Ambition's Ladder

"Tis a common proof... That lowliness is young ambitions ladder."
-William Shakespeare
Don't worry - I didn't spend the last week reading Shakespeare. I did, however, brush up on my late 19th century global central banking history, and that's actually where I came across that quote. The quote was in reference to an unproven country that decided to take their economic destiny into their own hands - the United States of America.
While many a British short seller of America's 20th century has rendered himself a secure job as a Scottish golf caddy, I left Edinburgh yesterday wondering what an American short seller of China's 21st century might end up doing... super size them fries for me there laddy!
On this continent, US investors should continue to open their minds to The New Reality of global macro winds that continue to blow onto her shores. They're real, and oh' are they a changin'.
While the easiest thing for an American investor to do is assume that he is smarter than everyone else and that the Chinese are making up their numbers, it's also proving to be the dumbest thing to do.
Whether you're having a pint in the highlands of the United Kingdom or sippin' on some Sapporo in Japan, if you have a television today you're going to see Madoff as frequently as you see Michael. They are both performers. They are both American. If your investment thesis is that the rest of the world lies, please take a look at the man in the mirror and re-adjust that set.
This morning I am waking up to a Chinese stock market that is hitting another fresh year-to-date high. In addition to effectively signaling that Q2 GDP will be reported at a higher growth rate than the +6.1% that was reported in Q1, Chinese central bank chief, Zhou, said China's reserve policy is aimed at "liquidity, safety and returns." I like that.
All the while, the American manic media is anchoring on Zhou's comment that China will not make any "sudden" changes to their currency policy. This has investors who completely missed the mother of all REFLATION trades perplexed. Hate to break it to you CNBC, Zhou's comments aren't perplexing - buying REFLATION stocks high at the lows of a Broken Buck in mid-June is!
When it comes to managing his largest position, no rational risk manager would ever signal to the world that he is going to start behaving like a crackberry addict. Do US centric investors think we are going to get a memo one day from the Chinese that 'today is the day we are blowing out of Treasuries'? C'mon. Let's be serious here.
Inclusive of locking in another higher-high last night, the Shanghai Stock Exchange is seriously in the green for 2009. At a closing price of 2,975 I'll proactively predict that you're going to see a cover story on Barron's sometime soon about a "China bubble". Right now, most people who missed the crash are bubble pros don't forget. That's what the "I'm smarter than you" does.
What is it that you do? I think that's the question that people managing countries, currencies, and companies will have to answer in the 21st century. As the Chinese sign a hugely relevant deal with Hong Kong this morning to settle international trade in Chinese Yuan, I think they are telling us what it is that they do. They are taking their destiny  into their own hands.
China is The Client. China wants "liquidity, safety, and returns." China wants the world to buy into one of the 33 IPO's they have on tap ($10B in issuance).
China doesn't want Bernie Madoff. China doesn't want Alan Stanford. China doesn't want any more US Treasuries (April Treasury data shows that the Chinese actually had a net outflow of US Treasuries to the tune of $4.4B. Outflows mean they are a net seller).
I know, I know... a billion dollars isn't what it used to be in this country. But then again, the Dollar isn't going to be the world's dollar like it used to be either. As we think about this "150 years" that will grip post weekend at Bernie's headlines this morning. I think we need to keep thinking about what them British caddies are still whining about missing 100 years back. The lowliness in which some currently regard this young Chinese economic power is their ambition's ladder.
I continue to think that the bubble and crash callers will be frustrated by a US market that, while still trading -61.8% lower than the Chinese stock market YTD, will continue to trade in a proactively predictable range. This morning I have downside support for the SP500 at 910, and upside resistance at 930.
Best of luck out there this week,


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

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

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 think Energy works higher if the Buck breaks down.  

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.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

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.
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.


Food costs continue to be extremely favorable for restaurant companies with only chicken prices currently up on a YOY basis.

Sales trends continue to be weak but the 20%-plus YOY declines in most restaurant commodity prices should continue to soften the impact on margins in Q2. Chicken prices are only up about 2% YOY and year-to-date so the only negative standout is the increasing gas prices, which though still extremely favorable on a YOY basis, are now up nearly 70% year-to-date. Gas prices tend to increase the most in the summer driving months so we will have to watch how these increasing prices impact consumers' discretionary spending and eating out habits in the coming months. Current prices at the pump still look good, however, relative to the $4-plus per gallon we experienced last June and July.

Lower dairy prices will continue to help restaurant margins in the near-term with milk and cheese prices down 51% and 42%, respectively. That being said, these favorable prices may reverse rather significantly in 2010 because according to a Bloomberg article, milk prices could rise by at least 25% by the second half of 2010. Dairy farmer profits are currently under pressure because it now costs $17 to produce $10 of milk. In an effort to improve profitability, the article states that the National Milk Producers Federation in Arlington, Virginia, will pay dairies to slaughter 103,000 U.S. cows in the coming months. "The cuts will lead to the first two-year drop in output in four decades and higher prices in 2010 for butter, cheese, milk and the non-fat dry powder that's a benchmark for global exports, according to U.S. Department of Agriculture forecasts....U.S. dairies are trimming the herd. The kill in the week ended June 6 rose to 60,800 head, 35 percent higher than a year earlier, according to USDA data. This year's cull is up 13 percent from 2008."






Macau was granted authorization to rent a plot of land on Hengqin island for the development of the new University of Macau campus.  The bill proposing the arrangement was passed by the eleventh National People's Congress (NPC) Standing Committee of China.  Presently under the jurisdiction of Zhuhai, the land will be rented to Macau until 2049. 

The central government has approved a pilot joint development project to make Hengqin Island "a new platform to promote industry upgrade in the west bank of the Pearl River under the 'one country, two systems' policy."


The second locally infected H1 N1 case with an unknown source of infection was reported yesterday.  The Influenza Emergency Coordination Center also announced one additional imported case of Influenza A (H1 N1), bringing the total number of local and imported H1N1 cases to 18 in Macau as of yesterday.

Health Bureau director Lei Chin lon said that tourists from different countries coming in and Macau were contributing to the problem.  "Macau is at risk of a H1 N1 influenza outbreak", he said.

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There is quite a bit of new supply entering the Macau market in 2009.  Besides MPEL's City of Dreams (CoD) which opened June 1st, US investors do not seem very focused on the supply picture.  That's typical, since the remaining new builds for 2009 are owned by non-US listed companies.

The most impactful property post-CoD will be SJM's Oceanus.  SJM is already knocking the cover off the ball in terms of recent market share gains.  Add to the SJM portfolio an attractive Mass Market casino, strategically located next to the Macau Ferry Terminal.  Unfortunately for LVS's Sands Macau, Oceanus is situated between Sands and the Terminal.  It is our understanding that SJM will provide covered and air conditioned moving walkways from the Ferry to Oceanus.  Location was a huge competitive advantage for Sands and it soon will be transferred to Oceanus.

Here are some details on Oceanus: 

  • Obscures Sands from the Ferry Terminal
  • 280 Mass tables vs 350 at Sands
  • Almost purely a Mass property
  • Billed as a regional locals property targeting ferry customers from Hong Kong and Guandong Province
  • Property to open in late 2009

Based mostly on the impact from Oceanus, we are now projecting a 20% decrease in 2010 EBITDA at Sands to $169 million.  We believe the Street is projecting well north of $200 million.  Sands is vulnerable because of its location and focus on the Mass market.  We calculate that over two-thirds of its EBITDA is derived from Mass play.  The Mass market has been stable and is likely to grow in the mid single-digits as Beijing keeps a tight grip on visitation.  However, Oceanus is not the only new supply.  L'Arc and City of Dreams (another large Mass property) will contribute to an approximate 25% increase in Mass supply from 12/09-05/09 and a 20% increase for all of 2010 as seen in the following chart.  Not good for the other LVS Mass Market property, Venetian Macau, either.

OCEANUS TO SINK SANDS MACAU - macau mass market table growth 

LVS faces many near-term hurdles including covenants in both credit facilities, a slow start at Sands Bethlehem, and the Las Vegas doldrums which are not over.  Add Oceanus to the list and don't underestimate the potential negative impact to Sands.


Until this week, it seemed fairly safe to suppose that an impenetrable divide existed between the world of SEC filings and the technophiles who have already downloaded MashDeck. And then we read the exhibit to this 8K, which included one of the first references we've seen in SEC filings to the popular social media site Mashable. (And because the web is a giant echo chamber, Mashable has its own account of the story).

It was filed by CKE Restaurants, Inc. (CKR) - the company behind Hardee's and Carl's Jr. restaurants - you know, the fast-food joints where you get those late-night Western Bacon Thickburgers and Jumbo Chili Dogs when nothing else will do.

Here's what we found, which comes shortly after CEO Andrew Puzder explained that while "It has never been my goal to get excited over reporting flat earnings or margins," the fact that the company's operating income and margins remained steady in spite of the poor economy and competitive industry practices was "a testament to our management team and the strength of our brands." Then Puzder said:

We just launched a very innovative partnership with YouTube whereby we are utilizing some of their most popular video stars to produce short videos promoting our burgers. With a combined following of 3.2 million subscribers, these video bloggers ("vloggers") are helping us target our customer demographic where they already are. In addition, the media cost is much lower than with traditional advertising. According to, the world's largest blog focused exclusively on Web 2.0 and Social Media news, our sponsored video content appears to have ‘turned out to be a big hit.' In fact, just one of the Carl's Jr. vloggers created a video that's already received over 2.4 million views across the web. All of the Carl's Jr. vloggers' videos, combined, have been viewed more than 5.7 million times.

But it's not just Carl's Jr. We also noticed that the annual report that Bob Evans Farms, Inc. (BOBE) filed earlier this week. In it, the company touts its use of "BE-Mail", Facebook, Twitter, and a revamped web site. Be sure to check out the unlikely pairing of its list of corporate Twitter users with the down-home images of rolling hills. Then again, a quick scan of some of Bob Evans tweeters shows that they're not exactly regulars.

Of course, the real question is whether this embrace of social media technology by decidedly non-tech companies is worth the money and the effort. We've eaten at Bob Evans before and it's hard to imagine much overlap between those folks and people who crashed Twitter yesterday looking for news and sharing memories about Michael Jackson.

Michelle Leder



And I thought Vegas was a draining trip.  I'm writing this Macau update on the Friday flight back from Hong Kong.  Five days, 15 meetings, and only 20 hours of sleep later, I'm tired, but full of thoughts and observations from a very enlightening trip.

Near term, I'm more negative on Macau, especially on LVS, and to a lesser extent, WYNN.  Our estimates will be going lower on both companies.  Sands, in particular, may get drilled by SJM's Oceanus property opening right next door.

We're still working on the MPEL model - our numbers will be below the Street but nobody believes the Street numbers on this one anyway.  Sentiment is extremely negative on City of Dreams and MPEL which is understandable given the slow start.  The stock has been pummeled.  However, there are reasons to be optimistic as the launch of the VIP effort tonight, and the advertising in China, could drive revenues to leverage what appears to be a lower cost structure than most are projecting.

We will expound on the major takeaways in coming posts but here are our observations:




  • Macau not having a good June
  • June visitation may have been down 20%, similar to May
  • MGM and Grand Lisboa may have been the only major properties to have a decent June
  • Some of the junkets experienced very high hold % in June

Mass Market:

  • Cost of player acquisition and retention going up on the Mass side - margins going lower
  • More evidence of increased rebate activity: "Front end buy in" vs. "Rolling buy in" - 1% rebate on wagering above a certain level vs. 0.3%-0.4% on all dollars wagered - Mass margins could be under pressure
  • Growing belief that Beijing will "manage" Mass growth to coincide with GDP growth in China. Good for stability but the days of 15% growth are over. Over the long-term, predictable growth is probably worth a higher multiple

Visa Restrictions:

  • Beijing tightened up tour group restrictions in June after a few months of abuse - players were skirting visa restrictions through tour groups
  • At least one enlightened participant does not believe a new CE means that visa restrictions will be loosened, despite consensus opinion
  • New CE is not a "guy of change". He is already the 2nd most powerful government official in Macau and is probably not Beijing's first choice
  • Nobody knows what is going on with visa restrictions. Beijing probably cracked down on tour groups but some think that other restrictions may have been loosened. Any impact will be masked by Swine Flu concerns


  • Over the near term, there are more negative catalysts: lower margins due to market share competition, CoD taking share, and L'Arc and Oceanus (SJM) opening this year
  • Delays in Galaxy's Megaresort good for the market




  • I'm increasingly worried about Sands. SJM really going right after the property with Oceanus opening late this year
  • Oceanus will open near Sands, right next to the Immigration Center - covered moving walkways right from Ferry Terminal to Oceanus
  • Sands and Venetian continue to lose VIP share to Jack Lam's Mandarin Hotel operation
  • Venetian Mass business hanging in despite City of Dreams opening - that could change with the new CoD advertising program launched this week in southern China


  • IPO is most likely financing option
  • No asset sales are imminent
  • Government approval for condo sales will be a long way off - no source of cash for LVS


  • Singapore doesn't look like it will open in 2009, April 2010 more likely
  • Junket guys worried about Singapore regulations potentially limiting or prohibiting Junket activity - junket credit, private rooms, background checks - we believe this is potentially a big negative for the two Singapore concessionaires



  • Wynn Macau not having a good June, losing share to MGM and SJM
  • High VIP commissions elsewhere and Mass rebates/higher customer retention costs causing market share losses
  • Wynn Macau also lost a huge high end slot player to MGM and City of Dreams
  • Encore Macau won't open until the spring and the budget is likely to go up a little
  • Not impacted much by CoD yet, but CoD business beginning to ramp in both VIP and Mass
  • No real positive catalysts for WYNN in Macau



  • Mass volume in first two weeks was below expectations but hold % was reasonable
  • VIP volume was fine but hold was actually negative
  • Negative VIP hold % (-0.5% to -0.7%) due to 5-6 players, not widespread through the casino - not sustainable
  • Mass volume has picked up recently
  • Structurally, there does not appear to be any issues with CoD
  • The only legitimate criticism I heard was that the property is difficult to navigate
  • Margins will be much better than expected - probably due to correct staffing and lower wages - 75% of what they expected
  • Revenues ramping and won't be far off near-term expectations
  • The Hard Rock Casino is probably the most unique in Macau
  • Hard Rock doing 60% more per position than CoD casino
  • Rolling Chip (VIP) launch is Friday night
  • The go ahead for advertising in China was given on Wednesday - only 13% of customers are from mainland, needs to be 30%
  • Have not gotten the mid-Mass business yet - advertising in China will help
  • Signing 2,000 Mass customers into City Club database daily - faster pace than the Venetian after 3 weeks
  • Former Venetian marketing people running the database
  • Generally positive commentary from competition
  • Given the stock performance and the incredibly negative sentiment, MPEL is starting to look interesting on the long side



  • Market share still growing, revenues stable
  • Margins lower due to customer acquisition and retention costs
  • L'Arc opening on 9/21/09 - apartment sales not going well (though not part of SJM's financial involvement in the project)
  • Oceanus - 280 mass market tables opening up by end of year - going directly after Sands business
  • Oceanus will be much more accessible to customers arriving at Ferry Terminal than Sands
  • Ponte 16 - doing very well. Casino was packed. Exclusively mass market for now



  • New games doing well in Australia
  • Similar games being introduced in Macau and competitor thinks they will do well



  • Being very aggressive, especially going after Wynn Macau's business
  • There seems to be more optimism surrounding the performance of this property
  • They seem to believe that $250 million in EBITDA is possible
  • Shun Tak's retail center will open in late 2009 and should be a catalyst for the property



  • Starworld lost share in June due to renovations and low hold % in June. However, property seems to be stable
  • Construction on Megaresort deliberately being slowed due to cost savings and market conditions
  • Construction costs may come in 10% below projections - running single shifts, no overtime pay
  • Will target Mass business from mainland China
  • Transportation infrastructure will be much improved by the time the property opens
  • No official opening date but 2011 looks likely

Early Look

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