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The Macau Metro Monitor, January 25, 2013




LVS has stopped executing international money transfers for its VIP customers and is overhauling its compliance procedures, including no longer allow gamblers to transfer funds from their bank accounts under an alias.  Officials at the U.S. Treasury's Financial Crimes Enforcement Network are considering proposing rules that would set down more specific anti-money-laundering requirements for casinos, said Steve Hudak, a spokesman for FinCEN.  The process is still in its early stages, he said. Sands has recently hired three former FBI agents to strengthen anti-money-laundering efforts and improve the background checks the company does on VIP customers and junket operators 


Sands has been negotiating with U.S. authorities to resolve a money-laundering investigation into whether the casino failed to alert officials about suspicious transactions of two high rollers at its Las Vegas casino


Mike Leven, president of LVS, said the current changes weren't prompted by specific government demands, but that Las Vegas Sands was restructuring its compliance functions to address increasing concerns from regulators.  "The world is changing. There are more people in government concerned about procedures," said Mr. Leven, speaking in an interview Wednesday at a conference in Los Angeles. "There are more international funds moving around and more stress about where the money comes from and where it's going."


Sands and other casino operators have allowed important clients to deposit money—on occasion millions of dollars at a time, in the case of Sands at least—in accounts in one country and use it in another for gambling, according to casinos executives and documents reviewed by The Wall Street Journal.  Law enforcement authorities say they are concerned about the use of these types of transfers across international borders, particularly from junkets; without the more specific source-of-funds and other requirements that banks provide, those fund exchanges could carry a high risk of money laundering, they say.


Executives at Wynn and MGM said their anti-money-laundering procedures evolve as needed, and that no big overhauls are currently planned. Both companies said they use company accounts to transfer money for clients and that their procedures comply with regulations.


Regulatory changes could require casinos to collect identification records for high-end customers and do more research on the sources of funds from these customers, similar to the requirements faced by banks.


Treasury officials have been discussing the internal fund-transfer systems with casino operators.  Inside LVS, executives had expressed concerns about the system, saying it improperly bypassed the banking system.



SJM announced a salary increase of 5-6% for all its employees effective from this month.  The gaming operator said in a statement that it would also offer a bonus payout for the year of 2012.  Employees with a monthly salary of MOP11,000 (US$1,375) or below will receive 175% of a month’s salary.  Other employees will receive a bonus of 125% of a month’s salary, which will not be less than MOP19,250.

SJM Holdings also announced it will increase meal allowances and extend rewards to employees who have not taken sick leave.  SJM is the first gaming operator to announce salary increases for 2013.



Venetian Macau is suing two mainlanders in Hong Kong over more than HK$30 million (US$3.9 million) in gaming debts.  According to the South China Morning Post, the operator is asking Zou Yunyu, owner of Shanghai Gaoyuan Property, and Xie Xiaoqing, former director the Goldbond Group, to pay back HK$23 million and HK$11 million, respectively.  The money was lent through credit agreements made separately between the operator and the two defendants in 2011 and last year, two writs filed with the High Court in Hong Kong state.  The Venetian Macau is also claiming the interest on the sum of the outstanding loans.



The second tower of the Sheraton Macao Hotel, located at Sands Cotai Central casino resort, is ready.  Sands will organize a ceremony marking the completion of the tower on Monday (January 28).  Named “Earth Tower”, it features 2,067 rooms and suites, bringing the hotel’s total room count to 3,896.


With this new tower, the Sheraton Macao Hotel will become the city’s largest hotel, ahead of the Venetian Macao, which has over 2,800 rooms.  The property is also the biggest Sheraton-branded hotel in the world.



The Guangzhou-Zhuhai Intercity Railway is adding an express train service before the Lunar New Year holiday in early February.  It will make only five stops, cutting up to 22 minutes from the 82-minute journey made by the regular service.


PRIVATE HOME PRICES UP 1.8% IN Q4: URA Channel News Asia

Singapore private home prices rose 1.8% in 4Q 2012, compared with a 0.6% increase in 3Q 2012. For 2012, prices of private residential properties increased by 2.8%, a smaller rise compared to the 5.9% growth recorded in 2011.

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Sentiment Dogs Bite

This note was originally published at 8am on January 11, 2013 for Hedgeye subscribers.

“I have a feeling that the bark is worse than its bite.”

-Winston Churchill


That’s what Churchill said about Joseph Stalin in 1944.


For their part, Churchill and Roosevelt never entirely trusted Stalin… they weighed every decision against the possibility that Russia might quit the war, as the Bolsheviks had done in 1917.” (The Last Lion, pg 445).


While I don’t make market calls based on “feeling”, how people feel about markets matters. America’s historical risk management lesson with Russia feels very familiar. Now that the shorts have been squeezed, do I entirely trust being long stocks right now? Of course not.


Back to the Global Macro Grind


The SP500 and Russell2000 finally delivered the Canadian Bacon yesterday, making higher-highs versus their September 2012 and all-time closing highs, respectively.


With the Financials (XLF) leading the charge on the day (+1.3%) and already up +4.6% for the YTD (the SP500 is +3.2%), those who stayed short this market definitely feel more than a little barking out there – these newfound fund flows to equities are like dogs panting.


To review our recent bullish call on Global Equities, there are 3 big parts:

  1. Global #GrowthStabilizing as Hedge Fund Short Interest was rising (NOV-DEC)
  2. Treasury Bonds and Gold breaking down (NOV-JAN)
  3. Fund Flows shifting from bonds to equities (DEC-JAN)

Since Global Macro markets are reflexive, it’s been nice to see these 3 things happen in order:

  1. US Equity Short Interest peaked (sequentially) in the last week of November at 3.98%
  2. Gold stopped going up at another lower all-time high in the 3rd wk of November ($1753)
  3. Global Equity Fund flows just had one of their biggest weeks since 1992 (see Merrill data this morn)

That, of course, is bearish for Treasury Bonds (we are short TLT) – and why we re-shorted Gold (GLD) on green yesterday (see our #RealTimeAlerts product for intraday signaling if you can stand watching me day-trade).


So, with all of this new “news” becoming rear-view mirror events, you don’t want to be getting piggy here; you want to be booking some gains. Depending on how hot these Financials Earnings Reports are for Q412, you can determine how leisurely you can take your time. Wells Fargo (WFC) reports first this morning and the belly of the money-center banks will be out next week.


Why would you make some sales on green?

  1. Global #GrowthStabilizing won’t last forever (remember, Keynesian economic cycles are short and volatile)
  2. #EarningsSlowing will be more readily apparent in late January to early February (Financials as good as it gets)
  3. It’s just generally cool to sell high after you bought low

That last one-liner might annoy some people, but it was pretty annoying seeing people short every up move for the last month as the economic data was improving too.


It’s one thing to be bearish on government; it’s entirely another to be a perma-bear of all things, all of the time.


In an over-supplied industry (asset management), this is why getting the Behavioral side of the market right matters more than it has ever mattered before. Sentiment is a factor that you fade. But it’s also one of the toughest market factors to quantify.


I’m constantly trying to find new channels and data to quantify sentiment. Currently, my Top 3 Sentiment Checks are:

  1. My research team’s proprietary data
  2. My Institutional Client base (our team collaborates best data with theirs)
  3. My Twitter stream

That last one is the one that fascinates me the most. I have built a “contrarian stream” of market pundits that are getting really good at chiming in, almost like an orchestra, on market direction (intraday). They have been trying to sell every down-move to lower-highs since the Fiscal Cliff low of 1400 SPX in the last week of December. #wrong


More on that later. For now, it’s important to realize that Institutional Short Sellers (Short Interest as a % of the total float for stocks listed in the SP500), just dropped from 3.98% in the last week of November to 3.74% into the 1st week of January. At the same time, the Institutional Investor Bull/Bear Spread just went from +950 basis points wide (wk of Nov19) to +2,770 bps wide this week.


Sentiment is a dog to follow, and it bites.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1642-1678, $110.33-111.48, $3.64-3.75, $79.48-80.11, $1.30-1.32, $87.41-89.10, 1.86-1.96%, and 1452-1494, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sentiment Dogs Bite - Chart of the Day


Sentiment Dogs Bite - Virtual Portfolio


1Q13 Starbucks comps in the Americas and China, Asia Pacific were impressive and, despite EPS only meeting expectations, the outlook for the company's earnings is positive with many tailwinds coming into play as we move through FY13.





Starbucks posted a solid quarter, albeit with unit growth missing expectations and some weakness in CPG.  Along with unusual items that negatively impacted margin, these factors prevented the strength in comps from flowing through to the bottom line.  We believe that FY13 consensus estimates for SBUX Americas SSS are conservative. and that the positive traction that has been gained in China will become more meaningful, complementing the strategies being executed on in other markets.   The company is laying the foundation for consistent EPS growth over the coming years. 


Below, we go through a quick recap of 1Q13 earnings and, following that, our thoughts on the company’s earnings potential for FY13. 



1Q13 Earnings

  • Revenues came in slightly lower than expected as CPG sales lagged expectations
  • Comps in Americas, CAP ahead of expectations and encouraging commentary on conference call
  • China continues to be a strong market, no impact on traffic from recent dissatisfaction with other western brands
  • Restaurant operating margin was slightly disappointing given the coffee cost tailwind (that is still growing) but unanticipated, unusual costs had a 130 bps impact on consolidated operating margin
  • Opened 212 net new stores globally versus consensus 283



  • Americas comparable sales grew by 7% in the quarter, including over 4% transaction growth
  • Promoted beverages, including the pumpkin spice latte, added more than a point of comp
  • The division saw operating margin contract by 50 bps due to expenses related to the global leadership conference (90 bps), litigation charges (70 bps), and the impact from Sandy (30 bps)
  • 86% more customers signed up for My Starbucks Reward card in 1Q13 vs 1Q12
  • 80 net new units opened in 1Q versus consensus expectations of 126



  • CAP comparable sales grew by an impressive 11%, including 8% transaction growth
  • Sales growth of 20% was reassuring after recent uncertainty in region
  • Holiday promotions performed well, loyalty card adoption rate encouraging across region
  • Unit growth is having a temporary negative impact on op margin – more than 60 bps in 1Q
  • 125 net new units opened in CAP during 1Q.  The Street was anticipating 136



  • EMEA comparable sales declined -1%, including 2% traffic growth.  Check declined, suggesting a trade down impact driven by difficult consumer environment in the region
  • Largest market, the U.K., received the pumpkin spice latte well
  • Operating margin expanded by 110 bps as a result of cost efficiencies and license stores’ revenue growth



  • VIA Ready Brew grew 16% in the quarter
  • 175 million K-Cups sold in the quarter
  • 150,000 Verismo machines sold across each channel since launch
  • Schultz underlined the company’s intention to provide incentives, going forward, for customers “to not only buy Starbucks coffee, but integrate that even further in the Starbucks ecosystem” with the card loyalty and mobile



SBUX COMPS A SIGN OF STRENGTH - sbux americas sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux cap sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux emea sss cons





The company remains well-poised to take further share of the US coffee market while growing its presence internationally.  In our view, this quarter’s revenue shortfall is not indicative of any significant issues within the business.  Initiatives within the CPG business, such as expanding the Blonde Roast offering and introducing new varieties of K-Cups, are set to maintain momentum in the category.  New unit growth, which missed expectations, is likely not a concern for the full-year since management reiterated its guidance of 1,300 net new stores globally (600 Americas, 600 CAP, 100 EMEA).  We are modeling $2.19 in EPS for FY13.


The long-term challenge for Starbucks is going to be maintaining control of its brand through every channel it pushes product.  As we wrote almost two year ago, “the future of the single-serve category is Starbucks’ to shape”.   The tone of today’s call certainly firmed that conviction.  


One risk that is in play during this quarter is the pending Kraft arbitration ruling.  Kraft is reported to be seeking as much as $2.9 billion plus legal fees.  Although no resolution has yet been reached, Starbucks management anticipates a ruling to be delivered later in the second quarter (ending March). 



Howard Penney

Managing Director


Rory Green

Senior Analyst

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