel is going to become a marathon runner.


“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers…”

-Angela Merkel (speech to the lower house of German parliament)


While she doesn’t appear physically prepared to reach 35k on her own, looks (when gravity is being banned) can be deceiving. Central planners can try just about anything and have people who are paid by short-term stock and commodity inflations cheer them on.


Preparing for marathon, of course, requires some form of a diet, discipline, and sacrifice.


“The lives of a lot of French people are even harder after three years. Everybody has had to make an effort; everybody has had to make a sacrifice… it’s been a genuine revolution that’s begun.”

-Nicholas Sarkozy (speech yesterday in France)


Never mind the last 3 years of French hardship. French and German bankers have been sacrificing 3 hour lunches for conference calls with La Bernank for the last 3 weeks. Convincing the Great Depressionista that we should melt The People’s Savings again must be hard a hard life.


Back to the Global Macro Grind


Life for real-time Risk Managers is hard too. God forbid none of us were born to this earth to constantly beat beta. But “god’s work” might have a different outlook than the 2 and 20 plan.


This, of course, like most things in human history, has happened before. The inability for asset managers to beat beta that is …


After Japan tried their 3rdand 4thquantitative and coordinated easing (and their stock market continued to make lower-long-term highs), beta was all that was left. What do you pay a manager to earn you beta?


Volatility kills returns, fund flows, and economic growth. Right now, all 3 of these factors are as clear as the sun rising in the East to anyone who manages money or a business.


But… we, as an industry, continue to beg for the very thing that perpetuates economic and market volatility – Big Government Interventions. Be careful what you beg for. In the long-run, we might all still have to live with its unintended consequences.


This morning, across the board in Global Macro, we’re seeing the Correlation Risk ramp as the US Dollar falls. Correlation Risk, if you are long and short, works both ways. It’s always on.


Looking across the asset classes in my model and across my core 3 durations (TRADE, TREND, and TAIL) here’s what I see:

  1. SP500 moves to bullish TRADE (1233 support); bearish TAIL (1270 resistance)
  2. US Equity Volatility (VIX) moves to bearish TRADE (31.02 resistance); bullish TAIL (23.07 support)
  3. Global Equity Volume remains in a Bearish Formation (bearish TRADE,  TREND, and TAIL)
  4. Chinese Equities remain in a Bearish Formation (closing down another -1.1% overnight and down -0.8% on the wk)
  5. Japanese Equities move to bullish TRADE (8344 support); bearish TREND (8706)
  6. Indian Equities remain in a Bearish Formation (BSE Sensex bearish on all 3 durations)
  7. Germany Equities move to bullish TRADE (5895 support); bearish TREND (6279 resistance)
  8. French Equities move to bullish TRADE (3074 support); bearish TREND (3274 resistance)
  9. Italian Equities remain in a Bearish Formation (predictable divergence versus German stocks)
  10. Brazilian Equities move to bullish TRADE and TREND after cutting interest rates
  11. Commodities (CRB Index) remains in a Bearish Formation with TREND resistance = 321
  12. Oil (Brent and WTI) are now back into a Bullish Formation (inflationary, big time)
  13. Gold scales back into a Bullish Formation with TREND line support (was resistance) = $1743/oz
  14. Copper moves to bullish TRADE ($3.47 support); bearish TREND ($3.72 resistance)
  15. US Bond Yields are testing a TRADE line breakout (2.12% is the TRADE resistance for 10-year yields); bearish TAIL

All the while, the driver of all this Correlation and Duration Risk remains the US Dollar Index. With the US Dollar being debauched by Bernanke this week (down -1.8% on the week to $78.21), that’s why you see all these immediate-term TRADE breakouts in the aforementioned market prices.


But, Cher Bernank, a TRADE does not a sustainable economic TREND or TAIL make. Neither does an overweight and overleveraged economy sprinting out of the money printing blocks for the 1st three miles of what will be a deleveraging and deflationary marathon.


My immediate-term support and resistance range for the SP500 is now 1. If this morning’s full employment report inspires you to chase beta, run like the wind.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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TODAY’S S&P 500 SET-UP - December 2, 2011


US Futures spike as short sellers are now in Pain Trade mode while the “long-onlys” chase beta. Always a powerful combo in the immediate-term – also the biggest downside risk after the immediate-term squeeze makes a lower-high.   As we look at today’s set up for the S&P 500, the range is 25 points or -0.93% downside to 1233 and 1.08% upside to 1258. 












  • ADVANCE/DECLINE LINE:  -610 (-2916) 
  • VOLUME: NYSE 855.83 (-48.67%)
  • VIX:  27.41 -1.40% YTD PERFORMANCE: +54.42%
  • SPX PUT/CALL RATIO: 1.54 from 2.33 (-33.69%)




TREASURIES: the most important quote today into/out of jobs rpt = 10yr yields; big TRADE line resistance at 2.12%

  • TED SPREAD: 53.74
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.11 from 2.08   
  • YIELD CURVE: 1.84 from 1.83


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in nonfarm payrolls: est. 125k (prior 80k)
  • 8:30am: Unemployment rate: est. 9.0% (prior 9.0%)
  • 9am: Fed’s Fisher speaks in Dallas
  • 10am: Fed’s Plosser speaks in Philadelphia
  • 12:30pm: ECB’s Stark gives speech in NY
  • 1pm: Baker Hughes rig count
  • 1:30pm: Fed’s Rosengren speaks on economy in Boston



  • Germany’s Merkel rejected joint euro-area bonds, central bank action while pushing for closer economic ties and tougher budget enforcement
  • U.K. judge ordered Apple to disclose to HTC Corp. which features of its competing mobile phones may infringe Apple’s European patents by today
  • Dallas Fed President Richard Fisher, St. Louis Fed President James Bullard say central bank doesn’t need to lower discount rate: WSJ
  • Market no longer thinks major US banks are too big to fail - WSJ




COPPER – The Doctor looks exactly like European Stoxx because they have the same correlation to the USD. Copper climbs back above its immediate-term TRADE line of resistance this week of 3.47/lb and remains under TREND line resistance of 3.72/lb. Pick your European stock market and the TRADE/TREND setup is the same. Trade the new ranges.



  • Oil Margins Falling as U.S. Fuel Import Era Ends: Energy Markets
  • Copper Traders Bullish for First Time in Six Weeks: Commodities
  • Commodities to Rally on ‘Cheap Money,’ Renaissance Predicts
  • Crude Oil Rises Amid Middle East Tension, Heads for Weekly Gain
  • U.S. Stocks Retreat After Rally as Spanish, French Bonds Advance
  • Palladium Set for 12% Weekly Gain, Most in Year; Beats Gold
  • Monsanto Corn May Be Failing to Kill Bugs in 4 States, EPA Says
  • Bank of Korea Boosts Gold Reserves for Second Time This Year
  • Gold Gains in London, Heads for Weekly Jump After Bank Purchase
  • Citigroup’s Base-Metal Research Head Thurtell Said to Leave
  • Copper Extends Weekly Gain After U.S. Manufacturing Data
  • Copper Stockpiles Drop to Lowest in 28 Months in Shanghai
  • Palm Oil to Surge as Production Growth Decelerates, Mistry Says
  • GFMS More Bullish on Palladium in 2012 on ‘Structural Deficit’
  • Rio Tinto to Invest $2.7 Billion in Aluminum Smelter Upgrade
  • Wheat Trims Biggest Weekly Gain Since August on Rising Supply
  • Oil Falls First Time in Five Days as U.S. Jobless Claims Rise
  • ICAP Names MF’s Pettit Global Head of Financial Futures, Options
  • Cocoa Futures Fall as Goldman Cuts Forecast; Sugar, Coffee Drop











EUROPE: Every market has taken out our immediate-term TRADE line of resist - TAILS remain bearish, but this insulates some downside, for now






CHINA – Unfortunately, the Chinese economy doesn’t like the commodity inflation – this only compounds the already accelerating deceleration in sequential (Q4 vs Q3) Asian and European growth. China closed down another -1.1% overnight, right back to where it was pre the rate cut.








  • Oil Margins Falling as U.S. Fuel Import Era Ends: Energy Markets
  • ‘Dubai’ Lands in Karachi as Pakistanis Flock to 60-Store Complex
  • EU Widens Iran Sanctions, Remains Split on Halt to Oil Purchases
  • Islamists Electoral Rise Due to Failed Secularism: Pankaj Mishra
  • EU Wimps Out on Oil Sanctions to Halt Iran’s Nuclear Drive: View
  • Sukuk Borrowing Costs Rise Most Since May 2010: Islamic Finance
  • U.S. Senate Approves Sanctions Aimed at Crippling Iran Oil Sales
  • Saudi Arabia Poised for Record Heavy-Crude Premiums on Fuel Oil
  • Lukoil May Buy Remaining 40% of Italy’s ISAB Refinery From ERG
  • U.S. Senate Backs Sanctions Intended to Cripple Iran Oil Exports
  • Emaar Said to Raise $800 Million Loan at a Discount to Its Sukuk
  • MSCI to Say Whether U.A.E., Qatar Upgraded on Dec. 14
  • OPEC to Boost Crude Exports on Asian Demand, Oil Movements Says
  • Citigroup Deal Haunts Pandit as Saudis Claim $383 Million
  • South Europe Wants Saudi Oil to Cover Iran Ban, Petromatrix Says
  • Biden Seeks Turkey’s Help to Keep Up Pressure on Syria and Iran




The Hedgeye Macro Team

Howard Penney

Managing Director


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