Correction, Not Crash

“A man’s feet should be planted in his country, but his eyes should survey the world.”
-George Santayana
Although he was considered an American essayist, George Santayana spent only 39 of his 89 years living in America. He was born in Spain and he, like many global macro investors of today, spent a lot of time surveying the world.
While it’s very difficult for most US centric investors to get away from the glaring levels of groupthink associated with everything that dominates the news flow of their day, that’s definitely a reality that you should be capitalizing on.  Wake up in the morning with a global macro process. Give yourself a competitive edge.
After a 2-day -3.3% low volume correction in the US stock market, you saw plenty of pundits calling for another crash last night. I’ll save the crackberry analysts on Fast Money the embarrassment and not call them out by name. One of those guys is having enough problems with basic pronunciation. It’s China – not “Chinarr.” It’s called a correction, not a crash…
Until we have replaced the CNBC crash calling with a basic understanding that we call these small percentage moves off of higher-YTD-highs, corrections, this US stock market will continue to set up to make higher-lows. Buying Thursday’s highs and selling yesterday’s lows is going to simply expedite the long overdue exit of irrational supply from this US asset management marketplace.
Back to the global marketplace, no you aren’t hearing much about yesterday’s nonsensical “Japan was weak” narrative this morning. Why? Well, probably because Japan wasn’t down last night. One factor model (price momentum) investing has its challenges. You are perpetually chasing price.
In Asia, we saw both Hong Kong and China put on +0.84% and +1.4% stock market moves, respectively, after Hong Kong posted an improved employment picture. At 5.4%, not only is the unemployment rate nominally low to begin with, but it stopped going up sequentially. This, on the margin, is better than bad. We still saw some follow through selling in Taiwan (-2.1%), Indonesia (-2.1%), and the Philippines (-1.4%)… and that’s less than great… but don’t forget how much most of these Asian stock markets are up YTD. Again, it’s called a correction, not a crash…
In Europe, we’re seeing a solid rebound from the 2-day correction after Germany posted one of the best country confidence readings that we have seen in global macro for 2009. Germany’s ZEW Index (economic sentiment) shot straight up to 56 for the month of August. That report was 39.5 in July. This report was the best sentiment reading for the Germans in over 3 years. We’re long Germany via the EWG. Yesterday’s selloff in the German DAX index is called a correction, not a crash…
In Commodities, after hitting a new YTD high on the same day that the Chinese stock market hit hers (August 4th), the US Dollar up move equated to another -1.6% correction in the CRB Commodities Index yesterday. Not surprisingly, two of global macro’s leading indicators (oil and copper) are rallying this morning as the US Dollar stops going up. A 2-week -6% down move in the CRB Commodities Index from its YTD high is called a correction, not a crash…
As the perceived safety trades for US centric investors (US Dollars, US Treasuries) sucked people into buying them high yesterday, I am going to remain on the other side of both of those ideas. Buying things that are actually crashing when they rally to lower-highs is what plenty a smartest fund master of the universe tried last year. It’s called averaging down – and until you can find a bottom, it doesn’t work.
So what am I doing now? Watching… I did my buying yesterday (covered the AAPL short, bought FCX, bought XLB, etc...). The last thing I am going to do is buy them today on the way up. While I don’t think its that generational of a mind shift to be buying low and selling high, I can assure you that it’s currently not a consensus strategy. Why? Primarily because the clients don’t let US centric managers invest that way right now. Durations have been shortened and emotions have heightened, as a result.
Hong Kong (Hang Send Index), London (FTSE), and New York (SP500) are all holding comfortably above their respective immediate term support lines this morning. Those risk management lines are 19846, 4547, and 972, respectively. As I survey the world this morning, I see that 3-factor setup as bullish. What you have seen so far is called a correction, not a crash…
Best of luck out there today,


XLB – SPDR Basic Materials We bought XLB into a -4% down move on 8/17. As the USD continues to burn we want to long its inverse correlation to Basic Materials.

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10 and 8/17. As the Buck breaks we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

COW – iPath Livestock This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

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.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

VXX – iPath VIX As the market rolled over and volatility spiked, we shorted the VXX on 8/13.

UUP – U.S. Dollar Index We believe that the US Dollar is a 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 US dollar.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

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.


GC put up another strong quarter last week.  The company finally seems to be executing on what should be a terrific business model.



For its Q2 reported last week, Great Canadian came in line with Street revenue but beat EBITDA expectations.  EBITDA was right in line with our estimate.  Given the subsequent move in the stock, investors clearly liked what they saw.  As we wrote about on June 30th in “TAKEAWAYS FROM A GREAT TRIP TO VANCOUVER” and “GC: GOOD CANADIAN GAMING” on April 4th, we have high hopes for GC heading into 2010.


After a long series of disappointments, this management team has demonstrated a clear ability to adapt to a difficult operating environment.  Over the last two quarters of solid performance, GC management has regained much credibility from an investor’s perspective.  Great Canadian achieved $10.2MM of y-o-y cost reductions in 2Q09 with an incremental $3.6MM of cost savings recognized in the quarter, compared to the $6.6MM of savings achieved in 1Q09.  GC believes that the majority of these cuts will be permanent.  We’ve heard that claim many times in our sectors but, as skeptical as we are generally, we believe that in this case there was a lot of fat to cut.  


The impact of the economic downturn is most visible in lower levels of slot play across the majority of GC’s properties.  GC is looking to refresh their slot product in an attempt to stimulate demand.  As a reminder, the British Columbia Lottery Corporation (BCLC) owns the slots and pays for their replacement.  There are also some new marketing initiatives involving the opening of the Canada Line for River Rock. The completion of the Canada Line, and slot installations at View Royal and Georgian Downs, will eliminate any disruption of construction at those properties.


View Royal will add 120 slots on August 18th and Georgian Downs will add 400 slots on August 26th, followed by an additional 150 slot additions in 2Q2010. Both of these facilities are operating at full capacity on the weekends:

  • We think that View Royal had an average win per day of approx $500
  • Georgian Downs had a win per day in excess of $600 (we think $625)


The Canada Line will begin operating the week of August 17th and GC will complete the parkade in September, and all renovations at its property will be finished by November (2 months ahead of schedule).



Management guided to 32% EBITDA margins going forward, which was above investor expectations. If GC can meet their margin targets they will continue to beat Street estimates, which we think are too low for the rest of the year.


Property level review:

-River Rock Casino revenues were $3.3MM below our estimate and EBITDA was $1.7MM below our estimate, primarily due to low hold on table games

  • Gaming revenues, including FDC funds, were 2.1MM below our projection
    • Table drop was slightly better than we expected, only down 2% y-o-y, however low hold of 18.3% versus normal hold at the property of 22% negatively impacted table win by $5MM
    • Slot coin in was weaker than we expected, down 16% versus our expectation of being down 10%
    • Property level expenses were $1.5MM below our expectations, down 22% y-o-y            

-Boulevard Casino revenues were $0.5MM lower than our expectations; however, EBITDA was a little better than we predicted due to deeper cost cuts

  • Gaming revenues, including FDC funds, were in line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.9MM

-Vancouver Island Casinos’ revenues and EBITDA came in line with our expectations

  • Gaming revenues, including FDC funds, were line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.6MM
  • The View Royal slots aren’t coming in until August vs our estimate of 2Q09

-BC Racinos revenues were in line with our expectations with weak racing revenues offsetting slightly better gaming revenues. EBITDA was $0.6MM higher than our estimate due to lower expenses.

  • Gaming revenues, including FDC funds, were ahead of our expectations by $0.4MM with strength in both table drop and slot coin in driven by the increased gaming capacity at Hastings




Visitor spending per-capita decreased to MOP1,527, a 5% year-over-year change for the second quarter.  Mainland visitors spent the most, spending MOP3,564 per capita, while those from Taiwan, South East Asia, and Hong Kong, spent MOP1,705, MOP1,684, and MOP1,112 respectively per capita. 


Compared with the second quarter of 2008, per-capita spending of tourists dropped by 12% to MOP2,088, while that of same-day visitors rose by 2% to MOP471.

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MPEL's City of Dreams beaches a whale.



We're hearing that a jumbo jet belonging to the royal family of the United Arab Emirates was parked in the Macau airport this weekend.  We're pretty sure that a member(s) of the family was staying at MPEL's City of Dreams (CoD).  VIP volumes should look strong again at CoD in August and, hopefully, revenues will as well.


August started out strong and keeps getting stronger. Visitors are pouring into Macau from HK, Venetian may have had its best weekend ever, and the junkets are playing lucky.



Another set of positive nuggets emerging from Macau:

  • Huge weekend in Macau
  • Hong Kong providing a lot of the visitation
  • August has been strong thus far but is getting even stronger
  • Venetian may have had its best weekend ever
  • Junkets holding very high so far in August


Our sources in Macau indicate that visitation this weekend was off the charts, on top of an already strong August.  The casino floors were packed all weekend.  The event calendar was strong - as usual recently - including Linkin Park performing at Venetian.  Venetian may have had its best weekend ever.  It seems that incremental visitation is coming from Hong Kong residents, who don't face visa restrictions, and mainland Chinese tour groups.  Anecdotally, August VIP volume was solid but more importantly, junket hold has been through the ceiling.  Volume may have been boosted by the visit royal family from United Arab Emirates as one of their jumbo jets was parked at the airport.  


Obviously, the recent surge in volume is a big positive for LVS, MPEL, and WYNN.  The August numbers look even better considering that August of 2008 was a very strong month (see chart below).  Comps ease considerably beginning in September which should make it easy for Macau to continue the positive momentum.




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