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Faith And Fear

“Fear has its use but cowardice has none.”

-Mahatma Ghandi


I sold into yesterday’s intraday US market strength again, primarily because my macro models told me to, but also because the Faith and Fear model of the old boy network in this country is really starting to worry me again. Never forget that these guys created the crisis that they claim to be saving us from.


There is absolutely no risk management process associated with having faith at the market’s highs and fear on the lows. The sad truth is that Washington has been fear-mongered into believing that a Fed hike will be the end of us all. As a result, our fine nation’s monetary policy becomes more and more like Japan’s with each passing market downtick.


When it comes to the economy, the mantra of both the Bush and Obama administrations has been to use fear as the governing principle behind keeping American savings account rates of return at zero percent. At the same time, there is some kind of backward looking faith that what happened during the most expedited 9-month stock market rally in a generation should be underwritten by a pandering Federal Reserve policy.


This isn’t just a Washington thing. This is very much a Wall Street thing. On December 29th, 2009, after the SP500 had rallied +66.7% from its Great Depressionista freak-out lows, I called out two of the most predictable perma bulls who, sadly, have influence over our manic financial media:


1.       Bill Miller said “there is a lot of upside left”

2.       Larry Kudlow was calling for a “mini-boom”


I titled that morning missive “Frightening Faith”, and that’s really all that was. As I have said many times in the last few years of penning my thoughts, hope is not an investment process. Neither is maintaining zero percent returns on our fixed incomes for an “extended and exceptional” period of time.


The good news is that there is one brave American soul who stood up at the last Fed meeting and agreed with me. Kansas City Federal Reserve President, Thomas Hoenig, dissented with He Who Sees No Real-Time Data (Bernanke) saying, “I dissented on the language.”


The bad news is that one independent voice isn’t yet strong enough to overcome the conflicted and compromised group-think that puppeteers this nation’s financial system. Sure, there are some fiscal conservatives who understand what a balance sheet is and respect that the cost of capital shouldn’t be zero – but at the whiff of a stock market down move, most of them run for the exits saying that “now is not the time” to tighten the Piggy Banker Spread.


The immediate and intermediate term bubbles that we said should pop (Gold, China, etc.) have already popped. The mother of all bubbles that remains isn’t where all of the lemmings are looking this morning. It’s the one that these political cowards live in – the Bubble in US Politics.


The best way to measure this bubble is via that Piggy Banker Spread and the bankers at UBS chowed down on it, big time, this morning. They reported almost $1 Billion in profits. The Spread (10-year minus 2-year yields) is +281 basis points wide. That’s only 0.005% away from its widest spread ever!


Thankfully, wealthy investors aren’t stupid. They get this. UBS may have made themselves a “B”, but the clients ran for the exits. The UBS Wealth Management division saw quarterly redemptions of $42 Billion, almost doubling from the total client money leaving the building in the quarter prior.


President Obama may be having a hard time executing on the Transparency, Accountability, and Trust model of his Presidential campaign, but Americans are obviously voting with their wallets. They have no faith in the current financial system. They fear those who are running it.


The SP500, Asian and European Equities, Commodities, and most Foreign Currencies have all recently broken both their immediate and intermediate term TRADE and TREND lines. The market doesn’t lie. It never believed in the US Dollar devaluation trade being a long term fix to begin with. From here on in, we will be held hostage by the Faith and Fear model that these politicians perpetuate.


Here are some critical intermediate term lines of resistance to consider, across asset classes, globally, as you manage the volatility and risk politicians around the world are underwriting:


1.       SP500 = 1099

2.       Nasdaq = 2193

3.       Shanghai Composite = 3158

4.       Hang Seng Index = 21,709

5.       London’s FTSE = 5360

6.       Germany’s DAX = 5751

7.       WTIC Oil = $77.28/barrel

8.       Gold = $1110/oz

9.       Euro/USD = $1.46


Every morning, we have our feet on the floor very early in order to manage the risk these political cowards impose upon our children’s futures. The reason why they don’t give you any transparency on what they see coming is simply that they don’t know.


They have never known. Maybe that’s their faith. A faith in the fear of their own incompetence.


I raised my cash position to 58% in the Asset Allocation Model yesterday. I sold my SPY (SP500) position and I cut my equity position in Brazil (EWZ) in half. I maintain a zero percent asset allocation to Commodities, and my immediate term support/resistance lines for the SP500 are now 1045 and 1081, respectively.


Best of luck out there today,






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.


XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


EWW – iShares Mexico We 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 Japan We 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 Fund Macro 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. 


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.


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.


Should be an in-line quarter although we are below the Street for 2010.



We’re at $0.25 cents of normalized EPS for 4Q09 and $244MM of Adj. EBITDA, which is in line with street for EPS and 2% above on EBITDA.  We are also ahead of mgmt guidance of $0.20-$0.23.  Note that our $0.25 excludes gains on timeshare note sales which should amount to $0.05.


However, for 1Q2010 we’re projecting EPS of $0.15 and adjusted EBITDA of $166 million (excluding gains), lower than the Street at $0.18 and $181 million, respectively.  For 2010, our EPS and EBITDA estimates of $0.83 and $841 million compare to Consensus of $0.88 and $856 million, respectively.


Below are our assumptions.




  • Worldwide (WW) RevPAR down -14% (vs. -13 to -16% guidance)
  • Owned, Leased, Corporate Housing & Other revenues down 9% and margins at 5.1% (inclusive of termination fees) - in –line with guidance
  • Fee revenues down 20% (above mgmt guidance of $310-320MM)
    • Base fees down 12% and incentive fees down 45%
    • Franchise fees down 8.7%
    • Timeshare segment results of $14MM vs. $15MM guidance
    • Net interest income of $28MM



  • WW RevPAR down -8.3%
  • Owned, Leased, Corporate Housing & Other revenues flat and margins at 2% (inclusive of termination fees)
  • Fee revenues down 8.3%
    • Base fees down 8.7% and incentive fees down 20%
    • Franchise fees down 2%
    • Timeshare segment results of $3MM



  • WW RevPAR down -2%
  • Owned, Leased, Corporate Housing & Other revenues flat and margins at 4.3% (inclusive of termination fees)
  • Fee revenues flat
    • Base fees down 1% and incentive fees down 5.4%
    • Franchise fees up 4%
    • Timeshare segment results of $56MM


Other stuff:

  • Fx will be less of tailwind than previously expected. At current rate, the Euro is 6% stronger in 1Q2009 (benefiting WW RevPAR by about 1.5 -2%) and only 60bps stronger than in 2Q2009.  In 2H2010 the fx tailwind reverts back into a modest headwind again since the current dollar/ Euro exchange rate of $1.37 is now below the 2H09 average of $1.45.





Current trends & Outlook: 

  • “We are encouraged by signs of economic recovery in our business.”
  • “We nevertheless expect REVPAR to continue to decline in 2010, albeit modestly, while occupancy levels will likely increase, negotiated room rates for special corporate and group business, not to mention per diem rates for government business, will likely constrain price improvement.”
  • “Pricing will continue to be pressured by a significant amount of price-sensitive, leisure, transient business.”
  • “While supply additions are slowing dramatically, the increase in new hotel supply expected in 2010 will still provide headwinds to near-term improvement in business fundamentals, especially in the upscale segment.”
  • “REVPAR may turn positive sometime during 2010, but probably not early enough or strong enough to report higher REVPAR numbers for the full year.”
  • “The first quarter of 2010 is likely to continue to show meaningful REVPAR declines as any gains in occupancy continue to be more than offset by softness in rates.”
  • “We expect to open 25,000 to 30,000 new rooms in 2010.”
  • “We continue to work with those owners most impacted by the economy, deferring FF&E reserves, relaxing brand standards, and delaying brand initiatives. Our hotels are paying fees and expenses on time and we are not cutting our fees.”
  • “We expect conversions to accelerate in 2010 as lending opens up a bit more and lenders begin to recognize and deal with problem loans.”
  • “Travel departments are quite aggressive and today everyone wants a deal. We have renegotiated from special corporate rates during 2009, lowered other corporate rates, we are selling fewer premium rooms.”
  • “Cancellations and attritions were less of a problem than in the first half of 2009. The last minute in the quarter/for the quarter bookings were relatively few.”
  • “We are beginning to see stabilization as contract sales for one-week intervals modestly exceeded expected levels in the third quarter.”
  • “We would need REVPAR to be positive modestly before we could keep margins in percentage terms, flat.”
  • “I think the optimistic side here is that we will cross over the zero line on occupancy sometime in, hopefully, the first half of 2010, though who knows. And once we've crossed over that line, we will start to have inevitably a little less threat around pricing.”
  • “I think one of the things we're seeing in groups is the cancellations and attrition is less of a problem than it was in the first half of the year. The booking windows are still pretty short, though. The fourth quarter booking pace is down 19% and 2010 is down 12%.”
  • “We have with, at least the Euro and the pound, some hedges that will remain in place through the end of the year and they insulate us. Ultimately, we'll still look forward to FX adjusted REVPAR but the fees in effect are coming in on a constant dollar basis through our P&L. At least with respect to those currencies.”



  • “While we aren't giving formal guidance for 2010, our fee outlook assumes 2010 worldwide, system-wide REVPAR will be flat to down 5% compared to 2009 levels. Even assuming the bottom of our REVPAR range, our 2010 base and franchise fees should at least stabilize as unit growth offsets the REVPAR decline.”
  • “We are working under the assumption that contract sales in 2010 will be at roughly 2009 levels, which would imply roughly flat timeshare development profits.”
  • “We do expect to target our timeshare business drive at least $75.0 million in net cash flow in 2009 and that least double that in 2010.”
  • We anticipate that Marriott's general and administrative expenses will decline about 20% in 2009 on an adjusted basis but will likely rise a bit in 2010 as we resume investing in our business and our people for the future.


The news flow on the MACRO front is quiet this week and so is the market.  The S&P 500 finished lower by 0.89% on very light volume.  The sovereign debt concerns are not going away as the issue continues to put pressure on the RISK trade.  The VIX closed up another 1.5% yesterday (22% Year-to-date) and is bullish on TRADE and TREND.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (23.98) and Sell Trade (27.66). 


Contagion fears are taking a toll on the Financials (XLF), which was the worst performing sector yesterday closing down 2.0%.  Yesterday our Financials analyst, Josh Steiner pointed out that Banking News reported that Deutsche Bank and Unicredit Group have denied requests from 3 to 4 Greek banks for loans on the repo market.    First it was the CDS market signaling trouble and now the repo market is breaking down.   


According to Bloomberg news, ECB Chairman Jean-Claude Trichet has decided to leave a symposium of policy makers in Sydney a day earlier than planned to attend a special EU summit on Thursday to discuss the growing debt problems among EU states. Trouble is brewing!


The Financials are also being hit with the Democrats talking regulatory reform with or without Republican cooperation.   The large-cap banks like WFC, BAC, C and JPM were among the notable underperformers.  In contrast, the bulk of the regional banks outperformed, while credit-card names were also under pressure. 


While the Materials (XLB) was the second worst performing sector yesterday, not all pockets of the RISK/RECOVERY trade underperformed.  Technology and Consumer Discretionary outperformed the S&P 500 yesterday.   


The Technology (XLK) sector outperformed the S&P 500 by 50bps yesterday.  The destruction in the SOX was halted for a day with the index down in line with the market.  Outside of the semis, there were a couple of bright spots in the communications equipment and PC related names.  Yesterday, we shorted AAPL.  We've spent the last week working on an Apple model and we think the Street's assumptions on margins in the upcoming two quarters are too hopeful. Hope is not an investment process. 


Yesterday, both the Consumer Staples (XLP) and Consumer Discretionary (XLY) sectors outperformed the S&P 500.  We are now short the Consumer Staples (XLP).   The XLP has finally broken both our TRADE and TREND lines. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


Along with the rally in the homebuilders, the XLY benefited from an earnings beat from HAS +12.7% and better relative performance from the retail group.  The S&P Retail Index declined 0.15%, only declining late in the day.  Within the XLP, CVS and TSN were higher following earnings. 


The Dollar index took a breather yesterday declining 0.17%; the Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64). 


As we look at today’s set up the range for the S&P 500 is 36 points or 1.0% (1,045) downside and 2.4% (1,081) upside.  Equity futures are currently trading above fair value after the markets broke down late in the day yesterday. 


Copper rose for a second day in London on speculation that demand may swell on increased imports into China. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.79) and Sell Trade (3.01).


In early trading gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,048) and Sell Trade (1,086).


Crude oil is trading near $72 in New York before the government data due tomorrow that may show U.S. inventories of diesel and heating oil declined last week. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.01) and Sell Trade (73.90).


Howard Penney

Managing Director














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Risk Management Time: SP500 Levels, Refreshed...

On strength this morning, I sold the long position I took in the SP500 on Friday’s weakness. Anytime I can book a gain on the long side of a market that remains in an bearish intermediate term position, I will.


In addition to the SP500 having broken my intermediate term TREND line of 1099 (thick red line in the chart below), here are some important risk management factors to consider intraday:

  1. Volatility: VIX remains in a bullish TRADE and TREND position, with newly established intermediate term TREND line support = 22.32
  2. Financials: XLF is the worst performing sector in our SP500 Sector Model today, and remains broken on both TRADE and TREND durations
  3. US Dollar: UUP continues to be in a bullish TRADE and TREND position, showing no signs of backing off after closing up for 3 straight weeks

At 2PM EST the SP500 is trading right in the middle of a new range that I think we will trade in for now (1052-1082). After 4 consecutive weeks of the SP500 closing down on a week-over-week basis, there is plenty of revisionist bearishness to support buy-to-cover rallies back up to what is becoming significant resistance.


This is definitely turning into a risk manager’s tape. Be patient, and pick your spots. If the SP500 starts churning here, a lot of weak hands will get frustrated and flushed out.



Keith R. McCullough
Chief Executive Officer


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



SJM may be embarking on a VIP market share grab strategy for 2010. 



Already with a combined 42% overall market share, SJM could be going for broke, somewhat literally.  The company secured only about 29% of VIP turnover (volume) share in 2009 but is looking to ratchet up that number meaningfully, potentially at the expense of their margins, and potentially the market’s margins.


Within its junket operations across its properties, SJM seems to be moving to a revenue share model with the junkets, rather than a commission based on rolling chip.  We are hearing SJM will keep only 5% of VIP revenues while 40% will go to the government and 55% to the junkets.  That is a very attractive model for the junkets and should drive significant share shift if the competing properties do not follow suit.  This model also takes commission caps out of play since it is a revenue share model and doesn’t violate the letter of the 1.25% commission cap on rolling chip.


If our intelligence is accurate, get ready because Macau VIP margins are going to shrink or share will shift dramatically.  Specifically, SJM may be targeting LVS’s VIP junkets.  However, this type of pricing will hurt everyone.  We’ll have more on this in the coming days.


Huge month with some share shifts, mostly related to hold. Feb promises to be a big month again but there are warning signals ahead.



January marked the sixth month of big y-o-y growth in Macau.  Total revenues grew 63% y-o-y, with VIP leading the charge up 77%, followed by Mass revenues growing 42%, and slot revenues growing 20%.  Melco was the clear share taker in the month, while WYNN was the clear share loser.  Luck was a primary factory for Melco's fortune and Wynn's misfortune.  MGM also gained back what it lost last month in market share while Galaxy did just the opposite. 


As we've written about in several recent notes, February promises to be bring another hot month with the calendar shift of the Lunar New Year and an easy comparison with Feb 2009 seeing a 14.5% revenue drop.  We expect a deceleration of growth in March and balance of the 2010 has comparisons become more difficult and the effects of bank tightening start showing some impact on the broader Chinese economy and trickling down to Macau.  The other issue may be more a big VIP market share battle initiated by SJM.  More on that in an upcoming post.



Y-o-Y Table Revenue Observations:


LVS table revenues up 64% with most of the growth coming from 103% increase in VIP revenues and 21% growth in Mass

  • Sands was up 73%, driven by a 137% increase in VIP and 19% growth in Mass
    • VIP growth was largely driven by easy hold comparisons.  Sands suffered weak hold in January 2009 of around 1.7%, assuming 10% direct play.  If we assume 12% of total VIP play was direct in Jan '10, this implies hold of 3.36% 
    • Junket VIP RC increased 28%
  • Venetian was up 41.5% with VIP increasing 58% and Mass increasing 20%
    • Most growth in VIP was driven by easy hold comparison.  Hold was weak, roughly 2.6% assuming 17% direct play in Jan 2009, vs. an estimated 3.65% hold assuming 20% direct play in Jan '10
    • Junket VIP RC increased 12.6%
  • Four Seasons was up 259% y-o-y driven by 531% VIP growth and 39% Mass 
    • Junket VIP RC increased more than five-fold to $858MM vs $137MM.  In 3Q09 FS also derived 50% of its RC from direct play versus having almost no direct play in 1Q09.  Therefore, if the direct play is material, volumes could be up even more y-o-y than the junket numbers imply


Wynn table revenues were up 27%, almost entirely driven by a 35% increase in VIP, while Mass revenues were only up 2%

  • Junket RC increased a massive 115%, however weak hold coupled with difficult hold comparisons, masked Wynn's share gain on the VIP side.  Assuming 12% direct RC play in Jan 09, Wynn's hold rate was 4.1% vs. 2.6% in Jan 2010 assuming 13% direct play
  • Wynn is battling the the impact of the loss of a VIP operator in mid-December and the departure of property's #2 marketing individual


Crown table revenues grew 144%

  • Altira was down -0.6% (the only property in Macau with lower January revenues) due to challenging hold comparisons
    • VIP RC was up 28% and hold was normal at 2.8%, however, hold was 3.7% last January
    • Mass win was very strong, up 58% y-o-y
  • CoD table revenue was up 83% sequentially, benefiting from better volumes and much better sequential hold
    • Mass ramped 25% m-o-m to $31MM
    • Junket VIP RC grew 24.5% sequentially. 
    • If we assume 20% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $3.5BN and hold appears to be quite high, at 3.7%, meaning any extrapolation of the $40MM of EBITDA MPEL did in Jan would result in a gross overestimation of the company's earnings power for 2010 and coming quarter.  If direct play was 20% in December, then the hold would only have been 2.2%. 


SJM continued its hot streak, with table revenues up 78%

  • Mass was up 53% and VIP was up 96%
  • SJM is being very aggressive on junket pricing


Galaxy table revenue was up 32%, driven by a 34% increase in VIP win and a 19% increase in Mass

  • Starworld's table revenue was up 60%, driven by 67% growth in VIP revenues and 21% growth in Mass win


MGM table revenue was up 61%

  • Mass revenue growth was 30%, while VIP grew 72%



Market Share:


LVS share's was up 20bps sequentially at 21.23%

  • Sands' increased 10 bps to 7.1% sequentially
  • Escalators and walkways from Ferry Terminal to competitor Oceanus are not yet complete
  • Venetian & FS share increased 10bps to 14.13%

WYNN's share dropped to 12.9% from 16.5% share in December

  • We attribute the market share change mostly to luck. In January we estimate that hold was only 2.6% while we estimate that December was roughly 3%. Wynn has suffered from poor hold in 3 of the last 4 months, which explains why their average share has been below prior averages
  • Departures discussed above probably hit VIP turnover a bit


Crown's market share increased by 5% from 10.9% in December to 15.9%

  • Like Wynn, hold was largely responsible for the massive share shifts here


SJM's share decreased to 30.9% from 31.9% in December


Galaxy's share dropped slightly to 10.4% from 13.3% last month

  • Starworld's market share fell to 8.15% from 10.4% in the previous month


MGM's share increased to 8.65%, from 6.3% in December



Slot market commentary:

  • Slot win grew 20.7% y-o-y to $80MM
  • Melco's slot win grew 87% y-o-y with the addition of CoD, LVS's slot win grew 21% y-o-y, and MGM's slot win grew 43% y-o-y
  • The other 3 concessionaires had paltry growth in slot win y-o-y, with Wynn's actually decreasing 5% and SJM's only increasing 1%, while Galaxy's increased 9.4%

MACAU JANUARY DETAIL - Macau Total Bac Rev Share  Feb 2010


MACAU JANUARY DETAIL - Macau MM Rev Share  Feb 2010


MACAU JANUARY DETAIL - Macau RC Turnover Share  Feb 2010

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