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The Macau Metro Monitor, March 5th, 2010



RWS gaming revenue per day has increased to $7-$8 million over the last week, much higher than the initial $3 million per day during its opening days. According to Union Gaming Group, RWS is generating earnings margins of 40 to 60%.

Oy Vey

“Maturity is achieved when a person postpones immediate pleasures for long-term values.”

-Rabbi Joshua Loth Liebman


Since we actually have a Rabbi on staff at Hedgeye Risk Management (for compliance purposes and not for reasons of faith), one would expect that he would be the one to take the lead in quoting a Jewish religious leader to start off the Early Look.  Ironically, it is not Moshe Silver, but Daryl Jones, the hockey playing goy, who has decided to quote Rabbi Liebman this morning.


For those who didn’t know, Rabbi Liebman was the author of book entitled, “Peace of Mind”, which was on the New York Times best seller list for more than a year and in fact reached the top of the list for a period of time.  To say Rabbi Liebman was no schlepper, would be an understatement.  He graduated from the University of Cincinnati at 19.  By the time he was 27, he was an ordained Rabbi and leading his own synogogue.


Despite passing away at the early age of 41, Rabbi Liebman left us with some memorable quotes from his writings.  As I was reflecting on the disparities of fiscal policy among nations, this quote stuck with me.  One on hand we have central bankers in some nations that are acting prudently and “postponing immediately pleasures for long-term values.”  While on the other hand there are certain central bankers and government leaders that continue to endorse erroneous fiscal policy with such chutzpah that we can only be concerned.


Chinese Premier Wen Jiabao of China, who is no schmendrik in our books, of course has been on the proactive and rational end of endorsing prudent fiscal and monetary policy.  Yesterday, while speaking to his colleagues in the Chinese government, he indicated that the Chinese economic growth path was “unbalanced, uncoordinated, and unsustainable.”  This morning the news out of China is that Jiabo is warning of the “latent risk” in Chinese banks and is pledging a crackdown on property speculation.


So, not only does Premier Jiabao see bubbles, he is trying to proactively prevent them.  Whether he will be successful before we have some sharper correction in China is yet to be seen, but the reactions we are getting from the private sector in China (if we can call it that) are certainly positive. Specifically, two major Chinese banks, ICBC and Bank of China, announced this morning they will slow lending after a record year in 2009.  While there are many investors that still aren’t kosher with China, we like this proactive fiscal leadership.


The risk of being a klutz as it relates to managing your budget and fiscal policy is that on the day of reckoning, when you are on the verge of default, is that there may not be anyone to support you.  Greece has its well publicized issues, which were emphasized by the egregious rates that it had to pay for debt yesterday in its $5BN Euro offering of 10-year notes (300 basis points above Berlin), and today we see where its neighbors stand on a bailout for the nation.  According to the German economic minister, Germany will not be offering Greece “even one cent.”


In contrast to China, yesterday we had two members of the U.S. Federal Reserve system, Chicago Fed President Charles Evans and St. Louis Fed President James Bullard give spiels on the economy.  Evans indicated that he needs to see “signs of sustainable growth” before supporting tightening and Bullard stated he thinks policy makers should remain “very accommodative”.  The leaders of the Fed continue to prove one thing, they are great shmoozers, but in terms of showing proactive leadership and moving past Depressionista level interest rates, they continue to fall short.


While we may be Fed Up With The Fed, there are nations and leaders that continue to show fiscal leadership.  With the mazel tovs barely behind them for winning a gold men in Men’s Ice Hockey, Prime Minister Stephen Harper of Canada proposed a budget yesterday with aggressive federal spending cuts.  The budget would position Canada to be the first member of the G-7 to erase its deficit by 2014. 


Not everyone is receiving this budget well.  As a columnist in Toronto’s Globe and Mail wrote today about the Harper strategy:


“We're going to ignore the environment, because you don't care. We're going to balance the budget, because you do care. We're willing to risk a fight with public servants, because you want us to. We're not going to spend money on anything new, because you don't want us to.”


Prime Minister Harper’s leadership here is admirable.  We continue to be bullish on Canada.


Focusing on a nation’s fiscal and monetary policy is critical before making an investment in any nation.  We need this policy to be “mature” and to “postpone immediately pleasures for long-term values.” After all, as history tells us, countries cannot issue debt in perpetuity without consequences.



Daryl G. Jones





XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red. 


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


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).

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.



EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE, and have a bearish bias on the country. Massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


XLP – SPDR Consumer Staples Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.


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.


Its not a surprise that Macau comps get a lot tougher in 2H 2010. What may be a surprise is that two-year comps have not really accelerated in recent months despite the big headlines. 



Macau has been gangbusters since August of last year and the trend line has been upward sloping.  Of course, the first half of 2009 was a disaster so the comps have been quite easy and will continue to be through June.




Given the volatility in the one year comps, we thought it would be instructive to look at the revenue change on a two year basis.  Here the recent monthly revenues for both VIP and Mass still look impressive on an absolute basis – Mass up 30% and VIP up almost 50% in February.  However, the February 2-yr comp for Mass is actually at the low end of the range while VIP is in the middle.  The 2-month moving average line is not upward sloping either.  So has Macau growth accelerated in recent months or just held steady?  It depends on your perspective.






Conclusion:  comps matter.  The question is will the sequential slowdown in growth in 2H 2010 impact investor sentiment?

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US STRATEGY – Inching Up

The S&P 500 is looking to end the week with another move to the upside.  Yesterday, the S&P 500 finished quietly higher by 0.4% on very light volume.  The S&P is now up 1.8% over the past five trading days. 


On the global MACRO front the risk trade continues to abate on the back of the upbeat developments out of the Eurozone, as Greece's sale of 10-year notes was supposedly more than three-times oversubscribed (according to StreetAccount).  The VIX continues to confirm the RISK AVERSION trade.  The VIX declined 0.6% yesterday and continues to be broken on all three durations – TRADE, TREND and TAIL.


On a number of different MACRO factors, price trends point to a continued recovery, though even with the S&P less that 3% from its recent high, there still seemed to be a lack of conviction.  Other positive MACRO moves yesterday included better-than-expected February comps, dampened regulatory concerns in the financial sector and a downturn in initial claims.  The two best performing sectors yesterday were the Financials (XLF) and Consumer Discretionary (XLY). 


The retail momentum continues with the S&P Retail Index +1.3% yesterday.  The index was underpinned by better-than-expected February same-store sales data, despite the fact that consensus was already fairly upbeat going into the day. 


Parts of the REFLATION trade outperformed yesterday; the Materials (XLB) was the third best performing sector yesterday despite renewed tightening fears that led to a selloff in China and a very strong dollar.   


The market seemed to ignore another round of weaker-than-expected housing data, as pending home sales fell 7.6% month-to-month in January vs. expectations for a 1% increase.   The January decline, which followed a 0.8% increase in December and 13.7% plunge in November, was broad-based, as all four regions posted lower sales.  Seasonal issues and weather is a partial explanation for the weakness in the recent trends.  Expectations are now for sales to surge in existing-home sales in April, May and June.


Yesterday, the best performing sector was Financials (XLF).  The sector benefited from the waning effort to overhaul the financial system.  This dynamic seemed to be particularly supportive for investment banks and money-center names.  


As we wake up today, equity futures are trading above fair value in a continuation of Thursday's rally on the back of the strong retail sales numbers. Today's focus will be on the February employment data.  On the MACRO calendar today we have:


February Nonfarm Payrolls

January Consumer Credit


In early trading, copper is trading higher and headed for a third weekly gain in four weeks.  Gold is little changed in London and looking to advance advance as demand strengthens on concern about European sovereign debt.  Yesterday, crude fell for the first time in two days as the dollar strengthened.  Oil is trading slightly higher today. 


Howard Penney

Managing Director

FL: Proactive Predictability

We’ve spent a ton of time on Foot Locker recently, working to understand the opportunities ahead and to proactively predict the company’s strategic moves.  This morning we received confirmation on a few areas of focus as well as few positive surprises:


  • The Nike relationship is alive and well.  We’ll see a collaborative effort in the Spring around Nike’s Fresh Air launch.  In addition, House of Hoops highlighted as an example of an already successful collaboration.  Management sounded upbeat about 2010 as it pertains to Nike and we suspect there are more programs yet to be announced.  A definite positive and also a prerequisite for this turnaround to work.
  • RUN by Foot Locker was acknowledged as a test and as an opportunity to tap into the large and growing running category.  Clearly management believes there is an opportunity to build share in performance/technical running.  It was also acknowledged that service levels are key to this concept’s success and there is much to learn there.  Staffing levels aside, any improvement in customer service across the chain will be a big deal. 
  • Apparel was the most often mentioned opportunity on the call but also the one with the least details.  An upgrade towards more performance oriented apparel, especially in women’s (at Lady Foot Locker) sounds like it’s in the works.  Importantly, a change in the company’s approach to clearing aged inventory (faster) will clear the decks. This was evidenced by a charge taken in the quarter to jump-start the process.  Current apparel trends are under-performing.  CEO, Ken Hicks, alluded to the “new apparel team”, which we hope to learn more about at Tuesday’s analyst day.
  • Europe continues to outperform, posting positive mid single digit comps for the quarter with strength carrying into 1Q.  Interestingly, an uptick in the basketball category was noted.  Historically, Europe has been more driven by low profile and running silhouettes.  This trend is noteworthy, as ASP’s in basketball are higher and this would present a great near term growth opportunity for the chain.  Perhaps, the proliferation of European basketball players throughout the NBA is finally starting to take hold…
  • Inventory well managed down 7.4% on an absolute basis, 10% in constant currency, and down 6% per foot- all against total sales that increase 0.6%  Expect to hear more about a focus on turning goods faster next week. 
  • Again, we believe this not a massive store closing story at all costs.  With that said the unprofitable, unproductive stores slated for closure are adding up.  Another 150 announced for 2010, mostly tied to lease expirations.  Lease attrition is clearly the preferred (and cheapest) method the company will use to right size the base.
  • Same-store Sales are trending even better post-quarter, giving management confidence to put out a low single digit forecast for year.  February comps were up mid single digits across all divisions, even against tough compares.  A word of caution here. While it’s good to see comps accelerating, let’s not forget that the entire retail universe had a great February.  A rising tide lifts all boats and in this case Foot Locker is back in the water. 
  • More to come on Tuesday with the official unveiling of the “strategic plan”.  We expect to hear much more detail about product collaborations, marketing plans, store segmentation, and internal personnel changes.

Eric Levine



MRT reported better than expected 4Q09 earnings yesterday and a -5.3% decline in same-store sales (on a comparable 13-week basis).  This -5.3% marks a significant improvement from the -16.8% in 3Q09.  Easier comparisons drove a lot of this improvement, but trends also got sequentially better on a 2-year average basis.  Comparable restaurant sales turned positive in December and have continued to get better since then (+1.5% in January and +4.4% in February to date).  Management said it is seeing increased business travel and as a result, improved Monday-through-Thursday business.  For reference, in the past, MRT has said that about 80% of guest checks are on expense accounts, but that mix has fallen off throughout this economic downturn.  MRT also said that in response to increased corporate spending, it experienced a pickup in holiday party bookings during the fourth quarter; though many businesses hosted lunch events in place of dinner events, lowering the holiday party average check. 


This increase in expense account dining at MRT supports PFCB’s expectation for marginally better business trends going forward (30% of tickets at the Bistro).  This also increases my conviction that we will continue to see a divergence in performance between casual dining and QSR names, particularly for those concepts that target higher income consumers.  Even after the most recent fall off in consumer confidence, confidence levels remain highest among consumers in the $50K+ income bracket.  The price action in the stocks, along with management commentary, has confirmed this thesis.




RESTAURANTS – DIVERGENCE BECOMING A TREND - consumer confidence income


As the Hedgeye Retail team said in our internal meeting this morning, February retail sales came in better than expectations across the board, but one of the biggest positive divergences came out of Nordstrom.  “Both Nordstrom and Neimans had solid months and although Saks missed relative to expectations, comps came in positive for the month, which is a victory in itself.”


Hedgeye’s Financial Analyst, Josh Steiner, also recently highlighted on February 25th following JPMorgan’s investor day that “The recovery is happening disproportionately at the high end of the income spectrum. The following chart shows that households with income greater than $125k spent +4.8% more in 4Q09 than in the prior year. This compares with +3.3% for families with between $75-125k and just +0.8% for those with less than $75k in household income.”



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