The Week Ahead

The Economic Data calendar for the week of the 26th of April through the 30th 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 - c1

The Week Ahead - c2

Bond Bubble?

Andrew Mellon, the banking icon, once famously said: “Gentlemen prefer bonds.”  The implication of this statement was likely that bonds, while less sexy than equities, will generate a predictable return for investors, and not put their investments at serious risk of capital impairment.  Ostensibly the latter part is true since bonds sit higher up in the capital structure and therefore have inherently more downside protection.


Asset allocation decisions are made based on a multitude of factors.  The correct allocation with the appropriate timing can ensure both capital preservation and capital growth for investors.  In the construction of a diversified portfolio, a critical decision relates to the appropriate percentage of allocation to bonds versus equities, and versus other asset classes of course.


Investors have effectively three choices as it relates to bond, or fixed income, allocation: government bonds (all levels of government), investment grade bonds, and junk bonds. In theory, the credit worthiness occurs in that order as well, and yields inversely reflect credit worthiness.  So government bonds will have lower yields than similar duration corporate bonds, and vice versa.


According to the Investment Company Institute, investors have poured almost $400 billion into bond funds since the start of 2009 and in aggregate there is more than $2.2 trillion invested in bond funds. As a result of this massive inflow of money into bond funds and the government’s purchase of government bonds as part of its quantitative easing program, yields in the bond market have come down substantially since the credit crisis of late 2008.  So, given the massive inflow into bond funds over the past, the question remains: are we in a bond bubble?


The answer is nuanced.  From a longer term perspective, bonds are, broadly speaking, at near all-time lows in yield. In particular, given the current loose monetary policy being implemented by the Federal Reserve, Treasury bonds are at close to all time lows in yield, and therefore highs in price.  Given this extreme in Treasury bond pricing, there is clearly bubble potential in the U.S. government bond market.


A quick Google search of “Bond Bubble” indicates that pundits have been suggesting bonds are in a bubble very consistently for the past three years. While it is easy to make a call that an asset class is in a bubble, it is more difficult to be accountable to the timing of such a call.  In addition, a bubble inherently implies that the unwinding of that bubble will be a crash.  So far the pundits have been wrong both counts.


We’ve charted the spread of corporate junk bonds bond versus 5-year treasuries and corporate investment grade bonds versus 5-year treasuries going back to 2002 (which is the inception of the Bloomberg bond indices). Interestingly, while yields for both investment grades and junk bonds are close to their lows in yield for this period, currently at 8.24% versus their low of 7.75% for junk bonds and 4.7% versus their all time low of 4.5% for investment grades, the spreads between 5-year treasuries remains relatively wide.  In fact, these spreads bottomed in 2007 at 0.93% for investment grade and 3.1% for junk, versus their current spreads of 2.30% and 5.74%, respectively.


Since the price of bonds should never be taken in isolation, if there is a bubble in bonds, it is likely related to Treasuries.  The case for the Treasury bubble is effectively three fold.  First, as mentioned, they are being priced based on extreme monetary policy that will not be sustained in perpetuity.  Second, they are incorporating very limited expectations for inflation, which we believe will occur and perhaps in dramatic fashion.  Finally, government bonds will eventually have to reflect the declining credit worthiness of the Unites State based on the United States’ deficit as a percentage of GDP and growing debt to GDP ratios.


Treasury bonds cannot stay at their current yield level forever.  And while we have seen some correction, yields and prices for U.S. government bonds are still at generational extremes.  In reality, though, just as it took decades for interest rates to come down from the meteoric highs of the 1980s, it will take interest rates time to go up, and it is likely that no crash is imminent. This move will be long and sustained.


From an investment perspective, the most effective way to play the re-pricing of Treasuries over time is to be short Treasuries out right, or to play a narrowing of the spread between treasuries and corporate bonds.


The reality is, gentleman only prefer bonds at the right price.


Daryl G. Jones

Managing Director


Bond Bubble? - hy





Malaysia’s consumer prices climbed 1.3% year-over-year in March, after gaining 1.2% in February.  The FTSE Bursa Malaysia Index traded flat last night and is up 5% year-to-date.  Consistent with inflation trends across Asia, most Asian central banks are starting to remove the emergency monetary stimulus implemented last year as inflation returns with stronger regional economic growth. 


India has raised interest rates twice since Malaysia increased borrowing costs on March 4, and Singapore said this month that it will allow its currency to strengthen.


One of our most admired central bankers, Australia’s Glenn Stevens, takes the prize for the most aggressive round of interest-rate increases and he is balancing the risk of faster inflation against a growing economy.  In a speech overnight he said “Our task is now to manage a new economic upswing and this will be just as challenging, in its own way, as managing the downturn.”   The central bank’s next meeting is in early May.  Next week’s reading on first-quarter inflation will have a big impact on the direction of interest rates in Australia.  Last night, the Australian Index was down 0.5% and is marginally higher on the year. 


Howard Penney
Managing Director



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MPEL should beat the Street slightly, and 2010 numbers look like they need to go higher



MPEL is reporting next Wednesday before the market open, and they should report a solid quarter. We think MPEL will beat the street's estimate of $91MM of EBITDA by $4MM. This should be the first quarter where neither property has 'hold' issues, so there should be a good read through on what normal operating costs and business leverage look like. If CoD can keep ramping and if Altira stabilizes, then MPEL should handily beat Street numbers and will likely prove to be the cheapest way to play Macau out of all the US listed companies.


For those of you that like the details on our assumptions, please see below.


City of Dreams

  • Net revenue of $347MM 
  • EBITDA of $68MM 
  • RC volume of $10.4BN and 2.9% hold 
  • Mass win of $103MM 
  • Slot win of $24MM
  • Net casino revenues of $335MM, $30MM of non-gaming revenues and $18MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $213MM, $11MM of non-gaming related costs, and $55MM of fixed costs (fixed costs were $53MM last quarter)


  • Net revenue of $198MM 
  • EBITDA of $20MM 
  • RC volume of $9.8BN and 2.8% hold 
  • Mass win of $13MM 
  • Net casino revenues of $200MM, $9MM of non-gaming revenues and $10MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $153MM, $3MM of non-gaming related costs, and $23MM of fixed costs

Mocha Slots

  • Net revenue of $27MM 
  • EBITDA loss of $7MM


  • Net interest expense of $19MM (compared to guidance of $20MM)
  • D&A of $75MM, including amortization of the gaming concession and land use rights (in line with guidance)
  • Pre-opening expenses of $5MM

4Q09 YouTUBE

  • “Going forward into 2010, I believe our business is in its best shape yet. We are on a solid positive trajectory with significantly improved mass market trends at City of Dreams and a return to strong rolling chip levels under a more profitable commission environment at Altira.”
  • "I’m confident that 2010 will be a great year for us particular given the positive economic outlook in China, the strong political support from both the Macau SAR and the central government and also the geographic advantage that Macau enjoys."
  • “Rolling chip levels have since rebounded and in January, Altira Macau generated 30 billion of turnover exceeding the average monthly load of 25 billion during 2009. Altira Macau earned over US$10 million dollar of EBITDA in the month of January 2010, our best monthly performance of this property since October 2008.”
  • “Now on to City of Dreams, mass market table drop was essentially flat between October and the seasonally weaker November last year. Drop volume improved by 14% sequentially into December breaking a US $150 million for the first time. The performance of our mass market business steps up again in January of this year. Mass table drop increased 11% sequentially from December to over 170 million for the month and mass table revenue increased 20% sequentially to approximately US $31 million. This is translated into improved profitability at City of Dreams. We generated over US$30 million in EBITDA in January of this year.”
  • “We expect to see continued improvement as occupancy at Grand Hyatt approaches to 90% plus levels, which we consistently achieve at Crown and Hard Rock.”
  • “If we normalize fourth quarter EBITDA using 2.85%, the midpoint of the commonly expected VIP home range, we would have reported US$56 million of adjusted EBITDA.”
  • “Guidance on non-operating line items for the first quarter of 2010. Depreciation and amortization cost is expected to be approximately US$75m. Net interest expense in the first quarter is expected to be approximately US$20m. Pre-opening expense will be approximately US$5 million, related entirely to the ongoing pre-production of our House of Dancing Water Theater show which will open to the public in about six months from now.”
  • “City of Dreams has got about 20% of its business being done direct.”


New home sales exploded in March, beginning what we think will be a major buying push that will run through the next few months as the lagged data around the homebuyer tax credit comes trickling through. Remember, we're now just one week away from the expiration on the tax credit. The March data released this morning came in at 411k (seasonally adjusted annualized rate) vs. consensus for 330k and last month's print of 308k (the lowest level in 12 months).






Inventory fell to 6.7 months from 8.6 months last month (downwardly revised from 9.2 months). While inventory is down significantly off its 1H09 highs in the 11-12 months range, it is still above its normalized range of 4 months.




As was the case with yesterday's existing home sales print, this March print is a lagging indicator as it reflects deals closed two to three months ago (Jan/Feb). In our view, the relevant benchmark is how it compares with August 2009's print of 408k. Against that measure, it's flat. The original tax credit expired in November, 2009, putting August 3 months ahead of that expiration. The current credit (for closing) expires June 30 (April 30 for signing), which means 3 months ahead equals March.


To reiterate our message from yesterday, we continue to expect a pull-forward of activity not unlike what we saw going into last November. However, in the real world of non-lagged data, this means buying activity will have to be wrapped up in the next 7 days. The NAR has indicated that the tax credit has done its job and that a further round of stimulus won't be necessary. We think the jury is still out on that, and we remain rather skeptical. Our view is that this pull forward of activity is setting the stage for a much weaker-than-usual summer housing environment where inventory could back up into the 1H09 levels of the 11-12 months.


Here's a chart showing sales levels in historical context.




And this chart shows inventory levels in historical context.





Joshua Steiner, CFA


Allison Kaptur



Below I have attached a note that doesn’t come to you this morning with a smile from Washington, DC. I’d like to thank one of our rising star healthcare analysts, Christian Drake, for the V-spotting picture of Hospital Services inflation.


Healthcare inflation, of course, isn’t weighted in the CPI in a way that would make a difference to Ben Bernanke’s conflicted and compromised view of “reported” core inflation. Things like “owners equivalent” rent depress the reported inflation numbers at the same time as local government’s inflate your property taxes. How do you like them apples?


Virtually every inflation chart we look at currently emphasizes our Q2 call for Inflation’s V-Bottom.



Keith R. McCullough
Chief Executive Officer


V-spotting - obama

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