An article claiming Macau revenues reached 10 billion mid-month doesn’t jive with our sources.



As we wrote about last week, our Macau sources indicated that table gaming revenues reached HK$7.5 billion through June 16th.  This weekend, an article in the Macau Daily indicated that gaming revenues were MOP10 billion (a little lower than HK$10bn) through the same date.  The Macau gaming stocks traded on the Hong Kong Stock Exchange ripped overnight, all up in the 5-6% range.  How much of that was due to the Yuan devaluation – the Hang Seng was up 3% on the news – or the Macau Daily report, we don’t know.


We reconfirmed with our source this morning that HK$7.5 billion remains the correct number so we stand by our report.  Our meetings last week in Macau certainly implied a level of business more consistent with the 7.5 than 10.  Obviously, the difference would be huge.  Our HK$14.0-14.5 billion full month total revenue projection yields a Y-o-Y growth rate of 74-80% versus the Macau Daily implication of a HK$19 billion month or 135% growth.


What a difference a week makes. After coming off new lows in high yield and leveraged loans the prior week, this past Friday showed a marked turnaround, which will surely be furthered based on China's currency news over the weekend. Overall, seven out of eight risk metrics were positive on the margin week over week.  The only outlier was Greek bond yields, which increased dramatically, indicating that risk in the Eurozone should not be considered resolved.  


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – Significant improvement across the board in credit default swaps for US financials last week.  Every US Financial we track tightened, and all but one (PGR) saw double-digit improvement on a percentage basis.  This is the best performance we've seen out of this metric in at least five weeks.  Even the worst performers, the Spanish banks, only expanded 2-3%.  Conclusion: Positive. 

Contracted the most vs last week: ACE, ALL, XL, TRV

Widened the most vs last week: BBVA-ES, POP-ES, PAS-ES, BKT-ES

Contracted the most vs last month: COF, AIG, GNW, MMC

Widened the most vs last month: SAB-ES, ACE, POP-ES, PAS-ES




2. High Yield (YTM) Monitor - High Yield rates fell 35 bp in a straight line last week last week. Rates closed the week at 8.94% down from 9.29% the week prior. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans rose last week, closing at 1463, up 10 bp from 1453 the week prior. Conclusion: Positive.




4. TED Spread Monitor - The TED Spread is a great canary. It came in modestly last week, closing at 44.4 bps down from 46.8 bps in the week prior. Conclusion: Positive.




5. Journal of Commerce Commodity Price Index – This week the JOC smoothed commodity price index is a useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index rose from 15.47 last Friday to 16.48 on Friday.  Conclusion: Positive. 




6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. In contrast to the broadly positive signals from the rest of the risk monitor, Greek bond yields increased significantly, closing the week at 942 bps, up from 818 the week prior. Conclusion: Negative.




7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. The Markit ABX Index was generally up vs the prior week. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Positive.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bullish on the margin vs last week. Bulls increased by 8% to 42.5% while Bears fell 12.4% to 30.7%, putting the spread at 12% on the bullish side, versus 9% to the bearish side last week. (One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.)  Conclusion: Positive.




Joshua Steiner, CFA


Allison Kaptur

Chinese Wisdom

“They must often change who would be constant in happiness or wisdom.”



Changing your economic policies as the facts do is not easy; particularly if politics stand in your way. Unlike Western countries, China has positioned itself to make monetary and fiscal policy decisions when it wants to make them, not as the political wind of Fiat Fools blows.


Club Myopia  in Washington will tell you that China’s decision to allow the Chinese Yuan to appreciate this morning was driven by American political pressure. That’s obviously ridiculous. Ever since they laughed at Timmy Geithner last year, the Chinese have done nothing but smile and nod.


Not unlike their decisions to appreciate the Yuan between 2005 and 2008, the main drivers of China’s move this weekend were domestic growth and inflation. We’ve shown this chart many times and we’ll put it up on again today, but when you overlay the sequential rate of change in China’s consumer price inflation (CPI) with the Chinese Yuan, the catalyst for currency revaluation becomes crystal clear.


Ronald Reagan and Paul Volcker figured this out a long time ago. Now the Chinese are trying to apply past American Wisdoms. Whether it works or not remains to be seen, but the domestic benefits associated with having a strong national currency are huge.


Both inflation and politics are local. The best way to ensure political safety and benign inflation at home (at the same time) is to maintain a strong currency. This will sound very foreign to the Japanese, European, and American Fiat Fools. They believe in debasing the Yen, Euro, and Dollar anytime there is a whiff of stock market weakness. It’s sad.


Stock and commodity markets around the world are moving higher on this Chinese news this morning because a stronger currency for the world’s strongest sovereign balance sheet means China has more purchasing power. Gold is hitting all-time highs at the same time that prices from sugar to oil are charging convincingly above their immediate term TRADE lines of support.


After he is done attempting to smirk, Timmy Geithner should realize that the corollary to a strong Chinese Yuan is a weaker US Dollar. This is another reason why assets priced in US Dollars are charging higher this morning. Dollar down equals assets priced in dollars up, for a trade.


Unfortunately, this also means that the sovereign risk implied on America’s balance sheet goes up this morning. The US Dollar is hitting a 4-week low, and is now decidedly broken from an immediate term TRADE perspective.


We are long a 12% position in Chinese Yuan (CYB) in the Hedgeye Asset Allocation Model. We’re also short the US Dollar (UUP) so from a currency exposure perspective, today is going to be a good day. Unfortunately, irrespective of what US stock market futures are doing this morning, today is not a good day for modern day Rome’s Financial Empire.


We showed this chart in Friday’s Early Look “Guarding The Guards”, and it’s worth reminding you of its long term consequences. Since the US was endowed with the global fiduciary responsibility of managing the world’s reserve currency in 1971, with the exception of the Volcker years, it has done nothing but erode the credibility of that global currency.


In that chart we outlined the long term TAIL line of resistance for the US Dollar Index at $88.89. China’s decision this morning is only going to reinforce that long term level of resistance as the US Dollar continues to break down below what was immediate term support.


When support becomes resistance in the immediate term (3 weeks or less in our model), we call that a change on the margin worth managing risk around. On this score, risk works both ways (when resistance becomes support it’s bullish), and that’s why we covered our short position in the SP500 (SPY) earlier last week.


Currently, the immediate term TRADE line of resistance for the US Dollar is $86.69. Last week alone, after the Fiat Fools at the Fed ballooned the balance sheet to $2.35 TRILLION Dollars, the US Dollar Index lost -2.1% of its value on a week-over-week basis. Since its intermediate term closing highs early this month, the US Dollar Index is down -3.3%.


China is America’s creditor. I’m not sure whether or not the professional politicians in Washington get that or not yet. But, as we head into the G-20 meeting next week in Toronto, the Chinese are definitely going to remind the world who is wearing the pants in this financial relationship. China holds $900.2B in US Treasuries and has plenty a reason to ask Timmy what he’s thinking about Chinese Wisdoms now.


My immediate term support and resistance lines for the SP500 are now 1097 (immediate term TRADE line) and 1144 (intermediate term TREND line), respectively. On Friday, we took our asset allocation to US Equities up from 3% to 6% - we bought the ETF for Utilities (XLU).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chinese Wisdom - CHINA

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Overnight Global markets rose for a 10th day, the longest rally in 11 months, as oil and copper are higher and Treasuries are lower after China signaled it will relax the Yuan’s fixed rate to the dollar. 


The S&P 500 finished fairly flat on Friday, with the strength coming from only three sectors Financials (XLF), Materials (XLB) and Energy (XLE).  Volume was up 53% day-over-day, which was largely a function of quarterly options and futures expiration, as well as the quarterly S&P 500 rebalancing.


With no MACRO news-flow on Friday, the NASDAQ and Russell 2000 all traded in a tight range as the markets took no real direction throughout the day.  Treasuries were little changed and the dollar index was flat on the day.  The DXY declined by 0.4% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.89) and Sell Trade (86.61).  The only factor in the model to make a convincing move in either direction was the VIX which was down 4.39% on Friday and 16% for the week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.41) and Sell Trade (31.93).


The three best performing sectors on Friday were Financials (XLF +0.3%), Energy (XLE +0.2%) and Materials (XLB +0.1%).  The Oil Service index was up 1.8% on Friday and 5.5% for the week.  Crude traded up 0.5% to 77.18; RIG (+10.3%), APC (+2.3%) and HAL (+2.2%) were the notable gainers on the day and BP rose 0.2%.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.79) and Sell Trade ($79.56).


The S&P Materials Index +0.50% rallied on easing MACRO concerns. CAT +1.4% reported improved machine sales and encouraging strength in Asia, especially China, which pared some investor concerns about Asian demand, especially from the materials sector.  In early trading, Copper rose the most in a month in London on speculation a stronger Yuan may accelerate imports into China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.99) and Sell Trade (3.05).


Commodities continued the move to the upside, with the CRB up 1% for the week.  The Philadelphia Gold and Silver index moved up 1.8% along with a continued climb in the commodities.  Gold closed at $1,259, up 0.9% on the day.  Gold remains in a bullish formation and we are long.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,233) and Sell Trade (1,258).  


Rounding out the top performing sectors on Friday was Financials (XLF).  Looking ahead, financial reform will see a busy push in DC as the summer approaches.  The AMEX BioTech index rose 1.1% on the day, as AMLN was up +19.9% on Roche’s 12-18 month delay for taspoglutide.


Underperforming for the third day in a row was Consumer Staples (XLP -1.1%) and Consumer Discretionary (XLY -0.6%).  Leading the XLY lower was the Homebuilders, with the S&P 500 Homebuilding index (-2.2%) continued to decline on weakness following yesterday’s worries about fading demand after the homebuyer tax credit expiration.  Lennar led the group down, declining 3.7% on the day. 


The EURO has rallied for the past two weeks, rising 2.2% last week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24). 


As we look at today’s set up for the S&P 500, the range is 47 points or 1.8% (1,097) downside and 2.4% (1,144) upside.  Equity futures are trading above fair value after China announced it has effectively abandoned its dollar peg thereby allowing some flexibility in its exchange rate. There are no economic or corporate releases scheduled for today but Wednesday's FOMC Policy Announcement will take center stage in what is a busy week for data.


Howard Penney














Despite public commentary by management, Four Seasons apartment sales are unlikely to happen any time soon.



Once again, LVS management are out in the public domain claiming that government approval is forthcoming for the sale of Cotai apartments.  This time it came from LVS’s Macau CEO Steve Jacobs who said approval may come this year.  We’ve been hearing this at least since October 2007 when LVS made a public announcement.


This issue came up quite frequently in our discussions in Macau last week.  Based on those discussions, it became apparent that government approval for apartment sales was actually unlikely this year and was complicated recently by Sheldon Adelson, LVS Chairman and CEO.  “[Edmund Ho, former Macau CE] made a commitment to us that, if we started parcels 5 and 6 and if we did an IPO, then for sure we could sell [the Four Seasons apartment hotel as] strata condos…”  Apparently, Bank of China was backstopping the sales but after Sheldon’s comments and a quick phone call from Beijing, that no longer seems to be the case. 


Mr. Adelson has also opined on the table caps (“not a good idea”) and relaxing imported labor quotas (“the right thing to do”).  While he maintains that Lots 5/6 are on track for a Q3 opening next year, we saw little construction activity and he still needs the government to get it done.  Following our Macau visit last week, we think a 2012 opening may be more likely.


Sheldon thinks that if he makes privy conversations with the government public then the government will be forced to oblige.  When will he learn - as Steve Wynn has learned - that it is just the opposite? 

US Growth: Taking Off the Training Wheels?

“God help us if earnings [in the U.S.] are anything short of fantastic.”

-Keith McCullough, June 17, 2010


Conclusion: Despite the remaining bullish sentiment, China still matters to the U.S. growth story. Moreover, signals from China and Dr. Copper are telling us that U.S. 2H10 growth will more than likely surprise bulls to the downside.


With the Shanghai Composite down 22% YTD, Chinese loan demand and loan growth slowing sequentially in 1H10, and Chinese property prices starting to show signs of deflating, it’s been clear for quite some time that the Chinese Ox is still boxed in.  Furthermore, Dr. Copper – a leading indicator for global growth – is in a bearish formation and continues to break down quantitatively.


What does this all suggest? Simply put, growth internationally is setting up to slow and the most leading of all indicators (marked-to-market prices) are telling us just that. U.S. bond yields have been creeping down, which has historically been a leading indicator for slowing growth. The yield on the 10Y Treasury is now at 3.22% - down 79bps from the YTD high on April 5. Factor in a slowdown from the European demand side of the equation as a result of austerity measures and rising illiquidity, and it’s not hard to see why we think growth will slow both globally and domestically in 2H10.


Bullish sentiment in the U.S. has hinged largely on a hopeful domestic growth outlook in 2H10, which is a large divergence from the Chinese growth story that pulled up equity markets globally since the March 2009 bottom in the S&P 500. Again, using market prices a leading indicator for growth, the S&P sectors most levered to the U.S. growth story (Industrials - XLI, Energy - XLE, and Basic Materials – XLB; each broken from an intermediate-term TREND perspective) are telling us that the U.S. is not yet ready to take off the training wheels. In fact, a very high positive correlation still exists between each of those sectors and Chinese equities and copper (see charts below). As noted before, both China and Dr. Copper are still in very bearish setups from a quantitative perspective and weakening international and Chinese fundamentals strongly support that. Despite that, a divergence has emerged between bullish domestic sentiment and marked-to-market leading indicators globally.


When it’s all said and done, we expect this bifurcation to create more downside risk in the U.S. equity market. As Shakespeare once penned, all crashes occur against expectations; and expectations domestically are still far too high in our option. Bulls are too bullish. Bears aren’t bearish enough. With U.S. sovereign debt and deficit issues approaching the limelight, a disastrous setup for housing domestically, and rising joblessness each not fully on everyone’s radar, U.S. growth is likely to crash against current expectations.


Darius Dale



US Growth: Taking Off the Training Wheels? - 1


US Growth: Taking Off the Training Wheels? - 2

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