"The fourth quarter was a tough one for us, and we're disappointed.  While the first half of the year was solid, the continuing deterioration of the economy resulted in less visitation and lower play per customer. We started to feel the economic downturn in late summer and we increased our marketing efforts. As a result, we maintained or increased market share in many of our larger markets, but our margins declined."

- John Giovenco, Pinnacle Entertainment's interim chief executive officer


Highlights from the Release

  • "As we enter 2010, we are focused on our commitment to increasing shareholder value. We're concentrating on operating efficiency and, in particular, effective marketing. We're evaluating our underperforming and non-strategic assets; reducing corporate overhead costs; taking a disciplined approach to capital spending; and developing Sugarcane Bay and Baton Rouge in Louisiana."
  • "To achieve these goals, we redesigned both our Sugarcane Bay and Baton Rouge projects, resulting in a reduction of more than $100 million in Sugarcane Bay's cash construction costs; restructured corporate and property marketing to result in a significant net reduction in headcount; subsequent to year-end decided to put our Atlantic City assets up for sale; listed the company airplane for sale; hired two highly experienced general managers for Boomtown New Orleans and Lumiere Place; moved to consolidate our three Las Vegas offices into one; reduced corporate overhead; and plan to institute a new compensation program that rewards executives for increasing long-term cash flow and EBITDA. We believe these actions will improve operating results."
  • "Separately, the board has engaged the international recruiting firm Heidrick & Struggles to help conduct the search for a new executive to succeed Pinnacle's former chief executive officer... The search is well underway, and we will announce a resolution at the appropriate time."
  • "Banc of America Securities LLC and J.P. Morgan Securities, Inc. have been selected as Joint Lead Arrangers for this new credit facility, which has a maturity date of March 31, 2014. Commitments from banking institutions toward the new credit facility have been received in the amount of $375 million. The Company expects that the new credit facility will close in the next few business days."
  • Property specific commentary:
    • "L'Auberge du Lac's market share improved to 52.6% in the period from 50.2% in the prior-year period. While the overall regional economy was softer in the 2009 fourth quarter compared to the 2008 period, unemployment statistics remain more favorable in this region than the nation as a whole."
    • "Market share at Lumiere Place climbed from 17.1% in the 2008 fourth quarter to 20.5% in the 2009 period."
    • "Boomtown New Orleans was affected by market softness as reduced Katrina relief efforts and related spending, reduced construction activity, reduced discretionary income, and weaker economic conditions have dampened operating results throughout the region. As such, marketing efforts by the competition have increased dramatically. The Property's increased marketing programs did not produce intended results"
    • "These results reflect the opening of expanded and enhanced casinos at two competing facilities, as well as softer general economic conditions. As a result of competitive pressures in the market, 2009 fourth quarter results at Belterra reflect increased marketing spend to compete against the augmented competition."
    • "We were able to maintain market share; however, revenues in the Bossier City/Shreveport market were down 13% for the fourth quarter of 2009 compared to the prior-year period."
    • "Boomtown Reno has been affected by significant competition from northern California Native American casinos, as well as weak economic conditions in both the region and northern California. Employee headcount as of December 31, 2009 has decreased 11% from December 31, 2008. The Company has targeted additional areas at Boomtown Reno to further reduce costs in 2010."
    • "Revenues have decreased due to a recent decline in the value of the Argentine peso, as well as weakness in the Argentine economy. The decrease in Adjusted EBITDA reflects the currency decline and inflation of certain costs, principally payroll costs."


  • Other properties start to feel the pressure of the recession at the end of the 3rd quarter and in response they increased marketing. So they had a double hit to earnings, lower revenues and higher marketing
  • Attacking costs at the corporate and property level, continuing to reduce headcount throughout the company
  • Recently the board separated the roles of Chairman and CEO.  The committee is currently interviewing CEO candidates


  • How much costs can they take out of corporate and property level expenses?
    • More of a question on can marketing become more efficient.  So costs will get reduced as a function of increasing efficiency (marketing is the largest cost opportunity)
  • Pricing on bank facility will be at L + 400 bps based on current leverage levels, may close today or Monday. No LIBOR floor (now its 23bps).  Intention is to close the facility at $375MM in size. Covenants in new deal will be more "accomodative" to their current operating plans
  • Spent $75MM on cash capex in 4Q09, $57MM was River City. $9MM on Sugarcane & Baton, rest was maintenance
  • 2009 cash spend $213MM, $157 on RC, $15MM Sugarcane Bay & Baton Rouge
  • Belterra: What happened there? What are they doing to improve things, given that the competitive environment isn't going to change?
    • Had increased competition with several boats (Lawrenceburg) in the area and increased marketing costs in response - to a level that they shouldn't have
    • It all comes down to spending marketing dollars in an effective way, have been focused on implementing those processes over the last two months and will see some results
  • How to think about cannibalization from River City on Lumiere Place?
    • View those two properties as a singular portfolio.  Don't worry about the cannibalization, but rather how much they can do as a whole.
  • AC: hope to sell it as soon as a reasonable bid comes in. They just put it up for sale
  • CEO search has been narrowed to a smaller group of people including some internal people
  • Why move forward in Baton Rouge, given how under pressure that market has been?
    • Feel like they have a locational and product advantage
    • Economic pressures are likely to be short term in nature and by the time they open there should be a different environment
  • The R/C will not entirely complete their financing needs, but it is a large part of it. Still need some capital which they will get to on an opportunistic basis
    • Sugarcane is not quite fully financed at this point either (self imposed liquidity needs)
  • Impact of low hold on L'Auberge? $1.5MM
  • River City opening will not impact corporate overhead
  • New CEO will be more of an operating than a development guy/or gal
  • Total capex spend for 2010: $35-40MM of maintenance, completion of RC + Sugarcane & Baton Rouge and some smaller projects
  • Are they going to move the corporate office closer to their operations? No, they already have leases in place, and would need to relocate everyone
  • Why haven't they hired investment bankers to pursue strategic opportunities
    • Think they can do a better job operating their assets and thereby grow their share price
  • Free play in Indiana?
    • Monitoring it, but no idea of the chances
    • Tables games at Betteroff would have a negative impact on them
  • Have until March 31 to submit a construction contract for Baton Rouge and have no intentions to extend that deadline
  • Bossier City, what to they attribute their success to in that market?
    • Have good efficient marketing
  • Try to keep the Sr. Secured leverage low
  •  No more room on the Sugarcane budget

Unemployment: Better Than Feared

With the volatility index (VIX) and NYSE volumes +21% and +41%, respectively (yesterday), the fear factor associated with the unknown was real. Now we all know what we didn’t know. The US unemployment rate dropped, sequentially, by 30 basis points (month-over-month) to 9.7%.


The reality is that both, relative to freak-out expectations, and on an absolute basis, this morning’s US unemployment report was better than feared. That, however, doesn’t mean the stock market has to go up.


My US Strategy partner, Howard Penney, and I made a call earlier this week that whether this report was better or worse than expectations, that the US Dollar was going to go up and the US stock market was going to go down. Some people quibbled with the math behind our conclusion, but that’s ok – that’s what makes a market. Today, on a better than feared unemployment report, the Buck Breakout continues and stocks remain weak.


A lot of people are used to seeing better than feared economic reports support higher stock prices. To some extent, its Pavlovian. The US economy is not in a “great depression”, even though those who short sold last year’s generational stock market squeeze are rightly depressed.


Everything that really matters in our macro model happens on the margin. Relative to bombed out expectations, the last 6-9 months of economic data has been much better. Now, relative to complacently high expectations, the next 3 months of data might just keep coming in as just that – complacently high.


Better than anything that resembles a required “emergency level of zero percent” Federal Funds rate, will continue to pressure Bernanke to see the data for what it is. This, relative to expectations, is the real reason why stocks are deflating. As the Fed prepares to remove the “extended and exceptional” language from their currently politicized monetary policy, the Buck Breakout will continue to manifest to the upside, discounting the same.


It’s somewhat unnatural for the manic on CNBC to understand this concept; but better than feared economic news can be bad for stocks, indeed. The US stock market’s REFLATION trades that we were riding last year (based on a Burning Buck) are completely unwinding as real-time risk managers come to grips with the reality that ZERO is not a perpetual monetary policy – not with GDP up +5.7% y/y, CPI +2.7% y/y, and the unemployment rate rolling over at least.



Keith R. McCullough
Chief Executive Officer


Unemployment: Better Than Feared - unemploy



What Is It That You Do?

Keith and I were discussing the Economic Club of Washington this morning.  At a certain point we both looked at each other and said, “What is it that they do?”.  Neither of us really had an answer.  So being the useful analyst that I am, I went to this great research tool called Google and looked up its website.  I thought the Membership Guidelines were most interesting:


“Economic Club membership is limited in number and includes CEOs of local corporations, managing partners in leading law and accounting firms, executives of top consulting, technology, and research organizations, and national heads of associations and other entities in healthcare, insurance, culture and education and other businesses and professions.”


Ok, got it. It’s an old boys club of group thinkers.  But still, what is it that they do?


Further, in the Membership Guidelines some clarity on the Club is given:


“Members convene five times a year for a luncheon or dinner at which they can bring a limited number of guests at a reasonable fee.  Events are held at the city’s leading hotels.  By tradition, one dinner each year is black tie.”


That certainly provides a bit more clarity.  The old boys club of group thinkers also get dressed up and goes to nice hotels.  Well, that is something I suppose.  But still, what is it that they do? 


The About Us section gives us a little more direction for this question.  It states that the Club has two primary purposes:


“First, it offers a forum in which prominent business and government leaders can express their views on important economic issues of the day and how those issues affect the region, the Nation, and the world.  Second, and equally important, it generates and promotes a greater sense of community among business leaders, government officials, and members of the diplomatic corps.”


Roger. The fancy pants old boy group thinkers get together and pontificate in front of each other.  Ultimately, of course, what this type of activity leads to is additional behavioral economic tendencies.  The two that come to mind are herding, when individuals act together without planned direction, and status quo bias, which occurs when people tend to not change an established behavior unless the incentive to change is compelling.


So, it seems, the Economic Club of Washington, or the Club as they call, does do something.  It provides case studies in behavioral economics.  If we can recognize that early, that is not a bad thing.


The danger of course is that when someone like David Rubenstein (“Ruby”), the Co-Founder of the Carlyle Group and the President of the Economic Club of Washington, makes public statements that other individuals may invest in based on his Perceived Wisdom.  As a case in point, his recent statement on emerging markets from Davos in late January:


“Emerging markets are the most attractive places to invest and rebounding more rapidly.”


Sadly, Ruby top ticked that one.  As we wrote this morning in the Early Look:


“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.”


We now know what the Club does and we also understand their output. The Club produces contrary indicators. 


Ruby, any good asset allocation ideas that we can take the other side of?



Daryl G. Jones
Managing Director

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

R3: A Sobering Perspective on Japan


February 5, 2009


In light of yesterday’s post-holiday gift card promotional euphoria, which was a key driver to ANF’s first positive comp in almost 2 years, we wanted to share a sobering perspective on the company’s recent entry into Japan. Before US-centric analysts get carried away with the “huge potential” for Abercrombie across the globe, it’s at the very least worth considering the cultural challenges that exist from Milan to Ginza. 





In light of yesterday’s post-holiday gift card promotional euphoria, which was a key driver to ANF’s first positive comp in almost 2 years, we wanted to share a sobering perspective on the company’s recent entry into Japan. ANF is currently in the midst of a major shift towards international growth and a strategy which is heavily dependent on high profile, high cost flagship locations. With the bulk of the business still stateside and struggling, it’s really not that surprising that both management and bullish investors are increasingly positioning the international growth story with tremendous potential.


Practically speaking, a heavy reliance on flagships in cities like London, Tokyo, and Milan makes it much more difficult to see what’s going on first hand for equity analysts. Especially those with limited travel budgets and little time for such exotic “channel checks”. Thankfully, the world is smaller these days with the Internet, and the feedback loop in the fashion world is about as instantaneous as a free stock quote on Google. With that said, take a look at the following key points pulled from a recent article about ANF’s early challenges Japan, written by W. David Marx for The Business of Fashion.


  • The initial opening of the 11 story Ginza store was met with the usual fanfare- long lines and plenty of excited first-time shoppers. Rumors suggest opening day sales were $550,000. That’s the positive.
  • Japan is in the midst of a low-price fashion boom, led by the success of UNIQLO, H&M, Forever 21, and cheap domestic labels. Against this backdrop, ANF came to market with a pricing strategy that offers the same US goods at nearly 2x US prices. We know that ANF is “aspirational”, but this might be taking the brand to a more “luxury” level.
  • A poll of first-day A&F shoppers in Nikkei’s Marketing Journal showed that 61.7 percent of people found the prices “a bit high” while 18.3 percent declared them “too high.” Less than one-fifth of consumers thought the prices were on target.
  • Unlike other multinational brands that have traditionally partnered with locals to adapt marketing and communication strategies to the Japanese consumer, ANF is taking a 100% American approach. In fact, the store and brand image is virtually identical to what we see on 5th Avenue in New York. The author makes the following points about how this approach clashes with the Japanese culture:
    • The staff is handpicked to be almost entirely “American”, with virtually no employees appearing to be authentically Japanese. Customers are greeted and approached in English, a language that natives are not normally expected to use while shopping in their homeland.
    • The boisterous store environment which includes loud music, singing, and dancing by staffers flies in the face of the principles of Japanese politeness.
    • Bare chested male models floating around the store is both out place with Japanese fashion culture and is off-putting to the Japanese customer.
    • Believe it or not, the Japanese culture is “perfume adverse”. This certainly doesn’t match up well with the in-store aroma that gets constantly pumped with cologne as it is throughout the entire chain.
    • A&F logos are prevalent across the merchandise offering. Interestingly, this positioning comes at time when the Japanese fashion culture is less interested in logos and more interested in subtle branding.


To be fair this is just one author’s opinion, and a fairly negative one at that. Nonetheless, the ANF strategy is extremely Americanized and differentiated as a result. Before US-centric analysts get carried away with the “huge potential” for Abercrombie across the globe, it’s at the very least worth considering the cultural challenges that exist from Milan to Ginza. For the full article take a look at the link here:


R3: A Sobering Perspective on Japan - ANF Japan 2 10 


-Eric Levine




  • The timing of the Super Bowl this year negatively impacted January sales and will benefit February sales. COST and BJ both noted that the impact from the calendar shift is about 100-200bps. We suspect that while the impact may not be as great across the board for all retailers, any company with a high concentration of consumables in their mix will likely see a benefit in February as well. In addition, all retailers of electronics noted the impact of the shift on TV sales.
  • Nordstrom indicated that traffic in its full-line stores, as measured by the number of transactions, increased for the fifth month in a row. The average ticket was flat compared to the same period last year.
  • Timberland pointed out that transportation costs as well as input costs are expected to increase by the middle of the year. In fact, the CFO said, “We are already facing transportation cost increases now versus where we were last year. As the capacity has been constrained they are driving prices up on container shipments.”
  • Footwear sales were consistently cited as a standout during the month of January, with the category leading sales increases for ROST, JWN (women’s), and KSS.
  • Most people are probably unaware of the “Bag War” taking place at Wal-Mart. Beginning late last year, WMT indicated it was looking to consolidate brands in the food bag category. As a result, Ziploc, Glad, and Hefty began to invest heavily in store tests and advertising to save their business with the retail giant. Well now the results are in, and it appears that Ziploc will be the sole remaining national brand alongside WMT’s own private label, Great Value. Importantly, this is likely just the beginning of further consolidation amongst SKU’s at WMT and other discounters, especially in commodity categories.


MORNING NEWS  (and Hedgeye Retail’s 2 Cents)


Claiborne Sued by Licensee Over Penney's Deal - A Liz Claiborne Inc. outerwear licensee has filed a $100 million breach of contract lawsuit over the company’s exclusive deal with J.C. Penney Co. Inc. The Levy Group Inc., which has held the license for Liz Claiborne rainwear since 1997, filed the complaint in New York State Supreme Court in Manhattan on Jan. 21. In October, Liz Claiborne announced that Penney’s would have exclusive rights to sell its namesake brand starting for the fall. The Levy Group alleged in the lawsuit that the deal will “destroy” the business it has spent more than 10 years developing by taking the brand out of better retailers and ultimately tarnishing the reputation of the trademark. “Even a robust business with J.C. Penney will not replace The Levy Group’s current volume, as sales at J.C. Penney stores are a fraction of those at the network of multiple ‘better zone’ department stores that The Levy Group has cultivated,” according to the complaint. “The Levy Group’s right to sell merchandise to ‘better zone’ department stores is meaningless unless Liz Claiborne protects the reputation and prestige of the marks and maintains the ‘better zone’ standard.” <>

Hedgeye’s 2 Cents: I won’t comment on the merit of the lawsuit without having seen the original contract, but this is yet another reason why running a model of licensing another company’s content is simply bad. (You listening, Warnaco?).


Men's Wearhouse Names Chief Marketing Officer - Diane Ridgway-Cross has joined Men’s Wearhouse as senior vice president and chief marketing officer, a new position. A 17-year veteran of the retail and consumer products industries, Ridgway-Cross was most recently with Mullen Advertising, where she directed new business growth and was the managing partner of Frank About Women, a marketing-to-women communications company. She also has worked for The TJX Cos. Inc., DSW Shoes, Hasbro, Kimberly-Clark and Nestlé USA. <>

Hedgeye’s 2 Cents: No strong opinion here on this hire. But ‘Men’s Wearhouse’ hiring the managing partner of ‘Frank About Women’ is initially a head scratcher. All that said, check out the site ( If she can translate the approach to a different gender, then this might actually be a decent move for Men’s Wearhouse after all.


SKECHERS Named Company of the Year by Footwear Plus Magazine - SKECHERS USA, Inc. (NYSE: SKX), a global leader in lifestyle footwear, today announced that it has been named 2009 Company of the Year by Footwear Plus, a leading footwear trade publication. This Plus Award for Design Excellence marks the fourth time in five years that SKECHERS has claimed the top prize. “It is a great honor to be named Company of the Year by our industry for the second consecutive year,” began Michael Greenberg, president of SKECHERS. “Considering the strong brands also nominated – including Nike – and the challenging economy of 2009, we are particularly proud of this award. We believe it is a testament to the strength of our brand, our determination to deliver fresh, innovative product, and the hard work of the entire SKECHERS team.” “For the second straight year, SKECHERS has taken home the Plus Award in the prestigious ‘Company of the Year’ category,” stated Greg Dutter, Editorial Director of Footwear Plus magazine. “Amid a difficult retail climate, SKECHERS adapted and thrived, turning in record-setting third quarter sales and has projections for a record fourth quarter as well. The Company continues to deliver on-target and affordable fashions across a wide range of footwear segments. Collectively, SKECHERS hits on America’s sweet spot when it comes to its everyday footwear needs.” <>

Hedgeye’s 2 Cents: Is this serious??? A company that has never had an original design in its history winning a design award?


China Protests EU Tariffs - China filed a complaint against European Union shoe tariffs at the World Trade Organization as Beijing continued its legal assault on what it says is unfair Western protectionism. Europe has grown increasingly concerned about China's balance of trade and what some critics view as its artificially weak currency. China, which joined the W.T.O. in 2001, filed its first unfair trade case against the European Union in July 2009, also involving antidumping duties. The latest move appeared intended to increase pressure on the European Union, which had itself been sharply divided over extending the shoe tariffs. In a statement issued by its mission in Geneva, where the WTO is based, the Chinese government said Europe's actions "violated various obligations under the W.T.O., and consequently caused damage to the legitimate rights and interests of Chinese exporters."  It added that China "had repeatedly consulted" with the European Union but said that its concerns "had not been properly addressed or settled." In an eight-page legal complaint, the Chinese government requested consultations on both the original 2006 decision to impose the shoe duties and last year's move to extend them. The EU and the U.S. have sought to stem the flow of Chinese imports with special duties. In the EU case, China is taking on one of the most important tariff increases ever levied, which has taken a bite out of its expansive shoe industry. The 16.5% tariffs are antidumping duties, meant to punish goods that are sold below cost and hurt the sales of domestic producers. The EU duties were inaugurated in 2006 and extended for 15 months in December 2009. At the same time, shoe imports from Vietnam were hit with a 10% tariff. <>

Hedgeye’s 2 Cents: This smells really bad. The China vs the West trade war covertly builds… at the same time its appetite for accepting dollars for locally manufactured goods is waning, and Asian nations are gearing up for increased local consumption in a post-free trade agreement environment.


Beyoncé's House of Deréon Accused of Breach of Contract - Beyoncé Knowles’ House of Deréon clothing line has been named in a breach of contract lawsuit filed by a Hong Kong manufacturer. In a complaint filed in U.S. District Court in Manhattan Monday, lingerie and women’s apparel maker Vier International Ltd. said New York apparel firm Donna Loren LLC and Brooklyn shipping firm HJM International were “conspirators who induced the shipment of goods to the United States with the intent to convert them or pay less than the agreed upon contract price.” Vier alleged that “defendants Beyond Productions LLC and The House of Deréon were parties to the breach and conspiracy providing purchase orders and specifications of manufactured goods.”  <>

Hedgeye’s 2 Cents: Kanye West should take the fall here.


FTC Warns 78 Companies to Scrutinize Bamboo Labeling - Seventy-eight companies nationwide have received Federal Trade Commission letters warning that they may be breaking the law by selling clothing and other textile products that are labeled and advertised as “bamboo,” but actually are made of manufactured rayon fiber. The letters, which the agency’s staff sent last week, make the retailers aware of the FTC’s concerns about possible mislabeling of rayon products as “bamboo,” so the companies can take corrective steps to avoid Commission action. In the letter, the FTC tells the companies they should review the labeling and advertising for the textile products they are selling and remove or correct any misleading bamboo references. The more commonly known retailers to receive the letter include:, Barney’s New York, Bed Bath & Beyond, BJ’s Wholesale Club, Bloomingdale’s, Costco Wholesale, Garnet Hill, Gold Toe, Hanes, Isotoner, JC Penney, Jockey, Kmart, Kohl’s, Land’s End, Macy’s, Maidenform, Nordstrom,, QVC, REI, Saks Fifth Avenue, Sears, Shop NBC, Spiegel, Sports Authority, Target, The Gap, The Great Indoors, Tommy Bahama, Toys R’ Us, Wal-Mart, and  <>

Hedgeye’s 2 Cents: This highlights an often overlooked issue as it relates to components in shoes. False labeling is one thing…but the componentry is another. For example, certain types of shoes have to have a certain percent of certain fabric or materials in them to the point where shoe companies will sometimes pad the liner or insole with them to avoid trade duties.


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.



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