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The Macau Metro Monitor, February 27, 2012




Three days after the Singapore government said it is considering more safeguards against problem gambling, it is also reviewing laws and regulations governing the integrated resorts (IRs), and will release more details in the second half of 2012.  Minister in the Prime Minister's Office and Second Minister for Home Affairs and Trade and Industry, S. Iswaran, said such a review is timely as the IRs have been in operation for two years.



MGM China's CEO Grant Bowie said, "We’re well advanced.  So far we’ve had three successful submissions on the project for Cotai, adding that the company is “almost in a position to submit the final drawing.”  Once the project gets government approval, it will take three years to build.  “Our Cotai venture will be financed with our cash flow, which is quite high, and a credit facility,” added Hubert Wang, MGM China’s CFO. 


“We are looking at some sort of show and some sort of exhibition opportunities,” Bowie confirmed. However, he added that MGM would not compete with Venetian Macau to host big exhibitions and conventions, two sectors that “have not developed as strong as we expected”.  Instead the company’s Cotai resort will focus on incentives trips as “companies in the region are growing and looking into premium destinations,” as well as meetings, the executive said. 


MGM's Cotai investment is ~USD 2 billion to USD 2.5 billion” (MOP 20 billion) with 500 tables, 2,500 slots, 1,600 rooms.



Former Co-COO Nicolas Naples has left MPEL on 2/27/2012 on mutual agreement.  Ying Tat Chan has been appointed as MPEL's sole COO.



Macau's unemployment rate for November 2011-January 2012 was 2.1%, down by 0.1% point compared with the revised figure of 2.2% in October-December 2011.  Total labor force was 345,000 in November 2011-January 2012 and the labour force participation rate held stable as the previous period, at 73.2%.

Complicating Life

“You should know that correcting your intuitions may complicate your life.”

-Daniel Kahneman


That’s just a great risk management quote from Chapter 18 of “Thinking, Fast and Slow” – Taming Your Intuitions. While the Storytelling about oil prices, what caused them, and what they mean to your portfolios can be creative, it can also complicate your life.


Complicating Life for the small some of us whose life will not change by prices at the pump is not what I mean. I’m talking about the most obvious of obvious of life’s complications – what’s in your wallet versus what you need to buy to feed your family.


While that may be the most intuitive statement of the year for the rest of the world’s consumer population, on Wall Street we are often numbed to believe that making the most obvious of obvious calls on markets and economies isn’t “smart” enough.


Back to the Global Macro Grind


One obvious call that we pounded on last week is that Global Consumption Growth has never not slowed with oil prices running north of $100/barrel. We’ll reiterate that very simple fact this morning. I couldn’t have repeated it enough in February of 2008.


Barron’s Mike Santoli did a nice job of bringing back those 2008 memories this weekend when he pointed out that the price of Brent Oil has not traded below $100/barrel for 269 days. Make that 270 days now. The longest streak (ever) prior to this was 110 days in 2008.


2008 and 2011 are the years that the willfully blind at both the Fed and Sell-Side groupthink-tanks would like to just forget. That’s why we like to remember them. When Growth Slowing happens every few years after the price of oil ramps, there’s something obvious Complicating Life for those of us who don’t hang our hats about being “dead” in the long-run.


To review the Dollar Debauchery, Oil Up trade last week:

  1. US Dollar Index was down -1.3% to $78.35
  2. Brent Oil price was up +4.9% to $125.47
  3. WTIC Oil price was up +6.4% to $109.77

And, of course, the headlines into the weekend were that Oil was rising because the “economic recovery” was picking up steam…


Then, a not so funny thing happened on the way to the pre-market US Futures forum this morning. Stocks fell down … because of “rising oil prices” … but, uh… oil prices this morning are falling…


Got Storytelling?


The sad fact of the matter is that many market participants need oil prices to rise to get paid. That’s just a sad fact for the country, not for absolute returns. At +25.2% and +21.8%, respectively, Russian and Venezuelan Equities are 2 of the Top 3 performing Stock Markets in the world for 2012 YTD. These are called Petro-Dollar markets – awesome, right?


It really is awesome if you are long Inflation Expectations Rising. The problem with that is 2 fold:

  1. That, ultimately, leads to Growth Expectations Slowing
  2. Most people on this earth are short inflation in their wallets

The other thing here Complicating Life is that our industry chases prices at tops and sells bottoms:

  1. CFTC data for last week shows bullish Commodity Options contracts up +7.3% week-over-week
  2. At 1.03 Million call options on commodity inflation, that’s the biggest number since the week of September 13, 2011
  3. From the CRB Index’s September 2011 high to its October 2011 low (292) we saw a -14% crash in commodities

Yes, Commodities Crashed. That was last year, remember?


Last year, post Qe2, expectations continued to build for a Stronger Dollar. So commodities crashed. Period. Commodities didn’t fall because growth expectations were slowing. US GDP Consumption Growth rose steadily as the price of oil fell with US GDP going from 0.36% in Q1 to +2.8% in Q4 of 2011.


I’m not saying it’s easy being a Macro man trying to navigate the whip-saw of Big Government Interventions. If I have written this 100 times I have said it 1,000 times over – cheap money Dollar Debauchery policies A) shorten economic cycles and B) amplify market volatility.


What I am saying is Ben Bernanke’s Policy To Inflate to 2014 is Complicating Life for the rest of the world’s consumption.


My immediate-term support and resistance ranges for Gold, Oil (Brent), Oil (WTIC), US Dollar Index, and the SP500 are now $1, $120.78-126.21, $105.44-110.66, $78.38-79.11, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Mid-Tier Retail: That’s a Wrap


This week’s earnings provide the latest look at the state of mid-tier department store retail, which is playing out as we outlined back in Q3. The bottom-line here is that inventory growth continues to outpace sales, which is fueling a highly competitive pricing environment in the mid-tier (i.e. more promotional) further widening the bifurcation between the low-end and high-end retailers. Good for JWN, SKS, as well as discount and dollar store players TJX, ROST, DLTR; Bad for KSS, JCP, SHLD, M, HBI & GPS.


Here are a few considerations for this week’s key themes:


1) Inventory Growth: The trend of inventory growth outpacing sales continues to plague the mid-tier department stores as reflected in the chart below. Also worth noting are the three companies in this set that posted positive sales/inventory spreads: SHLD, JCP, and DDS. While a positive spread is a just that – positive on the margin, not all positive spreads are created equal, composition matters. In this regard, both SHLD and JCP achieved positive spreads by stripping inventories out faster than sales declined. This is considerably different in quality from TJX and DLTR which posted +11% and +13% sales growth respectively with inventories growing, but just at a slower rate.


Re WMT International… “Inventory management remains an area needing improvement” – Doug McMillon, CEO WMT Int’l


High inventory levels led to increased markdowns and clearance, and unseasonably warm weather impacted several categories” – Lou D’Ambrosio, CEO SHLD


I would expect inventory to be up at the end of the first quarter somewhere around 4% or so.” - Kevin Mansell, CEO KSS (compared to Q1 sales outlook for +3%)



2) Promotional Environment: The aforementioned factor is what continues to fuel the promotional fire currently ablaze in the mid-tier channel. With gas prices surging higher and discretionary wallets getting tighter, unloading excess inventory will weigh on margins through at least the 1H effecting not only those directly operating in the mid-tier, but also those selling into it (e.g. HBI).


Re Q4…“a highly promotional competitive environment” – Charles Holley, CFO WMT


We lost some of our leadership on the price element of our value equation; we didn't have enough consistent excitement in our merchandise content; and our sense is our marketing message did not cut through, especially in a highly promotional fourth quarter.” – Kevin Mansell, CEO KSS


“Our promotional cadence should have been more surgical, and cost actions could have been taken earlier.” – Lou D’Ambrosio, CEO SHLD


In terms of promotional activity, I think that we're always challenging our teams. Last year was not necessarily our best year on this front” – Glenn Murphy, CEO GPS


“competitive intensity reached an all-time high during the holiday season. Research indicates that across retail, two out of three holiday season purchases in gift giving categories were on some sort of promotion, and these promotional discounts were significant, ranging from 25% in some categories to more than 50% in others.” – Gregg Steinhafel, CEO TGT



3) High/Low End Bifurcation: Consistent with what we’ve seen since the 2H of F11, the high-end continues to outperform its more price sensitive peers. While high-end growth is starting to decelerate on the margin, the mid-tier is declining at a faster rate. We expect this reality to persist over the intermediate-term as discretionary spending remains constricted at the lower end. The other fact to consider here is that due to the excess inventory in the mid-tier channel, discounters like TJX, ROST and even dollar stores DLTR, etc. will continue to benefit from better product flow providing a traffic tailwind as evidenced by strong top-line results. .



Mid-Tier Retail: That’s a Wrap - mid tier market chart


Mid-Tier Retail: That’s a Wrap - MIdTier SvI


Mid-Tier Retail: That’s a Wrap - SIGMA


Casey Flavin



The Economic Data calendar for the week of the 27th of February through the 2nd of March 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.




Weekly European Monitor: Floating Ships in Shallow Waters

Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)


Asset Class Performance:

  • Equities:  European equity performance fell largely in a band of -100 to +50bps week-over-week with some notable divergences. Top performers:Russia (RTSI) 4.4%; Romania 4.2%; Norway 1.7%. Bottom performers:Cyprus -19.3%; Greece -9.0%; Slovakia -1.8%; Poland -1.6%; Spain -1.5%; Portugal -1.0%. 
  • FX:  The EUR/USD is up 2.38% week-over-week.  Divergences:TRY/EUR -3.08%, ISK/EUR -3.05%, GBP/EUR -2.02%; PLN/EUR +0.46%. The RUB/EUR is up 6.10% YTD, one of the best performing major emerging market currencies against the EUR.
  • Fixed Income:  10YR sovereign yields were down week-over-week, with Portugal bucking the trend to the upside. Portuguese yields climbed 50bps to 12.77% w/w, while Spain’s 10YR saw the biggest decline at -21bps to 5.05%. Greece fell -14bps to 34.24% and Italy fell -9bps to 5.48%

Weekly European Monitor: Floating Ships in Shallow Waters  - 11. yields



In Review:

How hard can you scrape the hull of a ship before it tears? The Eurozone churned for another week and with the less-than-exuberant reaction to Tuesday’s news that Eurozone finance ministers forged a €130 billion rescue deal for Greece and terms on PSI to reduce the country's outstanding debt by €107 billion, it’s clear that few think this “deal” provides the nail to shore up Greece’s sovereign and banking imbalance and therein right the Greek economic ship. 


The main issue is that there are still so many question marks ahead, not unlike past weeks and months. One central issue concerns PSI. If not enough bondholders agree to the terms—and the agreement assumes 95% participation on a haircut of 53.5% of the principal value of the bonds with an average coupon of 2.63% for the first 8 years and then 3.65% for the balance of the 30 year maturity—a significant legal battle could be waged between parties.  And already in the weeds is discussion that the ECB, on its own and without judicial or parliamentary review, swapped its Greek debt for new Greek debt that is not subject to any collective action clauses (CACs). Obviously this “changing of the goalposts”, if substantiated, has severe negative implications on the success of participation and future issuance from other sovereigns.


Second, select Eurozone member parliaments still need to vote on the terms of the rescue fund and PSI package, with Germany’s vote coming on Monday, February 27. While it is expected to pass in Germany, it is not a guarantee, and more broadly the process to bring these measures to vote across countries simply runs final ratification closer to Greece’s €14.5 billion bond repayment coming due on March 20.


Announcements from the IMF this week also dampened sentiment, including a statement that the balance of risks in this "accident-prone" economic program is "mostly tilted to the downside, and “even a small shock could see the country's debt growing on an ever-increasing trajectory.”  Further, the downgrade from the European Commission of Eurozone GDP to -0.3% in 2012 versus a previous estimate of +0.5% muted the agreement talks. 


The bull camp however turns to the 2nd installment of the LTRO allotment of 36M paper that will be rolled out. We continue to caution that though this may help solve the liquidity crisis, it does little for underlying solvency issues at banks. Additionally, we’ve seen few indications that lending is picking up material. The chart below under “Charts of the Week” shows that these LTRO funds could simply be contributing to the elevated levels of the ECB’s overnight deposit facility.


Finally, another disturbing trend (however not new) is money deposits leaving southern Europe for Germany and points north. Bloomberg recently compiled this data and found that deposits in Greece, Spain and Italy shrank 28% from a peak in June 2009, as deposits climbed 10% since May 2010 (when Greece received its first bailout).


Below is a calendar of critical catalysts to be aware of:


This Weekend (2/25- 2/26):  G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B is expected.


Wednesday (2/29):  2nd 36-Month LTRO Allotment.

Wednesday (2/29):  Eurogroup Meeting to sign the previously endorsed agreement between the 17 members on the Treaty for the European Stability Mechanism.


Thursday and Friday (3/1-3/2):  Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further, the group will reassess the adequacy of resources under the EFSF and ESM rescue funds.



Call Outs:

  • The European Commission said it now expects the Eurozone economy to shrink by -0.3% in 2012, versus a previous forecast of +0.5% in November, with the region undergoing a "mild recession".
  • EU may give countries such as Spain softer deficit targets but there will be no let-up in the overall austerity drive as the continent struggles to draw a line under its two-year debt crisis.
  • Russia - Prime Minister Vladimir Putin will probably win Russia’s presidential election in the first round on March 4, according to the latest projection from the independent Levada Center.    Putin has the support of 66% of decided voters versus 15% for Communist Party leader Gennady Zyuganov, said Lev Gudkov, Levada Center’s director.


Portfolio Positions:


Short France (EWQ) – Keith opportunistically shorted France on 2/22 and again today (2/24) in the Hedgeye Virtual Portfolio as we got our price on a backdrop of weak fundamentals and data and an uncertain political climate that is trending towards a socialist candidate victory in the upcoming Presidential elections (in April) that could spell higher taxes and more spending.


French consumer confidence did climb for a second straight month in February one point to 82, according to a poll from the national statistics office Insee, however there are material signs that in 2012 France will be butting up against higher unemployment, a debt load of over 90% of GDP, stretched deficit targets, and uncertainty around cost saving measures (austerity) and associated revenues given the uncertainty of who will be leading the state in the weeks ahead: Sarkozy or his challenger, the socialist Francois Hollande.


While Hollande talks about fiscal consolidation, he’s indicated that he may undo Sarkozy’s rise in the pension age, has questioned the EU’s fiscal compact, is unclear on his position on Eurobonds, and may well be a bigger spender than saver of government money. Clearly there are many unanswered questions here, but we think the risk lies to the downside.


Returning to the data, this week showed that the number of people in France actively looking for work made its highest high since the Euro went into circulation, to 2,861,700 in January versus 2,848,300 in December. This should put upward pressure on last year’s 5.6% unemployment rate.  This week’s initial February PMI data also showed that Services underperformed expectations coming in at 50.3 (vs 52.0), which Manufacturing beat expectations at 50.2 (vs 49.0), as both run along the contraction/expansion line of 50.


Weekly European Monitor: Floating Ships in Shallow Waters  - 11. cac



Short EUR/USD (FXE) - Keith shorted the EUR/USD via the eft FXE on 2/23 and again today (2/24) in the Hedgeye Virtual Portfolio, after watching the pair rise from $1.30 earlier this week through $1.33 and then up to $1.34, the line in our quantitative model signaling overbought on the intermediate term TREND, prompting the decision to short.  We think that despite optimism around the Greek deal we see a long tail ahead to shore up Greek and Eurozone sovereign and banking imbalances.


Weekly European Monitor: Floating Ships in Shallow Waters  - 11. eurusd



CDS Risk Monitor:

On a week to date basis, CDS was largely down across European sovereigns (vs up last week), with Spain leading the charge on the downside -28bps to 370bps, followed by Italy (-25bps) to 391bps and Portugal (-19bps) to 1130 (see charts below).   


Weekly European Monitor: Floating Ships in Shallow Waters  - 11. cds a


Weekly European Monitor: Floating Ships in Shallow Waters  - 11. cds b


Charts of the Week:

Really?  In the chart below we show the secondary bond purchasing program of the ECB, known as the Securities Market Program (SMP). Last week the ECB did NO buying, and combining the last 4 weeks the Bank has only purchased €246 MILLION, versus €2.243 BILLION in the week ended 1/20 and 3.766 BILLION in the week ended 1/12, with the total facility at  €219.5B. We continue to wonder if the ECB is making up the numbers and not reporting their purchasing. Here we welcome your thoughts.

Weekly European Monitor: Floating Ships in Shallow Waters  - 11  smp



The ECB’s Overnight Deposit Facility remains elevated.  Thank you LTRO?


 Weekly European Monitor: Floating Ships in Shallow Waters  - 11. overnight ecb



The European Week Ahead:

Monday:  Jan. Eurozone Money Supply; Germany Bundestag will vote on new Greek Aid Package; Feb. UK Nationwide House Prices (Feb 27-29); Feb. Italy Business Confidence


Tuesday: Feb. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic, Industrial, and Services Confidence; Mar. Germany GfK Consumer Confidence Survey; Feb. Germany Consumer Price Index – Preliminary; Feb. Italy Reported Sales, GfK Consumer Confidence Survey


Wednesday:  Eurozone Second LTRO Allotment; Jan. Eurozone CPI; Feb. Germany Unemployment Change, Unemployment Rate; Jan. Germany Import Prices; Jan. UK Net Consumer Credit, Money Supply, Mortgage Approvals, Net Lending Sec. on Dwellings; Jan. France Consumer Spending


Thursday:  EU Leaders Meet in Brussels (Mar 1-2); Feb. Eurozone PMI Manufacturing – Final, CPI Estimate; Jan. Eurozone Unemployment Rate; Feb. Germany and France PMI Manufacturing – Final; Feb. UK, Russia, and Italy PMI Manufacturing; 4Q France Unemployment Rate; Feb. Italy CPI – Preliminary, Budget Balance; Jan. Italy Unemployment Rate - Preliminary


Friday:  Jan. Eurozone PPI; Jan. Germany Retail Sales; Feb. UK PMI Construction; 2011 Italy Deficit to GDP, Annual GDP



Extended Calendar Call-Outs:

27 February:  The German Bundestag plans to vote on the issue of Greece’s second bailout, including the embedded terms of the PSI.


25-26 February:  G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B is expected.


29 February:  2nd 36-Month LTRO Allotment.


29 February:  Eurogroup Meeting to sign the previously endorsed agreement between the 17 members on the Treaty for the European Stability Mechanism.


1-2 March:  Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further, the group will reassess the adequacy of resources under the EFSF and ESM rescue funds.


20 March: Greece’s €14.5 billion Bond Redemption due.


April:  French Elections (Round 1) begins to conclude in May.


April:  Greek Presidential Elections


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.



Matthew Hedrick

Senior Analyst

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