• run with the bulls

    get your first month

    of hedgeye free


Stealing Horses

“In West Texas in 1871, stealing someone’s horse was often equivalent to a death sentence.”

-S.C. Gwynne


The only thing I don’t like about working on America’s West Coast is that room service doesn’t start until 8AM EST. I’m in San Francisco, California this morning. And, away from no oatmeal in my belly, I am loving it.


What I don’t love is when Chuck Schumer speaks. I get especially irritated when he speaks at people like he did with my good pal Ben Bernanke yesterday, telling him to “get to work” on some more money printing.


As S.C. Gwynne explains in an excellent new book I started reading on the flight down here, “Empire of The Summer Moon: Quanah Parker and the rise and fall of the Comanches, the most powerful tribe in American History”, stealing someone’s most valuable asset (in my case US Dollars) is not cool.


Back to the Global Macro Grind


Admittedly, when it comes to explaining the basic concept of the Purchasing Power of your hard earned currency and how conflicted and compromised politicians are attempting to debauch it for the sake of their short-term career risk, I can’t walk a horse to water.


I can, however, steal away into the night and watch the only thing that matters in scoring the efficacy of what Chucky Schumer wants more of (Qe drugs) – Mr. Global Macro Market.


Mr. Macro has been giving plenty a buy-and-hold Keynesian a performance death sentence since the SP500 was +14.9% higher in October of 2007. While the same ‘growth is good, earnings are great, and stocks are cheap’ crowd still needs the SP500 to rise another +5% to get back to their 2012 break-even, here’s what the rest of the world’s country signals are telling me this morning: 

  1. CHINA – the Shanghai Composite Index remains a rock solid leading indicator for the slope of Chinese economic growth, and it remains in what we call a Bearish Formation (bearish on all 3 of our core risk management durations – TRADE/TREND/TAIL)
  2. JAPAN – the Nikkei225 opened up (after the US closed up) then finished on its lows last night. Its -0.32% loss on the session doesn’t matter as much as the context of its failure to recapture its only remaining line of support (8794)
  3. SOUTH KOREA – the KOSPI got blasted for another -1.5% loss last night after Intel said that they are hoping for +3-5% sales growth in 2012 (vs high single digit growth expected prior); KOSPI is a great leading indicator for Tech/Industrial demand
  4. EUROPE – the EuroStoxx50 looks like the SP500 (better than China, Japan, or KOSPI); that doesn’t mean that it looks good for anything more than what’s in the rear-view mirror off the lows (TRADE support = 2213; TREND resistance = 2282)
  5. SPAIN – the Spanish IBEX looks like the Comanches stole their horses again; leading losers this week and falling right back into crash mode (> 20% peak/tough decline) at -26.5% from March; Bearish Formation
  6. ITALY – the MIB Index looks like it’ll be walking barefoot until the German Parliament votes to ratify more #BailoutBull on September 12th; down again this morning and moving back into crash mode, down -21% from March
  7. BRAZIL – the BOVESPA has had zero bid since the Brazilians cut interest rates last week, so the perma 3-4% Global GDP crowd can talk about the 199 global “easings” all they want, but the BOVESPA is still crashing (down -21% since March 14th)
  8. CANADA – the TSX Composite Index looks a lot like the Eurostoxx50 and the SP500; bullish TRADE (barely) and bearish TREND (with TSX TREND resistance overhead at 11,991); Canada is a great place to live if you have a big hat (and cattle).

Then, of course, we have the good ole United States of America. The home of the 112th Congress, Ben Bernanke, and the brave. Across its big 3 leading market indicators, here’s how she looks:

  1. STOCKS (SP500) – bullish immediate-term TRADE (1351 support); bearish intermediate-term TREND (1365 resistance)
  2. BONDS (10yr) – Bullish Formation for bonds; Bearish Formation for yields; immediate-term risk range = 1.46-1.54%
  3. CURRENCY (USD) – Bullish formation (bullish across all 3 durations) with immediate-term TRADE support = $82.31

So, what does it all mean?

  1. GROWTH – slowing, at an accelerating rate, globally in Q2/Q3 versus where all of Washington/Sell-Side consensus was in Q1
  2. INFLATION – slowing through June, but setting up to re-accelerate where it matters to Global Consumption Growth in July (food and energy prices have v-bottomed since late June)
  3. POLICY – who cares? The manic media continues to scramble for whatever remains of their ratings, but The People are putting this entire thing (including fund flows) on mute. This is a No Trust; No Volume Global Equity market; TREND intact.

So what do you do?

  1. Maintain a large Cash position and keep your gross exposure to equity and commodity markets low
  2. Manage your net exposure to all markets, including the bubbliest of them all (bonds) tight
  3. And Fade Beta (buy red, sell green) –just beat the 93% of hedge funds who have become beta and you’re fine

If all of this is frustrating you, join the club. Global Macro’s interconnected risk (countries, currencies, commodities, etc.) has never been more obvious. Stock pickers are meeting their maker inasmuch as Macro gurus are meeting theirs. As Gwynne reminds us, this was no different in 1836 when different worlds were in collision (Whites and Indians):


“The meaning of their meeting, and the moment itself, became completely clear only in hindsight.” (page 23)


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $100.82-103.68, $82.76-83.98, $1.20-1.23, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stealing Horses - Chart of the Day


Stealing Horses - Virtual Portfolio


Below the Street Q2 but in-line with our estimate. EBITDA got a $31m net boost from an adjustment to the receivable reserve.




  • Las Vegas:  In the short run, their high-end baccarat business is very volatile.  Last's year's results benefited to the tune of $150MM, and this year WYNN only won $38MM.  Hold was 37% last year in 2Q vs only 17% this year.
    • If you normalize for hold, then they would have done more business this year
    • The rest of the business in Las Vegas was flat 
  • Business levels in LV are slightly better than last year
  • In Macau, the market has gotten more competitive.  Generally speaking, the high end of the market was flat.  Wynn suffered a bit on the revenue side but not on the EBITDA. 
  • They have been able to hold the rate that they pay to junkets to 40% + 3% for comps which is about 5% less then the competition. They believe that they give away as much of their money to junkets as they can to maintain a good business.  Wynn is really concentrating on maintaining the bottom line. 
  • Growth in Macau has slowed down as the base has gotten bigger and to a greater extent because Asia is also experiencing similar types of macro pressures as the rest of the world
  • Wynn is improving their high limit slot business in Macau
  • Using credit as a marketing tool is a big mistake in the gaming business.  They will not buy business with credit. They are very conservative with granting credit and as a result, over the last 6 months, their collections have actually improved (which is why their results in Macau look so good - the reversal of the bad debt provision was $17MM in the quarter, 2/3rds of which benefited Macau vs. a charge)
  • Got a $2.3BN R/C and T/L for the construction of Wynn Cotai; interest rate will be under 2%.  The facility is expected to close in about 10 days.  



  • Doesn't think that the slowdown in Macau is driven by political issues.  The junkets are being responsible in extending credit.
  • No real change in the mix of direct vs. VIP
    • According to our calculation, direct dropped to 8.25% from 10% last Q
  • Cash balance: 
    • $500MM is at the parent
    • $600MM is in Macau
    • Balance in Las Vegas
  • Plan to spend about $150MM on foundation over the next 9-12 months.  Spent $140MM on Cotai so far - mostly on the land.
  • Only held 9% in baccarat this Q, adjusted for hold the quarter would have been $116MM in Las Vegas
  • The reserve reversal was 2/3rds in Macau and 1/3 Las Vegas
  • When SCC opened, they did see an impact on their property.  Folks got very aggressive around the opening. Aggressive incentives have extended into the Mass segment and not just the VIP segment and even in slot promotional allowances. 
  • Macau will continue to have cost pressures primarily surrounding payroll
  • Giving some of those under-utilitized tables to sub-junkets and eliminating some of the middle men. That way they end up giving the junket a better rate than they had elsewhere.  
  • Use of cash will be a very interesting topic for their board now that the financing for Cotai is lined up
  • What they are doing to grow revenue in Wynn Macau?
    • Expand retail space to 58,000 (10% increase) and sales there are really rocking.  They get 15% increases in all their new leases.
    • Someone is paying them $500,000/Q fixed for 2,000 SQFT of retail space
    • New junket room open by Christmas
    • Late in the June Q, moved Tiffany and then LVMH expanded into their space
  • While there is no change in credit worthiness in their client base, collections are slower on the direct side
  • What's their normal reserve for doubtful accounts, normally $14MM charge - so its the delta of $31MM peak to trough. They were 100% reserved in Macau at 150 days. So while collections have slowed, they collected better than they thought.  They changed their 100% reserve to 1 year from 150 days in Macau. In Vegas they changed the 100% reserve from 1 year to 18 months. 
  • As the amount of credit being issued in Macau ballooned with all the new properties, WYNN reserved more worrying about the market as a whole vs. just their own books. In hindsight, they were over-reserving for the last year or two.  At the end of 2011, their bad debt expense was 42% of their accounts receiveable.  Their reserve is 44% today.
  • They are going to increase the number of Mass tables they have on the floor in Macau
  • One of the reasons why it takes longer to collect is because players have outstanding debt at multiple casinos
  • They usually settle on the 5th day of each month with their junkets. They don't have a rolling program like their competitors.



  • Wynn Resorts reported revenue of $1,253MM and Adjusted EBITDA of $384MM
    • Macau: $908MM of net revenue and $302MM of Adj. EBITDA
    • Las Vegas: $345MM of net revenue and $82MM of Adj. EBITDA
  • Wynn Macau's EBITDA benefitted by a large reversal of doubtful accounts. This quarter Wynn had a $17MM reversal- most of which related to Macau.  
  • Wynn Cotai expected to cost between $3.5-4BN to construct
  • We estimate that direct VIP play at Wynn Macau was 8.25%
  • We estimate that the hold impact to Macau negatively impacted Wynn's net revenue by $21MM and EBITDA by $3MM
    • VIP:  If hold was in line with historical averages of 2.93% then net revenue and EBITDA would have been $30MM and $6MM higher
    • Mass: Wynn's mass hold for the last 5 quarters of 28.8% would have resulted in net revenue and EBITDA being $7MM and $3MM lower, respectively
  • In Las Vegas, table hold was only 15% compared to a 9 quarter average of 23.5%.  Had Wynn held at 23.5%, win would have been $49MM higher

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.




  • Worse:  Below the Street quarter but in-line with our projection.  However, EBITDA got a $17m boost from an allowance for doubtful account reserve adjustment.


  • WORSE:  Growth has slowed; the outlook is more uncertain but China is relatively stable.  More cautious on direct VIP credit collection. 
  • PREVIOUSLY:  "All the way up until today, is volumes are up over last year in Macau on the VIP side. The market's still very robust.I also think that the customers are coming back to momma. They tried all the other properties and they are going to play where they feel the most comfortable. That's... what I'm seeing now."


  • SAME:  Still waiting for construction permit.  Groundbreaking will happen in Fall 2012.  46 month schedule remains unchanged.
  • PREVIOUSLY:  "I think everybody knows that we were finally given the green light in the land concession, which will lead to imminent ground breaking in the next few weeks."


  • BETTER:  WYNN benefited from a large reversal of doubtful accounts ($17MM).  2/3 was related to Macau, with 1/3 hitting the Las Vegas P&L.
  • PREVIOUSLY:  "Bad debt expense was up $8 million and that was all in Macau....We had a few large accounts that went past 150 days. We have a very conservative accounting policy. If it's 150 days we're fully reserved. And so we had a few large accounts go over 150 days. Our bad debt provision went up. We're 55% reserved in Macau right now and our collections in the second quarter have continued to be very stable and normal."


  • SAME:  Plan to close financing for a $2.3 billion revolver with interest rates under 2% in ten days
  • PREVIOUSLY:  "We're always conservative so it'll be between 25% to 40% in equity and the rest will be financing that we'll start working on this year. We're only two times levered right now on a net basis."


  • SAME:  Will expand retail space to 58,000 sq ft by the end of 2012 at Wynn Macau.  
  • PREVIOUSLY:  "We have 52,000 square feet of retail. It's going to 60,000 – it's in the process of going to 60,000, but we had 52,000 at year-end."


Non-performing loans in Wenzhou — a good barometer of Macau VIP


  • As announced today, 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.  
  • Wenzhou generates only 4% of visitors to Macau but its non-performing loan ratio has been a great indicator of Macau’s VIP growth particularly since June 2011, as shown in the chart below
  • Macau’s VIP business is heavily reliant on credit and liquidity




CONCLUSION: Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being.


ACTIVE THEME(S): Growth Slowing’s Slope


In a JAN ’11 note titled “PONDERING CHINESE GROWTH”, we wrote, “To date, we haven’t heard anyone mention the possibility that [the not-yet-released 2011-15 5YR Plan] may come with a more explicit slowdown in the Chinese growth model from the current high-single-digit-to-low-double-digit trajectory to a more modest mid-single-digit pace. While we won’t know until we know, we do know that this scenario is outside of consensus expectations.”


Those thoughts were the then unknowns; the known-knowns of today are as follows: 

  1. Chinese policymakers did, in fact, guide to lower economic growth target(s) in the so-called 12th Five-Year Plan (+7% per annum, down from a consistently-exceeded +7.5% per annum in the five years through 2010); and
  2. A structurally slower rate of Chinese growth is being increasingly priced into consensus expectations. 

To the latter point, global currency market participants have dramatically revised down their expectations for NTM yuan strength in both the onshore (Shanghai) and off-shore (Hong Kong) markets. The discount relative to the spot price embedded in 1YR USD/CNY non-deliverable forwards is -0.7%, which is down from an all-time high premium of +13% (MAR ’08). The discount relative to the spot price embedded in 1YR USD/CNH non-deliverable forwards is -1.3%, which is down from an all-time high premium of +1.9% (MAR ’11). Perhaps a greater callout is the sheer length of time the secular yuan-appreciation story has been more-or-less priced out of the market; at roughly 8MO, you’d have to pull the chart back to 2002 to see a comparable prolonged period(s) of expected yuan dormancy.




As a result, we interpret the aforementioned FX trends as a sign that international investors hold a generally neutral-to-bearish long-term view on the Chinese economy, particularly from a GROWTH/INFLATION/POLICY perspective (i.e. slow growth = lower interest rates; widespread credit quality headwinds = fiscal expansion). That was certainly not the case in JAN ’11!


As an aside, we place substantially more emphasis on actual flows of capital to gauge investor and corporate sentiment rather than on traditional sell-side polls. Looking to flows of hard capital, Foreign Direct Investment growth in China slowed to -6.9% YoY in JUN, which is the slowest rate since DEC. From a 1H12 perspective, FDI inflows dropped -3% YoY. It’s clear that corporations, too, are revising down their expectations for Chinese economic over the long-term by slowing their rates of capital investment into the Chinese economy. In spite of Chinese policymakers’ recent +167% increase in QFII quotas to $80B (APR ’12), growth in capital inflows, as measured by Chinese bank’s foreign exchange positions, have slowed dramatically since last SEP.






Needless to say, international investors and corporations simply aren’t buying into the sell-side-generated Chinese growth machine like they used to. While we certainly aren’t arguing for the Chinese economy to pack it in and go away, we do stick with the conclusion of our OCT ’11 note titled “PUTTING CHINA INTO PERSPECTIVE” as it relates our expectations for Chinese economic growth over the next three years:


“…a structural downshift in rates of Chinese economic growth is not at all out of the band of probable outcomes over the long term and this has major implications for a great many corporations and investor portfolios worldwide.”


In light of these expectations, it may very well be that consensus expectations for the Chinese economy over the long-term TAIL are as close to our subdued expectations as they’ve ever been. From an intermediate-term TREND perspective, however, they have farther to travel as it relates to narrowing that delta.


It was as clear as day to anyone at their desk last Friday that U.S. equity investors equated the sharp slowdown in China’s 2Q12 Real GDP growth into Pavlovian expectations of further rate cuts and perhaps a meaningful fiscal stimulus package (CNY4 trillion during 2008-10) fully-equipped with another state-directed lending spree (CNY17.5 trillion during 2009-10).


As we penned in a research note last Friday, titled “CHINESE GROWTH: STICKING TO THE [CENTRAL] PLAN”:


“…we maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth.”


In terms of updating our thoughts here, Chinese Premier Wen Jiabao was back in the media today guiding down expectations for Chinese growth [again], this time stating that China’s labor market will become “more severe” and “more complex”. He’s calling on Party Commissions and municipal governments to fulfill their role in promoting “proactive labor policy” by “maintain[ing] steady and relatively rapid economic growth”.


While it has been our official view that Chinese policy makers will surprise consensus expectations to the downside with regards to any announcement(s) of a fiscal stimulus package and/or a state-directed lending initiative, this does, on the margin, sound like the Chinese leadership is willing to turn an increasingly blind eye to local governments to do what they feel needs to be done to protect growth. That does not, however, include loosening restrictions on property investment – a clear directive Chinese policymakers have made repeatedly in recent weeks.


While it’s too early to tell if this is a meaningful inflection point in Chinese fiscal policy – which would provide a far-more substantial boost to economic growth than merely lowering the cost of capital – we are concerned by the fact Chinese equities simply aren’t pricing in any meaningful inflection point in China’s GROWTH/INFLATION/POLICY dynamics (the Shanghai Composite is still in a Bearish Formation). This leaves us to believe that it would be prudent to fade any incremental Chinese stimulus rallies for the time being.




In contemplating the other side of this view, the Shanghai Composite bottomed just five days prior to the State Council’s economic stimulus announcement in NOV ’08, which does call into question the discounting mechanism of the Chinese equity market to some degree – though we’d argue NOV ’08 was a more panicked and rushed response to a negative growth shock vs. a deliberate and partially policy-induced growth slowdown. Net-net, either Chinese policymakers are being uncharacteristically tight-lipped about their plans to “stabilize” growth or they simply don’t have any a’brewing at the current juncture.


Needless to say, confirmation of the latter would likely deliver a crushing blow to consensus expectations of broad-based fiscal and monetary expansion in China over the intermediate term.


Darius Dale

Senior Analyst

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.