VIP hold played a role but Mass was very strong.



November gross gaming revenues (GGR) increased 32% YoY to $2.88BN.  Despite facing a difficult YoY hold comparison, November 2011 was an even luckier month which gave revenues a slight boost.  Total direct play this month was 6.4% of the market, compared to 7.3% last year.  The total market held at 3.13% vs. 3.08% in November 2010.  Accounting for direct play and theoretical hold of 2.85% in both months, November revenues would have increased 31% YoY.  Had hold been normal, GGR would've been 5% lower.  High margin Mass business increased 40%, in-line with the 40% growth we’ve seen during the last 6 months.


Some other observations include: 

  • Despite the drop in market share, MPEL’s Rolling Chip volume was very strong and its Mass business gained share.  MPEL posted its lowest market share since December 2009 but Mass share in November was the company’s highest ever.  VIP hold percentage was the lowest among the operators which more than offset VIP volume that was in-line with recent trend.  From a profitability perspective, high margin Mass is where it's at and MPEL continues to knock the cover off the ball.
  • Wynn and LVS held the highest in the market in November
  • Wynn’s VIP Rolling Chip volume share was its lowest ever at 12.2% while its mass share was the lowest in over a year.  We think the VIP trend continues unless Wynn improves its junket offering.  There’s not much they can do in the Mass space as growth continues to be concentrated on Cotai.
  • LVS generated its lowest Mass share ever.  Their junket push, however, appears to be paying dividends as Rolling Chip volume share climbed back to pre-Galaxy Macau levels owing to the opening of the Neptune tables and more aggressive junket credit.  We’ll see how this junket for direct/Mass tradeoff works out from a profitability standpoint.

As we approach the next 2 months of the year, we expect YoY growth rates to decelerate, partly due to difficult hold comparisons and trends we are seeing in our sequential monthly projections (see “MACAU: EYE ON NOVEMBER” published on 11/2/11).  Hold rates for December 2010 and January 2011 were approximately 3.15% and 3.10%, respectively.  Normal hold levels would alone shave roughly 10% off YoY growth.



Y-o-Y Table Revenue Observations

Total table revenues grew 33% YoY this month, on top of 43% growth last November.  November Mass revs rose 40%; VIP revs grew 30%; and Junket RC rose 30%. 



Table revenues grew 35% YoY, showing a huge lift compared to recent trends due to the opening of junket rooms at Four Seasons. While the Venetian saw improved results, junket RC volume actually decreased slightly YoY.  As we’ve written in several past notes, including last month’s review, we’ve heard that LVS has been extending additional junket credit and 2 new junkets are coming online at the Four Seasons this month.  Neptune opened its rooms on November 1st.

  • Sands was up 9% YoY. While hold was low, the comparison from November 2010 was also easy.
    • Mass was up 17%
    • VIP was up 4%.  Sands held poorly in November.  Assuming 15% direct play (in-line with 3Q11), hold was just 2.43% vs. 2.45% last November assuming the same level of direct play (also in-line with 4Q10)
    • Junket RC was up 4%
  • Venetian was up 24% YoY, driven by a Mass increase of 18% and a 27% increase in VIP
    • Junket VIP RC fell slightly, down 1%
    • Assuming 23% direct play in the quarter (just slightly below the 24% we saw in 3Q11), hold was 3.5% compared to 2.8% hold in November 2010 assuming 19% direct play (in-line with 4Q10)
  • Four Seasons grew 227% YoY, driven by a tripling (297%) of YoY VIP revenue and to a much lesser extent, 53% increase in Mass revenues. 
    • Junket VIP RC increased 2.5x YoY
    • Four Seasons is clearly seeing a benefit from LVS’s recent initiatives plus an easy YoY hold comparison. If we assume that monthly direct play volume was in the neighborhood of recent trends - ~550MM, that implies a direct play percentage of 23% and a hold rate of 2.94%.  In comparison, if November 2010 direct play was in-line with the rest of 4Q10 at 54% then hold was just 1.35%.


Wynn table revenues were up just 4%, exhibiting the slowest growth of the 6 concessionaires, despite high hold.  As we’ve written about in “Macau Observations” on 11/16, Wynn is in a bit of pickle given LVS’s recent initiatives, the general continued shifts of play to Cotai, and the general constraints at the property.

  • Mass was up 21% and VIP increased 1%
  • Junket RC decreased 5% - the first YoY decrease since August 2009
  • Assuming 10% of total VIP play was direct (in-line with 3Q11), we estimate that hold was 3.6% compared to 3.4% last year (assuming 11% direct play – in-line with 4Q10)


Table revenues grew 15% - driven primarily by 72% growth in Mass and 4% growth in VIP

  • Altira revenues declined 7%, due to a 11% decline in VIP somewhat moderated by a 41% lift in Mass growth.  VIP revenues were negatively impacted by lower than normal hold and difficult comparisons.
    • VIP RC increased 17%
    • We estimate that hold was 2.7% vs. 3.6% last year (direct play is not material at Altira)
  • CoD table revenue was up 30%, driven by 79% growth in Mass and 17% growth in VIP – negatively impacted by low hold and a difficult hold comparison
    • Junket VIP RC grew 43%
    • Assuming a 15.5% direct play level, hold was 2.7% in November compared to 3.1% last year


Revs grew 15% in-line with October growth

  • Mass was up 77% and VIP was up 10%
  • Junket RC was up 12%


Table revenues continued its streak of triple-digit gains, +166%; Mass soared 272%, while VIP gained 152%

  • StarWorld table revenues grew 38%
    • Mass grew 45% and VIP grew 37%, helped by high hold and an easy comp
    • Junket RC grew 28%
    • Hold was high at 3.31% compared to normal hold of 2.85% hold last November
  • Galaxy Macau's total table revenues were $282MM, 17% lower than October’s seasonal high but 17% higher than September’s
    • Mass table of $56MM, down $3MM from October but up $10MM from September
    • VIP table revenue of $226MM, a 19% MoM decrease, despite high hold of 3.5% compared to 3.4% in October.  
    • RC volume of $6.5BN compared to $8.3BN in October, $7BN in September and $7.9BN in August


Table revenues increased 25% YoY, helped by high hold in the quarter

  • Mass revenue growth was 10%, while VIP grew 28%
  • Junket RC increased 41%
  • Assuming a direct play level of 8%, we estimate that hold was 3.1% this month vs. 3.3% in November 2010, assuming direct play of 11% 


Sequential Market Share



LVS was the big share gainer in November.  Share increased 1.6% sequentially to 15.6%.  This compares to 6 month trailing market share of 14.7% and 2010 average share of 19.5%

  • Sands' share increased 50bps to 4.0%
    • Both Mass and VIP rev share increased 30 bps
  • Venetian’s share remained flat at 8.1% share
    • VIP share improved 80bps to 6.7%, above the prior TTM average of 6.5%
    • Mass share dropped 3% sequentially to 12.5% - an-all time low for the property
    • Junket RC remained flat at 4.7%
  • FS share improved 1% to 3.0%
    • VIP share increased 1.6% to 3.4% the best share since January 2011
    • Mass share dropped 70bps to 1.6%
    • Junket RC improved 140bps to 2.9%


Wynn’s share ticked up 20bps to 13.3% share - although still below its 6 month trailing average share of 13.6% and well below its 2010 average share of 15%.  Wynn’s share should continue to struggle with the opening of Sands Cotai Central in March and with the ramp of new junkets at the Four Seasons.

  • Mass market share fell 90bps to 12.3%
  • VIP market share increased 90bps to 14.5%
  • Junket RC share fell 1.3% to 12.2% - the lowest share since October 2007.  This compares to Wynn’s 6 month trailing average of 14.4% and 2010 average of 15.2%.


MPEL had the largest share loss in November.  Market share fell 1.7% points to 12.9% - its lowest share since October 2009.  This compares to their 6 month trailing share of 14.8% and 2010 share of 14.6%.

  • Altira share fell 50bps to 4.2%, below the property’s 2010 share of 5.6%.  Mass share improved 40bps while VIP share dropped 60bps. 
  • CoD’s share dropped 140bps to 8.4% driven by share losses in VIP (which was impacted by hold) that were partly offset by strength in Mass
    • Mass market share increased 1.2% points to 10.4% - an all-time high record for the property 
    • VIP share fell 2.3% to 7.8%


SJM gained 1.2% share in November to 27.2%, which was still below their 6-month trailing average of 28.6% and below their 2010 average of 31.3%.

  • Mass market share increased 2.6% to 36.6% - off all-time lows in October
  • VIP share improved 50bps to 25.0%
  • Junket RC share was flat at 28.3%


Galaxy lost 60bps to 20.3%. November share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 18.0%.

  • Galaxy Macau share declined 30bps to 10.2%
    • Mass share ticked up 10bps to 8.3%
    • VIP market share fell 40bps to 10.8%
    • RC share ticked down 40bps to 10.4%
  • Starworld lost 40bps of market share to 8.8%, 30bps below its TTM share of 9.1% pre-Galaxy Macau level.


Lost 60bps to 10.6% due to share losses in VIP share.  November share compares with an average share of 10.3% in 2010 and a 6 month trailing average of 10.4%.

  • Mass share increased 20bps to 7.1% but was more than offset by a 70bps decrease in VIP share to 11.6%
  • Junket RC gained 1.2% share to 11.5%, above the property’s 2010 average of 8.4% and above its 6 month trailing average of 10.4%


Slot Revenue

Slot revenue grew 25% YoY – for a total of $33MM – flat sequentially.

  • As expected, GALAXY slot revenues grew the most with 356% YoY to $13MM
  • MGM slot revenues had the second best growth at 35% YoY to $16MM
  • LVS slot revenues grew 28% YoY to $33MM
  • SJM slot revenues grew 13% YoY to $14MM
  • MPEL slot revenues grew 7% YoY to $21MM
  • WYNN slot revenues fell 6% YoY to $18MM – the lowest absolute level since June 2010







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* The TED spread made a new YTD high at 53.3 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system.  This is a strong cautionary note amid widespread equity gains.  


Credit default swaps for Eurozone countries mostly tightened on Monday.  Spanish swaps were particularly noteworthy, tightening 23% compared to the prior week.


* Credit default swaps for American financial companies tightened 20% or more across the board (RDN, MTG, AGO the only exceptions). 


* The Markit MCDX, a measure of municipal credit default swaps, tightened 20 bps to 193 bps from 173 bps in the prior week.


* The high yield corporate bond index saw a 50 bps increase in yields.  


* Our macro quantitative model indicates that in the short term (TRADE), there is currently around 1.5 times more upside than downside in the XLF (1.5% downside vs. 2.3% upside).


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 11 improved / 3 out of 11 worsened / 2 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 5 of 11 worsened / 5 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged



1. US Financials CDS Monitor Swaps tightened for 26 of 27 major domestic financial company reference entities last week.

Tightened the most vs last week: GS, ACE, XL

Tightened the Least/ widened the most vs last week: MTG, RDN, AGO

Tightened the most vs last month: COF, ACE, MMC

Widened the most vs last month: BAC, SLM, RDN




2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 35 of the 40 reference entities. The average tightening was 9.2% and the median tightening was 22.6%.




3. European Sovereign CDS – European sovereign swaps tightened last week. Spanish sovereign swaps tightened by 23% (-108 bps to 360.5) and French by 21% (-49 bps to 185).






4. High Yield (YTM) Monitor – High Yield rates rose 50 bps last week, ending the week at 8.95 versus 8.45 the prior week.




5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4 points last week, ending at 1576.




6. TED Spread Monitor – The TED spread rose 3 points last week, ending the week at 53.3, another new YTD high.




7. Journal of Commerce Commodity Price Index – The JOC index rose 3 points, ending the week at -21.19 versus -24.16 the prior week.




 8. Greek Yield Monitor – In contrast to improvement across the rest of European sovereigns, the 10-year yield on Greek debt rose 72 bps last week, ending the week at 3059 bps.




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. Last week spreads tightened, ending the week at 173 bps versus 193 bps the prior week.




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 59 points, ending the week at 1866 versus 1807 the prior week.




11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 178 bps, 8 bps wider than a week ago.




12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 2.3% downside to TRADE support.




Margin Debt in October

We publish NYSE Margin Debt every month when it’s released. 


 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October’s print of +0.78 standard deviations. But overall, this setup represents a material headwind for the market.  


One limitation of this series is that it is reported on a lag.  The chart shows data through October.




Joshua Steiner, CFA


Allison Kaptur


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TODAY’S S&P 500 SET-UP - December 5, 2011


With pre-market futures up, the most read headlines are all about European hope – hope is not a risk management process.  As we look at today’s set up for the S&P 500, the range is 25 points or -1.65% downside to 1233 and 1.06% upside to 1267. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE:  +630 (+1240) 
  • VOLUME: NYSE 872.80 (+1.98%)
  • VIX:  27.52 +0.40% YTD PERFORMANCE: +54.04%
  • SPX PUT/CALL RATIO: 1.67 from 1.54 (+7.87%)



YIELDS – US Treasury Yields backed off hard at the 2.12% TRADE line of resistance on Friday and that level remains intact this morning with 10s trading 2.07%. The Bond market has had Growth right for all of 2011, and I don’t expect that to change this week.

  • TED SPREAD: 53.34
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.05 from 2.11   
  • YIELD CURVE: 1.80 from 1.84


MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: ISM Non-manufacturing, est. 53.8 (prior 52.9)
  • 10am: Factory orders, est. -0.3% (prior 0.3%)
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 12:10pm: Fed’s Evans speaks in Muncie, Ind.



  • Fed and Eurozone national central banks may give loans to IMF to help Euro zone -- Die Welt
  • Eurozone Dec Sentix index (24.0) vs consensus (22.5) and prior (21.2)
  • Wal-Mart Canada tries to seize online sales for Holiday - Globe and Mail
  • ECB lines up €1 trillion cash injection for the Eurozone economy -- Sunday Times
  • Italy's PM Monti unveils €30B austerity package
  • European leaders to meet in Paris today to work on another blueprint for fixing the debt crisis
  • Service industries in the U.S. probably expanded in November to 53.8, fastest pace in six months
  • Senate Majority Leader Harry Reid plans to offer a new proposal to extend payroll tax cuts and unemployment benefits that are set to expire this month
  • Vice President Biden meets with Greek Prime Minister Georgios Andreas Papademos in Athens




  • Merkel Heads to Paris as EU Leaders Seek Debt-Contagion Strategy
  • Chow Tai Fook $2.8 Billion IPO May Top 2011 Hong Kong Offers
  • Commodities Signaling Economic ‘Trouble Ahead’: Chart of the Day
  • Economy Avoiding ‘Death Spiral’ Boosts Fund Wagers: Commodities
  • Tinkler’s Aston Holding Deal Talks With Whitehaven Coal
  • Hedge Funds Reverse as Iran Drives Oil to $100: Energy Markets
  • Italy Approves 30 Billion-Euro Emergency Plan for Economy
  • Oil Rises a Second Day on Iran Tension, European Debt Meetings
  • Ternium Shareholders Lose Two Decades in Brazil Steel: Real M&A
  • Gold May Fall as EU Leaders Form Plan to Enforce Budget Rules
  • Cocoa Slump Signaling Hershey Chocolate Profit: Chart of the Day
  • China, EU Maneuver to Avoid Blame for Expiring Carbon Limits
  • Copper, Zinc Drop as China Industry Contraction May Cut Demand
  • Anglo, Stung by Australian Carbon Tax, Fights South African Plan
  • Aluminum Downside ‘Limited’ on Possible China Cuts: Goldman
  • Australia to Allow Uranium Exports to India After Labor Vote
  • Cameco’s Gitzel Says Uranium Supply Deficit May Loom After 2013
  • Oil Rises a Second Day on Iran Tension, European Debt Meetings
  • Palm Oil Gains for Third Day as China May Replenish Stockpiles


THE HEDGEYE DAILY OUTLOOK - daily commodity view





EURO – Get the EUR/USD right and you’ll get the market’s beta right. The Euro sold off intraday Friday and so did the US stock market; I think that’s how this ends on Thursday as an IMF backstop isn’t happening by then and hopes for the ECB backstop will only end up with another rate cut (which is Euro bearish). Big Euro resistance at 1.35-1.36.



THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – despite Merkel having lunch today in Paris, Chinese growth and stocks refused to stop slowing overnight with another weak Services PMI print and the Shanghai Comp closing down another -1.2% (down -0.8% last wk). Thursday is also China economic data day for November, and that will be negative, so keep that catalyst in mind as markets try to rally ahead of EU Summit.


THE HEDGEYE DAILY OUTLOOK - asia performance




  • Hedge Funds Reverse as Iran Drives Oil to $100: Energy Markets
  • Oil Rises a Second Day on Iran Tension, European Debt Meetings
  • Dubai Bank Provisions to Peak in Next Two Years: Arab Credit
  • Louvre Delay Lifts TDIC Yields to 7-Month High: Islamic Finance
  • Iranian Forces Shot Down U.S. Spy Aircraft, PressTV Reports
  • Debt Crisis Threatens Global Warming Fight as Kyoto Fades
  • Oil Rises a Second Day on Iran Tension, European Debt Meetings
  • Qatar Petroleum, Shell Sign $6.4 Billion Petrochemicals Deal
  • Emirates NBD Appoints Oppedijk as Interim CEO of Dubai Bank
  • Abu Dhabi’s Taqa Said to Sell 5-Year, 10-Year Bonds
  • Deutsche Bank Names Salah Jaidah as Chairman of Islamic Finance
  • Saudis Won’t Immediately Start Pumping Oil From New Fields
  • Iran Says It Downed U.S. Stealth Drone; Pentagon Acknowledges Aircraft Do
  • Libya to Pump 1 Million Barrels a Day by End-2011, OPEC Says
  • Iraq Considering Exxon Options, Not Sanctions, Upstream Says
  • EXtra Starts Share Sale in Worst Saudi Arabia IPO Year in Seven
  • Nakheel Posts First-Half Net of $134 Million as Projects Resume
  • Syria: Fall of Bashar Al-Assad Will Bring War to Middle East, Warns Iraq
  • Russia to Downgrade Diplomatic Ties With Qatar, Interfax Says





The Hedgeye Macro Team

Howard Penney

Managing Director

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 80.46%
  • SHORT SIGNALS 78.35%

Salvaging The Wreck

“The world will seek the greatest possible salvage out of the wreck.”

-Irving Fisher, 1918


That’s a famous Irving Fisher quote Silvia Nasar uses to introduce Act II “Fear” in her wonderfully written economic history book – Grand Pursuit.  She starts the Act with a chapter titled “War of the Worlds” where a young John Maynard Keynes obtained a critical WWI post at the British Treasury where he became the “go to-official for inter-Allied (read American) loans.”


“The Treasury’s task was not to only achieve “maximum slaughter for minimum expense” but also to finance the war without debauching the world’s safest currency or jeopardizing Britain’s supremacy as the world’s banker.” (page 198)


This week, as Keynesian bailout politicians attempt to make history through another currency debauchery, I thought I’d use the pre and post WWI period as a reminder of how The People used to think about a currency’s credibility and purchasing power.


After the Treaty of Versaille (1919) when the Germans, Austrians, and Hungarians were saddled with reparations debt, money printing became their only option – a political Policy To Inflate (sound familiar?). The economic stagflation (then hyperinflation) that ensued throughout Europe during the 1920s may rarely be discussed by Ben Bernanke and Tim Geithner, but it will never be forgotten.


As stock market futures hope for European resolve this morning, do not forget what the Germans will never forget. Hope is not a risk management process.


Back to the Global Macro Grind


After the worst Thanksgiving week for stocks since 1932, followed by one of the best weeks for stocks in the last 3 years, this week’s “full employment and price stability” Act III by central planners should be exhilarating.


Here’s how the Global Macro calendar of catalysts looks so far:

  1. Monday: US Federal Reserve President from Chicago, Charles Evans, will speak on his short-term politicking for QE3
  2. Tuesday: my brother Ryan’s birthday
  3. Wednesday: whispers of the ECB Rate Cut decision (Thursday) should be all over the tape, weakening the Euro (again)
  4. Thursday: The Chinese report all of their economic data for November (should be weak, sequentially, across the board)
  5. Thursday/Friday: The EU Summit where central planners will struggle to explain who, precisely, is going to backstop more bailouts

To review hope/expectations: there is hope of a $100-200B bank bailout fund from the IMF that is effectively backstopped by Americans more so than it would be Germans (USA’s IMF quota is 17% and Germany’s 6%). There’s also hope that we see an Italian Job by Super Mario Draghi to backstop the EFSF bailout facility by the ECB.


Hope is not a…


Right, right, Keith. But the futures are up, so how are we supposed to chase and/or beat beta when we don’t know what these European central planners are going to do?


Good question.


As most of you know, this Globally Interconnected Game of Risk is changing. In Hedge Fund Industry 1.0 some of us could “get the call” on a big market catalyst like this, whereas today Wall Street 2.0 is struggling with a flatter playing field of who gets to know what and when.


Rather than looking for some Orange Jumpsuit Risk, I look to the currency and bond market Correlation Signals before I look to equity markets. Why? Primarily because both FX levels and bond yields have had it right for the better part of 2011.


Effectively, currencies and bond yields have been front-running stocks.

  1. FX: the EUR/USD’s TRADE and TAIL lines of resistance are $1.36 and $1.40, respectively.
  2. BONDS: the UST and European 10-year yield TRADE and TREND lines continue to confirm the same I see in the EUR/USD FX pair.

For US Treasury yields to signal that Growth Slowing is no longer going to be perpetuated by Piling-Debt-Upon-Debt, I’d need to see 10 and 30-year UST yields trade, sustainably, north of 2.12% and 3.22%, respectively.


For European Sovereign Bond yields to signal that we’re all free and clear from European bank insolvency on the order of magnitude that the likes of Lehman have never seen, I’d need to see Italian bond yields trade, sustainably south of 6%.


Salvaging The Wreck is going to take a very long-time. The greatest possible salvation we can all hope for this week is that stock markets don’t run-up too high ahead of another failed expectation on Friday.


My immediate-term support and resistance ranges for Gold, Brent Oil, France (CAC40), Italy (MIB Index), EUR/USD, and the SP500 are now $1, $109.34-111.89, 3074-3303, 149, $1.32-1.35, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Salvaging The Wreck - Chart of the Day


Salvaging The Wreck - Virtual Portfolio

Weekly Asia Risk Monitor: China and the Rest of Asia Have Not RSVP’ed

Conclusion: While our central planners may have ignited a short-term beta chase across Global Macro markets, our analysis of the economic fundamentals out of Asia suggest there is more downside to come for the global economy.


Shorting AYT – Trade Update: This afternoon, Keith shorted the Barclays GEMS Asia 8 ETN (AYT) in our Virtual Portfolio – a security we’ve managed risk on the short side of over the past couple of months. To refresh, the thesis is as follows: slowing growth and peaking/decelerating inflation will lead to a broad-based monetary easing cycle across the region. Refer to the following notes for more in-depth analysis:

Our proprietary quantitative levels are included among the charts below.



Asian equity markets had a strong week, closing up +5.2% wk/wk on a median basis. Gains were led by South Korea and Hong Kong, up +7.9% and +7.6%, respectively. China was the only market to close down, falling -0.8% wk/wk. We interpret this dramatic negative divergence as signal to investors that near-term expectations of broad-based monetary policy easing in China need to be dramatically tempered.


Asian currencies also showed similar strength this week, closing up +2% wk/wk vs. the USD on a median basis, led by the Aussie and Kiwi dollars (up +5.3% and +5.1%, respectively).  Every single Asian currency we monitor (15 in total) finished the week flat-or-down over the last month vs. the USD.


Asian sovereign debt yields broadly declined on the week, driven by a mixture of higher risk appetite and slowing growth. China, India, Indonesia, and Thailand saw the greatest wk/wk declines across the curve (2yr: -22bps, -28bps, -16bps, and -16bps, respectively; 10yr: -14bps, -15bps, -66bps, and -13bps, respectively). Australia, whose bond market has been well ahead of the global growth slowdown, saw their yields back up +18bps wk/wk on the 2yr and +15bps wk/wk on the 10yr.


As it relates to monetary easing speculation, Chinese 1yr O/S interest rate swaps continue to support expectations for pending Chinese rate/RRR cuts: -25bps tighter wk/wk; -75bps below the benchmark deposit rate.  That said, however, our stance continues to be one of patience – it likely won’t pay to get broadly bullish at the start of China’s easing cycle, using 2008 as an admittedly imperfect proxy for the current Global Macro environment.


The credit default swaps markets signaled a broad-based improvement in the perception of creditworthiness of Asian sovereign borrowers. 5yr CDS contracts tightened -14.1% wk/wk on a median percentage basis. China – whose swaps have widened nearly +100% in the YTD on growing concerns surrounding its banking system – saw its contracts tighten -27bps/-16.3% wk/wk.




Weekly Asia Risk Monitor: China and the Rest of Asia Have Not RSVP’ed - 1


Weekly Asia Risk Monitor: China and the Rest of Asia Have Not RSVP’ed - 2


Weekly Asia Risk Monitor: China and the Rest of Asia Have Not RSVP’ed - 11



Growth Slowing:

  • Chinese manufacturing PMI slowed in Nov to 49 from 50.4 prior – the first sub-50 reading since Feb ’09. Looking under the hood of the China Federation of Logistics and Purchasing index, we saw that the forward-looking subcomponents all declined MoM as well: new orders (45.6 vs. 48.6) and backlog of orders (45.2 vs. 46). HSBC’s unofficial PMI index also confirmed this weakness in China’s manufacturing sector, falling to 47.7 vs. 51.0.
  • The lone bright spot in China’s Nov PMI report(s) was that the input price sub-index declined to the lowest level since Jan ’09 (44.4 vs. 46.2). Ahead of this decline in inflationary pressures (and economic growth), China cut bank reserve requirements -50bps to 21% for major banks starting 12/5. China continues to “fine tune” its monetary policy, but key policymakers continue to speak out against consensus expectations for a broad, near-term easing cycle. Per Xia Bin, a member of the PBOC’s monetary policy committee: “China’s policy fine-tuning doesn’t mean credit controls will be loosened and people shouldn’t hope for a reversal of curbs on the property market” (i.e. the main driver of Chinese economic growth). He continues: “High investment growth before the financial crisis can’t be sustained because it has led to property bubbles and huge latent risks in local government financing vehicles. Under such circumstances, we must maintain a relatively tight stance on credit.” Translation: Chinese demand will continue to slow over the intermediate term as the central bank and State Council maintain a largely-prudent policy stance.
  • Outside of China’s weak manufacturing PMI report, we also saw quite a few other nasty Nov PMI readings throughout Asia from either a marginal or absolute perspective: Japan (49.1 vs. 50.6 prior); India (51 vs. 52 prior); Korea (47.1 vs. 48 prior); Taiwan (43.9 vs. 43.7 prior); and Australia (47.8 vs. 47.4 prior). Taken in aggregate, it’s easy to see that manufacturing is broadly contracting in Asia at a largely-accelerating rate.
  • According to data from Clarkson Securities Ltd., a unit of the world’s largest shipbroker, shipping rates from China to the E.U. have fallen -39% since the end of August – more than double the -18% decline in China-to-U.S. shipping rates. As we’ve been calling for, growth in the world’s largest economic bloc continues to slow precipitously.
  • Hong Kong’s M3 money supply growth slowed again in Oct to -3.8% YoY vs. -0.4%. Why do we care about the supply of money in Hong Kong? Because its sustained drop into negative territory was a stealth leading indicator of deteriorating global economic conditions in 2Q08.
  • Japan’s unemployment rate backed up to 4.5% in Oct from 4.1% prior – a meaningful increase, given that the labor force is hovering down around 1989 levels due to population decline.
  • Indian real GDP growth slowed again in 3Q to +6.9% YoY vs. +7.7% prior – the lowest rate of growth in India since 2Q09. Moreover, Finance Minister Pranab Mukherjee’s latest commentary confirms exactly what we’ve been saying about India for several quarters now: “The Indian government has limited scope for a boost in spending to create demand and spur growth… When the adverse impact of the 2008 crisis was felt in the economy, we could generate domestic demand through a stimulus package. I am not in a position to provide that kind of fiscal stimulus [today].”
  • South Korean industrial production and service industry output growth slowed in Oct to +6.2% YoY (vs. +6.9% prior) and +3.5% YoY (vs. +3.2% prior), respectively. The marked-to-market slowing of Korean economic growth has the Bank of Korean considering lowering its economic growth forecasts for both 2011 and 2012: “Our economy will be less than our expectation… Global economic growth is now showing a kind of downward risk so in the sense, maybe the Korean economy is a little bit downward as well.” – Lee Jong Kyu, deputy director-general at the Economic Research Institute at the Bank of Korea. Any lowering of their forecasts is likely to tilt the balance of risks towards preserving economic growth, auguring well for future monetary easing in Korea.
  • Asian export growth continues to slow: India (+10.8% YoY in Oct vs. +36.4% prior); Indonesia (+16.7% YoY in Oct vs. +44% prior); and Thailand (-0.1% YoY in Oct vs. +18.4% prior) all showcased declining overseas demand for their products.
  • Got Confidence?: Bank Indonesia’s consumer confidence index ticked down in Nov to 114.3 vs. 116.2, while Thailand’s business sentiment index fell in Oct to 36.7 vs. 48.5 prior.

Deflating the Inflation:

  • Indonesian CPI slowed in Nov to +4.2% YoY vs. +4.4% prior. Core CPI held at a +4.4% YoY rate, however.

Sticky Stagflation:

  • South Korean CPI accelerated to +4.2% YoY vs. +3.6% prior. Core CPI accelerated as well: +3.5% YoY vs. +3.2% prior.
  • Thai CPI, both headline and core, came in flat in Nov at +4.2% YoY and +2.9% YoY, respectively.

Eurocrat Bazooka:

  • We continue to hammer away on our view that Asia will not be there in size to help lever the EFSF or some other form of E.U. bailout. Zhu Guangyao, China’s Vice Foreign Minister in charge of European affairs, had this to say regarding the use of China’s $3.2 trillion in FX reserves: “China can’t use its $3.2 trillion in foreign exchange reserves to rescue European nations… Foreign reserves are not revenues. China can’t use its reserves to fund poverty alleviation at home or to bail out foreign countries… Now is not the time for China to have a contingency plan in the event a euro zone country defaults on its debts or exits from the 17-nation single currency. The government has already done its part to help Europe, which has the wisdom and strong economic fundamentals to solve its sovereign debt crisis.”

King Dollar:

  • China’s confirmed entry into a monetary easing cycle is weighing on expectations of yuan appreciation; 1yr USD/CNY non-deliverable forwards are now trading at a -0.3% discount to spot prices. The specter of less yuan appreciation is, in turn, weighing on the dim sum bond market, where the average issue has fallen -2% in the YTD, according the HSBC indexes. It is also driving increased investor scrutiny over the quality of the issues in a market where over 60% of the non-financial issues have no leverage limits. As we like to say, nothing focuses the mind like an ole’ hanging.
  • Thailand, which, admittedly, is feeling the ill-effects of nationwide flooding, reduced its benchmark interest rate by -25bps to 3.25%.
  • Demand for mortgages in Australia hit another all-time low growth rate in Oct to +5.7% YoY vs. +5.8% prior. We remain long-term bears on Australia’s housing market and see this as a structural headwind to both Australian interest rates and the Aussie dollar.


  • Japanese retail sales and overall household spending growth accelerated in Oct to +1.9% YoY (from -1.1% prior) and -0.4% YoY (from -1.9% prior), respectively. As well, the country’s industrial production growth accelerated in Oct to +0.4% YoY vs. -3.3% prior. Construction orders and housing starts (earthquake/tsunami reconstruction) also accelerated in the world’s third-largest economy. Still the mere threat of slowing growth from current low levels of economic activity has driven policymakers to plan an unprecedented (post-WWII) fourth “extra budget” (i.e. stimulus package) in the current fiscal year to help support growth. Small in size (only $26 billion), it sends a large message to the international community that this country continues to be unable to grow w/o the help of deficit spending and sovereign debt buildup.


  • As China enters into the thralls of its economic slowdown, we’re seeing falling growth expectations impact corporate credit spreads in the mainland. The premium investors demand to hold securities rated AA or below over AAA-rated securities has widened to 433bps – the widest since Dec ’08.
  • Japan’s AAA status has been put of negative watch by a domestic ratings agency, shining light on what we’ve been saying for over a year: Japan’s eroding domestic savings tailwind and perpetual kicking of the can down the road away from cutting spending and raising taxes is a long-term headwind for JGBs. In conjunction with the ratings news, Japan’s bid-to-cover ratio on a 10yr issue declined to 2.47x – the lowest since Dec ’10. All told, we think investors are misinterpreting the [marginal] back-up in JGB yields and decline in demand as a credit event, but, in reality, it’s likely more a function of updated global growth/inflation expectations when analyzed with a globally-interconnected lens. This week’s global beta chase was simply not supportive of JGB or JPY demand.

Darius Dale



Weekly Asia Risk Monitor: China and the Rest of Asia Have Not RSVP’ed - 4


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