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MACAU NORMALIZES

Macau generated average daily table revenue of HK$775 million in the past week, down from HK$930 million in the first 10 days.  ADTR actually fell 1% from the similar week of 2011.  As we learned from our Macau trip last week, hold percentage ran high in the first 10 days (with the exception of Wynn) but seems to have been normal in the past week.  Our YoY projection is for GGR (including slots) YoY growth of 10-14%.

 

MACAU NORMALIZES - m1

 

While still above trend, LVS’s share has moderated to where we would project it to be.  Absent hold fluctuations, we believe LVS will be a consistent market share gainer over the next 12 months.  MPEL’s share has also moderated but still above trend.  MPEL remains on track for an estimated beating Q4, in our opinion.  Surprisingly, Wynn picked up very little share in the past week and remains >200bps below trend.  Galaxy is almost back to normal while MGM is definitely having a good month.

 

MACAU NORMALIZES - m2 


MACAU MEETINGS SUMMARY

Major Takeaways from meetings in Macau last week: 

  1. We continue to believe that Macau could be under a bit of pressure relative to expectations in Q1.  While some of our contacts were not concerned about the smoking ban, a few were.  We tend to agree with the latter opinion although there is a chance that the government provides a grace period.  However, we don’t think the risk is necessarily factored into the stocks.  At least one astute market observer feels that ultimately, the restrictions will be forced on a table basis rather than square footage. 
  2. A lot of the discussions related to the recent corruption crackdown.  We think that there may be another shoe to drop for Macau as the investigations continue and there is risk of further Macau connections.
  3. As you know, Macau GGR increased 33% YoY in the first 10 days of December.  However, most of the growth was likely due to high hold.  Wynn is probably the only operator holding below normal.  Indeed, the numbers we received today moderated significantly from the first 10 days and were actually down 1% YoY.
  4. MPEL and LVS look like the stocks that could hold up the best over the near-term:  LVS because of market share gains and MPEL due to a big Q4
  5. Wynn, Galaxy, and MGM could be under pressure although MGM's December share is trending high

 

Please review the following detailed notes from our trip to Macau.

 

Smoking Restrictions

  • Three concessionaires think this will have very limited impact
  • One thinks a -3% GGR impact and another felt that a double-digit impact could be experienced for a few months
  • LVS probably went all out for square footage split – department of health wasn’t happy
  • WYNN probably went the other way and offered up more non-smoking tables
  • Galaxy is somewhere in the middle
  • Following submissions from each operator of their plans for compliance, it doesn't appear that the government has yet made a decision as to the exact specifications - the uncertainty is likely to create problems and could impact margins
  • January 1 looking like the date for required implementation
  • One operator thinks that the Government could give a last minute grace period of up to 6 months
  • Mass hold is likely to be negatively impacted
  • Good luck trying to enforce it in the VIP rooms
  • Government banned the comping of cigarettes and cigars recently
  • Smoking regulations are probably not done – it is an election year and the dealers have a lot of power – they have the most to gain with a full smoking ban
  • Lower end more at risk because higher end players will always get a seat at a smoking table if they want it
  • MGM – 28% of Mass players are smokers, MPEL – 30-40% are smokers

China Corruption Crackdown

  • Given the early December results, it doesn’t look like it's having an impact
  • The corruption crackdown not focused on Macau but rather an investigation into Bo Xilai, who is suspected of funneling money through Macau
  • One astute contact thinks that there will be a delayed impact and there still is risk because investigations are ongoing and there may be more ties between some indicted individuals and Macau
  • Government handover isn’t complete until March so investigations will go on
  • Contacts in Beijing say big players are being monitored and will likely stay away from Macau
  • David Star junket rep at Four Seasons was one of the ones arrested

December MTD

  • GGR for the first 10 days was up 33% YoY but down 1% in the second week
  • Hold played a huge role and volumes may have only been up single digits
  • Wynn seems to be the only operator holding below normal here in December

WYNN and SJM at capacity but SJM still has a year of growth

  • Wynn can’t do anything meaningful since they are running at a higher level of capacity
  • Some operators believe the gap between what Wynn offers the junkets in terms of commissions and credit and the competition is just too high
  • SJM added some VIP rooms which is growing their market share and should lead to YoY growth over the next 3 or 4 quarters 

Mass Marketing

  • Galaxy Mass advertising program doing well - their recent market share struggles have been in the VIP 
  • Mass business very competitive which is impacting margins – could be some relief next year if Galaxy or MPEL pull back

VIP

  • Galaxy may have pulled back a little on junket comps
  • City of Dreams will likely follow suit

MPEL and the Philippines

  • MPEL can bring smaller Southern China and other Macau junkets to Philippines without hurting existing business
  • Worst case scenario:  Belle Casino in Manila will do $150MM in EBITDA
  • Philippines could ultimately be a US$5 billion market
  • Just got 2 helicopters to bring VIPs from HK airport directly to Macau
  • We remain comfortable with our Street high $255 million EBITDA estimate for MPEL

Back To Growth?

Client Talking Points

Shifting Gears

The fiscal cliff is the one catalyst that can really mix things up, but take that out of the equation and you can see the markets are experiencing a change. We’re slowly moving from #GrowthSlowing to #GrowthStabilizing. The commodity super-cycle is beginning to deflate with total net long commodity contracts falling -11% week-over-week and sugar, wheat and oil all dropping double digit percentages over the same time period. One exception is gold as bets that it’ll go higher continue to increase. With gold at $1690/oz right now, watch out for our TAIL line of support of $1670. If that breaks, look out below.

Asset Allocation

CASH 58% US EQUITIES 18%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Tepper says markets are going up and everybody buys $AAPLpremarket” -@harmongreg

 

QUOTE OF THE DAY

“There are some that only employ words for the purpose of disguising their thoughts.” -Voltaire

STAT OF THE DAY

Federal Reserve’s Empire State Index declines for fifth straight month to -8.1 in December from -5.2 in November.


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European Banking Monitor: Globally Bank Swaps Tighten

Takeaway: Globally bank swaps tightened last week.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

** Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week. The Euribor-OIS fell 2 bps.

 

** On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. euribor

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Globally Bank Swaps Tighten - 55. facility


MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD

Takeaway: Globally bank swaps tightened last week, while sovereign swaps widened. Euribor-OIS fell while the TED spread rose 5 bps.

Euribor-OIS vs TED Spread: This week the Euribor-OIS and the TED spread flashed conflicting signals. The TED spread rose 5 bps while the Euribor-OIS fell 2 bps. 

 

European Bank CDS: Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week.

 

American Bank CDS: Swaps were broadly tighter for domestic banks last week, with the average issuer seeing roughly 17 bps of improvement. The Moneycenter banks tightened the most on average (9 bps week-over-week). MBIA was the lone hold out, widening 75 bps to 1158. 

 

High Yield: The average rate on high yield corporate debt fell 9 bps week-over-week to 6.22%

 

MCDX: Our preferred measure of municipal default risk rose 5 bps week-over-week.

 

2-10 Spread: The 2-10 spread widened 8 bps week-over-week. That said, the longer-term trend of down, down, down is showing no signs of abating. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged  

• Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged  

• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Summary

 

1. American Financial CDS –  Swaps tightened for 26 out of 27 domestic financial institutions. The Moneycenter banks and Large brokers tightened by 9 bps on average, while consumer finance companies and insurance companies tightened an average of 12 bps and 6 bps, respectively.

Tightened the most WoW: GNW, AIG, C

Widened the most/ tightened the least WoW: MBI, MTG, SLM

Tightened the most WoW: GNW, C, GS

Widened the most MoM: ACE, MMC, ALL

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - American

 

2. European Financial CDS – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Europe

 

3. Asian Financial CDS – Swaps tightened across the board for all of the reference entities we track.  Japanese banks saw the most tightening, while Chinese banks saw the least.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Asia

 

4. Sovereign CDS –  European sovereign swaps tightened in the core, but widened in the periphery. Portuguese swaps tightened the most, falling 25 bps to 449 bps while Irish and Italian sovereign swaps widened the most, rising 23 bps and 19 bps, respectively week-over-week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov Table

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov 1

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 9.4 bps last week, ending the week at 6.22% versus 6.32% the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.7 points last week, ending at 1745.14.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - LLI

 

7. TED Spread Monitor – The TED spread rose 5.5  bps last week, ending the week at 28 this week versus last week’s print of 22.6.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 2.2 points, ending the week at 3.09 versus 0.9 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - ECB

 

11. Markit MCDX Index Monitor – Spreads widened 4 bps, ending the week at 135 bps versus 131 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - MCDX

 

12. Chinese Steel –Steel prices in China rose 1.0% last week, or 34 yuan/ton, to 3582 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~6.5%. The broader downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 147 bps, 8 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - XLF2

 

Margin Debt  – October: +1.19 Standard Deviations

NYSE Margin debt rose to $318 billion in October from $315 billion in September. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through October. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD VS REST OF WORLD - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

 


THE M3: MAINLAND TOURISTS; S'PORE HOME SALES

The Macau Metro Monitor, December 17, 2012

 

 

NO CONTROL OF MAINLAND TOURISTS: MGTO BOSS Macau Business

According to the departing director of the Macau Government Tourist Office (MTGO), João Manuel Costa Antunes, Macau will not create a mechanism to limit the number of mainland visitors based on the city’s capacity. Antunes was quoted as saying the individual visa policy is only implemented by Beijing authorities.

 

He was commenting on recent moves made by Hong Kong’s Chief Executive C. Y. Leung to control the number of visitors from the mainland, by creating a mechanism to assess the city’s capacity to receive visitors.  Leung has convinced mainland authorities to shelve its plan to relax visa restrictions for non-permanent residents in Shenzhen, which has limited the access of over 4.1 million potential visitors.  Both sides have agreed to set up a mechanism to assess Hong Kong’s capacity to receive visitors.

 

NEW PRIVATE HOME SALES PLUNGE 44% IN NOVEMBER, AFFECTED BY SCHOOL HOLIDAYS Strait Times

1,087 new private homes were sold last month, or -44% MoM, as the school holiday period dampened sales momentum.

 

CASH HANDOUT IN 2ND OR 3RD QUARTER: TAM Macau Business 

Secretary Tam said 2013's cash handout will be allocated during 2Q or 3Q.  Permanent residents will get a cash handout of MOP8,000 (US$1,000) next year, while non-permanent residents will get MOP4,800.  Last year, the cash handout was given out from April 24 to July 6.


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