The Macau Metro Monitor, February 15, 2013




On Feb 14, Macau welcomed over 155,000 visitors, an increase of 7.7% compared with the same period last year (CNY).  It was the second day in a row recording a growth slowdown.  Of the total tourist arrivals recorded yesterday, around 112,000 were from the mainland, up by 17.1% in comparison with the same period last year.  In the first five days of the Year of the Snake, Macau welcomed around 718,000 tourists, up by 17.7% compared with the same period last year.



Sales of new private homes in Singapore jumped by about 43% MoM, despite the latest round of cooling measures introduced last month.  According to the Urban Redevelopment Authority (URA), 2,013 units of new private homes - excluding executive condominiums - were sold in January, compared to 1,410 units sold in December 2012.



Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes said she believed that the mainland’s Individual Visit Scheme would continue to benefit the development of tourism in the city.  Asked by reporters for her comments on travelers’ complaints about the long wait to cross the Barrier Gate checkpoint during the Chinese New Year holidays and the city’s visitor capacity, Fernandes said that the situation would be improved after some of the immigration halls were extended.


Asked by reporters as to whether people from more mainland cities should be allowed to visit Macau through the Individual Visit Scheme or whether it should be limited, Fernandes said that mainlanders using the scheme gave a major boost to the local economy.  The Individual Visit Scheme was first introduced in four Guangdong cities (Dongguan, Foshan, Jiangmen and Zhongshan) on 28 July 2003 as a liberalisation measure under the Closer Economic Partnership Agreement (CEPA).  The scheme allows residents of these cities to visit Hong Kong and Macau as individuals.

Fake it 'til You Make It

This note was originally published at 8am on February 01, 2013 for Hedgeye subscribers.

"To be a great champion, you must believe you are the best.  If you’re not, pretend you are.”

- Muhammad Ali


Last night Big Alberta (aka Daryl Jones) gave me the late look that I was to write this Early Look, so this morning I get to take extra creative liberties and subject you all to thoughts on my sector, Energy.


It’s a difficult space to make money in when oil prices aren’t going straight up, a la 2009 and 2010. 


Oil and gas companies – particularly the producers (E&Ps) – are highly promotional, as they have to be, in order to raise capital for what has become an incredibly capital-intensive industry.  In 2012, capital expenditures from S&P500 companies in the Energy sector were 39% of the index’s total; in 2000, they were only 12% (see Chart below).  Someone’s got to foot that bill, as the companies can’t do it on their own – the free cash flow yield of that same group was 0.0% in 2012, and if you back out a few cash cows like ExxonMobil and Royal Dutch Shell, you’ll find that most producers are not self-funding.


Nevertheless, in general, market participants hold the energy sector near-and-dear to their hearts.  Investors tend to anchor on recent history, and energy was by far the best performing sector over the last decade (XLE +200%).  And the sell-side knows what pays the rent – capital raises – so it’s not too surprising that Energy has the highest percentage of “buy” ratings and lowest percentage of “sell” ratings of all S&P500 sectors.


But is the love deserved?  Most E&Ps cannot generate a return greater than their cost of capital (aka “create value”), even with real oil prices near multi-decade highs and interest rates at multi-decade lows.  We shudder to think what a serious back up in rates would do to the sector…bankruptcy cycle?


But all is not lost (can’t get too cynical on a Friday)!  Among all the wealth destruction so colorfully described by activist investors in recent letters to the shareholders of Chesapeake (Icahn), Sandridge (TPG), Murphy Oil (Loeb), and Hess (Elliott), there are legitimate franchises and investment opportunities in the sector.  Over our long-term TAIL duration, we believe that select companies highly-levered to US natural gas prices will generate the best risk-adjusted investment returns in the space.


As we hover around nominal natural gas prices last seen on a consistent basis in the 1990s, it is a non-consensus view, so it needs some defending…


1.  Because natural gas is a local commodity, market fundamentals (supply, demand, and inventories) in North America impact prices in North America.  It is a remarkably efficient commodity market, and one which we can fundamentally believe in.  If we have a warm winter, natural gas prices go down – we get that.  We can’t necessarily say the same about global oil markets.


2.  In a world characterized by slow growth and tail risk, we think natural gas is a relative safe-haven.  If China has a debt crisis or the EU collapses, we will still heat our homes and turn our lights on.  US demand for natural gas is inelastic – in 2009 it fell only 1% compared to a 3% drop in US real GDP.


3.  Natural gas will continue to take power generation market share away from coal.  We estimate the natural gas demand from the power sector was +20% y/y in 2012, largely due to coal-to-gas switching and the retirement of aging coal plants.  At least 10% of existing coal-fired capacity is likely to shut down between 2012 – 2015 due to impending emissions regulations.


4.  Demand from the industrial sector should grow above GDP as new petrochemical, chemical, fertilizer, and steel plants come take advantage of the energy cost advantage in North America relative to the rest of the world.  As one example, Italy’s M&G Group announced last month that it will build the world’s largest single-line PET plant in Corpus Christi, Texas.  M&G remarked, “This is the largest PET investment ever in the western world and probably one of the largest investments recently announced in the US in the private sector.”


5.  Price is below the marginal cost of dry gas production, which we consider to be $4.50 - $5.00/Mcf, or the price at which producers can generate a positive return on a Haynesville Shale gas well.  We do think that we have seen the last of Haynesville Shale production growth.


6.  Longer-term, we are optimistic about new sources of natural gas demand: LNG exports and natural gas as legitimate transportation fuel.  With the right R&D and policy measures, both are economic and feasible, in our view.

We’re not going to give away the shop here, so if you’d like to discuss ways to invest in the thesis send us an email at  Further, on Wednesday 2/6 we’re going to host a Black Book presentation and conference call for institutional clients on Gulfport Energy Corp. (GPOR).  There we have a very non-consensus view.  For now, we’ll just say that it’s one of the more promotional companies in the space...  Email for details on that call.


Have a great weekend,


Kevin Kaiser

Senior Analyst 


Fake it 'til You Make It - EL chart


Fake it 'til You Make It - yup

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HNZ: Berkshire Buys a Little ADM

On a day where we saw Berkshire Hathaway’s appetite for global consumer brands manifest itself as a $72.50 per share bid for Heinz (HNZ), a much smaller investment, but an investment that is no less consistent with Berkshire’s investment philosophy, may have escaped investor notice.  In a 13-F filing, Berkshire Hathaway reported a 6 million share position in Archer-Daniels Midland (ADM).

With the overarching investment principle a focus on long-term value, Berkshire has also displayed an interest in infrastructure when it ventures out beyond insurance.  We believe that part of the long-term investment thesis surrounding ADM (and Bunge, BG, as well) is the capital investment that both companies have made in global, agricultural infrastructure and the likely potential future returns associated with those investments.

The assets at ADM and BG are unique and leveraged to what we view as a powerful, long-term investment thesis – feeding an expanding global population and the associated need to get the crops from where grown to where consumed.

We expect that ADM shares will get a boost from this news and continue to see upside to the mid-$30’s in the name as we move through the start of the crop year in the U.S.  Similarly, we see upside to shares of BG, despite a recent quarterly result marred by the performance of the company’s risk management operations.


STZ: Happy Endings

Constellation Brands (STZ) closed up +37.2% today after news that it won full control of the Corona and Modelo brands after Anheuser-Busch InBev tried to salvage its deal to buy Grupo Modelo that was initially blocked by the Department of Justice. Constellation brands will become the third-largest brewer and seller of beer to U.S. consumers.


Back on January 31, 2011, Hedgeye Consumer Staples Sector Head Rob Campagnino noted that STZ had the potential for further upside per the Modelo deal. Said Campagnino:


"Our view remains consistent – this transaction represents significant value to ABI, and therefore we believe that additional concessions are very likely.

While the move down is painful, we continue to see substantial value to Constellation Brands should the transaction close, an event that we continue to see as likely, though delayed."


STZ: Happy Endings - STZBIGONE


Today we bought International Game Technology (IGT) at $16.26 a share at 9:53 AM EDT in our Real-Time Alerts. Buying back Hedgeye Gaming, Leisure and Lodging Sector Head Todd Jordan's Best Idea on red after it had a controlled correction to immediate-term TRADE support. One of our top guns on the long side.