The Macau Metro Monitor, April 5th, 2010


CASINO REVENUE UP 57% IN QUARTER South China Morning Post

Macau casino revenue soared to a near-record MOP 13.569BN in March 2010 (a record MOP 13.937BN was set in January 2010), up 42.4% from a year ago and 1.3% higher than February, according to the Macao Daily News. The rebounding economy and robust liquidity on the mainland have fueled VIP gambling volumes, while tourist arrivals rose 15% in the first two months this year. First-quarter casino revenue rose 57.2% from a year ago to MOP 40.91BN, putting Macau on pace to hit a record MOP 160BN this year.



Gaming operator Melco Crown has finally explained why it terminated an agreement to acquire a Macau Peninsula site where it planned to build a casino. “Our decision to terminate the agreement to acquire the Macau Peninsula site was based on our view that Cotai has established itself as the primary location for future development projects,’’ the company said in its annual report, filed on Wednesday. Melco Crown terminated the agreement to purchase the HK$1.5BN site in December 2009. According to an earlier report in the Sydney Morning Herald, the land is owned by companies associated with the third wife of Stanley Ho Hung Sun, Chan Un Chan.


Melco Crown also mentioned it is finalizing a revision to its land lease agreement for City of Dreams that would expand developed gross floor area by ~1.6MM sq ft. so that it may consider adding an apartment hotel tower at CoD.


Finally, Melco Crown states that its agreement with New Cotai to operate the Macau Studio City casino remains in place. However, the company notes that the formal opening of Macau Studio City has not yet been announced and that there are consensus problems amongst the resort developers – eSun Holdings, CapitaLand Integrated Resorts and New Cotai – regarding the development and the timing for the completion of financing.


On the First day of the second quarter, the S&P 500 was higher in an uneventful, pre-holiday trading session.  The biggest tailwind for stocks today was the upbeat and inflationary manufacturing surveys out of China, Japan, the UK, Europe and the US.


As reported Friday morning, payrolls rose 162,000 vs. the 184,000 consensus, while the unemployment rate was unchanged at 9.7%, in line with consensus. The payrolls increase was the largest since March 2007, though temporary 2010 Census hiring boosted the figure by 48,000. Net revisions were +62,000, with February payrolls revised to (14,000) from (36,000), and January revised to +14,000 from (26,000).


Some Hedgeye observations:

  • March unemployment rose to 9.8% (9.7% reported) net of census hiring
  • March employment gain of 162,000 was 114,000 net of temporary census hiring
  • The government continues to overstate the employment numbers

In early 2010, we learned that it’s the government bias to overstate payroll employment levels (to understate employment declines during recessions).  This bias was confirmed by the BLS’s benchmark revision published with the January 2010 employment report.  In January, the BLS had indicated that the underlying assumptions were failing to account for certain job losses.  We will not know the extent to which the government is making up the numbers until the next benchmark revision is published in February 2011 - after the November 2010 elections.


The better-than-expected economic data (and a declining dollar) helped fuel the outperformance on the part of market most leveraged to the REFLATION trade.  The Dollar index declined on Wednesday and Thursday last week and declined 0.47% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.66) and sell TRADE (82.31). 


With dollar down and commodities up on Thursday, the best performing sector on Friday was Energy (XLE).  Within the XLE, the E&P and oil services stocks led the sector higher.  Both subsectors finished higher every day last week.  The Materials (XLB) was the second best performing sector, with the precious metals stocks were among the best performers on the day.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.34) and Sell TRADE  (85.79). 


The Financials (XLF) outperformed by 10bps, with asset managers, life insurers, and guarantors providing the bulk of the outperformance.


The Hedgeye Risk Management models have all nine sectors positive on TRADE and TREND.  On Thursday, Technology (XLK) was a notable underperformer and the only sector to decline on the day. The software group was a notable laggard, with much of the focus on the weakness in MSFT.  The biggest loser was RIMM, which was down after the company missed on February quarter sales and units growth. 


Consumer stocks were higher on the day, but underperformed on a relative basis.  Consumer Discretionary (XLY) slightly outperformed Consumer Staples (XLP) on the back of the strength in Retail and names leveraged to the autos.


The VIX declined slightly on Thursday, down 0.7%.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.32) and sell TRADE (18.01).  We are currently long the VXX.


In early trading, gold is trading higher and stronger economic growth.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,114) and Sell TRADE (1,127).


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 (3.40) and Sell TRADE (3.67).


In early trading, equity futures are trading above fair value in reaction to encouraging non-farm payrolls data released while the markets were closed Friday, although the unemployment figure muted the impact of the payrolls information.  As we look at today’s set up the range for the S&P 500 is 12 points or 0.7% (1,170) downside and 0.3% (1,182) upside. 


Today's MACRO highlights are:

  • ISM Non-Manf. Composite - March data
  • US Pending Home Sales - February data

Howard Penney

Managing Director













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The Week Ahead

The Economic Data calendar for the week of the 5th of April through the 9th of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

The European Credit Markets Smell PIIGS

Position: Short the Euro via FXE


As we noted in our post “Politics vs. Pragmatism” last week, despite the decision by the EU and IMF on 3/25 to “safeguard financial stability” in Greece, sovereign debt imbalances (especially among the PIIGS) remain at large and continue to heighten investors’ fears.  Regarding Greece, most recently credit markets are clearly indicating heightened risk via rising bond yields.


In the first chart (below) we highlight that since 3/25 the yield on the 10YR Greek Bond has jumped a hefty 25bps. And while 10YR yields for the other PIIGS have held pretty steady over the last weeks (chart 2), we’d expect to see them to push up in the coming weeks as Greece shares more of the “sovereign debt” spotlight. Note that Portugal’s credit rating was recently cut to AA- by Fitch Ratings; we’d expect to see a downgrade of Spain in the coming weeks. For reference on the total debt and budget deficit constraints afflicting the PIIGS, see chart 3.


Where else is this fear showing up?

  • The equity markets of Spain, Greece, and Portugal are among the worst global performers YTD, down -7.3%, -4.6%, and -3.6% respectively.
  • Moody’s downgraded five of the nine Greek banks it tracks yesterday, saying the “country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity.” (a lagging indicator, but representative of consensus).

As we’ve said before, the lack of policy from the European Community to address the sovereign debt issues of its member states will continue to shake markets. We’re currently short the Euro versus the US dollar via FXE in our model portfolio, trading a range of:  buy/cover at $1.32 and sell/short at $1.36.


Matthew Hedrick



The European Credit Markets Smell PIIGS - e1


The European Credit Markets Smell PIIGS - e2


The European Credit Markets Smell PIIGS - e3



The data is hawkish and bonds are getting smoked for a reason!


Since the beginning of the year we have been very constant with our criticism of the man we refer to as “He Who Sees No Bubbles”  - Ben Bernanke. Not only is it his mandate to control “inflation”, he is also responsible for controlling “growth” too.  Today’s ISM data shows he is failing on both counts. But then again, has the Fed ever been accurate with their forecasts for inflation? They’ve only changed the CPI calculation nine times since 1996 – but who’s counting?


We are. 


Below, we have attached the latest readings on from the ISM: the Manufacturing Index and Prices Paid.

  • ISM Manufacturing for March just made another higher-high at 59.6 (versus 56.5 in February).
  • Prices Paid continue to ramp, coming in at 75.0 in March (versus 67 in February).



On the ISM Manufacturing reading - manufacturing expanded in March at the fastest pace since July 2004.


The Prices Paid survey is still below the 2008 highs, but those readings also carried $152/barrel oil prices!


Yields across the Treasury curve continue to breakout to the upside, as we are short High Yield and Municipal bonds.  The US Dollar has been lower for the past two days but is still in a bullish formation and we believe it will continue to make higher-highs throughout the intermediate term. As usual, the equity market gets the memo last and will be the last to see an impending rate hike priced in. As such, we’ve just shorted the S&P via the SPY this morning and will continue to manage risk around the position.


Howard Penney

Managing Director

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