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The Macau Metro Monitor, March 19, 2013




A trial is scheduled for next week in Nevada state court over claims by HK businessman Richard Suen that he helped LVS win a license to run a casino in the Macau territory in 2002 and that the company reneged on an agreement to pay him a “success fee.” A Nevada appeals court in 2010 reversed a $43.8 million jury award two years earlier in favor of Suen and sent the case back for a new trial.


Clark County District Court Judge Rob Bare in Las Vegas is scheduled to hear arguments today on pre-trial motions.  Jury selection is to start March 27 with opening statements the following week.  Adelson will take the stand April 4, according to court minutes.


Suen has claimed that it was through “guanxi,” a Chinese term for personal or human relationships, that he and his friends helped paved the way with Chinese government and Communist Party officials for the Macau license approval.  Suen said that following meetings in Beijing, LVS offered him and his group a deal, which evidence from the first trial showed was worth as much as $96.2 million if LVS received a Macau gaming license.  The company countered that Suen never provided evidence that linked the Beijing meetings with Macau officials selecting LVS to operate a casino.



China President Xi pointed out that Macau is enjoying a “relatively good period” right now.  However, according to Xinhua, he was quick to add that the city’s future development was also facing a string of challenges.

“I hope to enhance the sense of the Macau Special Administrative Region government and the community to take advantage of favourable timing and conditions, study to solve the outstanding problems that are restricting [Macau’s] development and to lay a solid foundation for Macau’s long-term development,” said Xi.


Meanwhile Macau CEO Chui said that the president and premier stressed the importance of collaboration among the mainland, Hong Kong and Macau.  Chui promised that the Macau government would further strengthen its two main cooperation projects with the mainland, namely the development of Hengqin Island in Zhuhai and Guangzhou’s Nansha district.

Fear's Flattery

“Let those flatter, who fear.”

-Thomas Jefferson


Two years prior to penning his first draft of the Declaration of Independence in 1776, Thomas Jefferson wrote his first significant thought piece. That’s where the aforementioned quote comes from – it was called The Summary View (1774).


In addition to his comment about the British old-boy culture of backslapping, he went on to add that “it is not an American art. To give praise which is not due might be well from the venal, but would ill beseech those who are asserting the rights of human nature…” (Thomas Jefferson: The Art of Power, pg 74)


Less government, more economic freedom, and a strong currency – there is no praise to give those who fear these founding American principles. As corrupt Russians whine about getting taxed in Cyprus, think that through. What scares Putin should flatter us.


Back to the Global Macro Grind


To fear, or not to fear – remains your risk management question. Clearly, living in fear of the US Equity Futures indicated down 20 handles was no way to live yesterday; buying on red was.


To review the lower-highs (see Chart of The Day) of Front-Month Fear (US Equity Volatility, VIX):

  1. December 28th, 2012: people freak-out on New Year’s Eve on a Congress concern; VIX down -41% since
  2. February 25th, 2013: 1-day freak-out over an Italian Election; VIX down -30% since
  3. March 18th, 2013: 1-hour freak-out over taxing money launderers in Cyprus; VIX down -11% from the open

In other words, from a Behavioral perspective, the stock market’s implied fear is:


A)     Coming on lower-quality “crisis” story-telling

B)      Becoming more and more short lived


No, I will not navel gaze with Old Media sources who make-up crisis stories in order to sell ad space. Instead, I will call them to account; especially if they are the same people who have missed this entire 4 month rally. It’s un-becoming.


There will be a time to fear the market’s internal signals. And while I am probably blind to them again this morning, there is nothing I can do about that. I go with my process, not the inevitable and humbling force that will be the market eventually going against me.


To review: there are 2 big parts to our process – the Research View and the Risk Management Signals. In terms of the Research View, the fulcrum point of our bull case since December has been #StrongDollar. It got stronger, again, yesterday – and:

  1. That makes this the 6th week in the last 7 of an up US Dollar Index, $82.79 last
  2. Commodities (CRB Index) have been down for 6 of the last 7 weeks, in kind
  3. Commodity Deflation keeps A) the Fed on hold and B) a Consumption Tax Cut in play

Good getting better in terms of US Consumption is good for a Q113 (vs Q412) sequential US GDP acceleration and, at the same time, the wealth effect on the two big things that matter (your house price and stock market portfolio) going up, at the same time.


What could go wrong? Well, that’s easy - the things that have been going right (US employment and housing). #HousingsHammer remains one of our Q113 Global Macro Themes, and we’ll be very interested to see this week’s US Housing data (Housing Starts come out today; Existing Home Sales/Inventory on Thursday). Jobless Claims on Thursday is important too.


All the while, the Global Macro Risk Management Signals continue to tick:

  1. Japan’s Nikkei held TRADE and TREND support and led Asian Equities higher last night, closing +2%
  2. China’s Shanghai Composite held TREND support (2206) and rallied +0.8%, making another higher-low
  3. South Korea’s KOSPI recovered TREND support (1975) after dipping below it on Cyprus fears (for a day)
  4. Germany’s DAX continues to hold a Bullish Formation (Russian mob footing bailout bills is good for Merkel)
  5. Russia’s RTSI stock market index continues to break down (bearish TREND), down -12% since topping in JAN
  6. Brazil’s Bovespa remains bearish TREND as well (Commodity Stock markets are not like Consumption ones)
  7. Gold failed at its 1st major line of resistance (TRADE = $1605, TREND $1659, TAIL $1681)
  8. Treasury Yield (UST 10yr) held TRADE support (1.91%) and long-term TAIL risk support of 1.84% remains intact
  9. Japanese Yen (vs USD) failed at TRADE resistance (93.65) and remains in a Bearish Formation
  10. US Equity Volatility (VIX) failed at 14.46 TRADE resistance and remains in a Bearish Formation

Net, net, net – what all this means is that chariots of Cypriot fire haven’t changed the view we’ve held since December. In fact, they’ve improved it. Don’t forget that money leaving Europe and Japan goes somewhere. US currency and equity finally has the flows.


Will we get run-over by a legitimate market fear? For sure – I just don’t know when (so let me know, if you know!). In the meantime, we want to be long of growth (Asian and US Stocks) and short of fear (Gold, Treasuries, Yen). It’s been a flattering position.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $107.74-109.93, $82.14-83.13, 93.65-97.10, 1.93-2.02%, 10.77-14.46, 941-958, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fear's Flattery - Chart of the Day


Fear's Flattery - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

NKE: Ahead of The Print

Takeaway: We think that the Q is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.

Conclusion: Our analysis suggests that Nike’s quarter is in good shape. But let’s face it, Nike always manages to light off a firework or two. If that happens to be case on Thursday, we’re confident enough in our underlying thesis that we’d support any weakness.



Nike remains one of our favorite names right now. We think its fiscal third quarter to be released on Thursday after the close will be another datapoint to support our view that it is gaining share and returns are rising – and there aren’t many other names that are doing both of those two things right now.


Will the quarter be a blowout? Not exactly. We’re modeling $0.72 vs the Street at $0.67. Nice upside -- but not huge.  We’re about in line with the Street on the top line at about 11%, but we’re 50bp higher on the gross margin line. We think that’s fair given the easing product costs flowing through the P&L as well as 2Q ending with the most favorable inventory position in nine quarters.


NKE: Ahead of The Print - nke1


Futures: As it relates to futures, bears are calling me with the expected ‘futures are decelerating’ concerns.  The company is going against a 22% North American futures number in this quarter, and +18% globally. It doesn’t take a genius to figure out that this is a ridiculously tough quarter to comp. On a 2-year run rate, a 7% North American or 5% Global futures number suggests an even underlying trend. We think Nike comes in 2-3 points above those levels. On a go-forward basis, keep in mind that after this quarter, we started to see China drop off precipitously. Beginning next quarter, we expect any slowdown in growth in North America to be offset by a rebound in China and an uptick in Western Europe (NKE is about to anniversary the latest downturn there, and FL recently noted a stabilization in Europe).


Sentiment is Flat-Out Bad: Lastly, we need to acknowledge sentiment and valuation. We agree that the stock isn’t cheap at 17x earnings. But let’s not forget that sentiment on Nike remains quite bad. Our sentiment monitor, which is based on both sell-side recommendations, short interest and insider trading activity, suggests that Nike is more hated today than almost any time over the past 10-years.


NKE: Ahead of The Print - nike sentiment


Takeaway: Even if this blow-up proves to be a 1-off, the reality is that it calls into question the sustainability of high-20s mgn on a 30x pe stock.

Conclusion: LULU's blunder has near-term financial implications, but the bigger question is whether high 20s margins are sustainable. We know that costs are going up, but now with such a major process breakdown that threatens one of its most important products it will surely call into question whether the real margin level is high 20s, 25%, 20%, 15%? The reality is that we simply don’t know. Regardless, this kind of uncertainty does not help with the stock trading at 30x earnings. 



There’s one key question that we think should be asked about LULU’s ‘wardrobe malfunction’ announcement, and it has nothing to do with the impact on comps, the quarter, or the year.


The question is whether or not this issue is worth the $1.5 billion in market cap that the company collectively lost today (when the news leaked) and in after hours trading. We think that the answer is ‘Yes’.


We don’t understand how could this company possibly have had such a breakdown in its procurement process that 17% of the most important product (women’s bottoms) became compromised in quality to the extent that it could not be sold.


Some people on the Street will come out and defend this as LULU making a great move to do what it needs to in order to protect its brand image. Yes, that’s a fair argument. But it’s irrelevant in the context of how big of a mistake this was.    


This is a company that has huge top line growth opportunity as it expands its reach globally. But margins are already in the high 20s, and we already know that costs are heading up to support more expensive growth. On top of that we’ve got proof of a hole in the company’s process that will hurt financially near-term.


Could this be a one-off 1-timer? Yes, it could, and we hope it is. But ‘hope’ is not an investment process. This will call into question how far LULU’s margins could potentially fall to preclude issues like this from happening again before finding a new baseline that will support future growth.


Is the real margin level 26%, 25%, 20%, 15%? If it's at the higher end, then the stock is probably a buy on this sell-off. But the harsh reality is that we simply don’t know. Regardless, this kind of uncertainty does not help with the stock trading at 30x earnings. 

What’s a RIN and what does it matter to corn prices and ethanol producers?

What’s a RIN and what does it matter to corn prices and ethanol producers?

A RIN is a Renewable Identification Number – a unique serial number that is attached to each gallon of renewable fuel produced.  Each year, petroleum refiners are required to submit RINs to the EPA to prove that the required amount of renewable fuel (ethanol) has been blended into the gasoline the company has produced.

During any given year, some refiners use more renewable fuel than the mandate requires - those refiners are permitted to sell the excess RINs.  This process insures, in theory, that the industry (collectively) will satisfy the Renewable Fuel Standard (RFS) quota as required by the Environmental Protection Agency.  We have seen estimates of anywhere between 1.9 to 2.0 billion gallons worth of RINs carried over from 2012 to 2013 (we are going to come back to that number in just a bit).

A secondary market for RINs has emerged, and while not the most efficient market in the world (it is somewhat opaque and there is counterparty risk related to fraudulent RINs, among other things) it is a market and it has been telling us some interesting things in recent weeks - RIN prices have been melting up.


What’s a RIN and what does it matter to corn prices and ethanol producers? - RIN Prices

Due to the shortage of corn, a number of ethanol plants have been shuttered across the U.S. – this despite the fact that the RFS mandate increased from 13.2 billion gallons of ethanol in 2012 to 13.8 billion in 2013.

As it currently stands, under Federal regulations ethanol can be blended into gasoline and sold at levels of up to 10% (“E10”).  Higher blending levels are possible (“E15” and “E85”) but require specially designed vehicles, so higher blends are consumed in very limited volumes.  Gasoline consumption in the United States has been declining, but is currently about 130 billion gallons per year.


What’s a RIN and what does it matter to corn prices and ethanol producers? - Gasoline Consumption

At a 10% blend rate, current gasoline consumption levels demand approximately 13.0 billion gallons of ethanol (note that, as previously mentioned, the RFS mandate of 13.8 billion gallons is already above projected demand – the “blend wall”).  Not all of the demand for ethanol is demand for corn based ethanol – approximately 750 million gallons will come from sugar-based ethanol (imported).

Where does that leave us?


The bottom line is that the demand for ethanol from gasoline consumption at the 10% blend rate less imported ethanol will be below the RFS mandate to the point where the excess RINs that were carried over from 2012 to 2013 will be nearly exhausted by end of year as companies purchase those RINs to be in compliance with the blending mandate.  To add insult to possible injury, the 2014 mandate is 14.4 billion gallons of ethanol blended.


What’s a RIN and what does it matter to corn prices and ethanol producers? - Running out of RINS

Absent a rapid move to E15 (15% blend) – an initiative pushed through by the ethanol lobby, in our view – it would appear that something has to give.  E15 is getting pushback because of potential damage to automobiles and the fuel infrastructure, so it would seem a move in that direction is unlikely.  The EPA has beaten down all legal challenges to the RFS, but it would seem it may be left with little choice but to relax the mandate.



If the mandate isn’t relaxed, it represents a negative for consumers, as gasoline prices will likely increase regardless of the price of crude oil. The lack of ethanol will drive the price of RINS higher as blenders seek to satisfy the RFS, thereby increasing gas prices at the pump.  In fact, there is some thought that speculation and manipulation may be driving RIN prices, in part in an effort to force the EPA’s hand.

If the mandate is relaxed, we suspect that corn prices and corn acreage will drop, to the detriment of farm level economics.  Ethanol margins should improve, to the benefit of producers (ADM, for example).  Fertilizer stocks are the names that are heavily levered to corn production and farm level economics, and were a significant beneficiary of the “ethanol pivot” – the continuing increases in the ethanol mandate over time.  A relaxed mandate might be a “reverse pivot”, if you will.

This is a complex issue, with multiple moving parts, but one the bears continued scrutiny as we move through the year.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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