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The Macau Metro Monitor, November 19, 2012




The best may be over for Singapore's booming hotel market as tightening corporate budgets and bank job cuts leave more luxury rooms empty.  "We will see a slight drop in occupancy rate (in Singapore) mainly due to new supply that is about to come on board in 2013," said Jonas Ogren, Asia director at hotel data provider STR Global, based in Singapore.  According to CBRE, the supply of four- and five-star hotel rooms in Singapore is expected to increase by 17.4% from 2011 to 2014. 


The city-state's high-end hotels have been hit harder than moderately priced rooms, which suggests that weaker corporate travel rather than tourism is weighing on demand. 



SJM said it has reached an agreement to continue leasing the Jai Alai Palace complex, where it operates a self-promoted casino, owned by Angela Leong On Kei.  The gaming operator now plans to revamp the run-down property.  


The new contract, which has a duration of three years, starts on January 2014.  SJM Holdings will pay monthly rental of MOP10.3 million (US$.1.3 million) for the property.  CEO Ambrose So said that the redevelopment project would cost up to MOP700 million.  He added the project would start “soon” and be completed in 2013.



SJM Cotai is set to have as high as 70% non-gaming business.  SJM said it’s planning to have 700 gaming tables in Cotai but CEO Ambrose So stressed that the number is what the company initially applied for, but the government is yet to give an answer on the precise figure. 



U.S. gaming regulators are looking at a payment made by a subsidiary of Kazuo Okada’s Universal Entertainment Corp to a former consultant for the Philippine gaming authority, the Philippine Amusement and Gaming Corporation (Pagcor).  An investigative report from Reuters says a Universal subsidiary made a US$5 million (MOP40 million) payment in May 2010 to a firm wholly-owned by Rodolfo Soriano, a close associate of Efraim Genuino, who headed Pagcor at the time of the events.

Universal has already filed a suit against an ex-employee saying he acted without proper authorization in channelling the US$5 million to Mr Soriano. The payment is part of US$40 million in transfers by Universal that are being looked at by the U.S. regulators.

We Build

“Together we build.”

-Henry Kaiser


In 1941, “the experts predicted it would take Bedford, McCoon, and their teams six months to build up enough solid ground before they could begin work in the shipyard. It took Kaiser’s men exactly 3 weeks.”


“There was a race … between the Kaiser draftsmen and the field people as to whether we could build it first or the engineers and architects could draw it first.” (Freedom’s Forge, page 131)


That was during WWII. We are in a very different kind of war now – a globally interconnected economic one that is dominated by compromised politicians and theoretical Keynesian draftsmen – but it is a war we free-market libertarians can still win. We, the field people, need to lock arms and build a new foundation for global growth. There’s only 1 big one that we have not tried.


Back to the Global Macro Grind


The difference between us and them is that we believe in a Strong Dollar providing the foundation for a Strong America (1 and 1) and a stronger global consumption economy at large.


They have always believed that a weak US currency would drive “strong exports.” We believe that a weak currency drives global food, energy, and cost of goods inflation – that, in turn, slows real (inflation adjusted) global economic growth.


With the US Dollar up for 8 of the last 9 weeks, if the SP500 can re-capture my long-term TAIL line of 1364, together, we can build upon 2 very bullish economic developments:


1.       Food Inflation is deflating

2.       Institutional Commodity gambling is imploding


With the US Dollar up +0.2% last week to $81.26, the Euro continued to weaken and the Japanese Yen got slammed for a -2.2% wk-over-wk decline. Japan is channeling its inner-Krugman (1997 “Print Lots of Money) by attempting to do what the USA did at the Bernanke Top (print money, juice stocks, and eventually fizzle out at another 20yr lower-high in the Nikkei).


Back to Food Deflation last week (and from Bernanke’s Top, 2 months ago):

  1. Wheat = down another -5.5% week-over-week (-7% in the last 2 months)
  2. Soy = down another -4.7% week-over-week (-20% in the last 2 months)
  3. Coffee = down another -1.7% week-over-week (-19% in the last 2 months)

If you eat carbs and drink coffee every morning, that’s good. And it’s really good for the likes of our Top 2 Global Consumption long ideas right now (Starbucks, SBUX and Walmart, WMT) too.


Forget about the USA’s politicized class warfare thing. When you deflate food prices, you save money for at least 99% of the world’s 7,053,206,438 people. With taxes going up on the some-of-us, I like tax cuts like that for the all-of-us.


If you’ve been living large long Oil futures contracts since 2009, you may not like how this story ends. If you’ve been shorting food and energy since September, you are smiling.


Here’s a look at how Institutional Commodity Gambling (CFTC futures/options contracts) is imploding:

  1. Net long contracts (bets on commodity inflation) = down another -17% last wk to 772,512 contracts
  2. Bullish Commodity bets are now crashing, down -42% from the Bernanke Top (SEP14, 2012)
  3. Crude Oil contracts = down another -18% last week (despite Israel/Gaza) to 100,021
  4. Farm Goods = down -22% last week to 415,498 contracts
  5. Corn (biggest component of the Farm Goods basket) = down -14% wk-over-wk to 202,853 contracts
  6. Copper joined Cotton as the 2nd major commodity to move into a net SHORT position

Since I won large in Vegas last week ($736 bucks!), I’ll bet my whole lot that at least 1/2 of institutional investors reading this note will call what I just outlined as a bullish contrarian indicator. On the margin (immediate-term TRADE duration) that’s probably right.


But, as you move out from intermediate (3 months or more) to longer term durations (TREND and TAIL), averaging down into a wildly volatile asset class like commodities can put perma-commodity bulls out of business, fast. So be careful.


From an asset allocation perspective, the most asymmetric long-term risk to all of Global Macro continues to be Strong Dollar. If it manifests itself into the mid-to-high $80 levels (US Dollar Index), you haven’t seen anything in terms of commodity deflation yet.


While it may sound perverse to call deflation bullish, it’s not. Letting free-market prices clear without fiscal and/or monetary price supports is the only big idea we have not tried for the last decade.


I think it’s the only way We Build sustainable consumption growth in both the US (71% of GDP) and global economy. Get the Dollar right, you’ll get long-term growth right. If you want to know how I get bullish on the economy, look no further than that.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, 106.12-109.98, $80.87-81.45, $1.26-1.28, 1.49-1.64%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Early Look

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Takeaway: ASCA is the most undervalued casino operator under the new valuation paradigm

How the PENN deal could impact other casino companies



Our view here is that the industry has and should receive a step up in valuation.  Maybe valuation does matter.  Our company specific commentary is below:

  • ASCA – Slam dunk in our opinion.  If there is one stock that should see a permanent valuation bump, it’s ASCA.  See our note from Friday. “RE-VALUING ASCA”.  Even after the big move, the stock is still trading at a whopping 18% FCF yield. 
  • BYD – If there was ever a stock that could use a valuation bump, it’s BYD.  A perennial underperformer, BYD is actually a very cheap stock if you factor in the significant unused real estate.  PENN’s deal should shed light on BYD’s 87 Strip acres that are non-producing.  However, it seems unlikely BYD could complete a PENN type transaction due mainly to prohibitively high leverage of over 6x.  Moreover, BYD has deferred CapEX and continues to spend well below normal on maintenance CapEX.  That is unsustainable. 
  • ISLE – At 6x leverage, it is unlikely ISLE could pull something off similar to PENN anytime soon.  However, they are in harvest mode, so debt pay down will occur fairly quickly.  We estimate that by the end of 2014, leverage will fall to about 4.5x and at that time they could consider a REIT spin-off.
  • LVS – Highly unlikely to pursue a PENN type transaction for a few reasons.  First, LVS maintains a deep backlog of potential developments that just doesn’t make sense within a REIT format.  In addition to Lot 3 in Macau, other Asian countries are likely to expand or open up to casinos and LVS is probably the most desirous operator because of its MICE focus.  Second, LVS generates most of its profits in international jurisdictions with significantly lower tax rates than in the US.  In fact, LVS pays almost nothing in corporate taxes in Macau.  The international exposure bites into the tax efficiency benefit of the REIT structure.  Finally, we don’t believe Sheldon would want to give up any control which he would have to do in a property company. 
    • However, the new focus on real estate should be a positive for LVS’s valuation.  LVS owns malls in Macau and Singapore that are worth a lot more to a separate real estate focused entity than the market is valuing them within LVS.  We would expect investors to begin to re-value LVS (again) using current cap rates on the Mall portfolio.  More on this later.
  • MGM – Just too much darn leverage.  The REIT structure probably cannot be pursued by this company.  However, with its low cost of capital, the new PENN PropCo should become a more aggressive buyer of casino assets.  We know MGM is a willing seller and PENN has been interested in The Mirage in the past.  So MGM could benefit from the PENN transaction.
  • PNK – We think PNK is a great candidate for a REIT split.  While leverage is a little high at over 5x, they should be able to pay down debt fairly quickly with the opening of Baton Rouge behind them.  In fact, the PNK situation is very similar to ASCA’s with one potentially major difference.  We wonder if this management team still views the company as a development company.  They’ve made a push in Vietnam and may be pursuing other growth opportunities.  We would rate the likelihood of PNK converting to the PENN structure to be lower than ASCA's.
  • WYNN – While leverage is low, we think the WYNN is an unlikely candidate for many of the same reasons as LVS.
  • CZR - Similar to MGM, CZR is way too leveraged in its current form for this to really move the needle for them (as an equity holder at least).  They can sell a few assets at higher multiples but their leverage is over 10x


TODAY’S S&P 500 SET-UP – November 19, 2012

As we look at today's setup for the S&P 500, the range is 29 points or 1.83% downside to 1335 and 0.30% upside to 1364

















  • YIELD CURVE: 1.37 from 1.34
  • BONDS – the US Treasury market has not and could not care less about Equity emotions flickering on the futures tick; 10yr at 1.60% this morning remains in a Bearish Formation; Bonds remain in a Bullish Formation, despite High Yield and IG debt underperforming last wk (HYG looking interesting short side for the 1st time in a long time).

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: NAHB Housing Market Index, Nov., est. 41 (prior 41)
  • 10am: Existing Home Sales, Oct., est. 4.75m (prior 4.75m)
  • 11am: Fed to sell $7b-$8b notes due 7/31/15-11/15/15
  • 11:30am: U.S. Treasury to sell $32b 3 mo. bills, $28b 6 mo. bills
  • 4pm: Crop conditions: winter wheat


    • President Obama continues trip to Southeast Asia, visits Myanmar
    • Brookings Institution holds discussion on capital markets, fiscal cliff with Robert Greifeld, CEO of Nasdaq. 1pm
    • House, Senate not in session


  • Cisco buys Meraki for $1.2b to add technology that elps businesses manage Wi-Fi networks remotely
  • Obama says he’s confident about deal to avoid fiscal cliff
  • Oct. sales of previously owned homes probably stayed at 2-yr high of 4.75m annual rate
  • Jana proposes 5 new directors for Canada’s Agrium: G&M
  • European finance chiefs seek to settle Greek aid this wk amid IMF spat
  • Nintendo Wii U goes on sale in U.S. with apps, no TVii
  • News Corp. expected 49% bid to value YES channel at $3b: NYT
  • Wal-Mart workers vow to mount 1k protests online and outside stores up to and including Black Friday
  • Hostess to seek approval to liquidate as Metropoulos weighs bid
  • ITC decision on whether to review Apple vs Samsung findings
  • EMI goes on auction block again this wk as Universal Music divests some assets to meet antitrust requirements
  • Israel ready to invade Gaza Strip if cease-fire efforts fail
  • HSBC is in talks to sell its $9b stake in Ping An Insurance
  • Shadow banking grows to $67t industry, Financial Stability Board said in a report
  • Weekly agendas: IPO, Media/Entertainment, Real Estate, Health, Consumer, Tech, Transport, Industrial, Energy, Canada Energy, Canada Mining


    • Lowe’s (LOW) 6am, $0.35 Preview
    • New Jersey Resources (NJR) 6:59am, $(0.26)
    • Tyson Foods (TSN) 7:30am, $0.44
    • Laclede (LG) 8:30am, $(0.17)
    • Urban Outfitters (URBN) 4pm, $0.41
    • Nuance Communications (NUAN) 4:01pm, $0.48
    • Bob Evans (BOBE) 4:01pm, $0.61
    • Krispy Kreme (KKD) 4:01pm, $0.08
    • Brocade Communications (BRCD) 4:04pm, $0.14
    • Agilent Technologies (A) 4:05pm, $0.80
    • Perfect World (PWRD) 5pm, $0.48
    • Qihoo 360 (QIHU) 5pm, $0.14


  • Gold Gains in London on Weaker Dollar, Israel Conflict Concern
  • Hedge Funds Cut Bets in Longest Retreat Since 2008: Commodities
  • Oil Rises a Second Day Amid Israel Conflict, U.S. Budget Talks
  • Soybeans Gain From Lowest Price Since June as U.S. Exports Jump
  • Copper Rises in London on Speculation U.S. to Avoid Fiscal Cliff
  • Sugar Gains Amid Speculation Recent Price Drop Attracting Buyers
  • Iron-Ore Swaps Fall Most in a Month on China Real-Estate Prices
  • Gold Set for Record in Euros by End of Year: Technical Analysis
  • Speculators Sell Gas at 1-Year High to Utilities: Energy Markets
  • Condoms Provide Lifeline for Malaysian Rubber: Southeast Asia
  • Glasenberg Breaks Word on Equal With Glencore-Xstrata Deal Near
  • BP Seen Takeover Target as Valuation Sinks on Settlement: Energy
  • IEA Says Energy Demand to Rise By More Than a Third to 2035
  • Cocoa-Growing Nations Seen Grinding 50% of Beans in Three Years
  • Rebar Declines on Speculation China Won’t Relax Property Curbs









EUROPE – Europe is picking up +1.1% of last week’s -2.7% decline in the EuroStoxx600; big damage done on that move as TREND lines snapped across the board; so watch the DAX from here as its TREND line of 7116 is one of the most important on my screens for Equity risk, globally; covered our Spain short on Friday, making us 16 for 17 (all-time) on the short side.





ASIA – very mixed message coming out of Asian Equities this morn – Japan is channeling its inner-Krugman w/ money printing rhetoric = Yen down, Stocks straight up (+1.4% overnight post Nikkei +3% last wk), but Chinese stocks closed 11bps above their YTD lows after the new leadership didn’t deliver a Western style bailout; Indonesia -0.87% led decliners.











The Hedgeye Macro Team




Known Unknowns

This note was originally published at 8am on November 05, 2012 for Hedgeye subscribers.

“By knowing more about what we don’t know, we may get a few more predictions right.”

-Nate Silver


First, my prayers go out to the 2 million Americans who are still without heat this morning on the East Coast. I am part of the 14% without power in Westport, CT. It’s getting colder. If you have the means to help others, please do.


Predictions, about the weather, politics, and markets, can get you in trouble; especially if your own money is behind your opinion. I guess the upside to being a partisan political pundit is that you’ll probably be gainfully employed regardless of your predicted outcomes. Right or wrong, someone will probably send you a sticker for effort; particularly if you drove ad revs.


From my model’s vantage point, markets have been predicting a closer election than the “expert” polls have been predicting for months. The recent strength in the US Dollar reflects Romney narrowing the gap. Whether or not he can beat Nate Silver’s Obama odds is something neither of us know. After all, that’s the conclusion of Silver’s book (The Signal and The Noise) – don’t trust the polls.


Back to the Global Macro Grind


Last week, the US Dollar Index was up another +0.65%. It has only had 1 down week in the last 7 and is now breaking out from an immediate-term TRADE duration perspective (after holding its long-term TAIL line of $78.11 support).


Nate Silver’s model doesn’t account for this, but those of you who trade markets do. The causality behind a Debauched Dollar has been weak fiscal and monetary policy. Heightening probabilities of Romney not getting crushed raises the probability that Ben Bernanke and Tim Geithner will be employed by Citigroup by 2014. That’s been Dollar Bullish, on the margin.


The Known Unknown here is that we don’t know who will win this election, but:

  1. If Obama wins, the US Dollar probably goes down from here
  2. If Romney wins, the US Dollar probably goes up from here

The key word in those Bayesian (conditional probability) statements is probably. Probably doesn’t mean certainly. If neither holds true (what if they tie?) markets could have a tough time digesting what to do next. Like it or not, all the quant machines are trading Correlation Risk, in size.


Causality doesn’t always drive correlation; sometimes it does – and big time. For the last 3 months (90 day Correlation Risk model), here are the inverse correlations between the US Dollar Index and the Big Beta driving your portfolio performance:

  1. SP500 = -0.91
  2. Eurostoxx600 Index = -0.97
  3. MSCI World (Equities) = -0.94
  4. CRB Commodities Index = -0.62
  5. Copper = -0.88
  6. Gold = -0.97

Yes, these intermediate-term TREND correlations are surreal. Which makes it likely that if Obama wins, you want to buy the living daylights out of Gold and European Stocks. If Romney wins, you want to respect the likelihood of known knowns (correlations) continuing.


Like my not having power for 6 days, legitimate TAIL risk is defined by the unknown unknowns. I didn’t know that was a known unknown until maybe 2 weeks ago. Risk happens fast.


Known knowns: for the last month, here’s what Strong Dollar has been doing to Bernanke’s Bubble (Commodities):

  1. Coffee = -15.8% (down -1.9% last week)
  2. Silver = -10.8% (down -3.6% last week)
  3. Copper = -8.4% (down -1.9% last week)
  4. Oil (WTIC) = -7.6% (down -1.6% last week)
  5. Gold = -5.3% (down -1.9% last week)

Sometimes Strong Dollar deflates commodity prices faster than a Debauched Dollar inflates them. That’s been the key risk management lesson of front-running Bernanke’s multiple QE experiments. What goes up, can come down in a hurry.


Bernanke has been at the helm of the Federal Reserve for 6 years. He has never raised interest rates. Never is a long time. So, that’s another Known Unknown to consider here that the market doesn’t yet consider a legitimate risk – what it means for the bond market.


If Romney wins but:


A)     He appoints Glenn Hubbard as his Fed Chief

B)      He appoints John Taylor as his Fed Chief


There are 2 very different possible outcomes for the US Bond market overall. Don’t forget, Hubbard is a hard core Keynesian - he could very well make Romney look like Bush, fast. Taylor would raise rates – and could scare the bond market, faster!


On the economy, it’s not a secret that I don’t think Obama is a good President. I didn’t think Bush was either. From a US fiscal and monetary policy perspective, those are known knowns in my model. Whether Romney can be any worse is an unknown.


My immediate-term risk range for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1672-1701, $105.17-108.26, $3.44-3.54, $79.86-80.79, $1.27-1.29, 1.67-1.75%, and 1399-1419, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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