VIDEO | Keith's Macro Notebook 5/8: Australia RUSSIA UST10YR


Q was exactly in line but commentary should somewhat allay Union Pay fears.




  • 1Q EBITDA luck-adjusted basis:  $380m
  • Have shifted mass tables to CoD in 1Q
  • CoD premium slot area opened before May Golden Week and better F&B offerings on 2nd floor - was disruptive but am optimistic on these developments
  • CoD Manila due to open later in 2014
  • MSC due to open mid-2015
  • CoD 5th tower:  open early 2017
  • 1Q Property EBITDA:  28.8%
  • 2Q guidance:
    • $95-100m D&A
    • $24-26m Corp expense
    • Consolidated net interest expense $31-33m:  $10m finance interest, $6m (CoD Manila), $17m MSC, net capitialized interest of $19m

Q & A

  • Great start to 2Q - regained share in April, Golden Week May was phenomenal.  Do not see any VIP deceleration given incidents. - Hedgeye would caution that while market share was healthy in April, hold % was high.  RC volume declined 20%+ YoY. Junkets appear to be under performing at the MPEL properties.
  • Macau market very healthy
  • Junket explosion/Unionpay/visa issues:  news stories get too polarized.  Long-term secular story intact
  • Capital allocation plans:  paid dividend but may not do much else given serious capex this year and positive news coming out of Japan 
  • Premium mass:  some disruption in 1Q due to developments.  Committed to table optimization.
  • Competition:  No competition on pricing but more on the side of more offerings or renovations.
  • 80% EBITDA at CoD is non-VIP
  • 75% EBITDA at MPEL is non-VIP
  • MSC:  have 500-550 tables at capacity; govt will work out actual table allocation closer to opening date.  Govt has stressed diversification and non-gaming areas.  Construction progressing well. 
  • Moving tables out of Altira:  will continue to move them if they get higher-yielding tables at CoD
  • UnionPay:  targeted at illegal mobile units... if anything, it would be positive going forward for the gaming industry.
    • Not a Macau phenomenon.  UnionPay is a global brand.
    • Do not see any slowdown from the UnionPay news
  • Manila opening:  middle of the year or 2nd half of year; don't want to open until they're 100% ready; have hired 3,000 people out of the 5,000 people they need.
  • Japan:  looking at a bigger city opportunity
  • Manila:  encouraged by what's going on in that market.  Market is growing.  Local/international visitation both growing.  2nd property to open in Entertainment City/Manila Bay area
    • Leverage customer base in Macau?  Local mgmt team working closely with Macau ops team.  There will be lots of cross-selling.
  • Confident in getting their fair share of tables for MSC
  • Infrastructure projects:  ferry terminal will open later in 2014. 
  • Philippines tax issue:  PAGCOR will have an annoucement soon on income tax issue.  Confident on positive outcome.
  • Altira table breakout:  110 VIP, 30 MASS 
  • CoD table breakout:  194 VIP, 290 MASS
  • Capex guidance: 375m (2Q), 475m (3Q/4Q) 
  • Capex guidance breakout:  MSC 120m (2Q), 250m (3Q), 350m (4Q); CoD Tower (30-40m/Q)
  • VIP
    • VIP liquidity due to junket disappearance incident:  do not have exposure to that junket; no evidence of any deterioration in liquidity
    • Visa shortened from 7 days to 3 days?  Macau govt denies this
      • Higher-end customers stay longer
      • MPEL targeting IVS customers
      • Most of premium mass customers will not be involved

Cartoon of the Day: King Kong

Takeaway: The next crisis will be a crisis of confidence in central planning.

Cartoon of the Day: King Kong - KinKongCartoon5.7.2014

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Best Idea Call Today: Long BOBE

We recently added BOBE to the Hedgeye Best Ideas list as a LONG.


We’re hosting a conference call TODAY at 11am EST to run through our thesis and field questions.


If you haven’t been following the Bob Evans / Sandell saga closely, we suggest you start.  We like Sandell’s relentless resolve and believe they have identified several, feasible opportunities to unlock shareholder value.  As such, we believe BOBE represents an attractive entry point on the long-side.  During the call, we plan to hit on several key topics including, but not limited to:


  • Sandell’s feasible proposals and admirable resolve
  • Potential sale or spinoff of BEF Foods
  • Transition to an asset light model
  • Poor capital allocation and opportunities to attack the middle of the P&L
  • The inherent value of its significant real estate portfolio



Toll Free Number:

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Conference Code: 988314#

Materials: CLICK HERE




Howard Penney

Managing Director


Fred Masotta



Here we go again...



Notwithstanding the “catch a falling knife” risk, some of these Macau stocks may look like screaming buys, potentially after today’s blood bath.  The uncertain China Macro environment has created the backdrop for fear escalation.  Whether it’s the Union Pay issue rearing its ugly head again or the alleged theft and disappearance of an individual associated with a junket, when it rains it pours.  Historically, heightened fears have created huge buying opportunities.



  • Our biggest near-term fear has always been a junket crackdown by Chinese authorities.  The impact on GGR would be meaningful but likely short-lived.  The Chinese government needs to show its constituents that it is against corruption but it also doesn’t want to permanently maim Macau.  Remember that China needs Macau and Hong Kong to succeed to ultimately convince Taiwan to join the SAR structure.  Any crackdown would pressure the stocks but also provide a buying opportunity. 

The latest news (first reported in April) is that a shareholder of the Jin Jin junket may have stolen over $1bn in investor funds and disappeared. While the junket was a player at MGM Macau, Altira (MPEL), and Starworld (Galaxy) the theft itself didn’t appear to directly impact those properties.  However, going forward Jin Jin may not have the liquidity to drive volumes.  More importantly for the market, to the extent that the government decides it needs to keep up the appearance of anti-corruption, any punitive measures could keep some VIP players and junkets out of Macau until the dust settles.


  • The Union Pay Issue – we wrote about this issue in our "Leisure Letter" on March 13, 2014 and March 18, 2014.  The issue seems to always surface when other fears gain momentum and investor sentiment wanes.  Mass players use Union Pay cards to retrieve cash in Macau to gamble and pull money out of China.  We believe Union Pay is a major contributor to the Mass business in Macau and any crackdown on its use would be detrimental to gaming revenues.  However, we’ve heard this story before and we have trouble believing China would slay the golden goose of Mass business in Macau.  If a crackdown is in the works, we haven’t seen the impact as Mass performed very well in April and anecdotal evidence supports a health start to May.  

While we have not seen a copy of the e-mailed statement made by the Macau Police regarding the arrests in February and March of this year related to Union Pay, we believe these arrests are related to the recent reports of individuals who were caught with five illegal Union Pay point of sale processing terminals, over 300 bank cards, 580 point of sale invoices and over HKD3.4 m million in a Macau hotel room.  Finally, we note, there has been NO discussion regarding shutting down the use of Union Pay cards nor the Union Pay processing network. 


  • Credit/Liquidity in China – this is a real concern although we’ve seen fairly healthy volumes as recently as last week.  The VIP business in China was flat in April, slightly below our expectations, and the first week of May showed GGR up 12% over last year and up 38% over the same week of 2012.  With this kind YoY growth and VIP must be doing reasonably well considering it comprises 60-65% of the gaming revenues.


  • Continued reports of very busy Mass floors
  • To offset any potential VIP slowdown, more “side betting” volume could be pushed through the casino.  This is the VIP cushion we’ve spoken about over the past 2 years.  With casinos providing more liquidity than ever before - and even more if Wynn gets more aggressive – the pressure is on the junkets to maintain volumes.  And we all know there is a lot of side betting volume out there.
  • May GGR surprise on the upside – our model has consistently projected 20% GGR growth for May which would be a positive and potentially a big one considering that expectations have been ratcheted down with the recent news.
  • Japan Gaming Congress next week – Japan looks like a huge potential market and LVS, WYNN, MGM, Genting Singapore, and MPEL all are potential players
  • G2E Asia the week after – investors will meet with managements that could assuage fears


  • Given last night’s dismal trading in the Hong Kong listed Macau gaming stocks last night, LVS, MGM, MPEL, and WYNN are all headed sharply lower this morning. 
  • We suspect the stocks will be buys sometime soon as the recent periods of fear have led to concentrated and compacted contractions in the stocks but little change in the intermediate and long term fundamentals. 
  • WYNN remains our favorite name as its Macau property has more levers to pull to bolster its VIP business.

ICI Fund Flow Survey - Domestic Equity Funds Plummet

Takeaway: Last week's data reveals significant deceleration in equity fund flows, capping off a week of less-than-stellar performance.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds fell week-to-week, with domestic equity funds booking the biggest outflow all year. 


Total equity mutual fund flows had their biggest redemptions year-to-date with over $3.8 billion being yanked from stock funds with the leading culprit the U.S. domestic stock category. Of the $3.8 billion that flowed out of all equity mutual funds during the most recent 5 day period ending April 30th, $3.9 billion came out from domestic equity funds which was saved by a slight $104 million inflow from international stock funds. This outperformance from foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.5 billion per week thus far this year in addition to the $2.6 billion inflow averaged per week last year in 2013 versus domestic fund trends averaging an inflow of just $932 million thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $3.5 billion, a slight improvement from the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flow also decelerated on a w/w basis, although managing to leg out a slight inflow for the week. For the five day period ending April 30th, $931 million flowed into all fixed income funds, as opposed to last week's much stronger $2.3 billion inflow. The deterioration of bond fund inflow this week was the result of only $602 million that flowed into taxable products and $329 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 12th consecutive week of positive flow and the inflow into municipal or tax-free products was the 16th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.8 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETFs had a strong showing this week, with a notable weekly subscription for equity ETFs, which experienced an inflow of $4.0 billion. The previous week saw only $193 million inflow into stock ETFs. Bond ETFs fell slightly this week, still, the $818 million inflow was only slightly below the previous week's $1.2 billion inflow. The 2014 weekly averages are now a $920 million weekly inflow for equity ETFs and a $896 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 1.3



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 2


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 3


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 4


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 5


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 7


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 9.2 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


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