The Macau Metro Monitor.  February 5th, 2010.



While no one can dispute that MPEL's January numbers were remarkable, DM cautions extrapolating those numbers for all of 2010 as some have to suggest that MPEL can do $400MM of EBITDA.  DM points out that Altira has had lousy luck for the last 12 months, averaging hold of just 2.64% so assuming that it will hold well at 2.85% for the year maybe a stretch. DM also questions whether the pick up in volumes that Altira saw in January wasn't partly attributable to more credit and faster payment of commissions, which proved unsustainable under the AMA umbrella.  DM also questioned the velocity of the January ramp at CoD in both the Mass and VIP side and the sustainability of such a trajectory. Bottom line, despite the worst of times likely being over for MPEL, its still premature to put a Sands or Wynn multiple on the name.



Ambrose So, CEO of SJM Holdings, responded to the latest market-share numbers for January (MOP14bn, SJM 30%, Sands China 22%, MPEL 16%, Wynn 13%, Galaxy 10%, MGM 9%) by saying SJM intends to increase its share further this year, and given that he's not a soundbite publicity man, DM thinks its likely to happen. DM  points out that SJM's valuation is ridiculously low compared to its peers in Macau (roughly 6 x forecast EBITDA vs. 12x for Sands) and that perhaps in a post Stanley Ho era, the company will need to do more marketing.


Three weights need to be lifted before SJM stock can perform: clarity on the health of Stanley Ho (which DM thinks will be resolved shortly), reporting transparency and liquidity in the shares.  The latter should be resolved fairly soon by the conversion of HK$2BN convertible notes. While the transparency issue may need the most work, Ambrose So's recent media comments may be a precursor or change to come. Reporting quarter numbers and giving guidance could do a lot for the stock, since shareholders don't know how much of the top line growth reported monthly is dropping down to the bottom line.  So has reason to be confident of market share expansion as the escalator being built outside the ferry terminal to take people to the bridge to Oceanus will help a little, but the commission caps in place margins should dramatically improve.



Grando Waldo, owned by Get Nice (0060.HK), reopened last Sunday with a new and improved casino and plans where announced to revamp the rest of the property. Grand Waldo, which operates under the Galaxy concession, was closed last year when Get Nice bought 50% of share of the property and shut it down for a major revamp.  Get Nice will invest between HK$100MM - $150MM with a target completion in 2Q2011, in time for Galaxy Mega Resort opening accross the road. 

The casino has been moved across from the main hall, which will now be turned into an outlet mall targeting thrifty mainland shoppers, the "family" spa is being rejuvenated, and the nightclubs are being redesigned.

PAC ON BACK ON TRACK Destination Macau

This week the government confirmed that the Pac On Ferry Terminal has been completely redesigned and will only open in 2012. Construction at the terminal is proceeding at a cracking pace. More berths are being built and new routes are already opening up. Turbojet now sails to the terminal from the Hong Kong airport (although still at long intervals between sailings), CKS has been approved to run a service into it from neighboring Jiangmen (CKS already runs the Xunlong ferry into Cotai from Shenzhen), while CotaiJet has been cleared to run sailings to Kowloon in Hong Kong (beginning this weekend) and eventually to the Hong Kong airport. This is good news for Cotai, as the new terminal couldn't come fast enough nearly 8,000 rooms coming online from Sites 5 & 6 and Galaxy Macau resort by 3Q2011.


A local academic was quoted by the Oumun Yatbo (Macao Daily) today as saying Singapore could take as much as 6-7% Macau's gaming market by luring away high-rollers.  This is how the academic made his calculation: 20% of Macau's VIP revenues are accounted for by direct, or “premium” VIP players; VIP players account for 2/3rds of Macau's gaming revenues, therefore, 50% of this traffic could end up going to Singapore. DM thinks there is no way that MBS and RW will take anywhere close to 6-7% of Macau's gaming revenues as rebates don't matter to high rollers and Singapore is a 4 hour flight from Guandong, where most of Macau's high rollers originate from. DM does think that RW will cannibalize Genting's existing business Malaysia as well as create new southeast Asian business.



Macau's crime rate dropped by 10.5% in 2009, including a significant reduction in violent crime, juvenile delinquency, robbery and arson.


Following comments by Secretary for Economy and Finance, Francis Tam Pak Yuen, that “imported labour will only be accepted if local hiring does not work out,”  Steve Jacobs, chief executive officer of Sands China, has given an assurance that the company will hire local workers first to restart its Cotai Strip projects.  However, importing labour will be inevitable because the local labour pool cannot meet market demands. Jacobs also stated that Tam assured Sands China that the completion of its Cotai Strip projects would not be jeopardised by imported labour quotas.  The government has not yet allowed Sands to import labour for construction of Sites 5 & 6.




East Asia Satellite Television, a non-wholly owned subsidiary of eSun Holdings, has filed a statement of claim with the High Court in Hong Kong against its partners in the Macau Studio City project in Cotai. East Asia is suing New Cotai, Silver Point Capital, Oaktree Capital Management and others for failure to co-operate and progress the Macau Studio City project.
The company is seeking compensation of HK$689MM for “breaches, or inducing breaches, of contract” and by way of “derivative action”, damages of approximately HK$18.6BN “for inducing or procuring breaches of fiduciary duties owed to the joint venture company”.  According to a HKSE statement yesterday: “The proceedings are being pursued in the context of a desire on the part of the company [eSun Holdings] to protect East Asia’s interests in the development and progress the Macao Studio City project.”

Rome's Groupthink

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.”

-Cicero, 55 BC


Recently, our stealth Managing Director of Financials, Josh Steiner, sent me that quote with a simple note attached – “Keith, this adds about 3200 years to the 800 years of Reinhart/Rogoff data you have been beating into us.”


Now that Groupthink Inc is coming to realize that the impact of piling sovereign debt upon debt upon debt is bad, I suppose they’ll eventually get to the required reading (“This Time Is Different”, by Reinhart and Rogoff). But sometimes I wonder who actually reads anymore?


There is something about the “arrogance of officialdom” that is starting to make the modern day Rome of Perceived Financial Wisdom shake. Whether it be politicians on the Senate Banking Committee focusing more on their crackberry messages than Paul Volcker, or CNBC’s Larry Kudlow labeling his nightly editorial the “Money Politics Message”, it’s all mashing like potatoes into the same political trend of short-termism.


Yes, I read (roughly a book every 9-10 days), but I certainly don’t consider that a unique skill set. Maybe reading about risk management topics before the risks get baked into this completely politicized cake is the differentiator. I am not sure. I suppose all you need is an investment process that proactively calls out probable risks when Groupthink Inc considers them improbable. Staying ahead of this herd isn’t that hard.


Consider my former employer’s recent prognostication in Davos, Switzerland about emerging markets: “Emerging markets are the most attractive places to invest and rebounding more rapidly” –David Rubenstein, Co-Founder of The Carlyle Group.


Then consider what’s happened in the last 48 hours of global risk management. Then consider that Rubenstein is currently the President of The Economic Club of Washington, DC!


The “arrogance of this country’s officialdom” lacks fiduciary responsibility to the core. If some of these high ranking politicians or private equity men of Rome continue to be this incompetent in calling out macro market risks BEFORE they occur, what will become of Rome’s Groupthink?


Per my friends at Bloomberg, “emerging market equity funds lost $1.6B in weekly withdrawals” so far this week. That’s the biggest weekly outflow in 2 years. Again, because those who get paid to be willfully blind are ignoring the omnipresent global macro risk in the marketplace, doesn’t mean it ceases to exist. What happened yesterday wasn’t new. It was a continuation of more of the same.


So now that stocks in Greece have lost -35% of their value since October 14, 2009 and Spanish stocks have lost -18% of their value since January 6th, 2010, what is a risk manager to do this morning? Freak-out? Revert to Great Depression fear-mongering?


C’mon. Let’s get serious and keep taking advantage of the crisis that the arrogance of America’s officialdom continues to create. Let’s start with how we proactively positioned for this and look at our Asset Allocation Model:

  1. Cash = 52%
  2. International Currencies = 24%
  3. International Equities = 12%
  4. Bonds = 9%
  5. US Equities = 3%
  6. Commodities = 0%

No, I am not worried whatsoever about who manages how much, or whether or not they can manage real-time risk dynamically enough to get themselves in these positions. Being too big to move your asset allocation doesn’t make you too big to fail.


What moves did we make yesterday in order to set ourselves up for today?

  1. We covered our short position in US Equities (SPY)
  2. We covered our short positions in gold and oil (GLD and USO)
  3. We bought German and Brazilian Equities on weakness (EWG and EWZ)

What do we plan on doing next?

  1. Watch and wait for an opportunity to sell some US Dollars on strength (Buck Breakout has been our call for Q1)
  2. Watch and wait for Chinese equities to get washed out (Chinese Ox in a Box has been our call for Q1)
  3. Watch and wait for US Equity fire engine chasers to freak-out

The long term TAIL of bullish support for the SP500 is currently down at 976, and I have an immediate term support line at 1052. Please don’t let other people’s reactive behavior freak you out this morning. This is not going to be a crash like we called for in 2008. This is America, and finally we are going to rid ourselves of Rome’s Groupthink.


Best of luck out there today,






FXA – CurrencyShares Australia Dollar — Aussi Dollar bulls finally capitulated on the sell side on 2/4/10. We bought FXA as a long term TAIL idea that remains intact, at a price. Glenn Stevens remains our favorite central banker, globally.  


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 — We added to our position in Germany on 2/4/10 on 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 — The long term TAIL of support for Brazil's Bovespa remains intact. We added to our position and bought EWZ on 2/4/10 on a -6.1% drop in the ETF, because the math is telling us to.

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.



EWW – iShares MexicoWe do not want to be net long Latin America (Brazil) anymore. Mexico short is a solid compliment to our short position on oil and our concerns about sovereign debt risks.


EWJ – iShares JapanWe shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


UNG – United States Natural Gas FundMacro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 


XLE – SPDR EnergyThe Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.


IEF – iShares 7-10 Year TreasuryOne 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. Russia’s GDP fell 7.9% in 2009.


EWJ - iShares JapanWhile 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.



Yesterday’s spectacular decline can be credited, in part, to the P.I.G.S. [Portugal, Ireland (or Italy or Iceland), Greece, and Spain] sovereign credit issues.  The accompanying dollar strength is exacerbating the pressure on commodities and stocks leveraged to the RECOVERY trade - a different kind of SWINE FLU!


Since the March 9, 2009 low there have only been three other days that the S&P 500 market has fallen 3% or more: 3/30, 4/20 and 6/22.  Yesterday’s 3.11% decline in the S&P 500 was a devastating blow to the internals of the market.  Volume accelerated by 39% day-over-day and the Advance-Decline number was -2582; you need to go back to 3/5 to see a number that bad.  Lastly, there are no sectors positive on TRADE and Healthcare (XLV) stands alone as the only sector positive on TREND.   


The pickup in the RISK AVERSION trade was evident with the dollar Index being up 0.78% yesterday.  The Hedgeye Risk Management model has levels for DXY at – buy Trade (79.03) and sell Trade (79.78).  Yesterday, VIX was blown out to the upside by 20.74%.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.26) and Sell Trade (27.08). 


Yesterday we did some buying/covering shorts.  We covered our short positions in the S&P 500 Gold and Oil.  Every short position has a time and a price where it’s immediate term oversold. We remain bearish on the SP500 from an intermediate term TREND perspective with resistance at 1,101.


China continues to be a MACRO headwind for stocks with the continued stories highlighting tighter credit conditions.


Another MACRO headwind was the initial jobless claims number, which came in significantly higher than expectations.  Initial unemployment Claims came in at 480,000 last week, up from 472,000 last week (revised up 2k).  The 4-week rolling average ticked up 12,000 to 469,000 from 457,000 last week. The improvement in this metric since March of last year has been tailwind for the equity market.  This metric raised some concerns about tomorrow's release of January nonfarm payrolls. 


The Financials were the worst performing sector yesterday, declining 4.3%.  After falling more than 2% on Wednesday, the banks group remained a source of funds with the BKX down 4.3%.  A number of Financials are struggling to find the post-crisis valuation level given the uncertainty of what the business models will look like post-regulation.  The regional banks also underperformed.  As our Financials analyst, Josh Steiner, noted yesterday the heightened employment concerns are a headwind for the financials, as the labor market recovery is a key component of future credit trends.


Rounding out the top three worst sectors were Energy (XLE) and Materials (XLB).  Obviously, the XLB and XLE are the two sectors with outsized exposure to RISK/RECOVERY/REFLATION trade.  The strength in the dollar and the continued removal of excess liquidity in China are the major macro-leaning headwinds putting pressure on these sectors. 

On a relative basis, Technology (XLK) outperformed yesterday on the heels of largely upbeat 4Q earnings.  However, inventory build concerns are part of the reason the SOX is severely underperforming. 


As we look at today’s set up, the range for the S&P 500 is 36 points or 1.0% (1,052) downside and 2.3% (1,088) upside.  Equity futures are trading slightly below fair value in the wake of yesterday's painful declines and ahead of today's job's report.  Also the there are continued concerns surrounding the P.I.G.S. and their debt issues.


According to Bloomberg News, Copper stockpiles jumped in Shanghai to the highest level in almost six years this week.  Copper traded down 3.1% yesterday and is down nearly 14% this year.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.13).


Gold is trading a three-month low in as the dollar’s rally hurts gold’s appeal as an alternative investment.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,052) and Sell Trade (1,110).


In early trading crude oil is trading flattish following its biggest decline in six months, as decline in the equity markets and a strong dollar are putting pressure on the commodity.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.69) and Sell Trade (77.32).  Yesterday, we covered our short in the US Oil Fund (USO).


Howard Penney

Managing Director















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Risk Management Time: SP500 Levels, Refreshed...

Once in a while, markets agitate me. There is a very high r-square with those times and when my macro returns aren’t positively correlated with my view. On Tuesday, I was agitated. Today, I am smiling. This is a cyclical business.


As we test my immediate term (TRADE) oversold line for the SP500 (1068) here intraday, I am very much respecting that the risk management game here for US Equities has changed. Whether or not I decide to cover my short position in SPY won’t change my intermediate term (TREND) view that the SP500 is broken (1101).


In the chart below, I show the long term (TAIL) line that I am currently measuring as support. It’s all the way down at 976. No, that doesn’t mean that I think we are going there today, tomorrow, or next week for that matter. It simply means that I think a test of that line is finally in play.


Market prices and the probabilities embedded in those prices are constantly changing. The fractal math in my macro model updates every 90 minutes of marked-to-market trading in an effort to dynamically reflect those probabilities. Some people call this being “short term.” I call it driving with my lights on.


Quite often, what consensus considers improbable becomes probable. The art of risk management is not missing those flashing lights as they turn from green to red.


It is now probable that we see the SP500 test the 976 line sometime in the next 3 to 12 weeks. That would equate to a -15% peak-to-trough correction from the recent cycle-high of 1150 that was registered on 1/19/2010. I wouldn’t consider that a “crash” scenario; but I would consider it a foreseeable probability that you should be managing risk towards over the intermediate term.


I turned the lights on this morning carrying only a 3% position in US Equities in my Asset Allocation Model. Even though that’s really low, I’m not deciding whether or not I should up that right now. I’m simply watching and waiting for an opportunity to cover my SPY short.


Take your time. Don’t get agitated.



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed...  - zeechart


Oh, Mexico!

Position: We are short Mexico via the etf EWW


“Baby's hungry and the money's all gone
The folks back home don't want to talk on the phone
She gets a long letter, sends back a postcard; times are hard”

-           James Taylor – Mexico


We’ve been negative of Mexico for most of the past year and have been in and out of her on the short side a number of times.  Rock and roll musician James Taylor sings the well known song Mexico, which is excerpted above.  While JT is referring to a lover from Mexico, the excerpt could just as easily be referring to the potential for increased fiscal issues in Mexico.


We are bearish on oil in the intermediate term and this is major problem for Mexico.  The Mexican oil industry is a monopoly controlled by state owned Pemex. On one hand, Mexican production of oil is in decline, which is bad for Mexico.  In fact, in 2009 Mexican production was 2.6MM barrels per day, which is its lowest level since 1990 and 6.8% less than the prior year.  In addition to that, any decline in the price of oil will also negatively impact state revenues.


As we have noted in the past:


“To this day, PEMEX owns and operates all of Mexican oil production and is a meaningful contributor to the Mexican economy. In 2007, Mexican oil exports contributed 10% of Mexican export revenue. PEMEX pays out over 60% of its revenue to the Mexican state in the way of royalties and taxes. In aggregate, PEMEX contributes almost 40% of the federal government's budget. Despite record oil prices over the last few years, the Company has a substantial debt balance estimated at over $42.5BN as the vast majority of profits have gone to the government rather than to pay down debt, let alone investing in the business.”


A decline in oil is clearly bad for Mexico. In 2009, the country posted a fiscal deficit of $20.1BN and even with a projected growth rate of 3% in 2010 it is likely that the deficit will continue.  To offset her budget gap  . . . you guessed it . . .Mexico issued sovereign debt. On January 11th of this year, Mexico issued $1BN in 10-year bonds at an interest rate of 5.25%.  This was her first offering since the credit rating of Mexico was cut by Fitch and Standard and Poor’s to BBB.


Declining oil revenues, burgeoning deficit, and increased debt. Oh Mexico, indeed.



Daryl G. Jones
Managing Director



Initial unemployment Claims came in at 480k last week, up from 472k the week prior (revised up 2k). This brings the 4-week rolling average up 12k to 469k from 457k last week. The improvement in this metric since March of last year has been the key metric for our bull case on consumer finance companies. As this rate backs up, we get, on the margin, less bullish, but this metric has shown some drift in the past, both up and down, relative to its predominant trajectory, so we give it some latitude. That's why we use a +/- 3 standard deviation range to keep track of whether the trend in rolling claims is veering off course or is simply moving within the channel. As the following chart shows, claims remain within the channel for now, so we're not changing our bullish view yet. That said, claims are as high within the channel as they've been at any time since the turnaround began, so we think we're at a very important moment in time, and intend to keep an extremely close eye on claims in the next few weeks to see whether we break out of the channel.



Joshua Steiner, CFA




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