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Timing Shorts

“Observe due measure, for right timing is in all things the most important factor.”



Efficient market folks say they can’t time markets. Take their word for it. It’s our job, not theirs.


Whether you practice the art of short selling in gnomic, hymnic, or genealogical form, at some point in the decision making process we all have to do the same thing – timestamp our position.


We waited, watched, and finally re-shorted the SP500 yesterday at 10:21AM EST (1405). Given all the perma-bullish narratives I’ve had to listen to for the last few weeks, I must say I enjoyed the experience quite thoroughly.


Back to the Global Macro Grind


To timestamp or not to timestamp, remains the question. All of you who do this with real money understand the concept obviously. Timing stares at you from your P&L every day. For the Old Wall’s finest strategists, the whole accountability exercise still appears to be quite foreign.


If you’re one of the many non-timestamping strategists who had a 3% US GDP growth forecast and 1 target for the SP500 back in March, you had the entire 2012 fundamental thesis wrong. In order to remain bullish, the best move from here is to beg for bailouts and just change your thesis entirely because the “market is up year-to-date.”


Since the March 26th YTD high for the Russell2000 (+5.5% higher at 846) and the April 2nd YTD high for the SP500 (+1.2% higher at 1419) if nothing else, we’ve been consistent with both our research call (#GrowthSlowing) and our risk management process (#timestamps).


Looking back at the tapes, since February 15th this will be the 9th time we have made a risk management call on the SP500 itself without violating Rule #1 (don’t lose money). We’ve shorted it 8 times and bought it once (bought SPY on May 17th when plenty a March Perma-Bull was in the fetal position).


I’m not trying to evangelize or puff out my chest here. We haven’t killed it with all these calls. They haven’t been the worst timed calls to land in your inbox either. They aren’t meant to be anything other than immediate-term risk signals (which go both ways).


I’m just reminding you that there are some firms in this industry that have at least attempted to evolve the research and risk management process while many haven’t changed a darn thing.


Maybe this time we’ll be wrong. Maybe we’ll be right. The only thing I can tell you is that there will be no maybe when the position is closed.


Timing Matters. In some parts of this country, so does winning and losing – and being held accountable to both.


My immediate-term risk ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $108.96-114.11, $81.95-83.01, $1.20-1.23, and 1, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Timing Shorts - Chart of the Day


Timing Shorts - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 10, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.06% downside to 1388 and 0.16% upside to 1405. 











    • Up versus the prior day’s trading of 62
  • VOLUME: on 08/09 NYSE 575.75
    • Decrease versus prior day’s trading of -9.56%
  • VIX:  as of 08/09 was at 15.28
    • Decrease versus most recent day’s trading of -0.26%
    • Year-to-date decrease of -34.70%
  • SPX PUT/CALL RATIO: as of 08/09 closed at 1.82
    • Up from the day prior at 1.52 


  • TED SPREAD: as of this morning 34
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.64%
    • Decrease from prior day’s trading of 1.69%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.42 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Import Price Index (M/m), July, est. 0.2% (prior -2.7%)
  • 8:30am: USDA crop forecast
  • 11am: U.S. Fed to sell $7b-$8b notes in 7/15/2013 to 1/31/2014 range
  • 1pm: Baker Hughes rig count
  • 2pm: Monthly Budget Statement, July, est. -$93b 


    • House, Senate not in session
    • CFTC holds closed meeting on enforcement matters, 10am
    • NOAA Acting Deputy Director Tracy Dunn, Greenpeace campaigner Phil Kline discuss U.S. ocean, coastal law enforcement at Environmental Law Institute, 12pm 


  • U.S. won’t prosecute Goldman Sachs, employees over CDO deals
  • Yahoo strategy review may result in changes to cash plans
  • RIM said to draw interest from IBM on enterprise-svcs unit
  • Corn near record as USDA to report on drought damage
  • Manchester United raises $233m as IPO prices below range
  • RBA highlights currency risk as 2012 growth forecast raised
  • Standard Chartered’s fitness is key grounds on shutdown decision in N.Y. law, not laundering
  • Knight says it may suffer more losses from trading error
  • Knight Investors face funding options with Hotspot, Direct Edge
  • WellPoint CEO faces ire of investor who says she must go
  • Citigroup offers to buy back bonds in plan to use “excess cash”
  • China export growth collapses as World recovery slows
  • Hong Kong economy grows at close to slowest pace in 3 years
  • Gold bulls strengthen on outlook for more stimulus    


    • Calfrac Well Services (CFW CN) 6am, C$(0.046)
    • Enerplus (ERF CN) 6am, C$(0.02)
    • J.C. Penney (JCP) 6am
    • ioCan REIT (REI-U CN) 7am, C$0.37
    • Rentech Nitrogen Partners (RNF) 7am, $0.98
    • Brookfield Asset Management (BAM/A CN) 7:06am
    • Harman International (HAR) 7:30am, $0.64
    • Celtic Exploration (CLT CN) 8am, C$(0.14)
    • Emera (EMA CN) 12:30pm, C$0.27
    • Pengrowth Energy (PGF CN) Post-Mkt, C$(0.04) 



COPPER – the Doctor sees this Chinese slowdown for what it is – too big to bail. Copper fails fast at 3.43 TRADE resistance, down -1.2% this morning; CRB Index fails at my TAIL risk line of 307. 

  • Rig Shortage Means Record $4.5 Billion Blowout Binge: Energy
  • Sugar Poised for Two-Year Low After Rains Ease: Chart of the Day
  • Cocoa Poised for Rally as Investor Bets Climb: Chart of the Day
  • Gold Bulls Strengthen on Outlook for More Stimulus: Commodities
  • Corn Advances to Record as USDA Set to Report on Drought Damage
  • Oil Pares Weekly Gain on China, IEA Sees Demand Growth Slowing
  • Gold Declines With Stocks, Euro as China Data Tempers Risk Mood
  • Copper Drops as China Export Collapse Adds to Slowdown Signs
  • Sugar Rises as India’s Set to Import From Brazil; Cocoa Advances
  • Oil May Rise on Refinery Runs, Middle East Tension, Survey Shows
  • Sugar Output in India Set to Fall on Dry Weather, Kingsman Says
  • China Soybean Imports Gain for Fifth Month Even as Prices Soar
  • China’s Iron Ore Imports Drop to 3-Month Low on Falling Prices
  • India’s Green-Energy Providers May Struggle After Power Blackout
  • Rises to Record on U.S. Drought Damage
  • Oil-Equities Link Nears Record as Stimulus Looms: Energy Markets
  • India to Import Sugar From Brazil on Dryness, White Premium 





EURO – snapping my 1.23 TRADE line again; that puts a boat load of correlation risk back in play, at lower-highs, for a lot of big beta trades (stocks and commodities).










CHINA – exports falling like hot knife through butter, but do not worry – bailouts coming, allegedly. No stimuli announced overnight; both Chinese and Japanese stocks fail at big TRADE and TREND lines of resistance, respectively.











The Hedgeye Macro Team





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Management cautious regarding near-term growth


The Group adopted a cautious approach in its business dealings towards the end of 2011, when an uncertain global economic environment began to present challenges to the Asian economies. Notwithstanding this, the Group continues to deliver a set of sustainable financial results that demonstrates healthy return on capital employed



  • Gained market share QoQ, which is commendable given their disadvantageous location
  • Will continue to see similar EBITDA margins this past Q


  • GGR market share 49%
  • Casino Control Act Amendment: Draft went public where you can find a lot of details. They don't think that there will be any significant impact on their business. They believe that the financially vulnerable that gamble is a small minority.
  • 3.1% hold rate for VIP this quarter
  • Collections: receivables have come down.  In 4Q, they spoke about slowing down the granting of credit and they did what they said. The have been more careful in who they credit to.  Incentives to collect are given to less than 1% of people that they need to collect from.
  • The higher commission has almost a negligible impact; i.e. there were no material changes in commission rate
  • RC volume QoQ change: it has come down by slightly more than 10% but less than 15%
  • Mass revenue was marginally down QoQ
  • Split between VIP/MASS 
    • 49% at the gross gaming revenue
    • 35% of the net revenue gaming revenue
  • Receivables: Casino receviable is all in current receivables S$734MM (Group level).  $269MM is the bad debt provision. 
  • Continue to maintain that the Echo investment is a portfolio investment
  • Labor expense inflation was basically flat YoY.  However, they added 1,300 employees to the West Zone.  With the Singapore government tightening up foreign labor they will be squeezed in two ways: difficulty in finding talent and wage inflation. They are focused on acheiving productivity gains.
  • Have 13,600 total employees now
  • There is no dividend policy for the company. They plan on continuing pay something similar in absolute terms as last year if things continue to go well.  Growth is primary and dividend is secondary for them.  Don't expect big dividends from them.
  • There was no material change in their bad debt expense this quarter.  They were impacted by Marine Life Park -which had very high electricity expenses and new employee expenses without any new revenue.  Over the next 2 quarters, they will have similar issues. The 45% margin should be the worst that they see and then see significant margin improvement next year when the Marine Life Park opens in earnest in 2Q13.  So the margin will be in the 45-50%. 
  • High impairment level (bad debt expense) is a prudent approach to provisioning given the state of the world economy at this time.  They would rather provision conservatively then see a big charge offs.
  • Net gaming revenue share was marginally lower QoQ
  • Not all the expenses for the Marine Life Park are in pre-opening: electricity, security, and other expenses difficult to breakout. The expenses in pre-opening relate to Marine Life Park specific personnel.
  • The slowdown from Chinese patrons was not huge but significant.  Chinese patrons are usually in their top 5 contributors.
  • RC volume market share: 48%
  • Mass market share: 47% (GENT didn't specify whether it was win or drop)
  • Junkets are called IMA's - they have two and their contribution to revenue is negligible at this point.  They are deliberating managing this on a low basis to take it slowly.  Both of the IMAs are Malaysians. Don't see a material contribution from IMAs for at least 2012.
  • Continues to be optimistic that something will get passed in the next 12-18 months in Japan.  The first legislation will allow casino legislation to get formed (i.e. legalize casinos). Then the second draft will decide locations of the casinos. There has been some talk about putting a Casino in the area of where the nuclear disaster happened.   
  • YoY trend in VIP RC:  close to sequential trend
  • 562 tables; Slots: 1017; ETGs: 710
  • How are the perpetual securities accounted for?  See on page 2. It's treated as equity and not a bond and is therefore entitled to a % of NI of the company. So it's a balance sheet item and not a P&L item.
  • EBITDA margins:
    • Gaming has the best margin
    • Non-gaming margins are not that great but that's part of the deal
    • West Zone- will not have great margins but it will have positive cash flow at steady state. Will not be a margin margin contributor for first 12-18 months.
  • Their new show will open in November but won't be as big as the previous one - Magic Illusion Show. They have learned in terms of what works and doesn't in terms of genre and pricing. Think it will be a lot more profitable than last one.
  • Were opportunistic about raising cash. They are confident that they will announce something in the next 12-18 months. Will not rush into anything but if the opportunity presents itself, they will be able to pounce on it. They are obviously looking at Japan and several other greenfield projects. In the worst case, they make enough to just pay interest on the securities and hopefully they will make a big ROI investment.
  • Their investment hurdle rate is 15%.  They have just rejected a greenfield project where the ROI didn't meet their expectation. They will only look at investments of S$500MM or greater. 
  • What is happening on the Mass side? It is difficult because the local population is small. The Singapore market will either be stagnant or deteriorate. They are not hopeful about getting growth from the local market. They are working with the government to be responsible. They need to work a lot harder in bringing overseas players. They are also working to add a few potential partners to bring in mid-segment patrons from overseas.
  • They need more hotel rooms to grow the Mass business. They are looking for more land in the vicinity to add hotel rooms. Would cost north of S$350MM.
  • The per cap at USS is down a little YoY. People aren't spending as much in the park as they used to. However, their non-gaming revenue is trending up. In a steady state, expect non-gaming revenue to comprise almost 30% of their total revenue.
  • Has the Singapore gaming market reached maturity or is it just an economic issue? 
    • Doesn't think that they have reached maturity. They still have a ways to go into growing their overseas market but it requires a lot of work and it will take time: 12-24 months
    • The local market is not likely to grow
  • 50% are gaming customers in the Beach Villas and Equarius. So they can improve how well they yield those rooms.



  • Genting Singapore net revenues of S$702.2MM and Adjusted EBITDA of S$311MM
  • RWS revenue of S$696.3MM and adjusted EBITDA S$313MM
  • Equarius Hotel and Beach Villas in the beginning of 2012, and overall room inventory increased by 8%
  • Hotel occupancy: 92%; ADR: $432
  • USS average daily visitation: 9,560 and S$86 spend per day
  • 2Q was impacted by "an increase in expenses for the Marine Life Park. The Park is under various stages of completion and incurring pre-opening operating costs without corresponding revenue generation."
  • "The high-end Equarius Hotel and Beach Villas are seeing good occupancy ever since opening just 6 months ago. The newly opened luxury spa ESPA and two exclusive treetop lofts are our latest luxury products. The Marine Life Park will soft open by the end of the year."
  • "RWS Invites, the non-casino loyalty programme was launched in April to drive loyalty and repeat visitation to our non-gaming products, offering the best the Resort has to offer. The card and its usage has been gaining momentum since"
  • "With the anticipated completion of the West Zone, we will be gearing up for our Grand Opening celebrations in the last quarter of this year."
  • "The Singapore government is set to make amendments to the Casino Control Act and we fully support its aim of protecting financially vulnerable persons. We will continue to work closely with the authorities on implementing responsible gambling measures."
  • "The global economy looks increasingly unfavourable. As we move into the pre-operations phase of the Marine Life Park over the next few months, we will continue to see similar narrower EBITDA margins as in the current quarter."
  • "The Group’s cash position today is healthy. In an economic challenging environment, such a good cash standing presents significant advantage for the Group to capitalise on any suitable investment opportunities."
  • "On 12 March 2012 and 18 April 2012, the Company issued S$1,800 million 5.125% perpetual subordinated capital securities (“Institutional Securities”) and S$500 million 5.125% perpetual subordinated capital securities (“Retail Securities”) respectively at an issue price of 100 per cent. The perpetual subordinated capital securities were issued for the Group’s general corporate purposes as well as to finance capital expenditure and expansion of its business."
  • "During the financial period ended 30 June 2012, the Group invested in a portfolio of quoted securities, unquoted equity investment and compounded financial instruments amounting to S$1,148.9 million. The Group also spent a total of S$315.1 million for construction work-in-progress and other property, plant and equipment during the financial period."


The Macau Metro Monitor, August 10, 2012





A planned Adelson Center for U.S.-China Enterprise in Beijing is now under scrutiny by the Justice Department, the Securities and Exchange Commission, and the company's audit committee for possible violations of antibribery laws, according to company documents and people familiar with the inquiries.  The probes go beyond the allegations in the FCPA suit, which is pending.


The Adelson Center was an attempt to network with influential business groups and included agreements to cooperate and promote trade with organizations such as the Chinese government's trade body, chaired by Wan Jifei, the son of China's former vice premier.  The Adelson Center was part of a plan announced in 2005 for LVS to invest more than $1 billion in an ambitious new non-gambling convention center, hotel, and retail complex near Macau on the southern Chinese island of Hengqin.


The Chinese government and company investigations are looking into at least three transactions in mainland China unrelated to the company's Macau casino properties.  Those transactions involve: a $50 million payment for real estate for the Adelson Center, Sands's sponsorship of a Chinese basketball team, and a contract for ferry service between Macau and Hong Kong.


A former Macau controller for Sands is assisting the FBI in its probe of the deals.  Preliminary results of the board's audit committee probe, led by an outside law firm, were presented last week to Nevada gambling regulators, who are conducting their own inquiry.



According to Business Daily, Sands China is proposing to build an Eiffel Tower replica in its parcel three site, in Cotai; it will be the centerpiece of the project, to be located besides the Four Seasons hotel.



SJM Holdings will relocate 40 live gaming tables from its satellite casino Greek Mythology to other properties under the group’s portfolio.  SJM's CEO Ambrose So Shu Fai said the recent row between the New Century hotel shareholders, where Greek Mythology is located, is “an internal issue”, but he admitted it has affected business volumes in the casino.  “So they will now give us back 40 [gaming] tables, as well as 200 employees,” Mr So said, quoted by Business Daily.    The table relocation is to be completed by September.



Singapore's economy contracted by 0.7% QoQ in 2Q 2012, a reversal from Q1's growth of 9.5%.  That compares with a July preliminary estimate of a 1.1% contraction in a Bloomberg News survey of 11 economists.  On a year-on-year basis, the economy expanded by 2.0%, compared to 1.5% in the preceding quarter.  The Ministry of Trade and Industry says it will narrow the GDP growth forecast for 2012 from 1-3% to 1.5% to 2.5%.  Singapore's growth outlook remains cautious in 2H 2012.  MTI says it expects global economic conditions to remain subdued, as consumer spending in advanced countries will be dampened by weak labour market conditions.




Chinese banks extended 540.1 billion yuan of new local-currency loans in July, well below market expectations for 690 billion yuan.


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




  • SLIGHTLY BETTER:  Although EPS was in-line, the BYI release was more positive than expected, particularly after the WMS and IGT debacles.  BYI placed more new participation games than expected.  Buying back as much stock as the did was also a plus.



  • IN-LINE:  Reported FQ4 of $0.78 and FY 2012 EPS of $2.45 (although better than the whisper)
  • PREVIOUSLY:  FY 2012 EPS: $2.37-$2.45 ($0.72-$0.80 in F4Q)



  • IN-LINE:  F4Q R&D was 10% of revenues (vs 11% of revenues YoY), while SG&A was 26% of revenues, (vs 28% of revenues YoY). A relief after the cost inflation seen at IGT & WMS
  • PREVIOUSLY:  "Our R&D and SG&A to grow at a somewhat lower percent of revenues, although we continue to invest aggressively in R&D."


  • BETTER:  purchased $73 million (1.6 million shares) of common stock in F4Q and purchased an additional $33 million (745k shares) of stock post June 30.  The company has ~$58MM available under its board-authorized share repurchase plan.
  • PREVIOUSLY:  "We still have approximately $57 million remaining under our board authorized share repurchase plan and would expect to increase this amount in the coming months if necessary."





  • SAME:  BYI reiterated shipping their Atlantic lottery units in F2Q13
  • PREVIOUSLY:  "We were awarded a little over 1,500 games…We would expect to start selling those units in the second quarter of our fiscal 2013, probably take about three to five quarters to fill that order out. Within the class three machines in Canada, there's probably a good 60,000 to 65,000, we routinely replace those games. We're about a 20% player in class three there, but VLT is definitely a new initiative for us."


  • SAME:  F4Q game equipment margins was in-line QoQ.  Guidance commentary on game equipment margins reaching 48-49% within the next 2-3 quarters remain unchanged.
  • PREVIOUSLY:  "Based on anticipated mix for our fourth quarter, which we expect will include multiple Ohio properties, we anticipate our Game Sales gross margin will decline slightly over the third quarter. However, we still expect our Game Equipment margins will approach 48% to 49% within the next few quarters, due to continued reductions in material costs on each of the Pro Series cabinets."


  • SAME:  BYI expects to begin shipments to the Illinois VLT market in FQ2 2013, pending final approval of locations
  • PREVIOUSLY:  "We've had good discussions with customers there, have signed several contracts and feel our products are well positioned for the market, which should result in us winning a fair share. We expect to begin initial VLT shipments in Illinois during the second half of calendar 2012, with the mix of sale versus lease to be determined by the contract terms, which are in various stages of negotiations now."





  • SAME:  F4Q systems margins came in at 74%
  • PREVIOUSLY:  "We currently anticipate that fourth quarter Systems margin will return to the higher end of our historical range of 70% to 75% based on mix.”





  • SAME:  Strong performance by both Grease and Michael Jackson.  BYI continues to believe they will do well.  Cannibalization remains low due to low WAP exposure and unique product offering. 
  • PREVIOUSLY: "We just released Grease in March, and it's doing very well in the marketplace better than our expectations.  We've seen very little cannibalization. Michael Jackson is in beta test performing very well mechanically, and we think it's going to perform well when we launch it here in the next week."


  • BETTER:   WAP increased base increased by 500 units (+31% QoQ and +72% YoY) including Grease & MJ placements; this exceeded mgmt expectations.  BYI continues to think that 750 placements for each of these games is acheivable.  They have a couple of follow on games and changes to extend the life of the games.
  • PREVIOUSLY: "Our guesstimate is that it would be reasonable to get in the neighborhood of 750 each of these two games [Michael Jackson/Grease] placed over the first six to nine months from launch; and we would expect very low cannibalization of our existing WAP games because we have so few WAP games."

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