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MASS IS THE WORD destination-macau.com

Although July’s visitor statistics showed that the overall market was down almost 15% year-over-year, this year’s number up 20% month-over-month and was facing a difficult y-o-y comparison with a record July ’08 figure. DM also states that it wasn’t until the middle of the month that mainlanders began “to stream across the border again” and that “August is proving to be a cracker”.

DM’s people on the ground are suggesting that the crowds on the floors look “like they do with weekend crowds”.  August is traditionally a good month, and it was only in September last year that the visa restrictions really began to bite so September will be key to keeping up the positive sentiment.


HERE COMES VML destination-macau.com

The Venetian is going to be looking good once month-end numbers come out.  VML (Venetian Macau Limited) can absorb the kind of volume it is seeing recently with ease and the timing is perfect for the operator.  Steve Jacobs, president for Macau, has been doing an impressive job cutting costs and ramping up revenue.  A local news outlet reported that 1,000 (speculation is that it could be as many as 3,000) people had been let go since Jacobs came on board, including people transferred to Singapore and to City of Dreams. 

Meanwhile, revenue is increasing.  DM suggests that US$1 billion in EBITDA could be possible at the three Macau properties over the next twelve months.  DM sees LVS as having a lot of potential; there is a possibility of an IPO in the near future, loan covenant pressure could be alleviated, possible assets sales and also a superior lodging product among the current “sordid” hotels on the peninsula. 


WHO’S A DIRTY ROTTEN SCOUNDREL, THEN? destination-macau.com

Allegations are already flying around among Macau concessionaires regarding who is breaking the previously agreed junket commission cap of 1.25%.  Some are claiming others are offering 1.4%, others that 1.25% plus a 0.2% bonus is being offered. 

It is difficult to know if Melco-Crown is involved in such behavior, but the rumor certainly is out there. It could be true, or it could be junkets trying to stir the pot in order to get other operators to raise their commissions in retaliation.  Junkets like Dore and Sun City are teaming up at the Lan Kwai Fong hotel to form a revenue share deal with SJM.  While the rooms at Lan Kwai Fong Hotel can’t compete with WYNN’s the margins are certainly juicier there, especially on mass play.


WYNN WILTING? PUH-LEASE! destination-macau.com

Wynn’s IPO application is being reviewed by the HKSE September 10, and could launch the public offering as soon as October.  Some competitors are taking pleasure from the recent market-share numbers which show Wynn falling down the pecking order.  City of Dreams, MGM Grand, and StarWorld are going after Wynn and his biggest junket operator is setting up show at the Lan Kwai Fong hotel.  That’s not to mention that L’Arc is opening up across the road.

DM believes that Wynn is not going to get involved in a discount war, seen as it is a five-star property, and that EBITDA is what counts – not revenue.  Encore opening up in the second quarter of next year will raise the bar on the luxury gaming experience in Macau.


SJM: BIDDING WAR TO COME? destination-macau.com

DM is quoting “Wife No. 3” in saying that Stanley Ho is not going to leave the hospital any time soon. Bankers are starting to consider the possibility of a bidding war breaking out for control of SJM Holdings, the HK listed owner of Sociedade de Jogos de Macau, the gaming concessionaire.

Should Stanley Ho concede all of his voting right in STDM, which owns 61% of SJM Holdings, it would still be insufficient to ensure a result at an EGM if one were called to replace Dr. Ho.  The remaining decision makers, Ho's sister Winnie, the charitable foundation of the late Henry Fok and tycoon Cheng Yu-tung are unlikely to simply choose a contender from Pansy Ho, Lawrence Ho, Angela Leong. Therefore, control will likely be gained by whichever party wants to step up the plate and put forth the highest offer. 

Numb Is The New Deep

“Numb is the new deep, done with the old me, and talk is the same cheap.”

-John Mayer


From George Carlin to John Mayer, we’re finding ourselves some new ideas this week. I am industry agnostic. I am looking for professional thought leaders who are right  - not those crusty “strategy” dudes on the sell side who get paid to report yesterday’s weather.


Mayer likes to make calls on the weather. From his song, The Remedy, Mayer will remind you that  “you can turn off the sun, but I'm still gonna shine.” He grew up close enough to Wall Street people (in Fairfield, CT) to understand this gong show, and he seems to be striking a strategic chord with where all the US market group thinkers are at right here and now. The metaphor is dead on - this market is numb.


To mix a little Research Edge with some PIMCO and Mayer, Numb is The New Reality, the “New Normal”, and the “New Deep”. Top to bottom (on a closing basis) the SP500 has traded in a 5 point (1025-1030) range this week. This is also The Grind.


Yesterday I explained that The Grind perpetuates the inertia of a Ball Underwater. Once we get through month end for August (Monday), I’m looking for a big move. That Ball Underwater is going to move to the bull or bear side, big time.  The US Dollar is going to decide the direction.


Unlike some, I don’t wake up looking to be bullish or bearish. Some market psychologists have labeled that “confirmation bias”, and I think they are spot on with that. In a global market place whose factors are as increasingly interconnected as this one’s continue to become, you have to be thesis agnostic. As the facts change, you should.


As I look across the global macro factors in my notebook this morning, more of them are color coded green.


Green is good. Red is bad. The market is numb.



What’s flashing green?


1.       The US Dollar failed to breakout through the immediate term TRADE line yesterday ($78.58); it backed off hard, and REFLATION took off


2.       Daily Risk/Reward for the SP500 this morning moves from negative to neutral (1012 support versus 1049 resistance)


3.       The SP500 made a higher-YTD-high yesterday at 1030 on accelerating daily volume (day over day volume was +14%)


4.       The VIX (US Volatility) continues to trade below the immediate term TRADE line of 25.09


5.       All 9 SP500 sectors in Howard Penney’s Sector Views continue to flash positive TRADE and TREND


6.       Asian markets, away from the Chinese local A-shares, continue on their bullish path making higher-lows on all selloffs


7.       Western European equity markets are up 1-1.5% across the board, led by Germany, trading up +1.4% at +15.4% YTD


8.       Eastern European equity markets are up double the West Side, being led by Poland, trading up +2.8% after posting POSITIVE +1.1% y/y GDP for Q2


9.       3-month LIBOR (the rate over which the world lends) is hitting another YTD low at 0.36%! (yes, that’s a ZERO)



What’s flashing red?


1.       The immediate term range of the SP500 continues to expand; now at 74 points wide versus last Friday when it was 40 points


2.       The US market’s breadth continues to deteriorate as we hit new YTD index highs (advance/decline line yesterday was +54% to -44%)


3.       China closed down -2.9% on the Shanghai Composite last night, breaking down through my intermediate term TREND line of 2,959


4.       Japanese unemployment spiked +30bps m/m to +5.7% from +5.4% in June


5.       Oil and copper prices are testing YTD highs again this morning; this assures us that we will see Reflation Rotation (into y/y inflation in Q4)


6.       UK Consumer confidence for August didn’t budge; at -25, the report is in-line with last month’s



What’s making this market numb?


1.       Money


A)     The US Federal Reserve’s Balance Sheet expanded for the 3rd consecutive week to $2.07T (that’s TRILLION)


B)      On a year-over-year basis, the Fed’s Balance Sheet has expanded by $1.2T (that’s TRILLION)


C)      M2 (money supply) growth is now running +8.5% annualized


Money, money, money… as John Mayer wrote: “Never, ever underestimate the power of I’d like that.”


Whether it’s a $16B US Madoff fraud or a $2.07T Balance Sheet, a “B” of this and a “T” of that ain’t what it used to be. Neither is a US Dollar. After the most expedited short squeeze in modern US market history (+52.4%!), this market is numb to it all at this point…


Was it Ben Bernanke or Alan Greenspan who said that the “MAX” that US Money Supply should grow is +5% year-over-year? Was it Ben or Alan who called this a Great Depression first? Was it some dude in Poland or the Philippines who just put up his hand in the last 48 hours calling out that their respective countries are still running positive GDP growth in that said Depression?  Who cares when we’re numb right…


“Numb is the New Deep” and Wall Street to Washington market strategy “talk is the same cheap.”


Have a great weekend with your families,




  • EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.


  • EWZ – iShares BrazilPresident 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 reflation call.


  • QQQQ – PowerShares NASDAQ 100We 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.


  • 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.




  • LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


  • XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.


  • DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21.


  • 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.


Forecasters were surprised by Q2 GDP data released in the Philippines today as the island nation’s economy grew by 1.5% on a year-over-year basis driven in large part by government stimulus.




Incremental improvements in smaller South Asian economies like the Philippines, Thailand and Malaysia are sending clear signals that demand is strengthening throughout the region as low relative rates help coax increased consumer spending and capital investments despite continued malaise in many exports markets in the west. Resilient demand from China is also moving the dial as exports and re-exports bound for “The Client” make up an increasing portion of total foreign trade (see the chart below showing US & China bound Exports as a % of Philippine total shipments.




Although we do not take positions in smaller economies like the Philippines, we follow them closely looking for signals and confirmation for our regional investment thesis.


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 80.51%
  • SHORT SIGNALS 78.32%


Today’s Initial Claims figure registered at 570K, down 10K from last week’s revised level but still higher than the four week moving average by almost 4k.


The rising trajectory of Claims figures since July has fueled increasing discussion of the “jobless recovery” thesis that many bears have been promoting.  We are not entirely opposed to this thinking: while unemployment and sentiment have improved sequentially as we had expected over the first half, we now believe that there is as high a probability that both will begin to deteriorate as there is of a continued improvement from here and, on the margin, this is both new and negative.


Note that from our view, the perverse mechanics of dollar degradation make it possible that converging negative factors like this can actually be a positive catalyst for US equities if they drive the dollar lower and foreign buyers take advantage of the discount.


Andrew Barber





Bullish German Data Points

A survey of German consumer confidence by Gfk indicated improving sentiment in its September reading. Sentiment increased to 3.7 from a revised 3.4 in August; economic expectations jumped to 8.8 from 1.8; and an index of consumers’ propensity to spend rose to 31.1 from 25.1.  This comes on the heels of yesterday’s announcement from the Ifo institute that its German business climate index increased to 90.5 from 87.4 in July, the fifth consecutive monthly sequential improvement.


These surveys suggest increased expectations for continuing recovery, which should translate into increased consumer spending in the near term. Retail Sales data continue to show a mixed picture however, with a separate survey from Markit Economics reported today that its German retail sales index, adjusted for seasonal swings, eased to 49.5 from 49.8 in July, the smallest rate of decline in over a year, yet under the 50 mark signaling contraction.


One consumer spending factor that is crystal clear is the impact of the cash-for-clunkers program on household expenditure. The Federal Statistical Office reported that Germans spent some EUR 36 Billion on purchases of motor vehicles in the first half of 2009, which represented a 23% increase compared to the same period a year ago. These purchases helped contribute to a rise of 0.1% in total household expenditure, which would have equated to a -1% decline in total consumption expenditure without the program.


Other German fundamentals continue to signal sequential improvement. On Monday EuroStat reported that German industrial production rose 4.6% in June month-over-month (+3.1% in Eurozone), after it rose 4.2% in May. We hold that Germany’s recent CPI and PPI figures represent a healthy short term deflationary environment. Today the National Statistical Office reported that August CPI is expected to remain unchanged (0.0%) on an annual basis, from -0.5% in July Y/Y. On the month comparison CPI rose 0.2%, due mostly to a rise in fuel prices, while food prices fell between 0.9% - 1.7% on the previous month.


It’s our expectation that this price environment in Germany will hold for the next couple of months and, as such, that the purchasing power associated with a strong Euro/ imported deflation (July import prices were down 12.6% Y/Y or -0.9 M/M) will be a net benefit in the near term for the consumer,  so long as the country can maintain a trade surplus.  In the intermediate (TREND) to longer term (TAIL) horizon, a weak Euro will be essential for any significant improvement in exports. The latest GDP report showed that German exports decline only -1.7% from the previous quarter, while imports fell -5.6%, yielding a trade surplus that contributed a significant +1.6% of price adjusted GDP growth. 


Despite these positive readings we remain cautious as the stimulus benefit associated with the cash-for-clunkers program winds down into year-end and as short-time worker contracts expire. Short term contracts have greatly contributed to stability in the unemployment rate, and both sentiment and spending could falter as unemployment rises. For now these concerns are only shadows on the horizon, as German sentiment appears strong following the +0.3% Q2 GDP number. 


We’ll continue to monitor Germany—especially with elections approaching in a month—and the impact of Europe’s larger economies on the periphery. We sold our position in Germany (EWG) for a tactical TRADE last week. Look for us to buy Germany back on a down move.


Matthew Hedrick



Bullish German Data Points - a1



According to the WSJ, with SBUX trading at 23x consensus 2010 estimates, ”the company's stock price suggests that Starbucks will naturally start expanding again as consumers regain confidence.”


Naturally there are some things that I agree with in the article and some that I don’t, but nothing is new (the “people won’t drink pricey coffee” thesis is definitely not a new argument).


First, SBUX is much better off controlling the store assets than to sell off selected stores to improve margins.  Each store sold would be dilutive to EBITDA and not create shareholder value.  Very few restaurant companies have been able to sell stores and create value.  YUM did it successfully because its stores were severely underperforming, and therefore, the company benefited by getting them off the books.  I don’t believe this is this case for SBUX.


Second, SBUX does NOT need to start expanding again.  In fact that would be a mistake.  SBUX, unlike most companies, has the ability to grow globally, but the company would be better served to maintain its more recent disciplined level of capital spending.  Overtime, the company’s ability to grow globally will come to light.  Right now, the company is in the early stages of becoming better not bigger.  The opportunity for the company to generate more profits from its existing store base is massive.  That being said, it will ultimately need to get more customers in the door, which means the company needs to generate positive same-store sales.  The company’s national advertising campaign and new value combo offerings should help with this but increased consumer confidence and lower unemployment is needed for a real turnaround in sales growth (as is the case for most restaurant companies).


Third, I have to dispute the idea that “the mainstay cafe business [is] in doubt.”  This seems to suggest that the business is going away, which is just not the case.  Yes, SBUX’s earnings growth has slowed, but the company achieved double digit operating margins in the most recent quarter with same-stores sales down 5%.  Additionally, the company generated over $500 million dollars in free cash flow in the last 12 months.  The company will definitely benefit from an improved economic environment and positive same-store sales growth, but in the meantime, this company has improved its business model and is not going away.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.