Finish Strong

“It wasn’t where he started, but where he’d finished, that mattered.”

-Arthur Herman, Freedom’s Forge


To be clear, in building the vision for My Business, I’m not finished – I’m just getting started. No matter what your political and/or economic view this morning, trust in yourself, family, and firm is what is going to help you build something that lasts.


Especially in this profession, where many are hyper-focused on what they get paid today, we can all learn a lot from the aforementioned quote in Freedom’s Forge about Bill Knudsen. That’s how he thought about the opportunity to compete with Ford. That’s how I think about competing with the Old Wall.


“What were you getting paid at Ford?” “Fifty thousand dollars a year,” came the answer. So Sloan started him on February 23, 1922 at six thousand dollars a year. Knudsen didn’t care.” (page 28) In 1922, Bill Knudsen took over “GM’s lowest-priced, but also least profitable, division.” It was called Chevrolet.


Back to the Global Macro Grind


With Global Equity markets down hard last week (USA -2.5%, China -2.3%, Europe -1.7%), all of a sudden November of 2007 doesn’t seem so far away. Remember, that’s when the global corporate revenue and #EarningsSlowing cycle started last time. In November of 2007, the SP500 was down -4.4%. It wasn’t all about “the cliff” then – it isn’t now, either.


I’m not suggesting the Fiscal Cliff doesn’t matter this time – I’m simply reminding you that:


A)     It’s not new and should have been proactively prepared for (it wasn’t)  

B)      It’s the outcome of a much larger causal factor that the country is begging for more of (Keynesian Policy)

C)      It’s not happening in a vacuum; both Japan and Europe are going off #KeynesianCliffs of their own


This is why we warned our clients of the #KeynesianCliff (Hedgeye Macro Theme #3) before it became the perma-bull marketers latest crutch. This is also why we’ll remind you that Japan reporting a -3.5% QoQ SAAR GDP for Q3 of 2012 (Nikkei down -15.4% since #GrowthSlowing started, globally, in March) is how it ends. Japanese stocks have been making lower-highs for 20 years.


Deficit spending and money printing has a very causal relationship with long-term #GrowthSlowing. Kicking this can down the road for the sake of a “market pop” is the dumbest thing Americans can hope for right now. We need to start anew by taking the pain, so that we our kids and theirs can finish strong. That’s what matters.


What doesn’t matter to the 97% of people who don’t get paid by them is creating asset bubbles that inflate, then pop. To review, there have been 3 Major Policy Bubbles perpetuated by Greenspan/Bernanke in the last 15 years:

  1. Tech
  2. Housing
  3. Commodities

Bubble#3 (our 2nd Hedgeye Macro Theme for Q412) remains Commodities. Looking at last week’s CFTC (Commodities and Futures Exchange) data, here’s what that looks like in real-time:

  1. CFTC net long contracts down -11% wk-over-wk (biggest weekly drop since June) to 931,048 futures/options contracts
  2. CFTC net long contracts down -31% from The Bernanke Top we’ve been focused since mid-September 2012
  3. Copper contracts down -70% last week to 2,077!

Now the Doctor (Copper) has been signaling #GrowthSlowing in our multi-factor, multi-duration, risk management model since February of 2012 (see Chart of The Day). Seeing copper implode since then is not new – but it doesn’t mean it has stopped.


On that score, last week’s commodity price moves highlight what I think summarizes the overall Q412 beta environment for stocks and commodities in particular:

  1. Copper = down another -1.1% wk-over-wk to $3.44/lb (bearish on all 3 of our core durations: TRADE/TREND/TAIL)
  2. Gold = up +3.4% wk-over-wk to $1730/oz (recapturing intermediate-term TREND support of $1702/oz)

To me, that’s demand slowing (Copper falling) versus long-term growth fear (Gold rising). Don’t forget that people choosing to invest in Gold are explicitly making a decision to invest in a relatively unproductive asset instead of high-growth companies like Hedgeye.


These people who are running around like chickens with their heads cut off saying the stock market falling is all about “the cliff” should also be reminded that Gold was down for 4 consecutive weeks into the US Election.  


Is Obama’s win bullish for Gold? Is it bearish for growth? Ask the bond market. If there’s so much “credit risk” now associated with “the cliff”, why are US Treasury Yields falling (and not rising like they did in Europe)?


If you know the answers to all these questions, good – because I don’t. All I know is that after blaming Bush for where he started, President Obama has a wide open opportunity to change growth expectations in this country. Where he finishes matters too.


My immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1, $105.22-109.72, $80.39-81.28, $1.26-1.28, 1.60-1.71%, $3.41-3.50, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Finish Strong - Chart of the Day


Finish Strong - Virtual Portfolio


Takeaway: LVS, WYNN, and Genting would be leading contenders to invest in a potentially high IRR market

A summary of our expert call on the prospects of expanded gaming in South Korea



Last week, we hosted a call with Steve Park, Senior consultant at Gaming Asia-Pacific, to discuss the prospects for gaming expansion in South Korea.  Mr. Park is heavily involved in the process of drafting the gaming expansion platform for the government.  His bio is below. 


According to Mr. Park, South Korea has a 50/50 probability of passing gaming expansion legislation.  At this point, the platform is likely to be modeled after Singapore only with more licenses.  Investment returns would be very high in our opinion.  We think LVS, WYNN, and GENTING would be leading candidates to capitalize on this gaming expansion.  In particular, LVS seems well-situated since it is a premier IR operator with a major focus on the MICE business in Korea.  MGM, MPEL, and GALAXY would also be interested parties but they are lower-tiered operators.  On the gaming equipment side, we think Aristocrat, IGT, and SHFL stand to benefit from expanded gaming in South Korea.



Here is a summary of Mr. Park's comments on South Korea:



  • Korea Tourism Organization (KTO) is in charge of tourism policy and reports to the Ministry of Sports and Tourism.
  • Back in 2009-2010, KTO looked at ways to increase inbound tourism, particularly the MICE business.  They studied the Macau and Singapore models and reached out to international gaming operators regarding interest in new Korean casinos that would allow local play.  The feedback was positive from LVS, WYNN, and MGM.  
  • Currently, there are 16 casinos with only one casino (Kangwon) that allows locals to gamble.

Gaming bill/Timeline

  • Bill details
    • Minimum investment of $2 billion (similar to S’pore standards).
    • $500 million needed for a foreigner’s casino license.  Recently, the Ministry made an ordinance change to allow for more flexibility.  The investment requirement to apply for a license has been reduced from $500 million to $250 million—provided the candidate meet a B investment grade rating and submit a plan for something other than a casino or hotel (e.g. auditorium, retail).
    • VIP and mass gaming taxes will be similar.  Currently, GGR tax is 10% in South Korea.
    • Prevention/treatment standards would be similar to Nevada standards.
    • IR job creation:  10,000 gaming employees (30,000-35,000 indirect jobs) per IR project.
    • South Korea/Singapore model differences:  will not limit the number of licenses; will not need to have 50% of investment before granting of license.
    • South Korea/Singapore model similarities:  US$ 70-80 (daily entrance fee), US$ 800-900 (annual entrance fee).
    • An IR could be located in the midpoint between Incheon airport and Seoul Metropolitan area.  Another IR could be located near the Busan area.
    • 24 legislative members comprise of the IR committee.  There are about 300 legislative members in total.
  • Current timeline 
    • Hope to submit legislation in April/May and have Congress review it by the end of 2013.
    • Selection/licensing process will take six months.
    • Earliest bill passage date:  Oct/Nov 2013—IR construction could start in summer 2014.
    • Presidential election:  Dec 19; new President will be in power Feb 2013.
      • Presidential candidates: will not support gambling publicly but will say they want to expand MICE industry via IR.
      • However, Mr. Park believes all candidates would be in favor of expanded gaming.
  •   Keep an eye on the agenda that comes out in February from the transition committee for any mention of IRs.


  • Negative public opinion on gambling
    • This is the biggest hurdle.
    • 70-80% of public has not been inside the casino.
    • Public needs to be informed about gaming.
  • Kangwon, who has a monopoly on local gaming, will oppose 
    • Foreign casino opposition:  7-luck (owned by Grand Korea Leisure Co)— also a government company, owned by KTO


  • Kangwon regulation
    • Political schedule dictates how Kangwon is regulated.  Every year, Korea has a regular congressional oversight period some time between end of September to end of October.  Any consideration on additional gaming supply or other changes to the facility would happen after the oversight period.  Hence, the additional tables may be approved in February or early Spring 2013.
  • 8 City proposal:  not optimistic on this project; too many logistical complications
  • Okada:  has hurt its image in South Korea with the WYNN debacle; furthermore, it is applying for two projects simultaneously - 1) Incheon City and 2) Incheon Free Economic Zone (IFEZ) Authority—two different jurisdictions.
  • CZR:  looking at Midan City - northeast part of Yeongjong Island which is 10 minutes away from the Incheon International Airport.  City infrastructure has been completed but Midan City is trying to find an operator for a foreigners-only casino license.  CZR is interested in the project in that they wouldn’t have to contribute to the construction costs.
  • Other Asia opportunities:  Taiwan expected to submit a bill in 2013.  It’s still uncertain in Japan.  Vietnam has said no to local gaming. 


Steve Park Bio

Steve Park is a partner and senior consultant at Gaming Asia-Pacific, a firm providing business and regulatory consulting for international clients wishing to enter the South Korean and Japanese markets. Serving as a consultant to the Korea Tourism Organization Advisory Board, Park advises the integrated resorts committee on political and media affairs. He also provides advice and assistance to the New Frontier Party to develop the government party’s legislative agenda and strategies. Previously as a policy advisor in the National Assembly, Park served in the Public Administration & Security Committee reviewing tourism development projects and spending by all 16 regional governments such as Incheon’s Yeongjeong Sky City and Jeju’s tourist-only domestic casino resort. He also served as a campaign consultant and reporter in the U.S for the Republican Party and the Washington Times. Park holds a bachelor's degree in international studies and a graduate degree in government from Johns Hopkins University.

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TODAY’S S&P 500 SET-UP – November 12, 2012


As we look at today's setup for the S&P 500, the range is 42 points or 1.15% downside to 1364 and 1.90% upside to 1406.

















  • YIELD CURVE: 1.35 from 1.36

 MACRO DATA POINTS (Bloomberg Estimates):

  • Holiday in U.S., no data releases scheduled
  • U.S. Rates Weekly Agenda


    • Veteran’s Day observed; holiday for most federal workers
    • Washington Week Ahead: Congress in lame-duck session


  • U.S. to overtake Saudi Arabia’s oil production by 2020: IEA
  • Natural gas to become largest fuel in U.S. by 2030: IEA
  • EU finance chiefs seek to keep bailout on track after Greek vote
  • Apple settles HTC patent suits in shift away from Jobs’s war plan
  • China’s loans unexpectedly fall as money supply misses forecasts
  • Best Buy said to hire Williams-Sonoma’s Sharon McCollam as CFO
  • Hertz said to divest outlets for FTC approval on Dollar Thrifty
  • “Skyfall” has $87.8m in N. Am sales, record for a Bond film
  • U.S. Weekly Agendas: Finance, Tech, Real Estate, Consumer, Health, Energy, Industrials, Media/Entertainment, Transports
  • Canada Weekly Agendas: Energy, Mining
  • U.S. Fiscal Cliff, China Exports: Week Ahead Nov. 12-17


    • Soufun (SFUN) 5:45am, $0.46
    • Beazer Homes (BZH) 6am, $(1.11)
    • DR Horton (DHI) 7am, $0.28 - Preview
    • Petrobank Energy & Resources (PBG CN) 8:05am, C$0.05
    • Cornerstone OnDemand (CSOD) 4:01pm, $(0.06)
    • Hologic (HOLX) 4:01pm, $0.36
    • Wuxi PharmaTech (WX) 4:30pm, $0.30
    • Tronox (TROX) Post-Mkt, $0.41
    • Jacobs Engineering Group (JEC) Post-Mkt, $0.79



COPPER – the Doctor remains checked out; Copper gets nothing remotely close to the Obama bounce you are seeing in Gold; Copper -1.1% last wk vs Gold +3.5% tells you all you need to know about the demand (slowing) vs fear (gold) flows. Copper remains in a Bearish Formation in our model, which is why you want to keep your net long exposure to beta on a short leash.

  • Brent Oil Snaps Two-Day Gain as Europe Officials Seek Greek Deal
  • Bulls Cut Wagers as Prices Rally Most in Two Months: Commodities
  • Copper Rises on Stronger-Than-Estimated Growth in China Exports
  • Gold Nears Three-Week High on Concern About U.S. Fiscal Cliff
  • Soybeans Slide to Lowest Price Since June on Raised USDA Outlook
  • Coffee Rebounds on Speculation of Investor Buying; Cocoa Slides
  • China Lags U.S. in Gold Holdings, May Raise Total, LBMA Says
  • EU Says Hasn’t Started Antitrust Investigation of Metal Storage
  • Natural Gas to Become Largest Fuel in U.S. by 2030, IEA Says
  • Rebar Climbs After Chinese Exports Expand Most in Five Months
  • Water Scarcity Threatening Energy Projects From U.S. to China
  • Gold Seen Outperforming as U.S. Fiscal Cliff to Hurt Base Metals
  • Goldman Lowers Soybean Price Forecast 12% on Higher U.S. Output
  • Metalor Plans Singapore Gold Refinery on Rising Asian Demand














JAPAN – if Americans and Europeans want to dress-up and play Japan, that won’t end well; Keynes would not be proud of today’s -0.9% y/y GDP print out of the Japanese; Nikkei down another -0.93% overnight (down -15.4% since global #GrowthSlowing began in March); we remain short the Yen – they have their own #KeynesianCliff, don’t forget.


CHINA – after 5 consecutive down days last wk, we get the river card this morning = Chinese Loan Growth down -14% y/y in OCT; any bottom in China will be a process, not a pt – they don’t subscribe to Krugman/Bernanke policy, evidently (yet).










The Hedgeye Macro Team




Sandy Bayes

This note was originally published at 8am on October 29, 2012 for Hedgeye subscribers.

“The only safe ship in a storm is leadership.”

-Faye Wattleton


US markets are closed today, but rest of world is still open for risk to be managed. US Equity futures are down 8 as the US Dollar (+0.16%) continues on its strengthening path toward popping Bernanke’s Bubble (Commodities).


Like Sandy’s progression, the global growth and earnings slowdown is measurable. The closer it gets to you, the more obvious its risk management realities become. Try it at home. Buy a stock in front of a guide down.


Nate Silver does a great job simplifying this Bayesian process of managing risk through probability theory on page 243 of The Signal And The Noise: “we learn about it through approximation, getting closer and closer to the truth as we gather more evidence.”


Back to the Global Macro Grind


Bayes’ Theorum is by no means a silver bullet. It won’t tell you how many trees Sandy will knock down in your yard inasmuch as it won’t tell you the precise day when China will “bottom.” It’s simply a framework that allows us to think flexibly.


This is the primary reason why our risk management style is so different than most that you read. Any buy-side fund worth their fees gets this. The sell-side and media at large does not. Like monitoring a hurricane, we probability-weight every decision based on what real-time price, volume, and volatility information we receive (every 90 minutes).


Ninety minutes? No, that doesn’t make me “short-term” – that just makes me less likely to make mistakes within the context of the intermediate to long-term cycles that we have already studied. Watch the storm. Risk Happens Fast.


Across our core risk management durations (TRADE, TREND, and TAIL), here’s what I saw last week:

  1. US Dollar Index = up +0.6% and up for the 4th week in the last 6 (bullish TRADE and TAIL)
  2. EUR/USD = down -0.76%, and down for the 4th week in the last 6 (bearish TRADE and TAIL)
  3. US Treasury Yield (10yr) = down 1 basis pt to 1.75% (bearish TAIL, which is long-term bullish for Bonds)
  4. CRB Commodities Index = down another -2.7% (down -7.8% since Bernanke’s Top, SEP 14, 2012)
  5. Oil (WTIC) = down another -4.4% to $86.28/barrel in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  6. Gold = down another -0.7% (bearish TRADE and TAIL)
  7. Copper = down another -2.1% (Bearish Formation, down -10% from its #GrowthSlowing high Q112)
  8. SP500 = down -1.5% last wk closing below both TRADE (1441) and TREND (1419) resistance
  9. Russell2000 = down -1.0% last wk closing below both TRADE (831) and TREND (846) resistance
  10. US Equity Volatility (VIX) = +4.3% last wk closing above both TRADE (16.29) and TREND (15.54) support
  11. Russian Stocks (RTSI Index) = down -3.7% leading European Equity decliners last wk (-18.5% since March)
  12. Chinese Stocks (Shanghai Composite) = down -2.9% remain in a Bearish Formation (TRADE, TREND, and TAIL) 

That last point (China) is a good one to qualify. Two weeks ago I heard plenty a pundit say “China has bottomed” without any process or conditional probability backing up their perma-bull proclamation of faith. Bottoms aren’t bottoms, until they bottom.


As a general rule, that’s why I like to teach the very basic risk management concept that tops and bottoms are processes, not points. To probability-weight them, you need to have a disciplined process to grind out evidence that risk is actually occurring.


Old Wall generally thinks about this bass ackwards. They call it “risk on” or  “risk off”, after the risk occurs. As a practitioner, you can safely assume that risk is never “on” or “off” – instead, it’s always moving. So embrace its uncertainty.


Speaking of which, I need to cut this Early Look short to get gas all over my hands and prime my generator. I’d hate to have a risk “on” moment in front of my kids where I didn’t proactively prepare for what’s staring me in the face.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1692-1725, $106.08-110.66, $79.67-80.35, $1.28-1.30, 1.71-1.81%, 2048-2098, and 1391-1419, respectively.


Best of luck out there today – stay safe,



Keith R. McCullough
Chief Executive Officer


Sandy Bayes - Chart of the Day


Sandy Bayes - Virtual Portfolio


3Q results as expected


"The global economic outlook continues to be uncertain but the Group remains optimistic in achieving a steady income from this region. Together with a healthy cash position, we are well placed to capitalise on investment opportunities that create shareholder value in the short and medium term."




  • Gained gaming market share for the 2nd Q in a row
  • Mass market remained flat
  • Non-gaming business remained robust
  • In the coming weeks, they will be opening the Marine Life Park 
  • They will target a larger customer base and expand their international marketing efforts with the completion of the Marine Life Park
  • They expect continued pressure on their EBITDA margin as the Marine Life Park ramps but better margins in 2013
  • Economic recovery seems elusive
  • They are actively looking at ways to increase their room inventory, which remains constrained



  • GGR market share is 51%
  • RC volume share is 49%
  • Mass share is 47%
  • Potential of Japan gaming:  thinks that the current government headed by the DPG will have a shortened life span and will call elections sometime next month. That means that there will be a new government over the next 3-4 months. They are hearing that the new government will be interested in liberalizing gaming. Very positive that legislation will be enacted next year.
  • VIP rolling chip % was about 2.8%
  • Receivables on VIP side:  Receivable is lower QoQ. Bad debt provision is almost the same as last Q.
  • They will continue to be cautious but it's on a case by case basis. So they are more cautious with new client credit extensions vs. existing clients. 
  • They are still offering some discounts to customers to pay debts in the first 14 days
  • $9MM of pre-opening expenses related to the Marine Life Park.  Pre-opening costs are those specific to the Park only before it opens. However, once the Park opens, they cannot write-off the expenses as pre-opening. Only from 2Q next year will EBITDA margins creep up. 
  • Mass market volume was down 3% QoQ.  But the win was up 1%. 
  • Slot volume was down 4% QoQ
  • The local numbers (Singaporean) have gone down and those just across the border have gone up slightly. They hope to increase their Singaporean #s next year. 
  • Will begin marketing to the Russian and Middle Eastern market next year which they haven't done before
  • Will continue to suffer a little bit more on the local side of the market
  • Net gaming revenue mix: Rolling win is 28%
  • Took a bit of cost out of the property.  They understand how to be more efficient. Used to operate 4-5 shifts but now they operating 7-9 shifts and so they can better match labor needs. Had 14,000 employees and today have 13,200. Target is to reduce their total employee base to under 13,000. Singapore is going through a labor crunch right now. They are trying to bring more labor efficiencies
  • Their undisclosed investments are within their core industries and expertise. 
  • Paid 5 1/8% interest on the perpetual securities so that is their minimum hurdle on their portfolio investments.  Usually north of 10%.
  • Looking at the Echo share price today, it looks like they made the right decision to sell the stock. The loss on their statement is the entire loss in relation to the sale.
  • Most of the cash sits at the Genting Singapore level. All of the debt sits in the Resorts World level. Genting Singapore has lots of cash but no direct borrowings since all the borrowings are at the IR level. 
  • Write-offs during the quarter? Exchange loss is just a pure FX loss. Other write-off just standard practice.
  • In terms of local marketing, they are just marketing local attractions, MICE marketing and "wedding marketing"
  • Thailand is still really weak and Vietnam has fallen off a cliff. Greater China still has great potential. There are more low cost flights between Singapore and China that have come online and are continuing to come online. 
  • The F&B numbers have actually gone up slightly QoQ
  • Commission rates on VIP have actually gone down slightly.



  • Genting reported net revenue of S$670MM and Adjusted EBITDA of $303MM
    • RWS net revenue of $662MM and Adjusted EBITDA of S$304MM
  • Comparing to the second quarter of 2012, overall revenue and adjusted EBITDA was affected by a lower win percentage in the premium player business. 
  • Other business segments remain healthy with Universal Studios Singapore (“USS”) recording a daily average visitation of 9,100 visitors and average spend of S$86. The hotel business saw an increase in occupancy rate to 93% with an average room rate of S$432. 
  • As the Marine Life Park (“MLP”) moves into its final pre-operations phase, we continue to incur pre-opening operating costs without corresponding revenue.
  • During the financial period ended 30 September 2012, the Group invested in a portfolio of quoted securities, unquoted equity investment and compounded financial instruments amounting to a net total of S$1,262.2 million. The Group also spent a total of S$376.9 million for construction work-in-progress and other property, plant and equipment during the financial period.
  • We continue to add new products and events to enhance Resorts World Sentosa (“RWS”)’s appeal as an exciting destination resort. In October, the second edition of Halloween Horror Nights in Universal Studios Singapore was a sold-out event, a sign that the park is earning brand equity with consistent delivery of products and signature events. In the first week of November, we opened to encouraging audience response our latest production - the magic spectacular Incanto
  • RWS will soon open one of its major signature attractions - the Marine Life Park (“MLP”). The MLP is positioned as a premium leisure product. Over the next few months, we will gradually build up capacity in the MLP and as such, EBITDA margins will continue to be constrained for the rest of the year and early part of next year
  • On 7 December 2012, we will celebrate the Grand Opening of our RWS Integrated Resort with a host of festivities that will signify the dawn of one of the world’s most exciting and enjoyable destination resorts.
  • Looking ahead to 2013, the full opening of RWS will allow us to capitalise on sales and marketing initiatives that appeal to a wider base of affluent travellers and new markets.
  • The Company’s operating activities continue to generate steady cash flow. In 2013, we expect cash flow to improve as our capital expenditure reaches steady state and the new attractions in our West Zone bring in additional revenue.

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