Average daily table revenues were HK$775 million over the past 9 days, same as the prior week and up 14% the comparable period last year.  We believe the market is on pace for December YoY growth of 13-17% which would be above our original expectations of 12%.  High hold percentage may be the main driver of the better than expected results.




Wynn has been unable to recapture much share lost in the first 10 days of December and remains well below trend.  LVS and MGM continue to outperform their recent trend.  We think LVS will continue to gain share over the coming months while MGM appears to be more of an anomaly.  




Client Talking Points

Edge Of The Cliff

Now that the holidays have come to a close, it’s time to get back to business. Congress in particular really needs to reach into their mahogany desks and pull out their thinking caps. It’s going to be extremely difficult getting the political class to work together with President Obama to come to a solution on the fiscal cliff, but it must be done. We are fast approaching our debt limit of $16.39 trillion and guess what? Americans have little faith that Congress can get its act together to come to a compromise on spending cuts, taxes and the like. InTrade’s odds of the debt ceiling being raised by year-end are currently at 10% - so much for confidence.

Raise The Roof

Housing is one sector that’s on the fast track to a bright recovery. For the last six weeks or so, we’ve seen positive data from nearly every spectrum of the housing market. This morning October home prices are up 4.3% year-over-year according to S&P/Case-Shiller. Mortgage lending is up and the amount of inventory is decreasing. This is the kind of recovery investors have been wanting/needing for some time now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


“When the #Fed & #ECB truly bring systemic risk in the banking system back to 2004 levels, they will lose complete control over yield curve” -@Convertbond


“Nature is trying very hard to make us succeed, but nature does not depend on us. We are not the only experiment.” -R. Buckminister Fuller


October S&P/Case-Shiller Home Prices rise 4.3% year-over-year.


The Macau Metro Monitor, December 26, 2012




According to Macau Health Bureau director Lei Chin Ion, the partial smoking ban on casino floors will take effect next week, even though some casinos will not be ready on time.  Lei says there would be “no room for exercising discretion or another grace period” for enforcing the partial smoking ban in casinos.  If a casino fails to get its project on smoking areas approved by the government by the deadline of January 1, it will be considered a full non-smoking area.


He pointed out that the bureau has already received requests for approval from all six gaming operators and is now conducting site inspections.  Lei added that he is confident that the bureau would conclude all the proceedings on time.



China has opened the world's longest high-speed rail line, which runs 2,298 kilometres (1,428 miles) from the country's capital in the north to Guangzhou.  Trains on this high-speed line will initially run at 300 kph (186 mph) with a total travel time of about eight hours.  Before, the fastest time between the two cities by train was more than 20 hours.  Railway is an essential part in China's transportation system, and its government plans to build a grid of high-speed railways with four east-west lines and four north-south lines by 2020.



85% of gamblers in Macau are reckoned to be smokers - representing the upper estimate by the casino operators.  The 50% floor space rule presents casinos with a clear choice: they will not ban smoking in any of the VIP rooms because they cannot afford to annoy the high-rolling smokers.  By taking that decision, and using their quota of smoking area on the VIPs, most casinos will end up having to have total bans on their mass gaming floors.  When American and Australian casinos enacted such bans, gaming revenue fell by an average of 12% in the first year, and that was in countries where only about a third of gamblers smoked.



China's new leaders have come out swinging against official excess and corruption. Expensive banqueting and lavish overseas trips are out. Clean living and austerity are in. Some senior officials are under investigation. The antigraft dragnet could catch more than just corrupt cadres.


Luxury retailers have benefited from the inflated incomes and gifting culture of China's officials.  It is difficult to say how much luxury spending is tied to corruption. But a recent Bain survey found about a quarter of all luxury goods are purchased for gifting.  Foreign auto makers that sell to the official fleet or cater to China's princeling set could also be affected. The likes of Audi and Ferrari now count China's wealthiest class as key customers, including bureaucrats, business owners and their offspring.  Macau's gambling sector could also suffer.


It is difficult to know how effective the new leadership will be with efforts to clean house.  Hu Jintao has railed against corruption for years to little apparent effect.  Rule changes that would force officials to disclose their assets and subjecting party members to the law would help.  But antigraft rhetoric without a change in the rules will likely have little permanent effect.  Still, corruption and excess have been important components of revenue growth for some sectors. If Beijing gets serious about stamping it out, the impact will be meaningful.



Macau unemployment rate (1.9%) and the underemployment rate (0.8%) for September-November 2012 held stable as the previous period (August-October).  Total labor force was 356,200 and the labor force participation rate stood at 72.5%.  Total employment reached 349,600, an increase of 2,900 over the previous period. 

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: The Marshmallow Experiment


CHART OF THE DAY: The Marshmallow Experiment - Chart of the Day

The Marshmallow Experiment

“Strength does not come from physical capacity.  It comes from an indomitable will.”

-Mahatma Gandhi


It is a quiet week at Hedgeye and in the markets this week.  Keith is spending some time with his family, so I’ve been handed the pen on the Early Look.  My family decided to take a little vacation in the Canadian Rockies for the holidays.  As a result, this note is coming to you from Banff, Alberta in all of its -30 degrees Celsius glory.


Similar to most vacations, I’ve taken an opportunity in the downtime to do some reading.  The most interesting book I’ve picked up this holiday season is called, “Willpower”, and was written by Roy Baumeister and John Tierney.  This is not one of those books in which the title has a double meaning - the book is in fact about will power. 


As the authors write, when psychologists attempt to identify the key traits that lead to positive outcomes in life they consistently come up with two: intelligence and self control.  Interestingly, the first trait, intelligence, is considered to be somewhat innate and researchers have thus far been unable to permanently increase a person’s intelligence.  Self control, on the other hand, can be improved.  In fact, according to Baumeister and Tierney, improving self control, or willpower, is the surest path to a better life.


One of the most interesting studies that support the relationship of willpower to positive life outcomes is the Marshmallow Experiment.  This experiment was conducted by Stanford psychologist Walter Mischel in 1972 and its original objective was to study how children learn to delay gratification.  In the experiment, four year olds were put in a room alone and told that they could eat a marshmallow whenever they wanted, or if they waited until the experimenter returned they would get two marshmallows.


Interestingly, Mischel’s daughters attended the school where the Marshmallow Experiment occurred, so he kept hearing anecdotes about the marshmallow kids from his daughters after the experiment had ended.  Naturally, this led Mischel to do follow up research on the children that had participated in the experiment. 


The follow up research showed that those four years olds who were able to hold off for the second marshmallow had SAT scores that were on average 210 points higher, earned higher salaries, had lower body mass indexes, and lower rates of divorce.  The results of this experiment surprised many academics, since prior to this experiment it was thought that childhood characteristics were not accurate predictors of future success.


Since discipline is an attribute of most great investors, I’m sure many of those men and women that went on to have great careers as stock market operators would have waited for the second marshmallow.  As for politicians, I’m not so sure.  If the most recent policy stalemate implies anything, it is that elected officials don’t really want any marshmallows.  The caveat over the last 24 hours is that President Obama has made the decision to end his Christmas vacation early and will return to Washington, D.C. today, thus the futures are up this morning.  Santa Claus Rally anyone?


So, even as President Obama is coming back in hopes of getting his proverbial second marshmallow, it remains very unlikely that the fiscal cliff gets resolved in 2012.  Senator Mitch McConnell, who has been a catalyst for prior bargains, is having none of it this year as he looks toward a re-election campaign in 2014 and recently stated:


“We don’t know what Senator Reid will bring to the floor.  He is not negotiating and the president is out of town.  So I don’t know what they are going to do over there.”


The Republicans in the House, of course, have also not been able to accomplish much. Speaker Boehner’s attempt before the holidays to get his members to support a tax increase on incomes over $1 million was not successful. The likely reality is that we are looking at a short term solution that allows Congress more time to negotiate.  If this reminds you of the definition of insanity, doing the same thing over and over again and expecting different results, it should.


The other major concern related to the influence of politicians is the debt ceiling.  According to the most recent data from the Treasury Department, the total outstanding U.S. government debt was $16.30 trillion as of December 21th.  This is just shy of the statutory debt limit of $16.39 trillion, a number which is likely to be violated in early January 2013.


So, where is Washington on resolving the looming breach of the debt ceiling? Well, according to InTrade, the online prediction market, the odds of the debt ceiling being raised by year-end are currently at 10%.  Similar to the fiscal cliff, our elected officials have decided to wait until both of these issues are directly upon us and volumes are back in the New Year.  I suppose this is a version of waiting for two marshmallows, albeit not a positive version.


Clearly, if we get past the inability of the politicians in Washington to put their partisan bickering aside and reach a workable solution to both the fiscal cliff and debt ceiling, then 2013 may shape up to be a positive year for equities.  As Keith has been writing, global growth seems to be bottoming (one of the more recent supportive global data points this week is Taiwanese Industrial Production hitting a nine month high on Monday), commodity inputs look to be on a deflationary path, and housing in the U.S. is poised for a parabolic recovery in terms of home prices.


The last point is critical for growth surprising on the upside in the U.S. as the value of the consumer’s home has historically shown a high positive correlation to their discretionary spending intentions.  A sustained housing recovery is the proverbial marshmallow that many U.S. focused investors have been patiently waiting for over the last five years.  Based on our models, 2013 could well be the year where that happens.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.21-109.77, $3.49-3.58, $79.13-79.99, $1.30-1.33, 1.70-1.85%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Marshmallow Experiment - Chart of the Day


The Marshmallow Experiment - Virtual Portfolio

It Happened

This note was originally published at 8am on December 11, 2012 for Hedgeye subscribers.

“It would all be as if nothing had happened.”

-Michael Sallah & Mitch Weiss


That’s a quote from the end of the book I cited in last week’s Early Look,  Tiger ForceA True Story of Men and War. It’s a true story about American war crimes in Vietnam (Pulitzer Prize, 2004). Sadly, it’s how a lot of cover up stories involving the #PoliticalClass end.


“The Pentagon had decided that is was better to cover up what had happened. Let the country move on… there would be no press conferences. There would be nothing at all… and so it was.” (page 306)


To be fair, maybe our central planning overlords do know what’s best for the country. But maybe they don’t. All I know is that whether it’s Bernanke, Geithner, or Petraeus – as Canadian-American Patriots, it’s our responsibility to keep questioning.


Back to the Global Macro Grind


I’ve been questioning Bernanke and Geithner’s Keynesian Policy To Inflate via US Dollar Debauchery for 6 years. Even if they refuse to acknowledge what has happened publicly, proving this out has been a daily dog fight – and I’m proud to have done the work.


All-time highs in food and energy prices? It Happened in the last 6 years. It all happened under Bernanke and Geithner’s watch. Causality was both fiscal (debt/deficit spending) and monetary (money printing). They both deserve their #FairShare of the blame.


As Bernanke and Paulson promised “shock and awe” rate cuts and bank bailouts, the all-time high in Oil prices happened during the economic crisis (2008). Think about that. Then think about why Gold and Food prices hit their all-time highs in 2011 and 2012, respectively as net long positions in futures & options commodity positions hit all-time highs (twice) in 2012.


All-time is a long-time. It Happened.


Now, deflating these policy mistakes, and popping the bubble in commodity price expectations, perversely, becomes the American and Global consumer’s greatest opportunity to get a real-time tax cut. I like that. If you don’t take car service to D.C. to work every day on US tax moneys and have all your meals bought and paid for, you should too.


From a Global Macro perspective, I also like the following positions:

  1. LONG Consumption
  2. SHORT Commodities

Perma marketers can attempt to label me whatever they want. Our clients only pay us if A) we are helping them avoid blowups and B) we are helping them get things right. Never mistake “negativity” with reality. Reality is that, since we launched our Bernanke’s Bubbles Theme, it started happening – the commodity bubble has started to pop, faster, and louder.


Since Bernanke’s Top (September 14th, 2012 when he decided to print to infinity and beyond), the CRB Commodities Index (19 commodity basket) is down -8.7%. That compares with the SP500 that is now down only -3.8%. Some global equity markets (like Germany’s DAX, which is crushing the Dow YTD) are now up versus their early September highs.


The US Dollar, of course, has been up for 8 of the 11 weeks since Bernanke’s last decision. Tomorrow’s FOMC meeting offers him an opportunity to get out of the way. We’ll see if he has the political spine to do that now that the election is out of the way.


All the while, you have had great buying opportunities presented by the #PoliticalClass and their cliff babbling along the way. Our critics will be the last to remind you that on the Hedgeye Best Ideas Conference Call on November 15, 2012, 6 of our 8 Best Ideas were actually longs. Timing matters. And we have a great deal of pride focusing on it.


To review, our 6 LONG US Equity Ideas have returned, on average, +9.9% (versus SP500 +5% off the lows) during the same period:

  1. International Game Technology (IGT) – Todd Jordan idea = +14.3%
  2. C&J Energy Services (CJES) – Kevin Kaiser idea = +12.4%
  3. Jack in The Box (JACK) – Howard Penney idea = +10.4%
  4. Paccar (PCAR) – Jay Van Sciver idea = +6.5%
  5. Nike (NKE) – Brian McGough idea = +8.0%
  6. TCF Financial (TCB) – Josh Steiner idea = +4.8%

That’s not a victory lap. That’s just the score. In what most would agree is a tough alpha generation environment, It Happened.


And I think, for me at least, it’s really important to highlight all the great work the men and women who grind it out for us every day do. They are both resilient and adaptive. They are also transparent and accountable. And for that, I am thankful to have the opportunity to work alongside them each and every day.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1719, $105.99-109.26, $3.62-3.72, $80.01-80.51, $1.28-1.30, 1.59-1.65%, and 1405-1421, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It Happened - Chart of the Day


It Happened - Virtual Portfolio

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.