The Macau Metro Monitor, April 15th, 2010


Visitor arrivals in package tours increased by 16.3% YoY to 464,370 in February 2010. Visitors from Mainland China (336,551); Japan (21,944); Taiwan, China (21,456); and Hong Kong (19,922) rose by 9.4%, 17.3%, 47.2% and 5.4% respectively. In the first two months of 2010, visitor arrivals in package tours rose up by 12.9% YoY to 923,277.

At the end of February 2010, total number of available guest rooms of the hotel sector increased by 1,360 (+7.7%) YoY to 18,937 rooms.

A total of 578,877 guests checked into hotels and guest-houses in February 2010, up by 12.3% YoY. The average occupancy rate of the hotels and guest-houses increased by 8.5% YoY to 77.8% and that of the hotels reached 78.5%, with 3-star hotels leading at 82.2%. The average length of stay of the guests increased by 0.2 night to 1.5 nights. The cumulative number of guests reached 1,243,276 in the first two months of 2010, up by 19.5% over the same period in 2009.



The Tourist Price Index (TPI) for the first quarter of 2010 rose by 9.40% YoY to 161.81. TPI reflects the price changes of goods and services purchased by visitors, which is compiled according to the consumption pattern of visitors.


The price indices of Miscellaneous Goods; Accommodation; Transport & Communications; Food, Alcoholic Drinks & Tobacco; and Restaurant Services increased notably by 19.26%, 11.66%, 4.94%, 4.59% and 4.59% respectively, attributable to rising gold prices; substantial rise of hotel room rate, airfares, food prices, as well as higher charges for restaurant services during the Lunar New Year. On the contrary, price index of Clothing & Footwear registered a slight decrease of 0.38% year-on-year.



The preparation of a law to create an independent salary guarantee fund to which employees of insolvent companies can apply is in its final stages, says Secretary for Economy and Finance, Francis Tam Pak Yuen. Salary guarantee funds help ensure employees their due salary, compensation and other legally recognised benefits. Tam said that, by law, a portion of the taxes paid by gaming concessionaires is already destined for such a fund.  At present, the accumulated contributions amount to MOP600 million, a figure considered sufficient by the government to start this new scheme, said Tam. One of the goals of the law proposal in preparation is to create a sustainable guarantee fund, noted Tam.



Lawmaker Chan Meng Kam has proposed the creation of a new gaming license in Macau, to be managed by a government-backed company. Chan believes that each resident, as a shareholder in the new gaming concessionaire, would enjoy the benefits of the city's gaming boom. Chan is president of Golden Dragon Group which operates Hotel Golden Dragon, which includes a casino managed under SJM's gaming license.



High vs. Low Society

“We took a perfectly useless psychopath like Valentine, and turned him into a successful executive. And during the same time, we turned an honest, hard-working man into a violently, deranged, would-be killer! Now, what are we going to do about taking Winthorpe back and returning Valentine to the ghetto?”

-Randolph Duke from the movie Trading Places 


When thinking about some of the topics that have been discussed in our morning meeting recently, the topic of a HIGH vs. LOW society has come up several times.  I joked that it’s like working at Hedgeye Risk Management where you have the Ivy League educated vs. everyone else.  All kidding aside, as a firm, we have some of the most talented young people working at Hedgeye, thanks to our ties with Yale University. 


That being said, the first thing I think of when talking about the HIGH vs. LOW society is the highly entertaining movie Trading Places.  (Sadly, our talented young group from Yale is too young to remember the movie.)  The storyline is that of a HIGH vs. LOW society and the movie has been called a modern take on Mark Twain's classic 19th century novel The Prince and the Pauper.


Fast forward to yesterday’s press briefing by White House Press Secretary Robert Gibbs and Treasury Secretary Tim Geithner; Mr. Gibbs commented that the market is going up because of Obama’s Administrative policies.  Mr. Gibbs is correct to a degree, and Mr. Obama gets full credit for the market’s performance under his term as president.  In fact, the President even gets credit for calling the bottom in the market when on March 3rd he offered some advice on the market saying stocks are "potentially a good deal for those willing to think long term.”  Great call!


Obama’s policies have created a V-shaped recovery and a 78% return in the market since he nearly called the bottom perfectly.  In many respects, his policies have created this HIGH vs. LOW society which might be very difficult to get out from under.


Yesterday, the S&P 500 rallied 1.1% (now up 8.6% YTD) on the back of the earnings calendar, with better-than-expected results out of the Financials (XLF - up 18.4% YTD) and Technology (XLK - up 4.4% YTD).  The Financials led the way yesterday, thanks to JP Morgan, and is the most striking example of the HIGH vs. LOW society.  


FOOD STAMPS VS PIGGY BANKERS SPREAD - The most recent statistics from the NY Times are that one in eight Americans rely on food stamps; one in four children in the United States rely on food stamps; and one in 50 Americans live on nothing but food stamps.  Contrast those disturbing facts against JPM’s reported earnings, which is a company that is printing money because of the Piggy Banker Spread.


To quote the CEO of JPM - “China’s growing, India’s growing, Japan is growing, home prices have stopped going down, consumers income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.”  Yet, according to the FED, we still have the need for interest rates to stay at exceptionally low levels.     


President Obama’s campaign promised “Change” and to help the middle class.  Unfortunately, his policies that have helped drive the V shape recovery in the S&P 500 are only making the rich feel richer.


RICH vs. POOR - Back in early 2009, the spread in confidence levels, as measured by the Conference Board, between those people making more than $50,000 per year and those making less than $15,000 was 2 points.  As of the most recent reading the spread stands at 17 points.  


YOUNG vs. OLD - The Millennials were often cited as a strong political force that helped the Obama administration get elected.  It’s also the Millennials that are being hurt the most by the current recession.  Unemployment levels among the youngest demographic of our society stand at 25% versus 9.7% for the national average.    


BULLISH BEARISH SURVEY vs. CONSUMER CONFIDENCE - The most recent Institutional Investor survey shows one of the widest spreads between “bulls” and “bears” since 2007.  This, contrasted against the most recent ABC consumer confidence index, which fell to -47 in the week ending April 11, down 4 points from a week earlier, highlights the Wall Street vs. Main Street disconnect.  As an aside, today it was reported that the UK Nationwide consumer confidence fell to 72 in March vs. 81 in February.  We are not alone!


We have a chart book of MACRO data points that has only one relevant shape to describe the current economic recovery and that is a V and the signs of “over stimulation” continue.  China’s economic growth accelerated to the fastest pace in almost three years in 1Q10 - GDP rose 11.9%.  The market reaction to the news was muted as the case for continued policy tightening is clear.   


We are short the S&P 500 and "fighting the Fed" which makes us wrong, for now.  Right now, it’s more prudent to manage risk around the excessive stimulus measures that are unsustainable and inflationary.


As for Billy Ray Valentine and Louis Winthorpe III - they're not just getting rich... They're getting even!


Function in disaster; finish in style


Howard Penney

Managing Director


High vs. Low Society - ABC Piggy



Well not quite an elephant but Cosmopolitan may be IGT’s 2nd SBG property.



Finally, a positive catalyst emerges for IGT.  We think IGT may have landed a contract with Cosmopolitan to provide Server Based Gaming (SBG) across the property.  While probably not material in terms of financial contribution and it won’t hit until IGT’s FY2011, this should be considered a positive from a sentiment perspective.


IGT’s first SBG property, MGM’s Aria, opened in December.  IGT received a one-time payment of roughly $6 million for the system hardware and is essentially providing a free two year trial of its SB software.  Not bad from MGM’s perspective.  We believe the Cosmopolitan deal could be similar.  IGT should also procure a 50-55% market share at Cosmopolitan, similar to that at Aria and above its recent 35% ship share.  This is also good news for IGT.


A few other slot supplier tidbits:

  • IGT has a promising new application for SB called Random Riches whereby if a player bets X ($$'s/lines/etc) they know they will get Y (ie bonus rounds/ spins/ etc) thereby extending the time on device
  • SB Window for legacy games was a defense move against iVIEW DM (Pechanga for example)
  • WMS has submitted their operating system that would allow them to go SB at Aria.  Issue is that their games aren’t performing very well now because they have a limited library that has been approved….. since they built SB into all the games – it’s a slow process for them
  • BYI still has 5 outstanding issues to get compliant with SB but should get there by year end - moving but moving slowly.  Their games are performing well at Aria

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A Tale of Two Commodities

Yesterday we added a long position in oil to our portfolio and gave a brief synopsis of the investment thesis in a follow-up research note.  The primary bullish factor in the longer term for oil, as we noted yesterday, is supply.  Global supply is constrained by almost any measure.  Some argue that Goldman Sachs manipulates the price (we heard this the other day), and maybe these pundits are correct, but the reality remains that there are serious supply issues globally for oil based on the current normalized demand picture.


Conversely, natural gas is exactly the opposite scenario.  The primary issue facing natural case pricing in the United States is natural gas supply.  Natural gas is primarily a local market, and therefore priced locally, with the swing factor being the increasing global supply of LNG (liquefied natural gas). 


Domestically in the United States, natural gas storage is well above the 5-year average.  In fact, as of the most recent report from the Energy Information Administration, natural gas in storage in the United States is 12 percent above the 5-year average.


Interestingly, the EIA expects natural gas consumption to increase 1.9% year-over-year in 2010.  In contrast, the current pace of production growth over the past six months has averaged 4.4%.  Needless to say, the combination of above average gas in storage with production growth outstripping projected demand, will be bearish for the price of natural gas.


LNG will also create a bearish overhang on the price of natural gas in 2010.  By some estimates, a 1% change in global liquefaction impacts global supplies by approximately 360 mmcf/d.  According to the IEA, from a mid-2009 report, LNG supply globally will increase by 50% between 2009 and 2013.  This will be a massive increase in supply, with the marginal amount being exported into the United States.


Below we’ve charted the price performance between oil and natural gas in the year-to-date, and the bifurcation is very clear.  We would expect the next couple of quarters to continue to be A Tale of Two Commodities.


Daryl G. Jones

Managing Director


A Tale of Two Commodities - Oil vs Nat Gas


Nike Outperforms During Modest Slowdown in Sports Apparel Industry

Nike Outperforms During Modest Slowdown in Sports Apparel Industry    


Sports apparel sales slowed modestly after last week’s surge. NKE stands out as a clear outperformer as the only company that grew sales on a sequential basis.



This week’s industry data reflects a modest slowdown in sports apparel with total industry sales up 3.9% vs. the 5.7% increase last week. Weakness was driven by a deceleration in the Athletic Specialty channel, which slowed from 15.8% to 10.8% while both Discount/Mass and Family retailers improved on the margin. At the same time we continue to see a divergence of ASP trends in the athletic specialty and family channels.  Both Mid-Atlantic and South-Atlantic regions had a strong week backed by warmer weather while portions of Mid-West experienced more precipitation than normal hampering sales.


Nike stands out as the clear outperformer for the week as the only company that grew sales sequentially accelerating share gains from 460 bps to 560 bps y/y driven by basketball and running.  Outdoor and outerwear categories dropped off this week and significantly dropped Columbia and TNF’s sales growth rates.


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 1


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 2


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 3


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 4


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 5


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - Weather Maps

Inflation: Reality's Illusion

The stock market bulls cannot get into my inbox fast enough this morning. Bernanke hasn’t raised rates since 2006 and they are cheering him on to keep a Japanese status quo. My inbox is usually a contrarian indicator. A hope that Americans aren’t experiencing an accelerating rate of inflation right now remains just that – a hope.


Rather than trust the data in the calculation of headline CPI (the government has numbed it down 9x since 1996), let’s look at both the absolute level of the government’s conflicted and compromised report (relative to itself) and the components of the calculation (without weighting them to the government’s benefit).


  1. Headline CPI accelerated sequentially (month over month) from +2.1% last month to +2.3% - that, on it’s own, is inflationary
  2. The Medicare and Education components were up a lot more than the Index, moving to +3.7% and +4.9% year-over-year, respectively
  3. Owner’s Equivalent Rent (which composes 40% of the Index) was down -0.1% sequentially and completely toned down the broad inflation in the report


So, what to do with in an America where the government tells you there is no inflation when there is? Assuming you live in DC and have a full medical plan and you don’t use gas in your car, eat, or have kids who go to school, you probably call this conflicted CPI report goldilocks. That’s just plain sad and that also speaks to the high-low society that this very wealthy nation is willing to continue to perpetuate. One out of every four children in America now eats off of food stamps.


There was a day when Bernanke was, in theory, “data dependent”; but that was as silly as the ideologies that Greenspan espoused. If these people didn’t see the inflation that you can see in this chart in 2008 (on their own compromised calculation), don’t expect them not to be willfully blind to it this time around.


The divergence between the Institutional Investor Survey (a contrarian indicator) and the ABC/Washington Post consumer confidence reading this morning is striking, but it makes sense. Americans aren’t stupid. Inflation is here until the Fed tones it down by raising interest rates.



Keith R. McCullough
Chief Executive Officer


Inflation: Reality's Illusion - US CPI

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