SJM has already dented LVS’s VIP share with its junket push and now, LVS may be feeling the Mass pinch as its market share has plummeted in May.


We’ve written quite a bit about SJM’s big push for junket share, and it has indeed paid off – if market share and no margins was their goal.  Higher commission rates paid to junkets and the company’s unique “franchise” structure that offloads more of the risk and reward to the operators have contributed to expanding share.  As can be seen in the chart below, SJM’s Mass share has also increased but not nearly at the rate of VIP's.




It’s hard to be too pessimistic on any Macau operator when the market is growing at a potential 85% clip (in May).  However, for a variety of reasons, LVS is losing share, which could be an issue once the market inevitably slows.




We do know that the Venetian junkets were directly in the sight line of SJM which partially explains the sharp degradation in LVS’s VIP share.  We also believe Encore took a big chunk out of LVS in May, contributing to a 5% sequential drop in share in May month-to-date relative to April.  If SJM is serious and successful in its Mass Market aggression, LVS’s properties could be most at risk given their higher Mass mix. 


SJM maintains third party operating arrangements at many of its properties.  On its quarterly conference call this morning, SJM discussed the opportunity for the satellite properties to cultivate a Mass business.  They believe they’ve only scratched the surface.  We’ll see over the coming months but the opportunity certainly seems to be there.

Ugly Chart of the Day

Position: Long Germany (EWG); Short France (EWQ)


We’ve been on the tape warning of mounting inflation pressures in the UK.  Earlier in the month the UK Producer Price Index for April measured +13.1% on an annual basis. Today, the UK Consumer Price Index for April registered +3.7% year-over-year, up from March’s rise of 3.4%. 


For context, we’ve charted UK CPI versus Eurozone CPI below. Within the Eurozone (16), only Greece (at +4.7%) has a higher inflation rate than the UK; and among the EU states (27), only Romania and Hungary (in addition to Greece) have higher inflation rates than the UK, at 4.2% and 5.7% respectively.  


Although inflation has surpassed the top-side limit of 3% set by the Bank of England for the last two months, Governor Mervyn King downplayed the rate as “temporary” in a statement today, citing “substantial spare capacity.” We’ll take the other side of the trade, namely that rising inflation is not just a near-term issue in the UK.  As Keith has noted in his work, “US sovereign debt problems are only different than Western European ones in one key factor – timing. The darkest days for professional US politicians who perpetuate a fiat currency policy are coming.” Alongside the US, we’d add the UK to our theme of Duration Mismatch. Stay tuned.


Matthew Hedrick



Ugly Chart of the Day      - uk CPI



“The increase in our net profit by 451% during the first quarter of 2010 and the increase in our Adjusted EBITDA by 155% show that we are obtaining positive results from the past year’s initiatives to expand capacity as well as to increase efficiency and operating leverage throughout our casino portfolio. While overall market conditions have been favourable, the fact that we have increased our market share testifies to the fundamental strength and excellent positioning of our business. We look forward to excellent prospects for the Group during the rest of the year.”

- Dr. Ambrose So, Chief Executive Officer of SJM Holdings Limited



  • Group gaming revenue of during 1Q2010 was HK$12,683 million, an increase of 74% from HK$7,280 million 
  • Adjusted EBITDA was HK$1,096 million, an increase of 155% from HK$430 million in the year earlier quarter
  • Profit attributable to owners was HK$760 million, an increase of 451% y-o-y increase from HK$138 million
  • SJM's gaming revenues accounted for 31.9% of Macau’s casino gaming market during 1Q2010, as compared with 28.8% 1Q09.
    • Group’s VIP gaming revenue was HK$8,282 million, a 104% y-o-y increase
    • Mass market gaming revenue was HK$4,122 million, an increase of 39% from HK$2,974 million
    • Slot machine revenue was HK$279 million, an increase of 11% from HK$250 million
  • 1Q2010 average table and slot counts:
    • VIP: 411 (first quarter 2009: 206)
    • Mass: 1,361 (first quarter 2009: 1,163)
    • Slots: 4,614 (first quarter 2009: 3,920)
  • 1Q2010 Group VIP chip sales were HK$288.5 billion (first quarter 2009: HK$140.8 billion), and the VIP gaming hold percentage (before commissions and discounts) was 2.87% (first quarter 2009: 2.88%).
  • Breakout of revenues and EBITDA for 1Q2010:
    • Grand Lisboa: HK$3.165BN and HK$508MM
    • Other self promoted casinos: HK$2.955BN and HK$240MM
    • Third party operated casinos: $6.563BN and HK$270MM
  • Adjusted EBITDA margins for the group were 8.6%, but would be 14.8% if calculated on a comparable basis to US properties.  If the Group’s revenue is further adjusted to include the net revenue of self-promoted casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s third party-promoted casinos and slot halls, the Group’s Adjusted EBITDA margin would be 26.0%.
  • Grand Lisboa Hotel achieved average occupancy rate of 72.2% and average room rate of HK$1,924 per night.


  • The 1Q2010 results show the benefits of the new agreements they have in place with their junkets.
  • Casino Oceanus is still in its ramp up state, but they are pleased with their results YTD
  • They are going to start the renovation of Casino Jai Alai later this year
  • Completing the installation of a new table and player tracking system at Casino Grand Lisboa
  • Considering the development of a site in Cotai and their site next to the Portuguese school, but have made no decision so far


  • Oceanus results so far?
    • Will do it midyear, just can’t do it this yet since they haven’t separated all accounts
  • They are considering developing on Cotai – and are waiting to see if they will proceed before making a dividend payment
  • Why doesn’t the sum of the Grand Lisboa, other owned casinos and satellites equal the total group EBITDA?
    • Because it doesn’t include the Grand Lisbao hotel  (36MM) and Ponte 16 (34MM) and some other investments (8MM). Those breakouts are already including corporate expense allocation.
  • Interest expense was $56MM
  • Interest income was $10.3 MM
  • D&A was 266MM
  • How much of the other owned casino EBITDA was from Oceanus?
    • Casino Lisboa is contributing more than Oceanus at this point
  • Moved to 3% and 5% franchise deals, average is 4.1%- some of that mix depends on the mix of VIP and Mass business
  • Impact of Encore?
    • Doesn’t appear to have any impact on their business.  May be taking share from other more ‘related’ operators
  • April is quite good and first half of May is even better because of Golden Week. They have no complaints of their market share. May trends should soften in the back half.
  • Margins are always higher in non-gaming since you don’t have the taxes.
  • Is this level of EBITDA sustainable?
    • It's been an exceptional quarter for the market.  They have been anticipating a softening of the VIP market but haven't seen it yet.  So they are unsure how much the softening will be offset by seasonally better trends.
  • Third party operated casino strategy is to encourage those properties to promote their casinos.  They didn't hold as well in their owned casinos, which is why the Satellite casinos appear to be growing faster.
  • The third party casinos have begun to realize that there is margin in the Mass now that they are "emancipated" to run their business as they wish, and the results reflect them growing that business
  • Portuguese school site is still more of a priority over developing the Cotai site.
  • Margins going forward at Grand Lisboa?
    • They are looking for margin improvement. They have been continuously doing that.
  • Satellite properties will benefit from their discovery of Mass business. The new contracts encourage them to market their own properties.
  • Jai Alai renovation capex: 100-200 MM $HK
  • Their Adjusted EBITDA was up 30% from the 4th Q
  • Table cap is for the next three years and by the time they open anything in Cotai it would be expired - since they haven't started construction.  After 3 years, there will be 3-5% annual table growth. Won't do anything without the government's blessing.
  • Why are they expecting a slowdown?
    • Money supply in China is really loose now. But as high-end individuals are less able to forecast their growth, they will be less likely to play.  Government has suppressed the housing market already and the stock market performance has also been poor, so it should affect play levels.
  • Expect that their market can stay at current levels or improve.  Will not open new tables or close tables, but will better yield manage their tables. Were fortunate enough to increase tables late last year before table caps went into place.  There has been no talks of reducing any concessionaire's tables.
  • Run rate expenses of Grand Lisbao? There has been no increase due to labor or marketing costs. Any margin pressure is a result of mix shift towards VIP.
  • Maintenance Capex? It's a lot lower than Venetian. It's only HK$200-250MM for them and HK$700-800MM in total capex for the year.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Angry Shorts

“When anger rises, think of the consequences.”



One of the best parts about being a risk manager in global macro is that there is no real information “edge” that my competitors can glean from getting winks and nods from the old boy network. The edge in global macro resides in having a repeatable research process that can quantify the crowd’s behavior.


The vaunted “1 on 1” is one of the most overpriced research products in our business. It being priced at a premium is the output of a self destructing sell-side business model whose “ideas” continue to be discounted as lagging indicators. As a result, there is an analytical void at both the sell-side supermarkets and the media that perpetuates their consensus leanings that you can capitalize on.


Without giving away the secret sauce manufactured here at our risk management boutique, I can tell you that we have learned a lot from neuroscientists like Dr. Richard Peterson in recent years and have found some very effective ways to quantify sentiment. This becomes quite handy, particularly when you can identify what we call the Angry Shorts in a crowded global macro position.


As a practical matter, we look for the appearances of key words and phrases in mainstream media and then overlay it with a multi-factor risk management model to come up with trading ranges in markets. Yesterday, the words “euro” and “parity” had what I considered a statistically significant reading.


That’s why I wrote in yesterday’s strategy note that “our call this morning will not be to pile on to the “parity call” that has quickly become the most deserved and consensus trade in global macro. Both our immediate and intermediate term duration targets for the Euro are converging in the $1.21-1.22 range. Whenever these durations converge, my own mathematical prejudice is to cover my short position.”


In other words, the timing of my calls is directly correlated to the math. I don’t wake-up every morning and lick my finger hoping the wind gives me the signal. I wake up to a new daily set of data - most of it is quantitative; some of it is qualitative; but all of it needs to be quantified and risk managed.


As a practical matter, the next step is putting the outputs of our models on the tape. Unlike the conflicted and compromised sell-side, we do that real-time, every day. In the Virtual Portfolio (we don’t believe in running a prop desk in front of, beside, or behind our clients), you can see all of our positions on a marked-to-market basis. We are either right or wrong and you should be the first to remind us of as much. We are accountable.


Yesterday, as it tested and tried our immediate term oversold level of $1.22, we capitalized on some Angry Shorts in the Euro and made the following two moves: 

  1. 1210PM (EST) – we bought oil as it was immediate term oversold
  2. 1219PM (EST) – we shorted the US Dollar as it was immediate term overbought 

Now the decision to buy oil was immediate term in nature (3 weeks or less), whereas the decision to short the US Dollar was intermediate term in nature (3 months or more). Oil is now broken, across all 3 of our core investment durations (TRADE, TREND, and TAIL), but has immediate term upside to $76.17/barrel. We were already long some oil going into the day, so we didn’t get angry about it; we waited for our price, and bought more with the expectation to keep a trade a TRADE.


On the US Dollar Index position, I laid out our intermediate term thesis on the Duration Mismatch between the Euro and the US Dollar in my strategy note from last Thursday titled Fiat Fools. Without re-hashing that in full, the bottom line is this: US sovereign debt problems are only different than Western European ones in one key factor – timing. The darkest days for professional US politicians who perpetuate a fiat currency policy are coming.


Yes, the Euro-trashing by Trichet has been voted on in a very public (marked-to-market) way. One TRILLION is a lot of French Fiat that has created what Mr. Macro Market sees well ahead of a lying Spanish politician. That’s why the Euro has lost -18% of its value since November. While it may be “new” to the money honey at CNBC, it’s not new to the real-time risk managers of global macro. Neither will it be “new” news to anyone who has studied basic calculus when the USA gets its turn.


If you are looking for the simpleton version of the math on the topic of US debt, deficits, and unfunded liabilities, read “Comeback America” by David Walker. I am in the middle of reading it right now. Since Walker was the comptroller general and head of the GAO (General Accountability Office) of the United States of America, his view of the actual numbers versus the Made-Off ones is quite revealing.


I’ll spend more time on what Walker calls the “Financial Hole” ($56 TRILLION US Dollars) in the coming weeks and months, but for now let me leave you with something that can help you help your friends get really angry about – a TRILLION dollars…


Whether its Euros or US Dollars, as Walker wrote, “think about that word, trillion”… “if you can”…


“The $1.42 trillion deficit translates to about $2.6 million of debt accumulated each minute, $160 million an hour, and $3.8 billion a day.”


Them be some liabilities that Americans are going to be getting really angry about within 6 to 9 months. Make sure you are short the US Dollar before that anger management becomes consensus.


My immediate term support and resistance lines for the SP500 are now 1109 and 1144, respectively. I remain short SPY and we will be hosting our Monthly Macro Call this afternoon (email if you’d like to participate).


Best of luck out there today,



Angry Shorts - DOLLAR


The S&P 500 finished slightly higher on Monday, after spending most of the day in the red.  On the MACRO front the “Sovereign debt Dichotomy theme/concerns” continue to provide downward pressure in Europe.  There were additional concerns over the strength and sustainability of economic activity in China, though these concerns did little to stop China from being up 1.4% last night. 


On the MACRO front, the May Empire Manufacturing came in below expectations; 19.1 vs consensus 30.0 and prior 31.9. New orders index was 14.30; down from prior 29.49. Shipments index was 11.29; down from prior 32.10. Inventories index was 1.3; down from prior 11.39.


March total net TIC flows were $10.5B vs revised prior $9.7B; net long-term inflow (purchases of equities, notes and bonds) totaled was significantly higher $140.5B than consensus $50.0B and $47.1B  billion in February.  Treasury purchases rose by the most since June as China added to its holdings for the first time since September.


On the housing front, May NAHB Housing Market Index was better than expected; 22 vs consensus 20 and prior 19. While still low by historical standards, this was the highest reading since August 2007.  The gauge of buyer traffic increased to 16 from 13 last month and the measure of sales expectations for the next six months climbed to 28 from 25.


Yesterday, Consumer Staples was the best performing sector and is now added to the list of sectors that are positive on TREND.  The others include Consumer Discretionary, Industrials and Utilities. 


Commodities fell to a seven-month low, led by the industrial metals and energy.  The CRB declined 2.1% to 253.20, the lowest level since October 5th. Copper plunged the most in 15 months and crude oil fell to the lowest price since December.  Oil declined sharply yesterday but has pared some of its losses.  Currently it is trading up 2.7% at $71.95. 


Not surprisingly, the REFLATION trade was hit hard yesterday.  Energy (XLE) was the worst performing sector, down 1% (with crude oil down 2.1% to 70.08 after trading below $70 earlier in the day).  Industrials (XLI) and Materials (XLB) round out the bottom three performing sectors.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.80) and Sell Trade (76.17). 


Within the Materials, the S&P Metals & Mining Select Industry Index was down 3.4%.  Chinese export concerns and the EURO are leading the list of concerns for the XLB.  Steel companies were among the worst performers, as were the precious metals.  Even gold stocks were notable as gold companies moved to the downside. 


Yesterday, at 12.10 PM we shorted the UUP.  We've been waiting for immediate term TRADE capitulation in the Euro. We may have seen that yesterday and the USD is approaching our intermediate term TREND upside target at the same time.  Today, the USD is up versus the GBP, JPY, and the AUD, down versus the EURO, CHF, CAD, and HKD.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.99) and Sell Trade (86.97). 


The Euro is holding Hedgeye's $1.21-1.22 level of intermediate term support, popping back up to 1.24 with immediate term resist at 1.26.  The Euro is up versus the USD, JPY, GBP, AUD, and HKD.  The Swiss Franc and Canadian Dollar are trading up versus the EURO, with the CAD showing less sensitivity to oil prices than the Australian currency.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.26). 


Looking at counterparty risk, three month LIBOR has increased again from yesterday to 0.46.  The inverse correlation between the TED spread and the EURO tightened further during yesterday’s trading; it is now -0.95.  The TED spread widened during trading yesterday but has come in slightly this morning (the Euro is up!), currently at 0.297.  Gold has shown some weakness over the past couple of days; at the time of writing it is trading down 1.1% at $1,214 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,177) and Sell Trade (1,255).


The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.99) and Sell Trade (3.15). 


At the time of writing, equity futures are trading above fair value, feeding the markets rallied into the close Monday.   Yesterday’s late session rally has translated into higher European and Asian markets, where RISK is slowly returning.  As we look at today’s set up, the range for the S&P 500 is 35 points or 2.5% (1,109) downside and 0.6% (1,144) upside. 


On the MACRO calendar we have:

  • April PPI
  • April Housing Starts, Permits 
  • API Crude Inventories 
  • ABC Consumer Confidence

Howard Penney

Managing Director














Despite a much higher Mass mix, Venetian’s margins are comparable to Wynn. High promotional activity is the culprit.



Wynn reported massive margins in Macau a few weeks ago which we discussed in our April 30th note, “WYNN GROWS INTO ITS MULTIPLE”.  A lot of the margin looks sustainable assuming Wynn continues to grow its direct VIP play and keeps its commissions low.  Unfortunately, we cannot say the same for the LVS Macau casinos.


Bottom line, Sands China is paying total commissions much higher than the “official” cap of 1.25% of rolling chip or 44% of win.  A fat commission structure explains why Venetian’s margins are in-line with Wynn Macau's despite Venetian generating a higher mix of higher margin Mass business and a greater percentage of VIP play than Wynn.  See the chart below for illustration.




Sands China paid out aggregate commission dollars of 1.37% of RC in 1Q2010, 1.27% in 2009, and 1.31% in 2008 or 47%, 45% and 46%, respectively, if we look at commission as a % of win.  We define aggregate commission dollars as the sum of:

  • Rebates offered to direct players and the estimated monies paid to junkets that ultimately get paid back to junket customers as rebates.  This number can be calculated as the difference between calculated gross gaming revenues and reported net casino revenues. Rebates are recorded as a contra-revenue item.
    • For Sands, this amount is usually between 75bps to 100bps of VIP Turnover or 28-35% of VIP hold %.
  • Junket commission expenses are the part of the junket commission that the junket keeps in return for his service of providing credit, working capital, collection services and client promotion activity.  Junket commission expenses are reported in casino operating expenses by Sands China and broken out in the notes section of their releases.
    •  Junket commissions are estimated between 24-30bps for Sands China.
  • In addition to offering players rebates and paying junkets commissions for their services, operators also offer “comps” to their junkets and VIP players in the form of free rooms, free meals, free transportation (including those wonderful jet rides), and other forms of “entertainment.”  When we met with DJIC last year before commission caps were put in place, they told us that the caps were meant to capture the value of “comps” in the all-in rate.  Of course, they also intended to put a cap on revenue share deals, but that also never happened.  Regardless, complementary services have a cost to them and should be included in thinking about the cost of the VIP business.  Like rebates, complimentary non-gaming services are treated as a contra-revenue item.  When Sands China reports, non-gaming revenues are reported as net of “comped” revenues vs. when LVS reports the comps are in the promotional line.  To be fair, we reduce the promotional line by 50% in order to capture the true cost of the promotional instead of just the revenue forgone.
    • Gross comps are not insignificant;  they’ve been running between 19-30bps.

Even excluding the complimentary non-gaming services, commissions are higher than one would expect given the high percent of direct play across the 3 properties and the significant weight towards RC junkets vs. revenue share arrangements. Part of the explanation for higher all in commissions is that Sands pays a higher rebate rate to its direct players – perhaps closer to 1% not including comps.

  • 80% of Venetian’s VIP commissions are paid on a RC basis (i.e. 1.25%).  Venetian’s direct play as a % of total VIP Turnover was 21% in 1Q2010, 17% in 2009 and 15% in 2008.
  • 50% of Sands’s VIP commissions are paid on a RC basis.  Sands’s direct play as a % of total VIP Turnover was 10% in 1Q2010, 11% in 2009 and 2008.
  • 80% of Plaza’s VIP commissions are paid on a RC basis.  Plaza’s direct play as a % of total VIP Turnover was 43% in 1Q2010, 28% in 4Q2009 and 49% in 3Q2009.

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