The Yield Curve


Position: post the most recent weakness in the Treasury market, we covered the etf SHY today, but will re-short Treasuries on strength


The yield curve has been flashing in our notebooks over the last few months, especially relative to where it was at the start of the year.  We focus on the spread between 10s and 2s, which has widened from 158 basis points to 221 basis points from January 2nd 2009 to May 2st 2009.  As interestingly, the long end of the curve, specifically 30-years, has risen from 2.83% to 4.09%, or 126 basis points since the start of the year.


Historically, the 20-year Treasury bond yield averages approximately 200 bps above three-month Treasury bills.  At the start of the year, this spread was 316 bps and is now 398 bps, or an increase of 26%.  The standard interpretation of this steepening is that an economic recovery has become more likely and with this recovery there is an increased expectation of inflation.  Interestingly, the SP500 closed January 2nd at 929.6 versus its current price of 899, despite the fact that the yield curve is actually signaling that an economic recovery is more likely within a shorter duration.  In effect, the bond market is signaling an economic recovery, while the equity market is more uncertain. (Hint: Equity usually isn't the leading indicator.)


Aside from an expectation of an economic recovery and the related inflationary impacts, there has been a massive increase in the issuance of U.S. government debt over the last 6-months, which are naturally driving up rates.  According to Wrightson ICAP, the federal deficit is running at $956.8BN, or nearly one seventh of GDP, which is a level last seen in the mid 1940s.  In addition, according to the New York Times on May 3, 2009, "for all of 2009, the administration probably needs to borrow about $2 trillion." However we slice the numbers, the increase of U.S. government debt in 2009 will be massive and will come only with higher interest rates.


From a purely supply / demand perspective, the Federal Reserve announced in their March 18th release that they intend to purchase $300 billion of 2 and 10-year treasuries over the next 6 months to "improve conditions in private credit markets". To put this in context, the largest foreign owner of U.S. treasuries (China, or The Client) owns ~$750BN, so this is massive incremental demand.  The implication of this is that rates will be held artificially low while this purchasing program is being undertaken, but should naturally increase after its completion.  This incremental demand from the government is the lever that has likely kept rates at such low levels despite the dramatic increase in U.S. government debt that is anticipated. 


From a pure risk/reward perspective, it is hard to imagine that there is much downside to being short the short end of the yield curve with rates at all time low levels.  There is only one direction that these short term rates can go from a rate that is effectively zero - UP!  Now I know gentleman prefer bonds, but I also know that when interest rates go up, bonds go down.


Daryl Jones
Managing Director


The Yield Curve - a1


WYNN 1Q09 Earnings call:


Vegas commentary:


"I'm still going to be a little reticent... I'm not sure if the stimulus package is in effect yet"

  • "I am cautiously optimistic that we have reached the bottom"
  • "Booking window used to be 60-90, then collapsed, then in April they saw it begin to widen"
  • Back in the 90s occupancy
  • Avoided the rampant layoffs that competitors have done, instead WYNN has adopted a shared pain approach that was more gradual to take out 75-100MM of expenses, and we're seeing it in the results
  • How long will this downturn last? He thinks that people will want to go back to their normal behavior and that things need to get worse from here for things not to get better
  • Job creation / unemployment is the #1 driver of Vegas visitation once that stabilizes and starts getting better, Vegas will rebound
  • In January they were really focused on launching Encore and once they got that done they focused on cost savings and operations in Feb & March
  • In March they focused on business mix and trialed a bunch of different strategies to see what works and are evaluating that. But think that if you look at March as a normalized level - they would have reported approx 70MM of EBITDA
  • Things have been stable for the last six weeks
  • Hotel booking window is still a lot shorter than last year, so they still have very limited visibility


General Commentary:

  • Seeing very strong weekends in both Macau & Vegas - this past weekend. In general weekends aren't bad for them



  • Holding in better than the US
  • Junket operators are being more conservative in their lending
  • Things are trending up in terms of volume
  • Slot programs are going from strength to strength
  • May should be strong from a calendar standpoint
  • Overall things have been steady there
  • Think that the first quarter was also hurt by a pullback in credit extension (also in Vegas)
  • The customers in China are still coming and spending - just being more careful with their spend
  • Macau Encore - will receive the building permit in April 30, 2010 - wants to open everything at once, so plan a grand opening in May. 405 all suite rooms - smallest room is 1000 SQFT - completely contained space with casino, hotel, restaurants, retail.



  • Think that a normalized March would amount to 72MM EBITDA for the quarter
  • Macau hold impact on EBITDA - just apply the junket margin at 3% to get a normalized EBITDA
  • Wouldn't describe themselves as aggressive shoppers unless there is a transaction that is clearly attractive to shareholders (right price & right fit or totally not competitive with their current product)
    • Thinks that the whole Bellagio article from the Milken conference was exaggerate
    • There is no transaction in the works now
  • Was Encore positive cash flow on its own this quarter?
    • Decided to treat Nevada as a group - same as for Macau
  • No change in the April rate, more focused on getting people to spend money at the hotel once they are there
  • Once the weekends start selling out it is a sign that things are getting better but the convention side is still weak and don't expect it to change until the end of the year
  • Affect of stimulus in China - It hits way faster in China
    • Lower tier of Guandong were out of work and now they are getting better
    • Visitors / Visa - no formal visa change - but signs of relaxation. No shortage of people coming - line takes hours to get through
    • There has been a formal relaxation from Shenguen and Hong Kong
  • Raised equity to make sure that they can focus their efforts on everything but the balance sheet
  • Effect of CityCenter: Aria
    • Isn't worried about what goes on outside his building

Bidding For A Bernanke Buck?

Until they finally let Volcker speak on May 20th, Ben Bernanke is literally the only person that the US Government  can put on the You Tubes right now with the end result of the US Dollar arresting it's decline.


The more we see the likes of Timmy Geithner, Hank Paulson, Kenny Lewis, etc... (basically anyone who is conflicted and compromised by their long standing membership in de Club) the lower the US Dollar will go.


Today, Bernanke is back on the Tube, issuing the world some long awaited American credibility. As a result, the US Dollar stops going down, and stocks stop going up.


I know, its perverse... and I know, every time I write this I get the customary "that doesn't sound right" feedback... But know this - the inverse correlation between the US Dollar and US stocks is as relevant in 2009 as any inverse correlation in global macro.


Can Bernanke Break the Buck? Sure - he needs to buy a mother load of bonds though in order to accomplish that from here because the Chinese don't look to be as excited about "investing alongside" the USA as they used to be... would you be?


China selling Treasuries (or not buying them) and Bernanke buying them back are not 1:1 offsetting factors either. This is very complicated and will continue to be as long as the Chinese continue with this US Dollar Replacement Rhetoric. Rhetoric and reality are often two very different things...


Economic recovery, and the associated raising of interest rates here in the USA can also provide the Buck a bid. For now, on the American side of the ledger at least, I am not comfortable saying that this morning's ISM Non-Manufacturing recovery (see chart below) is going to be sustained through the summer months. 


Where does this chart and the US stock market go from here? I am, data dependent. As the facts roll onto the tape, fully loaded from moves in the US Dollar to the yield curve, I will adjust my positioning. For now, the best position is to have sold yesterday's rally, and wait...


Keith R. McCullough
Chief Executive Officer


Bidding For A Bernanke Buck?  - bus

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China's Crystal Clear Rear View...

The Ox isn't fast enough to beat Mine That Bird, but once in motion it is hard to stop...


Position: We recently sold our CAF (China Fund) position into proactively predictable news, but remain positive on fundamentals.


CLSA PMI data released yesterday provided continuing confirmation that the stimulus package adopted by Beijing has prodded the Ox into motion, and that the recovery is being felt in ever broadening swaths of industry. At 50.1 the index turned positive for the first time since last September, driving equities higher in Shanghai and across the region as "The Client's" suppliers anticipate increased demand.


For now, this isn't about deltas anymore - this is positive as an absolute. Selling into that news is just what we do. Market prices move on what's going to happen next, not what's in the rear view.


China's Crystal Clear Rear View...  - china12


The primary focus of market optimism in Shanghai is the here-and-now, with metal fabricators and refiners trading upwards as the markets anticipate that "big-dig" infrastructure projects in central and western regions will drive demand for the heavy industrials.  Meanwhile Taiwan has seen the floodgates open for investment from the mainland as "panda diplomacy" draws the estranged siblings closer, paving the way for joint ventures that can feed consumer demand for technology products by the middle class which, with March retail sales registering at 15%, still represents massive growth prospects.


We remain positive on Chinese recovery in the intermediate term and will look for entry points to go long again. This is not to say that we are jumping on board with the mindlessly bulled-up Mobius mob; we continue to recognize significant potential negative factors like credit quality and asset bubbles that may develop as the recovery kicks into full swing.


Remember that stimulus, by nature, is a kind of emergency procedure -like a shot of adrenaline for a patient whose heart as stopped: the risks and complications may be outweighed by the outcome, but they are still real.  To that end, as the recovery cycle matures over the coming months we will seek to manage risk by focusing on sector and industry specific opportunities as well as broad indices.


Andrew Barber


Not a great quarter out of WYNN when "luck" is taken out of the equation.  However, in this market with the momentum surrounding the sector, no quarter is a bad quarter.  We were not impressed, however, and WYNN may face a more difficult Q2 than some of the other players.  Here are some preliminary thoughts.


  • WYNN did better in Las Vegas than we thought but still below the Street. Slot hold % was higher than normal. Table hold percentage of 18% appears low, but in this environment 18-20% is probably normal, not 21-24%. If we give them credit at a table hold of 20% and normalize the slot hold %, LV EBITDA would've been $53 million instead of the actual of $44 million
  • Macau was strong but the hold % was pretty high on both the Rolling Chip and Mass Market business. EBITDA of $114 million would've been $20-25 million lower assuming a normalized hold percentage, below the Street at $103 million.
  • In LV, WYNN is very reliant on room rates and his have farther to fall than the rest of the Strip.
  • In Macau, WYNN maintains large exposure to the Rolling Chip business which is the segment most under pressure.
  • We are assuming the discussion surrounding Las Vegas will center around a "less bad" thesis, similar to MGM.
  • WYNN lost 3-4 percentage points of market share in Macau in April. It will be interesting to see how this is addressed on the call


The online travel company Expedia put up a good quarter last week.  Here are some broader takeaways from the call:


  • Leisure travelers have responded to better value
  • Ticket sales up double digits for the March-April period y-o-y. January and February sales were down 9% y-o-y. 
  • International transactions were up 16% internationally but the two countries looking the weakest were the UK and Germany
  • Aggressive fare sales from air carriers were partly responsible for the uptick in demand 
  • EXPE expects bookings, revenue, and free cash flow to decline y-o-y for 2009 
  • Based on the economic conditions, etc., consumers were becoming more price sensitive and that is why promotions on the air booking fees [and other booking fees] made sense 
  • "On the other side of the equation, for example, London as a destination for us has been very, very strong. So again, that's another response to FX rates as far as where consumers are going. As far as a booking window goes, we do see some compression there, and as a result unfortunately our visibility is not what it used to be." 
  • "The OPEG channels continue to be very strong. Hotwire unique visitors are up very nicely, transactions were up 30% or so in Q1 so that's a continuing trend that hasn't changed. I'd say one other trend that has changed is that U.S. consumers are starting we're seeing some increase in U.S. demand going into Europe because of the strength of the dollar." 
  • Leisure market has been stimulated by the aggressive actions of suppliers 
  • The effects of the swine flu are yet to be determined but momentum was even stronger before the breakout occurred.


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