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THE M3: SCC PHASE 2; NEPTUNE; AMAX

The Macau Metro Monitor, March 5, 2012

 

 

SANDS COTAI CENTRAL PHASE TWO TO OPEN IN OCTOBER Macau Business

Sands China CEO Edward Tracy said the second phase of Sands Cotai Central is planned to open in October.  He also reconfirmed that Sands Cotai Central’s first phase will open in April, which includes the Conrad and Holiday Inn hotels and the casino.  The property’s casino is to include about 140 VIP gaming tables, as well as 200 mass market gaming tables. Sands China plans to add 200 mass market gaming tables by 3Q 2012, Mr Tracy said.

 

NEPTUNE PROFIT UP Macau Business

Junket operator Neptune Group Ltd. announced a profit of MOP229.7MM for the six month period ended December 2011. The company’s board says this will be a challenging year and that revenue growth may slow down depending on the mainland’s economic performance.  “Importantly we will continue to invest in our business, continuing to acquire more VIP room operators’ business in Macau and in other Asian countries,” says Neptune.  Previous media reports have stated that Neptune promotes nearly 200 VIP tables across 10 venues in Macau.

AMAX GOES AHEAD WITH GREEK MYTHOLOGY IPO Macau Business

Amax Holdings shareholders voted last week in favor of an IPO of its associate company Greek Mythology (Macau) Entertainment Group Corp Ltd. that controls Macau's Greek Mythology casino.  A new holding company, Greek Mythology Holdings Ltd., is to be listed in Hong Kong within two years.  Amax Holdings will control a minimum 49.9% interest in the new holding company.  The IPO was the course decided on by the board of Amax Holdings in order to recover a disputed stake in Greek Mythology (Macau) Entertainment Group Corp Ltd.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 5, 2012


As we look at today’s set up for the S&P 500, the range is 20 points or -1.00% downside to 1356 and 0.47% upside to 1376. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1013 (-2046) 
  • VOLUME: NYSE 699.91 (-14.07%)
  • VIX:  17.29 0.17% YTD PERFORMANCE: -26.11%
  • SPX PUT/CALL RATIO: 2.05 from 2.29 (-10.48%)

CREDIT/ECONOMIC MARKET LOOK:


USD – after a +1.3% week, finally attempting to stabilize above critical $79.03 support – Romney solidifying the Republican base has had a high correlation to a more stable dollar than the Newt/Santorum thing. Super Tuesday could be another bullish USD catalyst inasmuch as winning Michigan was. 

  • TED SPREAD: 41.48
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 1.98 from 1.97
  • YIELD CURVE: 1.70 from 1.70 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10:00am: ISM Non-Manf. Comp, Feb., est. 56.2 (prior 56.8)
  • 10:00am: Factory Orders, Jan., est. -1.5% (prior 1.1%)
  • 11:30am: U.S. to sell $33b 3-mo., $31b 6-mo. bills
  • 1:20pm: Fed’s Fisher speaks in Dallas on state of economy
  • 7:30pm: Fed’s Fisher speaks in Houston on state of economy 

GOVERNMENT:

  • Quinnipiac Univ. releases poll of likely Ohio voters
  • VP Joe Biden Meets Mexico President Felipe Calderon
  • Defense Secretary Leon Panetta meets with Chile Defense Minister Andres Allamand at Pentagon, 10am
  • White House cybersecurity coordinator Howard Schmidt unveils report on protecting electronic health records, 10am
  • Treasury Secretary Tim Geithner speaks on national security at Northwestern Law School, 4:30pm
  • House, Senate in session:
    • Senate Minority Leader Mitch McConnell, R-Ky., House Minority Leader Nancy Pelosi, D-Calif., speak to AIPAC
    • FTC Chairman Jon Leibowitz, Commissioner Thomas Rosch testify on agency’s budget before House Appropriations, 3pm
    • House Energy and Commerce marks up Medicare Decisions Accountability Act, 4pm 

WHAT TO WATCH: 

  • BP reached a $7.8b settlement with businesses, individuals over the 2010 Deepwater Horizon oil rig disaster; U.K. shrs up as much as 3.1%; watch HAL, RIG
  • Israeli PM Benjamin Netanyahu visits White House amid questions over how to confront Iran’s nuclear program
  • China cut its eco. growth target to 7.5% from 8% in place since 2005
  • AIG sells $6b of AIA shrs to pay back U.S. govt.
  • “Dr. Seuss’s The Lorax” was top weekend film in North America, taking in $70.7m in the biggest opening weekend this yr
  • Deutsche Bank appoints James Ratigan joint head of Americas M&A
  • Polls show virtual tie between Rick Santorum, Mitt Romney in Ohio ahead of Super Tuesday primary
  • Vladimir Putin wins Russia presidency; opponents say vote marred by fraud
  • European services, manufacturing declined more then est. in Feb.
  • No IPOs expected to price today: Bloomberg data

 EARNINGS:

    • Vermilion Energy (VET CN) 6:55am, C$0.72
    • Casey’s General Stores (CASY) 4pm., $0.44
    • VeriFone Systems (PAY) 4:01pm, $0.52
    • Giant Interactive (GA) 4:30pm, $0.17
    • ABM Industries (ABM) 5pm, $0.22
    • Uranium One (UUU CN) 5:01pm, $0.05
    • First Majestic Silver (FR CN) Post-Mkt, $0.24
    • Flint Energy Services Ltd (FES CN) Post-Mkt, C$0.34    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Speculative Wagers on Crops Reach Five-Month High: Commodities
  • Gold Drops in London on Stronger Dollar, China Growth Target Cut
  • Crude Oil Falls in New York After China Lowers Economic Target
  • India Bans Cotton Exports Until Further Notice; Futures Gain
  • Copper Falls for Second Day as China Lowers Target for Growth
  • Wheat Declines as Former Soviet Nations May Increase Exports
  • Sugar Falls as Slowing Economies May Dent Demand; Coffee Slides
  • Palm Oil Seen Climbing 7.8% to Year High as Inventories Drop
  • Glencore CEO a ‘Little Lost’ at Calls for Higher Xstrata Bid
  • Hedge Funds Cut Bullish Gas Bets Most Since June: Energy Markets
  • Coffee Crop in Indonesia Poised for Highest in Three Years
  • Goodman Fielder Takeover Seen With Wilmar Instant 31%: Real M&A
  • Car-Sales Rebound Boosting Platinum, Palladium: Chart of the Day
  • Wagers on Crops Surge to Five-Month High
  • Freeport Union to Resist Move to Resume Grasberg Output Today
  • Sixth Supertanker of North Sea Crude Heads to Asia, Data Show
  • Clean-Energy Mandate for Utilities Seen Benefiting Natural Gas

 THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


CHINA – Growth Slowing has been plainly obvious in just about every high frequency economic data point in Jan-Feb – plenty shrugged that off as being all about the Lunar calendar, but this morning’s Services PMI print out of China is a 48 and that’s more inline with what Wen’s guiding to in a 7.5% GDP Growth rate (vs the 9-12% China has been tracking since 2009).

 

YEN – President of Japan’s Credit Rating Agency Inc said the BOJ is “damned if they do, damned if they don’t” (buy bonds) with this massive debt maturity spike in 2012. Them be fighting words in Japan as the Yen continues to be in a Bearish Formation (bearish TRADE, TREND, and TAIL) with an immediate-term oversold level of $81.96 USD/JPY.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

The Hedgeye Macro Team

 

 

 



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 80.33%
  • SHORT SIGNALS 78.51%

The Trick

“The trick was to focus narrowly… on numbers: lot number, number of bidders, paddle numbers, bid steps.”

-Benjamin Wallace

 

I’ve recently jumped into The Billionaire’s VinegarThe Mystery of the World’s Most Expensive Bottle of Wine – and, I must say, I can’t put the book down!

 

The aforementioned quote scrapes the surface of British wine critic and auctioneer Michael Broadbent’s process. Born in 1927, Broadbent “was twenty-two before he tasted a top wine”, but started out in the business by simply “taking notes on every wine he tasted. He never stopped.” (page 27)

 

Neither have I.

 

Back to the Global Macro Grind

 

I have 1-2 pages of hand-written notes of every market day of my working life. I’m not saying that makes me anything other than what it makes me – maniacal about my process. The way that I learn is through repetition. If I write down market prices, risk management levels, and economic data points every day, I have a much higher probability of not missing something.

 

That’s The Trick.

 

As far as I can tell (so far), The Trick to this game is not missing when the big things, like Growth and Inflation, are changing. That’s why, in principle, our Macro Models are grounded in Chaos Theory – we embrace the uncertainty that each day brings, because we have no idea what is going to be the proverbial grain of sand that knocks down that perfect pyramid of market expectations.

 

For the last 3 weeks I have been calling out Growth Slowing As Inflation Accelerates as the #1 risk factor that’s changing on the margin. Changing doesn’t mean the market realizes it instantaneously like a Janet Jackson moment at the Super Bowl. The difference between what’s changing on the margin and when markets are forced to react to it is time.

 

Get time and price right, and you’ll get mostly everything in the market right. Looking at last week’s Global Macro Performance Divergences, here’s where you didn’t want to be long:

  1. Small Cap US Stocks (Russell 2000) = down -3.0%
  2. India’s stock market (BSE Sensex) = down -1.6%
  3. The Euro (vs the USD) = down -1.9%
  4. CRB Commodities Index = down -1.5%
  5. West Texas Intermediate Crude Oil = down -2.8%
  6. Gold = down -3.7%

Now if you were long the Venezuelan stock market (+8.6% on currency devaluation) or the US Dollar Index (+1.3% after Mitt Romney solidified the Republican base in Michigan and Arizona), you were just fine last week.

 

Or were you?

 

The Trick about markets is that the tricks are always changing. Causality and correlation are very often two very different things, but Correlation Risks can sneak up on you like a Chinese Growth Slowdown in the night.

 

China Slowing?

 

Apparently both the data that we have been discussing since we sold our long China (CAF) position on February 16thand the guys running the joint agree – China’s long-term GDP growth rate looks like it’s going to be a lot lower than the +9-12% it’s been tracking since 2009. China’s Premier Wen guided to a 7.5% number for 2012. Global markets didn’t like that.

 

In addition to the guide down of Chinese Growth Expectations, here was the Asian economic data that mattered most on the margin overnight:

  1. Chinese Services PMI dropped to 48.4 in FEB vs 51 in JAN
  2. Chinese Vehicle Sales are tracking down -3% year-over-year for 2012 YTD (worst start to a year since 2005)
  3. Australian Services PMI got smoked to 46.7 in FEB vs 51.9 in JAN

I know. That data can be tricky when you convince yourself that the bad January data in Asia was all about the Lunar calendar – until the February data rolls in even worse!

 

To be fair, some of the data for Asia in February has been as good as you should expect it to be with the calendar shift. But the problem from here isn’t January’s calendar or what your run-of the mill Keynesian economist is going to tell you about rising oil prices not impacting real (inflation-adjusted) growth. For markets, it’s all about time, price, and expectations.

 

The Trick is to keep moving out there – across countries, currencies, commodities, etc. – and keep risk managing your gross and net positioning to account for multiple durations across multiple factors.

 

I’m not saying I see everything early. I’m saying quite the opposite really – I really have no idea what I am going to say about a market’s risk parameters until I write everything down in my notebook in the morning.

 

My immediate-term support and resistance ranges for the Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $120.57-123.64, $79.03-79.51, and 1.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Trick - Chart of the Day

 

The Trick - Virtual Portfolio


MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS

Key Takeaways

*Interbank risk throws off mixed signals. Last week the Euribor-OIS spread tightened by 4 bps to 61 bps while the TED spread rose 1.6 bps over the same period to 41 bps. What's interesting here is the emerging divergence between the two series. Euribor-OIS continues to improve at a consistent rate, as it has done since the start of the year. The TED spread, however, has flattened out since mid-February and is essentially just moving sideways now. Last week's round two of LTRO was the short-term catalyst the markets had their sights set on (see our Macro Team's note on the matter entitled: "Yea"). While interbank risk was among the most significant factors at the start of the year, the amount of renormalization that has occurred in Euribor-OIS (we estimate ~60% complete) leaves far less room for improvement today than there was back just two months ago.

 

* High yield rates sank to another new YTD low on Friday. This is both an indication of the risk appetite as well as a reflection of the Fed's policy to pay zero for the foreseeable future.

 

* Both European and American Bank CDS tightened week over week, again likely reflecting the round two of LTRO.

 

 * Balanced Short-term Outlook - Our macro team's quantitative model indicates that on a short term duration (TRADE), there is equal upside and downside in the XLF (0.6% downside vs. 0.6% upside).

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

 • Long-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Summary

 

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

Tightened the most WoW: WFC, GS, C

Widened the most/tightened the least WoW: MBI, MTG, SLM

Tightened the most MoM: RDN, MTG, AGO

Widened the most MoM: MS, MBI, GS

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 38 of the 40 reference entities. The average tightening was 8.2% and the median tightening was 8.8%.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - CDS  Euro

 

3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened by 5.8% (-23 bps to 373 ) and Portuguese sovereign swaps widened by 8.8% (99 bps to 1225).

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 23.0 bps last week, ending the week at 6.88 versus 7.11 the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6 points last week, ending at 1642.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - LLI

 

6. TED Spread Monitor – The TED spread rose 1.6 points last week, ending the week at 41.2 this week versus last week’s print of 39.7.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 1.4 points, ending the week at -5.47 versus -6.8 the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - JOC index

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 61 bps.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - ECB liquidity facility

 

10. 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 widened 4 bps, ending the week at 129 bps versus 125 bps the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - MCDX

 

11. 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 53 points, ending the week at 771 versus 718 the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Baltic

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 170 bps, 3 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - XLF

 

Margin Debt - January

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 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 last 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 2011. 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 +0.55 standard deviations in November, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in December and January's print of +0.53 and +0.70 standard deviations.  Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through January.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK THROWS OFF MIXED SIGNALS - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser 

 

 


CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION

The Implications of a Rollover in Claims for the Card Stocks

The credit card stocks are among the most-correlated names to inflections in jobless claims. We anticipate the claims have troughed and will start gradually backing up towards 380k over the next three to five months, which will create a headwind for COF, AXP, and DFS.  

 

In the charts below we show the long-term weekly relationship between the credit card stocks and rolling initial jobless claims. Note that all three of these charts are over a long time period: from 2000 to present for COF and AXP and since the IPO for DFS.

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - AXP

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - COF

 

CREDIT CARD CORRELATION TO CLAIMS WARRANTS CAUTION - DFS

 

Why We Expect Claims to Rise

In our note last week, we walked through a quantification of the distortion in seasonal adjustment factors arising from the Lehman shock in 2008.  Because the Labor Department uses a five-year lookback to create its seaosnal adjustment, the 2008 shock is still percolating through the data. See our note from last Thursday for more detail. 

 

The seasonal distortion plays out as follows.  Claims are understated by the largest amount in the last weeks of February.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 

 

Long-Term Ceiling

There's another set of implications for this analysis: the long-term call.  Looking at the charts of AXP and COF in particular (since DFS hasn't been public through a full decade), it's striking that the stocks seem to retrace their steps almost exactly from one cycle to the next. This is the natural consequence of failing to accrete TBV over the cycle. American Express in particular is eager to spend cash on buying back stock at multiples to tangible, a process that is guaranteed to reduce TBVPS in exchange for growing EPS.  

 

Keep in mind that claims don't go much lower than 300,000, and right now we're already at 350,000.  That's not a lot of room to play for.  For the stocks to go meaningfully higher, they need loan growth, multiple expansion, or a very extended stay with claims at 300k.

 

Bottom Line

This reversal in jobless claims should put a lid on upside in these card stocks from now through the end of the summer. Therefore, on the long side you're playing for arguably very little. However, that opens up the possibility of serious downside in the event that gas prices, Iran or any of a number of the other risk factors we're monitoring come to pass. We see the setup for these stocks over the next five months as asymmetrically negative.  

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.  

 


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