Battling Bulls

“Having nothing, nothing can he lose.”

-William Shakespeare


That quote comes from the battle of all Shakespearean battles. “Henry VI”, Part 3 contains more battles than any other Shakespeare play. Yesterday was a big Bull versus Bear battle. And I lost.


No matter where I go this morning, the War of the Proverbial Roses will carry on. A battle lost doesn’t lose the war that we engaged in on the short side at April’s end. If the bulls think I am going to rollover or point fingers today - think again. I’m accountable for this team’s losses. I’m moving forward.


Before we move forward it’s important to take the time to look back. What risks are embedded in the setup for today’s battle given yesterday’s closing prices? What calendar catalysts are in front of us?


The good news is that we called for our own fall in an intraday note yesterday titled “Squeezy: SP500 Risk Management Levels, Refreshed.” Good news because it’s better to understand why you are losing than living in fear of your process. Have a plan - change the plan as prices change.


The most important part about yesterday’s price action was that the immediate term TRADE in price momentum and volatility turned positive for US Equities. We use a simple 3-factor model to measure all durations in our model dynamically: Price, Volatility, and Volume. The third leg of this stool (volume) did not confirm price and volatility, but there really are no buts – the closing price of the major indices are what matter most.


From an immediate term TRADE perspective (3-weeks or less), here are the new lines of support:

  1. SP500 = 1101
  2. Dow = 10,299
  3. Nasdaq = 2276

There are some critical strategy points to be made here.

  1. When TRADE lines of resistance become support, you need to change the immediate term plan (stop selling aggressively).
  2. TRADE lines of support can quickly become resistance again, so you need to be patient in watching prices confirm new support.
  3. TRADE lines are not TREND lines. Never confuse the immediate term with intermediate term durations.

This is where the battle becomes the war - when there is Price Momentum Mismatch between durations (i.e. the TRADE goes bullish within a bearish TREND). So the next leg of analyzing yesterday’s losses on the short side becomes looking forward to the forest of where the real risk in staying short can be found.


From an intermediate term TREND perspective (3-months or more), here are the lines of resistance:

  1. SP500 = 1144
  2. Dow = 10,698
  3. Nasdaq = 2369

Once again, no matter where you go this morning there those real-time prices are – sitting right in between a rock and a hard place of bullish TRADE and bearish TREND. I’ll be selling on rallies toward 1144 and buying on selloffs toward 1101.


How about today? What is Thunder Bay Bear who is Battling Bulls to do?

  1. Watch and wait like we did into yesterday’s close.
  2. Don’t run out there and get emotional, flailing your rifle and shooting at any bullish price that moves.
  3. Watch and wait some more…

The way I look at it is that both my fundamental Fiat Fool macro thesis and my quantitative setup continue to confirm one another for both the intermediate and long term. To a degree, some of the wins I’ve had this week (short the US Dollar, long Gold) continue to confirm the same. The US government is inching toward the Road to Perdition that the Europeans have already started to march upon – austerity.


The #2 story on Bloomberg this morning is born out of the same source of every government oriented story that ends up in your inbox – a leak – “Fed May Trim Growth Outlook”…


Make no mistake, no matter where the immediate term TRADE in this market goes, this is where the real intermediate term war between Bulls versus Bears will be decided – will US GDP growth be slower or faster than consensus expects in 2011?


We’ve been saying Bernanke and the Administration’s growth estimates for both Q4 2010 and all of 2011 are way too high. Apparently the bulls in the Fiat Fool camp have been delivered the message. Evolving the government’s forecasting process is progress for America, but that doesn’t mean this bearish TREND in the US stock market ends as a result. After all, the output of Bernanke and Co. lowering their numbers will be marked-to-market, in the end.


My immediate term support and resistance lines for the SP500 are now 1101 and 1122, respectively. Saddle up. Into the brink of Battling Bulls we go. As “Old Blood and Guts” (Patton) said, it’s time to “lead, follow, or get out of the way.”


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Battling Bulls - sp


Sinagapore appears to be off to a strong start for Genting and LVS. Here are our notes.



Overall Market:

  • Currently, VIP/Mass is roughly 50/50.
  • Commissions paid on direct VIP play are based on a percentage of Rolling Chip (RC) buy-in and the number of times the initial buy-in is turned over, plus 0.1% of RC towards expenses (rooms & F&B allowance)
    • Commissions are accounted for as rebates (i.e. contra-revenue deductions against gross gaming revenues)
  • In order to qualify for the lower 5% VIP tax rate, players must:
    • Buy-in with a minimum of S100,000 – which allows the government to document how much and where the cash came from
    • Inform the CRA (Casino Regulatory Authority) one hour before play
    • Follow anti-money laundering rules (unlike in Macau, you can’t just come with a bag of cash and play)
    • Declare win/loss to the government
    • The min S$100,000 initial buy-in qualifies a player as VIP for 12 months – regardless of how much he gambles on repeat visits
  • Marketing for both properties has been very limited thus far.  Marketing of the casino is prohibited in Singapore; however, the properties can market their other attractions but have postponed large marketing efforts pending their respective “grand openings.”
  • Given that a lot of the Singaporean players are “new gamers,” the house advantage may be abnormally high initially
  • Despite a different mix of table games (i.e. more roulette) than Macau, hold rates should be similar.  MBS doesn’t have insurance on its bets, while RWS does.  Insurance increases the house advantage but also slows play so there is a trade off.  Insurance is popular with Southeast Asian players


Junket operations:

  • There are no licensed junkets at the moment but currently there are around 30 junket operators that have submitted with the CRA.  Likely that half a dozen junket operators will get licensed by the end of July.
  • In order to operate at either RWS or MBS, the properties must sponsor the junket’s license application.
    • MBS is not sponsoring any of the junkets applications at this time and will take a wait and see approach for now
    • Genting is sponsoring several of the junket applications and is happy to do business with junket operators
  • Some of the junket operator applications are from Singaporean-based junkets and have already been sourcing and providing credit to Singaporean customers who play at Genting’s Highlands Malaysian property Malaysia and Star Cruises ships operating in the vicinity.  Most of these junket operators already have strong ties with Genting, and hence it makes sense that Genting is welcoming their business and sponsoring their applications.
  • We have heard that Genting currently has “junkets” currently buying in millions of rolling chips and distributing them to their clients in the form of credit
  • We think that the government may over time loosen licensing requirements for junket operators, but that will take time
  • We think that the rolling chips generated by junkets will be a relatively small percentage of the VIP market given the licensing hurdles



  •  State of the property & completion schedule
    • Casino:
      • Started with 70 VIP and 442 mass tables
      • Have the ability to operate up to 139 VIP tables and up to 650 Mass tables
      • Currently operating 127 VIP tables and have 28 private salons on the 3rd and 4th floors
      • Started with 1,450 slots and can get to 1,650.  They are also adding over 300 electronic tables games (roulette)
      • 3rd floor is premium mass play and 4th floor is VIP play
      • RC programs start with buy ins of S$50k
    • Hotel:
      • Currently 963 rooms are open (up to the 22nd floor), with the remaining rooms opening just after the opening party on June 23rd
      • Will likely comp between 20-30% of the rooms but it remains to be seen
    • Retail:
      • Approximately 90% of the retail space is currently leased and 20% of the space is currently open
      • They hope to have 70% of the space open by September, 95% by December and grand opening of the Louis Vuitton space by 1Q2011
    • Other:
      • Museum should open by Dec 2010
      • Sky park will be partly open by the grand opening and complete by August
    • Spending:
      • As of March 31st, they had $1.4bn in cash left to spend, $1bn to be spent in 2010, and $400mm in 2011
  • Commissions & VIP play:
    • For the first month of operations, MBS offered very low commissions ranging from 0.3% to 1% of RC plus 0.1% toward expenses
    • Subsequently, commissions were raised to 0.6% to 1.4% of RC plus 0.1% toward expenses
    • Despite very low commissions, the first month of operations produced strong volumes, which subsequently dropped and then resumed growth once commission levels were raised to market levels
    • Roughly 60% of the VIP players are currently Singaporean but that number is a bit misleading since there are many Malaysians and Indonesians who are permanent residents in Singapore
    • While an initial minimum buy-in of S$100,000 qualifies a player as VIP (i.e. 5% tax rate), all the programs have 30 days lives which require fresh buy-ins.  Almost all the VIP players at MBS buy in to various commission programs.
  • Visitation:
    • Have a bus terminal with 60 buses, but it isn’t fully up and running yet
    • Current visitation mix is roughly 30% Singaporean, 40% Malaysian, and 30% Indonesian
    • Currently have more than 20,000 average daily visitors coming through the casino and believe that they will get to 60-100k on weekends when they are fully open
    • Vast majority of Singaporeans just pay the daily S$100 fee rather than the S$2,000 annual fee
  • Mall:
    • Believe that the mall will be a big shopping destination
    • Tenant terms:
      • Base rents: $150-$200, closer to $150 when you net their free rents and TI incentives
      • Term: 3-5 years
      • Percentage rents: 7-12%
      • Sheldon thinks that the mall can do $200mm of NOI but $100mm ramping to $150mm is probably a more realistic assumption
  • Costs:
    • Have 7,000 employees now and will likely have 7,700 when they are fully open (excluding the retail employees for whom they are not responsible).  Average yearly salary of $30k/year is a reasonable assumption.
    • Marketing/HVAC/other expenses are roughly $20-25mm per month.
  • Credit granting:
    • Usually know in advance when an incoming big player would want credit.  They have an extensive credit approval process and are supposedly taking very large reserves



  • Have a huge bus interchange--120 buses daily to and from Malaysia.
  • A high percentage of visitors from Malaysia are already their players but the Genting Highlands hasn’t taken much of a hit
  • Phase 2 will be completely open by the end of 2011 and will cost an incremental S$2.6BN to complete.  Phase 2 will consist of:
    • Arcade and Asian food court (“hawker” food) on the waterfront which is opening in 2 months
    • Maritime museum with a massive aquarium
    • 2 more hotels--all suites are underground and have “ocean” views which will open in mid-2011
    • Waterpark will open at the end of 2011
  • Universal Studios:
    • Designed to handle up to 25k daily visitors people.  Currently, they are capping the number of ticket sales to 8k mid-week and 10k on weekends
    • The park is sold out for the whole month
    • It should be fully open within a few months, at which time they expect to be selling between 15-20k tickets per day
    • Haven't even started marketing the park yet
    • Ticket prices range from S$66-74/ day (depending on whether they are peak or off peak purchases)
    • Pay Universal a royalty fee but operate the park themselves
    • At current visitation levels, the park is still EBITDA negative
  • Have about 10,500 employees that make roughly S$2,000-2,500/month
  • Hotel occupancy currently at 75% right now
    • Festive (the family hotel with 400 rooms) is almost entirely cash
    • Crockfords (120 suites) is 100% comped and for VIP players only
    • Hotel Michael (300 rooms) is roughly 40% comped
    • Hard Rock is roughly 30% comped
    • Rates are roughly S$300-350
  • Casino details:
    • They are currently operating more than 300 tables and have the ability to operate up to 500 tables
    • Opened with 1,200 slots but now have roughly 1,500-1,600 slots. Can have up to 2,000 machines
    • Orchid club for Singaporeans only
    • Despite huge gaming volumes, they still believe that their business is ramping, as marketing of the property has only just started
    • Smoking is permitted in 70% of the casino, but they have designated only 50% of the space to smoking areas
    • Maxims is their members-only premium, mass casino with 8 private salons with minimum bets of S$500 and Crocksford is their VIP casino with minimum bets of S$2,000 and has 14 private salons
    • Commission rates on various buy-ins and turns (add .1% for comps to all levels):
      • S$30-99k: 0.6%
      • S$100-999k: 1%
      • S$1mm-1.99mm: 1.1%
      • S$2-4.99mm: 1.2% - 1.3% (depending on number of turns)
      • > S$5mm: 1.3-1.4% (depending on number of turns)
    • A fair amount of players don't want to register for programs in order to remain anonymous; hence, they get no rebates/commissions.


"Market Rumors"

  • Genting is rumored to be at risk of investigation by the CRA for running illegal junket operations, loan sharking, and side insurance betting
  • MBS is rumored to be subject to government fines for its delayed opening

The Derivative Effect of Tight Liquidity in Europe

Conclusion: A lack of lending in Europe will likely lead to an incremental slowing of growth in China.


If we have learned anything in the last few years, it is that all major markets are connected.  The classic example of course, was the subprime crisis in the United States, which roiled almost all global markets across asset classes in 2007 and 2008.


The 2010 consensus global risk factor is European sovereign debt and the risk of defaults.  Our view is that consensus is still not negative enough on the potential implications of a global sovereign debt unwind, primarily because believe the issue related is still deemed to be primarily specific to Europe.  But, as ever, the global markets are interconnected with trade being a primary connector.


Specific to that, China reported an export number that was up 48.5% year-over-year in May, which exceeded most estimates.   As it related to the 27-nation European Union, exports were up 34.4%.  The European Union accounts for the largest share of Chinese imports (or exports from China as this data measured) followed closely by the United States.  In May, this number amounted to $25.9 billion in exports to the European Union, or roughly 20% of total Chinese exports.  Clearly, any slowdown in Europe will have a direct impact on European purchasing power and Chinese export growth.


At face value, the export data from May seems to suggest that sovereign debt issues had a negligible impact on global commerce and, if anything, the issues were specific to troubled countries within the European Union.   Unfortunately, exports, like many economic indicators, are backwards looking in nature.  In fact, according to the Chinese Ministry of Commerce, it typically takes Chinese companies two months or so to fulfill orders.  Therefore the May export number actually reflects orders from March, which would predate any slowdown in the European Union caused by sovereign debt turmoil.


As always, it is difficult to get a real time read of the underlying growth in an economy until after the fact.   While we can read the tea leaves from company earnings announcements and delve into economic releases from the government, neither of these are typically real time, let alone leading indicators.  One real time leading indicator though is the amount of liquidity in an economy at any time, which can be measured by the banking system’s willingness to lend.


As it relates to liquidity in Europe, we have been very focused recently on European Central Bank overnight deposit facility usage.  As outlined in the chart below, in lieu of lending to each other, banks are depositing funds with the European Central bank at record levels.   The best way to think about this chart is as a measure of banks’ willingness to lend to another bank, so their inherent trust in the counterparty’s credit worthiness.  As we can see, there is now less trust, on this basis of more money being deposited with the European Central Bank versus being lent on a short term basis to other banks, than around the time of the implosion of Lehman Brothers.


European banks are, en masse, choosing to deposit funds with European Central Bank, at rates of just 0.25%, as opposed to lending to other banks at higher rates.  The decision is primarily based on a concern over the credit worthiness of other European Banks due to their holdings of European sovereign debt.


So, what exactly does this have to do with China?  Very simply, the less banks lends to each other, the less that is lent to consumers and businesses.  As money piles up in the ECB deposit facility it is not circulated and used in the economy, therefore it is not supporting commerce.


In the attached chart we compare deposits in the ECB facility to Chinese exports.  Deposits hit an extreme of $210 billion in November of 2008, which was a dramatic increase from October 2008 of $19.9BN, so indicative of declining intra-bank lending and overall liquidity.  By February 2009, on a reported basis, exports from China to Europe were at 56% of prior levels.  Clearly, as liquidity was pulled out of the system and banks stopped lending, business slowed orders from China and this was eventually reflected in Chinese exports numbers a couple of months into the future.


Coincident with this dramatic drop off in exports to Europe of course was the decline of all things related to sustaining Chinese growth. Think oil, copper, steel, plastic, most basic materials, and the multiple on the Chinese stock market.  As orders from Europe slowed for Chinese goods, so did the demand for raw inputs.  It was not coincidence that the price of Oil bottomed in February of 2009, which was the same month, as noted above, that year-over-year declines in exports to China’s largest trading customer, the European Union, were at their worst.


It is likely that we have yet to see the worst of the sovereign debt issues in Europe, and we certainly haven’t seen the broader implications of the tightening of liquidity in Europe.  Obviously, to believe that the world is not interconnected and that European sovereign debt is an isolated issue is naïve at best.


Daryl G. Jones

Managing Director


The Derivative Effect of Tight Liquidity in Europe - ECB CHINESE EXPORTS

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World Cup Chart Of The Day: Brazil

The intermediate term TREND line for the Brazil Bovespa Index remains broken at 66,687.


World Cup Chart Of The Day: Brazil - Bovespa

German Economic Sentiment Cliff Dive

Position: Short France (EWQ)


While we typically don’t give credence to any one economic survey, the latest reading from ZEW aligns with our fundamental view on Germany.  The 6 month forward-looking  economic sentiment number fell off a cliff, registering 28.7 in June versus a Bloomberg forecast of 42.0 and the previous month’s reading of 45.8, while the current situation reading improved sequentially, registering -7.9 versus a forecast of -15 and the previous month’s reading of -21.6 (see chart below).


What’s our read-through on Germany?


In the last weeks we’ve pulled back on our long call on Germany, which was part of our Q2 theme call Sovereign Debt Dichotomy, even though the DAX is in positive territory YTD with the performance spread over Spain’s IBEX at 22% YTD.


The fundamentals still look bullish for Germany: unemployment has improved over the last months, down to 7.7% (versus Eurozone average of 10.1%), a weaker Euro is benefiting the country’s export base, and inflation looks stable over the medium term. We think this is showing up in the improvement in current sentiment survey.  However, we caution that sovereign debt contagion in the region and poor go-forward prospects for Chancellor Angela Merkel’s coalition government could provide formative headwinds over the medium term, which look to be reflected in the economic sentiment survey.


While we’re not calling for new elections in Germany, the government is a real concern that we’ll have on our radar, one that would be a significant destabilizing catalyst in Europe should elections need to be called. What’s clear is that Merkel’s coalition has lost its majority in the upper house of parliament (Bundesrat) since losing a critical election in the economically important state of North Rhine Westphalia in early May. Her choice to fund the Greeks as part of the €110 Billion loan package was a main point of contention that lost her the election and has since eroded her support. Further, her recently-issued four year €80 Billion package of austerity measures, which we view as largely positive, is being met with fierce opposition at home.


The next piece of the puzzle for the government is finding a replacement as President following the resignation of Horst Koehler last month after he made an inappropriate comment related to the country’s economic interest in being involved in the Afghanistan war. While the position is largely ceremonial, the void has nevertheless added further uncertainty to Merkel’s party. The announcement of the next President is scheduled for June 30th.


The cocktail of German bank exposure to countries with sovereign debt risk combined with the future uncertainty of the government are downside risks that we’ll be monitoring acutely. Stay tuned.


Matthew Hedrick



German Economic Sentiment Cliff Dive - zew

Squeezy: SP500 Risk Management Levels, Refreshed

This market is definitely doing its best to frustrate both bulls and bears. Yesterday was bearish. Today is bullish. Our longs (GS, BAX, and NKE, etc) feel great. Our shorts (EWQ, AXP, and SPY, etc) don’t.


We currently hold 10 longs and 9 shorts in the Hedgeye Virtual Portfolio. Only 2 of 9 short positions have positive P&L today (UUP and SHY).


As of 1PM EST we’re pushing up against yesterday’s 11:14AM intraday high of 1104. Yesterday we called it a critical immediate term TRADE line of resistance and it proved to be into the close. Today the bulls are running up against it again. A close above it would be as bullish as a close below it bearish. In our risk management model, closing prices matter most.


All the while, the intermediate and long term TREND and TAIL lines rest above and below this market’s last price (see chart). To a large extent, seeing this market rotate in between these TREND (1143) and TAIL (1082) lines perpetuates volatility.


The VIX itself is down a hefty -9% today to 26 and from an immediate term TRADE perspective that makes it broken finally as well. From an intermediate to long term perspective, the VIX remains in a very bullish position with TREND and TAIL lines converging in the 23-24 range.


Confusing short term price action on decidedly bearish volume is as confusing does.


We’re doing a whole lot of nothing for now. Watching and waiting for the close.



Keith R. McCullough
Chief Executive Officer


Squeezy: SP500 Risk Management Levels, Refreshed - S P

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