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Eurozone Swings

Research Edge Position: Long Germany (EWG)


With our pulse on the European patient we’ve still yet to see any dramatic moves in fundamentals across the Eurozone. That said, European markets traded down significantly over the last week and a half—particularly on missed European Q3 earnings and bearish US-centric data—before popping back up yesterday and closing back down today, suggesting that yesterday’s expansionary US Q3 GDP report was the key positive catalyst.  From a macro set-up across the region, unemployment and inflation could tip the balance, but have remained steady:  a mild deflationary environment in the Eurozone (-0.3% in September year-over-year) has aided purchasing power of households, and unemployment has crawled up to 9.6% over the last months, but is far from any freak-out levels.  (For more on unemployment see “Jobless Recovery in Europe” on 10/08).


This week brought a few bullish and bearish data points to call out:


Yesterday’s employment data from Germany (although rear-view) actually showed a decline in the unemployment rate, a surprise to us as we forecasted a slow ramp in joblessness beginning in Q4 as government incentivized part-time work and stimulus spending wane.  In fact, September saw an increase of 269K jobs, or 0.7%, over the previous month, a bullish data point, yet one we’ve taken with caution due to the seasonality reflected in the end of summer break and the beginning of the new training year in Germany.  


German retail sales fell 0.5% in September month-over-month (adjusted for inflation and seasonal swings) , the second straight down month, or fell 3.9% year-over-year, said the Federal Statistical Office today.


Finally, the European Commission reported that Eurozone confidence improved—albeit on small sequential rises—across multiple subsectors, including Economic, Consumer, Services, Industrial, and Construction, while retail confidence remained unchanged. The improvement in consumer confidence across the region runs counter to separate country-level consumer confidence surveys out earlier this week from Germany (Gfk) and Italy (Isae) that turned down.


We see darker clouds ahead in 2010 when unemployment picks up, which should dampen consumer and business confidence and could erode gains in production and consumption. We continue to see uneven performance across the region and will look to limit our exposure by positioning ourselves on the long and short sides.  Within the Eurozone we continue to like Germany (although the DAX recently broke its TRADE line), on the long side. Other headwinds that we’ll have on our screens include a strengthening Euro and the impact of the ECB withdrawing stimulus measures, which ECB council member Axel Weber said this week. Stay tuned.  


Matthew Hedrick




October 30, 2009






With all the enthusiasm over the past few weeks surrounding improving same store sales, positive earnings pre-announcements, and early positive sell-throughs on cold weather goods, it’s time to revisit the short interest for the retail and apparel sectors. As shown below, there has clearly been a reduction in short interest since the summer, as sector fundamentals improved and the “pain trade” took its toll. However, with so many investors “looking for shorts” and the reality that we are now in the absolute sweet spot for easy sales and margin comparisons with last year’s Perfect Storm, we would not be surprised to see the trend reverse as holiday hype begins to build. Short interest alone is not the sole factor in looking at the group, but it certainly has been a tailwind for retailers and apparel manufacturers that have been printing substantial upside against what until recently was still a big wall of worry.






Some Notable Call Outs


  • Whether it’s the “green” nature of Timberland’s Earthkeepers product line or the overall styling, the consumer seems to be responding well to the innovative offering. Given the line’s success since the launch with 4 SKU’s in 2007, management now believes the brand will comprise approximately 10% of the company’s entire footwear sales and 50% of apparel sales by Fall 2010. After the shoes/boots reach their useful life, they can be returned to Timberland at which point they are disassembled and the parts are recycled.


  • The mixed read on a retail recovery in California continues. Office Depot reported that California remains a challenging market and actually showed a deceleration in 3Q vs. 2Q and also performed below the company average for the quarter (comps down over 14%). Management went on to say they “are worried about the situation” in California. The company’s exposure to the public sector as well as small businesses in that region is a key reason for the continued weakness.


  • Office Max management indicated that “cherry pick” rates were up for the second year in a row over the back to school season and are expected to continue to rise over the holiday season. Consumers are apparently willing to shop multiple doors (with gas prices at more reasonable levels this year) in order to buy specific items that are on promotion. As a result, both basket size and gross margin is pressured as the consumer purchases fewer, less profitable items.





Retail Groups Oppose Health Bill - Major retail groups were critical of an $894 billion bill unveiled by House Democrats on Thursday that would overhaul the health care system and require payroll tax penalties for uninsured workers. House Speaker Nancy Pelosi (D., Calif.) and Democratic leaders spent months merging three House committee bills and might vote on the legislation next week. The National Retail Federation and the Retail Industry Leaders Association both expressed reservations about the House bill, which President Obama hailed as a “historic step forward.” <wwd.com>


New Issues Arise at U.S. China Trade Talks - The United States and China diffused some trade tensions during high-level talks held here this week, but new rifts emerged just as quickly to take their place. Top trade officials from both sides met in this coastal city for the 20th meeting of the U.S.-China Joint Commission on Trade and Commerce, where on Thursday they unveiled new breakthroughs on sticky two-way trade tensions involving poultry and pork. Chinese Minister of Commerce Chen Deming pledged China would soon lift the ban it had placed on American pork imports in May after the emergence of the H1N1 flu virus in North America. In turn, the Chinese government hopes the U.S. Congress will follow through with a recent proposal to end the 2007 prohibition on Chinese chicken imports to America. <wwd.com>


U.S. Consumer Spending Probably Fell as ‘Clunkers’ Plan Ended - Spending by U.S. consumers probably fell in September for the first time in five months as auto dealer showrooms emptied in the wake of the government’s auto- rebate program, economists said before a report today. Purchases decreased 0.5 percent after a 1.3 percent jump in August that was the biggest in almost eight years, according to the median forecast of 75 economists surveyed by Bloomberg News. Other reports may show consumer sentiment dropped this month and business activity shrank at a slower pace. <bloomberg.com>


Sanofi-Aventis to Acquire Oenobiol - Sanofi-Aventis said it would acquire Laboratoire Oenobiol, the French maker of nutritional, health and beauty supplements. Terms were not disclosed. Founded in 1985, Oenobiol has annual revenues of 57.2 million euros, or $84.8 million at current exchange. Eighty-five percent of its business is generated in France, with the rest stemming from countries such as Italy, Spain, Belgium, Poland and Portugal. <wwd.com>


Amazon.com launches PayPhrase as a new online payments option - Amazon Payments Inc., a subsidiary of Amazon.com Inc., today launched Amazon PayPhrase as a new option for speeding up online checkout, including on the sites of retailers Buy.com and J&R Electronics. At Buy.com, which launched PayPhrase today along with the Checkout by Amazon payment feature, PayPhrase promises to offer a new level of shopping convenience, Buy.com Inc. president and CEO Neel Grover tells Internet Retailer. “This new technology brings an exciting new feature into alternative payments,” he says. “We think our customers will want to use this during the holiday shopping season and beyond.” <internetretailer.com>


Barnes & Noble puts its considerable weight behind the EPUB e-book standard - Adobe Systems Inc. and Barnes & Noble Inc. have joined forces to further e-book standardization based on the open EPUB standard and on PDF files. They also are collaborating on a content protection standard based on Adobe and Barnes & Noble technology. The collaboration enables users of Barnes & Noble’s nook e-reader hardware as well as users of Barnes & Noble e-reader software for iPhones, PCs, BlackBerrys and other smartphones, to access digital content from thousands of content providers across the web that is copy-protected with Adobe technology. In addition, e-book users with devices that use the Adobe Reader Mobile software development kit will soon be able to purchase and read content from BN.com. <internetretailer.com>


China: Textile firms expect an upturn despite labor woes - The Chinese textile and garment industry has seen signs of recovery despite an acute labor shortage, riding largely on the revitalization plan charted by the government for the sector. Figures from National Bureau of Statistics indicate that garment exports from January to August were around $101.7 billion, down 11.8% over the same period last year. Garment exports dropped 35.8% in the first two months of this year. The current figures indicate that decline has narrowed by 24% points over the first two months. However, the whole sector has shown signs of recovery in terms of investment volumes and profitability after the industry revitalization plan was launched by the State Council in April. <fashionnetasia.com>


Volcom Net Slips in Third Quarter - Volcom Inc. delivered a lower but better-than-anticipated bottom line in the third quarter and, despite sales declines and softened forecasts for the current quarter, said it was poised to take market share in the next fiscal year. In the three months ended Sept. 30, the Costa Mesa, Calif.-based surf and skate brand reported net income of $13.3 million, or 54 cents a share, 18.5 percent below the $16.3 million, or 67 cents a share, generated a year ago. <wwd.com>


P&G, Revlon Profits Fall - As quarterly results from Procter & Gamble Co., Revlon Inc. and others attested Thursday morning, the beauty world is still struggling to limit recession-driven sales declines as shoppers hold on tight to their dollars. P&G’s first-quarter net income slid 1.2 percent to $3.31 billion, or $1.06 a diluted share, on a 5.6 percent dip in sales to $19.81 billion. Income for the quarter, which included July, August and September, came in ahead of the 99 cents Wall Street expected. The company boosted its guidance and said it now expects sales for the year to rise 3 percent to 6 percent. <wwd.com>


Callaway's Q3 Profit Sink 25%; Sales Down 11% - Callaway Golf Company said third quarter net sales slid 11% to $190.9 million from $213.5 million in the year-ago period. On a currency neutral basis, the company said net sales would have been $194 million, a decrease of 9% compared to the third quarter of 2008. Gross profit fell 25.7% to $59.6 million compared to $80.1 million a year ago, yielding a gross margin of 31% compared to 38% a year ago. <sportsonesource.com>


North America: Holiday sales expect a marginal growth - North America's retail holiday sales, particularly after Halloween, are likely to be marginally better than last year's, according to North American retail advisory firm Karabus Managment Inc. The firm foresee flat to 1% growth in holiday sales this year due to the "recession weariness" and aggressive inventory management. <fashionnetasia.com>


German Retail Sales Unexpectedly Dropped in September - Retail sales in Germany, Europe’s largest economy, unexpectedly fell for a second month in September after companies shortened working hours, leaving consumers with less money to spend. Sales, adjusted for inflation and seasonal swings, slipped 0.5 percent from August, when they dropped 1.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a gain of 1 percent, according to the median of 23 estimates in a Bloomberg News survey. From a year earlier, sales declined 3.9 percent. <bloomberg.com>


A&F Opens in Milan - Move over H&M — the opening of the Abercrombie & Fitch store here Thursday drew a crowd of girls with their moms, teens, university students and young men and women taking a day off from work. At 10 a.m. sharp, they all surged into Abercrombie & Fitch’s second European store, after London, as the doors opened. “We are really proud to open a store here in Italy, especially in a fashion capital like Milan,” said a spokeswoman for Abercrombie & Fitch. <wwd.com>


Movie Gallery Late on Rent, May Shut 200 More Stores - Movie Gallery Inc., owner of the Hollywood Video chain, is renegotiating leases and past-due rent and may close 200 more stores as customers defect to mail-order and kiosk retailers. The Wilsonville, Oregon-based operator of Movie Gallery and Hollywood Video has shuttered 250 stores since Sept. 1, cutting the number of outlets to 2,921, according to Chief Marketing Officer Clifford Torng. Another 150 to 200 may close by year- end, he said. <bloomberg.com>


Ebay to Appeal French Court Ruling - EBay is appealing a French court decision that the online auction giant should pay damages to LVMH Moët Hennessy Louis Vuitton SA for allowing a keyword search for the French company’s perfumes without authorization. Last month, eBay was ordered to pay 80,000 euros, or $117,820 at average exchange rates for the period, after LVMH complained keyword searches on the site for Christian Dior, Kenzo, Givenchy and Guerlain perfumes provided links to sites selling these products. <wwd.com>


Online display ad spending dips this year, as overall web ads grow - Spending on Internet display ads by retailers, catalogers and other marketers this year will decline by 1.2% to $7.2 billion from $7.3 billion last year, but advertising expenditures for all forms of non-e-mail Internet advertising will grow 1.1% to $23.1 billion, the Direct Marketing Association says in a new report. <internetretailer.com>


Bally Taps Hauptkorn as CEO - Bally has appointed Berndt Hauptkorn as chief executive officer, effective Monday. Hauptkorn is no stranger to Bally since previously he was ceo of Labelux Group, the two-year-old, Vienna-based luxury goods holding company. Owned by Joh. A. Benckiser SE, a family-controlled financial holding company, Labelux acquired Bally in April 2008 from private investment fund TPG Capital. <wwd.com>


Walmart One Stop Shopping: Food, Apparel & Caskets - It now seems that you could be caught dead inside Walmart, in one of their caskets, that is. Walmart's looking to bury its competition, and has undertaken selling caskets on its website at discount prices. That could mean grave news for funeral homes, that have to accept third party caskets by law. But for consumers, it means they won't be "coffin" up as much cash at a time of bereavement. <kbmt12.com>





NFLX: Reed Hastings, CEO, sold 10,000 shares after exercising options to buy 4,500 shares for a net gain of $522k.

US Strategy – The Risk Trade!


On Thursday, the S&P 500 closed at 1,066, up 2.3%.  What a rip that a Dollar Down day gives you!  The strong gains on Thursday snapped a four-day losing streak for the S&P 500.  With a better that expected GDP number, the overriding theme was the return of the risk trade, as the VIX declined 11.3% after spiking more than 25% over the last four days. 


More importantly the Dollar index (UUP) declined 0.7% on the day, but remains up 1.2% over the past week.  


These dynamics led to the outperformance of high beta Financials, Materials and Consumer Discretionary sectors.  Not surprisingly, Utilities, Healthcare, and Consumer staples were the bottom three performing sectors.  In total five sectors outperformed the S&P 500. 


On the MACRO front, initial jobless claims fell 1,000 to 530,000 in the week-ended October 24th; the consensus expectations were for a bigger decline to 525,000.  The four-week moving average continued to trend lower, falling to 526,250 last week, the lowest level since early January. 


The Financials (XLF) was the best performing sector rising 4.2% yesterday.  The better-than-expected GDP numbers brought back to life the risk trade, leading to strong gains in the lower-quality names within the sector.  The decline in the Dollar also put back in focus the REFALTION trade.  As a result the Materials were one of the best performers, rising 3.0% on the day.  The Energy (XLE) also outperformed, rising 2.7%


Today, the set up for the S&P 500 is: TRADE (1,042) and TREND is positive (1,019).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 3 of 9 sectors are positive from the TRADE duration.  Both Energy and Technology moved back to positive on both TRADE and TREND. 


The Research Edge Quant models have 1% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open to the down side. 


The Research Edge MACRO Team.


US Strategy – The Risk Trade! - hp10 30


US Strategy – The Risk Trade! - s pperf

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Macro Monkey

“By trying often the monkey learns to jump from the tree.”
-African Proverb
At this point, understanding what’s driving assets priced in Burning Bucks isn’t that difficult. The US Dollar was down -0.7% yesterday, leading the SP500 up +2.3%. Oil up, Gold up, Financials up. Monkeys jumping all over one another as they figured out they were all short the 50-day Monkey Moving Average.
Inverse correlations like this won’t last forever, but it will definitely last into this month-end. High R-Squares in Global Macro are never perpetual. But, for now, all of the monkeys are really learning how to jump from the trees.
I use the 50 and 200-day moving averages as behavioral tools. Other people use them as a driver of their risk management process. I wonder if they have done the math on how crowded that is. Using a one-factor model (a simple moving average) is something that I expect my son Jack to be able to do once I show him where to hit the button on Yahoo Finance.
I realize that we’re all just a bunch of monkeys trying to prove that we deserve compensation to opine on markets, but let’s get real here and at least try to evolve. Monkeys yelling “yo, bro – that chart is breaking down dude” is embarrassing. The Chinese watch CNBC’s Fast Money. I can’t imagine what they must be thinking.
Actually, I can. The Chinese are a net seller of everything US Dollar exposure and a buyer of other currencies, gold, etc. China and Japan are diversifying away from what we have been YouTubed as – a conflicted and compromised financial system. America is no longer trusted as the world’s financial fiduciary.
I received a lot of emails yesterday about why the US Dollar was going down. For the better part of this week, Howard Penney and I have been issuing thoughts on what could make the Bombed Out Buck go up, so I think these questions are both well-timed and well-placed. As we have learned this week, what the US Dollar does is the lead indicator for the Fed’s next move.
Why was the US Dollar Down yesterday?
1.      Timmy Geithner speaking – that’s the Credibility Cross that the American Financial System still has to bear. I’ll let you watch the YouTube yourself.

2.      President Obama speaking – right after the non-Great Depressionista GDP report of +3.5% was released, he came out and talked down the number.

There is no credibility in a currency that is backed by conflict of interest. Whether it’s Geithner telling you that US banks are “not too big to fail” or Obama telling you that you better get cozy with an “emergency” rate of ZERO percent on your hard earned savings accounts, it’s all the same thing. It’s just wrong. Americans don’t buy it, and neither do our Chinese Creditors.

Newsflash for CNBC: markets don’t trade on lagging GDP reports. They trade on future expectations.
With the US Dollar breaking down through my immediate term TRADE line of $76.20 yesterday, you saw the power associated with a multi-factor macro model. You can say that it doesn’t work, and you can say that Obama and Geithner are right too - but, if you say that, Mr. Macro Market is voting on the other side of you. Market prices don’t lie; people do.
The Buck is Burning again this morning (down to $75.88) because the 2 aforementioned political statements reminded those who are looking forward to next week’s FOMC decision that there is an explicit message from Bernanke’s boss to not signal a rate hike.
Message from Obama: Get back to your Depressionista history books Benny and start getting beared up again – there is no time for you to be doing math right now. It’s all about revisionist history and keeping rates at ZERO for an “exceptional” period of time. With Healthcare and Afghanistan, I don’t have time to deal with the house of cards that Robert Rubin built. Not now.
Unfortunately, President Obama, markets wait for no one – not even you. Norway raised rates this week and India and China are signaling sobriety now too. As the world moves toward the Australian interpretation of non-Great Depression math, they’ll be moving away from the compromised rates of return you are signing off on.
My immediate term TRADE lines of support and resistance for the SP500 are now 1042 and 1075, respectively. If Bernanke panders again next week, Burning the Buck further from here, and 1066 in the SP500 holds, we could see a final 2009 crescendo of clanging Macro Monkeys like me take the SP500 to higher-highs at 1109. People hate this rally, and they probably hate the idea of that happening too.
The alternative, President Obama, is to have Bernanke signal what he should have a month ago. Yes, you’ll have to take your medicine and see the stock market drop like it did in 4 out of the last 5 days. But medicine is what this sick monkey called the US Financial System desperately needs. A reflated stock market hasn’t helped your approval ratings anyway, so you may as well get on with it.
Have a solid weekend with your families. Best of luck out there today,



EWZ – iShares Brazil
President 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.

EWT – iShares Taiwan With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities
We bought low beta Utilities on discount (down 1%) on 10/20. Bearish TRADE, Bullish TREND.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.


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.


The Macau Metro Monitor. October 30th, 2009.





Las Vegas Sands Corp. has won approval from the Hong Kong stock exchange to list shares of the company’s Macau operations.  LVS can now move forward with the Hong Kong IPO which is expected to raise US$2 billion or more to help the company pay off its massive debt and revive their construction plans on Cotai.  The company is seeking a further US$2 billion in financing ahead of the offering.  Potential lenders are biding their time but LVS, ideally, would want the financing before the IPO to reassure investors and earn a better valuation.  The high levels of debt and skepticism over the “fickleness” of regulatory bodies in China have negatively impacted the company’s valuation.




GALAXY LAND DEAL SIMMERS destination-macau.com

Following the controversy surrounding the government’s decision to allow Galaxy to transfer the tenancy rights for their Cotai property to a third party while it is being developed, some local lawmakers have done a comparable survey of land values in Fai Chi Kei, near the border with Zhuhai.  They believe that the same-sized piece of land as Galaxy’s there is worth around MOP 175 billion.  Fai Chi Kei allows for the building and sale of residential units, whereas Cotai has been – up until now at least – an area where people are supposed to work rather than live. 




eSUN SUES NEW COTAI destination-macau.com

The Macau Studio City dispute is coming to a head. eSun Holdings, owned by Jack Lam, is suing New Cotai LLC, run by David Friedman, for HK$17 billion.  The bulk of the claim, HK$16.6 billion, is for “inducing or procuring breaches of fiduciary duties”.  HK$689 million is being sought for breaches in their sales and purchase agreement. 




AN APPLE A DAY KEEPS THE DOCTORS… destination-macau.com

The Apple Daily has quoted a “source” as saying that the Ho family is considering suing the doctors that have been taking care of Stanley Ho.  This “source” claims that the patient has never regained consciousness since undergoing brain surgery three months ago.  DM believes it would be quite likely that the Ho family could now sue Apple Daily, since the implication of the report is that they have been lying to the media about their father’s health.


Blow out quarter in Macau vs. low hold in LVS. The bulls will win this debate. 



LVS posted a huge quarter in Macau, beating our EBITDA projections which were already well above the Street.  The only "incremental" negative was an extremely low hold percentage in Las Vegas.  I use the term incremental because we still have issues with Las Vegas and are not so optimistic about 2010 as LVS management seemed on their conference call.  However, Macau will and should dominate the discussion and, until the massive table supply kicks in, near-term momentum remains.  Over $500 million in annual cost savings is not too shabby either.


Since consensus was only $133 million, the Street was probably surprised by the $150 million in EBITDA generated at the Venetian Macau during the quarter.  We were not - we projected $147 million - but Sands Macau did surprise us, beating our estimate of $65 million by $13 million.  Fixed cost reduction remains a story at both properties. By our math, Venetian Macau reduced fixed expenses by $16 million year over year and are on an annual run rate of $300 million in total fixed expenses at the property.  At Sands Macau, we estimate that fixed costs declined a whopping 57% and drove most of the variance from our EBITDA estimate.


In Las Vegas, EBITDA was a paltry $34 million.  We estimate the number should've been $65-70 million if not for a horrendously low table hold percentage of 12.2% - but still below our $75 million estimate.  Management was very excited about the group segment where there is more business on the books for 2010 already than was recorded for all of 2009.  This is a big positive but the enthusiasm must be tempered somewhat.  LVS is going off of a very easy comparison into the seasonally strongest convention quarter of the year with 3k more hotel rooms (Palazzo).  We are very encouraged by the cost cutting - 18% or $40 million y-o-y per our estimate.  Q4 EBITDA could surprise on the upside.


LVS looks to be in good shape for the remainder of the year and incremental catalysts are positive.  Just make sure to check your share counts.  When profitability returns in Q4, fully diluted shares should total around 815 million shares and not the 660 million shares recorded in the Q3 per share loss calculation.  Much of the sell side doesn't seem to have this right.

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