Everyone is waiting to see how Melco Crown's $2.1bn property, City of Dreams, is doing.  The preliminary revenue figures will be an important indication.  After the first two weeks of June, the marketshares are as follows, according to industry "insiders": SJM Holdings had around 31 % of the market; Las Vegas Sands had 27 %; Wynn Resorts had 14.5 %; Galaxy Entertainment had 13.3 %; Melco Crown had 9.9 %; and MGM Grand Paradise had 4.1 %. 

Melco Crown had around an 11% share last month.  The other big movers were LVS (up from 21% last month) and MGM (down from 8% last month).  Considering that the property has only been open for two weeks, it is worth considering the impact of luck and the volatility that may be factored into revenue figures over such a short period. 



Destination-Macau strikes a more negative note than the SCMP on the second week of revenue figures for CoD.  They suggest a total for June of MOP 100 and state that it would be a "disastrous" first month for the project if that was the case. 

Criticisms of the property cited in the article include design, details of finishing, poor service, and a lack of effective marketing.  The most likely reason, suggests,, is that the property is opening "at a difficult time and in a difficult market".  Also, the author sees brand loyalty as a new but pertinent factor in Macau gaming and sees it as being increasingly difficult to break as the market matures.  In addition, the market is simply not growing.  The swine flu and central government restrictions have exacerbated what is usually a weak month anyway.



The number of additional visitors attracted to the Venetian by the recent Indian Film Academy awards turned out to be nowhere near the tens of thousands that had been conjectured by the organizers. Although overall retail sales were apparently up by about 15 per cent, retailers in Grand Canal Shoppes said it had made no difference to their business. Moreover, F&B managers were dismayed to discover that even the in-house official invitees took most of their meals in Venetian function rooms.

However, for Macau as a whole, Indian visitors are up nearly 30% y-o-y for the first half of '09.  If the TV reruns help to bolster this growth, then the ROI from the Venetian for the rest of Macau will look a lot better.



Macau reported its first confirmed case of the swine flu yesterday, with a Filipino man who arrived at the airport from Manila.  Health officials are confident that the man's positive test is not an issue for the community as he was stopped and tested in the airport.

Lei Chin-ion, director of the Health Bureau, said Macau had mounted a strong defence against the spread of the A (H1N1) virus from other regions.

But he said he could not rule out the possibility of people carrying the virus but not showing symptoms having entered the city.  Mr Lei also said that it is unnecessary to shut down casinos that have good hygiene standards, even if they had been visited by people confirmed as carrying the H1N1 virus.

An Indian man who had stayed at the Venetian casino resort last week for a film festival returned to Honk Kong on Sunday and tested positive for swine flu on Tuesday.  The authorities have asked casinos and hotel to ban people with a fever and carry out regular cleaning and disinfections.



The Portuguese national airline, TAP, says it is planning to sell its entire (15%) stake in Air Macau.  The Portuguese may end up being diluted out of the business by Air China, the dominant shareholder that is about to inject nearly half a billion patacas into Air Macau to keep it going.

It will be interesting to see if other significant shareholders, like EVA Airways from Taiwan and Stanley Ho's STDM, will match Air China's move or will step aside and allow the Chinese company to take it all. 

Also, Viva Macau is planning to fly to Mumbai later this year. Once the International Indian Film academy awards are broadcast there, demand from India is expected to grow further from the 30% y-o-y jump in visitation seen in 1H'09.



The Cirque of the Sun opened the Zaia show in the new $150m theatre at the Venetian.  The attendance numbers have been disappointing.  This article applauds the organizations humility in vowing not to begin another permanent show on Cotai.  The company has realized that Chinese customers are different to those where most of Cirque's permanent shows are based, in Las Vegas.  As Cirque adopts the style of the shows, and the number of them they perform, to suit the Chinese audience, the attendance should pick up.  They have learned from the mistaken "build it and they will come" approach that they assumed initially.



The Mandarin Oriental is set to become the "Grand Lapa" on August 1. Lapa is Portuguese for "cave" and has been used in naming some famous neighborhoods throughout cities in the former colonial empire, such as Lisbon, Rio de Janeiro, and Sao Paolo.

The hotel is now owned by Stanley Ho's STDM and Pansy Ho's Shun Tak.  Most of its customers come through junket operator Jimei.  Mandarin Oriental Hotel Group will continue to manage the hotel for the next two years.


I feel a little uneasy about regional gaming revenue trends.  It's not so much that May was disappointing.  It was with same store revenue falling 4%, but the comp was the most difficult of the year after February.  On the other hand, June is a much easier comp.  June of 2008 was down 7% versus May 2008 down only 2%.  I don't want to get bogged down on monthly revenues but it feels like the January positive pivot has stalled out. 

Beyond the June easier compare, the catalysts look negative:

  • With the lapping of the IL smoking ban and the removal of the MO loss limit, shouldn't numbers be better? May in Missouri was very disappointing. Same store revenues fell despite the loss limit removal and the faster than expected ramp up at Lumiere Place.
  • Gas - 50 straight daily increases? This has to have an impact. As we wrote about in our 06/29/08 note, "GAS PRICES AND THE ECONOMY DO MATTER", gas prices are a statistically significant variable. Every 1% increase in gas prices causes a 0.15% decline in gaming revenues. Gas prices on average were down an average of 39% YoY year to date through the end of April. Unfortunately, gas prices have increased 30% over the last 50 days. The precipitous drop in gas prices in the first third of the year may have masked more serious issues in gaming spend. More on this in an upcoming note.
  • Sequential comps - We'll look at 2 year comps when June comes out. May started out strong and trailed off in the second half of the month.
  • Government transfer season is over - Tax refunds and other transfer payments have already made their way into consumers' pockets. We'll see how sustainably stimulating that stimulus will be.

REGIONALS: DISCERNING A TREND - regionals delta chart


As we headed into the trading day today, the Healthcare (XLV) was down 3.9% year-to-date versus the S&P 500 up 1.5%.  The best performing sector so far this year is Technology (XLK), up 17.2%.  Over the past week the XLV has seen significant relative outperformance as it is flat, while the S&P 500 is down 3.6%.   

Healthcare has been in the penalty box all year are the uncertainty of Health reform looms.  As the cloud of over healthcare dissipates there is tremendous "ALPHA" do be generated as the XLK plays catch up with the averages.

Healthcare  - c1

The Followers of Research Edge's Healthcare analyst, Tom Tobin, will have noticed a clear change in tone since the beginning of this week about the prospects for Healthcare reform.  Today's Healthcare's Early look is no exception:


"A Trillion Dollars is a large amount of money" -Tom Daschle

Obama has to be a little embarrassed this morning with Bloomberg running a story about the problems with Organizing for America and its ability to bring grass-roots pressure to help move his Health Reform agenda.  Apparently the lack of details and diversity of objectives among participants is causing some problems.  Without the same kind of energy Obama's election campaign harnessed for his Presidential bid, his grass-roots pressure on the process appears to be an empty threat.  Two polls released this morning find that while Obama enjoys a 63% an overall approval rating, on Healthcare his approval drops to 44%.  On the margin, the odds of major reform happening have to be dropping at this point. 

Healthcare looked great with 80% of stocks up on the day on solid volume.  Despite the 10 year backing off and TIPS down, balance sheets continue to matter.  The FOMC meeting should diminish balance sheet as a factor given the low reading on the CPI number and signals from Fed Officials that rates will remain low for the time being.   USD has not been a factor with suggests the market expects USD stability.

Managed Care and Hospitals showed a second day of divergence.  The next major event for Managed Care is the Senate Finance bill.  According to one person close to the topic, Public Plan has even odds of being included.  But given the lack of an effective grass roots campaign and a high price tag, even if a Public Plan is included, odds are high it will be dropped before the final package finalized.

Healthcare  - c2

What does this mean for Healthcare stocks?  Looking at valuations suggests there is some pent up multiple expansion in the group.

Healthcare  - c3

Howard Penney

Managing Director


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Oil’s TAIL is Supply

We've started discussing some of our TAIL prices and themes lately, which relate to a duration of three years or more.   Following its dramatic re-flation year-to-date, oil is now trading very close to its TAIL price; a breakout above would be bullish for a longer term duration.  We've discussed the longer term bullish case for oil in a number of notes, and it relates to long term supply constraints. 

The best evidence of supply constraints is simply to look at global oil production over the last five years.  According to BP's 2008 Statistical Energy Review, in 2004 global oil production was 80.2MM barrels per day and in 2008 global oil production was 81.4MM barrels per day.  This is unique in that the global economy was growing and the price of oil was increasing, which of course led to massive investment in oil exploration.  Despite that massive investment and increase in global demand, oil production had a very difficult time keeping pace.

The simple fundamental reality of resources such as oil and natural gas is that they have decline rates.  That is, the amount of oil that can be extracted from any field over time will naturally decrease over time, so for production in a region, or the world, to grow, the amount of new oil supply brought online must offset the natural decline rates that exist.  The last five years show us that we have barely been able to budge the global decline rate.  As a point of fact, global oil rig count hit a 20+ year high in 2008.  This means that more wells were drilled and completed in 2008 than since any year in the past 20 years.  Rig count has been on a steady up tick from the 1990s, and accelerated over the past five years.  Once again, massive investment in production, but a very tepid increase in supply.

This simple conclusion from the combination of massively increasing drilling activity and flat global production levels is that oil is supply constrained.  I'm not necessarily a peak oil theorist (I'll leave that to our VP of Marketing, Todd Enders and his San Francisco brethren), but when it comes to TAIL investment themes, those with a duration of three years or more, this thesis that it is much harder to get incremental oil out of the ground than it has ever been in the past is one to keep front and center, especially as oil breaks out on longer durations and the fundamentals begin to show incremental improvement.

And, on the margin, oil fundamentals are improving.  Some fundamental data points that we've picked up and wrote about in recent notes include:


  • - The International Energy Agency increased its forecast of global oil consumption by 120,000 barrels per day last week. The Agency's new projection is for 83.3MM barrels per day in demand, which is down 2.9% y-o-y. This data point is noteworthy for the fact that this is the first time in 10 months that the IEA has raised their oil demand forecast, so signifies an inflection point in demand even if levels are well below y-o-y levels.


  • - Last week IEA's head Nobu Tanaka told Reuters that OECD stock levels for oil were at 63 days, but he expected them to be at 57 days by year end. It is conventional wisdom that that 50 days of forward cover is very bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days very bearish.


  • - Earlier today, the DOE reported the oil inventories in the U.S. declined by 3.9 million barrels, which was the second week of declines. Both of which we substantially greater than expectations.

Clearly, so far in the year-to-date, US dollar strength and inflation concerns have been driving the price of oil in US dollar terms, but there is a fundamental case staring at us from the TAIL.


Daryl G. Jones

Managing Director

Oil’s TAIL is Supply - tail



Keith is a cowboy

Research Edge Position: Long COW

I suspect that Keith is a Canadian cowboy at heart. I arrived at this suspicion based on several clues: 1) last Halloween he came in to the office dressed in full cowboy regalia, 2) when he and I first met it turned out that one of the few friends that we had in common was the former two-time national Bull riding champion of Canada (it takes one to know one principle, myself notwithstanding), and 3) his tendency to shout "Hoowah!" when trades work out better than anticipated.

Thus when he first asked me what I thought about the ETN COW last year, I realized that I had to take it seriously, because it might well end up in the portfolio.  Since then it has remained on the back burner of my market universe. Our decision to go long this week was based on a convergence of factors: Keith was attracted by the technical set up that it was presenting, several underlying fundamentals looked compelling, and it ties in with our overlapping macro view on reflation and the US consumer.

COW tracks an AIG commodity sub-index that consists of Live Cattle and Lean Hog front month futures contracts. The mix is currently 62.27% front month Live Cattle, 37.73% front month Lean Hogs. 


Although earlier today I wrote that I have a bias against historical comparables, for agricultural commodities, the seasonality is undeniable.

Traditionally, US beef consumption is greatest during cold weather months, and supply levels are driven by the spring calf breeding cycle/late summer slaughter cycle. The start of slaughter cycle coincides with lower consumption patterns to drive prices down in late summer, while prices tend to rise in March and April when demand typically is still  high but supply is at its lowest after the slaughter cycle has ended and the breeding cycle just begun.

In the chart below I illustrated the 20,15,10 and 5 year average indexed price returns for the front month LC contract under the current year. Although earlier today I wrote that I have a bias against historical comparables, in this instance the seasonal inflection is undeniable. Clearly the futures are currently underperforming historical seasonal averages as macro factors weigh on anticipated demand.


Pork demand also follows a seasonal pattern, but the price pressure inflections for that market are different because the breeding and slaughter cycle tends to be based on the corn harvest since farmers breed heavily in advance of the cheapest feed prices. As such, supply is at its lowest in midsummer during comparatively low demand.  Like cattle, Lean Hog futures are currently outside typical seasonal inflections.

Now keep in mind that these are just general rules based on long term historical observations (which I have stated on multiple occasions that I tend to discount), but in agricultural markets it is dangerous to ignore seasonality.


  • Current USDA forecasts anticipate that both Beef and Pork production will be reduced for 2009 based on statistical data showing declining slaughter and carcass weight measures.
  • Canadian Pork exports are forecast to decline more sharply than US production as overlapping local factors have driven feed prices higher simultaneous to a strengthening Currency versus the US Dollar. Next Friday's quarterly USDA Hog report should provide a better picture of the developing import situation.
  • Argentina's Ministry of Agriculture officially estimates that cattle production will decrease by 13% this year due to decreased demand from customers like Russia. Unofficially the disastrous policies pursued by the Kirchner regime have driven Argentine farmers to despair and it has been reported by some media sources that the country may become a net importer for the first time since 1871. Getting hard data on the impact will be difficult as the Ministry stopped generating monthly data in November of last year.
  • Although the work Howard Penney is doing in the restaurant sector shows that the dining industry continues to face a challenging environment, the data continues to suggest that the situation has not deteriorated to levels initially anticipated for mass market food retailers as cheap gasoline; cheap food prices and cheap money have left broad domestic consumption patterns relatively unscathed.


So now we have COW in our portfolio with supporting seasonal inflections, a solid technical setup and a some positive fundamental data points. That doesn't mean there aren't risks involved, primarily tactical in nature. For starters there is always a liquidity risk trading livestock futures, and during summer months the volume can get especially thin. Also, since the ETN tracks the Index, during each delivery month the product must "roll" into the next series: this roll impact will result in a divergence between the continuous front month levels and the ETN performance.

For now we remain long US livestock and will continue to own the COW for as long as the data supports our thesis.

Yipppie Kay Yay.

 Andrew Barber



Yesterday's CPI buys more time for the "free money" cycle. Buying time can be expensive.

Keith and I talk about history frequently. I know a bit about a fairly broad range of economic and political history, in part because of my education and in part because of my interests. Like many students of history, I have a tendency to massively discount its importance in the decision making process. To my mind, the more you know about past events, the more you understand the unique factors involved with each and, as such, the less confidence you will have in drawing conclusion solely based on corollary. When discussing yesterday's consumer inflation data I told Keith that the current environment seems anomalous to me, and those looking for clues in the reflation puzzle will be frustrated by historical comparisons.

At -1.28%, yesterday's CPI reading arrived at the lowest level since 1950 when the massive deflation/reflation cycle that followed the end of WW2 were wreaking havoc on global commodity markets (see chart below). 


This reading leaves the fed with ample room to keep easy money train rolling at next week's board meeting and also provides the market with clear signals that the return of year-over-year inflation growth will not arrive until mid to late Q4. This breathing room gives the economy more time to recover but that time may come at a steep cost:  with the scales tipped so far in one direction, even modest catalyst could trigger inflationary pockets rapidly, providing a nasty "snap-back".

One of our core ideas coming into 2009 was the demise of correlation of returns for different asset types, and this will be critical in our approach as we position ourselves to profit when inflation does finally raise its head.  We anticipate significant divergence inside the commodity matrix as overlapping demand factors and currency valuation throw the momentum mentality that worked perfectly in the 07-08 boom out the window in favor of market specific fundamentals. In other words, in the cycle that we see on the horizon, soybeans won't necessarily go up because Chinese demand for coal increases, and gold won't necessarily go down because the Brazilian cotton crop is larger than expected. 

As such homework will be required and, if history is any guide, many investors will not do the assigned work and fail the exam.

Andrew Barber

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 80.43%
  • SHORT SIGNALS 78.34%