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SJM Holdings Ltd extended its lead in the gaming market last month.  SJM Holdings had 26% GGR share and Galaxy had 21% share.  Sands China fell to third place after its share shrank by two % points to 20%.



Kazuo Okada’s Universal Entertainment Corp has signed a deal with a Philippine developer that appears to be meant to calm a legal storm over a US$2-billion (MOP16 billion) gaming project in Manila.

Century Properties Group Inc signed a deal to develop 5 hectares of a 44-hectare site earmarked for an entertainment and gaming project. It also acquired a 26% interest in the Universal subsidiary that controls the Manila land.  Universal’s move appears to be meant to undermine allegations that it broke Philippine law by setting up dummy companies to get around a rule that limits foreign ownership of land to 40%.

In a separate deal, Universal sold another parcel of shares in its Philippine subsidiary to First Paramount Holdings 888 Inc.
The combined effect of both deals means 60% of the project is in Filipino hands, Universal said.


TODAY’S S&P 500 SET-UP – November 4, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.38% downside to 1755 and 0.53% upside to 1771.                                        










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.30 from 2.31
  • VIX closed at 13.28 1 day percent change of -3.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York, Oct. (prior 53.6)
  • 10am: Aug., Sept. factory orders data issued in single report following govt shutdown
  • 11am: Fed buys $3b-$4b in 2019-2020 sector
  • 11:30am: U.S. to sell $33b 3M bills, $29b 6M bills
  • 11:40am: Fed’s Powell speaks in San Francisco
  • 4pm: Fed’s Rosengren speaks in Boston
  • 4pm: USDA Crop condition/progress reports


    • Senate in session, House not in session
    • Crist’s Fla. Gov. race may be most expensive ever in state


  • SAC Capital to plead guilty to securities fraud, NYT says
  • House cmte. interviewed Obamacare webmaster for >9 hours
  • BlackBerry bidder said to be short funding as deadline looms
  • LightSquared suing GPS makers, trade goups over promises
  • Roche to pay up to $548m for antibiotic against superbug
  • China leaders to start reform summit w/ eco. in recovery
  • Google’s Schmidt says China censorship has gotten worse
  • Anadarko may sell Chinese oil, gas assets, Reuters says
  • Tri Pointe said near $2.7b bid for Weyerhaeuser co.: Reuters
  • AMR in settlement talks w/ Fla. to resolve merger lawsuit
  • U.S. seeking broad divestitures from both cos., WSJ says
  • Muddy Waters seen right on NQ mobile payments, wrong on cash
  • Biofuel makers mount last effort to save renewables mandate
  • Food supply faces risks from climate change: NYT, citing panel
  • Investors concerned with Blackstone rental-home bond: Reuters


    • CME Group (CME) 7am, $0.73
    • Halcon Resources (HK) 7:30am, $0.07
    • Kellogg (K) 8am, $0.89 - Preview
    • Realogy (RLGY) 7am, $0.87 - Preview
    • Spectra Energy (SE) 6:30am, $0.33
    • Spectra Energy Partners (SEP) 6:34am, $0.38
    • Sysco (SYY) 8am, $0.47 - Preview
    • Targa Resources (TRGP) 7am, $0.45
    • Targa Resources Partners (NGLS) 7am, $0.30
    • Tenet Healthcare (THC) 7:30am, $0.45
    • Vulcan Materials (VMC) 8am, $0.26


    • American Equity Investment Life (AEL) 4pm, $0.45
    • Anadarko Petroleum (APC) 4:02pm, $1.16
    • BRE Properties (BRE) 4:45pm, $0.64
    • Carrizo Oil & Gas (CRZO) Aft-mkt, $0.72
    • Century Aluminum (CENX) 4pm, $(0.33)
    • CF Industries (CF) 4:05pm, $3.92
    • DDR (DDR) 5pm, $0.28
    • DryShips (DRYS) 4:05pm, $(0.06)
    • Dun & Bradstreet (DNB) 4:15pm, $1.88
    • Forest Oil (FST) 4:22pm, $0.09
    • Goodrich Petroleum (GDP) 4:15pm, $(0.72)
    • GT Advanced Technologies (GTAT) 4:15pm, $(0.01)
    • Hertz Global (HTZ) 4:13pm, $0.71
    • MannKind (MNKD) 4pm, $(0.15)
    • Marathon Oil (MRO) 5:26pm, $0.77
    • McDermott Intl (MDR) 4:10pm, $(0.02)
    • Mindray Medical Intl (MR) 5pm, $0.48
    • Pioneer Natural Resources (PXD) 4:01pm, $1.35
    • Plains All American (PAA) 4:05pm, $0.48
    • Prospect Capital (PSEC) 4:02pm, $0.33
    • Retail Properties of America (RPAI) 4:01pm, $0.24
    • Rock Tenn (RKT) 5:05pm, $2.47
    • SBA Communications (SBAC) 4:01pm, $(0.12)
    • Unum (UNM) 4pm, $0.82
    • Vornado Realty (VNO) 4:56pm, $1.10
    • Weatherford (WFT) 4:38pm, $0.21


  • Gold Bug Schiff Counters Goldman Sachs on First Drop Since 2000
  • Cheaper Chickens Seen in Record Corn Cutting Costs: Commodities
  • Corn Nears Three-Year Low on Expectations for Bigger U.S. Supply
  • Copper Falls a Third Session on Speculation Fed to Slow Stimulus
  • WTI Trades Near Four-Month Low on U.S. Crude Supply; Brent Gains
  • Gold Extends Gain in London, Rises 0.2% to $1,318.71 an Ounce
  • Robusta Coffee Gains on Vietnam Storm Speculation; Cocoa Drops
  • China Steel Prices Rising as Iron Ore Advances to Two-Month High
  • Coconut Crisis Looms as Postwar Palm Trees Age: Southeast Asia
  • Spot Silver Extends Decline to Lowest in More Than Two Weeks
  • Iran Burning Gas Worth Billions to Lead Exporters Amid Sanctions
  • South Africa Union Starts Strike Over Pay at Northam Platinum
  • Fuel-From-Soy Makers Mount Last-Ditch Lobby Push on EPA Rule
  • Canada Rail-Car Shortage Slowing Grain Exports Amid Record Crop


























The Hedgeye Macro Team














The Scarcest Commodity

This note was originally published at 8am on October 21, 2013 for Hedgeye subscribers.

“Ideas are incapable of confinement or exclusive appropriation.”

-Thomas Jefferson


One of the biggest push-backs I’ve been getting from both US stock market bulls and bears throughout the 2nd half of 2013 is one and the same – “I can’t buy that up here – I missed the move.” And my response continues to be that Mr. Market doesn’t care about what you did or did not miss. The market’s price is both dynamic and non-linear. As Jesse Pinkman would say, ‘it’s evolution, yo.’


Pinkman is not Jefferson. The aforementioned quote comes from a great book on the evolution of entropy economics that I’m still reviewing: George Gilder’s Knowledge And Power. If you are a growth investor (and/or you just want to be long growth as a Style Factor right now), read Chapter 10: “Romer’s Recipes and Their Limits” (Paul, not that raging Keynesian, Christina Romer).


“Still, change keeps coming, fueled by technology, as Romer’s 1990 paper reminded the economics fraternity. As productivity grows, technology keeps freeing people. And this … really is, in some sense, the scarcest commodity: the power of the human intellect.” (Knowledge and Power, page 96)


Back to the Global Macro Grind


BREAKING: the Global Macro call of 2013 is basically baked into the cake. You were either long growth, or you were not. With the Russell 2000 closing at another all-time high on Friday (1114 = +31.2% YTD), long virtually anything growth has absolutely pulverized the #EOW (end of the world) “new normal” thing (Gold, Bonds, Utilities, etc.).  


In terms of 2013 US Equity Market Style Factors, here’s how awesome growth, as a style, looks at the all-time highs:

  1. LOW YIELD (i.e. growthier stocks) = +35.2% YTD (vs High Yield Div stocks +14.9%)
  2. TOP 25% EPS GROWTH (Top Quartile of SP500) = +34.1% YTD (vs Bottom 25% = +20.8%)
  3. TOP 25% SALES GROWTH (Top Quartile) = +31.4% YTD
  4. HIGH BETA = +30.5% YTD



To be clear, growth (as an investing style) can be very frustrating to A) embrace and B) capitalize upon. I think the reasons for that are bountiful (it’s called a cycle), but here are three big ones:

  1. STYLE: Growth Investing hasn’t worked like this since the 1990s – and few were positioned for an early 1990s style US recovery
  2. CYA: many equity investors are still fighting the last war of getting smoked in 2008 – consensus is long yielding income, not growth
  3. MULTIPLE EXPANSION: expensive gets more expensive on the way up

That last one is really tough for people to swallow, primarily because there are just so many people managing money these days. How many people do you know short stocks because they’re “expensive”?


I’d argue that part of Carl Icahn’s resurgence as an activist has a lot to do with being mucho long Style Factors 4 and 5 (HIGH BETA + HIGH SHORT INTEREST). With what was working locked into his sights, all he needed was Bill Ackman pumping those factors live @CNBC.


How many investors break the market down by Style Factors?


I’d say a lot fewer than you might think. And, to a degree, this makes Institutional Investing a lot like Moneyball was before Billy Beane did Moneyball. In the end, a chubby 1st baseman with a high on base % beats a pretty boy “highly concentrated” activist long ball hitter.


So what if my writing this note top-ticks growth vs. slow growth for 2013?

  1. That could very well happen – the performance divergences between growth and slow growth styles is at its YTD high
  2. That could very well not happen – if you started short selling growth in 1995 or 1996, let me know how that went by 1999

This is why the 1994 Global Macro Market metaphor (bond market blew up) really matters to me. As you can see in the Chart of The Day:

  1. Utilities (XLU) = -17.4% in 1994, 0.2% in 1996, -12.8% in 1999
  2. Tech (XLK) = +19.1% in 1994, +43.3% in 1996, +78.4% in 1999

How many investors are positioned for 2013 being 1993? How about 1995?


I don’t know if this is the top of growth investing. If it is, it ends with the Twitter IPO. But I do know that The Scarcest Commodity out there right now is being a raging growth bull. And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.58-2.69%

DAX 8736-8968

SPX 1701-1760

VIX 11.55-15.19
USD 79.21-80.28

Gold 1267-1333


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Scarcest Commodity - Chart of the Day


The Scarcest Commodity - Virtual Portfolio

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Solid and in-line quarter but should've been better. VIP volumes were huge but were offset by lower Mass/Slot (not surprising) and higher fixed costs (surprising) which had been trending lower.




  • VIP RC:  thinks that the growth in volume will continue
  • Reason for the loss on impairment trade receivables:  In line with the roll and the revenues. The company decided to be prudent.
  • VIP RC:  hold was just marginally above the theoretical.  Q3 was up 58% YoY and 15% QoQ volume wise
  • Looking at opportunities in gaming and "leisure" (theme parks/attractions) "very seriously".  Hope that something materializes within the next 12 months.
  • ROI on USS?  Too complicated to calculate within their structure.  Hurdle rate is 12% IRR.
  • Tokyo vs Osaka as sights: Both cities are great. Osaka is the 2nd largest city in Japan. Tokyo has a large population.  Osaka has an emergent base population/trading city. They like both locations.
  • Is the full cost of the water park reflected in the margins? There is still a little more to go in terms of improvement since they have not reached steady state visitation.  The parks are mostly fixed costs so margins are highly dependant on volumes.  Thinks that the margins are getting better.  In the early part of 2013 they were still trying to organize the place better.
  • Japan:  the bi-partisan committee met last month. There is another meeting in 2 weeks, where hopefully they can get the approval of the various parties and something can be send to the cabinet this session. They do not believe that the bill will be passed in this Diet session but will be passed in the next Diet session early next year.  They believe that there will be some entry levy for locals.  Clarification: doesn't think that that there will be enough time to debate the bill since the session closes on December 6th.  But do believe that it will be introduced. Believe that from January-April in the next Diet session, the bill will pass.  Hope that the bill will pass around March 2014.
  • VIP RC volume share (& revenue share): 54% and non RC share: 44%
  • Growth (RC) is coming from all over the place not just China
  • They are more positive on their outlook this Q than last Q
  • Why was admin expense up so much? Increase was mainly due to additional expenses from property tax
  • $210MM investment securities? Ponte 16: that $210MM is a net total - amount purchased vs. disposed.  $570MM and $930MM.  The amount disclosed on Ponte 16 is just the pure nominal amount on what they have spend? All of their investments and financials instruments are included in their available for sale securities.
  • What % of total net revenues was VIP:  45% and 60% of gross
  • Should see the steady state margins by 1Q14.  Win %'s will really sway margins.  For a normal theo win, they should have about a 45-46% EBITDA margin
  • Thinks that 20-30% VIP growth for 2014 is overly optimistic
  • They should know about other development opportunities in Asia within the next few months.
  • View of the Olympics in Tokyo - does this help or hurt prospects of a resort hotel? Believe that it will help assist in the vibrancy of Tokyo
  • Mass win was lower by 10% on a QoQ and YoY basis and slots were about 5% lower YoY or 9% QoQ. The declines are volume related.
  • Hold for VIP was around 2.9-3.0%
  • No change in commission structure this Q
  • Growth out of SE Asia - is there any junket (IMA) benefit? No real benefit from IMA.
  • They sold their London High Street property - have no more of those
  • USS: 9,900 daily; 8,800 for MLP. Average spend: $84/ and $28 for MLP
  • $84MM gain from the sale of the UK property


  • Resorts World Sentosa (“RWS”)  revenue  and Adjusted EBITDA for the third quarter of 2013 increased by 17% and 15% year-on-year to S$776.4 million and S$348.3 million respectively
  • The gaming business segment continued to report higher volume in the premium player business. 
  • The non-gaming segments registered healthy growth with strong visitation. 
  • Attractions enjoyed a daily average visitation exceeding 18,000, while the hotels achieved an occupancy rate of 94% with average room rate at S$405.
  • Our gaming business recorded 15% year-on-year growth, driven by increased visitation and new VIP
    customers’ interest.
  • At ACW, we officially launched the Dolphin Island interaction programmes.
  • The construction of our new hotel in the Jurong Lake District is progressing  on schedule. Piling works are scheduled to complete soon, followed by super-structure work before year-end.
  • The current global economic environment is still relatively unpredictable. The continued weakening of regional currencies versus the Singapore Dollar continues to make Singapore a more expensive destination for our regional customers. Like many Singapore companies, we also face a tight labour market. To address these challenges, we continue with our efforts to improve productivity yet not sacrificing customer service and re-engineer our processes.
  • At Genting Singapore PLC, we are seriously pursuing opportunities in the gaming, leisure/entertainment and hospitality sectors in the region. Such projects are appealing where the development complements our existing competencies and the projected returns are significant to our corporate objectives. We continue to monitor with great interest the legislative passage of the Integrated Resort Execution Law in Japan.


The Economic Data calendar for the week of the 4th of November through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



CAT: Is "It" Spreading? (10-Q Review)





We continue to see evidence that CAT’s challenges extend beyond its Resource Industries segment.  CAT’s divisions do not form a true conglomerate, as we see it.  Construction Industries shares key competitors, components and end-markets with Resource Industries.  Similar resource-related capital spending trends drive sales at both Power Systems and Resource Industries.  CAT Financial has credit exposure across CAT’s manufacturing customers, with potential stress in mining appearing this quarter.  These businesses fall under a corporate structure that continues to show instances of poor governance.  Rather than address these structural challenges, CAT's management seems to cling to unrealistic financial targets and demand expectations.  Long-term, we expect CAT shares to continue to underperform as investors recognize that ongoing declines in resources-related capital spending are a return to normal levels, not a decline from them.  







Progress Rail Subpoena & Criminal Investigation:   Progress Rail, part of CAT’s Power Systems segment, received a grand jury subpoena “relating to allegations that Progress Rail conducted improper or unnecessary railcar inspections and repairs and improperly disposed of parts, equipment, tools and other items.”  The company was also “informed by the U.S. Attorney for the Central District of California that it is a target of a criminal investigation into potential violations of environmental laws and alleged improper business practices.”  It doesn’t sound like a favorable development.


CAT acquired Progress Rail in mid-2006 from One Equity Partners, a JPM (which has had its own Federal investigations of late) PE fund.   It was formerly the rail services business of Progress Energy and, later, helped form a rationale for CAT’s 2010 Electromotive Diesel acquisition.  Progress Rail was a big acquisition for CAT at the time (“only the second that we've done at or above $1 billion”) and we know a lot about it circa 2006 because it filed an S-1 prior to being acquired by CAT.  Progress Rail has exposure to public transportation services and short lines in addition to the Class 1 rails.  Union Pacific has been litigating a complaint regarding derailments from improper remanufacturing work, but the claims are very small.  U.S. Attorneys usually have high win rates and do not, to our knowledge, engage in frivolous investigations.  We will wait for more information, but the investigation is another possible notch against the CAT’s internal controls.


Excess Inventory Not Isolated to Mining:  It has become increasingly clear that CAT is not just facing challenges in its mining heavy Resource Industries segment.  For example, excess inventory extends to Construction Industries and Power Systems, with even “changes in dealer inventories…unfavorable for electric power applications.”  Even part of the “decline in petroleum application sales was due to the impact of changes in dealer inventory.”  The broad dealer inventory problem should raise yellow-to-red flags for investors, in our view.  How can nearly every relevant product category have excess dealer inventory?  It would seem broader than the years-old flawed implementation of the "lane strategy", since CAT is similarly facing excess company inventory. 


Mining Not Isolated to Resource Industries:  While hinted to on the earnings call, Construction Industries sales to mining applications reached the 10-Q with “The unfavorable mix of products is primarily attributable to relatively higher sales of small and mid-size machines which generally have lower margins than larger size machines which are also sold into mining applications.”  Further, competitors in mining equipment, such as Komatsu and Hitachi, are refocusing on construction equipment because of weak mining equipment demand, depressing prices and margins for construction equipment.  Mine site power and locomotives are also exposed to mining investment, and Power Systems is broadly exposed to resources-related capital spending (e.g. petroleum), in our view.


No Capacity Reduction Cure:  While management hinted that Resource Industries was not planning a major capacity overhaul, additional disclosure puts it in writing: “We are expecting lower mining sales in 2014 and are continuing our efforts to lower structural costs. In order to be well-positioned when the industry improves, we are working to reduce costs, but are not expecting to make substantial changes in physical capacity”  (emphasis added). We expect CAT to eventually undertake more significant restructuring at Resource Industries, including the removal of excess capacity.


Increased CAT Financial TDRs/Impaired Assets:  While it is a long section (has its own 10-Q) and worth a read, CAT Financial showed meaningful increases in TDRs and Impaired Loans and Finance Leases.  When combined with the issues highlighted last quarter on “incorrectly reported” impairments, the increase may be of interest.  Total Troubled Debt Restructurings (where a debtor/lessee is in financial distress and the lender has granted relief as a result of that distress) increased to $195 million vs. $159 million in the year ago period.  What is more interesting is that the “Mining” TDRs went from (apparently) zero in the year ago period to $123 million in the three months ended September 2013.    Mining equipment sales may be down, but CAT Financial Mining segment assets increased 10.4% YoY, interesting given the credit dynamics there.  Investors may start to focus on this exposure, particularly if metal/mineral prices soften.  CAT Financial was the best performing CAT segment last quarter - the only one showing revenue and profit growth.  Under the hood, it may also prove mining/resources exposed.  CAT Financial is not exactly leverage and covenant free.


CAT: Is "It" Spreading? (10-Q Review) - bvc



Warranty Language Change:  The language describing warranty accrual rate switched from “are developed for each product build month” to each “are developed for each product shipment month” (emphasis added).  While it does not appear relevant in its impact on the quarter (warranty liability was not very interesting from what we see), warranty accruals are noteworthy as an area of flexibility for manufacturing companies.


Some Good Stuff, Too:  The yen impact should start to decrease over the next few quarters and currency in the third quarter “was unfavorable $188 million primarily due to the weaker Japanese yen, as sales in yen translated into fewer U.S. dollars.”  Pension remeasurement is likely to help 2014, as the use of a quarter-end discount rate would “result in a decrease in our Liability for postemployment benefits of approximately $2.6 billion.”  We expect these impacts to be well exceeded by the ongoing headwind from declining resources-related capital spending.  Nonetheless, these items are minor positives for reported EPS.




Long-term, we expect CAT shares to continue to underperform as investors recognize that ongoing declines in resources-related capital spending are a return to normal levels, not a decline from them.  CAT’s apparent control issues may limit management’s strategic flexibility (e.g. attention, limit M&A) as it responds to these challenges.  While 2014 expectations are now at more reasonable levels relative to our expectations, we expect further weakness, not a recovery, in 2015.  


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