Agonizing Math

“He who will not economize will have to agonize.”



Yesterday was a great day for risk management. I don’t say that because most markets were down. I say that because markets actually did what the math said they should. In other words, from Spanish equities to US volatility, the macro moves were proactively predictable. Markets don’t lie; people do.


I went into the US equity market part of the day with a similar position to Ben Bernanke – at least in terms of absolutes. Rather than posting a zero percent rate of return to prudent American savers who refuse to be dared to speculate, I posted a zero percent asset allocation to US Equities.


If you are me, making a short call on the SP500 to correct on the order of 4-7%, it stands to reason that I would not only have been short the SP500 but not, at the same time, telling our clients that I want assets allocated to a market that I think is going down. Only a full service super-market-ing broker/dealer would tell you do something like that with your hard earned net worth.


You know I love to be right. I’m not one of those people who wakes up every morning expecting to be wrong. I don’t get paid what I used to, but I am certainly having more fun. My goal this morning isn’t to grandstand. It’s actually to explain what it is that I do. My friends call me Mucker, and I am your Risk Manager.


Every short call starts with a top down Global Macro Theme. We change these themes every three months because market prices and the expectations embedded in them do. As a reminder, our Q2 Macro Themes at Hedgeye Risk Management are:

  1. Sovereign Debt Dichotomy (short the Euro, long the USD; short Spain, long Germany)
  2. Inflation’s V Bottom (long TIP, oil, Aussi dollars, Chinese Yuan; short SP500, short term Treasuries and select US Equities)
  3. April Flowers/May Showers (short the SP500 with a topside target of 1214)

If you’d like the slide presentation for these themes, email the ex-Captain of the Colgate Women’s Field Hockey team who show jumps as our head of sales, Jen Kane, at . Jen plays center link for us in New Haven and she is flanked by a recently retired pro hockey player named Leclerc and our race car driver, Bergie.


Once we establish these top down themes, we lock, load, and refresh our multi-factor risk management model. We refresh our view (upside/downside bands of probability across 3 investment durations: TRADE, TREND, and TAIL) every 90 minutes of marked-to-market trading. We refresh because prices, volatility, and volumes are constantly changing.


We call this dynamic (real-time) risk management. At the Bloomberg Hedge Fund Conference yesterday afternoon in NYC, I had a great discussion with John Taylor (CEO of FX Concepts) and Dean Curnutt (CEO of Macro Risk Advisors) about being a risk manager in these globally interconnected times. Both gentlemen agreed that managing risk doesn’t occur in your ideologies or politics. It occurs daily and mathematically.


We don’t need to geek out on the math this morning, but we do need to remind you that there is a huge difference between managing risk in an interconnected ecosystem whereby you accept certainty (ie. I know Mastercard is going to have a good quarter) and uncertainty (chaos and complexity theory). The last price is what matters, and your daily objective should be to manage the risks associated with probable outcomes based on that real-time price.


Back to the grind… and explaining what we did yesterday… and what we’ll do this morning…


Like Jim Chanos, who seems perfectly ok with talking about his Chinese short position in transparent forums these days, we like to make all of our moves on a live marked-to-market investment portal. Here’s what we did yesterday as the market weakened – everything is time stamped:

  1. 1012AM, sold Mastercard (MA) after a solid EPS report
  2. 1019AM, sold the US Dollar ETF (UUP) on strength
  3. 1040AM, covered our short position in Ross Stores (ROST) on weakness
  4. 1044AM, covered our short position in the Euro (FXE) on weakness
  5. 1051AM, bought China (CAF) on weakness
  6. 1223PM, bought Intercontinental Exchange (ICE), on weakness
  7. 1226PM, covered our short position in the SP500 (SPY) on weakness

That’s it. That’s the best transparency I can give you on what it is that we actually do with all of our math. We have a research team that’s approximately 22 people in size (depending on what Big Alberta eats for breakfast). We grind research. We fade the market’s price action. We rinse and repeat.


As of this morning’s real-time prices, here are some critical risk management thoughts.

  1. SP500 immediate term TRADE support and resistance levels are now 1170-1192 (we’ll look to re-short the bounce)
  2. SP500 intermediate term TREND line of support = 1143; so ultimately, this correction has another -2.6% to go from last night’s close
  3. VIX (volatility) was up +18% yesterday to 23.84 and is now bullish on both TRADE and TREND with TREND line support = 19.51
  4. US Equity market volume was up a moon-shot +34% on our daily risk management study = bearish when combined with price/volatility
  5. Spanish equities have officially crashed, down another -1.5% this morning and down -21.5% since January
  6. The Euro is immediate term oversold and now has refreshed support/resistance levels of 1.29-1.32
  7. Brazil’s Bovespa finally broke its intermediate term TREND line = 68,334 after Brazil raised interest rates by 75bps to 9.5%
  8. Hong Kong’s Hang Seng is now broken from a TRADE and TREND perspective after trading down another -2.1% overnight
  9. Dr. Copper is signaling abort mission to the global growth trade; breaking its intermediate term TREND line of support at $3.35/lb

There are plenty of other “fundamental” news items this morning affecting prices. From Dodd/Shelby on Financial Reform to Putin Power taking this Euro freakout as an opportunity to seize Ukrainian energy assets, the “news” is always there.


All the while, our role as your Risk Manager, is to have our feet on the floor earlier than most, consume the news, and register the price action. No one said this is easy. That’s why we do it. And global macros risk waits for no one – so there are no days off.


Proactively sell high; buy low; and remember, “he who will not economize, will have to agonize” reactively. So capitalize on his consensus emotions.


Best of luck out there today,



Agonizing Math - Bovespa



The Macau Metro Monitor, May 5th, 2010




The Secretary for Transport and Public Works, Lau Si Io, says the government has received “a lot of applications” for land in Cotai. Lau says companies have requested land in the north of Estrada Flor de Lotus for “tourism and entertainment purposes” but did not specify which companies.


The market came under pressure on Tuesday as one of our 2Q themes Sovereign Debt Dichotomy continues to gain momentum and drive incremental volatility. As a result, there was a significant pickup in RISK AVERSION trade associated with skepticism surrounding the ability of the issues Greece in facing spreading to the rest of the world.


On the heels of that trade, the VIX was up 18% yesterday and 36.5% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (19.41) and sell Trade (25.08).


We have been very vocal about the mounting sovereign solvency issues in Europe.  In many ways, the European crisis echoes the way the U.S. banking crisis brought the global banking system to its knees.  At that time, the global monetary policy-makers allocated trillions to prevent systemic collapse.  In total, the sovereign debt crisis in Europe could also pose the threat of systemic collapse.  As with the U.S. banking crisis, I expect that everything possible will be done to prevent that type of massive melt down. 


 As a result, U.S. fiscal stability is the key to keeping global systemic risk in check.  Unfortunately, our balance sheet issues are very much the same as those facing the PIIGS. Despite this, the dollar is a beneficiary of the RISK AVERSION trade rising 1.25% yesterday. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (82.05) and sell Trade (83.39).


The MACRO calendar was a tailwind, but failed to offer any reprieve for stocks as better-than-expected March factory orders help to put the REVCOVERY trade on solid footing. In addition, pending home sales were surged on the expiration of the homebuyer tax credit.


The low beta defensive sectors such as Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU) were the relative outperformers yesterday. The commodity equities saw outsized losses on a dollar rally and a 2.3% decline in the CRB. The Materials (XLB) sector suffered its biggest one-day pullback since February 4th. Along with the macro headwinds from Greece and Spain, Copper is BROKEN and worries that China may be gaining some traction in its efforts to dampen liquidity also seemed to weigh on the sector.


In early trading, oil is trading down nearly 1.4% after suffering a 4% decline yesterday on the heels of increased tightening in China and a pickup in the RISK AVERSION trade with the dollar advancing 1.25% on the day. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (81.67) and Sell Trade (84.63).


Yesterday, copper suffered a similar fate to oil as global RISK AVERSION and incremental tightening in China facilitated a decline of 3.5%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.16) and Sell Trade (3.35).


In early trading, gold is trading down slightly, down 0.15%. This is following a 1.2% decline yesterday on dollar strength. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,165) and Sell Trade (1,188).


In early trading, equity futures are trading flat to fair value as some stability returns to markets after Tuesday's dramatic decline. At 8:15 the ADP jobs data will be monitored for a potential positive reading as it has become a proxy for non-farm payrolls which are due on Friday. As we look at today’s set up the range for the S&P 500 is 22 points or 0.3% (1,170) downside and 1.6% (1192) upside.


Today’s MACRO events: 

  • MBA Mortgage Applications
  • April Challenger Job Cuts
  • April ADP Employment
  • April ISM Non-Manufacturing Composite 

Howard Penney

Managing Director













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McCullough Says Market Volatility Up on `Fear' in Greece


In preparation for LVS's Q1 earnings, we've highlighted management's forward looking commentary from its Q4 conference call and subsequent investor conferences.



LVS hasn't set an earnings date but we're guessing it could be Thursday after the close.  We are considerably above the Street in company EBITDA, $341 million versus $295 million, respectively.  We estimate total Macau EBITDA to be $273 million and Las Vegas to generate $101 million.  We think Las Vegas played lucky in the quarter and we are estimating 24% table hold versus 20.5% last year.  Baccarat volume was also very strong in Las Vegas.




Business update from Deutsche Bank's conference on 3/3/2010 and CLSA AsiaUSA Forum on 3/1/2010:

  • "I think that I do know that we’ll probably reach about our goal of 660,000 room nights. I think we’re somewhere about 500,000 now and our goal for next year is 800,000 plus and then I think we’ll bring it back to the most recent pre-crisis number. And from my standpoint, that gives us a base of about 7,100 suites and then we can yield up from there."
  • "So I think we look very good, our numbers were primarily beginning with the two for the ADR and I think our occupancy rate was starting with a nine (January and February)."
  • "We’ve checked out what Singapore is doing and what Genting is doing and they’re doing incredible numbers, like S$500 bet on baccarat. But that was the holiday. Now they are down to about 250, S$300. So take 70% of that, so it’s over $200 for the average bet in baccarat. Compare that to Macau, which is $85. Compare that to Vegas, which is $25... But that’s on the mass market side."
  • "We can only figure the theoretical, but based on my 20-year experience in Vegas, it’s typically about half of what the actual is. So, the bottom line is that Mike Leven and I have discussed over the last couple of days, redoing our numbers on the high side. And we were estimating $3,600 per win per table per day and about 250 or $300 win per slot per day. And now we find out that the slots (from Genting) were winning $1,000 a day."
  • Customers for MBS: "The first country is of course Singapore. The first country beyond Singapore is Malaysia. Also, Indonesia will be two, Thailand will be three, the Vietnamese might be four and China would be five. But on the high roller side, I don’t think we’re looking at any mass market. Mass market may come from Malaysia, Indonesia, maybe some from Thailand, but we’re going to raise the level of spend that each person from Thailand would bring with them. So the average batch will be significantly higher, which is what Genting is showing us up till now. The average batch is significantly higher than what we’re experiencing both in Vegas and Macau."
  • "As far as the hiatus concern, we have no indication except people that we talk to, and our own sales people– field junket reps. They just get a commission on sending some body in with a small several thousand dollar cap for the commission. They don’t provide credit or they don’t provide collection or something like that, they just send the player in."
  • Japan: "There is a committee of one member of each of the two governments, the LDP and DPJ, with whom we’ve met before. It’s a long process because Japanese change things very slowly. But what you should know is that there’s 16,000 pachinko parlors that does admittedly 25 billion."
  • Conventions/FIT: "So, gaming is in everybody’s nature, FYI, only 14% of the people who go to Vegas, according to the convention authorities research, go for the purpose of gaming; that means 86% go for other reasons, including conventions. We see the convention market picking up, I won’t say significantly, but I will say substantially from where it was. It was at it lowest point last year, and one guy characterized that they’re coming in force. For this year and we think next year, there’s a possibility we’ll get back to the levels of ‘07. So, the groups are picking up, but the FIT market is low."

Q4 Conference Call:

  • Sands Bethlehem: "We expect to introduce approximately 80 tables to the property in the third quarter."
  • "The pace of group bookings continues to improve and all signs indicate 2011 will be stronger than ‘10. In 2009 we realized approximately 470,000 group room nights, as of today we have more than that number on our books for 2010."
  • "In addition, in March, we expect to close the previously announced $1.75 billion credit facility to fund construction of parcels 5 and 6 in Macau."
  • Rates: "We’re trending down, relative to 2009 rates, we’re 211 for actual group segment for the year. We’re down in the 180 range for 2010, high 170’s, low 180’s."


High VIP hold % helps drive market - WYNN and LVS in particular. Here is the property detail.



April was another huge month for gaming revenues which increased 70%.  Much of the "huge" growth was driven by VIP table revenues which grew 89% y-o-y, while Mass table revenues increased 36%.  Slots were up 28%.  While WYNN and LVS gained table revenue share at the expense of all the concessionaires, these sequential gains were driven by much better luck in April vs. March (and much better than normal).  Looking at junket RC volumes it appears that just the reverse occurred; WYNN, LVS and to a lesser extent MGM lost share to the three HK-based concessionaires.  For WYNN at least, growth in their direct VIP business may have contributed to the higher hold versus volume, which actually wouldn't be such a bad thing.



Y-o-Y Table Revenue Observations


LVS table revenues increased 40%, with growth coming from a 56% increase VIP revenues but only a 16% increase in Mass revenues.

  • Sands grew 21%, driven by a 29% increase in VIP revenue and an 8% increase in Mass revenue
    • Junket RC increased 43%. 
    • Hold looks high - roughly 3.3%, but last April's hold was even higher - we estimate 3.6%.
  • Venetian was up 21%, driven by a 22% increase in VIP revenues  and a 21% increase in Mass
    • Junket RC decreased 23% y-o-y, however, hold more than made up the difference.  Assuming 18% direct VIP play volume, we estimate that hold for April was 3.7%.  Last April, assuming 16% direct play, the hold percentage was only 2.4%.
    • Gaming revenue growth would likely have been negative with normal VIP hold.
  • Four Seasons was up 475% y-o-y entirely driven by 1360% VIP growth (and massive hold %) with Mass growing a relatively tiny 14% 
    • Junket VIP RC increased 297% to $649MM.  If we assume 35% direct VIP play then hold percentage in the month was north of 5%.

Wynn Macau table revenues were up 87%, primarily driven by a 117% increase in VIP while Mass revenues were only up 11%.

  • VIP volumes were driven by Junket RC increase of 77%, high hold, and easy hold comparisons.
  • Using the same adjustment factor for direct play in both April 09 and 2010, hold this past month appears to be 3.1% vs. 2.5% last year.

Crown table revenues grew 143%, with the growth fueled by 561% growth in Mass and 113% growth in VIP.

  • Altira was up 19%, all due to a 21% increase in VIP revenues which was partly offset by a 16% decline in Mass
    • VIP RC was down 4%, but hold comparisons were favorable.  Last April hold was only 2.3% while this April it appears to have been 3%.
  • CoD table revenue increased 11% sequentially, due to a 15% decrease in VIP win,  while Mass was up 1.4%
    • Mass was $34MM (they did say that hold was in the low 20's so perhaps drop wasn't so great).
    • Junket VIP RC increased 11% sequentially
    • If we assume 18% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $4.1BN.  However, hold in April was very weak at only 1.8%.

SJM continued its hot streak, with table revenues up 87%.

  • Mass was up 43% and VIP was up 119%.
  • Junket RC volumes increased 130%.
  • As we wrote about on several occasions, we believe SJM is being very aggressive on junket pricing.

Galaxy table revenue was up 61%, entirely driven by a 71% increase in VIP win, while Mass increased 18%.

  • Starworld's table revenue was up 92%, also entirely driven by 105% growth in VIP revenues, while Mass decreased 15% y-o-y.

MGM table revenue was up 35%.

  • Mass revenue growth was 19%, while VIP grew 43%.
  • VIP RC grew 26%.


Market Share


LVS share increased 170bps sequentially to 20.9%, with most of the share gain coming from VIP.

  • LVS's share of VIP revenues increased to 18.7% from 16.4% in February.  However, LVS's share of Junket RC actually decreased 150 bps to 12% which is the lowest share that LVS has had since at least May 2007 (when we started tracking the data).
  • Mass share increased by 50 bps to 27.4%.
  • Sands gained what it lost last month (44bps), increasing to 6.9% sequentially.  Sands gained share across both VIP and Mass win while losing 50bps of junket RC share.
  • Venetian gained 30bps to 10.5% sequentially. 
    • Venetian actually gained 95bps of market share in VIP sequentially to 8.5% but VIP gains were largely offset by a 87bps sequential drop in Mass share.  If not for high hold, Venetian's share would have dropped, as Junket RC share fell 80bps to only 5.5% - Venetian's lowest share since opening.
  • FS share increased 90bps to 3.5%.
  • After SJM, LVS commanded the second highest share of the overall market, mainly due to the strength of their Mass business which commanded market share of 27.4%, followed by Wynn at 9.4%.

WYNN's share increased to 14.1% from 12.9% in March.

  • In a reversal of last month's trend, Wynn's gain was entirely driven by higher VIP hold.  Wynn's share of the VIP revenues recovered to 15.6% from 14.1% in March.  Junket RC fell by 119 bps to 14.4% - falling to fourth place behind SJM, Crown and Galaxy. However, the Encore addition should help in May and as long as they continue to grow their more profitable direct play, which we saw last quarter, it doesn't really matter.

Crown's market share decreased by 30bps to 12.6% in April.

  • All of the share loss came from CoD, whose share dropped to 6.4% from 7.5% in March
  • CoD's share drop was entirely due to a 1.6% decline in VIP share to 5.9% which was driven by the property's low hold.  Junket RC share increased by 100bps to 8.3%.
  • Altira's share increased to 6.2% from 5.3% in March.  Mass market share decreased slightly by 6bps to 1.2% but was more than offset by VIP share growth of 100bps to 7.8% which was all hold related as Junket RC share decreased by 10bps to 8.2%.

After 3 months of climbing, SJM's share slipped by 90 bps to 34.2% - which is still its 2nd highest share month since Nov 2007.

  • Despite share of Junket RC increasing by 70bps to 34.9% in April, VIP share decreased 145bps to 31.2%.
  • SJM Mass share increased by 150bps to 43.2% sequentially.

Galaxy's share decreased slightly to 11.7% from 11.9% last month.

  • Starworld's market share was increased slightly by 2bps sequentially to 9.6%
  • Galaxy and it's flagship property gained share in Junket RC.  VIP share creeped up for Starworld and was flat for Galaxy while Mass share decreased for both.

MGM's share decreased by 155bps to 6.5%, this is the property's second lowest share month since March 09.

  • MGM's share loss can be attributed to a 1.94% sequential decrease in VIP share to 6.3%.  Mass share decreased 40 bps to 7.2%. We can't imagine that Encore is doing them any favors... nor is SJM's aggressive share grab.

Slot market commentary

  • Slot win grew 28.5% y-o-y to $82MM.
  • LVS's slot win grew across all 3 properties by 7% y-o-y to $23MM.
  • Wynn slot revenues increased by 3% y-o-y to $15MM.
  • Melco's slot win grew 139% y-o-y.
  • MGM's slot win grew 35% y-o-y to $8MM.
  • SJM's slot win grew 29% to $15MM.
  • Galaxy's slot win grew 15% to $2MM.






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