The Macau Metro Monitor, December 19, 2012




In the Steve Jacobs case against LVS, a Sands ledger showed intracompany transactions between Macau and Las Vegas with junket and individual names blocked out; WSJ has now seen the names.  Two people with past alleged ties to Chinese organized crime groups known as triads are either listed in the ledger—or are business partners of junkets on the document.


The two men—Cheung Chi Tai and Charles Heung—have each been identified as high-ranking triad figures in a 1992 U.S. Senate subcommittee report on Asian organized crime; the report, which followed a series of triad-related arrests by the FBI, drew its findings from law enforcement authorities and informants.  More recently, a Hong Kong appeals court judgment in March 2011 said Mr. Cheung was a "triad leader" who ordered the death of a casino dealer.  He wasn't charged in the case, but a subordinate was sentenced for conspiracy to commit murder.


For their part, Treasury and other law enforcement authorities who have seen or are familiar with the Sands ledger say they are alarmed by the size of some of the activity.  Although the reasons for the fund movements aren't known, the Journal found more than two dozen junket operators on the ledger transferring a total of about $28 million from 2006 to 2010.  One junket operator alone transferred $3.6 million in two days between Macau and Las Vegas in 2009; another transferred $2.4 million in one day, according to the ledger.


People close to the junket industry also provided the Journal with names of four operators who have been registered to do business in Nevada—but who were found unsuitable last year by outside investigators for the Casino Regulatory Authority of Singapore.  Three of the four are still registered in Nevada.  Investigators reviewed the application of a junket operator registered in Nevada—and recommended he not be approved because he failed to disclose ties to a suspected organized crime figure.  The same investigators found another Nevada-approved operator, Chan Ting Lai, unsuitable because he failed to provide all of the documentation that was requested by the investigators to account for his assets, which the investigators valued at more than $250 million.  Chan is still waiting for news on his application from the regulatory authority in Singapore.


The casinos also said their operations comply with all laws and that their junket partners haven't been charged with any serious crimes. "We can't be held to account for something that legal authorities have yet to resolve," said Alan Feldman, a spokesman for MGM.  Casino officials for Sands, MGM and Wynn say they comply with all federal requirements and have policies guarding against money laundering; gamblers, they say, aren't allowed to cash transferred funds in Las Vegas, just the winnings they make from them. "Our company has a detailed compliance program that is submitted to regulators," said Ron Reese, a Sands spokesman


Mr. Lipparelli, at the Nevada gaming board, said his office has found no evidence of junkets introducing organized crime to Las Vegas.  


Here in Las Vegas, casino executives say the junket industry is much smaller, accounting for no more than 20% of their mainland China VIP business. But some consultants say that number is higher.  One problem: it is hard to track junket revenues because some junkets don't use formal contracts—part of what Mr. Lee, the expert in the Chinese gambling market, calls the "shadow junket" industry.  "Getting money over to America is even harder than getting money to Macau," he said. "That's why the junkets have a big role in Vegas."



According to Yoko Ku, a Galaxy spokeswoman, Galaxy expects to begin construction on Phase 3 of the resort on Macau’s Cotai strip at the end of 2013 or the beginning of 2014.  The construction will cover about 10 million square feet and will involve spending of HK$40 billion to HK$50 billion (US$6.5 BN).  The operator plans to draw more middle-class families by dedicating about 95% of the area to be developed under the third phase to retail and entertainment.  The expanded area will include a concert arena with about 10,000 seats, a theater with 1,800 to 2,000 seats, and one shopping mall.  The company is looking for hotel partners for Phase 3, which is expected to be completed in 2016 at the earliest and will add 4,200 rooms, Ku said.



Macau CPI increased 5.72% YoY in November.  For the 12 months ended November 2012, the average Composite CPI increased by 6.19% from the preceding period.




Wave Riding

“Waves are not measured in feet or inches, they're measured in increments of fear.”

-Buzzy Trent


Great stock calls come and go, but rarely are there times when one can ride a Macro wave that tees up broad-based outsized returns in Retail.


History points to three distinct time periods over the past decade where this worked on the long side:


a)      January-November 2003 = MVR Retail Index +60%

b)      March 2009-April 2010 = +165%

c)      September 2011-September 2012 = +49%


Our process is leading us to one bet from here, and it’s that 2013 will not contain one of these periods. That is, unless, we see the retail group flat-out crash first. After all, in the three periods noted above, only one happened without a preceding selloff in the group before a subsequent rally.


There are two waves leading to our summation. One is Macro, and the other is Micro.


1)      Macro: One thing that is critical to measure is the spread between the price consumers are willing to pay for apparel and footwear versus the price for which the wholesalers and retailers are buying the product. Simply put, one minus the other is a major component of the margin that all members of the retail supply chain fight over at the end of the day.

The beauty is, over the past year, they have not done much fighting. Following a historic surge in raw materials costs in 2011 we saw Consumer Price increases hold in the +4-5% range despite a reduction of 2-3% in actual costs in 2012.

That resulted in a quarterly run rate of about $3bn in ‘free money’ injected into the supply chain. We’re talking about $12bn in total for an industry that only generates about $30bn in annual operating profit. Some of this is yet to be reported in 4Q with a residual in 1Q13, but the fact of the matter is that we’re on the downside of this realization. It gets harder from here. This is a wave if we ever saw one…but it’s already crested.


Wave Riding - wave


2)      Micro: This one is all about JC Penney. So many people get so caught up in their opinions of CEO Ron Johnson and his latest and greatest ideas like giving free haircuts to every school kid in America. But they don’t keep tabs on the big picture.

First off, size-wise JCP is about 8-9% of US apparel retail. To put this into perspective, it is about 4x as big to US apparel as Greece is to the Euro zone. There’s no way that JCP can have such a major change to its operating metrics without meaningfully shaking the rest of the ecosystem.

And shake it did in 2012. We don’t think it’s appreciated exactly how much share JCP has hemorrhaged in year 1. For the first three quarters of this year we’re talking over $2.7bn. When 4Q – the seasonally strongest quarter – is released, we’ll be looking at something closer to $4bn in annual share. This is coming off a base of only $17bn in revenue.  Our sense is that the M’s, GPS’, KSS’ and TJX’s of the world are underestimating how much share JCP is handing them.  Is it any coincidence that these companies posted some of their best growth rates in recent history as JCP imploded? This is not a permanent share shift by any stretch. 


Wave Riding - jcpchart


There's nothing wrong with this if the industry both acknowledges and plans around it. But ask the average CEO of an apparel company what they think about this. They'll deny that the JCP-factor is meaningfully helping them. Check M, GPS, TJX, and KSS conference call transcripts for the words “JC Penney”. You won’t find much. The industry is in denial. That means that their process around keeping the share is nonexistent.


The key distinction is that these companies need JCP to keep comping down 25% in order to continue to feel the same competitive benefits that they have today.


We have one simple question. What if JCP comps +1 for the year? That’s a +26% positive swing.


We’ll make the call right now that the company is more likely to comp positive than negative. We think they’ll have to pay for it, but we think they’ll get it. Also remember that 33% of JCP stores will be rebranded by the end of 2013. This will not make comping easy for anyone that competes with JCP, or sells into retailers that compete with JC Penney. JCP might ultimately be a zero, but it won’t get remotely close in 2013. Check out our 12/13 report “Reasons to Reconsider Your JCP Short”.


So...where’s the next wave? We think we’re in it and the barrel is collapsing. Get out of the way otherwise it could snap your board like a toothpick. On the short side, we like names that don't have much differentiation and are at the mercy of changes in the macro climate. Financial leverage is a plus. We’re talking GPS, M, KSS, and VFC. There are others that make the cut as well, but have some company specific reasons like CRI, FDO and GES.


On the long side, be careful, but there are companies with asymmetric setups that should work. That's NKE, FNP, RH and RL.


In the end, Jon Kabat-Zinn said it best…'you can't stop the waves, but you can learn to surf.'


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1, $105.95-108.94, $3.64-3.71, $79.36-79.99, $1.29-1.31, 1.69-1.80%, and 1, respectively.


Brian P. McGough
Managing Director


Wave Riding - vp


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Buying The Love

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

“Buying love is as stupid as loving money.”



Off the ice, I’m a sometimes cuddly Thunder Bay bear. And since it’s the holiday season, I decided to spread some of the holiday cheer and went shopping yesterday. I love buying things on sale, so I bought some US Consumer stocks. Why some people only buy these things when they are green is still beyond me.


Clearly, buying the love here requires a suspension of disbelief. I get that. But I am also getting used to getting that. For most of 2012, the economy has not been the stock market. On global #GrowthSlowing, the bond market has been closer to the truth.


But what is the truth? That’s a question that people have been asking since Pythagoras did circa 530BC. I’m sure Christopher Columbus found some not so true truisms when he landed on the shores of Hispanolia today in 1492 too. We’re always learning something.


Back to the Global Macro Grind


The truth is that it helps to know when someone is lying to you. For example, look at the fine folks of the Political Class in Greece. Today, the Greeks got the nod as the “most corrupt” country in the European Union. Nice. Must do more bailouts.


In other love-oriented news this morning, it turns out that France’s sperm count just dropped by 32%. Now, if you are a single French male getting taxed at 75%, that’s a problem. The good news is that this isn’t new news. The French study cited by BBC News Europe this morning goes back to 1989. Centrally planned life was not cited as causal.


On a more serious note, why would you love buying US Consumer stocks here? The reason for that is as simple as it has always been in our Global Macro Economic model – deflating the Bernanke’s Bubble (commodities) is a real-time tax cut.


I know, I know – the whole Marxist tax demagoguery thing is still a factor out there. And I’m certainly not trying to downplay the confidence interval you’ll need to have in the bottom-up research that will get you to buy something on sale (74% of companies issuing guidance so far in Q412 have guided lower ) - but tickle me with something that isn’t French this morning and humor me.


The immediate-term risk management setup for US Consumer Stocks is as follows:

  1. SP500 held its immediate-term TRADE support line of 1404 yesterday
  2. Consumer Discretionary (XLY) held its immediate-term TRADE line of $46.49
  3. Consumer Staples (XLP) held its immediate-term TRADE line of $35.28

From an intermediate-term TREND perspective, the Commodity Deflation setup looks equally bullish:

  1. CRB Commodities Index Inflation remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  2. Brent and WTI Crude Oil prices remain in Bearish Formations as well ($111.58 and $92.20 TAIL resistance, respectively)
  3. Food Prices (Coffee, Corn – and don’t forget Wheat! “cream of wheat” –Woody Allen) are in Bearish Formations too

So, while deflation of certain asset prices may not be good for some in the Political Class, it’s really good for the Rest of Us. If they are going to tax everything and anything that isn’t locked down, we’ll take some back-pocket relief where we can find it.


What are the risks to Buying The Love in US (or Global) Consumption stocks?

  1. The Government
  2. The Government
  3. And, The Government

You see, it’s only the Government that can impose Policies To Inflate on its people. Bastiat and von Misses called it plundering. That’s what politicians do – they plunder you so that they get paid (that’s why they call your taxes, “revenues”).


Moving along…  In other globally interconnected market news this morning:

  1. Chinese stocks stopped crashing (up huge overnight at +2.87% on the Shanghai Composite)
  2. Russian stocks = +1.75% today (out of crash mode as well, now only -17.5% from the March #GrowthSlowing top)
  3. Both Global Equity Volatility and Sovereign Bonds (Treasuries and German Bunds) are finally overbought

When bonds and volatility are immediate-term TRADE overbought, it’s easier to fall in love with stocks (for a day) too.


Our Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1694-1711, $109.12-110.69, $3.54-3.68, $79.52-80.32, $1.29-1.31, $1.59-1.66%, and 1404-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying The Love - Chart of the Day


Buying The Love - Virtual Portfolio

Chinese Rebar Nears '09 Lows

We’ve always been a fan of Chinese steel rebar as an indicator of Chinese construction activity. The spot price of Chinese rebar is now nearing 2009 lows, reflecting weak demand for the commodity. There’s now a wide spread between the price of Brent crude oil and Chinese rebar, which historically had a positive correlation. It will take a stronger US dollar and a boost in Chinese construction to bring the two commodities together again.


Chinese Rebar Nears '09 Lows - chinarebar

WYNN: Under Pressure

Wynn Resorts (WYNN) has had a tough time in Macau this year. The company is struggling to collect market share and revenues have been flat versus 2011 figures. While the Street consensus is that WYNN will see EBITDA growth of +3% over the next quarter, we see it falling 4%. Unless Wynn changes its junket commission and/or credit strategy, EBITDA growth is likely to remain flat at best until Wynn Cotai opens in 2016. Right now, the stock is under pressure with slowing market growth and hurdles like smoking restrictions and crackdowns on corruption in Beijing. 


WYNN: Under Pressure - wynn1

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