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THE MACAU METRO MONITOR

CHOW MISSES MACAU RESORT BUYOUT DEADLINE scmp.com

David Chow Kam-fai has missed a deadline to pay US$200 million to buy out a group of shareholders in Macau Legend Development, Mr. Chow’s company which owns the Landmark hotel and gaming hall and the Fisherman’s Wharf entertainment resort.  The buyout had been offered by Mr. Chow as a means to ending the business relationship between him and the shareholders after the shareholders’ investment in Fisherman’s Wharf (at 10x EBIT) fell flat; Fisherman’s Wharf failed to make financial targets after intense competition from other resorts including the Venetian.

The businessman and former lawmaker has pledged to spend HK$3 billion on a revamp of Fisherman’s Wharf.  Shareholders have been selling large tranches of their stakes but remain in the consortium.

UNEMPLOYMENT IN MACAU ROSE TO 3.6% IN THE SECOND QUARTER macaunews.com.mo

The rate of unemployment in Macau rose by 0.1% to 3.6% in the second quarter compared to the first three months of the year, according to official statistics.  According to the Census and Statistics Bureau, the rate of unemployment between April and June also rose 0.8% compared to 2Q08. 


RESTAURANT INDUSTRY - Supply Trends

We all know same-store sales growth was weak for casual dining operators in 2008, but continued unit growth, albeit at a decelerated rate of growth, helped to support overall revenue growth.  As shown by the chart below, new unit growth has turned negative for the bar and grill segment in 2009 so achieving revenue growth will be increasingly more difficult this year as demand remains weak.  And, this chart only accounts for Ruby Tuesday, O’Charley’s, Applebee’s and Chili’s.  The total reduction in supply would look much greater if we could account for all of the mom and pop and privately-owned restaurant closures, including Bennigan’s.

Although the cut back in development could put increased pressure on revenues in the near-term, this rationalization of units will benefit all of the relevant players once consumer demand returns.  It is a well known fact that there was too much casual dining supply, particularly in the bar and grill segment, as same-store sales turned negative in early 2006, prior to the economic slowdown.  The economic slowdown only magnified the problem, convincing restaurant operators to curb their growth targets.   

As excess supply is removed, unit economics should improve across the board as there will be fewer seats to fill.  Restaurant operators cannot cut costs forever so as I said last week sustainable operating margin growth relies on business picking up, the timing of which is still unknown.  As almost all of the restaurant companies’ management teams have said (I am paraphrasing), “due to the economic slowdown, we have made changes that make us better positioned to outperform once sales return,” this is definitely true for the bar and grill segment as a whole.

RESTAURANT INDUSTRY - Supply Trends - bar and grill supply

 


FACING GUANGDONG

June trade data released today for Hong Kong saw the deficit expand to 16.5 HK Billion, with total exports increasing to  211 HK Billion a year-over-year decrease on 5.41%  -a big sequential improvement over May.  Shipments to the mainland increased by 10.18% (NSA) over last June and accounted for 52.5% of the total, continuing the trend that has held since February when the impact of Beijing’s stimulus was first felt and exports to “The Client” rose to more than 50%.

FACING GUANGDONG - abchi23

For us, this data is an excellent rear view mirror confirming the impact of Beijing’s plan, but is less valuable as an indication of future demand. Although the Export orders in neighboring markets like Taiwan suggest consumer spending in China is showing no signs of slowing anytime soon, Baltic Shipping indices (admittedly a volatile and imperfect measure) have pulled back in recent weeks as anecdotal evidence that stockpiles for base metals and other industrial commodities have built to surplus levels that may at least warrant a breather for heavy imports in August.

FACING GUANGDONG - abchi45

We view the Shanghai Composite’s current level as unsustainable as more easy credit finds its way into the hands of more first time equity investors and prices reach irrational highs. We also believe that the internal demand spurred by the stimulus will plateau for a period in the near term unless the nature of that demand shows signs of broadening more rapidly than it has thus far. Neither of these opinions makes us bearish on a long duration basis necessarily, we simply manage risk in real time and focus on the math first, the narrative second.

Andrew Barber

Director


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Where's Wang?

Sometimes macro pictures capture much more than we can with prose…

Andrew Barber’s picture of President Obama shaking hands with The Client (China) today frames up this critical stage of American economic history quite well. These, as we say, are the early days of The New Reality…

KM

Keith R. McCullough
Chief Executive Officer

Where's Wang? - wang2


Yes, In Q2 US Housing Bottomed...

According to data released by the U.S. Department of Housing and Urban Development, sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes.  Consensus had forecast seasonally adjusted sales of 352,000. 

While the rate of improvement is consistent with our 2Q09 housing bottom call, the rate of sales is still 21% below the year ago levels.  For reference, four years ago (during the height of the housing boom), the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month.

This report is impressive given what is going on with existing home sales and all of the foreclosure activity, which is sending home prices significantly lower.

I think most people would agree that Obama's $8,000 tax credit for first-time homebuyers is having a positive impact, but what will happen when it goes away in December?

Importantly, the June inventory of new homes dropped to 281,000, an 8.8 month supply at current rates of sale; in May, supply stood at 10.2 months.  Most of the excess inventories tend to be concentrated in just a few markets, such as California, southern Florida, Las Vegas and Arizona. 

As we look forward, "the construction-put-in-place” data next month will likely suggest that housing will be an additive to GDP versus being a drag as it has been more recently.

Howard Penney

Managing Director

Yes, In Q2 US Housing Bottomed...  - housingch

 


Slouching Towards Wall Street… Notes for the Week Ending Friday, July 24, 2009

Home Court Advantage

Who is the tall dark stranger there?

Maverick is the name.

Riding the trail to who knows where

Luck is his companionGamblin' is his game.           

- “Maverick” TV series, Theme Song

The SEC has seen a couple of high-profile cases go the wrong way.  One recently hit a brick wall (WSJ, 18 July, “Mark Cuban Scores In SEC Case”) when a federal judge in Dallas threw out the SEC’s insider-trading case against billionaire Mark Cuban.

At issue was Cuban’s alleged promise not to sell his 6% stake in the common stock of Mamma.com after a phone conversation in which the Mamma.com CEO told Mr. Cuban about a proposed PIPE (“Private Investment in Public Equity”) offering.

We are not attorneys, and we offer here only our own observations from a compliance professional’s perspective.  We caution that you should not rely on this for a legal interpretation.  Nor are we giving legal advice.  We are – like Jim Cramer – just providing entertainment.

That being said, it is clear that what Judge Sidney Fitzwater, of the US District Court in Dallas, has done is to define the concept of Duty in very specific terms.  In so doing, he has stuffed the SEC’s attempt pretty decisively.  As the Journal article points out, quoting a former SEC Enforcement attorney, the SEC “already put in all their best facts, and the court said those weren’t sufficient.”

What we like about this ruling is it says corporate executives can not use the law to bludgeon their shareholders.  It is clear to us that Mamma.com’s proposed capital raise was in violation of promises made to Mr. Cuban at the time he took his stake.  We can just imagine the conversation in the boardroom at Mamma.com’s offices.  No doubt, it boiled down to one conclusion: Mark Cuban’s gonna be pissed.

Based on this conclusion, the CEO seems to have hit on the brilliant strategy of calling this significant shareholder and, in the jargon of investment banking, “bringing him over the wall” by disclosing that the financing was going forward.  The CEO no doubt figured that, once Cuban knew of the proposed offering, he would be prevented from selling his shares – to do so, the CEO reasoned, would be a textbook case of insider trading.

Indeed, according to the SEC complaint, Mr. Cuban’s response was “Well, now I’m screwed.”

But the court thought not. 

This ruling leads to the conclusion that, while recipients of information may not disclose it, they may be permitted to trade on it.  We should point out that this is not the first time this concept has been applied to exonerate people accused of insider trading.  But coming from a federal district court, and in such a high-visibility case, this hits the SEC where they live.

The longstanding practice of the SEC Staff has been to prosecute persons or entities for trading in a security while in possession of MNPI regarding the issuer.  The Dallas ruling appears to hold the Commission to the strict letter of US insider trading law, which prohibits trading on the basis of MNPI.  According to the definition which the court appears to favor, mere possession of such information also does not create Duty – the other required element under US law.  Indeed, the court found that even being a major shareholder and having a conversation with the CEO does not in itself create a Duty.

We think this is a big ruling.  It puts executives of small companies on notice that they can not use securities laws to manipulate their shareholders.  It puts large shareholders on notice that they have rights and remedies, and that they must be properly guided as to how to proceed, in order to best protect those rights.  And it puts the SEC on notice that they can’t make up the law as they go along. You thought activist judges were a problem – how about Activist Regulators?

It is not lost on us that Mark Cuban (“Luck is his companion”) is the owner of the Dallas Mavericks, and that the court that threw out the SEC’s case was the US District Court in Dallas.  The SEC lawyers assigned to this case couldn’t even figure out how to forum shop for a better venue.  And from reading the complaint and what has appeared in the press, the SEC’s case hinged on whether or not Mr. Cuban had promised not to trade on the information allegedly conveyed in the phone call.  The complaint was drafted to rely solely on the alleged promise not to sell the shares.  The complaint further relies on one of the most difficult things of all to prove in a court of law – intent and mental state.  In legal terms it’s called “scienter”.  How the SEC’s attorneys figured they were going to prove scienter in this case is anybody’s guess.  We think it is not the hubris of hindsight to suggest that, with the entire case hanging on the intent embodied in a single telephone conversation between two men who are out to get one another – and with the single key sentence in that conversation under dispute – it would have been prudent to add some meat to the complaint beyond a single deniable utterance.

This looks like rather poor lawyering.  Clearly, the SEC attorneys who prepared this case will not be offered high paying jobs on Wall Street any time soon.  No, only the really smart lawyers get to leave government and go to work on Wall Street.  Those not competent enough to get an offer from Goldman Sachs stay on at the SEC.

 

Them As Can’t

Do or do not.  There is no “try”.

- Yoda

Speaking of those at the SEC who didn’t get an offer from Goldman – as of this writing, we still do not know where Lori Richards will go when she leaves the Commission on 7 August.

Richards has served as head of the Office of Compliance Inspections and Examinations (OCIE) since it was created in 1995 under Arthur Levitt.

“It was completely my decision to step down” she has told the press.  This was no doubt in response to the poor showing she made in her appearance before Congress in February, where she did not discuss how it could be possible that Bernard Madoff perpetrated a decades-long scam to the tune of tens of billions of dollars, yet her Office’s examinations consistently failed to turn up anything suspicious.

Or Ms. Richards may be responding to the widespread perception that Enforcement Chief Linda Chatman Thomsen had been bounced as Part One of a one-two combo, and that Ms. Richards would be heading for the exit in short order.  Thomsen’s departure was announced just after the disastrous February appearance before Congress where both ladies played leading roles.

Ms. Richards and Mary Schapiro are understood to have enjoyed a close professional relationship, one that should have been enhanced by Schapiro’s move to the Commission.  It is our understanding that, while Richards knew she would have to go, she prevailed upon Schapiro to give her time to find a colorable position in the private sector.  Her colleague Thomsen returned to her old haunts at the high-profile law firm of Davis Polk.  But Ms. Richards has so far come up with no offer.  And her time has run out.  In between all the quotes about it being “my decision” and her re-entering private life, we note there is no announcement of a next professional step.  We are hearing that no one wants to touch her professionally, and that the next head of OCIE will have a full plate just overcoming the sins of the past.

One might make a small allowance for Ms. Thomsen that is not available to Ms. Richards.  The Enforcement Division received tips about Madoff and failed to act on them.  That is bad enough.  Yet, whatever the failures of the Enforcement Division with respect to the Madoff case, it is generally up to OCIE to make an enforcement referral.  Enforcement typically goes after investigations based on what the examiners turn up, and since the allegations against Madoff did not come from his own family or firm insiders, they were likely automatically classed as rumors.

Or, there was a cover-up.

In 2001 John Mack, CEO of Credit Suisse First Boston, hired Gary G. Lynch, then a partner at Davis Polk & Wardwell, and a former SEC Enforcement Chief.  Lynch became CSFB’s General Counsel, reporting directly to the CEO.  In 2005, John Mack became Chairman and CEO of Morgan Stanley.  The next year, he hired Davis Polk partner Eric Grossman to become Morgan’s global head of litigation.  Davis Polk, where Ms. Thomsen is resuming her career in private practice, is also home to former SEC Commissioner Annette Nazareth, and former Acting Head of Market Regulation, Robert Colby.

We think it can nut be just bad luck that Ms. Richards is having such a tough time landing.  Now, it is clear that Ms. Richards’ time has just plain run out.  In the testimony of fired SEC Staffer Gary Aguirre, he refers to John Mack as being untouchable because he has “juice” – the ability to contact the Director of Enforcement directly.  Clearly, Lori Richards never came close enough to getting anyone really big in any serious trouble.   Can it be that, after being the only Director OCIE has ever known, no one in the private sector owes her any favors?

Can it be that OCIE’s bailiwick was so restricted, and Ms. Richards’ running of her Office so tame, that after fourteen years, she has not a drop of “juice”?

That looks stunningly incompetent – even by SEC standards.

 

Boxing Out

You watch some teams these days and you wonder if they just met on the playground and decided to choose up sides.

-Dennis Rodman    

The going has been rough for the SEC of late.  No sooner does a Dallas judge ring the curtain down on a high-profile insider trading case, than they go into a paroxysm of chest-thumping over a case they won on paper but that, like the Cuban case, appears to narrow the SEC’s powers.

The Commission issued a press release this week claiming victory in its case against Perry Corp, a $6.6 billion hedge fund.

What is odd is the language the SEC uses in characterizing this case.  Their press release (21 July, SEC 2009-165) is titled “SEC Charges Perry Corp With Disclosure Violations In Vote Buying Scheme”.  An intelligent person who did not read the article might believe Perry Corp had bribed corporate directors to vote on a corporate matter.

In fact, what Perry Corp did was to buy shares of Mylan Labs, in order to vote in favor of a corporate transaction.  Perry had taken a large position designed to yield a profit when the pending merger between Mylan and King Pharmaceuticals closed.  Subsequently, a large activist investor entered the picture, this time with Hart-Scott-Rodino clearance to acquire Mylan shares.  This investor proceeded to buy the shares, file a 13D, and announced its intention to solicit proxies against the Mylan-King merger.

According to the SEC complaint Perry, to protect its own position, started buying up Mylan shares, planning to vote in favor of the merger.  In acquiring these shares, Perry took two steps, both of which feature prominently in the SEC’s complaint: their traders allegedly instructed their banks to buy the shares outside of normal market hours in such a way as the purchases would not be widely reported; and they reportedly entered into swap contracts to hedge out the risk of owning the additional shares.

In the complaint, and in press coverage surrounding the case, much is made of these swap contracts – indeed, they feature so prominently in what has been written that one might believe the case is about the swaps themselves.

We have seen an inverse type of transaction, where portfolio managers wanted to exercise control over shares, but without owning them.  This is done to avoid having to report under the provisions of Section 13, or of Hart-Scott-Rodino.  They enter into a long-side swap for the shares, in some cases instructing the bank how to vote the shares.  The portfolio manager owns the economic consequences of ownership of the stock, though not the stock itself.  There is a certain logic that the bank should vote the shares as the swap-buyer dictated.

In the Perry case, the SEC is not alleging that swaps were improperly used to cloak ownership of either shares or votes – just that swaps were put on the long position, thereby hedging out the economic risk of owning the additional Mylan shares.

What first caught our eye was the settlement.  Perry is paying $150,000 to settle this case – on a transaction where they acquired just under ten percent of Mylan’s shares.  The SEC case focuses on Perry’s purported obligation under Section 13 of the 1934 Act.  The amount in question – $150,000 – is a small settlement, given both the depth of Perry’s pockets, and the general seriousness of Section 13 violations.

As with the Mark Cuban litigation, the Perry case focuses on narrow matters of law and SEC Rules.  A key element of the case is the question of whether the 13D – the filing that Perry did not make – is specifically intended for takeovers.  The SEC argued that the 13D is a catch-all filing.  Perry Corp believed that its acquisition of the additional Mylan shares were “in the normal course of business” and exempt from filing.

Whatever merits underlie either side’s arguments, we were stumped by the noisy discussion of the swap contracts.  Clearly, this is an exercise in public consciousness raising – tinged with fear-mongering – on the part of the Commission.  For the purposes of generating public outrage it does not matter that the swaps were not what was wrong with the transactions.  Because swaps, like all derivative contracts, are poorly understood by the public and by legislators alike, the SEC has a free hand to do a little public pitchfork-waving at the expense of the truth.

As one industry participant observed, with all the uncertainty around regulatory reform, all these agencies are boxing one another out under the basket, each hoping to snag the rebound of increased regulatory turf.  The SEC apparently wants to regulate swaps, and will be expanding that to other derivatives as well.  They appear not to have thought through the implications of the Commission’s own lack of experience in those markets, nor of the budgetary constraints that should make this expansion impossible.

Industry observers have expressed admiration for Chairman Schapiro’s ability, in the aftermath of Madoff, to hold on to, and even expand the Commission’s turf.  The whole world of derivatives regulation is up in the air.  The SEC appears to be using every opportunity to increase its areas of oversight – but so are the CFTC, the FDIC, Treasury, and the Fed.

This jump ball begs the issue of how one can entrust increased regulation – and in areas in which its staff is not even trained – to a government agency that is not well enough capitalized, or well enough run, to oversee its own discreet marketplace.

Frighteningly, it looks like the answer may be: It’s not, but since we are politicians, that’s all right.

 

 

Is This The Person To Whom I Am Speaking?

I don’t need to talk to you, Jerky!

          - The Jerky Boys

Last on this week’s litany of SEC near-successes is the case of SEC vs. Eric Todd Seiden.

According to the SEC complaint, “Seiden has fraudulently induced at least fifteen broker-dealers to buy over $1.8 million of thinly-traded stocks.”  How did he manage that, you ask?

“On numerous occasions from at least October 24, 2008 to the present Seiden, a former securities professional, telephoned broker-dealers, falsely identified himself as a customer or customer representative, and place large orders to purchase a thinly-traded stock for the customer’s account.”

Seiden, a 38-year old resident of Boca Raton, worked as a registered representative from 1993 until October of 2008, which is the month in which his alleged fraud started.  Seiden knows lots of folks on Wall Street.  He has worked at a number of firms and knows lots of folks, both professionally and socially.  Using the names of individuals, and of customers that h has known off and on over the years, Seiden allegedly placed calls to at least 24 different firms to have them buy large blocks of penny stocks.  These trades would typically not be discovered as problems until at least T+1, when they would be rejected for delivery by the firm that allegedly placed the order.

One point that stands out in the SEC’s complaint is that the traders and brokers at these firms all know Seiden.  Trading desk tapes were played back for some of them, and they immediately recognized his voice.

Another point that emerges – in the Prayer For Relief at the end of the Compliant – is the SEC has not yet determined the purpose of this behavior.  One would naturally assume that Seiden first established positions in these illiquid stocks, then, by placing fraudulent orders, created the liquidity to make his own positions profitable.  But the SEC has not yet determined whether such trades were ever done, so they only ask for disgorgement of any illegal profits Seiden may have received from this activity.  We find it curious that the SEC has not tracked down Seiden’s motive.  This looks like the SEC moving swiftly to put a stop to fraudulent behavior.  It may take more time to track down Seiden’s own financial interest in this matter.

But the big kicker on all this – compliance officers take note – is that these trades are not being reversed.  In each case, the name of the broker or trader who allegedly gave the order was known to the executing firm.  That is why Seiden gained access at all.  But it was Seiden himself, and not the person whose name he used, who placed the orders. 

Once this scam came to light, compliance officers and lawyers from the brokerage firms were on the phone immediately to the firms on the other sides of these trades, insisting that the trades be broken. 

But trades are not being broken, and after a certain amount of huffing and puffing, the calls are being abandoned and the trades allowed to stand.

As with every scam – Madoff comes to mind – there were those who did not take the bait.  There were firms that were approached with orders from Seiden, and that declined to do the trades.

As to those firms that went through with it and made the purchases, trades are being left to stand.  They are being told they did not know their customer.

‘Nuff sed.

 

 

Out F Depths I Call 2 U OMG Hr My Voice

As any religious person will tell you, God is everywhere.  Those who have searched in vain for the presence of the Almighty on LinkedIn, Facebook and MySpace can now take comfort: the Lord has achieved a virtual presence.                                                                   

For nearly two millennia, Jews from around the world have made their way to the Western Wall in Jerusalem – known in Hebrew simply as the Kotel, the Wall.  They have scribbled their hearts’ deepest longings and sorrows and fears on scraps of paper and, with trembling fingers, inserted them in the crevices of this ancient wall, the only part of the Temple still standing.

Now “TheKotel” on Twitter will take your Tweeted prayer, print it on a suitably small piece of paper, and insert it in the crevices of the Wall.  There is no charge for this service – those who carry out the task in the Holy City do so for the reward they will reap in the World to Come.

We wonder whether President Obama will take advantage of this service.  As Candidate Obama, he was mobbed when he visited the Wall, and his prayer note was stolen, allegedly by an enterprising yeshiva student – though to our knowledge it has not surfaced on eBay.  Now, with the anonymity of electronic communication, he can pray from the safety of the Oval Office, and his fervent words can be hand-delivered to the Almighty.

In the past, Israeli soldiers were often permitted unrestricted use of cellphones.  This has led to terrifying, yet at a distance comical moments of young men calling friends and family from the battlefield.  Now these youths will be able to Tweet their prayers from the heat of battle, then call their mothers while the bullets whiz by.

Yea verily – having formally entered the 21st Century, now the Lord is truly everywhere.  Watch for LinkedIn invites from Jehovah.

Moshe Silver

Chief Compliance Officer


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