• run with the bulls

    get your first month

    of hedgeye free



The Macau Metro Monitor, May 12th, 2010




Human Resources Office (GRH) coordinator Wong Chi Hong said Sands China will only get imported labour for the resumption of its Parcels 5 & 6 construction when half of the workers needed are Macau residents.  He confirmed yesterday that GRH has already received the imported labour application from Sands China “a long time ago”, but said he was not sure if it was in last year or this year.


In addition, Wong Chi Hong stressed that the Office will not approve any quotas at this moment before Sands China can meet the requirements and confirms when exactly the suspended construction work on the Cotai Strip can be restarted.  “We definitely won’t give them [Sands China] any quotas in advance, it has to depend on the actual conditions of the construction because it’s still waiting to be resumed, and also how many local workers they are going to hire,” Wong Chi Hong said.  “We have already said that the minimum ratio [of local to imported workers in the construction industry] is 1:1. So we will only approve the quotas when at least 50 percent of their workers come from Macau,” he added.



Sands China has obtained the official land concession contract for parcels 5 and 6 in Cotai.  The company will have to pay a premium of MOP1.87 billion for the two parcels, which have a total size of 150,134 square-meters.  The concession contract states that the company has 48 months to develop parcels 5 and 6.



According to a letter reviewed by The Wall Street Journal, an impatient Macau government could move to settle Studio City's fate as soon as this week.  The letter, signed by Jaime Roberto Carion, director of land and public works in Macau, said the government would invalidate or terminate land rights for the $2.4 billion casino-resort project unless a satisfactory reason is given for its delay.  The parties, including U.S. investment firms Silver Point Capital LP and Oaktree Capital Management LLC, had one month from the date of the letter, April 14, to respond.



Stephen Weaver, chief development officer of Sands China, has left the company.  The creator of the Cotai Strip masterplan, Weaver had already resigned from the Sands China board a few weeks ago.

Financial Triumvirate

“Don’t tell mom I’m an investment banker. She still thinks I play piano in a brothel.”

– Bruce McKern


Early on in my career on Wall Street I had a friend who ended his Wall Street career after just a few years to become a teacher.  He has gone on to become headmaster at one of the best private schools in Ohio, helping to shape the minds of thousands of kids.  As for me, I don’t know what it’s like to wake up in the morning and not think about making money. 


There are lots of ways to make money legally on Wall Street and some do it better than others.  Wall Street storytelling is exemplified by bankers dressing up assets to look better than they are.  Then they charge huge fees for this service, while charging you interest on the money you borrow from them (and they can borrow money while paying little to no interest). 


Since March of 1792, it does not matter what side of the Street you are on; it’s all about making money.  Today, thousands of people are waking up thinking “how can I make money today”, but at the same time they see that Washington is demonizing what has been part of our culture for 218 years.   


The excesses of Wall Street are not excusable and are front and center right now, but Wall Street continues to be a necessary and critical part of our culture, and our economy.


With Financial reform on the tip of Obama’s tongue, can the recent string of events be just a coincidence?


(1)   SEC charges Goldman Sachs with fraud

(2)   Federal prosecutors are investigating whether Morgan Stanley misled investors

(3)   Last week the market melts down for some unknown reason….

(4)   JPM, GS and BAC have perfect quarters (what were they thinking?)


What is not a coincidence is the “Financial Triumvirate” of perfect quarters from JP Morgan, Goldman Sachs and Bank of America (Ken Lewis must be steaming right now).  Maybe now it's time for Mr. Bernanke to stop throwing money at the “Piggy-Bankers” who get up every morning and have nothing better to do but think about making money. 


He is making life so easy for them…. 


If you are a client that is on the other side of the “Financial Triumvirate”, you must be thinking “what do they know that I don’t?”.  Yes, it’s a stacked house!  The big boys have an unfair advantage in knowing exactly what the order flow pipeline looks like, so they can sit back and let their clients come to them for another losing trade.  This is a theme Washington can understand! 


Even so, you would think that in a “normal quarter” they would still have some trades go against them.  Flawless is definitely an outlier and nearly statistically improbable.  According to our in-house financial guru, Josh Steiner, in a “normal quarter” the historical charts of profitability distribution suggest that they lose money 5-10% of the time. 


When it’s all said and done, Main Street is the biggest loser. The man on the street is not getting paid on his /her savings account while Washington continues to enrich the Piggy-Bankers on Wall Street, whose sole purpose in life is to make money.  Last night, the ABC consumer confidence index came in unchanged at -47 for the week ending May 9.  The “Financial Triumvirate” may be doing what they do best, but it’s not trickling down to the little guy on Main Street.   


After last week, it is much clearer now why the Federal Reserve is keeping rates so low.  The European Sovereign debt issues and the size of the new loan facility have exposed the vulnerability of the EU as an economic power, which puts the US in a position of relative strength.  Having a sound banking system is critical to maintaining this mystique.  This is Dollar bullish! 


What can’t be ignored is that the consumer credit cycle of the past 20 years is dead.  At the same time, sovereign credit issues, combined with unsupportable entitlement spending, have ushered in an era of political and social instability.  This is a negative for the market and equity valuations, and I will point to Healthcare as a classic example.   Yesterday, our Healthcare analyst Tom Tobin said to me that he thought that Healthcare as a “safety trade” was gone, as the US and EU governments account for about 50% of payments to Healthcare.  Without healthcare, what’s left? Utilities?  Please say it’s not so.  


How many times in 2008 did you read that “cash is king” and that anything with leverage was going to zero?  In 2010 cash is still king and asset valuations are dependent upon the predictability and sustainability of cash flow generation. 


Yesterday, we sold our trading long position in QQQQ and took our allocation to US Equities in the Hedgeye Asset Allocation Model back to zero percent.  Also, at 12:14 PM we re-shorted the SP500 on strength (SHORTED SPY at $116.69) and our view of the market right here and now with the S&P at 1,155 is implied by our positioning.  Financial reform, Healthcare reform, the elimination of the Bush tax cuts, trillion dollar bailouts and the negative credit cycle are all inhibitors to growth.     


Wall Street’s interests are not always aligned with those of Main Street, and given what is happening on Main Street today, it is easy to demonize Wall Street.  However, not all bankers are bad.  Washington is trying to push through its financial reform so it does not want to educate people on the good guys and the critical role they play in today’s economy.  Some reform may be necessary, but too much financial reform will not only be an inhibitor to growth, but could also put a damper on a culture that has thrived on the dreams of those waking up, wanting to make money.



Howard Penney
Managing Director


Financial Triumvirate - gs dealer 1

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

ObamaCare's Fuzzy Math: High Risk Pools Will Cost 8 Times What Is Budgeted

Chinese Inflation Watch . . . Negative for Global Demand

Conclusion: All parties and asset classes  leveraged to the RECOVERY trade (copper, oil, Brazil, Industrials globally) will come under increased pressure if China's latest round of tightening proves ineffective to contain inflation and the country is forced to implement further tightening.


In the last 48 hours, a bevy of inflationary data points out of China have been cause for concern globally and may lead to increased tightening in China, which is negative for global growth.  Furthermore, we believe that the Bovespa in Brazil will continue to ride the tide of Chinese producer demand, which is already showing signs of slowing on the margin.


 According to recent estimates, China accounts for nearly 13% of Brazilian exports (second only to the U.S. at ~14%). With China’s imports slowing sequentially to +49.7% Y/Y in April and the prospects of further tightening by the Chinese government, Brazil’s export-heavy economy could come under increased pressure on the margin. The chart below outlines the tight trading relationship between the two countries of late.


Chinese Inflation Watch . . . Negative for Global Demand - 1


Furthermore, China’s shrinking trade surplus (-87% Y/Y in April)  may limit the size of any perspective yuan appreciation, which is less positive for the Brazilian economy vs. a larger appreciation (FYI: Brazil, India, and Europe have backed the U.S.’s call for a stronger yuan).


Below is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours which took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD: 

  1. Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively - the largest spikes in inflation in 18 months!
  2. Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005;
  3. China's purchasing price for raw materials accelerated 50bps sequentially to +12% y/y;
  4. Chinese imports came in at +49.7% year-over-year growth;
  5. Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March);
  6. Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March;
  7. China’s Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y, which suggest future inflation will be  very difficult to avoid (The Central Bank of China has a inflation target set at +3% y/y - just 20bps away from April's reading). 

All told, these inflationary data points add increased pressure for China to raise interest rates and allow the yuan to appreciate. Aside from those options, however, China has already taken measured steps to cool its economy, the most important of which are: 

  • Raising reserve requirement ratios three times YTD;  those levels are now at 17 percent for the largest banks and 15 percent for smaller ones;
  • China's Banking Regulatory Commission ordered 78 state-controlled companies to exit real estate sector;
  • Chinese Banks are now asking for 40%-50% down payments  for second mortgages;
  • In March, Chinese officials raised deposit requirements for buyers at land auctions to 20% of the minimum price to increase costs for developers; and
  • China's State Council raised down payment requirements for second homes to at least 50% and have pegged mortgage rates to no lower than 110% of the benchmark rate. 

Despite the latest round of tightening measures being put in place just a few weeks prior, these steps have already had a slight, but measured impact in property prices. Beijing News reported today that property prices in the Capital fell 31% in the past month. While we must be careful to not extrapolate this decline and apply it to the entire Chinese property market, it's important to note that a systemic 20-30% decline in housing prices in China's first-tier cities will ease tightening concerns. It may, however, cause producers to substitute away from investment in property, which, on the margin, is bearish for Brazilian exports and the global industrial sector at large.


In fact, we're already seeing signs of that substitution effect, as Total Planned Investment in New Construction Projects has slowed sequentially from +34.5% y/y in the three-months ended in March to +31.3% y/y in the four-months ended in April. Furthermore, Chinese PMI slowed sequentially to 55.4 in April vs. 57 in March, which raised concerns that Chinese demand for commodities will continue to wane.  These are marginal sequential changes, but they matter.


Time and data will tell the full story on Chinese housing prices and whether or not the Chinese government will continue to tighten to prevent further inflation. It is important to remember that the Chinese economy is a managed and controlled market, suggesting that incremental tightening will be at their own pace, in spite of external pressure to revalue the yuan. Regardless, all parties and asset classes  leveraged to the RECOVERY trade (copper, oil, Brazil, Industrials globally) will come under increased pressure if China's latest round of tightening proves ineffective to contain inflation and the country is forced to implement further tightening.


According to the below Hedgeye RECOVERY Index, the Indices, Industries, and Asset Classes leveraged to the RECOVERY trade have suffered near-widespread declines YTD, with the notable exceptions of the S&P Building and Construction Index and the S&P Homebuilders Index.


Chinese Inflation Watch . . . Negative for Global Demand - 2


Darius Dale



Downgrades, unlucky play, and china stock market swoon have all pressured MPEL.  It’s now relatively cheap, and strong May volumes should lead to market share gains, assuming hold, well, holds.



MPEL hit a recent high of $5.53 on April 9th.  One month later, the stock is down 25% because of the China stock market decline and a few downgrades.  Good enough, damage done.  What now?


We think Macau is having a very good May.  VIP volumes are very strong and while Mass seemed to slow down toward the end of Golden Week, May revenues should increase nicely over last year; we estimate +60%.  More importantly, City of Dreams is off to a great start in May, particularly on the VIP side where we are hearing the property is generating strong volumes.  Market share could be going higher for MPEL.


The sentiment on MPEL is pretty negative.  This stock could experience a quick ride up if CoD posts market share gains in May.  The valuation has plenty of relative upside.  At 11x 2011 EBITDA, MPEL trades at a +20% discount to WYNN and LVS which assumes no share increase for MPEL.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.