The Macau Metro Monitor, March 19, 2012
SANDS CHINA LTD. SETS OPENING DATE FOR SANDS COTAI CENTRAL Lasvegassands.com
Sands Cotai Central will officially open on Wednesday April 11th with 600 Condrad suites and 1200 Holiday Inn rooms. To date, LVS has invested $8BN in Macau.
GALAXY MACAU PHASE II TO INCLUDE MICE macabusiness.com
According to Francis Lui Yiu Tung, the vice-chairman of Galaxy Entertainment Group, Phase II of Galaxy Macau will double the properties' size. Additions will include more non-gaming amenities including an increased focused on MICE business as he believes that Macau will become an important convention and meeting destination over the next 5 years.
This Friday, GM is opening The Pavilion, a new high limit slot machine area for the premium mass gaming market. On March 30, the property will officially open its China Rouge members–only private club.
Mr Lui also confirmed that Galaxy has been in talks with Zhuhai authorities to invest in a resort on Hengqin Island.
MACAU HOTEL PRICES SOAR OVER HK TO HK1,607 Macau Daily Times
According to hotels.com, in 2011, Macau hotel prices increased 9% to HK1,607, making it the most expensive of Chinese cites; including being HK337 ahead of Hong Kong's ADRs.
LARGEST TRAFFICKING BUST RESCUES 41 WOMEN Macau Daily Times
On March 11, a joint sting by police in Macau and Liaoning and Guangdong provinces ended in the arrest of 30 suspects involved in abducting women and forcing them into prostitution; the largest human trafficking bust since June 2008. More than 20 of the women being forced into prostitution were released from captivity in Macau.
Be ready for guys selling their own books
We were in Las Vegas last week and our takeaways don’t necessarily jive with some of the common wisdom in the investment community. Here are some pitches by guys pimping their own pads likely to be heard this week out at the conference. Our responses are in italics:
- “WMS is going to punt badly again”
- We disagree – 2H fiscal 2012 looks in line to better
- Sentiment is awful
- Investor meetings likely to be positive on the margin
- “MGM is so leveraged to the recovery. Upside will be massive”
- Growth is not explosive and companies only expect modest growth
- Street looks aggressive beyond Q1
- Not sure Street is taking into account the likely food and healthcare inflation
- “MPEL is going to do a dilutive equity deal”
- We don’t think so
- The Macau Studio City joint venture is more likely to sell equity at the project level
- “The WYNN short is NOT overcrowded”
- Yeah it is
- We agree that WYNN faces some market share challenges in Macau but the market is just so damn strong
- “All gaming stocks go up into the opening of new properties. Gotta buy LVS. Gotta buy PENN”
- Both stocks have been strong – especially LVS – but so has the group
- That’s the first thing the new pimple faced analyst at Consensus Capital learns
- “IGT’s online strategy is flawed. They will be competing with their customers”
- Wait that was Gary Loveman that said that
- IGT’s international pitch may finally be gaining some traction
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The Knapp Track numbers from February were, on a two-year average basis, stronger than January’s.
Malcolm Knapp released his Knapp Track casual dining sales numbers for February this weekend. He cited weather as an important factor in the results; highlighting Texas, the Midwest, and the eastern region of the country as areas where the harsh weather of last year made for particularly easy compares in 2012 to-date. On February 22nd, we highlighted data from the National Operational Hydrologic Remote Sensing Center in order to approximate the year-over-year difference in snow coverage in three regions: the Midwest, the East Coast, and the South. We would make to statements about the Knapp Track numbers at this point. First, it will difficult to ascertain the true underlying trend in this data set until April’s results emerge. Second, traffic trends are disappointing when we consider that weather is boosting sales quite substantially in 1Q12.
Estimated Knapp Track casual dining comparable restaurant sales grew 2.8% in February versus a final accounting period number of 3.3% (prior estimate 3.2%) in January. The sequential change from January to February, in terms of the two-year average trend, was +50 bps.
Estimated Knapp Track casual dining comparable guest counts declined -0.1% in February versus a final accounting period number of 1.2% (prior estimate 0.5%) in January. The sequential change from January to February, in terms of the two-year average trend, was +35 bps.
It is disappointing to see traffic trends so soft even with the benefit of weather. CPI for Food Away from Home clearly shows that prices are being raised more than last year at restaurants but the cushion that operators have at their disposal in terms of pricing (CPI for Food at Home versus CPI for Food Away from Home) is shrinking. Companies facing high levels of cost inflation in 2012 (we would highlight TXRH and BWLD) may have to choose between margin and continued top line strength although we will have to wait until the weather impact falls off before becoming certain. Please refer to our note, titled “BWLD UPDATE”, for our current thoughts on BWLD.
This note was originally published at 8am on March 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The trick was to focus narrowly… on numbers: lot number, number of bidders, paddle numbers, bid steps.”
I’ve recently jumped into The Billionaire’s Vinegar – The Mystery of the World’s Most Expensive Bottle of Wine – and, I must say, I can’t put the book down!
The aforementioned quote scrapes the surface of British wine critic and auctioneer Michael Broadbent’s process. Born in 1927, Broadbent “was twenty-two before he tasted a top wine”, but started out in the business by simply “taking notes on every wine he tasted. He never stopped.” (page 27)
Neither have I.
Back to the Global Macro Grind…
I have 1-2 pages of hand-written notes of every market day of my working life. I’m not saying that makes me anything other than what it makes me – maniacal about my process. The way that I learn is through repetition. If I write down market prices, risk management levels, and economic data points every day, I have a much higher probability of not missing something.
That’s The Trick.
As far as I can tell (so far), The Trick to this game is not missing when the big things, like Growth and Inflation, are changing. That’s why, in principle, our Macro Models are grounded in Chaos Theory – we embrace the uncertainty that each day brings, because we have no idea what is going to be the proverbial grain of sand that knocks down that perfect pyramid of market expectations.
For the last 3 weeks I have been calling out Growth Slowing As Inflation Accelerates as the #1 risk factor that’s changing on the margin. Changing doesn’t mean the market realizes it instantaneously like a Janet Jackson moment at the Super Bowl. The difference between what’s changing on the margin and when markets are forced to react to it is time.
Get time and price right, and you’ll get mostly everything in the market right. Looking at last week’s Global Macro Performance Divergences, here’s where you didn’t want to be long:
- Small Cap US Stocks (Russell 2000) = down -3.0%
- India’s stock market (BSE Sensex) = down -1.6%
- The Euro (vs the USD) = down -1.9%
- CRB Commodities Index = down -1.5%
- West Texas Intermediate Crude Oil = down -2.8%
- Gold = down -3.7%
Now if you were long the Venezuelan stock market (+8.6% on currency devaluation) or the US Dollar Index (+1.3% after Mitt Romney solidified the Republican base in Michigan and Arizona), you were just fine last week.
Or were you?
The Trick about markets is that the tricks are always changing. Causality and correlation are very often two very different things, but Correlation Risks can sneak up on you like a Chinese Growth Slowdown in the night.
Apparently both the data that we have been discussing since we sold our long China (CAF) position on February 16thand the guys running the joint agree – China’s long-term GDP growth rate looks like it’s going to be a lot lower than the +9-12% it’s been tracking since 2009. China’s Premier Wen guided to a 7.5% number for 2012. Global markets didn’t like that.
In addition to the guide down of Chinese Growth Expectations, here was the Asian economic data that mattered most on the margin overnight:
- Chinese Services PMI dropped to 48.4 in FEB vs 51 in JAN
- Chinese Vehicle Sales are tracking down -3% year-over-year for 2012 YTD (worst start to a year since 2005)
- Australian Services PMI got smoked to 46.7 in FEB vs 51.9 in JAN
I know. That data can be tricky when you convince yourself that the bad January data in Asia was all about the Lunar calendar – until the February data rolls in even worse!
To be fair, some of the data for Asia in February has been as good as you should expect it to be with the calendar shift. But the problem from here isn’t January’s calendar or what your run-of the mill Keynesian economist is going to tell you about rising oil prices not impacting real (inflation-adjusted) growth. For markets, it’s all about time, price, and expectations.
The Trick is to keep moving out there – across countries, currencies, commodities, etc. – and keep risk managing your gross and net positioning to account for multiple durations across multiple factors.
I’m not saying I see everything early. I’m saying quite the opposite really – I really have no idea what I am going to say about a market’s risk parameters until I write everything down in my notebook in the morning.
My immediate-term support and resistance ranges for the Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1691-1735, $120.57-123.64, $79.03-79.51, and 1356-1376.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
* There was little movement again this week in several key indicators. Euribor-OIS continued to trend downwards, falling 4 bps over last week. Over the same period, the TED spread remained flat. Both of these series have largely renormalized.
* European and American Bank CDS tightened week over week.
* European sovereign swaps mostly tightened week over week with only Portugal and Ireland widening.
* The MCDX measure of municipal default risk fell 10.6% last week.
* The 2-10 spread widened significantly week over week, ending 29 basis points higher. A sustained period of widening would be positive for bank margins.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 12 improved / 0 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged
1. US Financials CDS Monitor – Swaps tightened for 20 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: BAC, GS, C
Widened the most WoW: MBI, MMC, CB
Tightened the most MoM: AIG, BAC, PRU
Widened the most/ tightened the least MoM: MBI, AON, MMC
2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 36 of the 40 reference entities. The average tightening was 3.9% and the median tightening was 5.9%.
3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. German sovereign swaps tightened by 10.5% (-8 bps to 69 ) and Portuguese sovereign swaps widened by 3.9% (49 bps to 1283).
4. High Yield (YTM) Monitor – High Yield rates were flat last week, ending at 7.01.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.6 points last week, ending at 1646.
6. TED Spread Monitor – The TED spread was flat last week, ending the week at 39.
7. Journal of Commerce Commodity Price Index – The JOC index rose 0.5 points, ending the week at -7.65 versus -8.1 the prior week.
8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 49 bps.
9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads tightened, ending the week at 115 bps versus 129 bps the prior week.
11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 50 points, ending the week at 874 versus 824 the prior week.
12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened to 193 bps, 23 bps wider than a week ago.
Margin Debt - January
We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.55 standard deviations in November, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in December and January's print of +0.53 and +0.70 standard deviations. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through January.
Joshua Steiner, CFA
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