Slowing growth is real but other factors may be exaggerating the issue.



We’ve seen this Macau movie before.  The sentiment pendulum swings too far, this time to the negative.  However, there are some additional, more transitory factors to explain May’s disappointing revenues thus far.  Don’t get me wrong:  we’ve been on the growth slowing theme for a while and have been mostly negative on LVS, WYNN, and MGM over the past few months.  So it’s not like we’re trying to justify Buy ratings.


Here are some thoughts on May:

  • Low hold:  We think low hold may have impacted YoY growth by around 5%.  Our unadjusted growth projection was 8-12%.
  • Shorter Golden Week:  Not only was Golden Week only 7 days (last year it was 10) but it started in April.  So May 2012 didn’t get as big a pop from the GW celebration.
  • Calendar:  May 2012 was down 1 Sunday from May 2011.

Our conclusion is that May was actually not that bad.  In fact, we think June could rebound to growth of 17-22%.  Given how low sentiment and the stocks have gone in the past month, a rebound like this would be a big catalyst.


We like LVS and WYNN here for a trade.  LVS’s market share will grow off the current 17.5%, evidence of which could come as soon as Monday when we get the weekly numbers.  Wynn Macau may have been hurt the most by low hold in May and we believe their market share was probably in the 12-13% range assuming normalized hold versus the 11.1% generated MTD. 

Optimistic Bias

This note was originally published at 8am on May 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The optimistic bias may well be the most significant of the cognitive biases.”

-Daniel Kahneman


If I had to pick three books that have been the most influential in my learning process in the last few years, they would be: 1. This Time Is Different (Reinhart & Rogoff) 2. The Road To Serfdom (Hayek), and 3. Thinking, Fast and Slow (Kahneman).


The only way out of getting caught off-sides by the groupthink of our profession is to get into books. I think it’s critical to remove your mind from the daily dose of hope and get real with what’s not only happened across generations of economic history, but what’s developing in terms of what we’re learning about ourselves.


I call this being Duration Agnostic in my risk management approach. Long-term mean reversions in big Global Macro data and immediate-term behavioral factors in our heads matter, all at the same time. Embrace Uncertainty.


Back to the Global Macro Grind


If you loved the US stock market 7 trading days ago, you’re going to get married to it this morning. Or are you? Do you have to keep buying on the way down? When the facts change, do you? I don’t marry markets.


I can’t imagine anyone telling me with a straight face that they thought that JPM reporting a $2B loss on the eve of Durbin taking the Volcker Rule implementation to the Senate floor was either expected or reason to be optimistic. With both JPM and the Financials (XLF) having already broken my intermediate-term TREND lines of $41.14 and $14.99 support, respectively, timing here matters.


I’m not dog-piling bad news. In fact, from a leadership perspective, Dimon showed his stripes as being the real deal in terms of transparency and accountability last night. That doesn’t make this a ‘buy the Financials’ day though (see Chart of The Day).


On the margin, the fundamental news for the US Financials has been worsening for at least 2 months. As one of our top performing Risk Manager clients asked last night – “So, what do you think is already priced in?”


The short answer is I don’t know. We let the market tell us what to do next.


The more well rounded research and risk managed answer is something that our Managing Director of everything Financials, Josh Steiner, and I will host a conference call on at 830AM EST (email if you’d like to join).


What else do we know?

  1. The concept of the US “de-coupling” is as loose as Keynesian economic forecasting
  2. Globally Interconnected risk, across currencies, countries, and commodities, continues to flag bearish
  3. Whatever your bottom-up view is on the Financials, it has to be considered within the context of the top-down

We do Top-Down in 2-ways:

  1. Global Macro Top Down
  2. Industry Top Down

On the Global Macro front, here’s what I see across currencies, countries, and commodities right now:

  1. US Dollar Index up for the 8thconsecutive day to $80.20; EUR/USD moves back into a Bearish Formation
  2. US Dollar Index immediate-term correlations: SP500 = -0.91, EuroStoxx600 = -0.95, CRB Commodities Index = -0.95
  3. US Dollar Index  immediate-term correlation to the US Financials Sector ETF (XLF) = -0.92

In other words, the Correlation Risk is moving towards -1.0, again – and if you don’t remember how this movie tends to climax, you are definitely hostage to a serious Optimistic Bias. This is not a time to be recklessly long on a gross or net basis.


The Correlation Risk to the world’s reserve currency doesn’t always matter. But when you are in the soup like this, it’s basically all that matters. That’s the lesson of the 2008, 2010, 2011 Q1 peaks to the ultimate draw-down lows established sometime in Q3.


Valuation is not a catalyst right now. Events are. From a Top Down Industry perspective for the Financials, here’s what’s next:

  1. Morgan Stanley’s pending multiple notch ratings downgrade (May)
  2. Volcker Rule implementation (July)
  3. Europe (ongoing)

Notwithstanding that the US Money-Center banks are going to have to also report earnings in July – and that one of the main drivers of those cash earnings, Net Interest Margin (NIM), has seen the Yield Spread (10yr minus 2yr yield) compress by 21% since it topped in mid-March, there’s a lot to think about here.


If every single major Global Equity market hadn’t already put in a lower long-term high in late-Feb to early April, I would answer my client’s question with a maybe (in whether or not I think this is all priced in). But they have. So my answer is not maybe. You don’t pay me to be optimistic – you pay me to be realistic about real-time risk.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Financials (XLF), JP Morgan (JPM), and the SP500 are now $1577-1637, $109.71-113.87, $79.42-80.39, $13.87-14.99, $36.83-41.14, and 1341-1367, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Optimistic Bias - Chart of the Day


Optimistic Bias - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 25, 2012

As we look at today’s set up for the S&P 500, the range is 48 points or -2.02% downside to 1294 and 1.61% upside to 1342. 












    • Down from the prior day’s trading of 643
  • VOLUME: on 5/24 NYSE 796.46
    • Decrease versus prior day’s trading of -7.71%
  • VIX:  as of 5/24 was at 21.54
    • Decrease versus most recent day’s trading of -3.54%
    • Year-to-date decrease of -7.95%
  • SPX PUT/CALL RATIO: as of 05/24 closed at 1.24
    • Down from the day prior at 1.83 


CLIFF – first time we have written about the fiscal cliff in a while - that’s because it’s the 1st time we have had a quantitative signal to do so – short rates (2yr UST yields) are starting to hint at a breakout (0.28% = TRADE support). If we keep up w/ these ridiculous rumors and the denominator (GDP) keeps slowing, that US deficit/GDP ratio comes back on the table, faster. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.77
    • Decrease from prior day’s trading at 1.78
  • YIELD CURVE: as of this morning 1.47
    • Down from prior day’s trading at 1.48 

MACRO DATA POINTS (Bloomberg Estimates):

  • Univ. of Michigan releases confidence index for May, Est. 77.8 (prior 77.8), 9:55am
  • USDA issues monthly food inflation data, 10am
  • Baker Hughes rig count, 1pm 


    • Comment period ends on proposed Federal Reserve rule for determining whether a company is “predominantly engaged in financial activities”
    • House, Senate meet in pro forma sessions
    • CFTC holds closed meeting on enforcement matters, 10am     


  • Morgan Stanley said to tell brokers it will fix Facebook orders
  • Merkel considers debt-sharing plan as Monti says she’s isolated
  • SEC staff said to end Lehman probe without finding fraud
  • JPMorgan gave risk oversight to museum head who sat on AIG board
  • Delphi open to more acquisitions after buying supplier for almost $1b
  • Dell said to weigh buying Quest to add computer-management tools
  • Lehman said to reach deal with banks to buy rest of Archstone
  • NBCUniversal is in talks to buy Microsoft’s stake in
  • Fox, NBC, CBS sue Dish over ad skipping video-on-demand service
  • Gupta prosecutors try to show links with wiretaps, phone records
  • French 10-yr bond yield declines to record low of 2.422%
  • Money funds open to deal w/ SEC, WSJ says
  • U.S. markets closed on Monday for Memorial Day holiday
  • U.S. Jobs, Chinese Output, Cannes: Week Ahead May 26-June 2 


    • Mentor Graphics (MENT) 8am, $0.25 


  • Copper Traders Extend Bearish Streak as Prices Drop: Commodities
  • Oil Rises on Euro-Bond Speculation to Trim Fourth Weekly Drop
  • Copper Advances as European Leaders May Contain Debt Crisis
  • Gold Climbs in London as Buyers Take Advantage of Price Drop
  • Corn Climbs in Chicago as Dry Weather Threatens Crops in Midwest
  • Robusta Coffee Gains to Eight-Month High on Rising Global Demand
  • China’s Cotton Planting Drops 10% as Labor Costs Increase
  • Nigeria Losing Top Oil Buyer U.S., Turns to Asia: Energy Markets
  • Palm Oil Climbs as 10% Fall in Prices This Month Lures Investors
  • Trade Deal Spurs Flow of Arbitrage North Sea Oil to South Korea
  • Copper Set to Extend Losses to $7,100 a Ton: Technical Analysis
  • Balrampur Says Mills Losing Money on Controls: Corporate India
  • China Zinc Smelters Likely to Further Cut Output, Wang Says
  • Copper Extends Bearish Streak on Price Drop
  • Soybean Imports by Japan Seen Dropping to 43-Year Low on Yen
  • Rubber Gains First in Three Days on Thailand Purchase Plans
  • Indonesia’s Nickel-Ore Exports Seen Dropping 20% in Second Half           










RUMORS – back to the same playbook that has already killed European equity markets and, to a large degree, killed US inflows into Equities too – people don’t trust this casino, and they probably shouldn’t. Monti says that there is a consensus amongst countries that can’t fund on Eurobonds – I bet. But Germany doesn’t need a consensus.






CHINA – 3rd consecutive day of selling in the Chinese stock market after snapping our critical TREND line of 2373 support; markets don’t think growth is slowing at a slower rate there yet – it’s consensus (and has been), but that doesn’t mean consensus can’t be right for another few months. Our models have China’s growth slowing at a slower rate in Q3/Q4, not in Q2.










The Hedgeye Macro Team

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Rumor This

“China, despite the slump of 2012-2013, has recovered its growth momentum and is economically dominant.”

-Arvind Subramanian


That’s my rumor this morning. Got one? How many more do we need from conflicted and compromised central planners of Keynesian states to keep this no-volume stock market ball in the air? This is really getting sad to watch.


Markets don’t lie; politicians do. The aforementioned quote isn’t a lie; it’s a potential long-term risk management scenario. Looking at our core Growth & Inflation macro model for China in 2013, it’s actually a very credible one.


The forecast comes from the introduction of a book I just started reading called “EclipseLiving In The Shadow of China’s Economic Dominance.” Since it was published by the Peterson Institute, at least some of the people sleeping in Washington right now have seen it. They don’t even have to read it. The cover is red and shows Obama bowing to Premier Wen.


Back to the Global Macro Grind


If I’ve written this 100x in the last 5 years, I’ve said it 1000x – if you lose the trust of The People, you will lose the mother’s milk of markets – inflows. The more markets depend on baseless rumors for intraday moves, the less inflows you are going to have.


Actually, never mind inflows – at this point what you should be really worried about as an asset manager are outflows. Some people are stupid with their money. Most people aren’t – at least not after you burn them 3, 4, or 5 times with the same thing.


Q: What is that thing? A: Growth.


If you don’t have growth, a government certainly can’t manufacture it. Remember Obama’s economic “advisors” (Christina Romer and Jared Bernstein) promising a government spending multiplier on $800B of 1.5x? Lol. Thank God they’re both gone.


What you need to do is what the #FairShare crowd can’t handle - let it slow. Then growth slows to a point from which it can recover. When Growth Slows at a slower rate, we start to think about getting long; really long (like we did in 2009).


When it comes to Chinese growth, genius observers of the last 2 years of reported news will tell you that it’s slower than where it was in 2009-2010. Newsflash: that’s why the Chinese stock market was down double digits for each of the last 2 years. Markets discount future expectations.


Today, we’re trying to measure the slope of Chinese growth (we model the same for 86 countries in our model) and when it’s most likely to slow at a slower rate. When running our predictive tracking algorithms, we consider Growth & Inflation on all 3 of our risk management durations:

  1. TRADE (3 weeks or less) = we see Chinese growth slowing at an ACCELERATING rate
  2. TREND (3 months or more) = we see Chinese growth slowing at a SLOWER rate
  3. TAIL (3 years or less) = we see Chinese growth re-ACCELERATING at some point in 2013-2014

We use real-time market signals and high-frequency economic data to make risk managed research statements. We don’t take a survey or tell you how Chinese growth “feels.” The only feel I can give you about Global Growth Expectations right now is that they still feel heavy. And they will until Hatzius and Hyman cut their growth estimates to where the growth data currently resides.


Q: What’s the only way out of this thing? A: Strong Dollar.


That’s the only thing that will Deflate The Inflation of commodity prices. That’s the only thing that matters, on the margin, to the 71% of US Consumption growth that drives US GDP. That’s also the biggest thing that will allow China to cut rates, aggressively.


So instead of begging for bailouts and whatever other rumor some Keynesian can concoct in the next 4 hours of trading, let’s keep pressuring the political elite to get out of the way. Out with the academic dogma, we want our Dollar back.


With the US Dollar Index up for 4 consecutive weeks, it’s working.

  1. American Purchasing Power (USD) is up +4%
  2. Oil prices are down -15%
  3. US Consumer Discretionary stocks (XLY) are now the best performing Sector in the S&P 500 (+11.1% YTD)

Get the Dollar right, and you’ll get America right. If we don’t, by 2013 we’ll be stranded on an island of hopeless growth like Japan and Europe are, begging for the Chinese to bail us out.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $104.48-108.43, $81.53-82.61, $1.25-1.27, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rumor This - Chart


Rumor This - vvvvvp


The Macau Metro Monitor, May 25, 2012




According to Business Daily, Hoffman Ma Ho Man, deputy chairman of Success Universe Group, which owns a 49% stake in Ponte 16, a JV with SJM, said he has a commercial interest in talking up Hainan’s gaming prospects as he would like to bid to operate a casino there if the opportunity arises.


According to Ma, Hainan has approval in principle from the central government for a casino.  “A condition of getting the casino licence is that the central government will not support Hainan [financially]. It gives RMB30 billion [MOP37.85 billion] to RMB40 billion to Hainan per year. So Hainan would need to survive by getting the tax from the gaming," said Ma.



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