The Macau Metro Monitor, March 1, 2013




Macau February Gross Gaming Revenues hit MOP 27.084 BN (HKD 26.294 BN, USD 3.39 BN) up 11.5% YoY.



Hong Kong-listed Melco International Development Ltd, one of the two main shareholders of MPEL, is placing HK$460 million (US$59.3 million) in bonds.  The five-year notes will pay 4.15% interest annually  The bonds are being issued by Melco International Finance Ltd, a British Virgin Islands company, and fully guaranteed by Melco International Development.  The cash will be used for general working capital and future investment purposes, according to the company.




Box of Frogs

This note was originally published at 8am on February 15, 2013 for Hedgeye subscribers.

“If it’s your job to eat a frog, it’s best to do it first thing in the morning.  And if it’s your job to eat two frogs, it’s best to eat the biggest one first.”

-Mark Twain


My Hedgeye mates and I have been over in London for almost half a fortnight.  Meeting with European investors and getting entrenched into the British culture has been an interesting experience for us.  To be fair, we probably have spent a few more quid at the pub then we would in a normal week, but even that seems to be part of the culture over here. 


Since being in the U.K., we have learned a few bits and bobs, and also some new phrases.  The most interesting one to me is, “box of frogs.”  It is actually used to describe a crazy state of mind, such as: that Keynesian economist is as mad as box of frogs.  The point being that if frogs were placed into a box, it would drive someone crazy if they had to hold onto the box.  The parallels to our frustration with global monetary policy are quite evident.


I’ve also taken up reading the Irish Times when I have had a break for coffee and biscuits during the day.  While I can’t say I totally understand rugby, the hockey player in me obviously has some affinity for the sport.  This morning in the Irish Times the Rugby Analyst Liam Toland wrote the following:


“Yes, I was enthralled by England’s application, their maturity, their discipline, and their ever growing belief in negotiating a tough fixture.  That’s why I stayed. Remember not so long ago, these guys were throwing dwarfs around.”


I’ve heard, and frankly overused, many sports analogies in my days, but “throwing dwarfs around” is a new one even for me. I’ll have to ask one of the blokes on our restaurant team, Rory Green, about that one.


On a serious note, the trip to London was very fruitful in terms of gauging expectations.  Over the course of the week, we probably met with well over 500 billion sterling in cumulative investor capital.  From a philosophical perspective, many of the money managers in London describe themselves as thinkers, especially as compared to the traders in New York and Connecticut. And from our view, they are a very thoughtful and strategic group.


Interestingly enough, we may actually be entering an environment in which thinking is rewarded more than trading.  This is certainly not to say thinking is a better risk management strategy per se, but rather that we are in a new environment of low volatility.  In the Chart of the Day we actually look at the VIX over the past five years.  The interesting point to note based on our models is that upside resistance is what was for the past three or more years the point where we recommended shorting and/or selling stocks (right around 14).


The implication is simply that based on the VIX, it looks to us we may actually be entering a new and lower phase in volatility. This supports our bullish case on U.S. equities, especially if the VIX breaks through its year-to-date lows.  In that scenario, our models have the VIX going to 9.  This would obviously be a very favorable tailwind for equities, and really risk assets generally.  Not so favorable, though, for the end-of-the-world, such as long Treasuries and gold.


A key question many of the asset allocators in Europe are asking us is in regards to what regions of the world we are most favorably disposed to, or vice versa.  For us this is less an exercise of whetting our fingers and sticking them up to see which way the wind is blowing, but rather just a function of what our models are telling us.  As it relates to countries specifically, we focus on growth, inflation and policy.  Our views on some of the key economies are as follows:

  • The U.S. economy – The U.S. is currently in Quad 1, which means growth is accelerating, or poised to accelerate, and inflation is decelerating;
  • The Chinese economy – China is currently in Quad 2, which means that growth is accelerating with inflation also accelerating.

In terms of being long equities, an investor wants to live in Quads 1 and 2.


Interestingly enough, Europe is actually also currently in Quad 1, albeit growth itself is stabilizing at very low rate in Europe and it is a continent, as usual, with very distinct potential by country. One of the most negative countries being flagged in our models currently is France, the regions second largest economy. (And no, Box of Frogs was not a reference to France!)


One of the lads on our Macro Team, Matt Hedrick, knows his onions as it relates to European economies and emphasized the key risks to France in a note yesterday.  Some of the key negative trends include:

  • Public debt – pushing 91% (as a % of GDP) - France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth;
  • Credit Rating – Fitch is the only main agency to maintain its AAA status. S&P is at AA and Moody’s at Aa1. We expect all three to be lined up at AA in 2013 and for this reduction in credit standing to weigh on its public finances, and put upward pressure on yields;
  • Competitiveness Drag – Hollande’s policy to tax the rich (75% on those making €1MM or more) is not only driving out his countrymen but sending negative investment signals to the business community. Hollande has moved the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain;
  • Hamstrung Spending – we believe that Hollande will not be able to issue additional spending cuts due to push back on the street against austerity; and
  • Bank Leverage – French banks remain an outside concern due to their leverage to the periphery.

The research in this instance also supports the price as the CAC is broken in our quant models.  It is not totally surprising either, as some of the government policies in France seem a little dodgy.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1628-1661, $117.21-118.92, $80.04-80.77, 92.71-94.48, 1.96-2.05%, and 1513-1529, respectively.


Enjoy your weekends and if you want to talk Europe, feel free to give us a bell.


As always, keep your head up and eyes on the blindside of the pitch,


Daryl G. Jones

Director of Research


Box of Frogs - Chart of the Day


Box of Frogs - Virtual Portfolio


Today we shorted the iShares MSCI Malaysia Index Fund ETF (EWM) at $14.63 a share at 3:46 PM EDT in our Real-Time Alerts. One of two (India is the other) Asian countries in our GIP (Growth, Inflation, Policy) Model that doesn't look bullish like the rest of them do.


TRADE OF THE DAY: EWM - image002

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VIDEO: Staying The Course


Hedgeye Director of Research Daryl Jones appeared on CNBC's Closing Bell this afternoon to discuss the US stock market. Daryl laid out his case for being long equities, noting that recent economic data like new home sales and Chicago PMI show real recovery in the economy. You can watch Daryl's full appearance in the clip posted above.


Takeaway: The weak FY14 budget proposal exposes the Indian economy and its financial markets to meaningful TAIL risks.



  • For the third consecutive year, India’s beleaguered Finance Ministry disappoints investors with a complete joke of a budget outline, and, for the third consecutive year, Indian financial markets are threatening to selloff heading into [at least] the mid-summer months.
  • All told, India is a short here (equities and currency) until the market comes to grips with negative implications of this third-consecutive budget gaffe. As evidenced in the chart below which includes our refreshed quantitative risk management levels, India’s benchmark SENSEX is flirting with a TAIL line breakdown and is less than 2% away from that occurrence.
  • A confirmed breach of TAIL support will be explicit confirmation of our dour interpretation of India’s fiscal policy outlook, as well as our marginally hawkish monetary policy outlook. Specifically, the bear case for the Indian economy and its financial markets as outlined in our 1/8 note tiled: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA” continues to be confirmed by the data.


***To get up to speed with our calls India’s previous two budget gaffes and the associated negative macroeconomic implications therein, please review the following two notes:



This past Monday, we put out a note titled, “MAKE IT OR BREAK IT TIME FOR INDIA” in which we laid the analytical groundwork for contextualizing today’s budget release. To the extent you’ve got exposure to Indian capital markets and are looking to get into the weeds a bit, please review that note as well. The key takeaway was as follows: “The FY13 budget stands to create either a meaningful buying opportunity or intense selling pressure across Indian financial markets.”


In the spirit of being frank, it is our view that Finance Minister Palaniappan Chidambaram missed big relative to expectations of meaningful fiscal retrenchment with his FY14 budget proposal. Moreover, today’s budget ‘miss’ is likely to apply “intense selling pressure across Indian financial markets” as we alluded to in Monday’s note.


To review the FY14 budget in greater detail, we posit the following highlights:


  • Total expenditures up +16.4% YoY to 16.7 trillion rupees;
  • Subsidy expenditures down -10.3% YoY to 2.3 trillion rupees;
  • Tax & fee receipts are projected to come in at +21.2% YoY to 10.6 trillion rupees;
  • Capital revenues are projected to grow +8.9% YoY to 6.1 trillion rupees (receipts from equity divestments projected up +132.6% YoY, LOL!); and
  • Real GDP growth in FY14 is projected to recover to +6.7% YoY from +5% in FY13-to-date (through 4Q), with the latter figure representing the slowest growth rate in 10 years and compares with a trailing 10Y average of +7.9%.






Simply put, relying on aggressive forecasts for tax & fee revenues growth predicated on an aggressive GDP growth assumption to help fuel a +16.4% ramp in public expenditures is a dangerous cocktail for India’s sovereign balance sheet. We expect official budget deficit projections to be revised wider in the coming quarters and for the associated markets to front-run this to some degree. Moreover, with India’s growth slowing to +4.5% YoY in 4Q12 (from +5.3% prior) as per this morning’s report, we do not consider it reasonable to anticipate such a demonstrable pickup in economic activity.


That said, however, India’s 2H13 growth outlook should brighten substantially, eventually giving Indian policymakers some degree of hope at least from a directional (i.e. not “absolute”) perspective. For now, however, the Indian economy is likely mired in Quad #3, as per our latest projections.






From an inflation perspective, the -10.3% decline in subsidies will translate directly to higher prices (i.e. inflation) for Indian consumers and businesses in the coming months. Specifically, energy subsidies are budgeted to decline -33%. While the +5.8% increase in food subsidies to 900 billion rupees is little more than a cunning attempt to buy votes ahead of the 2014 general elections, it should offset some of the inflationary pressures stemming from the de facto energy price hike.


On balance, any inflationary pressures stemming from the aforementioned decline in total subsidy expenditures should curb a fair amount of scope for the RBI to continue easing monetary policy at the margins, a view that is starting to be confirmed by India’s OIS market. That’s not good for foreign investors, who, until recently, were bidding up Indian capital markets on the heels of a [widely-perceived] outlook for aggressive monetary easing.




Recall that on FEB 16, RBI Governor Duvvuri Subbarao said that he will “weigh the quality of the government’s fiscal adjustment,” and that “there is room for monetary easing, but that room is limited.” If Subbarao interprets this budget in line with our views, then that “room” just got a lot smaller.


A slowdown in “flows” similar to the ones we’ve seen in past cycles will, at the margins, exacerbate the funding of India’s twin deficits and further threaten the country’s already-shaky economic growth prospects. Moreover, a widening of either deficit relative to the economy will inch India closer to a full-blown balance of payments crisis. While that’s not necessarily a call we feel comfortable making at the current juncture, it remains a critical tail risk for India and a host of other EM economies.






For our updated thoughts on the rising potential for a broad swath of EM BOP crises over the long-term TAIL, please review our 2/20 note titled: “CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL”. FYI: the rupee (USD/INR cross) isn’t trading just above all-time lows for no fundamental reason whatsoever. It would be a real shame if the Singh administration ultimately failed to deliver on so many opportunities to get India’s fiscal house in order and the country’s rampant inflation under control…




All told, India is a short here (equities and currency) until the market comes to grips with negative implications of this third-consecutive budget gaffe. As evidenced in the chart below which includes our refreshed quantitative risk management levels, India’s benchmark SENSEX is flirting with a TAIL line breakdown and is less than 2% away from that occurrence.




A confirmed breach of TAIL support will be explicit confirmation of our dour interpretation of India’s fiscal policy outlook, as well as our marginally hawkish monetary policy outlook. Specifically, the bear case for the Indian economy and its financial markets as outlined in our 1/8 note tiled: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA” continues to be confirmed by the data.


Darius Dale

Senior Analyst

MNST Q4: Where do we go from here?

This note was originally published February 27, 2013 at 21:26 in Consumer Staples

Coming into yesterday's earnings release, we had concerns that the company would disappoint versus consensus – those concerns were validated.  We like the category and we like the company, and we want to like the stock, but we still need to see 1H ’13 consensus come down a shade(2%).  Ultimately, we continue to believe that MNST’s superior growth profile isn’t being appropriately valued, in part because of ongoing regulatory overhang and in part because of weakness in the energy drink category in the U.S.

MNST reported Q4 results this evening, falling short of consensus on both the top and bottom line.  Revenue growth was 15.0% (versus 17.6% contemplated by consensus) while reported EPS of $0.39 was $0.02 light of consensus.


What we liked in the quarter (the good)

  • Sequential improvement in revenue growth versus a more difficult (420 bps) one year comp
  • Sequential improvement in EPS growth versus a more difficult (930 bps) one year comp
  • Sequential mitigation in gross margin declines against a marginally easier comp
  • Continued share gains by MNST in the energy drink category
  • Sustained strength in international sales (+29.6%)
  • Aggressive share repurchase by the company in the quarter

What we didn’t like in the quarter (the bad)

  • Continued year over year declines in the price per case (fourth consecutive quarter)
  • Weakness in the broader energy drink category

What else (the ugly)

  • Very difficult one and two year comps in 1H 2013
  • Pending adjustments coming out of this release, we remain below consensus for 1H ‘13

We continue to like the longer-term prospects for the energy drink category in general and MNST specifically, but this quarter’s results are precisely the reason we haven’t been as vocal as we have been in other situations – we prefer to see a clear path to EPS upside before we get excited about a name.

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