The Macau Metro Monitor, January 30, 2012




Sands China Ltd said visitors to its Macau casinos grew by 5-6% to more than 1 million during the Chinese New Year (Jan 23-29) holidays.  The Venetian Macao casino drew 750,000 visits, Sands Macao had 160,000 and the Plaza Macao had 150,000.




“The conclusion is straightforward: self-control requires attention and effort.”

-Daniel Kahneman


That’s a very simple quote from a very important chapter in “Thinking, Fast and Slow” titled The Lazy Controller. I personally have a lot of work to do on this front. As an athlete, I was much better at this than I am as an investor – control what you can control.


It required some attention and effort to sell into the stock and commodity market inflations inspired by The Bernank Tax last week. With the S&P futures trading at 1305 this morning, US stocks are down over -2% from Thursday morning’s intraday 2012 high of 1333.


With China coming back from the holiday closing down -1.5% overnight, it looks like I should have sold that too (I sold everything else). The Chinese do not appreciate US policies to inflate because food and energy inflation slows Chinese growth.


Back to the Global Macro Grind


I make a lot of mistakes. The biggest ones tend to occur when I either get influenced by someone else’s process and/or when I don’t let the market stop me out of my own.


Thinking fast about the immediate-term while thinking slow about the long-term is the holy grail of being at what Kahneman calls “cognitive ease.” I can’t work any harder – so for me, at this stage of my career, my goal is to work smarter.


I think Kahneman nails my own issues to the boards in saying that, sometimes, “too much concern about how well one is doing in a task sometimes disrupts performance by loading short-term memory with pointless anxious thoughts.” (page 41)


But, most of the time, that’s our over-supplied profession’s short-term cross to bear more than it is my own – and we can turn that regressive energy into positive P&L by coming to the most straightforward conclusion, fast.


As a reminder, our primary conclusions about Big Government Interventions in markets for the last 4 years has been:


1.       They Shorten Economic Cycles

2.       They Amplify Market Volatility


This is the #1 reason why I am such a bull on stabilizing/strengthening the #1 factor in my Global Macro Model that drives short-termism in global market prices/volatilities – the US Dollar Index.


Last week’s price action doesn’t lie, Keynesian policy makers do. With the US Dollar down -1.6% week-over-week, here’s what the big stuff did:

  1. CRB Index (18 commodities) Inflation = straight up +1.6%
  2. US Stocks = flat (Dow down -0.5%; SP500 up +0.1%)
  3. US Treasuries = 10-year yields dropped -6.4% to 1.89%



1.       Inflation Expectations were rising

2.       Growth Expectations were falling


And, again, that’s how my risk management model rolls:

  1. Policy drives currency
  2. Currency debauchery drives inflation expectations
  3. Inflation expectations drive growth (and margin) expectations

If you go back and analyze every single big investment mistake I have made in the last 13 years (I have), unless there’s something like a take-out in one of my short positions (I was short Reebok when Adidas bought them), almost all of the time I was long something where Growth Slowed and Margins Compressed.


That’s why I think, fast and slow, about Countries/Economies this way. Ultimately, on the margins of Growth and Inflation, they act like companies.


I know there’s a lot of controversy around my macro views. I know there’s a lot of emotion in what we do. I know I should have been long Gold last week. I know what I know.


What I don’t know is what really matters to me. That’s why I need the Self-Control to Embrace Uncertainty and let the market tell me what to do next.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, German DAX, and the SP500 are now $1, $110.12-112.06, $1.29-1.31, 2, 6, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Weekly Asia Risk Monitor: Silent, but Japan

Conclusion: As predicted, the silence of Lunar New Year brought forth a largely uneventful week in Asia. Ahead of next week’s headlines, which will hit fast and furious amid a bevy of economic data releases, we take a moment to briefly focus on Japan from a fiscal policy perspective – especially in light of the negative long-term fundamentals that were reported this week.


Virtual Portfolio Positions in Asia: Long Chinese equities (CAF); Short Indian equities (INP); Short Japanese equities (EWJ).



All % moves week-over-week unless otherwise specified.

    • Median: +0.8%; High: India +3%
    • Low: Philippines -1.4%
    • Callout: Thailand +12.1% over the last three months vs. a regional median of +0.1%
  • FX (vs. USD)
    • Median: +1.3%
    • High: Malaysian ringgit and New Zealand dollar +2.2%
    • Low: Indonesian rupiah -0.2%
    • Callout: New Zealand dollar +11.3% over the last two months vs. a regional median of -0.1%
    • High: Philippines +51bps
    • Low: Indonesia -10bps
    • Callout: India -92bps over the last six months
    • High: India +19bps
    • Low: Indonesia -9bps
    • Callout: Australia +15bps YTD
    • High: India +19bps
    • Low: Philippines -51bps
    • Callout: Australia +15bps YTD
  • 5YR CDS
    • Median: -3.9%
    • High: China, Thailand, S. Korea, and Thailand all flat wk/wk
    • Low: Indonesia -9.9%
    • Callout: Japan +23.6% over the last three months vs. a regional median of +3.2%
    • Median: flat wk/wk
    • High: India +12bps
    • Low: Singapore 4bps
    • Callout: China -61bps/-28.3% over the last three months vs. a regional median of -1.3%
    • Median: flat wk/wk
    • High: India +40bps
    • Low: Thailand -25bps
    • Callout: India +137bps/+17% over the last six months vs. a regional median of -1%
    • The gradual receding of European sovereign debt risk since NOV has been supportive of foreign inflows into Asian capital markets, with the JPM Asian Dollar Index garnering a +97% correlation to the MSCI AC Asia Pacific Equity Index on a six-week basis.

Full price and performance tables can be found at the conclusion of this note.



 On Monday, we’ll be releasing the second installment of our Japan’s Jugular thesis, which details our long-term research and risk management views on the country.  The following charts are a sneak peak at what we promise will be a thought-provoking slide deck:


The year 2012 has the potential to be a rather volatile year for the JGB market, with a few key months worth monitoring from a bond auction perspective:


Weekly Asia Risk Monitor: Silent, but Japan - 1


Relative widening in the CDS markets suggests that this incremental credit risk is being priced in, on the margin:


Weekly Asia Risk Monitor: Silent, but Japan - 3


If Japan does face an environment of sovereign debt challenges this year, the Bank of Japan has limited resources to step in and calm the market under current statutes (which, as we’ve learned, can always be changed mid-game):


Weekly Asia Risk Monitor: Silent, but Japan - 2



Growth Slowing’s Bottom:

  • Japan: Export growth slowed in DEC to -8% YoY vs. -4.5% prior. The country posted its first annual trade deficit since 1980, driven by the strong yen and weak external demand on the export front and a surge in post-tsunami energy imports. Japanese nuclear power generation remains -85.3% below pre-crisis levels and will face structural political headwinds going forward.
  • Japan: Retail Sales growth accelerated in DEC +2.5 YoY vs. -2.2% prior, as Japanese consumers (some flush w/ insurance payouts) took advantage of the first post-crisis Holiday Season to treat themselves.
  • Japan: The Bank of Japan lowered its economic growth outlook for FY12 to +2% from +2.2% prior while maintaining is +0.1% CPI target.
  • Hong Kong: Export growth slowed in DEC to +7.4% YoY vs. +2% prior.
  • South Korea: Real GDP came in essentially flat on a YoY basis in 4Q: +3.4% vs. +3.5%. On a QoQ basis, growth slowed to +0.4% vs. +0.8%.
  • South Korea: Korea’s JAN Business Survey came in slightly better than the DEC version, with the Manufacturing Index ticking up to 81 (from 79) and Non-Manufacturing Index holding flat at 79.
  • Thailand: Rebounding from generational flooding, Thailand’s Manufacturing Production growth accelerated in DEC to -25.8% YoY vs. -47.5% prior. Capacity Utilization ticked up as well: 52.3% vs. 40.5% prior.

King Dollar:

  • Japan: CPI accelerated in DEC to -0.2% YoY vs. -0.5%. Any erosion of Japan’s real interest rate advantage applies pressure, on the margin, upon JPY/JGB assets relative to the USD/USTs.
  • India: Amid receding inflation, the Reserve Bank of India lowered the country’s Cash Reserve Ratio -50bps to 5.5%, which should add around 320B rupees ($6.4B) in liquidity for Indian banks. Ironically, Indian O/N Interbank Rate closed up +40bps wk/wk, indicating that at least some lenders were anticipating perhaps a greater degree of easing (rate cuts). Refer to our Thursday note titled “Re-Shorting India: INP Trade Update” for more details regarding the scope for monetary easing in India.
  • Singapore: CPI slowed in DEC to +5.5% YoY vs. +5.7% prior. More importantly, the Monetary Authority of Singapore said that it expects inflation to average +2.5-3.5% in 2012 – a slowdown that would give it room to ease by revaluating the Singapore dollar’s USD-peg lower.
  • Thailand: The Bank of Thailand cut the country’s Benchmark Interest Rate -25bps to 3%.
  • Australia: Australia came in with some mixed-to-slightly dovish 4Q inflation data: CPI slowed to +3.1% YoY from +3.5% prior; Core CPI accelerated to +2.6% YoY vs. +2.4% prior; and PPI accelerated to +2.9% YoY vs. +2.7% prior. From a monetary policy perspective, this data doesn’t force the RBA to react dramatically in either direction.


  • China: Xi Jinping, the likely candidate to replace Hu Jintao as China’s next president in MAR '13, will likely be a catalyst for China to take additional steps toward free-market capitalism, based upon his economically liberal reforms as party chief of the Zhejiang province.
  • China: Chinese property prices need to decline an additional -30% in various areas to reach a “reasonable” level, according to He Keng, who serves as deputy director of the National People’s Congress. This is in-line with our view that China will keep its “foot on the brake” with regards to its property market for the foreseeable future.
  • Japan: Per the Japanese Cabinet Office, the country will likely miss its goal of balancing the budget by at least fiscal 2020 – even if it doubles the consumption tax to 10%! Slow projected growth (+1% per annum) and an unavoidable surge in entitlement spending will continue to grow Japan’s sovereign debt load well beyond the ¥1,086,000,000,000,000 (QUADRILLION) its projected to rise to in FY13.
  • Japan: Understanding the growing urgency to tackle the challenges above, the Diet is debating a DPJ-backed bill that would increase the consumption tax +300bps to 8% in 2014 (followed by another +200bps hike in 2015). The bill, which is opposed by 60% of Japanese voters, is unlikely to pass, as LDP appears to not want Noda’s administration to take credit for attempting to finally tackle the nation’s fiscal imbalances despite having similar goals in mind. Amid the political squabbling, which Standard & Poor’s cited as a reason for another [potential] downgrade, the Japanese public assigns a 17 and 16% approval rating for the DPJ and LDP, respectively.


Key economic data releases and policy announcements:

    • Philippines: 4Q Real GDP
    • New Zealand: DEC Services PMI
    • Japan: JAN Manufacturing PMI ; DEC: Unemployment Rate; DEC: Industrial Production
    • South Korea: DEC Industrial Production; DEC Service Industry Output
    • Singapore: 4Q Unemployment Rate
    • Taiwan: DEC Unemployment Rate
    • Australia: DEC NAB Business Sentiment; DEC Private Sector Credit
    • China: JAN Manufacturing PMI (2x)
    • Japan: DEC: Construction Orders; DEC Housing Starts; JAN Small Business Confidence
    • India: JAN Manufacturing PMI
    • South Korea: JAN CPI; JAN Manufacturing PMI; JAN Trade Data
    • Indonesia: JAN CPI; DEC Trade Data; JAN Consumer Confidence (2x)
    • Thailand: DEC: Business Sentiment Index; DEC Trade Data; JAN CPI
    • Taiwan: 4Q Real GDP; JAN Manufacturing PMI
    • Australia: JAN Manufacturing PMI; DEC New Home Sales; 4Q House Price Index
    • Malaysia: Monetary Policy Decision
    • Japan: JAN Vehicle Sales; JAN Monetary Base
    • India: DEC Trade Data
    • Singapore: JAN Manufacturing PMI
    • Australia: DEC Trade Balance
    • China: JAN Services PMI (2x)
    • Hong Kong: DEC Retail Sales; JAN Manufacturing PMI
    • India: JAN Services PMI
    • Australia: JAN Services PMI
    • None

Darius Dale



Weekly Asia Risk Monitor: Silent, but Japan - 4


Weekly Asia Risk Monitor: Silent, but Japan - 5


Weekly Asia Risk Monitor: Silent, but Japan - 6


Weekly Asia Risk Monitor: Silent, but Japan - 7


Weekly Asia Risk Monitor: Silent, but Japan - 8


Weekly Asia Risk Monitor: Silent, but Japan - 9


Weekly Asia Risk Monitor: Silent, but Japan - 10


Weekly Asia Risk Monitor: Silent, but Japan - 11


The Economic Data calendar for the week of the 30th of January through the 3rd of February is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.






We’re bullish on slots for CY2012 but the big short squeeze and WMS’s pulling forward of shipments has us cautious about the near-term outlook.



WMS reported an interesting quarter, one that the investors loved or at least liked enough to scare the shorts off the shorts.  To be clear – all of the red flags that we raised before are still there.  Those 957 new units that were deferred are a perfect example of trying to pull revenue forward.  However, we actually raised our back half F12’ estimates – granted we were 20 cents below consensus to start with.  We’re currently at $1.47 for FY2012 EPS.



Here are some quick takeaways from the quarter:


Product Sales

  • If you include the deferred units, their ship share should be about 23% - otherwise, we think it was closer to 17%
  • While the company didn’t say so, it’s pretty obvious that the 957 deferred units (which were all new and expansion shipments) were shipped to the Ohio casinos
    • Again, not confirmed, but we’re fairly certain that Scioto Downs is in there
    • We know that there was more than one casino shipment there and it was not Revel or Maryland Live so that makes Cleveland Horseshoe a pretty good guess
    • Out of the revenue recognition reasons that were not fulfilled and hence, led to the deferral,  we’re pretty sure WMS still had some contractual obligations to be met
    • As a reminder, the racinos in Ohio are governed by the Ohio Lottery Commission and the manufacturers have been licensed by that entity
  • If we had to guess, the 1,500 unit deal is with Caesars, and our understanding is that the shipment of those units will be heavily weighted towards the first half of calendar ‘12
  • ASP’s will likely be a tad higher in WMS's 2H12
  • WMS is back to shipping to Mexico – contrary to prior guidance, there were some Mexico shipments in international.  Last year, there were about 1k units sold into that market. 

Gaming Operations

  • Participation revenues were clearly disappointing.  The company claims it was 1 for 1 replacement but the numbers tell you that it wasn’t that good. 
  • The only good news is that most of the units that came out were weighted to the beginning of the quarter.  We don’t know if they will get back to flat by year end; we’re not giving them the benefit of the doubt in our model just yet.
  • There were no new leased units – still only the 600 units placed with the Seminoles at $15/day
  • Portal applications are earning between $10-15/day and have very high margins
  • The online UK casino is growing fast on the top line but is still not break even and likely contributed a bit of a drag on game operations margins
  • The other bucket in games operations will become material next year when Italy comes online