The Macau Metro Monitor, March 12, 2013




According to filings, Steve Jacobs alleges that Sheldon Adelson became "enraged" with the then-head of Macau's government, Chief Executive Edmund Ho, because of decisions made by Ho regarding condos that Sands was trying to sell in Macau.  The filing calls Adelson's alleged order a "threat" against Ho, but it doesn't specify how Jacobs was supposed to threaten the official.


Jacobs says Adelson ordered him to tell Ho that he was indebted to Adelson for settling a lawsuit to protect Ho.  Jacobs says Adelson's instructions were to remind Ho that "Adelson had settled a lawsuit paying $40 million" to help Ho "and that he [Ho] owed Adelson."  Jacobs said he refused to carry out the order, which he considered "improper," and reported it to the company's then-general counsel and to Chief Operating Officer Mike Leven.


Adelson said in his statement that he holds Ho "in the highest regard."



At the end of 4Q, the Gaming Sector had 54,835 employees, up by 9.2% YoY.  In December 2012, average earnings (excluding bonuses and allowances) of full-time employees reached MOP18,040, up by 7.9% YoY. Job vacancies totaled 2,144 at the end of 4Q 2012, down by 130 YoY.


Beautiful Rage

“How with this rage shall beauty hold a plea?”



As our Director of Research, Daryl Jones, said on CNBC last week, “this is the most hated rally we’ve ever seen.” Hating the truth isn’t cool. But, as the late Andre Gide noted, “it’s better to be hated for who you are, than to be loved for someone you are not.”


Reality is that if you hate this market, you are raging against one of the more impressive 4-month changes in Asian and US growth prospects that we have seen in a decade. Cheering for the end of the world isn’t cool either.


A strong US currency, at the big turns (for both Reagan in the early 1980s and Clinton in the early 1990s), can be a Beautiful Rage. If sustained, it’s a pro-growth signal. So, from here, to have or not to have a #StrongDollar, remains the question.


Back to the Global Macro Grind


One of the most obvious places we’ve been monitoring Bear-Rage is in the term-structure of US Equity Volatility (VIX). At every lower-high (and lower-low) we’ve seen in the front-month VIX, many have still held onto their future fear expectations. That’s not working.


Looking at the Front-end of Fear (where front-month VIX is trading):

  1. VIX was down another -8.2% yesterday to close at a fresh 5yr low of 11.56
  2. VIX just crashed (and quickly), down -40% from its FEB25, 2013 “Italian Election” day lower-high
  3. VIX has been crashing, down -49%, from its DEC28, 2012 Congress New Year’s Eve lower-high

When I say lower-highs, I mean long-term lower-highs. And this has really been our point throughout the last 2-3 months. What was long-term support for the Front-end of Fear (14-15 VIX), is now solidifying itself as intermediate-term TREND resistance.


Just to put some risk management levels around that – across our core risk management durations:

  1. VIX immediate-term TRADE resistance = 13.98
  2. VIX intermediate-term TREND resistance = 16.21
  3. VIX long-term TAIL resistance = 17.18

So, the Front-end of Fear is being pulverized into what we call a Bearish Formation (bearish across all 3 of our core risk management durations – TRADE, TREND, and TAIL).


And, all the while, all you’ll hear from the hedge fund community is how the “term structure” of VIX doesn’t agree. In other words, consensus doesn’t agree with higher-highs in US stocks (perpetuated by lower-lows in volatility). That’s why it keeps working.


Bridgewater’s Ray Dalio outlines what an oversupply in consensus hedge funds has meant for returns. The correlation of hedge fund returns to US stock market beta = +0.9. If you want to be freaking out about something, freak-out about that.


Why is the asset management business changing? Well that’s pretty simple. It’s called evolution. Plenty of our pension fund, mutual fund, and RIA clients are changing what it is that they do as this globally interconnected game of global macro risk changes.


That has big implications. Don’t forget that the RIA (Registered Investment Advisor) community is as large (in terms of assets under management) as the hedge fund community.


Country, Currency, Commodity, etc. ETFs and the like are allowing lower-fee structures and strategies to compete, head-to-head, with Global Macro Hedge funds. Don’t fear that – competition is a beautiful thing too.


Some other tactical points to consider (in the immediate-term) as the VIX is crashing:

  1. Things that are crashing tend to bounce, fast – so watch what US stocks do once VIX tests our 11.21 oversold level
  2. SP500’s immediate-term Risk Range of 1 is finally signaling more downside than upside in US stocks
  3. Immediate-term Risk Ranges change as fast as price, volume, and volatility factors do – so keep moving

We’re not suggesting that we are smarter than anyone else. We have a broad spectrum of clients we are collaborating with. We are using quantitative signals and research to highlight what we think are becoming more probable non-consensus market moves.


In order to convince you that our risk management process is both flexible and dynamic, we have to Embrace Uncertainty. Selling certainty is like selling fear; over long periods of time, you’ll get run over by being anchored to either one or the other.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.51-110.98, $82.21-82.93, 93.56-96.81, 1.95-2.09%, 11.21-13.98, 928-951, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Beautiful Rage - Chart of the Day


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Early Look

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The following is a brief summary of why we want to be LONG DRI at these levels.  We will be hosting a black book conference call entitled "DRI: The Unthinkable Long Case" on Thursday, March 14th, at 1:00pm EST. to talk through in more detail the summary thoughts below.   


By way of background, we initiated a short call, “The Unthinkable Short Case”, on DRI on July 19th, 2012.  The following is a recap of our prior stance:

  • Accelerated unit growth masking other issues
  • Cash burn was unsustainable
  • Waning ability of Darden to be all things to all people (buyback, dividend, growth, fortress balance sheet)
  • Secular macro headwinds were changing the industry’s operating environment
  • Leverage outlook was set to impede future growth
  • Declining ROIIC


The current setup for the stock looks like this:

  • Stock price depressed but dividend yield highly supportive at these levels
  • Unit growth is being reined in (albeit modestly)
  • Secular nature of industry change being acknowledged
  • Guidance is for EPS to decline 11% in FY13 and little-to-no earnings growth in FY14
  • Promotions underperforming
  • Underinvestment in Olive Garden showing in results
  • LongHorn no longer a jewel in the crown
  • Significantly lagging peers in international expansion efforts
  • Self-evident that managing portfolio is proving difficult


But on the bright side:

  • The investment community has become far more bearish on the stock
  • Room for improvement with the “Big 3” (Olive Garden, Red Lobster, LongHorn) same-restaurant sales growth is lagging the benchmark (Knapp Track) by 340 bps
  • Management is outwardly admitting past mistakes and the reality of the environment it is operating in
  • Potential changes within the C-Suite could greatly improve the company’s prospects – can current roster turn things around?


In the end the Low-Hanging, Bountiful, Fruit are too sweet not to harvest

  • Tremendous cash flow potential
  • Huge real estate value
  • Non-core, under-utilized assets that can be sold at rich valuation
  • Core assets represent a classic reorganization opportunity
  • Market’s valuation of the whole is far below what we believe the sum of the parts would represent in a reorganization/breakup
  • G&A rationalization opportunities
  • Buying the stock today, an argument can be made that investors get Olive Garden  for free!


We see the current setup as a "win-win" for the stock:






Howard Penney

Managing Director


Rory Green

Senior Analyst


DKS: Value Trap -- Even After Getting Lanced

Takeaway: DKS is entering a period where margins will tread water while asset turns back-peddle. That's not a recipe for the stock to go up.

A few people have asked us today as to whether we think that the DKS stock price reaction is overblown. If anything, we think it’s underblown (if that’s not a real word, now it is).


This has nothing to do with missing the flow of cold weather patterns or getting ‘Lanced’ by its stagnant inventory of Livestrong treadmills. But rather, it is a company in a mediocre business that is running at peak margins at a time when the outlook for comps (low single digits) is below the rate needed to leverage occupancy, deferred investments on the P&L are eating up an incremental 5% of earnings this year, and capex is trending up an incremental 20%.


Furthermore, let’s not forget that DKS falls into the bucket of names that has high risk of share loss to competitors and brands’ direct growth initiatives, and at the same time we see the company openly admit that it has underinvested in the infrastructure needed to take its ecommerce platform to the next level.


We get the whole point about DKS being a ‘best in breed’ retailer. But this is not necessarily a breed that needs to be owned.


We think that the crux of where DKS is in its cycle can be summed up in the Profitability Roadmap below, which shows the progression of margins vs. asset turns. Retailers, as we all know, can improve either one of those at any given point in time, but it’s when they improve simultaneously that real value is created and the stocks outperform materially (0.92 performance correlation). This is exactly what DKS did from 2009 through 2011, and it accounted for a 4-bagger in the stock.


But today, we think that we’re stuck at a point where margins will tread water, and it will be on an incrementally larger operating asset base. That is the ultimate recipe for a value trap.  


DKS: Value Trap -- Even After Getting Lanced - dksprrdmp

Tired? SP500 Levels, Refreshed

Takeaway: The all-time highs remain in play, but so does some very short-term mean reversion (to 1532). We want to be flexible here.

This note was originally published March 11, 2013 at 10:47 in Macro



I sold the open this morning (sold 2 LONGS, added 2 SHORTS) because the bottom up signals in each security told me too. The SPY didn’t register a sell signal (it usually doesn’t until after stocks do). The market has been up for 9 of the last 10 weeks; certain stocks are getting exhausted.


Exhaustion can last (think the 1995 US stock market), particularly if the research fundamentals support it (they do). So don’t expect me to get too cute here. This remains a market we want to be risk managing with a bullish bias, until something (signal or research) changes.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1565
  2. Immediate-term TRADE support = 1532
  3. Intermediate-term TREND support = 1477


In other words, the all-time highs remain in play, but so does some very short-term mean reversion (to 1532). So we want to be flexible here. Keep moving and don’t get plugged buying on overbought signals.




Keith R. McCullough
Chief Executive Officer


Tired? SP500 Levels, Refreshed - SPX

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