The Macau Metro Monitor, July 17, 2012




Non-performing loans surged in the city of Wenzhou, Zhejiang province in June 2012 to 2.69% of overall loans, up from 1.33% at the beginning of 2012.  Wenzhou was named a pilot zone in March to test a series of financial reforms aimed at ending reliance on shadow banking.  Bad loans has reached 18.1 billion yuan (US$2.8 billion).  In June 2011, the bad loan ratio was 0.37%, one of the nation's lowest.  Since then, the rate has been increasing as growth slows in the city.



According to internal documents obtained by reporters working for the University of California's Investigative Reporting Programme, as part of an ongoin collaboration with ProPublica and PBS, there was a September 2009 email from Leonel Alves to Steve Jacobs, where the lawyer (Alves) says the unnamed high-ranking person claimed he could help Sands China to gain government authorisation to sell units at its Four Seasons luxury apartment hotel.  The deal was also to include a settlement for the on-going litigation process between Sands and Taiwanese Asian American Entertainment Corporation Ltd, led by businessman Marshall Hao.  Another email dated December 2009, shows that in return, the unnamed person requested US$300 million (MOP2.4 billion).


The alleged emails also show that Sheldon Adelson instructed Jacobs to pay about US$700,000 in legal fees to Alves, a move opposed by the company’s general counsel and an outside law firm, who warned that the arrangement could potentially violate the Foreign Corrupt Practices Act, as Alves was (and still is) a Macau legislator, and a member of the Executive Council, an advisory body to the Macau government.  He is also a member of the Chinese People’s Political Consultative Conference.

In an interview with the Portuguese channel of Radio Macau aired over the weekend, Mr Alves said the person who approached him in Beijing was not a high-ranking Beijing official, but a high-profile Macau developer.  Alves confirmed the US$300 million request, and added that Mr Jacobs ordered him to continue negotiating regarding the Four Seasons deal only.  He said during the interview that Jacobs was willing to pay up to US$500,000 to the Macau developer for “consultancy services” regarding the Four Seasons serviced apartments.  According to Alves, such “consultancy services” would have meant assisting to publicly clarify the concept surrounding integrated resorts and apartment hotels.  However, the middleman refused the offer and the negotiations ended there, according to Alves, who claims all negotiations were legal.



The Venetian Macao was hit last night by a bomb scare.  The presence of a suspected bomb at the hotel-casino’s premises led the police to evacuate and seal off part of the property’s west lobby and car park, although the casino remained operational.  The suspicious box contained two small megaphones.


TODAY’S S&P 500 SET-UP – July 17, 2012

As we look at today’s set up for the S&P 500, the range is 26 points or -1.08% downside to 1339 and 0.84% upside to 1365. 











  • ADVANCE/DECLINE LINE: on 07/16 NYSE -306
    • Down versus the prior day’s trading of 2044
  • VOLUME: on 07/16 NYSE 602.07
    • Decrease versus prior day’s trading of -11.85%
  • VIX:  as of 07/16 was at 17.11
    • Increase versus most recent day’s trading of 2.21%
    • Year-to-date decrease of -26.88%
  • SPX PUT/CALL RATIO: as of 07/16 closed at 1.47
    • Down from the day prior at 1.62 


BERNANKE – what started slowing growth, globally, in late Feb early March was Bernanke’s pushing of the goal posts on 0% money to 2014; oil ripped and consumption growth slowed – so, now the Qe people want more of that? Brent Oil busting back towards $104 this morning is only going to compound the #GrowthSlowing problem in July. 

  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Increase from prior day’s trading at 1.47%
  • YIELD CURVE: as of this morning 1.25
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 8:30am: Consumer Price Index M/m, June, est. 0.0% (prior -0.3%)
  • 8:30am: CPI Ex Food & Energy M/m, June, est. 0.2% (prior 0.2%)
  • 9am: Total Net TIC Flows, May (prior -$20.5b)
  • 9am: Net Long-term TIC Flows, May, est. $41.3b (prior $25.6b)
  • 9:15am: Industrial Production, June, 0.3% (prior -0.1%)
  • 9:15am: Capacity Utilization, June, 79.2% (prior 79.0%)
  • 10am: NAHB Housing Market Index, July, est. 30 (prior 29)
  • 10am: Bernanke delivers monetary policy report to Senate
  • 11am: Fed to sell $7b to $8b notes maturing Feb. 15, 2014- Aug. 31, 2014
  • 11:30am: U.S. to sell $ 4-week bills
  • 1:15pm: Pianalto speaks on economy in Erie, Pennsylvania
  • 4:30pm: API inventories 


    • House, Senate in session
    • HSBC officials appear before Senate Homeland Security subcommittee to testify on lapses in London-based bank’s money-laundering controls
    • Bernanke will discuss the outlook for economy, U.S. central bank monetary policy in semi-annual report to Congress
    • CFTC Chairman Gary Gensler testifies before Senate Agriculture on Dodd-Frank, consumer protections; Robert Cook, SEC’s director of trading, also gives testimony
    • Committee for a Responsible Federal Budget holds event on debt reduction at National Press Club, with Dave Cote, CEO of Honeywell International; Larry Fink, CEO of BlackRock; Paul Stebbins, CEO of World Fuel Services, 2pm
    • Bloomberg Government hosts breakfast with Southern Co. CEO Thomas Fanning; NextEra Energy Chairman Lew Hay; NV Energy CEO Michael Yackira, 8am
    • FERC, Energy Dept. hold technical conference on small generator interconnection agreements, 9am
    • Senate Energy holds hearing on protecting the electric grid from cyber attacks, 10am
    • House Energy panel holds hearing on alternative fuels, vehicles, 3pm
    • U.S. International Trade Commission meets on third review of stainless steel bar from Brazil, India, Japan, Spain, 11am
    • Former Fed Chairman Paul Volcker speaks at State Budget Crisis Task Force discussion, 11am 


  • Yahoo names Google’s Marissa Mayer as CEO
  • Joblessness issue prompts Fed to shift its focus as Bernanke set to testify to Senate committee today
  • Fed’s George says U.S. growth may not exceed 2% in 2012
  • Spain borrowing costs fall at 12-month bill auction
  • U.K. inflation falls to 2.4%, lowest rate in 2 1/2 yrs
  • HSBC probe shows bank allowed laundering, dodged Iran sanctions
  • Libor manipulation losses probed by 5 state AGs
  • Consumer price index in June probably was little changed
  • US Airways, American Eagle pilot leaders to meet: union 


    • Host Hotels & Resorts (HST) 6am, $0.33
    • Mattel (MAT) 6am, $0.21
    • Comerica (CMA) 6:40am, $0.62
    • Mosaic (MOS) 7am, $1.15
    • Omnicom Group (OMC) 7am, $1.01
    • Goldman Sachs (GS) 7:30am, $1.18
    • State Street Corp (STT) 7:17am, $0.97
    • Coca-Cola (KO) 7:30am, $1.19; Preview
    • TD Ameritrade Holding (AMTD) 7:30am $0.26
    • Johnson & Johnson (JNJ) 7:45am $1.29; Preview
    • Forest Laboratories (FRX) 8am, $0.32; Preview
    • Kansas City Southern (KSU) 8am, $0.84
    • M&T Bank Corp (MTB) 8am, $1.69
    • McMoRan Exploration Co (MMR) 8am, $(0.13)
    • Charles Schwab (SCHW) 8:45am, $0.18
    • Intel Corp (INTC) 4:01pm, $0.52
    • CSX Corp (CSX) 4:01pm, $0.47
    • Wynn Resorts (WYNN) 4:02pm, $1.49
    • Yahoo (YHOO) 4:05pm, $0.23
    • Albemarle (ALB) 4:05pm, $1.22
    • Fidelity National Info Svcs (FIS) 4:05pm, $0.59
    • United Rentals (URI) 4:15pm, $0.50
    • AAR (AIR) 4:24pm, $0.46
    • Fulton Financial (FULT) 4:30pm, $0.20
    • Cathay General Bancorp (CATY) 4:30pm, $0.32
    • MB Financial (MBFI) Late, $0.38
    • Equity Lifestyle Properties (ELS) Late, $1.02
    • Ironwood Pharmaceuticals (IRWD) Unknown time, $(0.31) 



OIL – Oil looks different than Gold coming out of the weekend’s Israel/Iran chatter; there is nothing that will slow the world’s marginal real-consumption growth than higher oil prices; rising food/oil prices also puts further Chinese rate cuts on hold don’t forget. 

  • Good Dirt Gone Dry Wilting Corn as Food Costs Gain: Commodities
  • Oil Supplies Decline for Fourth Week in Survey: Energy Markets
  • Oil’s Center of Gravity Shifts Toward Asia: Chart of the Day
  • Rio Tinto CEO Closely Watching Economic Turmoil as China Slows
  • Oil Near Seven-Week High on Iran Tensions, Stimulus Speculation
  • Corn Slides From 13-Month High as Demand Slows for Fuel and Feed
  • Gold Set to Gain in London on Speculation Over Further Stimulus
  • Copper Seen Rising Ahead of U.S. Data and Bernanke Testimony
  • Sugar Falls on Surplus Outlook; Cocoa Gains on El Nino Concerns
  • Iron Ore Drops to Lowest Price Since May as Chinese Demand Wanes
  • Rubber Gains as China May Add Stimulus, Thailand Boosts Support
  • Palm-Oil Refining Capacity Seen Climbing 24% in Indonesia
  • Zinc Poised for 9% Rally on TD Buy Signal: Technical Analysis
  • Mosaic Doubles Dividend as Profit Beat Estimates on Planting
  • Soybean Acres in India to Climb as Record Prices Boost Planting
  • Palm-Oil Options Seen Boosting Futures Volume on Malaysia Bourse





US DOLLAR – get the Dollar right and you’ll get today/tomorrow right; watching that closely into and around Bernanke at 10AM EST; if we had to bet (we don’t, so we won’t take a position until we see the river card), USD and Gold are saying Bernanke doesn’t deliver the drugs. USD remains in a Bullish Formation and Gold a Bearish one.




















The Hedgeye Macro Team

A Crisis of Confidence







Another day of what Jesse Jackson would call “keep hope alive.” The market is rallying pre-open this morning as the masses use hope as a risk management process. The hope is that Fed Chairman Ben Bernanke will continue on his path of quantitative easing, kicking the goalpost down the line past the current 2014 date. And in turn, oil is ripping higher with Brent crude at $104 a barrel. It appears everyone really enjoys those prices at the pump.



...and you get a lot of other things right, especially in lieu of Bernanke today. Get the USD right and you’ll solve the correlation puzzle connected to commodities, oil, currencies and equities. Just so you know: we view the USD in a bullish formation and gold in a bearish formation.



71% of the US Economy is based on consumption. That’s a lot of big macs, Ford trucks and Chinese buffets. The inflation in food and oil we’ve experienced since the dawn of the age of QE has pissed the public off and with good reason. Why people continue to subject themselves to $10 boxes of cereal and $5 a gallon gas is beyond us. You get the US economy right and it helps guide you on the slope of growth.




Cash: Up                U.S. Equities: Down


Int'l Equities: Down    Commodities: Down


Fixed Income: Up        Int'l Currencies: Down





The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.








Tweet of the Day: “BoE's KING: First we knew of LIBOR fraud was two weeks ago; BoE not responsible for regulation of markets.”-@DailyFXTeam


Quote of the Day: “Character is much easier kept than recovered.” –Thomas Paine


Stat of the Day: CHINA: +0.6% for the Shanghai Comp on the bounce after yesterday's -1.7% smackdown






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Lie-bor Losses Set to Balloon

This note was originally published at 8am on July 03, 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 fellow that can only see a week ahead is always the popular fellow, for he is looking with the crowd. But the one that can see years ahead, he has a telescope but he can't make anybody believe that he has it.”

-Will Rogers


To Will Rogers’ point, telescopes are in short supply these days. Ask an investor what they would have predicted for the XLF three years ago, and chances are their reply wouldn’t have looked much like the chart at the end of this note. The reality is that it’s a natural investor tendency to extrapolate the recent past as the most likely path for the next twelve months of trading. Obviously, the problem with this approach is that it misses big turning points.


Looking at the last three years there have been at least six big turning points in the Financials space. We’re not talking about small rallies or corrections. Being on the right or wrong side of these big moves has made or broken investors’ years.


What’s so interesting to us is that in hindsight they seem to follow a very recurring and seemingly predictable pattern. The XLF peak in 2010, 2011 and 2012 occurred on April 14, February 21 and March 26, respectively. The XLF low for those same years occurred on August 30, 2010, October 3, 2011 and as-yet-to-be-determined, 2012, though no earlier than June 4.


We’ve come up with a framework for thinking about why the pattern seems to rhyme so consistently over the last three years. The foundation of the framework is the distortion of government economic data, which was introduced by faulty seasonal adjustment factors arising from Lehman Brothers’ bankruptcy. The recurring annual effect makes many of the government’s data series appear stronger than they really are from September through February and weaker from March through August. We’ve quantified this effect in the initial jobless claims series, and it is strong enough to create the illusion of both robust recovery in Q4 and Q1 of each year and an economy teetering on the brink of recession in Q2 and Q3. Given that we just entered Q3 on Monday, we think the effect still has a few months to go before predictably beginning to reverse.


The second thing to understand is that central banks play a predictable role in exacerbating this trend. As the data appears to weaken steadily over the course of the March through August period, the calls for QE grow louder. In 2010 this culminated at Jackson Hole with the unveiling of QE2. In 2011 QE-Light (aka Operation Twist) was unveiled in September while the ECB’s large-scale LTRO program came out that December. The takeaway here is that the announcement or start of these massive intervention programs coincides with the turning point in the cycle when the economic data is already beginning to roll from bad to good.


This phenomenon is likely to be with us for the next two years. Government seasonality models work on a five year look back, this being the third year following the incorporation of the original data distortion. As such, we’d expect to see this effect present itself again in 2013 and again in 2014. That said, the effect should become progressively smaller, as the government models weight older years less heavily than more recent years.


There are other factors at play. For instance, May 2010 saw Dodd-Frank roll out – a major Financials sector overhang. 2011 saw the debt ceiling debate culminate in the S&P downgrade of the United States. Additionally in 2011, the large cap banks were plagued by mortgage putbacks and Basel III SIFI concerns; none more so than Bank of America. And, of course, Europe has played a central and recurring role in the last three years. This year it’s a combination of Europe (again) and angst over how punitive the Volcker Rule will be for the large banks.


Looking ahead, the most likely candidate on the radar for the next large-cap bank boogeyman is the rapidly emerging LIBOR scandal. So far it has claimed only Barclays as a victim, as that bank agreed to pay three regulators a total of $451 million in penalties in addition to actually admitting wrongdoing – when was the last time you heard a bank admit that? Specifically, the bank has acknowledged that it deliberately reported artificial borrowing rates from 2005 through 2009. The company’s Chairman resigned over the weekend and CEO Diamond bowed to the pressure to resign this morning. Barclays got a slap on the wrist in exchange for enormous cooperation in helping regulators understand the extent of the wrongdoing. Remember that price fixing is a criminal violation under the Sherman Act, so Barclays was treated with kid gloves. The fear that the large US banks will be treated less favorably is appropriate.


There are approximately $10 trillion in loans tied to Libor and another $350 trillion in notional value derivative contracts linked to the rate. Just one basis point of that notional total, for reference, equates to $36 billion. Early indications suggest that Libor may have been manipulated by as much as 30-40 bps, though this has yet to be confirmed. Any way you slice it, the math is big. Back in the Fall of 2010 we estimated that the mortgage putback fiasco would cost the big banks $49 billion in total, with Bank of America shouldering almost half that amount. Putbacks were the principal concern driving BAC shares down to $4.99 (38% of tangible book value). Given the magnitude of the affected securities in this scandal, it doesn’t seem hard to imagine a class action process that reaches into the tens of billions of dollars, with fears and chatter about “hundreds of billions”. We expect this issue to heat up over the coming 12 months as there are active investigations by the Dept. of Justice into all the large banks involved in setting LIBOR. Domestically, JPMorgan, Citigroup and Bank of America appear at risk.


Perhaps the most important thing to understand is that the big banks have, in the last few years, been overshadowed by one cloud of uncertainty after another: mortgage putbacks, AG settlements, Durbin, Reg-E, Volcker, etc. Until it’s crystal clear to the market how much an issue is going to cost and/or how detrimental it will be to the business going forward, the market shoots first and asks questions later. This Libor scandal fits that mold perfectly: it’s big, it’s as yet unquantifiable and the media is in the bottom of the first inning getting its arms around what’s happened. The numbers that will start to get thrown around will be staggering: “trillions”. Very few investors, as well as the banks themselves for that matter, will have any real handle on what the loss profile may look like. As such, the prospects for the large banks finally achieving escape velocity out of their March 2009 to February 2011 price/tangible book value ranges is unlikely over the next year.


As a final point, it’s worth pointing out where we are in this current cycle. It certainly looks as though 6/4/12 was a possible major turning point. From our vantage point the most glaring difference between this year and the last two years is the level of recorded fear. In both 2010 and 2011 the VIX exceeded 45 briefly and traded for some time above 30. So far in 2012 the VIX has only exceeded 25 on a few days and hasn’t exceeded 30 at all. Considering this emerging LIBOR scandal and that the problems in Europe seem larger today than what we faced in 2011 or 2010, it strikes us as counterintuitive that the market would be less afraid today.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1593-1615, $92.99-98.53, $81.41-82.31, $1.23-1.27, 6284-6581, and 1337-1373, respectively.


Josh Steiner, CFA
Managing Director


Lie-bor Losses Set to Balloon - xlf chart


Lie-bor Losses Set to Balloon - vp 7 3

You Built This

“If you’ve got a business, you didn’t build that.”

-Barack Obama, July 16th, 2012


Really? I couldn’t make up what the President of The United States said (off teleprompter) yesterday in Roanoke, Virginia if I tried. I guess I should send some wine to Barry and Timmy for keeping Citigroup’s research unit intact. Thanks for the help boys.


Obama went on to say that “somebody else made that happen.” I thought for a minute he was referring to my almighty God. Then I thought again. By somebody, he meant government.


Sadly, the same goes for how Obama, Bernanke, and Geithner think about the US stock market. They fundamentally believe that by not intervening, our markets won’t work. That’s not the America I came to in the early 1990s. That’s just sad. This is a No volume; No Trust market – if you’ve got a confidence and hiring problem Mr. President, you built this.


Back to the Global Macro Grind


Now that I got that off my chest, onto the American Made Central Planning Hope of The Day – Ben Bernanke’s testimony at 10AM EST in front of our clueless economic overlords in the Senate.


This is actually getting as funny as it is pathetic. Ahead of whatever sweet-nothing Bernanke will whisper about Qe4 today, markets are front-running him again. This has been happening all year. Each rally is shorter in duration, and to lower-highs in elevation.


Commodity markets in particular are straight up into the right. If you are into the Down Dollar Drugs (USD was up yesterday until that bomb of a June US Retail Sales print of -0.5%), that’s where you get your short-term fix. That’s where the boys who jacked 1.05 million commodities options contracts (CFTC data) right back up to their early April highs are looking for some pop.


“Pop, pop, bang!” (Jimmy Braddock’s punching combo in Cinderella Man).


Unfortunately, that’s how it all ends. They’ll get their pop, then its lights out for whatever is left of US Growth. With US GDP Growth this slow, everything on the margin really counts – and the last thing the US (and global) economy needed was a +17% rip in the price of oil since late June on Bernanke Begging.


That’s why we are starting to see the market leaders of both the US economy and US stock market (Technology and Consumer Discretionary) start to lag. While they loved the tax cut of $89 Brent oil in mid-June, they do not appreciate $104/barrel staring them in the face this morning.


With the SP500 down for 7 of the last 8 trading days, this is how the S&P Sector ETF laggards look like for July and Q3 to-date:

  1. Consumer Discretionary (XLY) = -1.01%
  2. Technology (XLK) = -1.69%
  3. Industrials (XLI) = -2.92%

Now if I have been anything since March 12th when we shorted Industrials (XLI) on the #GrowthSlowing call, I have been consistent. My team’s research has also been very consistent on what infects real (inflation adjusted) US Consumption Growth too – the marginal price inflation of food and energy.


Since 71% of the US Economy = Consumption, this is one of the main things you need to get right if you want to get the slope of growth in the US economy right. That’s precisely why the politicians of the 112th Congress have had their policy to inflate food/energy prices all wrong.


Post 2006, Bush had this as wrong as Obama has it now. Don’t forget that both Presidents empowered Bernanke. For Bush, that was then. For Obama, we live in the now. And not letting free-market prices clear for the sake of a broken belief system that central planners can “smooth” economic cycles and suspend economic gravity is now his problem.


Your conflicted and compromised cronies built this environment for small business owners and market participants in America. My team and I have been building our business in spite of you.


My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar Index, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $100.25-104.02, $82.47-84.03, $1.20-1.23, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


You Built This - Chart of the Day


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