THE MACAU METRO MONITOR, AUGUST 14, 2013
SANDS CHINA RECORDS 5.6 MLN VISITORS IN JULY Macau Business
Sands China says it had a record 5.6 million visitors to its establishments in July, 34% YoY. Sands China president and chief executive Edward Tracy says July’s performance was a sign of the company’s commitment to the government strategy of making Macau a global attraction by diversifying its tourism industry.
He says promotions and events accounted for much of the increase in the number of visitors. Sands China’s 600 shops had over 4 million visitors, 67% YoY.
PHILIP CHAN'S DAUGHTER SUED FOR HK$4.5MM OVER GAMBLING DEBTS SCMP
MGM Macau is suing the daughter of showbiz veteran Philip Chan Yan-kin for gambling debts of HK$4.52 million chalked up in December, a writ filed to the High Court showed. MGM Grand Paradise claims Joanne Chan Jo-yan agreed to accept a line of credit granted by the casino to gamble at the venue.
MGM says in the writ that it hired Hong Kong solicitors to issue a demand letter to Chan to seek further repayments. Despite the written demand, she failed to make payment, it said. The casino filed a lawsuit in a Hong Kong court to claim the debt and interest.
TODAY’S S&P 500 SET-UP – August 14, 2013
As we look at today's setup for the S&P 500, the range is 32 points or 0.72% downside to 1682 and 1.17% upside to 1714.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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SJM 2Q CONFERENCE CALL NOTES
Q & A
Here's a look at the epic move in the S&P 500 since we first made our call to go long U.S. equities. Stick with the game plan that's working. Get long growth, short fear.
To be sure, we are plenty bearish, on plenty of things, the things that are actually going down. But here's the point: bears have been mauled and have missed the move in equities for the better part of the year. Meanwhile, as money continues to flow from the bond market to avoid losses, equities will be waiting with open arms to receive this capital exodus.
Takeaway: The flows should continue to dominate (and influence) the fundamentals across many EM economies and asset classes.
THE TREND IS YOUR FRIEND IN GLOBAL MACRO
When we last updated clients on our #EmergingOutflows thesis in a 7/19 note titled: “SEPARATING THE FOREST FROM THE TREES IN EMERGING MARKETS”, we plainly stated the following in the conclusion of the note:
“Various EM asset classes could bounce another +5-10% from here to their respective TREND lines of resistance without signaling any shift in our interpretation of the fundamentals.”
Well, unfortunately for value buyers of emerging markets, EM asset classes couldn’t even do that (% change in price since 7/19)!:
Two countries have, however, been able to stage semi-valiant relief rallies: Brazil (Bovespa Index up +6.2% since then) and Mexico (Dow Jones Mexico Stock Index up +4.8% since then). The aforementioned equity market gains compare to a regional median delta of +3.9%.
Obviously with our structural bear thesis across EM asset classes still very much intact, we think these dead-cat bounces are to be eventually faded.
In fact, both Brazilian and Mexican equities are within striking distance of bumping up against TREND resistance according to our quantitative models, so we are of the view that it’s actually a good spot to either A) book gains if you’ve played these immediate-term relief rallies on the long side; or B) short them if, like us, you’ve been patiently waiting for better entry prices from which to play our #EmergingOutflows thesis.
Without being overly simplistic about our #EmergingOutflows thesis (there’s a cumulative 183 slides of research accompanying two presentations backing our views), we think a protracted tightening of global credit conditions driven by sustained USD appreciation and a back-up in US interest rates will weigh on growth in EM fixed investment (via negative inflections in portfolio and FDI flows) and on growth in EM consumption (via a negative inflection in purchasing power as EM FX reverts to the mean).
It should be noted that domestic housing TRENDS, labor market TRENDS, credit TRENDS (both on the consumer and commercial fronts) and birth TRENDS all continue to support our bullish bias on the USD and US interest rates with respect to the long-term TAIL duration (email us to acquire a compendium of the relevant research notes).
From an intermediate-term perspective, however, the one major caveat to our thesis is the recent run-up in crude oil prices (Brent’s +7.1% run-up over the past 3M is aided by a -2% decline in the DXY over that time frame) that will undoubtedly serve as a headwind to domestic consumption growth here in 3Q.
We don’t have a high degree of conviction in any call on crude oil from here as it has decoupled dramatically from the rest of the commodity complex in recent months. That said, however, we continue to do work behind-the-scenes on why oil prices can go a lot lower from here over the long-term TAIL, but we aren’t yet ready to present those findings. Stay tuned.
“NOT SO FAST” SAYS BRAZIL
Over the past three weeks, Brazil’s Bovespa Index has been outperforming on a rebound in commodity speculation, registering a +0.91 correlation to the CRB Index and a +0.86 correlation to the XLB SPDR (Materials Sector); those figures compare to its -0.35 correlation to the SPX.
Additionally, China’s JUL growth data did not disappoint and showed exactly what the Politburo said they were going to deliver: economic stabilization. Recall that China is far and away Brazil’s largest export market at 17%. On the margin, economic stabilization in China is supportive of Brazil’s manufacturing sector, which, oddly enough, showed renewed weakness per the most recent data: Brazil’s Manufacturing PMI ticked down to 48.5 in JUL from 50.4 prior.
Lastly, a slightly less hawkish monetary policy outlook has been supportive of Brazilian equities as well. The country’s benchmark IPCA CPI ticked down to a 5M-low in JUL (+6.3% YoY) and is now back inside BCB’s 4.5% +/- 200bps target range. More importantly, the IGP-M CPI which leads the official IPCA series by 1-2 quarters ticked down to a 13M-low of +5.2% YoY in JUL.
That, coupled with the fact that BCB is now supporting the BRL by selling USD’s in the face of dollar declines, is supportive of the view that they may want to use the exchange rate to fight inflation going forward. The spread between 1Y OIS and the benchmark SELIC rate has tightened from a YTD high of 186bps back in late-JUN to “only” 104bps as of today (i.e. the swaps market sees less tightening, at the margins). Brazil’s fixed income market has exhibited a similar delta: 1Y sovereign yields are now trading at a 100bps spread to the SELIC, down from a YTD high of 137bps at the beginning of JUL.
All that being said, however, we wouldn’t fight the tape here if the Bovespa breaks out above its TREND line; Brazil’s idiosyncratic GIP outlook is, in fact, supportive of continued strength in the country’s equity market for the time being – provided the BRL stabilizes around current levels (to date it’s been absolutely smoked, having declined just inside of -15% vs. the USD over the past 6M).
As outlined above though, that’s not a call we expect to have to make at the current juncture, as the flows should continue to dominate (and influence) the fundamentals across many emerging market economies.
MEXICO CHIMES IN WITH A STARK “NO WAY, JOSE”
Flipping over to Mexico, the Dow Jones Mexico Stock Index has been outperforming for more idiosyncratic reasons, registering a -0.71 correlation to the country’s 2Y sovereign yield and a -0.75 correlation to the country’s 10Y sovereign yield as investor capital has plowed back into the Mexican economy ahead of speculation that policymakers would unveil their first steps to open up the country’s decayed energy sector to private investment for the first time since it was nationalized back in 1938.
The latest on this front are the PRI and PAN’s recent proposals to the Mexican parliament. The PAN, which is the larger of the two main opposition parties in Mexico, kicked things off with a plan to allow for concessions and a framework for [eventually] partially divesting the government of its stake in the state-owned Petroleos Mexicanos (Pemex).
The ruling PRI’s plan was met with less enthusiasm from investors. Rather than outright concessions, where private companies take ownership of their share of oil at the well head, President Nieto opted for a profit-sharing model with private servicers getting a cost reimbursement and a pre-negotiated share of the net income.
The PRD might pose a challenge to any comprehensive overhaul, as both Jesus Zambrano (PRD president) and Andres Manuel Lopez Obrador (PRD’s former presidential candidate who came in 2nd to President Nieto in last year’s election) recently affirmed their intention to publically oppose anything that resembles privatization.
With the Pact for Mexico still intact and the PRI in a bargaining mood per party president Cesar Comacho, however, it looks like some form of this potentially game-changing legislation in Mexico’s energy sector will eventually be ratified.
If, however, the PRD can’t come to terms with amending the constitution, the PRI and PAN, along with the PRI-allied Green Party, control more than the two-thirds vote required to pass a constitutional change in both the lower house and Senate and could successfully pass the legislation regardless of the PRD opposition to the extent they can work out their – albeit not insignificant – differences.
Recall that Mexican crude oil production has been in secular decline since peaking in 2004 at 3.83Mbpd; JUL’s 2.48Mbpd production rate represents both an 18Y-low and a -35.2% peak-to-present decline). Needless to say, anything Mexican policymakers can do to get a jump-start on domestic energy production will be positive, at the margins, for Mexican economic growth and the country’s current account dynamics (Mexico’s latest crude oil exports-to-production ratio is ~44%).
On the flip side, taxes and royalties from Pemex fund about 34% of Mexico’s public budget (Pemex paid roughly 55% of its $127B in revenue in taxes last year), so less direct taxation of Mexico’s oil and gas “industry” would have to be offset by credible reforms backing Nieto’s drive to broaden the country’s tax base.
To this tune, Mexico’s latest sovereign revenue/GDP ratio of 23.6% is well below the EM average of 30.7% and the G-7 average of 40.1%. If Nieto is unsuccessful in his drive, the country’s fiscal position will deteriorate, at the margins. To note, Mexico’s 2012 sovereign budget balance/GDP ratio of -2.5% (i.e. squarely in deficit territory) was -1.2 standard deviations below the trailing 10Y mean.
All in, we like economic reforms that are capitalist in nature as they tend to be positive for economic growth over the long run. Moreover, Mexico screens exceptionally well on our EM Crisis Risk Model, so, all things being equal, holders of peso-denominated financial assets have a considerably lower degree of tail risk to incorporate into their fundamental views.
All that being said, however, we continue to think that as long as the core drivers of our #EmergingOutflows thesis remain intact, the flows should continue to dominate (and influence) the fundamentals across many emerging market economies – including Mexico.
AND THE WINNER IS…
A decade of dramatic outperformance in emerging market asset classes has trained investors to eye country-specific fundamentals as idiosyncratic drivers of any one country’s currency or capital markets. In this scenario, it’s easy to see why the reporters at Bloomberg, Reuters, WSJ, etc. search for idiosyncratic reasons why XYZ country/asset class is appreciating and lose sight of the core top-down factors determining the direction of the flows.
In the midst of a potential phase change like this, however, investors would be better served paying attention to what’s going on “underneath the hood”:
Indeed, there remains an entire class of investors on the buyside that have never really seen EMs (or commodities) decline in price on a sustained basis – myself included! Don't get caught offsides thinking certain assets are cheap way up here (pull up just about any ~10Y chart of anything-EM and you'll know exactly what we mean).
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