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The Macau Metro Monitor, November 14, 2012




Macau CEO Chui says he is confident gaming operators will be able to establish smoking areas before the forthcoming ban on smoking in casinos comes into effect on January 1.  Chui also admitted the private property market is “overheated” and prices are “high”. But he downplayed the situation, saying market fluctuations must be seen as something normal.  Chui also said preparation works for the new border checkpoint between Macau and the mainland continue and are “on schedule”. 



Macau's media cited statistics from casinos that Mainland government officials accounted for a quarter of the high‐end players in Macau, while executives from state-owned enterprises accounted for almost a quarter.



Macau visitor arrivals in package tours increased by 21.9% YoY to 749,496 in September 2012.  Visitors from Mainland China (538,178) increased by 23.7%, with 222,914 coming from Guangdong Province.  There were 100 hotels and guesthouses operating in September 2012, providing 26,083 rooms, an increase of 3,704 (+16.6%) YoY, of which guest rooms of the 5-star hotels accounted for 63.9% of the total.  The average length of stay decreased by 0.18 night to 1.3 nights.


CHART OF THE DAY: Collective Enlightenment


CHART OF THE DAY: Collective Enlightenment - Chart of the Day

Collective Enlightenment

“The only thing that makes sense is to strive for greater collective enlightenment.”

-Elon Musk


I was on a plane to Austin, Texas yesterday, grinding through my reading pile, and came across that excellent thought leadership quote in Businessweek from the Founder/CEO of Pay Pal and current Chairman of Tesla, Space X, etc. – Elon Musk.


Then I came across another quote from Amazon’s Founder/CEO, Jeff Bezos: “We don’t want to do me-too things. The people we’ve attracted over time to Amazon want to be pioneers. They want to be inventors. They want to do new things.” (All Things Digital)


And I couldn’t help but do what I should probably do every day in this business – stop everything I am doing that has to do with regressive broken sources and just think about more and more ways to collaborate, innovate, and create. That’s progress.


Back to the Global Macro Grind


What was not progressive was seeing so many people get sucked into buying September’s top. While I am fine with sending you “Buy The Flush Notes” as our long-term TAIL line of 1364 SP500 support holds, I am far from fine with where the bull case goes from here.


It’s not like the risk management signals in September/October haven’t been obvious. Seasoned veterans of going to cash like Baupost’s Seth Klarman (went to 33.5% cash at the time of his note) wrote as recently as October 23rd in his client letter:


“The overall market environment seems increasingly risk to us… US corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination.”


Obvious is as obvious does, in hindsight.


US Corporate Margins coming off an all-time peak and Bernanke’s Bubbles (commodities) popping are long-term cycle risks. Going off (or saving us from) the #KeynesianCliff that politicians perpetuated in the first place won’t change that.


So where do we go from here? I don’t know. All I know is that we are observing a non-linear and dynamic market ecosystem that gives us an opportunity to change our mind about that, daily.


In the meantime, conditional probabilities give us clues. If, if, then. If a market is bearish TRADE, TREND, and TAIL, then don’t buy it. If a market is bearish TRADE and TREND, but bullish TAIL, then you don’t play hero – you take your time.


With that decision making process in mind, here are some US centric risk management signals to consider, across our core durations (TRADE, TREND, and TAIL):

  1. SP500 = down -6.2% from the Bernanke Top is bearish TRADE and TREND (1419) with long-term TAIL support of 1364
  2. Russell2000 = down -8.8% from the Bernanke Top bearish TRADE, TREND (846) and TAIL (797)
  3. Nasdaq = bearish TRADE, TREND (3069), and TAIL (2937)
  4. Financials (XLF) = bearish TRADE and TREND ($15.58); bullish TAIL ($14.93)
  5. CRB Commodities Index = bearish TRADE, TREND (305), and TAIL (312)
  6. Oil (WTIC) = bearish TRADE, TREND ($88.35), and TAIL ($92.86)
  7. Gold = bearish TRADE (1748); bullish TREND (1704)
  8. Copper = bearish TRADE, TREND (3.61), and TAIL (3.91)
  9. US Equity Volatility (VIX) = bullish TRADE and TREND (16.02); bearish TAIL (19.58)
  10. US 10yr Treasury Yield = bearish TRADE, TREND (1.72%), and TAIL (1.91%)

Global markets reflect our Collective Enlightenment. It will be a great day in this business when best in class risk management and research processes do too.


Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1, $105.02-109.41, $80.56-81.34, $1.26-1.28, 1.56-1.69%, $3.41-3.51, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Surviving Storms

This note was originally published at 8am on October 31, 2012 for Hedgeye subscribers.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

-Charles Darwin


Suffice it to say, from a survival perspective, the last 48 hours have been humbling. As my generator teeters on running out of gas again this morning, I write this Early Look to you under a flickering light with a heavy heart.


We will move forward today. We will adapt and change. We will get through this together.


Yes We Will.


Back to the Global Macro Grind


Today is month-end for October (year-end for many mutual funds). Early morning futures are indicating we’ll get a lift into those month-end markups. Unfortunately, the broader risk management picture of Global Growth and #EarningsSlowing has not yet changed.


From The Bernanke Top (September 14, 2012), US stocks (SP500) and commodities (CRB Index) are down -4.3% and -8.1%, respectively. For October to-date, the SP500 is down -2% and the Tech Sector (XLK) is down -6%.


What will November bring?


I sincerely hope health and safety to the many of us who are in the dark here on the East Coast. But from a stock and commodity market perspective, hope is obviously not a risk management process.


On that score, because I’m really at a loss for words this morning – here are some risk management lines to consider that will be highly influential to US stocks and commodities in the coming weeks:

  1. US Dollar Index immediate-term TRADE breakout line of $79.57 (long-term TAIL support = $78.11)
  2. Euro (EUR/USD) long-term TAIL resistance = $1.31
  3. SP500 TRADE (1431) and TREND (1419) resistance
  4. Russell2000 TRADE (824) and TREND (846) resistance
  5. Tech Sector ETF (XLK) TRADE ($29.62) and TREND ($30.28) resistance
  6. Apple (AAPL) TRADE ($624) and TREND ($640) resistance
  7. US Equity Volatility (VIX) immediate-term TRADE support = 16.61; TAIL resistance = 19.05
  8. CRB Commodities Index TRADE (305) and TAIL (312) resistance
  9. Oil (WTIC) TRADE ($88.32) and TREND ($91.77) resistance
  10. Gold TRADE ($1735) resistance; TREND ($1699) support

At the same time, it will be important to monitor what the US Bond market thinks about risk. The 10-year US Treasury Yield has been as good a leading indicator as any on US growth in 2012 – here are the levels that matter most in our model:

  1. UST 10yr TRADE resistance = 1.81%
  2. UST 10yr TREND support = 1.72%
  3. UST 10yr TAIL resistance = 1.91%

In other words, if the 10yr yield can’t find a way to breakout > 1.91% in the coming weeks and months, the high probability situation in our model is that US growth will remain below 2% in Q4.


All the while, Chinese demand will be an open question. While our research and risk management views currently say that the “China has bottomed” crowd has no confirming data to support that claim, our views are always subject to real-time change.


Across risk management durations in our model, here are the lines that matter most on the Shanghai Composite:

  1. Immediate-term TRADE resistance = 2112
  2. Intermediate-term TREND resistance = 2151
  3. Long-term TAIL resistance = 2294

When an asset class is bearish across all 3 of our core risk management durations, we call that a Bearish Formation (when last price is above all 3 we call that a Bullish Formation). We don’t have to be bullish or bearish. We simply have to embrace uncertainty, change our minds, and adapt as the data does. That’s how we survive storms.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST Yield, and the SP500 are now $1691-1721, $106.21-109.97, $79.57-80.45, $1.28-1.30, 1.72-1.81%, and 1391-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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DKS: Not Much Room For Error

Takeaway: Nice print from DKS. But don’t chase it. The space should buoy the fundamentals. But NKE, FINL, FL are better buys. UA is better to sell.

We were asked several times today if we’d chase DKS on today’s print. The answer is No. In order to buy it here we need to be able to argue a sustainable 5-7% comp growth rate over the next 2-3 quarters to get to the earnings upside needed to justify a $50 stock. Recall that with DKS’ prime locations and escalating rent minimums, it generally needs a 3-4% comp without excessive discounting to leverage occupancy costs.

While we wouldn’t buy it, we wouldn’t short it, because the fundamentals of the athletic space in the US are simply too good, and should continue to be that way through at least the first half of 2013. As it relates to DKS, the times investors have really made money long and short have been when the company’s comp performance has deviated meaningfully from these levels. It’s quite difficult to argue either of those right now. Yet, at least.

With the completion of this year, DKS is likely to complete the best 3-year comp run in its public history. The only period that comes close was ’05-’07 – but that was a) a relatively solid economy, and b) just after its top competitor (Sports Authority) was just taken private and handed market share to DKS. Are we going to tack on ANOTHER year – especially when Golf Galaxy is going against some particularly hard compares? We’d consider it…but our concern is that the consensus is already there.


Yes, there’s more than just comps. We know that. The company is getting more efficient, it is doing a better job branding itself with key vendors, and dot.com just put up a 47% growth rate albeit off a low base accounting for ~2pts of top-line growth (though the 2-year change held steady vs 2Q levels). Also, DKS just put in its new AZ DC that should facilitate another 300 stores (50% growth from here). That is not to say that we NEED 900 stores, but the company can certainly get them if it so chooses. But at 17x next year’s earnings, would we rather own DKS, NKE, or RL? You can pretty much take your pick (within a point or so). That’s a no brainer for us. We’ll take content over distribution in this space in a heartbeat.

We’d look elsewhere – specifically NKE, FINL and FL – in that order for long  exposure here. If you have to short something, we’re still compelled to hang on to our UA short thesis here – as the company is going to incur some near-term pain in order to achieve the longer-term share gains that we definitely think will come.


Takeaway: The Street is not bearish enough on MCD.

We believe that the bulls on McDonald’s are basing their stance on some dangerous assumptions in FY13.  We have been looking for a reason to get long McDonald’s but believe, at this point, that 9% earnings growth in 2013 is unlikely to materialize. 


If history is any guide, the aggressive move to value will not be effective in over-riding investor concerns next year.  Back in October 2002, Jack Greenberg, then-CEO of McDonald’s, embarked on a “price war” after seeing his company report 10 months of declining same-restaurant sales, bringing back the Dollar Menu from a five-year hiatus.  At the time, as today, it was hoped that the Dollar Menu would help reverse a negative trend and lead to positive same-restaurant sales, but that did not materialize at the time and has failed to materialize so far in 4Q12.  Consumer perceptions of value are constantly changing; we don’t expect McDonald’s current strategy to achieve its objectives.


Management has been unwilling to concede that any factors, other than the macro environment, are weighing down earnings growth.  We are working on a more detailed analysis of the company’s outlook and will be publishing on that in mid-December. 


While McDonald’s is not reporting 4Q12 results for another two months, we are expecting one of the worst earnings reports from the company since the turnaround began in 2004.  We have come to the conclusion that the street is too optimistic on what MCD can earn in 4Q12 and in 2013.  In 4Q12, food, labor and other expenses are all working against company in what could be one of the worst quarters in the company’s recent history.

  1. We have MCD 4Q12 revenues of $6,754 million vs. consensus of $6,874
  2. Restaurant level margins of 17.1% vs consensus of 17.8%
  3. Operating margins of 29% vs consensus of 30.4%
  4. EPS of $1.29 vs consensus of $1.33

We are currently expecting 2013 to be another no-growth year for MCD EPS.  The Street is expecting a snap-back in EPS to $5.81, or 9% higher than 2012, versus our estimate of $5.27-5.30.


Howard Penney

Managing Director


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