Sentinel's Schapiro On China's Property Market


Thoughts on March, the VIP outlook and market share, and how much growth is too much?  Negative catalysts seem to be piling up.



The near-term hurdles seem to be piling up for WYNN and LVS:  high investor expectations, sequential monthly slowdowns, less liquidity on the mainland, potential visa tightening, tough 2nd half comparisons, and VIP market share shifts.



Based on our statistical work, we believe tightening and sequentially slowing growth in China constricts the Macau VIP business.  We haven’t seen it yet, unless March was a major disappointment, but we did get the first, albeit very preliminary, indication that liquidity could be an issue.  One of the largest junket operators noted that some customers are asking for longer repayment terms.  This could be completely anecdotal and we will be researching this further.  However, this scenario would be a logical first step in a liquidity fueled VIP slowdown.


The Triads and VIP Market Share

The Macau media was all over the alleged association between a “known” Triad member/junket operator and LVS.  LVS quickly responded that there are no junket operators with known associations with organized crime and/or shady organizations that are “on the books”.  The Macau government is likely to back up this assertion.  We also don’t think the Nevada Gaming Commission will want to open up this can of worms so the direct impact of the allegation is likely to be contained.


The general consensus of people on the ground in Macau is that the US operators do business with “shady” junkets unofficially.  While the direct impact may be minimal, the controversy from the LVS/Cheung story may draw scrutiny to the US operators and force them to distance themselves from these junkets.  Moreover, the junkets don’t like the media attention either, which may lead them to move their business voluntarily to the non-American owned properties.  Either way, the pressure on VIP market share at the LVS and WYNN properties may accelerate as we can see in the chart below.




March Revenues

There has been much debate about where March will shake out.  We think revenues will total around HK$14.0-14.5 billion, higher than the lowest estimate of HK$12.8 billion, but at the low end of consensus of HK$14.0-15.0 billion.  It didn’t help expectations that some analysts recently threw out projections of 60-80% versus our 52-57%.


So HK$15 billion would be great, right?  Well, not so fast.  I hate to bring up the dreaded V-word but the Chinese government has, in the past, tightened visa restrictions with less growth than this.  There has been very little talk in the investment community about visa tightening lately, but it is being discussed among the operators.  

The Coming Inflation Wave

Whether the American economy is in an inflationary or deflationary environment sounds like it should be a fundamental and settled question. But due to the unprecedented financial crisis, the answer is actually subject to intense debate among economists.


Making economic projections is far from a scientific process, so it's not surprising to find valid arguments on both sides of the divide. The economists who are right will help investors drive returns over the next three years.


Inflation can be a positive or negative, depending on the level and duration of it in our economy. The main negative associated with inflation is a drop in purchasing power of money, and therefore, consumers. In extreme cases, consumers may actually start hoarding if they fear continued and aggressive price increases. The positive side of inflation is to decrease the real value of debt, or essentially provide debt relief.


How do we measure the level and duration of inflation, to know whether it will help or hurt? In basic terms, inflation is a rise in prices of basic goods and services over a given period of time. In the United States, the government generally tracks inflation using the Consumer Price Index, or CPI.


Besides measuring inflation, CPI is also used to set income rates for more than 80 million people on entitlement programs. 48 million people on social security, 22 million food stamp recipients, and 4 million civil service retirees, have benefits tied to the CPI.


When inflation increases, so do their benefits. These payments are among the largest non-defense obligations in the federal budget. Not surprisingly, then, the government tends to understate inflation and has changed the way the CPI is calculated nine times since 1996.


Another common inflation metric is the Federal Reserve's core inflation, which it uses to measure overall inflation. The Fed excludes food and energy prices to smooth out short-term volatility. However, based on government data, food and energy purchases make up 36% of the average consumer's budget. The Fed's inflation graph might look nice and smooth, but it's probably not the best indicator for how your wallet feels when paying bills or buying groceries.


The Coming Inflation Wave - 1


So, conventional measures of inflation are imperfect at best. Which may embolden economists who dispute the idea that we are in an inflationary environment. They argue that our economy is too slack to be inflationary.


With a 9.7% February unemployment rate (the worst for February since 1983) and capacity utilization is at 72.7% (7.9 percentage below the average from 1972 to 2009), the thinking is, what's there to inflate? If employment and utilization of industry are low, then so are supply and demand which help set pricing levels. How, then, can prices possibly inflate?


Despite this argument, and primarily due to aggressively accommodative monetary policy in the United States and around the globe, we believe inflation is here, and poised to accelerate as all the slack in global economies begins to tighten. Measures of inflation for major nations around the globe give support to our conclusions: most of the G20 nations are reporting higher than normal inflation rates.


While we take some issue with the U.S. government's calculation of inflation, even federal economists have reported inflating prices this year. The January CPI came in at 2.6% and February reported at 2.1%. We expect March figures to accelerate even further.


The U.S. treasury and currency markets have also showed inflation signs for months, with the dollar up and the price of treasury bonds down. Also, as we recently noted to our clients, fixed versus floating interest rate swaps have turned negative for the first time in over a decade.


This means investors are aggressively betting that floating interest rates will increase, because the Fed, as it becomes more concerned about inflation, tends to raise interest rates to try and slow it down.


Back in the treasury market, 30-year treasuries have gone from yielding 3.73% to yielding 4.72% over the last year. That increase has happened for shorter-term treasuries -- the short end of the yield curve -- as well. And all these increases have happened despite the fact the Fed has maintained its target rate at 0 -- 0.25%. Bond yields, in other words, are already accounting for inflation.


The Coming Inflation Wave - 3


Finally, in the chart at the top of this page, we've plotted the Journal of Commerce Industrial Price Index over the last year. This index charts the price of key commodities that are used in industrial production. The chart is up and to the right, screaming inflation. Commodity inflation will likely lead China to report its first trade deficit in March in 6 years!


As they say, the markets don't lie, people do (or government statistics as the case may be). Based on the evidence above, we're sticking with our inflation call -- until the markets, and the data, tell us different.


Daryl Jones

Managing Director

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%

Overbought Is As Overbought Does: SP500 Levels, Refreshed

It’s been a fun quarter. Fortunately we didn’t get stopped out of any of our Q110 Macro Theme calls: Buck Breakout, Rate Run-up, and Chinese Ox In A Box. From time to time we’ve made overbought/oversold calls on the SP500 where our proprietary multi-factor model has signaled to do so. On the short side, not losing money in an up tape continues to be our daily risk management challenge.


While the SP500 was up yesterday, we said the SP500 would be overbought in the 1175-1178 range. Apparently it was. Since our model refreshes every 90 minutes of trading, we are getting a lot of questions as to what we see right here and now. As of this morning’s opening hour of trading, the SP500 has corrected -0.7% from our refreshed immediate term TRADE line of resistance up at 1177. We are seeing a controlled level of selling.


There is plenty of bullish support in this market across durations. In the chart below we have shown the immediate term TRADE and intermediate term TREND lines of support down at 1159 and 1120, respectively.


We aren’t calling for a crash. We, as risk managers, are simply telling you where the important thresholds are for the pain trade (which remains up).


Bull markets do in fact get immediate term overbought. Overbought is as overbought does.



Keith R. McCullough
Chief Executive Officer


Overbought Is As Overbought Does: SP500 Levels, Refreshed - S P

R3: DG: The Last of the Good?


March 31, 2010



TODAY’S CALL OUT - DG: The Last of the Good?


Based on what we see thus far, this solid print appears to be the post-offering peak for DG as it relates to rate of acceleration in business growth. Comp guidance is suggesting deceleration, GM yy compares get very difficult effective immediately, and SG&A/capex begins to accelerate along with stepped up square footage. If you want to buy this name, KKR will likely give you another shot at buying theirs. Be wary.


This morning Dollar General reported 4Q results, and by most measures this was as solid a quarter as one could envision.  The biggest surprise was the nearly 200 bps of gross margin expansion, not the robust same store sales growth of 7.4% which was in-line with expectations.  Clearly the company’s strategy of working with less vendors and focusing on category management is helping to produce volume discounts- which in turn is helping to reduce COGS.  As one of the few true growth stories (units and comps), it’s not surprising to see vendors step it up at a time when other more traditional formats are standing still.  We just wonder how sustainable this process can be over the course of 2010, especially when growth will begin to slow from peak levels.


Recall that we’ve been cautious on Dollar General and the overall space that generally caters to low income consumers.  Our view has not been that the sector is going to fall off of a cliff, but rather the marginal growth in the low income demographic is slowing while at the same time capacity (i.e new store openings) is accelerating.  This supply/demand disconnect is a scenario that will unfold over time, and one that is clearly not impacting current results.  We know this.  But what we also know is that 2010 represents a year where both top and bottom line compares for DG will be at their toughest in the company’s history.  Same-store sales momentum will slow and reliance on margin enhancing strategies such as “better buying”, increased private label penetration, and improvement in more discretionary categories such as home and apparel is far more speculative and risky than it has been over the past year.  We continue to believe momentum will slow on the margin, much like it has already done with the pace of Americans entering the “sweet spot” of the DG demographic.  For the near-term, it’s likely we’ll see another stock offering before there is a meaningful correction in the company’s momentum.  We have no knowledge of the exact timing of a secondary, but we’re pretty sure there is a road show coming to town very soon.


Eric Levine



R3: DG: The Last of the Good? - DG SIGMA 





  • In an effort to drive traffic to its newly rebuilt website, CHRS has implemented amongst other features a universal checkout across business concepts (i.e. Lane Bryant, Catherine’s, & Fashion Bug) as well as free shipping to store locations. Surprisingly, 25% of customers are opting to ship to the store resulting in increased traffic at the store level as well.


  • While OXM’s year-end results reveal an improved balance sheet compared to last year, last I checked a 58% Net Debt/Total Capital ratio does not qualify for ‘fortress’ status. Nonetheless, management was disturbingly enthusiastic about increased M&A activity and the possibility of growing the business via acquisition. Other uses of cash noted included accelerating Tommy Bahama store growth. With a lone star brand in an otherwise challenged portfolio, OXM might just find itself on the other side of the table in an acquisitive environment.


  • Add Swoozies to the list of retailers facing liquidation.  After filing Chapter 11, the 43 store stationary/gift retailer was unable to execute a credible reorganization effort.  As a result, the entire chain is now entering liquidation.  At one point early in its growth, Swoozies was dubbed the “hip Hallmark” and was thought to have one of the more innovative retailers in the card/gift space.




 R3: DG: The Last of the Good? - Calendar





Annual SGMA Report on Fitness and Sport Participation - The fastest growing activity in the country is Pilates. With 8.6 mm Americans participating in ’09, it’s up 456% since 2000. The activity most Americans participate in is walking (110 mm) followed by bowling (57.3 mm). Thanks to the UFC, viewing of mixed martial arts might be on the rise, but only 6.5 mm Americans participated in the cross disciplined sport in 2009, down 3.8% from last year.  There are now 44 mm runners in the US, up 6.7% vs. 2008. <>


Sizing Up the Chinese Market - Industry leaders and local government officials discussed their outlook for the Chinese luxury goods market at a conference over the weekend, touching on a range of topics such as the untapped potential of third and fourth tier cities and whether Chinese consumers are ready to accept Chinese made luxury products. In a recent report, Bernstein Research estimated that the Mainland Chinese market for luxury goods was worth 6.6 bn euros, or about $8.9 bn. The report went on to state that Greater China, comprising the Mainland, Hong Kong, Taiwan and Macau, accounts for 10% of the world’s demand for luxury goods. Japan accounts for 12% while Europe and the Americas count for 39% and 29% respectively. <>


Hong Kong Government Boost for Textile and Clothing - Hong Kong apparel and textile companies will be benefited from the government's latest launch of research and development cash rebate scheme that will be launched at the start of April.  The R&D Cash Rebate Scheme aims to reinforce a research culture among enterprises and encourage them to establish stronger partnership with public research institutions. Under the Scheme, enterprises conducting applied R&D projects will enjoy a cash rebate equivalent to 10% of their invested amounts. The preliminary forecast is that HK$20 mm will be disbursed in 2010-11. <>


Hon Kong February Sales Surge - Hong Kong retail sales surged by 35.8% in terms of value in February due to improved labor market conditions that boosted consumer confidence. The growth was faster than the 6.5% growth in the previous month. However, growth in retail sales was smaller than the consensus forecast of 39%. The statistical office said retail sales tend to show greater volatility in the first two months of a year due to the timing of the Lunar New Year. "As the Lunar New Year fell on February 14 this year but on January 26 last year, it is more appropriate to analyze the retail sales figures for January and February taken together in making year-on-year comparison." In the first two months of the year, retail sales value increased 18.8% compared to the same period of the previous year and retail sales volume grew 15.1%. <>


EU General Court Rules Against Claims from 5 Chinese Footwear Exporters - Chinese footwear exporting producers, notably Brosmann Footwear, Seasonable Footwear, Lung Pao Footwear and Risen Footwear, argued against the EU Commission’s decision to consider Market Economy Treatment (MET) claims of only sampled producers and not of all producers who applied for MET. <>


Tommy Hilfiger to Assume Direct Control of China - The brand reached an agreement with its licensee Dickson Concepts (International) Ltd. to assume direct control of its Chinese wholesale and retail business as of March 1 next year. Dickson will continue on as licensee for the brand in Hong Kong, Macau, Taiwan, Singapore and Malaysia until 2019. “This acquisition is in line with our strategy to consolidate brand management and approach the market in the most coordinated manner possible,” said Fred Gehring, chief executive officer of Hilfiger, which is set to be acquired by Phillips-Van Heusen Corp. in a $3 billion deal unveiled this month. <>


The Misses Category in Fashion - Over the last two years, everything from overhauling the executive and design ranks to cost-cutting, modernizing collections to installing “brand filters” has occurred at Ann Taylor, Talbots, Dress Barn, Chico’s, J.C. Penney, Macy’s, Liz Claiborne and Jones Apparel, stirring a sense this could at last be the year the sector crawls out of its hole and reverses declines. Retailers say they’ve been waking up to what women want and imbuing what were mundane “missy” lines with higher-grade fabrics, detailing, embellishments, color, closer fits and stretch, not to mention taking inspiration from contemporary and designer styles for a younger, sexier appeal but with age-appropriate sizing and moderate to better pricing. The NPD Group estimates that, for the last fiscal year, misses’ apparel generated $45.84 bn in sales in the U.S., compared with $48.35 bn the year before. NPD said the total women’s apparel market came to $108.7 bn last year. A dressy cycle, layering pieces, jacket alternatives and a shift in knits to crafted looks, fabric manipulation and embellishments are fueling misses’ sales. So is activewear, either functional or spectator-oriented, including terry and velour separates, track suits, hoodies and brands such as Nike, Adidas and Puma. <>


First Kohl’s and Avril Lavigne, then Wal-Mart and Miley Cyrus, and recently J.C. Penney with Mary-Kate and Ashley Olsen. Gomez, the 17-year-old star of Disney Channel’s “Wizards of Waverly Place,” is taking the fashion line she’s launching for back-to-school exclusively to Kmart’s 1,327 stores across the U.S. and in Puerto Rico. With retail prices capped at $24, Dream Out Loud by Selena Gomez will play a central role in Kmart’s strategy to double the size of its juniors section, where the company will weed out lesser-known labels, introduce new brands and create a shopper-friendly space. Gomez’s team is dreaming big: Retail sales are projected to hit $100 million in the first year. <>


`Luxury Is Not Dead' as Americans Seek $490,000 Watches, $16,000 Weekends - Samantha von Sperling realized luxury shoppers had regained some of their confidence last month when her clients began booking $16,000 weekend excursions to Manhattan that included Jean Georges dinners and shopping sprees at Barneys and Giorgio Armani. <>


Consumers Look More Kindly on Online Ads -  A new survey suggests that online advertising has not worn out its welcome. In the new poll, conducted this month, 51% of respondents said they're "very likely" or "somewhat likely" to read and act upon e-mail offers, up from 47% last year. There were similar upticks in the numbers saying they're at least somewhat likely to read and respond to sponsored search-engine links (from 39% last year to 40% this year), banner ads (from 25% to 28%) and pop-up ads (from 13% to 19%). 53% this year (vs. 51 percent last year) said they're at least somewhat likely to read and respond to "articles that include brand information."   <>


An online retailer settles with American Apparel - Online retailer has reached a settlement with American Apparel Inc., which sued the e-retailer for allegedly violating the consumer brand manufacturer’s policy against selling unembellished American Apparel garments. <> hit its stride with online shoppers in 2009 - Having only launched e-commerce in April, the web ended up accounting for 4% of total sales for LuLuLemon Athletica last year. <>


Australian Retail Sales, Building Approvals Tumble as Rate Increases Bite - Australian retail sales and building approvals unexpectedly tumbled in February, adding to signs the central bank’s interest-rate increases are cooling domestic demand. <>


Borders Said to Be Close to Arranging Financing to Repay Loan Due April 1 - Borders Group Inc., the unprofitable U.S. book retailer, is close to arranging financing that would allow it to repay a loan due this week, two people with knowledge of the matter said. <>


Collective Licensing International and Bioworld Merchandising - Collective Licensing International (CLI) announced today that it has entered a three-year agreement with Bioworld Merchandising to license apparel and accessory lines under the Vision Street Wear brand. Under the design and manufacturing licensing agreement, Bioworld will help accelerate the momentum that Vision Street Wear has experienced since its re-launch in Summer 2009. <>



The Macau Metro Monitor, March 31st, 2010



Citibank, Goldman Sachs, Barclays Capital, BNP Paribas, and UBS AG are part of a syndicate struggling to offload the $1.75BN financing of Venetian Orient Limited (VOL) they agreed to sell to preserve their relationships with Sands and to land the equity raise mandate. Due to the oversupply of Sands-related loans already available in secondary markets at more attractive yields and the upcoming Galaxy syndicated loans ($1.13BN), banks have even less reason to snap up the debt.


The syndicate underwrote the VOL financing to pay for the stalled construction of parcels five and six of Sands China’s Venetian Macao Casino Resort. In January, they packaged the debt as a project finance loan and began shopping it with a 2015 maturity and margin of Libor +450bps with varying upfront fees of 135bps-225bps implying an all-in yield as high as L+499bps. However, pre-existing loans such as the US$3.9BN Venetian Macao Limited (VML) corporate loan sold in 2007 and the SGC 5.44BN Marina Bay Sands (MBS) loan both have more attractive yields at L+621 bps and SOR + 625bps, respectively.


Aside from economics, VML is the least risky of the three because it is fully operational, followed by MBS, which is scheduled to open phase one in April.  The two pre-existing loans are also issued at the corporate level, which banks prefer to exposure in a Greenfield project financing, according to several of the bankers interviewed for this article.


VOL’s prolonged marketing process is blamed on the mid-February Chinese New Year holidays and bankers taking extended holidays during that time period. VOL’s syndication was initially scheduled to close at the end of February, but has been pushed by one month.  At least five institutions have joined the syndication, and according to bankers, commitments thus far are in line with expectations.


MGM Mirage has hired five banks--BNP Paribas, Bank of Ameirca/Merrill Lynch, HSBC, JP Morgan and Morgan Stanley--for its HK listing of its Macau operations, scheduled for the second half of this year. The deal is expected to raise about US$500 million (MOP4billion), according to sources with direct knowledge of the deal.



According to previously undisclosed court transcripts from a trial late last autumn, Cheung Chi-tai was a leader of the Wo Hop To--one of the organized crime groups in the region known as triads. A regular casino patron testifying in the murder-for-hire trial case said that Cheung was  "the person in charge" of one of the VIP rooms at the Sands Macau. Documents show that his investment allowed him a share in the profits from a VIP gambling room at the casino.


Cheung Chi-tai's ties to Sands Macau came through such a multi-tiered arrangement. His solely owned company, Jumbo Boom Holdings, provided capital for another firm, now called Neptune Group, to acquire a stake in Hou Wan, a junket operator. Hou Wan was entitled to profits from Sands Macau's Chengdu VIP room. Cheung owned more than 8% of Neptune Group in 2008, according to public filings with the Hong Kong stock exchange. That made him a substantial shareholder when the call for the dealer's murder went out.


However, Nicholas Niglio, Neptune's COO, said Neptune wasn't a junket itself but invests in VIP junkets that operate at the Sands Macau, the Venetian Macau and Galaxy Entertainment's StarWorld casinos. He said Neptune now had a 20% stake in Hou Wan, a junket operator that runs around 20 VIP tables at the Sands Macau.  A gaming official, who insisted upon anonymity, said: "This relationship (with Cheung) would be of concern to Nevada authorities. You're talking about direct ties to bad guys."


The involvement of the triads in Macau's casinos is centered on the murky and highly profitable junket business. The VIP sector brought in $9.9BN last year, two-thirds of the enclave's total gambling revenues. Macau has about 187 licensed junket operators, said Manuel Joaquim das Neves, director of Macau's Gaming Inspection and Coordination Bureau.  Asked specifically about whether Macau will strip the license from a casino operator if the regulators discover that it is hiring a junket operator with links to organized crime, Neves said: "It's separate. In principle, it doesn't affect the concessionaires."


Ko-lin Chin, a professor at Rutgers University and one of the foremost experts on Asian organized crime, says that even if crime groups are involved in the junket business, with the casinos making so much money, the government reaping huge taxes, and the citizens of Macau enjoying full employment, there is scant political will to remove them. "No one wants to crash the party," he said. "This is a feel-good story."

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