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My consultant in Macau had some thoughts about Crown's (MPEL) City of Dreams property following his visit there yesterday.  CoD opens June 1st.  Here is his commentary:



My first stop was dinner at Lung Hin, the Chinese fine dining restaurant at CoD inside the Crown Tower with access from The Boulevard Mall on one side and the VIP Casino on the other.  Personally, I am not a fan of the design of most of the Crown facilities and was really disappointed by the appearance/design of some sections in this corner of the property.  On a more practical note: most of the staff uniforms have yet to arrive, as has all of the linen for the F&B portions of the property.  So the restaurant is operating without napkins... The staff was mostly local, very poorly trained with little to no English skills. A few of the senior managers are Malaysian and Vietnamese with experience and they were very good.


After dinner, we walked through the VIP casino into the Hard Rock Casino - a whole new world.  I would call this the first Las Vegas style casino in Macao.  The moment you walk in, you feel the vibe of party and good times.  However, it is also the smallest of the casinos in the property.  The main Crown casino floor however is huge, unappealing and doesn't display anything I recognized as special to set it apart from other casino floors in Macao.  The dealers and most of the pit managers are completely green.  We were invited to play with fake money in a trial run of the casino and it was a pretty sad experience.  Even with the pit boss standing behind the dealer, a lot of mistakes were made and blatant attempts at cheating were accepted.  I later ran into the VP running the casino and his only hope was that the staff was friendly.  All else, he acknowledged, is beyond expectation right now.


The Boulevard is very interestingly laid out around the exterior of the casino. Pretty much whenever you want to enter or leave the casino, you have to cross through some part of the mall which will likely make retail an interesting component of the experience at CoD.


I am promised that the Bubble Show is a total highlight but it was off limits to us last night.


The pool deck at Hard Rock is fantastic as is the Spa at Crown.

Gas versus Oil: Flashing an Extreme


My colleague, and Research Edge's Asian Strategist, Andrew Barber told me the other day that he had a dream that we would one day all be driving cars powered by natural gas.  While Barber is a great analyst who has nailed China this year, he is also a man of ideas.  As of now, cars powered by natural gas are just that, an idea.  We neither have the vehicles to do this, nor the infrastructure in place to deliver the natural gas.  With all things, though, there is a price. 


Currently, the oil / gas ratio is suggesting that price may be near as we are at an extreme in the price differential between the two commodities.  In fact, the oil / gas ratio (the price of one barrel of oil divided by the price of one BTU of natural gas) is currently nearing 18x, which is 9-year high.


According to many experts, a barrel of oil contains roughly 6 BTUs of energy equivalence.  On that basis, natural gas should be trading at ~$10.80 per BTU. Based on its current price of $3.93, natural gas is trading at just 36% of energy equivalent price.  In theory, if oil stayed at its current price and natural gas reverted to its energy equivalency value, there would be ~175% upside to natural gas.  As we know, in the real world arbitrage opportunities happen for a reason and the theoretical energy equivalency value is just that, theoretical. 


Our competitor Dennis Gartman uses many ratios to justify his positions.  On most, we would vehemently deny that there is a fundamental underpinning (Gold versus Agriculture as an example).  With oil and natural gas, on the other hand, there is clearly some fundamental basis to consider this ratio since both oil and natural gas have an energy value that can be measured.


Some analysts suggest that on the industrial demand side, there is 5 - 10% overlap in oil and natural gas, which can be switched at different price levels.  While this may be accurate, the most relevant data point relates to transportation.  As the EIA reported last month in their year end natural gas review:


"Natural gas for vehicle fuel has increased over the past several years but remains at less than 1 percent of the total."


Until we see this number move meaningfully, it will be hard to argue that oil and gas are interchangeable from a usage perspective.


Investors who use history as a guide would suggest that either oil is over priced or natural gas is under priced.  In the short term, they could both be correct.  Longer term, the reality is more likely that we have entered an era of cheap natural gas and relatively expensive oil.  Most importantly, oil has quantifiable supply constraints and burgeoning demand from emerging economies, most specifically China, while the natural gas market is flush with supply domestically and abroad.


We can see this change in growth of domestic supply of both commodities. In the simple table below, we have outlined the growth in domestic oil product and gas production in 2008 and 2000 versus 1990, with 1990 as the reference year.  As we can see, on domestic basis, the market for oil has tightened dramatically.  Since 1990 oil production on an annual basis in the U.S. is down -32%, while natural gas production is up 15%.


Gas versus Oil: Flashing an Extreme  - change


While the oil / gas ratio is a relevant input for a fundamental view of the two commodities, until interchangeability becomes more prevalent between the two commodities, the history of the ratio is probably not the best guide to its future.


Daryl G. Jones

Managing Director


Gas versus Oil: Flashing an Extreme  - nymex

German Unemployment Improves on Mixed European Backdrop


German unemployment dropped a seasonally adjusted 10 basis points to 8.2% in May, an important call-out as unemployment is busting out across Europe.  While we're not calling a top on German unemployment, the number should provide a tailwind for German confidence.  For our fundamental view on the country see yesterday's post entitled "Germany Grinding It Out".


Today the European Commission released its May confidence numbers, which improved across nearly all industries.  Overall economic confidence rose to 69.3 from 67.2 in April, a six-month high. Consumer sentiment stayed flat on the previous month, while industrial, services, and retail indices improved. Only construction dipped mildly. (See the chart below).


In conflict with the retail sales results is Bloomberg's purchasing managers index (PMI), which recorded that retail sales for the Eurozone declined to 47.1 from 48.4 in April, based on more than 1,000 executives compiled by Markit Economics.


We continue to follow European data points to monitor health, yet place greater emphasis on country-specific data when considering a position as we believe auto-correlation is dead. Due to the importance of the Union as a trading partner for European countries, improvements in fundamentals and confidence will benefit the whole.


In Europe we're currently long Sweden via the eft EWD. We're bullish Sweden on a fundamental basis and believe that exports will benefit from a weaker Kronor versus the Euro.


Matthew Hedrick



German Unemployment Improves on Mixed European Backdrop - euroconf

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 80.51%
  • SHORT SIGNALS 78.32%

Claiming Confucius?


In this morning's Early Look I quoted our old friend of the fabric, Confucius. When market's trade in a proactively predictable range like this, maybe that's the only thing left to do - trade the range and philosophize...


The last few weeks of jobless claims data have given plenty for both perpetual bulls and perma bears to pontificate on. Last week's claims saw us shoot above the 4-week moving average, while this week's print takes us for another dive below it (see chart).


The New Reality is that consensus fears of the American Consumer's death were largely exaggerated. That well known phrase and a Confucius quote might give you the magic fairy dust of a Wall Street narrative fallacy.


Two consecutive weeks of improving jobless claims, is what it is - bullish for a market that tested the bottom end of its new trading range early this morning (886 SPX). Don't make this any more complicated than it is - trade the market and the data points that are in front of you.



Keith R. McCullough
Chief Executive Officer


Claiming Confucius? - initial


Big Research is a consumer centric research firm that does very detailed survey work in multiple retail categories. In the May survey of 6,000 consumers, they asked- which Fast Food Restaurant or Coffee Shop do you purchase COFFEE at most often?


The most recent coffee survey shows McDonald's gaining ground on both Starbucks and Dunkin Donuts. Although Starbucks is still #1 - 9.2% of consumers frequent the Starbucks most often for their coffee needs. The survey shows that McDonald's is taking more market share from Dunkin Donuts.


McDonald's market share has consistently grown since May of 2007, according the BIGresearch's May 2009 Consumer Intentions & Actions (CIA) Survey. With McDonald's spending upward of $100 million on its coffee campaign, it's likely that the momentum will continue.


According to the analysis, McDonald's coffee drinkers (those who purchase coffee most often from McDonald's) tend to be older than Starbucks drinkers with an average age of 47.7 vs. 39.2 for Starbucks drinkers. Also, 46.8% of Starbucks drinkers are in the 18-34 age range, compared to 25.8% for McDonald's.


More Starbucks coffee drinkers are single at 29.1% vs. 19% of McDonald's drinkers and a higher percentage hold professional/managerial jobs - 27.2% vs.15.7%. Starbucks customers are also more affluent with annual income of $67,487 vs. $55,572 for McDonald's.

Other Thoughts:
• 33.7% of McDonald's coffee drinkers are confident/very confident in the economy, vs. 30.3% of Starbucks drinkers.


• 72.7% of McDonald's drinkers are focusing more on needs over wants, vs. 65.7% of Starbucks drinkers.


• 44.2% of McDonald's drinkers are buying more store brand/generics vs. 36.2% of Starbucks drinkers.


• 26.4% of McDonald's drinkers feel better about their economic situation, vs. 34.4% of Starbucks drinkers.


• 20.8% of McDonald's drinkers are starting to spend more on discretionary items, vs. 21.4% of Starbucks drinkers.


CONSUMER COFFEE SURVEY - coffeemarketshare



Goldman upgraded Starwood to Buy after the close yesterday.  It doesn't look like a buy to me but that is fine.  At the same time, the firm upped its price target a whopping 145% to $27.  So fundamentals must be improving, right?  Cost of capital must be falling, no?  The hotel transaction market is opening?  Asset values increasing?  Try none of the above. 


Instead, the upgrade is predicated on minimal supply growth and easier 2H comps.  Yet, these "catalysts" were in place 2 ½ months ago when the stock was under $10.  Now that the stock is up 145%, the supply and easy comparison drivers are suddenly important?  This smells like a sentiment upgrade to me, i.e. stock is up big, momentum guys are buying, and I want to jump on board.  Getting in front of the time when RevPAR improves (given as the catalyst for stock appreciation) is dubious when:  a) we are a long way from that happening, b) stocks have already ripped.


Is this the kind of research institutional investors pay the sell side for?  The fact is that the stock has made a big move, along with everything else in my space, based in part on the "less bad" thesis.  The 2nd derivative thesis can be an effective one.  The problem for HOT and lodging in general is that business hasn't gotten less bad like other sectors we follow.  Occupancy is still declining, forget about rate.  There is very good reason to believe 2010 will be worse than 2009 due to the timing of 2010 corporate rate negotiations occurring this year (when the buyer has all the power), the long tail of the group and convention business, and the deep cost cuts already implemented in 2009.


Besides, a recovery thesis works better when stocks are on their back, which is clearly not the case here.  Price targets based on 11-12x EV/EBITDA look very aggressive, especially when based on 2011 EBITDA.  Can you say momentum justification?  As we've written about, historical EV/EBITDA multiples are less relevant when cost of capital is escalating.  Why is an 11.5x multiple appropriate when the cost of borrowing is 300-500bps higher than the 2004-2008 period and there is so much more risk?