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The Macau Metro Monitor.  December 9th, 2009


TIMETABLE FOR MACAU LRT thestandard.com.hk

It was disclosed yesterday that Macau will have a light rail system connecting the peninsula with Taipa Island and the Cotai Strip in four years.  Construction on the system will start soon and there is a plan to eventually link the LRT system to the future Hong Kong-Zhuhai-Macau Bridge.  Macau transport infrastructure office consultant Michael Lan Soi-hoi has said that the first phase of the LRT project, costing MOP7.5 billion, will be completed in 2014.  Passenger capacity will reach 14,000 at peak hours in 2020 and fares are expected to range between four and six patacas. 




Stanley Ho’s Sociedade de Jogos (SJM) announced Tuesday that is will open its Casino Oceanus at Jai Alai on Tuesday of next week.  SJM Chief Executive Officer Ambrose So Shu Fai said that the Oceanus “provides another anchor to our business on the Macau Pennisula, the principal gaming and entertainment area of Macau”.   The casino will have a staff of 2,400, according the announcement. 




Melco Crown Entertainment does not plan to raise equity, but will refinance its debt through bonds and bank loans by mid-2010, its CFO said on Wednesday.  CFO Simon Dewhurst also said that Melco Crown could “carry comfortably” $US1.5 to 2 billion of debt on its balance sheet.

Respect The Fans

“It's impossible to work under conditions where they confused negativity with objectivity. You can't fool the fans.”
-Marv Albert

As Washington and Wall Street become one and the same, politicians and bankers are having a very hard time fooling the citizenry. Americans are not stupid. The fear- mongering associated with maintaining a ZERO percent rate of return on American savings is a tax. Borrow from the people to pay the bankers? The fans don’t like it.
This morning’s Bloomberg National Poll saw those who see this country headed in the right direction drop to 32% in the first week of December. That number was 40% back in September and continues to fall, despite the stock market’s climb. Timmy Geithner thought that Burning The Buck would get the Debtors, Bankers, and Politicians paid. The score there ends up being 2 out of 3. There is a bubble in Big Government. The politicians are losing political capital.
Only 26% of respondents rated the Treasury Secretary “favorably.” That’s bad. I’ve said this before and I’ll say it again this morning: I think Geithner should either resign or be fired. Replace him with Paul Volcker, or someone with credibility. Sustainably strong markets are built on confidence. America’s is waning.
On Friday, we are going to get the University of Michigan Consumer Confidence report. Our head of US Strategy, Howard Penney, continues to be as right as the sun rising in the East on his consumer confidence forecasts. The short term highs we saw in American Confidence readings are now in the rear-view. We have already seen the Michigan survey drop from 73.5 in September to 70 in October to 67 in November. December will be another lower-high versus September.
In our macro models, lower-highs are bad. We aren’t just seeing this in America’s Confidence readings (this week’s ABC/Washington Post reading dropped to minus -47!). We are seeing this across global commodity and equity markets. We are seeing confidence in certain Sovereign Debt markets implode. What we are seeing is a Minsky Moment, of sorts. Piling debt, upon debt, upon debt … and socializing the losses of economic systems has a price. “You can’t fool the fans.”
Some people were fooled into thinking that credit issues from Dubai to Greece were one-day trading events. That couldn’t be further from the truth. I see no irony in the timing of between the world’s reserve currency collapsing to lower-lows (October and November) and the popping of sovereign debt bubbles. Never underestimate the power of 63% of this world’s debt being denominated in US Dollars. Crashing that currency has many unintended consequences.
Stock markets in the Middle East and Europe have two things in common – a price and a date. On October 14th, both the Athex Index in Greece and the DFM Index in the United Arab Emirates put in their highs for the year. Since October 14th, here’s what prices have done:
1.      UAE (inclusive of trading down another -6.4% this morning) = DOWN -35%

2.      Greece (inclusive of trading down another -2.4% this morning) = DOWN -27%

CNBC might tell you that these aren’t risks. Apparently the local fans from Dubai to Athens are on the other side of that opinion. By any mathematical consideration, over a 2-month duration, these are called stock market crashes. “You can’t fool the fans.”
Now the fun part. As the US Dollar rallies, all of these levered up REFLATION trades start to really unwind. If a Burning Buck got the DEBTORS paid. A Bottoming Buck calls in those chits. This is why I raised my Cash position into November end. In the immediate term, Dollar DOWN and Dollar UP were going to be bearish.
Across the board, here are the REFLATION markets that have all of a sudden broken what we call our immediate-term TRADE line of support:
1.      Japan’s Nikkei

2.      Hong Kong’s Hang Seng

3.      Australian stocks and dollars

4.      Canadian stocks and dollars

5.      Russia’s RTSI Index

6.      UK’s FTSE Index

7.      US Financial stocks (XLF)

8.      The CRB Commodities Index

9.      Oil

So if you didn’t know that there was a high inverse correlation between US Dollars and most things priced in Dollars, now you know.
The fans definitely know. I had dinner with some of the more thoughtful investors in Boston last night. The weather was crisp. Their thoughts were sharp. These guys are far less bullish than consensus has recently become. I guess it’s only fitting that last week marked the YTD low on the bearish side of the Institutional Investor survey (at the market top). These Boston boys are apparently allowed to be bearish.
Importantly, these investors are not Crash Callers. These are simply market craftsmen who were smart enough to sell some of their REFLATION P&L before it started to unwind. Everything has a time and price. In the end, a strong currency is what these Americans crave. For now, we just need to respect and understand that the math associated with the REFLATION score is proactively predictable.
After moving my Asset Allocation to ZERO on the International Equity side a few weeks back, I put my first toe back in the Brazilian waters yesterday, buying back our bullish long-term TAIL position in the Brazil ETF (EWZ). I have dropped my position in US Cash down from 67% last week to 58% this morning. I feel like taking my time. So I will.
Respect the fans. They set marked-to-market prices. They vote real-time.
My immediate term support and resistance levels for the SP500 are now 1085 and 1101, respectively.
Best of luck out there today,



EWZ – iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

XLK – SPDR Technology
We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

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.   

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.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK
Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.3%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

– 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.

US STRATEGY – A One Day Delay

Yesterday, I wrote “on Monday there was no follow thru from the big move in the dollar on Friday.”    Well, we got the follow thru we needed to from the Dollar index (DXY) yesterday.   The DOLLAR index closed today at 76.19, up 0.6% on the day; over the last three trading days the DXY is up 2.1%.


The S&P 500 finished 1% lower on Tuesday, weighed down by the increased risk aversion resulting from renewed concerns surrounding both Dubai and sovereign credit ratings. The biggest impact of the risk aversion trade can be felt in the commodities and commodity stocks.  The Energy (XLE) and Materials (XLB) were the two worst performing sectors yesterday.  Increased sovereign concerns were highlighted by Fitch downgrading Greece's ratings to BBB+ and Moody's said that deteriorating public finances in the US and UK may “test the Aaa boundaries.”  Thanks for that!


There was an interesting divergence in the SAFETY trade as the Consumer Discretionary (XLY -0.8%) outperformed the Consumer Staples (XLP -1.1%).  The grocers presented the biggest drag for the sector as SVU (8.7%), SWY (6.8%) and KR (11.9%) sold off following weaker-than-expected Q3 results and reduced F09 guidance from KR. Reynolds American was another notable underperformer trading down 4.3% on the day. 


The biggest drag on the XLY was McDonald’s, which reported softer-than-expected November same-store sales.  Media names were the best performers in the XLY with GCI and IPG up 6.4% and 5.3%, respectively.   


The Industrials underperformed the S&P 500 by 0.5%, despite better-than expected earnings from FDX.  The company said that it expects fiscal Q2 EPS of $1.10, compared with prior guidance of $0.65-$0.95 and consensus of $0.85. Stronger volumes out of Asia were the primary drivers of the improved outlook. Surprisingly, UPS finished down 0.2% on the day.


The XLV also outperformed as the managed care group outperformed with the HMOs +0.7%; up for a third straight day. The group benefitted from continued reports downplaying the likelihood of the inclusion of a pure-play public option in the Senate version of healthcare reform legislation.


Technology (XLK) slightly outperformed the S&P 500 closing down 0.9% on the day.  The XLK benefited from the semiconductors with the SOX +0.1%. The index has rallied nearly 9% over the last seven sessions.   Yesterday’s performance benefited from XLNX, which raised its December quarter revenue and gross margin guidance.  The company cited broad-based strength across all of its end-market categories and geographies.


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  Today the range for the S&P 500 is 1% upside and 0.5% downside.  At the time of writing the major market futures are trading slightly higher.


Crude oil is trading above $73 a barrel, arresting a five-day decline.  The American Petroleum Institute said crude inventories fell by 5.82 million barrels last week. The U.S. Energy Department will release its weekly report today in Washington.  The Research Edge Quant models have the following levels for OIL – buy Trade (72.59) and Sell Trade (77.92).


Gold for February delivery declined for a fourth day, dropping as much as 1.3 percent to $1,128.70 an ounce in New York.   The Research Edge Quant models have the following levels for GOLD – buy Trade (1,130) and Sell Trade (1,185). 


Copper fell for a fifth day in London, posting the longest losing streak since July.  Japan’s economy grew less than expected in the third quarter and concern about Greece’s ability to meet debt commitments.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.12) and Sell Trade (3.26). 


Howard W. Penney

Managing Director


US STRATEGY – A One Day Delay  - sp1


US STRATEGY – A One Day Delay  - usdx2


US STRATEGY – A One Day Delay  - vix3


US STRATEGY – A One Day Delay  - oil4


US STRATEGY – A One Day Delay  - gold5


US STRATEGY – A One Day Delay  - copper6



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 80.46%
  • SHORT SIGNALS 78.35%


In yesterday’s employment post there were three key words that I highlighted that reflect the trends in the labor market according to some recent consumer surveys  – DECLINED, WEAKENED and DETERIORATION.  Having said that, it should be no surprise that another index of consumer confidence (on the state of the U.S. economy) fell last week. 


After yesterday’s close it was reported that the ABC consumer confidence index fell to -47 in the week ending Dec. 6, down 2 points from a week earlier (a reading below zero means the number of negative responses is greater than the number of positive responses). 


The DOLLAR index closed yesterday at 76.19, up 0.6% on the day, and over the last three trading days the DXY is up 2.1%.  Also, the XLU has been outperforming by a country mile over the past week.  The SAFETY trade is in full force… 


Howard W. Penney

Managing Director




Last night’s release of the government G-19 data shows a consumer continuing to delever at an orderly, but unrelenting pace. Aggregate card debt outstanding declined $8 billion in October to $888 billion, making this the 13th consecutive month in which credit has shrank. Peak to trough decline is now up to 9% ($87 Billion).




The crunch continues to have two drivers: consumers pulling back voluntarily and banks stripping credit away from the bottom third of the borrower profile (FICO <660). The rate of decline in October was 9.3%, right in line with the monthly average over the last several months. Some might take comfort in the fact that the rate was down modestly from September (10.5%) and August (10.6%), but we think it's too early to call any sort of emerging inflection in this trend.




The G-19 data is a lagging indicator, as October-end data is just becoming available some five weeks after the fact. It's important, however, as it confirms trends unequivocally. If we see this number flatten out and reverse course we'll know that consumers (and banks for that matter) are returning to business as usual. If the trend continues, we'll know the "new normal" is becoming more and more real.


The next chart shows the monthly rate of change (annualized) going back about 40 years. The takeaway is that there's never been a period of credit contraction this sustained. We are in new territory here.




Finally, you might wonder how the individual companies are faring amidst this downturn. The answer: not much better. Take a look at Capital One's managed consumer loan growth - it practically mirrors that of the industry, and in fact, of late, has been accelerating to the downside.




Please join us Wednesday evening for a Holiday get together.  See the invite below.



Please join the Research Edge Consumer Team for Holiday cocktails in Midtown on December 9th.  It’s hard to believe another year has almost passed and as a result it’s time to celebrate!  In appreciation of your support throughout the year, we look forward to seeing you at Bar 44 (located in the lobby of the Royalton Hotel, 44 West 44 Street b/t 5th and 6th).  Please stop by at any time between 6:30-8:30pm.  We will have an area reserved on the right side of entrance across from the lobby bar.



Research Edge Consumer Team,

Todd, Anna, Brian, Eric, and Howard

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