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The Macau Metro Monitor. January 29th, 2010



Large construction projects such as the Zhuhai-Macau-Hong Kong bridge and the light railway, will contribute to Macau's economic growth in 2010 and help drive the unemployment rate to under 3%. “In 2010 the economy is expected to have positive growth, but there is some uncertainty in external terms and a threat of a second flu pandemic,” warned the Macau Monetary Authority's most recent report.



It appears that this week marked the conclusion of the Melco and AMA relationship and that the two parties are going their separate ways. It also seems that Melco has walked away unscathed from the breakup, with RC at Altira remaining healthy with a speculated turnover of MOP 23BN in January. The authorizes sited that the conclusion of agreement between MPEL and AMA came to a logical end as many of the original reasons for putting the deal in place no longer exist:

  • When Altira opened in 2007 they had no marketing plan and AMA did a great job of establishing Altira in the marketplace and was paid a commission for their efforts. Now Melco can take it from here
  • The deal gave Melco cashflow while it focused on building CoD. Now that CoD is open it doesn't make sense for Melco to pay a consolidator to bring customers to one property over the other
  • Melco helped Amax to raise HK$2BN from people on Wall Street in its back-door listing on the HKSE- money which was poured into credit lines for the sub-junkets and thereby guaranteed their business. Furthermore, Melcogave AMA faster-than-normal payment schedules, allowing them to use their credit better. But ultimately, this was all unsustainable. It was a wild, expensive grab for market share that temporarily disrupted the market. It had to unwind, and that was clearly the case over the course of 2009, especially as COD came online.

Now that the agreement is disolved, we'll have to wait and see if Altira can run a successful VIP business on its own. It will also be interesting to see how Lawrence Ho's supposed partner in this deal, Ng Wai, will continue to get compensated for his business . It's unclear whether he will move his junkers back to SJM properties, including his own Greek Mythology since he can no longer get paid 1.35% on the turnover at Altira.


TIME TO BUY MPEL Destination Macau

Gary Pinge from Macquarie is making a buy call on MPEL for 2 reasons: 1) Numbers are looking good due to the marketing zeal of Steve Webster positively affecting Mass and the IM team is holding their own in the VIP business, even at Altira. 2) "the price is right" given the recent hammering in the stock market.  There has also been chatter this week about Harrah's coming to buy out Crown's interest from the JV. The authors of DM dismiss the rumor as "nonsense" as Lawrence Ho doesn't need another foreign partner and has plenty of cash to buy out Packer is he really wants out.



DM dismisses the recent sell-side chatter of Macau's direct VIP business being bound to get hurt by the higher rebates that Singapore can offer players and the RWS has been poaching staff from Macau's International Marketing teams. Below are the rebuffs:

  • No one even knows what the direct VIP vs. junket VIP is exactly, since the government only cares about the entire number and how much taxes it will collect
  • While rebates may matter to junkets, it's unclear that they can even get licensed in Singapore. All high rollers care about is how well they get treated and how much credit they can get. A .2% difference in how many chips a player can buy only equates to one hand at the table
  • The loss of Mabel Lee (formerly at Wynn now at RWS) doesn't even matter. Mabel Lee previously helped Linda Chen at Wynn run the VIP business coming from Southeast Asia.  Channel checks at Wynn denied that Mabel was a significant loss, and in any case its unlikely that the loss of one person would bring down the world's most successful IM team
  • Genting is more likely to be like SJM than LVS. DM is unconvinced that they will be able to successful run a truly integrated resort. 
  • DM questions where the Chinese gamblers are going to come from.  So far RWS has not spent any money marketing in Macau, the largest place where Chinese really gamble.


January numbers are on track to beat MOP13BN, despite bank tightening. This is especially remarkable since Chinese New Years falls in February of this year vs. January of last year. Given the calendar shift, February results are likely to be huge as well. From all the accounts, hotels for CNY are fully booked.

Red Light Risk

“As investors, we can’t change the course of events, but we can attempt to protect capital in the face of foreseeable risks.”

-David Einhorn


Admittedly, when “bottom’s up” hedge fund manager David Einhorn proclaimed his new macro mystery of investing faith at the ‘Value Investing Congress’ on October 19, 2009, I was smiling. Our Hedgeyes call this proactively managing macro risk and I do support Mr. Einhorn’s message.


Einhorn and I are about the same age. We both grew up in a hedge fund bubble. For a decade, we were probably both overpaid. He still runs money and I run my mouth, so I am thinking that he’s probably worth a lot more than me. But what does that mean?


To some in this business, that means a lot. To others, it means nothing at all. We all wake up early every morning with a passion to play this game. David’s Greenlight Capital now has its macro views. I have mine. Game on.


The global macro risk manager’s job in this business is to acknowledge amber flashing lights, before they go red. It’s also being keenly aware of when one of your big “ideas” is everyone else’s too. Measuring consensus is part of any repeatable Red Light Risk Management process.


Embedded in our macro risk management process are 3 dominating Global Macro Themes. We change them quarterly, because the math changes daily. As a reminder, my team’s current Macro Themes for Q1 of 2010 are:


1.       Buck Breakout (bullish on the US Dollar; bearish on gold)

2.       Rate Run-up (bearish on government bonds)

3.       Chinese Ox In A Box (bearish on Chinese equities; bullish on Chinese currency)


I do not know what Einhorn thinks on Macro Themes 2 and 3 but, now that he does macro, he obviously better have a view. That said, I do know that he stands on the other side of me with regards to both the US Dollar and Gold.


In that same speech, Einhorn made the following conclusions about gold:


1.       “Of course, gold should do very well if there is a sovereign debt default or currency crisis.”

2.       “I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long term value as difficult to assess.”

3.       “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”


After being bullish on gold since 2003, and vehemently bearish on what I labeled the “Burning Buck” in early 2009, I do think I have the credibility associated with understanding the bearish dollar/bullish gold case. There are many aspects to Einhorn’s conclusions that I agree with, but not at every price and every duration.


Now, if you really want to manage Red Light Risk in global macro, you better manage those two things dynamically  - price and duration. I have written about this before, but it’s worth mentioning again. Duration Mismatch is one of the top 3 risks that has hurt me over the course of my risk management career. We need to monitor it systematically and measure it scientifically.


Back to Einhorn’s points on gold. On an immediate (TRADE) to intermediate term (TREND) duration (3 weeks to 3 months), gold has not done well in the face of sovereign debt default risks rising. Now maybe he meant a sovereign debt default crisis in the USA and, to be fair, we should give him the benefit of the doubt until he replies to this. But, so far, with CDS (credit default swaps) in Greece blowing out to 414 basis points last night, gold is still going down.


Gold is going down because I am right on the Buck Breakout. Yes, as Mr. Buffet pointed out to David way back when, there are many risks embedded in evaluating the gold price. But those difficulties work both ways! Today, in terms of measuring the risks of being long gold, the r-square is highest relative to up moves in the US Dollar.


Managing Red Light Risk is just that. You have to accept that there are many types of investors telling many different types of qualitative stories about what it is that they are bullish on. You also have to accept that Mr. Macro Market’s math will rule the day over all the storytelling.


This morning the US Dollar is making a 5 month-high at $78.94. Gold is trading down another -1% for the week to-date at $1083/oz. I am long the US Dollar and short Gold via the UUP and GLD etfs, respectively, and I have a zero percent allocation in our Asset Allocation Model to Commodities.


The long term TAIL of resistance for the US Dollar Index is up at $80.21, and I think it’s going to test that line this year. My long term TAIL line of support for the gold price is down at $997/oz. That’s another -8% of Red Light “foreseeable risk” that these Hedgeyes are calling out for you Mr. Einhorn. Welcome to the game of proactively managing macro risk. It’s a full contact sport.


Best of luck out there today,





XLV – SPDR Healthcare — We bought back our bullish intermediate term view on Healthcare on 1/22/10.


EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).


EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 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.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



GLD – SPDR Gold SharesWe re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.


IEF – iShares 7-10 Year Treasury One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.


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


After a 5.7% correction in the S&P500 since January 19th the Hedgeye Risk Management models have zero sectors positive on TRADE and only three sectors positive on TREND - XLI, XLY and XLV.  The S&P 500 came under pressure on Thursday, closing down 1.18%, though it did finish off their worst levels on the day. 


Yesterday, the blame game put Greece, the tax proposals in President Obama's State of the Union address, earnings and initial jobless numbers as the reason for yesterday’s decline.


On the MACRO front, Initial claims fell to 470,000 in the week-ended January 23rd from 478,000 in the prior week, compared with consensus expectations for a decline to 450K. On a rolling 4-week basis, average initial claims rose 9k to 457k from 448k and are up 15k in the last two weeks. While the rolling number remains within the channel of improvement (see yesterday’s post for the chart), it is moving to the upper band of that channel quickly. Given the historical tendency for this seasonally adjusted data to trend up in mid-to-late January we will give it the benefit of the doubt for now that the longer-term trend lower remains in place, but we think the next month's worth of data will be very important. It’s definitely time to pay attention.


Durable goods orders rose 0.3% month-to-month vs. consensus expectations for a 2% increase. The miss was fueled by a 38.2% decline in non-defense aircraft orders.  However, there were some positives, particularly in terms of the 1.3% increase in core capital goods, which followed an upwardly revised 3.1% increase in November.


The Dollar was strong again yesterday, up 0.29%, on the back of the increased RISK AVERSION trade surrounding the fiscal troubles in Greece and a 2.5% increase in the VIX.  The Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.81) and Sell Trade (79.26). 


A surprising relative outperformer was the Financials (XLF).  The Banks were a bright spot yesterday with the BKX up 0.3% on the day   Regional and money center names fared the best with C, BAC and JPM up on the day. 


The best performing sector yesterday was the Consumer Staples (XLP).  RISK AVERSION played a big part in the outperformance, while P&G was up after the company raised its 2010 growth rate.


The RECOVERY trade remained under pressure with Materials (XLB) underperforming the S&P 500 by 60bps.  In addition, earnings out of the Technology (XLK) was not met with a warm reception, especially the results out of the communications equipment and semiconductors space.  Yesterday the XLK declined 2.9%, with the SOX down 3% and the S&P Communications Equipment Index down 6.95%.  QCOM declined 14.2% and was the worst performer after the company guided March quarter EPS below the consensus and MOT declined 12.4% on lower guidance too.  


As we look at today’s set up, the range for the S&P 500 is 32 points or 1.7% (1,065) downside and 1.1% (1,097) upside.  At the time of writing the major market futures are trading up slightly on the day.  


In early trading today, Copper is up slightly, but is looking at its worst monthly loss since December 2008, because of six-year high stockpiles, a stronger dollar and concern about China’s demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.32).


In early trading today Gold is little changed but is headed for its second monthly decline.  The decline in gold is consistent with our “BREAK-OUT BUCK” theme.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,068) and Sell Trade (1,111).


Crude oil is trading slightly higher in early trading, but is looking at the second straight weekly decline and first monthly decline since September 2009.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (71.98) and Sell Trade (77.04).


Howard Penney

Managing Director














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ARO: Revisiting a Crowded Debate

It’s rare that Keith reaches out to us and says “XYZ Ticker looks awful” (based on his multi-factor models). Well, yesterday he said just that on ARO. At last count there were 34 published sell-side ratings on Aeropostale.  Wow, that’s a crowded debate!  That puts the “coverage” smack in the middle of the 23 analysts following GE and the 40 following Google.  So what does ARO do aside from selling cheap teen apparel to deserve all this attention?  Over the past year, the company has arguably been the biggest beneficiary in specialty apparel retailing from a confluence of positive events.  Let’s look at the facts:

  • The company’s highly promotional marketing approach and value pricing resonated well with the core 14-17 year old consumer over the past year.  Same store sales are up 10% YTD on top of an 8% increase in 2008.  With an average unit retail of around $11.80, there is no question that ARO’s price-driven merchandising strategy is working as higher priced competitors American Eagle and Abercrombie continued to lose share.  It’s no coincidence that Old Navy, Rue 21, and other deep value apparel retailers also outperformed.
  • Along with the topline, came an outright breakout in the company’s profitability.  With the fiscal year essentially over, ARO’s EBIT margins expanded by 400 bps in 2009- ending the year somewhere around 17.2% (beyond peak).  That puts ARO in the upper quartile of all vertically integrated specialty retailers, eclipsing JCG, GPS, ANF, and pretty much every other mall-based retailer on the planet.  Very rarely, if ever, have we seen a high-teens margin structure exist at a company that plays the in the value arena.  COH, ANF, CROX, DECK have all been there at one point or another, but these are all brands with price points substantially higher than ARO…
  • With 950 stores, ARO is no longer a growth driven story.  In fact, the core store base is pretty close to maturity.  As a result, same store sales leverage is huge. A fixed cost infrastructure pumping more and more units (180-190 million annually) through the same number of boxes is surely going to yield outsized upside.  This is especially true if you consider that one-third of the store base is approaching 10 years old and rents are probably pretty good in those locations.  Add to that some recession-driven cost cutting, and the formula makes a ton of sense.  Customer traffic increases (helped by the economy, supported by ARO’s aggressive marketing efforts) and throughput have been key to the strength in 2009.  But can this continue? And for how long?

Now let’s look at some concerns: 

  • While still in its infancy, the company’s key growth vehicle of the future is P.S. by Aeropostale, a concept aimed at a 7-12 year old consumer.  This makes a ton of sense longer term, as it’s probably cost effective to merchandise the brand as a “takedown” of the older original.  However, any ramp on growth will be a negative based on mix alone.  It’s near impossible for a chain of 40 or so stores to approach company average margins without greater scale.  Yes, it is still early to make a call on the concept’s eventual success, but nonetheless it’s both risky and margin dilutive in the near term.
  • Management cites the company’s past history when AUR’s were closer to $14-$15 vs. $11.80 today.  This is an opportunity according to management, and it surely seems like one on the surface.  However, raising prices (even if done the right way through better quality, trims, features) seems counter to what has been driving the business over the past two years.  Given the company’s strength in driving price driven purchase decisions, it seems unlikely that taking prices higher will be well received.  Yes, adding more fashion product into the mix has been in part a reason to command a higher ticket, but this also adds inventory risk.  ARO has historically been a fashion follower, which makes it hard to believe that they can successfully transition into a fashion leader. 
  • Co-CEO’s will take the helm in 2010.  The combination of an operating executive and a merchandising executive makes sense on paper, but this combo rarely works.  Before you email us with examples of how this has worked in the past, Aeropostale is no Ralph Lauren.
  • The shares have generally stopped responding positively, to positive news.  Even with continued upward earnings revisions, driven by outsized same store sales it appears that even the most aggressive assumptions are already discounted in the stock.  Yes, the shares appear cheap at 10x this year’s earnings, but the reality of slowing comps and potential EBIT margin contraction is likely to keep a lid on the shares at a minimum.  Any hiccups along the way with management’s transition and potential inventory build and this suddenly becomes one of our favorite shorts…

ARO: Revisiting a Crowded Debate - ARO earnings adj 1 10


  • Finally, our latest SIGMA analysis suggests that the peak may have already occurred.  Sales are still outpacing inventory growth, but the spread is narrowing.  Margin compares begin to increase meaningfully in 1Q.   With such a heavy reliance on selling more and more units, it’s becoming harder to envision a third year in a row of outsized same-store sales without a commitment to more inventory and/or higher price points.  Both prospects would suggest higher incremental risk…

ARO: Revisiting a Crowded Debate - ARO S 1 10


Eric Levine


Continued Sovereign Debt Buildup

I wrote a note a few days ago that summarized some key points from, “This Time is Different”, by Carmen Reinhart and Ken Rogoff.  As they write, global financial crises initiated by sovereign debt defaults are much more typical than most investors realize.  In many instances, the debt to GDP ratio of 0.9 is a metric that signals when many less than mature economies will risk defaults.


In the year-to-date, we have seen a massive issuance of global debt as many nations are attempting to plug holes in their budgets.  Below we’ve outlined from press releases some of the key recent issuances and their dates:


1/25 – Greece is reportedly trying to sell $32.5 billion of government bonds to the Chinese in a deal brokered by Goldman Sachs.  This deal would be more than 3x the size of the National Bank of Greece.


1/26 - Hungary on Tuesday sold $2 billion worth of 10-year debt, mainly to U.S. investors, in a move confirming its plans to come off International Monetary Fund aid this year.  Hungary sold the debt at a discount price of 99.86, bringing a yield of 6.269 or 265 basis points over comparable U.S. Treasuries, Deutsche Bank, one of the lead managers of the deal said.


1/26 -Vietnam raised $1 billion from its second global bond sale, offering higher yields than lower-rated Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.  The central bank set a 7 percent limit on the yield, the minimum amount investors AllianceBernstein L.P. and Western Asset Management estimated would be required to attract sufficient orders.


1/25- Greece raised 8 billion euros of a 5-year syndicated bond at a yield of 6.2%. The bond attracted total bids of EUR 25 billion, well above the EUR 3 billion to EUR 5 billion targeted by the government.


1/13- Indonesia scaled back an offering of dollar bonds to $2 billion from as much as $4 billion and scrapped a 30-year portion yesterday, people familiar with the deal said. Poland by contrast raised the most ever in a single sale of zloty bonds today, receiving 5.5 billion zloty ($2 billion) after 16.2 billion zloty of orders.


1/11 - Mexico sold $1 billion of bonds in the country’s first international offering since its credit rating was cut by Standard & Poor’s and Fitch Ratings. The bonds yield 5.25 percent, or about 1.42 percentage points more than U.S. Treasuries, the Finance Ministry said in a statement.


This acceleration of global debt issuances appears to be leading to a bubble in sovereign debt.  While we are not at bubble stage yet, we will be very focused on monitoring the issuance in the coming months.


Former Citigroup Chairman Walter Wriston once famously said, “Countries don’t go bust.”  In that case Mr. Wriston we have some Zimbabwean 30-years for you to buy . . .



Daryl Jones

Managing Director



From the presentation that just ended.




  • Current operating environment in Las Vegas?
    • Supply and demand environment that are out of balance hence putting pressure on rates
    • Still doing good volume but at materially discounted rates than 2 years ago
  • $200/night is still a reasonable but difficult rate to maintain given the competition.  However, they have reduced their expenses as well – despite the lower gross margins on rooms
  • 2010 group nights will definitely be better than 2009 – what’s on the books now is already better than 2009
    • Political rhetoric is over and Vegas is no longer a shunned location
    • Not at all worried about the group business in 2010 & 2011
  • The whole market is seeing more group activity than last year - the problem is getting that business at the rates that they used to have, and that’s not going to happen in 2010 and not in early 2011.  Although 2011 rates are up a little from 2010
  • Are there incremental opportunities to cut more costs here and in Vegas?
    • There are always opportunities, but the low hanging fruit is gone
    • Have 6500 employees in Vegas (casino/hotel level) – so think that they are pretty efficient given that they have 7,000 rooms


  • Take on political climate in Macau
    • Government of China has been very vociferous in supporting MICE and tourism business in Macau
    • As far as Visa & financial restrictions, expect that there will be some restrictions to allow for absorption.  Already said that they want Macau’s growth will be a few points above China’s GDP (~15%)
    • Feel like they are perfectly aligned with the government’s policy
  • Have had some success at growing direct play at FS.  However, junkets often try to steal that business
  • Their real success will hinge on a good balance btw VIP and Mass


  • Balance of VIP/Mass play in Singapore given the junket restrictions?
    • They are building their business based on the assumption that they will have no junket business.  
    • Will build their business on direct play and bussing programs (Malaysia for example)
    • Don’t think that many junkets will apply for licenses
    • Don’t know the mix right now, but Singapore is very accessible by flights
    • Piaza club (100 tables) Mass floor (600 tables) Slots (1500)
  • US entity is still very highly leveraged, what are the long term plans?
    • $5BN debt in the US restricted group, and $4.5BN of cash… they can meet covenants as long as they have > $3BN of cash in the bank
    • Once Singapore opens they can see what the cash flow/cash needs will be they can make a decision


  • Strategy in PA?
    • Disappointed with the numbers so far.
    • They will put in the tables games (80 tables) at a cost of $16-17MM. Projecting roughly a $25MM benefit from tables that open in the fall
    • No plans to start the hotels again until they can see justification from table games.  Will be using a newly opened Hyatt nearby for table players
    • Will have improved results in Bethlehem, slot facilities take about 17 months to ramp
  • RevPAR in Vegas for 2010 & 2011?
    • Guess is that in 2010 RevPAR will be down – but depends on what people put in for their “casino rooms” but that’s a fudged number since it includes comps.  Cash rooms will have lower rates
  • Will finish Sites 5 & 6 on Cotai with $500MM more equity

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.