Fernando Chui Sai On is set to be the only candidate in the upcoming election for CE.  Ho Chiu Meng had been his main rival, but he announced to the Macau Daily News that he would not stand in next month's CE election. In order to run for the position, Ho Chiu Meng was required to resign from his current position as chief prosecutor and he has not done so.

It is said that Chui Sai was not Beijing's preferred candidate for the position. However, it seems unlikely that the changing of the guard in Macau will alter current laws regarding visas and the curbing of junk visitation in the near-term.



City of Dreams has had a less impactful first week than had been anticipated.  While it was known that VIP and premium mass market play would take some time to get up to speed, there has been some surprise at unofficial marketshare numbers suggesting no meaningful sequential gain on the part of Melco-Crown. 



Two major takeaways from the May gaming revenue numbers:

  • 1) SJM and WYNN gained considerably in terms of volume, as the number of rolling chips purchased overall was the highest since last August.
  • 2) The gap between SJM and LVS (31% to 21%) has widened as a result of higher volumes for SJM and lower win-hold rate for LVS.



The Macanese government has pledged to spend MOP100m on at least two flu shots for each resident. This comes as Hong Kong's chief has closed schools and nurseries to prevent the spread of the flu.  This has caused some concern among casino operators, fearful that their business will be impacted by flu fears.




The Macau Daily Blog posted an article outlining four "big phenomenons" [sic] hurting Macau.

  • 1) Dropping EBITDA margins.
  • 2) Mass Market has been squeezed
  • 3) The product mix being put out is the same across the board. No "wow" factor
  • 4) Junk tourism. Low value, low yield, for operators.



Macau is enjoying a taste of Bollywood magic with a galaxy of Indian stars arriving in the city for one of Asia's most-watched film awards. Oscar winning composer A.R. Rahman, who wrote the score for Slumdog Millionaire, superstar Amitabh Bachchan and Bollywood's leading couple Aishwarya and Abhishek Bachchan, are among those visiting the Las Vegas of the east for the 10th International Indian Film Academy (IIFA) awards.



MGM Mirage, the casino company controlled by Kirk Kerkorian, and Malaysia's Genting Bhd. are considering a possible partnership, spokesmen from both companies said.



High rollers in Macau are increasingly playing the slots.  Slot machines remain a minor segment of the market, at 6% of total revenue. However, in Q109 slots accounted for some $743m in revenue vs $81.5m of revenue in Q104.


City of Dreams has only been opened for two weeks but we thought we'd give you some initial impressions from our guys on the ground.  Warning:  these insights are early and anecdotal in nature.  We are actively attempting to corroborate all of the following.

  • Weak Rolling Chip (RC) turnover at City of Dreams - MPEL acknowledges it will take a while to ramp up the RC segment. We are hearing CoD only did HK$4BN in Rolling Chip turnover over first 10 days, or HK$400MM per day. By contrast, Venetian and Wynn Macau average approximately HK$700MM and HK$900MM per day, respectively, during the summer months. All three properties maintain approximately 140 RC tables.
  • Traffic strong at CoD- indicative of the mass market focus. Uncertain of the turnover per customer but hearing it is somewhat low.
  • CoD may be experiencing low hold
  • Venetian Rolling Chip business holding up - the junkets are reporting that RC turnover at Venetian hasn't been impacted much.
  • Venetian traffic down - see chart below
  • Wynn losing MM and RC customers to MGM? - Something is going on here. We've heard it from multiple industry sources.

We'll have more to report this week and next.  I will be in Macau on 6/22-26 visiting the operators, suppliers, junkets, developers, etc.  Stay tuned.




Consumer sentiment continued to improve in the month of June, although the University of Michigan index rose by less than expected, it was certainly not a bad number.   The index rose to 69 in mid-June from 68.7 in May, up sharply from the 28-year low of 55.3 in November, but still below the 88.2 ten year average.


As I said in the Early look, it appears the numbers ARE peaking. The market forecasts were for a higher number, in the area code of 69.5.

It not clear to me that it's prudent to plan for a strong summer season for the consumer.  From where I sit a cautious consumer still prevails and most remain resolute about becoming more practical when making purchasing decisions.

As we head into the key summer driving season the price of gas at the pump is surging.  While the relative "affordability" compared to last year's $4+/gal price tag has most consumer feeling less of a pinch, the 63% increase year-to-date will put the brakes on incremental spending.  Especially with the sequential increase that is outlined in the chart below.

Howard Penney

Managing Director


Early Look

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Research Edge Position: Short XLU

We are short XLU currently; this is a trade that has set up nicely from a technical standpoint and ties in with our reflation theme.  With rising fuel costs and increased rate regulation the utility sector is looking at a potential squeeze on margins on the horizen, not to mention the anticipation that emission costs will increase as control measures (or caps) come into play.

Our model portfolio does not allow for options, and we are outright short.  For those of you that trade options and are looking to capture premium, the near month calls might be attractive.

Currently the implied volatility levels for XLU have remained high compared to the broad market on a historical basis; with at-the-money July calls showing levels in the 24 to 25 range, vs. a 30 day realized volatility of 24.5 and a VIX at 28. This volatility could in part reflect some of the bond market action we commented on this morning due to the sectors rate sensitivity.

For those brave souls who are looking to harvest premium here a short call look position looks relatively attractive as the macro and technical factors intersect with decent premiums  -particularly as broad market volatility  levels continue to trend down. Note also that this ETF goes ex-dividend in the coming week, another positive for the play.

Andrew Barber




Research Edge Portfolio Positions: LONG TIP/SHORT SHY

With no indication that the Fed has any intention of changing rate policy in the near term, the current spike in interest rate volatility is being largely viewed as a measure of fear in the face declining global confidence in the US balance sheet colliding with the reflation trade head on.  The replacement rhetoric in advance of next week's BRIC summit may become louder over the weekend as the manic media refines its hysteria.

Yesterday's $11 billion 30-year auction drove volatile trading as the highest yields since 2007 drew in anxious buyers causing the futures to swing sharply back into firmly positive territory intraday .  The prevailing perception that this buying was committed longs who agree with the Japanese finance minister's assessment of the US balance sheet is tempting, but the post auction yield also presented spread players already short the short end of the curve like us a chance to get off the bench at a lower low. With relentless supply  showing no signs of letting up anytime soon it will be critical to us  to see if buying can sustain through today's session into next week. 


Currently, the implied volatility on July  at-the-money options on TLT, the Barclays 20+ year treasury ETF, are registering at 20/21 -down slightly from levels earlier this week but still close to the VIX, which closed at 28.  These converging volatility levels are visible in historical measures as well -as illustrated in the chart below, which shows realized 30 day volatility on TLT vs. the S&P 500.  Clearly the jitters in the market support higher absolute yield levels in the intermediate term.



Although the spread between investment grade debt and treasuries have now contracted to pre-Lehman levels, the chart below illustrates what a 450 basis point premium looks like in historical context. While it would be tempting to view the decision by management to issue bonds at these levels as an indication that their view is that absolute rates can rise faster than spreads will contract, but the reality for mid and lower grade issuers is probably much simpler: they are simply taking liquidity whenever and wherever they can find it after a long drought, and are likely more focused on their cash needs in 2 months than prevailing rates in 2 years. 



We remain of a mind that absolute rates can begin to rise in advance of any sentiment shift by Bernanke & co. as the market puts a premium on liquidity and discounts rhetoric, and also that the widening spread between the 10-year and the target is the beginning of a intermediate period trend that will see a flattening of the curve regardless of policy.


Currently we are short the short end of the curve via SHY and long reflation via TIP.  

Andrew Barber



"Confidence comes not from always being right but from not fearing to be wrong."
-Peter T. Mcintyre
Although the unemployment rate reached a 25 year high in May, it appears that most consumers are still relatively hopeful about our economic future.  The S&P 500 being up 40% since the March 9th low and the NASDAQ up 18% year-to-date has a little something to do with the increased confidence readings.  I'm not sure if the stock market can accurately reflect the strength of the current economy, but it has a great track record.
If the market goes up, most consumers are going to say, if asked, that they are confident or very confident in chances for a strong economy over the next six months.  There are other forces at works too.  On the margin, if consumers have less money in their pockets at the end of the month because of higher gas prices, are they going to be more or less confident?
With today's University of Michigan confidence reading, it appears that we are more likely to see that the numbers PEAKED sequentially last month rather than a big upside surprise.  Right now the consensus reading for the University of Michigan Confidence June number is 69.5 versus 68.7 in May.  A 67.7 reading would suggest that the best is behind us.  The market has been churning in a very tight range, as there has been no help from consumer related names.  Confidence has peaked!    
The call on today's confidence reading is a very important call for Research Edge given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did.  
Coming into today's confidence reading, the underperformance in consumer related names has become more pronounced and yesterday was no exception.  The Consumer Discretionary (XLY) has been underperforming on a relative basis for the past month, and is down 0.5% over the past week while the S&P 500 is up 0.5%.  The increase in interest rates and higher gas prices are two reasons for the underperformance and the consumer confidence number today could be the river card.  
The REFLATION trade is alive and well, but that is bad for the consumer and the consumer matters!  Inflation sucks!  Utilities, Energy and Materials were the best performers yesterday, as the dollar index finished down 0.8% yesterday.  
The dollar got smoked in the face of the Japanese Finance Minister Kaoru Yosano saying that they are confident about the outlook for U.S. Treasuries!  Committing hari-kari?   "We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental."  I'm happy the Japanese have confidence in us, but one thing is for sure, their Finance Minister is not on the Research Edge distribution list.  
The Chinese are on a roll - China's credit continues to grow at a breakneck pace and industrial output and retail sales climbed more than consensus expectations.  At this point, the Chinese are confident in the programs they have established to reinvigorate their economy.
The market's REFLATION story has been remarkable to watch, but knowing the end could be ugly does not instill CONFIDENCE.
Function in disaster; finish in style
Howard Penney
Managing Director


QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 as a better way to be long the US market than the SP500. The index includes companies with better balance sheets that don't need as much financial leverage.

FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet.  

XLV - SPDR Healthcare -Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We bought Energy on 6/05. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.


SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.


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