LVS, WYNN, and MPEL all held earnings conference calls recently. While certainly not positive in general, the managements all conveyed a sense of optimism with regards to Macau. So why the optimism? Macau certainly appears to be struggling. January revenues fell 19% and the market will likely suffer a string of double digit monthly declines. However, the declines relate more to very difficult comparisons as the junkets flooded the market with credit in the first half of 2008 and Rolling Chip volume soared.

That level of credit is not likely to be duplicated any time soon. Meanwhile, visitation continues to rise despite tighter visa restrictions now versus last year. There is still excess demand. And there is reason to believe those tighter restrictions could be loosened. I don’t necessarily share the belief of an imminent loosening. However, we’ve maintained that Beijing could offer this tailwind to the new Chief Executive when he takes over late in the year.

Here are some excerpts from the conference calls:


“Though the market is currently being impacted by various external factors, our outlook for Macau remains robust. We are confident that this is just the early innings in terms of the profitable development of the market.” – Lawrence Ho

“A reduction in the short term rate of growth in [real] supply in Macau will allow the city's infrastructure to catch up with visitor growth.” – Lawrence Ho

“I believe that the worst days of Macau were probably behind us in December. And I think so far if you look at stats in January sequentially, January has been up on December and so far for us at least February is up on January again in terms of rolling chip volume. So we're pretty pleased” – Lawrence Ho

“Hong Kong, Macau and the Guangdong Province government will be jointly propositioning the central government to open up the whole region as one regional destination” – Lawrence Ho


“Visitation to the properties has been strong with Venetian Macao enjoying its greatest visitation on record with over 6.7 million people visiting the property during the fourth quarter. That visitation drove a healthy mass play in occupancy, as well as record slot play and hotel revenues during that quarter” - Brad Stone


“We’ve had decent volumes particularly at weekends and over the two holiday periods that we experienced in January and February. Our table game to market share is positive, it’s over 17%. We’ve had some success stories in our slot program which is ahead of last year, retail is ahead of last year so it isn’t all doom and gloom” – Ian Coughlin

“Business in China is far more optimistic scenario even thought the economy in China has been touched as all countries have by what’s going on in the world today. Our businesses, EBITDA is off by 10% to 12% over there but that’s on a very big number to begin with and I’m happy to say that we’re very comfortable” – Steve Wynn

Yeah I know, management teams always try and paint a pretty picture. I’m as skeptical as they come but I do sense some real optimism here. We are becoming more optimistic for the following reasons. The Chinese economy may not be growing as fast as it was but it is growing at a nice clip. Second, the visa proposal outlined by Lawrence Ho above is very comprehensive and very positive. Of course, Beijing is ultimately driving the car. Finally, comps are artificially high but ease considerably in the second half of the year. Any loosening of the visa restrictions could turn EBITDA comparisons positive due to the high profitability of the mass market business.

Chart Of The Week: Bond Breakdown!

The long standing, long term Trend of a bull market in US Treasuries is finally under assault.

After multiple tests (and failures) to breakout through what I consider intermediate term resistance at 2.84% (see chart), yields on 10-year US Treasury Bonds broke out to the upside this week. The US Bond market has gone from shaking in my macro model, to breaking. This is important.

While it’s hard to take a step back from the vacuum associated with the SP500 breaking down to lower lows into week’s end, we must. These global macro factors that run across asset classes are as interconnected as I have ever seen. As yields on US bonds shoot higher, US Equities (at a price) become more attractive. That’s just the math.

Interestingly, both gold and volatility (VIX) agreed with this newly issued investment Trend. Gold, alongside the US Dollar and US Treasuries, has been a beneficiary of the safety trade in 2009, but gold closed down -5.5% on the week (we were short it for most of the move down, then covered into week’s end and went long again). Meanwhile, US equity volatility (as measured by the VIX) dropped -6% on the week, despite the SP500 making new lows.

How can volatility and gold prices dampen as US Equities weaken? Maybe there’s a big asset allocation shift that’s setting up to take hold here... and one that no one is ALLOWED to be long, right when it makes the most sense… long US Equities?

I, for one, am short US Treasuries via the SHY etf (1-3-year Treasuries), and as I sit here on Sunday morning thinking this through, I am seriously contemplating why I don’t own more exposure to US Equities…

As the macro facts and prices embedded within them change, I will… and for now, at a bare minimum, you don’t want to be long this Bond Breakdown!

Best of luck out there this week,

Keith R. McCullough
CEO / Chief Investment Officer

US Market Performance: Week Ended 2/27/09...

Index Performance:

Week Ended 2/27/09:
DJ (4.1%), SP500 (4.5%), Nasdaq (4.4%), Russell2000 (5.3%)

FEB09 (A):
DJ (11.7%), SP500 (11.0%), Nasdaq (6.7%), Russell2000 (12.3%)

2009 Year-to-date:
DJ (19.5%), SP500 (18.6%), Nasdaq (12.6%), Russell2000 (22.1%)

Keith R. McCullough
CEO / Chief Investment Officer

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Eye On US/China Relations: Beijing releases it's own report...

Low Stress? SP500 Levels, Refreshed...

We took this market into the dunk tank again on the open, tested my support range of 730-734, and bounced pretty convincingly. I covered my short position in the US Financials (XLF) this morning – no, they aren’t all going to zero…

In the chart below, I have painted the lines of this market’s support/resistance. I have SP500 resistance lines at both 767 and 816. For certain, this remains a bear market. But with each lower low, it’s becoming a less stressful one to trade. People are getting used to this slow motion government sponsored train wreck – this is the behavioral side of finance.

While this may very well change into the close, the VIX is actually only +2% here on the day at 45.50. On the margin, that’s actually one of today’s surprisingly bullish signals. I have stiff intermediate term “Trend” resistance up at VIX 51.38, and even with Citigroup collapsing we didn’t come close to testing that VIX level. As volatility continues to break down, we should be able to form another trading bottom.

I have SP500 support down at the 733 line. That’s not a lot of downside reward left for me as a short seller, so I’ll be buying/covering on the way down, from here…

Keith R. McCullough
CEO & Chief Investment Officer

Eye On US Housing...

Looking past the bad news is very hard to do…..

Over the past two days we have been dealt a body blow on the housing front. Sales of existing homes nosedived in January to the lowest level since July 1997 - the NAR said Wednesday that sales of existing homes fell 5.3% to an annual rate of 4.49 million in January, from 4.74 million in December. Importantly, supply of existing homes was 9.6 months at the end of January, up from 9.4 months at the end of December. Single-family home sales fell 4.7%, while sales of condos and co-ops were down 10. In addition, sales of new homes in the U.S. plunged to a record low in January. While inventories of unsold homes fell by 3.1% to 342,000 (the 13th consecutive decline), sales are falling even faster. As a result, the inventory of new homes at the end of January represented a record-high 13.3 month supply at the January sales pace.

The January trends are less encouraging, as opposed to December when sales surged providing some hope that the long-awaited housing market bottom was in sight. This sequential slowdown in home sales is, on the margin, not a positive. The glut of supply combined with the lack of buyers is currently driving prices down, but looking forward, we continue to think that housing prices will bottom by 2Q09 (prices will decline at a lesser rate).

There are a lot of reasons to be sanguine about the real estate market; there are also plenty of reasons to be optimistic. Sure, if more Americans are worried about job security, they are not likely to buy a new home. That being said, it is actually a great time to be buying a home today as prices have declined significantly. Additionally, the combination of low interest rates and the $8,000 first-time homebuyer tax credit in the economic stimulus plan signed by Obama this month should motivate some buyers.

Significant issues still rest with home builders and home building stocks. Today, homebuilders are faced with intense competition from foreclosures, distressed sales of older homes and the supply of new homes on the market. Buyers are facing two opposite forces when thinking about buying a home, with the force against buying currently having the upper hand. Buyers are faced with declining wealth (in both their stock portfolios and their home values) and an uncertain labor market, offset somewhat by lower mortgage rates that are improving affordability. If housing prices do bottom in 2Q09, buyers’ wealth will begin to decline at lesser rate, thereby mitigating one of the opposing forces.

Howard W. Penney
Managing Director

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