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The Macau Metro Monitor, December 10, 2012




Nicholas Niglio, CEO of Neptune Group Ltd, dismisses rumors that junket operators in Macau are involved in illegitimate businesses.  “They [the promoters] will not give up their credibility for such a small return from illegal activities,” he added, noting the junket activity in Macau is regulated and governed by the Gaming Inspection and Coordination Bureau. As of June-end, Neptune controlled 51 VIP tables.  Around 2,000 licensed agents work for these tables.


Niglio also said that the VIP sector in Macau is now facing a consolidation period.  “It is time for industry consolidation as small junket promoters are gradually absorbed by mid-sized ones.”



Secretary Tam said he had not heard anything about any possible restrictions to be imposed by Beijing that could affect the city’s VIP gaming sector.  “We expect that the VIP gaming business will enjoy stable development in the coming year,” said Tam.  The secretary was commenting on rumors that plans by the mainland authorities to strengthen their fight against money laundering and corruption will affect the casino industry.


Universal Entertainment Corp last week announced that it has signed a non-disclosure agreement with the Shinsegae Group of South Korea.  “The agreement was signed in preparation for commencing discussions regarding the commercial facilities at the casino resort complex development project at Yeongjongdo Island, Incheon, Korea being undertaken by the Shinsegae Group,” Universal Entertainment said.


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

As we look at today's setup for the S&P 500, the range is 13 points or 0.85% downside to 1406 and 0.07% upside to 1419.         















  • YIELD CURVE: 1.37 from 1.38
  • VIX closed at 15.9 1 day percent change of -4.10%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.5b-$2.25b notes due 2/15/36-11/15/42
  • 11:30am: U.S. Treasury to sell $32b 3-mo., $28b 6-mo. bills
  • 12:45pm:Bank of England Governor King speaks at Economic Club of New York


    • President Obama to deliver speech in Detroit to promote his federal budget deficit plan
    • FDIC Systemic Resolution Advisory Committee meets to discuss Title II of Dodd-Frank Act


  • Obama, Boehner held private meeting at White House on budget
  • Greece extends deadline for debt buyback after nearing target
  • Canada’s approval of $20b energy takeovers may spark more foreign investments
  • Dragon Systems founders take Goldman to trial over advice
  • SEC said to investigate SAC Capital’s trading in Intermune and Weight Watchers
  • Apple, Google team up for $500m-plus Kodak patents bid
  • AIG sells ILFC majority stake to Chinese investors for $4.23b
  • Japan sinks into recession as opposition leader Abe calls for more stimulus
  • China’s exports rose less than forecast in November
  • Ingersoll-Rand said to plan share buyback, asset spinoff
  • Apple/Samsung ruling on U.S. phone sales may come this week
  • Wanxiang outbids Johnson Controls for most of A123 assets
  • Suntory weighs takeover of whiskey maker Beam, official says
  • Mattel returns to appeals panel that threw out Bratz verdict
  • ‘Skyfall’ reclaims top spot with ticket sales of $11m


    • Ferrellgas Partners (FGP) 7am, $(0.23)
    • John Wiley & Sons (JW/A) 8am, $0.82
    • Casey’s General Stores (CASY) 4pm, $0.85
    • Teavana Holdings (TEA) 4:01pm, ($0.01)
    • Greif (GEF) 4:07pm, $0.55
    • ABM Industries (ABM) 5pm, $0.40


  • Oil Rebounds as German Exports Advance; OPEC to Meet in Vienna
  • Speculators Cut Bullish Bets on Fiscal Cliff Talks: Commodities
  • Japanese Aluminum Fees Said to Decline for First Time in a Year
  • Gold Gains in London on Drop to One-Month Low, Stimulus Outlook
  • Copper Reaches 7-Week High as Chinese Industrial Output Expands
  • Corn Falls to Three-Week Low as South American Outlook Improves
  • Sugar Declines on Indications of Ample Supplies; Cocoa Slides
  • Gold Set for Retreat on Momentum Indicator: Technical Analysis
  • China Crude Imports Rise to Six-Month High as Oil Refining Jumps
  • Tin Shipments From Indonesia Drop for First Time in Three Months
  • Iron-Ore Exports From Australia Jump to Record on China Recovery
  • Palm Oil Stockpiles in Malaysia Climb to Record as Exports Drop
  • Japan Suspends Beef Imports From Brazil on Mad-Cow Disease
  • Hedge Funds Quit U.S. Natural Gas as Cold Fades: Energy Markets




USD – 1st up week in 3 for the USD last week punished Commodity prices, and we liked it. Oil in particular is back into a Bearish Formation after snapping TRADE support of $109.63 Brent; TREND in USD is higher, not lower (up for 8 of last 11 weeks), so we’ll see if getting a cliff deal strengthens it further – not clear on that yet either way.





ITALY – Monti probably took a peek at down -2.4% y/y Q3 GDP growth and said we’re out! So is whoever bought last week’s lower-highs in Italian equities; MIB index down hard (-3.4%) moving back below 15,615 TRADE support and back into a Bearish Formation – risk happens fast.




CHINA – Chinese stocks moved out of crash mode putting on a +4.1% move last week and saw +1.1% follow through this morning back about my TRADE line of 2039 support (Shanghai); that was bullish, and so was NOV Industrial Production growth (10.1% vs 9.6% in OCT) and Retail Sales (+14.9% vs 14.5%); CPI rose to 2% from 1.7% only neg news.







The Hedgeye Macro Team




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The Economic Data calendar for the week of the 10th of December through the 14th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



DRI - The dividend has become a liability

The recent DRI press release stating the latest disappointment stopped short of dealing with reality. 


A recent note we published highlighted the DRI Annual Report as an important document for investors given the primary takeaway which was: the growth ethos at Darden is an entrenched as ever.  Against a backdrop of sustained traffic declines, it is jarring to read the following sentence: “Our brands have strong individual and collective growth profiles”.   We believe that management has, and is continuing to, set itself up to miss expectations.


Unfortunately, the press release of December 4th did not address the most important issue that the company is facing: excessive growth.


Clearly, in light of the fundamentals at the company’s largest brands, the five-year growth plan outlined in the Annual Report needs to be reevaluated.  The thesis of our Darden Black Book this past summer expressed our conviction that Darden’s continuing acceleration of new unit growth over the past couple of years has masked evidence of secular decline in Olive Garden and Red Lobster.  Knowing what we now know about how FY13 to-date only adds to the need for management to address how its pace of growth can be sustained without further erosion to the financial health of the company.


The message from Darden’s management team highlights the economy as the biggest issue facing the company and, furthermore, sees weakness in trends at its core brands as being transitory in nature.  We have suggested that the longer-term view, as defined by the data, suggests an altogether different story. 


The traffic trends at Olive Garden and Red Lobster clearly are demanding significant action of management.  The economy is undoubtedly a factor but the poor performance of the “Big Two” versus the Knapp Track casual dining benchmark is a clear indication that the company’s sluggish traffic trends are not entirely attributable to the macroeconomic environment.  The data points – traffic trends – that we are pointing to as a primary reference for our thesis are indicative of, in no small part, self-inflicted wounds.


If the company has become dependent on growth as a drug for all ailments, management’s message is not indicating that Darden is facing up to its growth problem.  Stating that the “core brands remain highly relevant to restaurant consumers” can be supported by pointing to the average unit volumes at Red Lobster and Olive Garden as being some of the strongest in the industry.  We believe this statement to be misguided, however, when considering same-restaurant sales trends – a far more relevant metric when assessing relevance to the consumer.


DRI - The dividend has become a liability - red lobster comp detail


DRI - The dividend has become a liability - olive garden comp detail


DRI - The dividend has become a liability - longhorn comp detail


Going back to the very first conference call announcing Clarence Otis as CEO of the company, the pervading theme throughout his tenure has been “growth”.  Acquisitions of LongHorn Steakhouse and, more recently, Yard House, are testament to the unwavering loyalty Darden’s CEO has to his philosophy. 


Now the numbers don’t add up.   The balance sheet is levered up and margins are declining.  The company is not generating enough cash to pay the dividend given the current rate of capex growth.  The dividend has become a liability. 


Will management admit its past mistakes or, at least, change course and slow growth?  Or will reality continue to be ignored?  The earnings call on December 20th will be the first chance for management to face the music.  The sooner they do it, in our view, the better.



Howard Penney

Managing Director


Rory Green

Senior Analyst




Weekly European Monitor: Cutting Growth

Takeaway: We think GDP estimates are just now getting closer to the pain the region has dragged itself into.

-- For specific questions on anything Europe, please contact me at to set up a call.


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.2% week-over-week vs +0.9% last week. Top performers:  Greece +3.9%; Portugal +3.4%; Cyprus +3.0%; Finland +2.8%; Russia (MICEX) +2.5%; Netherlands +1.8%; Ireland +1.7%; Ukraine +1.7%; Denmark +1.6%.  Bottom performers:  Hungary -2.6%; Spain -1.1%; Italy -0.7%; Czech Republic -0.4%; Norway -0.3%. [Other: Germany +1.5%; France +1.4%; UK +0.8%].
  • FX:  The EUR/USD is down -0.45% week-over-week vs +0.22% last week.  W/W Divergences:RUB/EUR +0.67%; GBP/EUR +0.62%; NOK/EUR +0.45%; CZK/EUR +0.22%; SEK/EUR +0.17%; DKK/EUR +0.04%; CHF/EUR -0.23%; PLN/EUR -0.40%; RON/EUR -0.40%; HUF/EUR -0.73%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly flat across the region week-on-week, excluding Greece (more below on the Greek bond buyback). Greece declined -175bps to 14.46%. France -9bps to 5.46%, Germany -7bps to 1.30%, and Portugal -6bps to 7.56%. Spain gained +8bps to 2.07% and Italy was flat at 4.53%.

Weekly European Monitor: Cutting Growth - 66. yields



EUR/USD: Our TRADE range is $1.29 – 1.31 with a TREND resistance of $1.31.

  • Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.
  • We believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012, which could support the band the cross has been trading in over the last weeks.
  • We expect that the ECB and Germans will be at loggerheads over the formation of a Banking Union and Fiscal Union, which should strengthen the lid on the EUR/USD at $1.31.
  • The cross could weaken alongside the ECB showing some willingness to cut the benchmark interest rate: Draghi cited that there was wide discussion [about a rate cut] but the prevailing consensus was to leave rates unchanged when the council met on Thursday.

Weekly European Monitor: Cutting Growth - 66. eurusd


Weekly European Monitor: Cutting Growth - 66. cftc



Cutting Growth:


The week’s news-flow was dominated by Greece’s sovereign debt buyback program (more below), however our eyes were drawn to growth forecasts that were greatly cut this week. The revisions came as no great surprise – and signal to us that despite all the market intervention (Draghi “unlimited” OMT), prices will (in time) reflect the underlying health (or lack thereof) of the region.  While Greece may continue to maintain the spotlight, we’re focused on the underlying health of the region; we think estimates are just now getting closer to the pain the region has dragged itself into. Here are the notables:


The ECB staff’s Eurozone GDP projections fell for yet another reading for this year and next:

Eurozone 2012 GDP - DEC: -0.6% and -0.4%   SEPT: -0.6% and -0.2%   JUN: -0.5% and +0.3%

Eurozone 2013 GDP - DEC: -0.9% and +0.3%  SEPT: -0.4% and +1.4%   JUN:  0.0% and +2.0%


The Chancellor of the Exchequer George Osborne forecast 2012 UK GDP of -0.1% versus +0.8% in March and +1.2% in 2013 versus a previous estimate of +2.0%.


The German Bundesbank cut its forecast for economic expansion in Germany to +0.7% this year, down from its previous forecast of +1%, and revised 2013 projections to +0.4% versus  +1.6% predicted in June.


Banking Union Blues


This week EU finance ministers came to no conclusion on establishing the framework for a single supervisory mechanism (SSM) – aka a banking union—by 1 January 2013. Ministers are expected to reconvene on December 12th in Brussels, but we have our doubts that anything concrete will come from it. At the heart of it is an issue that was raised in the Q&A of Draghi’s press conference on Thursday, along the lines:


“Given that the ECB’s stance on a Banking Union remains that it should include all 6,000 banks whereas the Germans believe it should only include its largest banks, if it is decided that a Banking Union does not include all 6K does it make sense to have it at all?”. To this Draghi dodged the answer and only said that a Banking Union needs a strong supervisor where the ECB doesn’t have reputational risk.  


This is a clear signal to us that the ECB and Germans (in particular) will be at loggerheads over the formation of a Banking Union. Further we think there will be extensive push back on countries giving up their fiscal sovereignty to reach a Fiscal Union. 


For more on the ECB’s decision to keep rates on hold see Thursday’s note titled “December ECB Presser: Only Growth Cut, Happy Holidays!”



Greece Buyback, continued

Official results have not yet been released (and may not until next week) but Greece met today’s deadline to use a 10 billion EUR loan from Europe’s bailout fund (EFSF) to buy back some of the 62 billion EUR of new bonds issued when Greece restructured its privately held debt in March and unblock its next aid tranche (34.5B EUR) as part of a package approved from the European Union and International Monetary Fund to cut the nation’s debt to 124% of GDP in 2020 from a projected 190% in 2014.


Note: Greek banks held about 15 billion EUR of the bonds, while the country’s pension funds had 8 billion EUR, according to a Nov. 27 draft report by the troika of the European Commission, European Central Bank and IMF. According to Royal Bank of Scotland Group, hedge funds held as much as 22 billion EUR of Greek government bonds.


Despite uncertainty over bank participation earlier in the week, just today Greece’s three largest banks (National Bank of Greece SA, Alpha Bank SA, and Eurobank Ergasias) agreeing to participate, with Finance Minister Yannis Stournaras saying that the banks would have legal indemnity from potential shareholders who might file lawsuits against losses suffered.


Based on information in a statement from the Athens-based Public Debt Management Agency on Dec. 3, the prices offered for bonds maturing from 2023 to 2042 averaged 33.1% of face value, which compares with the average price of 28.1% of face value on Nov. 23.


We have no further comment on Greece or the buyback beyond reporting the developments. We continue to view Greece as a shell game that Eurocrats are running.



Italian Indigestion

If Italy didn’t have enough on its hands with its outsized sovereign debt, political tensions flared this week when on Thursday, former Prime Minister Berlusconi's centre-right PDL abstained from a vote in the Senate on stimulating economic growth and a vote in parliament on cutting regional spending. Despite the move, Prime Minister Monti had a quorum, and the measures still passed in both chambers. In addition, the PDL said that the abstentions were intended to signal its disapproval of Italy's economic policies and not a move to topple the Monti government.


While tension appear to have calmed,  speculation around Berlusconi running in next year’s election (set for early March)  remains a destabilizing force. However, it’s worth noting that Berlusconi and the PDL are trailing badly in the opinion polls. According to a poll by Demos & Pi published in La Republica today, support for the PDL has fallen to 18.2% from 23.5% in March. In addition, the centre-left PD has seen its support jump to 37.8%, the highest since its founding in 2007.



The European Week Ahead:

Sunday: Nov. UK releases Lloyds Employment Confidence


Monday: Dec. Eurozone Sentix Investor Confidence; Oct. Germany Exports, Imports, Trade Balance, Current Account; Nov. UK RICS House Price Balance; Nov. France BoF Business Sentiment; Oct. France Industrial Production, Manufacturing Production; Oct. Italy Industrial Production; 3Q Italy GDP – Final; Nov. Greece CPI; Oct. Italy Industrial Production\


Tuesday:  Dec. Eurozone ZEW Survey Economic Sentiment; Dec. Germany ZEW Survey Current Situation and Economic Sentiment; 3Q France Non-Farm Payrolls - Final


Wednesday: First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow); Oct. Eurozone Industrial Production; Nov. Germany CPI – Final; Nov. UK Jobless Claims Change, Claimant Count Rate; Oct. UK Average Weekly Earnings, ILO Unemployment Rate, Employment Change; Nov. France CPI; Oct. France Current Account; Oct. Spain House Transactions


Thursday: Dec. Eurozone Bloomberg Economic Survey, ECB Publishes Monthly Report; 3Q Eurozone Labour Costs; 1Q13 Germany Manpower Employment Outlook (Dec. 13-15); Dec. Germany Bloomberg Economic Survey; Dec. UK Bloomberg Economic Survey, CBI Trends Total Orders and Selling Prices; Dec. France Bloomberg Economic Survey; Dec. Spain Bloomberg Economic Survey; Nov. Spain CPI – Final; Dec. Italy Bloomberg Economic Survey; Nov. Italy CPI – Final; 3Q Greece Unemployment Rate


Friday: Dec. Eurozone PMI Manufacturing - Advance; Nov. EU27 New Car Registrations; Dec. Germany PMI Manufacturing and Services – Advance; Dec. France. PMI Manufacturing and Services - Preliminary; 3Q France Wages – Final; 3Q Spain House Prices, Labour Costs



Call Outs:


ESM - Moody’s downgrades ESM to Aa1 from Aaa. It said the decision was driven by the recent

downgrade of France to Aa1 from Aaa and the high correlation in credit risk which it believes is present

among the entities' largest financial supporters.


Spain - PM Rajoy says it may be “very complicated” to achieve 6.3% deficit to GDP target in 2012 given revenue problems and high financing costs. Rajoy reiterated that if an intervention request is in Spain's interest in the future, he would not have any doubts about turning to the ECB for help.


Greece - S&P puts Greece in “selective default” following the launch of their debt buyback.


Germany - Chancellor Merkel Begins Election Drive after her party nearly unanimously re-elected her as party leader.


Eurozone banks - The WSJ said that after borrowing more than €1T from the ECB nearly a year ago, some of Europe's biggest banks are preparing to repay the three-year loans early (they can start next month). The paper added that while the push to repay the loans highlights the partial recovery in the industry, it has also generated some concerns that banks are moving too fast and could be exposed if the crisis flares up again. According to the article, a poll conducted by Morgan Stanley found that European banks are expected to repay a total of ~€80B of the ECB loans in early 2013, with the bulk of the funds coming from the northern European banks. The Journal also discussed how repayment speeds may be influenced by the lack of opportunities to deploy the borrowed funds to businesses and individuals.


Italy - Italian banks held a total of €273B in funds from the ECB at the end of November, down from €276.5B in October, according to ECB data. Italian lenders took down a total of €255B in three-year funds from the ECB's LTROs in December 2011 and February 2012.


Eurogroup - Jean-Claude Juncker said he plans to step down at the end of the year. No replacement named.



Data Dump:


Weekly European Monitor: Cutting Growth - 66. pmis


Eurozone Prelim. Q3 GDP -0.1% Q/Q (UNCH)    [-0.6% Y/Y (UNCH)]

Eurozone PPI 2.6% OCT Y/Y vs 2.7% SEPT

Eurozone Retail Sales -3.6% OCT Y/Y (exp. -0.8%) vs -1.6% SEPT   [-1.2% OCT M/M (exp. -0.2%) vs -0.6% September]


Germany Factory Orders -2.4% OCT Y/Y vs -3.9% September

Germany Labor Costs 3.3% in Q3 Y/Y vs 2.7% in Q2

Germany Industrial Production -3.7% OCT Y/Y vs -0.8% September


France ILO Unemployment Rate 9.9% in Q3 vs 9.8% in Q2


UK PMI Construction 49.3 NOV vs 50.9 OCT

UK Industrial Production -3.0% OCT Y/Y vs -3.2% September

UK Manufacturing Production -2.1% OCT Y/Y vs -1.7% SEPT

UK BoE/GfK Inflation Next 12 Months 3.5% NOV vs 3.2% OCT

UK Halifax House Prices -1.3% NOV Y/Y vs -1.7% OCT

UK New Car Registrations 11.3% NOV Y/Y vs 12.1% OCT


Switzerland Retail Sales 2.7% OCT Y/Y vs 5.0% SEPT

Switzerland Unemployment Rate 3.1% NOV vs 2.9% OCT

Switzerland CPI -0.1% NOV Y/Y vs -0.1% OCT


Spain Industrial Output WDA -3.3% OCT Y/Y vs -7.5% SEPT

Portugal Final Q3 GDP -0.9% Q/Q vs initial estimate -0.8%   [-3.5% Y/Y vs initial estimate -3.4%]


Netherlands CPI 3.2% NOV Y/Y vs 3.3% OCT

Netherlands Industrial Production -1.7% OCT Y/Y vs -0.2% September


Norway Industrial Production 2.5% OCT Y/Y vs -5.0% September

Finland Q3 GDP -0.1% Q/Q (exp. 0.3%) vs -1.1% in Q2   [-1.2% Y/Y (exp. -0.8%) vs -0.3% in Q2]


Ireland Unemployment Rate 14.6% NOV vs 14.7% OCT

Ireland Industrial Production -16.7% OCT Y/Y vs -12.6% SEPT


Austria Wholesale Price Index 2.8% NOV Y/Y vs 4.2% in OCT

Iceland Q3 GDP 3.5% Q/Q vs -6.5% in Q2   [2.1% Y/Y vs 0.5% in Q2]


Greece Final Q3 GDP -6.9% Y/Y vs initial estimate -7.2%

Greece Unemployment Rate 26.0% SEPT Y/Y vs 25.3% AUG


Russia CPI 6.5% NOV Y/Y vs 6.5% OCT

Czech Republic Retail Sales 2.2% OCT Y/Y vs -2.9% SEPT

Romania Producer Prices 6.8% OCT Y/Y vs 6.6% SEPT

Romania Retail Sales 0.7% OCT Y/Y vs 5.1% September


Turkey Consumer Prices 6.37 NOV Y/Y vs 7.80% OCT

Turkey Producer Prices 3.60% NOV Y/Y vs 2.57% OCT

Malta Q3 GDP 4.3% Y/Y vs 3.8% in Q2

Cyprus Q3 GDP -0.4% Q/Q vs -0.5% in Q2   [-2.0% Y/Y vs -2.2% in Q2]



Interest Rate Decisions:


(12/5) Poland Base Rate Announcement CUT 25bps to 4.25%

(12/6) ECB Interest Rate on HOLD at 0.75%

(12/6) BOE on HOLD at 0.50% and asset purchase at 375B GBP


Matthew Hedrick

Senior Analyst

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