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REBAR: Big Trouble In Little China

Since as far back as 2009, everyone from politicians to fund managers have been shouting from proverbial rooftops that growth is slowing in China. It’s no secret that we think growth is slowing across the globe as well – growth implies a sustainable economic model. And with the Chinese rate cut this week, it’s just yet another data point that backs up our case.


Chinese construction is what everyone keeps their eye on. When construction slows, commodities like copper and rebar will see their price drop significantly, regardless of what Federal Reserve Chairman Ben Bernanke has up his sleeve. It has to do with supply and demand, no matter how outrageous that might sound these days.



REBAR: Big Trouble In Little China - CHINA RebarPrices



The above chart tells us a bit about what’s going on China. Essentially, this is the story:


• Real rebar prices continue to decline, suggesting weak Chinese construction activity

• This is negative for construction equipment producers, many of which have become increasing dependent on sales to China (e.g. Komatsu)

• Chinese metal demand has been heavily driven by construction activity.  Weakening could reduce global mine capital investment, impacting equipment suppliers like CAT and Sandvik.


TODAY’S S&P 500 SET-UP – July 6, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.63% downside to 1359 and 0.62% upside to 1376.








THE HEDGEYE DAILY OUTLOOK - global performance




    • Versus prior  trading day +1773
  • VOLUME: on 7/5 NYSE 684.1
    • Versus prior trading day 466.46
  • VIX:  on 7/5 closed at 17.50
    • Change versus most recent trading day of +5%
    • Year-to-date change of -25.21%
  • SPX PUT/CALL RATIO: as of 7/5 closed at 1.50
    • Versus prior trading day 1.40                     



  • TED SPREAD: as of this morning: 38.35
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year yield: as of this morning 1.58%
    • Versus prior trading day 1.60%
  • YIELD CURVE: as of this morning 1.30
    • Versus prior trading day 1.31



  • 8:30am: Change in Nonfarm Payrolls, June, est. 100k (prior 69k)
  • 8:30am: Chg in Private Payrolls, June, est. 106k (prev 82k)
  • 8:30am: Unemployment Rate, June, est. 8.2% (prior 8.2%)
  • 8:30am: Avg Hrly Earn M/m All Emp, June, est. 0.2% (prior 0.1%)
  • 8:30am: Avg Weekly Hours All Emps, June, est. 34.4 (prior 34.4)
  • 8:30am: Underemployment Rate (U6), June (prior 14.8%)
  • 10:30am: EIA storage data
  • 11am: Fed to sell $7b-$8b notes in 1/15/2013 to 6/30/2013 range
  • 1pm: Baker Hughes rig count



  • President Obama signs transportation, student loan bill
  • House, Senate not in session
  • CFTC holds closed meeting on enforcement matters, 10am



  • Lagarde: IMF to Cut Growth Outlook as global economy weakens
  • June U.S. jobs gain probably capped worst quarter since 2010
  • Amazon said to plan smartphone to vie with Apple’s iPhone
  • Seagate says 4Q prelim. sales, gross margin missed forecasts
  • Samsung shrs decline after quarterly sales miss ests.
  • Yahoo said to consider Hulu’s Kilar for CEO
  • U.K. producer prices fall most since 2008 as oil costs drop
  • Italian cabinet approves $32b in spending cuts through 2014
  • Buffett, Zuckerberg, Gates to attend Sun Valley conference
  • China GDP, JPMorgan, Air Show, Wimbledon: Wk Ahead July 7-14



  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Copper Declines for a Second Day Before U.S. Employment Report
  • Oil Drops Before Payrolls on Concern Economy Failing to Recover
  • Corn Declines as Rally to Nine-Month High Seen Curbing Purchases
  • Gold Declines for a Second Day as Dollar Strength Curbs Demand
  • Sugar Heads for Second Weekly Gain in New York on Brazil Rains
  • Soybean Meal Has Biggest Commodity Advance on Demand From China
  • Indonesia’s Tin Exports to Decline as Low Prices Curb Output
  • Copper-Scrap Discount May Widen as Prices Encourage More Supply
  • BP’s LNG Expansion in Tangguh to Target Japanese, Korean Buyers
  • Japan Atomic Disaster Called ‘Man-Made’ by Investigators: Energy
  • Coffee Crop in India Seen at Record Poised to Boost Exports
  • Gold ETP Assets Advance $2.2 Billion in June, BlackRock Says
  • Copper May Advance 6.7% Near Moving Average: Technical Analysis
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Oil May Rise on Signs of Recovery, Inventories, Survey Shows











THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance




  • Corporate Sukuk Yield Premium Falls on Earnings: Islamic Finance
  • Oil Extends Decline After U.S. Payrolls Count Misses Estimates
  • Axius CEO Kaufmann Indicted in Alleged Scheme to Bribe Brokers
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Amazon Said to Plan Smartphone That Would Vie With Apple IPhone
  • Draghi’s Move to Zero Rates Fuels Talk of QE Entering ECB Armory
  • Turkey Agrees With Iraq on Oil Pipeline From Basra, Yildiz Says
  • Made-in-London Scandals Risk City’s Reputation as Finance Center
  • Carry Trade Means 10% Lira Bond Returns Persist: Turkey Credit
  • Middle West Oil Menaces Middle East Dominance: Cutting Research




The Hedgeye Macro Team

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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