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No Advantage

This note was originally published at 8am on June 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is the greatest of all advantages to enjoy no advantage at all.”

-Henry David Thoreau


Thoreau had a lot more time to think and write than many of us.  He actually went completely off the grid and lived in a little self built hut on Walden Pond for two years to focus his thoughts.  Unfortunately, going into the woods for a couple of years is not really practical for those of us who manage global macro risk daily, but as a result of Thoreau’s sojourn we have some very insightful writings from him.


A couple of days ago we made the somewhat controversial call to go to 100% cash.  In fact, Keith actually titled the Early Look just that, “100% Cash”.   To the Thoreau quote above, being in cash is not really a relative advantage as cash inherently generates no return. We get that.  In economic and market environments like the one we are in, though, sometimes the best advantage is, in fact, to have no advantage at all.


Now, obviously, most investors by mandate can’t go to all cash.  The point was that regardless of your mandate, our view was that it was time to get out of the way and take the chips off the table.


Simply, and much like what Baupost’s Seth Klarman articulated in his recently quarterly letter, we are happy to be on the sidelines when investing becomes based on speculating what the next round of government intervention will be.  Will QE3 be introduced? Will Operation Twist be extended? Will Operation Twist end?  It’s all speculation, it’s all a loser’s game and none of us have an advantage.


The original Money Honey Maria Bartiromo was kind enough to have me on for the Closing Bell to discuss our call two days ago.  As I highlighted in the interview, this is an environment that requires tactical investing.  The gentleman I appeared with, after trying to give me a hard time about us going to cash, also eventually agreed (five minutes after he disagreed) that this environment requires tactical investing versus a long term buy and hope strategy.


As many of our long term subscribers know, we have two key products that provide a clear indication of where we stand in terms of asset classes and specific stock and macro investments, these are: the Virtual Portfolio and the Hedgeye Asset Allocation model.  Over the last couple of days as prices have corrected, we’ve adjusted our stance slightly and have added the following positions:


1)      Bought a yield curve flattener via the etf FLAT – The thesis here is pretty simple.  The Federal Reserve is extending “Operation Twist”, which inherently drives down the long end of the curve.  In general we do not mind fighting the Fed, but in this instance we recommend investing with the Fed as its just math that the yield curve should revert to the mean with the Fed’s aggressive buying.  This reversion to the mean potential is highlighted below in the Chart of the Day. 


2)      Bought Target Corporation (TGT) – With oil down dramatically over the past three months, this benefits retailers such as Wal-Mart and Target, who will gain share of wallet from consumers via their reduced spend on energy.  Also with the ongoing disaster at J.C. Penney (we are hosting a lunch in New York today to discuss this short idea so email sales@hedgeye.com if you’d like to attend), TGT should and will take share.


3)      Bought Under Armour (UA) - Growth is hard to come by in this environment and our retail team thinks that UA will print $3 billion in revenue by 2014.  This would be a doubling of revenue from 2011.  Meanwhile, in the short term UA will be comparing against a high inventory build a year ago in the upcoming quarter, so margins should look relatively good.


In global macro news this morning, the key event over night was the much anticipated downgrade of 15 global banks.  Our Financials Sector Head Josh Steiner wrote the following on this last night:


“While there's a small aftermarket "buy the news" rally taking place, we'd caution against getting too excited. First, consider what ratings downgrades mean. At their heart, they're saying that default probabilities of 15 of the largest banks around the world are higher now. In other words, the world has become a riskier place. While this is something the market's known for a while and the ratings agencies, as usual, are just catching up, recall one of the themes from our calls with Peter Atwater regarding Hardwired Ratings Linkages Lead to Hardwired Financial Contagion. At its core is the concept that sovereign and bank ratings are increasingly interwoven with growing mutual dependency/causality while Aaa rated entities are becoming fewer and less willing to do "whatever it takes". Considering how many of these firms' long term issuer ratings are still on negative outlook, and the growing uncertainty facing the sovereign debt of countries like Italy and Spain, we wouldn't uncork the champagne just yet.”


In the short term, as in today, to Josh’s point we may see a relief rally, but over the longer term the implications of ratings downgrade do remain ominous.


In Europe today, Hollande, Merkel, Rajoy and Monti are meeting in Rome ahead of the EU Summit next week. The proposal to allow the EFSF/ESM to buy peripheral sovereign debt will remain in focus with the key question being whether Merkel will continue to resist pressure. 


The EU Summit next week will be the focus of market action and speculation around government intervention next week.  A major investment bank is out this morning saying that it has heard from participants at the recently ended G-20 meetings in Mexico that there could be a “bazooka” of sorts in the works.


We have no advantage on the next round of government intervention, but we would refer you to Einstein’s definition of insanity:


“Insanity : doing the same thing over and over again and expecting different results.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1570-1591, $89.92-95.58, $82.08-82.82, $1.24-1.27, and 1318-1333, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


No Advantage - Chart


No Advantage - vp 6 22


Even with the excuses, June wasn't a great month



As you already know, June in Macau was a relatively soft one with GGR up “only” 12.8%.  Mass growth was solid again, up 31%.  VIP hold was fairly normal although well above last year.  We estimate that total direct play this month accounted for 6.9% of the market, compared with 5.6% in June 2011.  The total VIP market held at 3.01% vs. 2.79% in June 2011.  Accounting for direct play and theoretical hold of 2.85% in both months, June revenues would have increased 7% YoY.


A typhoon and the Euro Football Championship likely played a role in the slower growth, but the numbers were disappointing nonetheless.  As we’ve been discussing all year long, outside of normal seasonality, there hasn’t been any real VIP volume growth sequentially since June of last year.  In fact, Rolling Chip RC actually declined YoY for the first time since June of 2009.  Thus, it’s a bit shallow to just blame the lack of growth on a storm and soccer.  Our analysis from 5/22/11 “A VIP SLOWDOWN IN THE CARDS” was proved prescient.  In that piece, we cited the lag of RC to changes in the China Lending Rate and the China Reserve Requirement Ratio which were working against junket liquidity and credit.  The good news is that China is now in monetary expansion mode.


In terms of market share, LVS and Galaxy were the big winners.  I guess we can’t really call LVS a winner yet with all the capital they put into Sands Cotai Central which has yielded only a small sequential increase in market share since it opened.  However, we do expect continued improvement to 19% over the summer and ramping closer to 20% following the opening of the Sheraton and additional amenities in September.  Moreover, while the LVS properties held close to normal, the win percentage was well below last year’s.  Galaxy has really ramped its Mass business over the past 4 months while maintaining its RC share.  In June, the company also benetted from a big jump in hold percentage which was lower than normal in June of last year and much higher than normal this June.


Galaxy and LVS were the only companies to post meaningful YoY growth in GGR.  WYNN and SJM were negative and MGM was flat.  Not good.  Wynn actually held better than last year although it was normal hold.  Wynn’s Mass market share was its lowest ever.  MGM, on the other hand, held much better than normal and last year.  Rolling Chip volume was actually down YoY at the property.  MPEL finished up 5% YoY but quarterly GGR will still be down from Q2 of last year.  MPEL held normal but above last year on VIP.  



Y-o-Y Table Revenue Observations

Total table revenue growth rose 13% in June.  Mass revenue growth was 31%, compared with 39% growth in the last twelve months.  VIP revenues grew  7%, while Junket RC declined 2%, the 1st decline since June 2009.



Table revenues grew 33% YoY, 2nd best in performance after Galaxy, due to the addition of Sands Cotai Central.  Sands China held at 3.01%, vs 3.29% last June, adjusted for direct play. 

  • Sands table revenues declined 13% YoY, extending its losing streak to three months.  The good news is that the entire YoY decline came out of the lower yielding VIP segment.
    • Mass was flat
    • VIP tanked 19% YoY.  We estimate that Sands held at 3.52% in June compared to 3.11% in the same period last year.  We assume 11% direct play  (in-line with what we saw in 1Q12).
    • Junket RC was down 21%.  This was the 7th consecutive month of YoY declines in VIP RC at the property.
  • Venetian table revenues dropped 11% YoY
    • Mass increased 26% 
    • VIP tumbled 31% while junket VIP RC dropped 25%
    • Assuming 27% direct play, hold was 3.76% compared to 4.18% in June 2011, assuming 22% direct play (in-line with 2Q11)
  • Four Seasons continued to perform well, soaring 232% YoY due to an easy revenue and hold comp 
    • Mass revenues increased 69%, reversing two months of declines
    • Junket VIP RC increased 227% YoY and VIP revenues soared 337%
    • If we assume that monthly direct play volume of ~$650MM is in-line with 1Q12 absolute levels, that implies a direct play percentage of 28% and a hold rate of 1.79%.  In comparison, if June 2011 direct play was around 41% then hold was approximately 1.12%.
  • Sands Cotai Central produced $117MM in June, compared with May's $135MM
    • Mass revenue of $34MM, $2MM higher MoM
    • VIP revenue of $83MM, $19MM lower MoM
    • Junket RC volume of $2,354MM, a 8% decline MoM
    • If we assume that direct play was 15%, hold would have been 3.01%, compared with May's 3.39% and April's 2.29%.


Wynn table revenues fell 13% in June, again exhibiting the worst table performance of all 6 concessionaires.  Wynn’s hold was normal this June and last June.

  • Mass declined 1%, the 1st decline since Sept 2009 while VIP dropped 16%
  • Junket RC declined 17%
  • Assuming 10% of total VIP play was direct (in-line with 1Q12), we estimate that hold was 2.80% compared to 2.75% last year (assuming 8% direct play – in-line with 2Q11)


MPEL table revenue rose 4% due to strong performance at CoD. 

  • Altira revenues fell 25%, due to a 28% decrease in VIP.  Mass grew 13%. 
    • VIP RC decreased 24%, marking the 7th consecutive month of declines which have averaged -20%
    • We estimate that hold was 2.89%, compared to 3.05% in the prior year
  • CoD table revenue jumped 26%
    • VIP revenue and Mass revenue both gained over 20% 
    • RC increased 3%
    • Assuming a 16% direct play level, hold was 2.81% in June compared to 2.35% last year (assuming 13% direct play levels in-line with 2Q11)


Table revenue fell 2%, 2nd straight month of declines

  • Mass was up 18% offset by a 10% drop in VIP
  • Junket RC was down 15%
  • Hold was 2.67%, compared with 2.52% last June


Galaxy posted the best table revenue growth of 64%, with Mass soaring 82% and VIP growing 60%.

  • StarWorld table revenues grew 22% 
    • Mass grew 42%, while VIP grew 20%
    • Junket RC fell 4%, the 1st time since October 2008
    • Hold was normal at 3.48%, compared with last June's 2.79%
  • Galaxy Macau's table revenues grew 120%, roughly shared equally by Mass and VIP segment
    • RC volume almost doubled and hold was 3.59% 


Table revenues declined 1.4%

  • Mass revenue grew 29%
  • VIP revenue fell 8%, while VIP RC dropped 23%
  • If direct play was 7%, then June hold was 3.43% compared to 2.82% in June 2011


Sequential Market Share



LVS share in May was 18.6%, +1.7% MoM, the highest share since October 2010 as SCC ramps up.  This compares to a 6 month trailing market share of 17.5% and 2011 average share of 15.7%.

  • Sands' share was 4.0%.  For comparison purposes, 2011's share of 4.6% and 6M trailing average share was 4.1%
    • Mass share was 5.5%, an all-time low
    • VIP rev share was 3.4%
    • RC share was 2.8%, in-line with its 6M average
  • Venetian’s share increased 1.4% to 7.4%.  2011 share was 8.4% and 6 month trailing share was 7.8%.
    • VIP share increased 140bps to 5.2% and mass increased 90 bps to 13.2% 
    • Junket RC fell 120bps to another all-time low of  3.2% 
  • FS dropped 30bps to 2.7%.  This compares to 2011 share of 2.2% and 6M trailing average share of 4.2%.
    • VIP share declined to 3.0%.   
    • Mass share rose 30bps at 1.9%
    • Junket RC gained 30bps to 3.6% 
  • Sands Cotai Central achieved table market share of 4.2% in June, slightly lower than May's 4.3% share.
    • Mass share of 4.3%
    • VIP share of 4.1%
    • Junket RC share of 3.8%


Wynn’s share was 11.8%, far below its 6-month trailing average of 12.6% and 2011 average of 14.1%.  We expect Wynn’s share to continue to struggle in the face of a ramping Sands Cotai Central.

  • Mass market share was 8.6%, a new low 
  • VIP market share rose 90bps to 12.8%
  • Junket RC share remained steady at 13.3%


MPEL gained 60bps of share in June to 12.9% which is below their 6 month trailing share of 13.6% and 2011 share of 14.8%.

  • Altira share increased 0.7% points to 3.9%, which is in-line with its 6M trailing share but below the property’s 2011 share of 5.3% 
    • Mass share fell slightly to 1.3% 
    • VIP jumped 110bps to 5.0%
  • CoD’s share fell slightly to 8.8%; below its 2011 and 6M trailing share of 9.3% and 9.4%, respectively
    • Mass market share fell 40bps to 9.5%
    • VIP share was unchanged at 8.5%
    • Junket RC gained 40bps to 8.2%


SJM was the biggest share loser in June (reversed its course from May when it was the biggest share gainer), down 4.1% MoM to 25.2% share; lower than its 2011 average of 29.2% and above its 6M trailing average of 27.2% 

  • Mass market share rose slightly to 32.8%
  • VIP share fell 6.0% to 23.1%, its lowest level since August 2009
  • Junket RC share fell slightly to 27.9%


Galaxy’s share rose to 22% from 19.6%. Its 6M trailing share average was 19.1%. 

  • Galaxy Macau share increased 120bps to 12.6% - a new high
    • Mass share matched its all-time high of 9.6%
    • VIP share increased 180bps to 13.8%, marking an all-time property high
    • RC share increased 50bps to 12.4%, a new high
  • Starworld share gained 123bps to 8.7%
    • Mass share was roughly unchanged at 3.2%
    • VIP share soared 210% to 10.9%
    • RC share increased 30bps to 10.0%


MGM share fell 1.0% to 9.5%, below its 2011 share of 10.5% and 6M average of 10.1% 

  • Mass share fell 30bps to 7.7%
  • VIP share dropped 120bps to 9.7%
  • Junket RC dropped 150bps to 8.4%


Slot Revenue

Slot revenue totaled $124MM in June, falling 14% from an all-time high set in May

  • MGM grew the most at 49% YoY to $22MM
  • GALAXY had the second best growth at 26% YoY to $13MM
  • LVS grew 24% YoY to $33MM
  • MPEL grew 17% YoY to $22MM
  • WYNN fell 18% YoY to $19MM
  • SJM lost 20% YoY to $15MM







The Macau Metro Monitor, July 6, 2012




A public consulation on proposed amendments to Singapore's Casino Act will start on Monday and end August 6.  Among the proposed changes is the setting up of an Evaluation Panel - appointed by the Minister for Trade and Industry - to give its opinion to the Casino Regulatory Authority (CRA) on the performance of the IRs in terms of their attractiveness as tourist destinations, when processing casino licence renewal application.  There are no plans to change the casino entry levy for now, said the public consultation paper.



Hong Kong-listed Get Nice Holdings Ltd is selling its controlling stake in casino resort Grand Waldo in Cotai.  According to Business Daily, the company has already signed a letter of intent with an “international group engaged in the operation of a number of hotels, casinos and other entertainment facilities."  If the deal goes ahead, Get Nice will receive US$500 million (MOP4 billion) for its stake in Grand Waldo.  Get Nice indirectly owns 65% of the Grand Waldo.



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Guilo - A term for a Person of white ethnicity used by Cantonese speaking Asians.


I thought about this term when watching Steve Leisman on CNBC yesterday morning.  CNBC’s senior economics reporter (oxymoron, I know) was incredulous that Feng Shui could have anything to do with the PBOC’s number choice for the lending rate cut.  Yes Steve, the Chinese are a superstitious bunch and they do believe that numbers matter.


Now I’m not the China expert at Hedgeye.  That role belongs to Darius “da gezi” Dale.  However, I did just get back from a 3 week trip to China and some other Asian countries (of course, I went to Macau) so I feel like an expert. 


A few general observations from my trip are in order before I get to the sector analysis:

  • More than one Mainlander commented to me that there are a lot of people being paid to do worthless things like digging ditches, filling them in and then re-digging
  • A lot of construction – hope there is demand
  • Government development contracts are done on a big scale – instead of building one hotel, they want you to build 10 for instance – again, hope there is demand
  • Flying domestically sucks but the trains are great
  • Saw a lot of buildings outside the main cities but not a lot of people
  • The best jokes in China are the ones ridiculing the central government – quietly of course – maybe playing to the audience

And now on to the subject that’s near and dear to my heart and the main reason for my trip to Asia:  the leisure sector.  First, the hotels in Beijing and Shanghai are great – all new and all very well-staffed.  I couldn’t pick my nose without a Chinese finger there to help.  Loved the service.  I visited quite a few and they were all overstaffed.  Chalk one up for the Americans who manage but do not own any of these hotels.  Margins, shmargins.  Many of the hotels were also part of mixed use development, so it’s difficult for the owners to determine ROI on the hotel piece.  This might explain the extravagance of the hotels and the favorable management contracts for Starwood and Marriott. 


On to the gambling world and its capital – China.  As most of you know, China plays a major role in the world of gaming.  Las Vegas has become almost an afterthought.  Macau is the largest gaming market in the world with the vast majority of the business originating from mainland China.  In June, Macau gaming revenues grew 13% MoM on top of 7% growth YoY.  Investors would be cheering most markets with that kind of growth, but not here.  Macau gaming stocks traded in the US (LVS, MPEL, WYNN) are down 25-30% since their YTD highs in April.  The concern lies in the sharp VIP slowdown.  VIP comprises about 70% of gaming revenues in Macau and although margins are lower than in the Mass business, VIP volumes really haven’t grown sequentially since June of last year.  In fact, VIP YoY growth went negative in June 2012 for the first time in 3 years.


For the purpose of this Early Look, we will update the rather timely analysis we did on 5/22/11 in a note entitled “VIP SLOWDOWN IN THE CARDS”.  Yes, we’re pimping our research a little here (somebody’s gotta do it – this is a business after all), but there is also an interesting macro angle to the analysis that’s appropriate for this forum and once again timely.  At that time, we found that Macau VIP volumes were highly negatively correlated to changes in the China Reserve Requirement (peaked at a lag of 9 months at -0.85) and the China 1-Yr Lending Rate (peaked at a lag of 11 months at -0.75).


The timeliness comes in because China began loosening on June 7th followed by another rate cut yesterday.  If history is a guide, we’re still 3 quarters away from material improvement in VIP but at least there is a light at the end of the tunnel.  From a near-term perspective, the rate cut is probably indicative of a weaker economy than many thought.  If weak VIP volume growth continues to drag these stocks down, there will be a tremendous buying opportunity – a la 2009, the last time VIP cracked.  As long as growth in the Mass segment continues its strength – up 30% in June – further estimate reductions, while likely, shouldn’t be devastating. 


While it may not be time to back up the truck just yet or even start it, the keys should be in the ignition because these stocks are cheap and help is on the way.  Stay thirsty my friends.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $97.21-102.74, $82.30-83.21, $1.22-1.25, 6, and 1, respectively.


Todd Jordan

Guilo and Managing Director – Gaming/Lodging/Leisure







HedgeyeRetail Visual: Mid-Tier Share Shift

With nearly $270mm in mid-tier share up for grabs in June, the off-price channel is the big share gainer.


If we assume that the underlying 2yr revenue trend of ~-8% from JCP’s first quarter remained consistent in June, this would imply revenues down ~14% for the month creating a loss of ~$230mm. Adding on the $40mm in sales that KSS ceded in June at a time when it should be benefiting from JCP's strategic mishaps, we estimate a total of $270mm in mid tier share was up for grabs.


With M’s revenue growth slowing from +$80mm to +$20mm in June, we think the off price retailers have been the biggest beneficiaries of JCP's & KSS’ lackluster execution. Assuming half of ROST & TJX’s domestic dollar growth was in categories overlapping with JCP/KSS, the two combined account for ~40% of the share ceded in June. As we've been saying, Ron Johnson better be aware that the off price competition is indeed snagging a large portion of the sales he’s losing. It won’t be easy to recapture these customers from the off-price channel even if the new strategy gains traction in 2H.


HedgeyeRetail Visual: Mid-Tier Share Shift - JCP share loss 


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