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THE M3: US REGULATORS REVIEW LINKS TO ORGANIZED CRIME

The Macau Metro Monitor, April 1rst, 2010

 

US REGULATORS PROBE MACAU macaubusiness.com

Several US gaming regulators are analyzing Macau casinos and possible links to organized criminals, Reuters reports.

Nevada’s Gaming Control Board is looking at LVS operations, following the report on triad member, Cheung Chi-tai. In addition,  a spokesman for the Pennsylvania Gaming Control Board told Reuters that ''the review of suitability by the Bureau of Investigations and Enforcement is ongoing for all license holders, and it will not confirm or deny whether this is a matter in which it is actively investigating.''

 

MGM Mirage will be investigated by the Illinois Gaming Board, after the state of New Jersey found that the company's Macau partner, Pansy Ho, allegedly has links to organized crime. The Michigan Gaming Control Board said it was also reviewing MGM, which owns a share in MGM Grand Detroit casino, after the New Jersey findings.  The Mississippi Gaming Commission said it was reviewing the New Jersey report on MGM Mirage, according to the commission's deputy director, Allen Godfrey. In Nevada, where MGM operates 14 casinos, regulators have no plans to reopen the MGM case.


US STRATEGY - DON'T GET FOOLED

Yesterday, the S&P 500 finished lower by 0.33%, while breadth continues to deteriorate and volume spiked nicely (up 26% day-over-day).  Despite this week's holiday shortened week, volume was slightly better than the average over the last 100 days of trading.  While it’s hard to quantify, quarter-end dynamics also played a role in yesterday’s performance. 

 

On the MACRO front the weaker-than-expected ADP private payrolls data, was a slight headwind for the market.  ADP private payrolls fell 23,000 in March vs. consensus expectations for a 40,000 gain. The decline was completely driven by the goods-producing sector, which shed 51K jobs last month, while service sector payrolls rose for the second consecutive month.  The data presented a headwind for the broader market, and especially the Consumer Discretionary (XLY) names.  The XLY was the worst performing sector yesterday, declining 0.7%.   Ford, Limited and AutoNation were the three worst performing stock in the XLY.  Retail was also a laggard on the day. 

 

Energy (XLE) was the best performing sectors yesterday, as oil continues to rally up 4.4% so far this week.  In early trading today, crude is trading 0.9% higher, to $84.54 a barrel - the highest since Oct. 14, 2008. The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (81.08) and Sell TRADE (84.43). 

 

Yesterday dollar weakness also helped the REFLATION trade.  The Dollar index corrected 0.49% yesterday and 0.79% so far this week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.67) and sell TRADE (82.30). 

 

Along with the XLE, the Financials (XLF) was the only other sector to be up on the day.  The XLF benefited from a big run-up in the mortgage insurers.  Notable under-performers were the regional banks.

 

Also on the MACRO front the Chicago PMI fell to 58.8 on March from 62.6, below consensus expectations for a slight decline to 61. New orders slipped to 61.8 from 62.2, while production fell to 60.5 from 65.2. Employment held roughly steady at 53.1, while the order backlog dropped to 54.3 from 58.5 and the supplier deliveries index fell to 57.8 from 62.6.  The Industrials (XLI) was the second worst performing sector despite an upside pre-announcement from HON.

 

The VIX rallied 2.69% yesterday, but remains broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.23) and sell TRADE (18.14).  We are currently long the VXX.

 

In early trading gold is trading unchanged, but near a two week high.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,086) and Sell TRADE (1,119).

 

Copper is trading at a 20-month high as China’s manufacturing expansion and shrinking global inventories helping drive copper higher.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.38) and Sell TRADE (3.60).

 

In early trading, equity futures are trading above fair value in response to strong gains seen across Asian and European markets today.  As we look at today’s set up the range for the S&P 500 is 18 points or 0.9% (1,159) downside and 0.7% (1,177) upside. 

 

Today's MACRO highlights are:

  • March Challenger Job Cuts
  • Initial Jobless Claims
  • March ISM Manufacturing
  • February Construction Spending
  • Natural Gas Inventories

Howard Penney

Managing Director

 

US STRATEGY - DON'T GET FOOLED - S P

 

US STRATEGY - DON'T GET FOOLED - DOLLAR

 

US STRATEGY - DON'T GET FOOLED - VIX

 

US STRATEGY - DON'T GET FOOLED - OIL

US STRATEGY - DON'T GET FOOLED - GOLD

 

US STRATEGY - DON'T GET FOOLED - COPPER



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THIS WEEK IN MACAU

Thoughts on March, the VIP outlook and market share, and how much growth is too much?  Negative catalysts seem to be piling up.

 

 

The near-term hurdles seem to be piling up for WYNN and LVS:  high investor expectations, sequential monthly slowdowns, less liquidity on the mainland, potential visa tightening, tough 2nd half comparisons, and VIP market share shifts.

 

VIP

Based on our statistical work, we believe tightening and sequentially slowing growth in China constricts the Macau VIP business.  We haven’t seen it yet, unless March was a major disappointment, but we did get the first, albeit very preliminary, indication that liquidity could be an issue.  One of the largest junket operators noted that some customers are asking for longer repayment terms.  This could be completely anecdotal and we will be researching this further.  However, this scenario would be a logical first step in a liquidity fueled VIP slowdown.

 

The Triads and VIP Market Share

The Macau media was all over the alleged association between a “known” Triad member/junket operator and LVS.  LVS quickly responded that there are no junket operators with known associations with organized crime and/or shady organizations that are “on the books”.  The Macau government is likely to back up this assertion.  We also don’t think the Nevada Gaming Commission will want to open up this can of worms so the direct impact of the allegation is likely to be contained.

 

The general consensus of people on the ground in Macau is that the US operators do business with “shady” junkets unofficially.  While the direct impact may be minimal, the controversy from the LVS/Cheung story may draw scrutiny to the US operators and force them to distance themselves from these junkets.  Moreover, the junkets don’t like the media attention either, which may lead them to move their business voluntarily to the non-American owned properties.  Either way, the pressure on VIP market share at the LVS and WYNN properties may accelerate as we can see in the chart below.

 

THIS WEEK IN MACAU - VIP Volume

 

March Revenues

There has been much debate about where March will shake out.  We think revenues will total around HK$14.0-14.5 billion, higher than the lowest estimate of HK$12.8 billion, but at the low end of consensus of HK$14.0-15.0 billion.  It didn’t help expectations that some analysts recently threw out projections of 60-80% versus our 52-57%.

 

So HK$15 billion would be great, right?  Well, not so fast.  I hate to bring up the dreaded V-word but the Chinese government has, in the past, tightened visa restrictions with less growth than this.  There has been very little talk in the investment community about visa tightening lately, but it is being discussed among the operators.  


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