The Macau Metro Monitor, June 4th, 2010


CEO Adelson said yesterday that Sands China could generate between $1.0 to $1.2 billion in adjusted EBITDA in 2010.  He added that LVS could generate on a consolidated basis as much as US$3.0 billion of adjusted EBITDA in 2011.

Meanwhile, on CNBC, Adelson remains optimistic on the Las Vegas market and is interested in the Japanese market.



Foreigners with only tourist visas will no longer be allowed to work in Macau, the Department of Foreign Affairs (DFA) said Friday.  Under the new law, jobs in Macau will be available only through direct hiring in the Philippines, or through a legitimate agency in the Philippines connected to a legitimate Macau employment agency.



Beginning 8/1/2010, Visa will block holders of Chinese dual currency credit cards that bear both Visa and UnionPay symbols from using the China UnionPay service when they travel overseas, including to Macau and Hong Kong. This move will result in Chinese mainland consumers paying a 1 to 2% money-exchange fee and exposing them to various FX risks.


Sources in Macau are skeptical Visa will go through with this change as it will hurt tourism.  “The dual currency credit cards [Visa and China UnionPay] have become very convenient, especially considering that there are still many restrictions for mainland tourists to take money when they travel to overseas destinations.  I don’t believe that this move will come into effect,” a source close to the local banking supervision body told Macau Daily Times.


“UnionPay will continue to expand business overseas, improve services and strengthen international cooperation … with strong support of our member institutions,” UnionPay said in response to the media reports.


Paulson & Co will provide a cash infusion of $351 million for $532 million debt owned by a Harrah's subsidiary. Harrah's owners Apollo Management LP and TPG Capital LP will put in about $200 million into the company to buy $303 million debt from the Harrah's subsidiary. The companies together will exchange that debt for 15.6% equity in the company.


Harrah's CFO, Jonathan Halkyard said,  the total cash investment of around $550 million  would allow to Harrah's to pursue international opportunties, particularly in Macau.  "Macau remains our first, second and third priority," Mr. Halkyard said.


The S&P 500 finished higher (up 0.4%) on Thursday, but the move was choppy and unconvincing.  The RISK trade continues to outperform, but the underlying risk factors don’t support the move as volatility continues to reflect the heightened uncertainty surrounding a number of key MACRO drivers for stocks.


Some of the unsettling factors are:


(1)    Volume declining sequentially for three straight days.

(2)    Negative Advance/Decline line.

(3)    VIX declined yesterday, but is in a bullish formation.

(4)    The DXY is up, Euro down.

(5)    Copper is down for four straight days - Broken on TRADE and TREND.

(6)    China is still in CRASH territory.

(7)    Hedgeye RM sector studies are bearish

(8)    Three-month LIBOR has risen to 0.5378%

(9)    Although it has come in today, the TED spread has widened considerably this week


The potential contagion from the fiscal pressures in countries throughout Europe will continue to plague the financial sector.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).  The Financials (XLF) was one of two sectors that declined yesterday.


The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.52) and Sell Trade (87.63).  The VIX declined by 2.3%, but still remains in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.11) and Sell Trade (41.12). 


While the CRB rallied by 0.83% yesterday, the impact from China's efforts to cool an overheating property market and the earnings hit from the Gulf of Mexico moratorium may not completely factored in to commodity demand, which may suggest further downside.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.20) and Sell Trade (76.12).


The Materials (XLB) sector was the worst performer yesterday and the other sector that declined alongside the Financials (XLF).  China seemed to be one of the bigger drivers of today's pullback in the industrial metals and related equities.  Yesterday, Copper declined 3% and is looking down for four straight days.  Copper is now down 9.7% year-to-date.  The Ag chemicals group also came under some pressure today with CF (3.5%) and MOS (3.4%) among the worst performers.  A notable divergence in the REFLATION trade was the Energy sector (XLE), which caught a bid as crude rose 2.4%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.03). 


A notable standout to the upside was Technology (XLK); the software group was one of the bright spots in the sector.   The Internet group also fared well with EBAY +4.4%, GOOG +2.5%, YHOO +1.7%, and DELL +4.9%.  Dell Inc. Chief Executive Officer Michael Dell said he has considered taking the company private.  After rallying more than 3.5% on Wednesday, the semi group finished higher again today with the SOX +1.2%; the semi-cap equipment names were among the best performers in the group.


Looking at the Hedgeye sector models, the Consumer Discretionary (XLY) remains the only sector that is positive on TREND, although the underlying names are running into a brick wall.  Yesterday’s May same-store sales data did not seem to provide any meaningful overall direction for the S&P Retail Index, which underperformed.  The Thomson Reuters same-store sales index rose 2.5% in May vs. consensus expectations for a 2.6% increase. While total comps came in below expectations for a second straight month, a number of companies noted a pickup in sales in the back half of the month stemming from better weather.


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,202) and Sell Trade (1,237).   


As we look at today’s set up for the S&P 500, the range is 34 points or 2.3% (1,077) downside and 0.7% (1,111) upside.  Equity futures are trading above fair value after posting their first consecutive gain in over a month with investors poised for May's nonfarm payrolls due at 08:30am.


On the economic front to be reported today will be:

  • Euro zone Q1 preliminary GDP +0.6% y/y vs. consensus 0.5%
  • US Nonfarm Payrolls (May) consensus 500K
  • US Private Payrolls (May) consensus 175K
  • US Manufacturing Payrolls (May) consensus 35K
  • US Unemployment Rate (May) consensus 9.8%
  • US Average Hourly Earnings MoM (May) consensus 0.1%
  • US Average Weekly Hours (May) consensus 34.1

Howard Penney













The World As It Will Be

“No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”

-Isaac Asimov


Isaac Asimov was a Hedgeye type of thinker: multi-factor + multi-duration, and ample storytelling to synthesize both.


Asimov was a Russian-American scientist (professor of biochemistry at Boston University) but also a renowned science fiction writer. He built a base of understanding in the accepted sciences of the world before he stepped out onto the edge to consider the “world as it will be.”


“The world as it is” perceived to be isn’t very difficult to discern this morning. Everyone with a market quote is hanging on whether or not the US unemployment rate will be terrible or toxic. Goldman got everyone hopped up intraday yesterday that we won’t see a 10% handle on the unemployment rate – isn’t that comforting.


Unfortunately, “the world as it will be” after a cyclically adjusted (for census workers) employment report won’t change. Like Japan, America has laid down the structural trolley tracks for what our healthcare analyst, Christian Drake, calls Destitution’s Duration. That is, the percent of unemployed in America for 27 weeks or more which continues to make higher all-time highs. At the same time, the percentage of Americans living on food stamps continues to push to higher-highs as well.


The bulls may very well enjoy the headline of a 9-percent-something unemployment rate that gets trumpeted by the willfully blind. However, after the first hour of trading, every prop desk in America will have sucked what they could have out of our Government Sponsored Game of Volatility and will prepare for the weekend. No sensible intermediate term decision can be made without considering this world’s debt, deficit, and employment problems as they will continue to be.


Because CNBC is mesmerized by a made for American TV 830AM manic countdown, what’s going on in the rest of the world this morning certainly doesn’t cease to exist. So let’s strap on the global macro pants and take a walk down that path:


1. Japan – After becoming the 5th said leader of Japan since 2006 (how embarrassing is that?), newly elected PM Kan said: “First and foremost we must gain the public’s trust. I want to help the party break through Japan’s frustrations.” Isn’t that inspirational? Japan remains the precedent that Ben Bernanke and the Fiat Fools continue to be willfully blind to. “The world as it will be” with Japanese style monetary policy in America and Europe will not be good.


2. China – After making a fresh YTD low yesterday, the Shanghai Composite rallies a whole 4 basis points last night. Instead of being down -22.1% year-to-date, China’s stock market is down 0.04% less than that. “The world as it will be” according to this major economic leading indicator is one of slowing global growth.


3. Spain – After attempting to convince its citizenry that austerity measures are good, the professional politicians in the land of the 20% unemployment rate are looking forward to massive demonstrations early next week. Spain’s IBEX index is flashing a negative divergence versus European equity markets again this morning, trading down another -0.58% to -22.8% YTD. “The world as it will be” when you plug your social net with wage cuts and taxes will not be good.


4. Hungary – After hoping that no one in Europe would notice, finally the President of the European Commission, Jose Manuel Barroso, who presides over 26 other political professionals (commissioners of 3 hour lunches) in the European Union, called Hungary’s burgeoning deficit/GDP “a very delicate situation.” At least these guys are starting to see what they are no longer allowed to ignore. “The world as it will be” is one with a long term sovereign debt default cycle.


5. Copper – Dr. Copper has been making a series of lower-lows as global equity markets Buy-And-Hope ahead of this employment report. Iron ore inventories ramped another +2.1% week over week in China and copper’s price has broken our long term TAIL of support line of $3.03/lb. At $2.97/lb this morning, copper prices are down -4.5% week-over-week. “The world as it will be” according to this major global macro leading indicator is one of slowing industrial demand.


6. Fed’s Balance Sheet – After telling Ron Paul that he was going to “cut the Fed’s balance sheet to $1 Trillion dollars”, ole Heli-Ben has done nothing but Pile Debt Upon Debt. This week, the Fed’s balance sheet expanded by another $2.2B to $2.34 TRILLION DOLLARS. Bernanke continues to buy the toxic waste that is US mortgage backed securities. Watch what this man does, not what he says. “The world as it will be” with the US as the Global Debtor nation will not be good.


On that cheery note, enjoy the manic media’s coverage of the US employment report and have a great weekend.


My immediate term support and resistance levels for the SP500 are now 1077 and 1111, respectively. We invested 3% of our bulging cash position in gold yesterday (gold was down), taking the cash position in the Hedgeye Asset Allocation Model down from 76% to 73%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The World As It Will Be - Unemployment Fed Funds Rate

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A Look Into May

A mixed bag for the month of May, but plenty of nuggets below the headlines worth highlighting.  Notably, business picked up across the board over the final week of the month for most retailers.




May sales are old news by now, but as with any month there’s a fair amount of company-specific detail that should not go overlooked.  In aggregate, a few themes emerged from the month.  First, business almost universally picked-up over the final week of the month, with most retailers citing a return to favorable (i.e warm) weather as a driver of apparel and seasonal sales.  Second, California was oft-mentioned as one of the weaker regions for the month.  Most retailers cited unseasonably cool and wet weather as the culprit, but is something bigger looming in one of the weakest (financial) states in the Union?  Finally, home categories stood out as the most consistently positive product areas across a wide range of distribution points.  With the Memorial Day calendar shift aiding most retailers and the early read on a better start to the month, it’s fair to expect a meaningful pick up in absolute results come next sales day. 


Additional highlights/lowlights:

  • Target noted that groceries and HBA were strong categories for month, increasing by mid to high single digits.  Apparel was also above average, driven by footwear and ladies.  Notable weakness occurred in the electronics category, which was “well below the company average”.  Comments on electronics are consistent with Costco’s recent commentary which suggested promotional activity in flat panel TV’s remains limited, which in turn is impacting demand. 


  • ROST continues to report exceptional strength in the dress and home categories, both of which increased by a mid-teens percentage for the month.  From a regional perspective, there was a wide range of performance amongst key states.  California registered a disappointing month, down 1% vs. Florida/Southeast which posted a high single to low double digit increase.  Management believes cool and wet weather during the month had a disproportionate impact on CA results. 


  • Kohl’s is awarded the e-commerce growth of the month award after registering a 50% increase in online sales.  This is consistent with Q1 trends and with management’s previous commentary on the growth potential for the .com business.  Recall, that infrastructure investment to support online growth is a key focus in 2010. 


  • While JWN did miss Street expectations, it is worth noting that the timing of the company’s Half-yearly sale did negatively impact the month’s results by 350-400 bps (amongst the highest calendar impacts of any retailer for the month).  As a result, the true measure of whether or not momentum is slowing at JWN cannot be measured until June is complete.  Jewelry, dresses, and men’s shoes were top performing categories for the month. 


  • While maybe more of a moral victory than anything else (given overall same store sales decreased by 1.8%), JCP noted that men’s apparel was the leading merchandise category for the month of May.  Management attributes this outperformance to changes the company has made in the merchandising and marketing of the category. Recall that men’s remains a key area of focus and was one of the focal points at the company’s recent analyst day.  E-commerce is also a top priority, however it continues to lag its peers, posting only a 3.1% increase for the month. 


  • Contrary to most retailers which saw a pick-up in business over the final week of the month, Abercrombie noted that sales were weaker over the second half of the month.  Management attributes the weakness to the Mem Day calendar shift and difficult compares with a summer clearance event last year. 


  • Costco noted that it is beginning to see very slight signs of inflation of the meat and produce area.  For the month, average prices for beef and pork were up, while chicken was down slightly.  Deli and frozen food also showed slight inflation.  Other standouts include softline sales, which were up in the mid-teen range for the month. Strength was driven by housewares, home furnishings, small appliances, domestics, and jewelry. 


  • Mark your calendars for the annual Aeropostale back to school line preview on July 14th.  We expect to see many positive sell side notes following the event, as this has become standard practice over the years.  How much do denim, hoodies, and graphic tees really change in one year?  


  • Keep an eye on June results for American Eagle, which will highlight the company’s efforts to clear slow selling merchandise in advance of the arrival of the company’s first back to school floorset on July 10.  Recall that AEO is betting heavily on denim and will likely need a material acceleration in same store sales to keep inventories in a favorable position relative to sales. 


  • With better than planned sales and substantially lower inventories year over year, The Limited is planning a substantial reduction in the number of days in BBW’s semiannual sale.  The event will be 10 days shorter this year, which is expected to negatively impact June comps by 7-10 points.  Overall, LTD continues to highlight substantially higher margin rates as the company has taken inventories down substantially across both brands. 


  • The Buckle noted that denim was a leading positive category for both men and women during the month.  On the flipside, footwear was one of the weaker categories.  While not a major driver of the overall business, the weakness in footwear is notable given the category’s strength across most other mall based retailers. 


  • TJX reported a notable divergence in the performance of the company’s apparel and home business.  Within the core MarMaxx division, apparel sales increased by 2% vs. an 11% increase in the home category.  Management noted that it believes home categories tend to outperform when unfavorable weather tends to impact apparel sales.  Overall, the trend in the strength of the home categories was consistent across most retailers during the month.


 - Eric Levine



The EU’s Unemployment Line-Up and a Flight to Safety

Position: Short France (EWQ)


1.       European Union Unemployment Rates


While unemployment is a lagging indicator, it is nevertheless a formidable metric that can tell quite a story about a country’s “health”.  While country statistical offices may have different measures for calculating employment, we’ve used Eurostat data below to present the high-low divergence that exists across Europe.  As we pointed out in our Q2 Theme call Bearish Enough on Spain?, a high rate of unemployment, especially among persons 18-35, can have significant longer-term TAIL implications on economic growth. Simply said, higher levels of unemployment beget lower levels of consumer spending and tax revenue; pile on government austerity measures, ie cutting spending and levying higher taxes (which we’ve recently seen from  Spain, UK, Italy, and Portugal) and we believe you have a cocktail that will push growth prospects further out on the curve (chart 1).


The EU’s Unemployment Line-Up and a Flight to Safety  - M1


We’d draw your attention to the Baltic countries in chart 2 below, in particular. Over the trailing 6 months based on most current readings, Estonia, Lithuania, and Latvia show some of the largest gains in unemployment rates.  While the Baltic economies account for only 0.5% of total European Union’s GDP according to IMF data, investment risk is embedded in the region’s continued leverage to western European mortgages and loans, especially Swedish banks, and is nevertheless not insignificant. Remember that the Baltic countries experienced some of the largest contraction in GDP last year. We have seen sequential improvement in GDP for these countries over the last 3 quarters off bombed out year-over-year levels, which has helped contribute to the outperformance of the underlying equity markets YTD, yet we’d caution that rising unemployment will eat into the region’s potential growth prospects.


One country that stands out in chart 2 is Germany. As we’ve noted in our recent work, the decline in German unemployment over the last months is decidedly bullish, however last week we sold our position in Germany due to the drag we expect from the continent’s debt-laden peers.


Another key take away from the EU unemployment divergences is that a one-size-fits-all monetary policy is clearly not working in the Eurozone.  This is a longer term structural negative for the Euro.  We believe that there will be increasing conflict between countries within the Eurozone as their economies recover at different rates (or don’t recover at all) as the monetary union continues to weaken due to a lack of political solidarity.


The EU’s Unemployment Line-Up and a Flight to Safety  - m2


2.       ECB Deposit Levels Ramp to Historical High


Although the Europeans in collaboration with the IMF issued their $1 trillion “loan” facility in early May, European capital markets continue to shake day-to-day. Data from the ECB today may confirm investor worries as banks in the Eurozone parked record levels of cash with the ECB. Overnight deposits totaled €320.4 billion yesterday versus €316.4 billion in the previous day (chart 3).


As the chart points out, the flight of banks to safety began with Lehman and the financial crisis blowing out in the Fall of 2008 and has continued since then. With Euribor heading to a new YTD high of 0.706% today, it’s clear banks are cautious on the road ahead. Our call remains that Greece is not an anomaly, but rather that the fiscal imbalances of much larger economies such as Spain, France, and Italy are next, followed by the USA in 3-6 months.


We’ve positioned ourselves to take advantage of weakness in European markets. We’re currently short France via the etf EWQ and have been short Spain (EWP) in our virtual portfolio this year.


The EU’s Unemployment Line-Up and a Flight to Safety  - M3


Matthew Hedrick



Plug The Hole! SP500 Levels, Refreshed...

If the SP500 breaks down and closes through its long term TAIL line of support (1077) in the next few days, there may not be enough hands in the West Wing to plug the pricking of America’s last giant bubble - the Bubble in US Politics.


In the long run, I’ll take that short term stock market pain for America’s long term gain. Government’s heavy hand in markets is creating some of the highest levels of market volatility we have seen in generations.


In the meantime, I’ll keep playing the game that’s in front of me, no matter how conflicted or compromised some of the rules of this game of government sponsored volatility has become. The VIX is up +1.3% here to 30.57 and has ominously held its immediate term TRADE line of support (29.86).


Ominous is as ominous does. As a reminder, there is no upside resistance in the VIX to the 45.31 level. That means that any breach of the 1077 line in the SPX has plenty of probability to wreak some havoc on market prices.


In terms of upside resistance, nothing has really changed so far here in June. As of this afternoon’s price, the SPX is around flat for the month-to-date and the immediate and intermediate term TRADE and TREND lines of resistance remain overhead at 1109 and 1144, respectively.


Homebuilder Hovnanian (HOV) is down -13% in response to a -17% decline in net orders and bearish commentary on May demand trends (post homebuyer tax credit expiration). We put out a note titled “Shorting US Housing” yesterday and, at the same time shorted Toll Brothers (TOL). After being bullish on housing since around this time last year, we are making a call to get out.


If you’d like to take a look at Josh Steiner and Allison Kaptur’s work on housing, please email Jen Kane at . Being bearish on housing right here and now is not even in the area code of what this market is currently focused on. Lack of focus doesn’t mean opportunities on the short side cease to exist.


We remain short the SPY and QQQQ.



Keith R. McCullough
Chief Executive Officer


Plug The Hole! SP500 Levels, Refreshed...  - S P

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