Junkets are getting liquidity from many sources.



With monthly VIP revenues up an average of 85% this year, Macau may indeed be benefiting from a credit bubble. However, we found no visible signs of that abating as we turned over every rock and looked in every nook and cranny on our recent trip to the SAR.  It’s not all credit related – Mass revenue was up 39% over the same period – but the junkets have bountiful access to capital.


The consensus commentary from almost everyone we met with in Macau was that business is good and there doesn’t seem to be a whole lot of risk on the horizon for the balance of 2010.  By all accounts, the junkets are flush with cash and, barring a crackdown from Beijing, will continue to keep the credit flowing to players, who in turn will keep trying their luck in Macau.  So where are the junkets getting the capital?

  • Public equity – Some of the junkets are public
  • Private equity – Junkets are paying 10% annualized interest for 30-day money.  Wealthy Chinese individuals and Chinese private equity firms are the primary lenders.
  • Operators – Most operators provide the junkets with some level of rolling working capital, usually over 30 days.  We’ve heard recently that City of Dreams, MGM (upcoming IPO), and Wynn have ramped up the lending, while LVS has been more aggressive on direct play credit.
  • “Other” sources

Apparently, the lack of good investment opportunities around the world has made the ballpark 10% annual return that many junkets offer on private placements an attractive option for wealthy Chinese to park some of their cash.  Since default on credit obligations to a junket rarely occurs (for obvious reasons), the high yield offered by junkets is viewed as safe and therefore quite attractive.


The feeling in Macau now is that although Chinese monetary tightening would lessen availability of capital, the impact on Macau would be delayed and not huge.  The bigger perceived risk is a China crackdown. If Macau gets "out of line," Beijing will use its power to pressure the junkets.  So far the new Macau Chief Executive, most of the operators (Sheldon’s behavior is much improved but not exactly perfect), and most of the junkets (there may be another shoe to drop here) have behaved.



June 22, 2010


Don’t you love when CEOs tout ‘record’ growth rates vs. levels from 2008 and 2006?. Hey Adidas, there’s this thing called a CAGR. You may want to give it a whirl.





Am I the only one who thought it was hilarious when Adidas issued a press release yesterday noting that it would post a record year in football sales following the World Cup. Adidas claimed that soccer sales are expected to be at least 1.5Bbn Euro for the year, which is 15% more than its previous record in 2008 and 25% from 2006.


Herbert Hainer (CEO) noted "After the first 10 days it is already clear that this World Cup will be a great success for Adidas. We will not only achieve our ambitious goals in football, we will over achieve them.”


First off…EVERY company that claims to be a growth company (and have a growth multiple) should set record results EVERY YEAR. Second, it’s been a while since I’ve heard a CEO state how good its growth numbers are vs. 2-years ago and 4-yrs ago!  Hey Herbert, there’s this thing called a CAGR. Try giving that one a shot on your next press release! Sure, 15% since ‘08 and 25% since ’06 sounds great, but we’re talking less impressive CAGRs of around 7%. Again, that’s great, but it is about the rate of growth in football apparel/footwear globally.  Winners take share, and they take it profitably.





- In an effort to flex its creative muscles, Urban Outfitters is bringing an interesting approach to its latest Manhattan location slated to open later this year. The outside of the store is designed to look like a series of local mom and pop stores. Whether this is an attempt to appease local opposition to development or purely creative genius is unclear. Either way, Urban continues to show its flexibility in choosing sites and adapting them appropriately.


- Keep an eye on Polyvore, the internet’s largest fashion community. Think Facebook crossed with e-commerce. The site allows users to create custom “sets” of fashion items, almost as if they were creating a spread for a fashion magazine. However, all the images are actually linked back to online stores in which other social networkers can actually purchase the goods. Putting the sales aspect aside, this may be one of the fastest ways to see a trend unfold, ever.


- Mark your calendar for July 17th, the official return date of Abercrombie’s Quartlery (magalog). Maybe reverting back to old strategies will help to boost the company’s sales, which have been struggling pretty much since the last magalog printed several years ago. In all seriousness, wouldn’t have made sense to re-release the publication in iPad or iPhone form in an effort to keep up with the times? While the rest of the world is going all digital, ANF is heading back to paper…





Chinese Footwear Companies Focus on Domestic Rural Markets - As national policies intensify consumption in rural areas and competition is getting more intense in urban areas, an increasing number of Chinese footwear companies have been shifting their business focus onto the rural markets, according to the China Leather Industry Association.  <>

Hedgeye Retail’s Take: This call is gaining momentum – we hit on this theme again last week after Yue Yuen results reflected significant outperformance in sales out of Asia. A stronger Yuan only bolsters the case.


WMT Works With City of Chicago to Build Stores, Jobs - Wal-Mart Stores Inc. said Monday it is working with the city of Chicago on a plan to build “several dozen” stores and create about 10,000 jobs in the process.As part of a long-term initiative, dubbed the Chicago Community Investment Partnership, Wal-Mart said within five years it would seek to open stores that, in addition to positions within the stores and organization, would create about 2,000 unionized construction jobs to help ease the city’s 11.4% unemployment rate. <>

Hedgeye Retail’s Take: WMT taking advantage of the rare opportunity to score one with local communities while it still can..


US-Brazil Cotton Deal Shaded With Doubt - The U.S. and Brazil have reached an agreement in a long-standing dispute over cotton subsidies that could essentially forestall the imposition of sanctions on U.S. exports until 2012. Under the long-term framework agreement, the two sides will meet quarterly to discuss a resolution in the context of a new farm bill containing the cotton subsidy programs that Congress will begin negotiating in 2012.In April, the U.S. and Brazil reached an agreement that averted $800 million in sanctions for 60 days. Under the deal, the U.S. agreed to make some changes in its cotton export and credit guarantee program and to work with Brazil to establish a $147.3 mm fund to provide technical assistance and capacity building for the Brazilian cotton industry. The agreement affects raw cotton, woven fabric, men’s and boys’ cotton pants and shorts, women’s and girls’ cotton pants and shorts, and some jewelry and beauty products.  <>

Hedgeye Retail’s Take: Consider this a band-aid approach to a broader issue for US cotton producers – less stability and support in the near-term future.


India’s Shopper's Stop Plans to Increase Stores by 50% - Shopper’s Stop Ltd. , India’s second- largest publicly traded retailer, plans to add 50% more stores in about 18 months as demand rises in the world’s second- most populous nation. <>

Hedgeye Retail’s Take: China, China, China... There’s another country out there that has around 2.4bn feet. India is definitely a tougher culture to crack, but seeing it’s second largest publicly traded retailer grow at this rate can’t be dismissed.


Hugo Boss to Open Up to 60 Stores This Year - Hugo Boss AG aims to open as many as 60 new shops per year, a third of which will be in China, to help raise sales, Handelsblatt reported, citing CEO Claus-Dietrich Lahrs. Hugo Boss wants to increase the share of sales stemming from shops and Web-based retail to about 50% by 2015 from 33% last year, the newspaper said. <>

Hedgeye Retail’s Take: 15% growth isn’t exactly earth-shattering, but the shift towards controlling its own distribution is certainly noteworthy. A growth initiative in China on the day that the Yuan is revalued is not exactly great PR timing.


Alli Sports Acquires Standard Boardshop - Alli Sports, the NBC- and MTV-owned company behind the Dew Tour, has acquired, the skate e-tailer. It also plans to launch a new e-commerce site called the Alli Shop. <>

Hedgeye Retail’s Take: This acquisition by Alli, a leading action sports multi-media site, makes a lot of sense. provides Alli with an online retail presence – one of, if not the outperforming channel(s) in retail.


E-book Reader Price War Erupts - Barnes & Noble brought the price of a fully functional 3G e-reader under $200 today. Hours later, beat it by $10. The market for e-books has been heating up so much that it may have reached a tipping point where merchants can now subsidize device cost via e-book sales.  <>

Hedgeye Retail’s Take: As with any razor – razorblade model, there’s little keeping prices of the device afloat with profits embedded in e-book sales. It’s only a matter of time before we see a $99 reader. Innovation in this category will be vital.


Father's Day Results Lift Retailers - Shoppers turned out for Father’s Day, lifting the spirits of retailers and affording them the opportunity to meet or exceed plan. Tailored clothing and dress shirts, along with knitwear, were among the bestsellers for most stores, stoking further confidence that the upcoming fall season will be healthy. Brooks Borthers, which ran some one-day specials to drive traffic, said business was strong the week leading up to Father's Day and better than anticipated. Barneys New York was also upbeat noting that shirts, ties, briefcases and watches did well. Saks Fifth Avenue reported that men's wear delivered on buy-now, wear-now and pre-fall with top categories in dress shirts, knit shirts and men’s accessories. Men’s wear for Lord & Taylor saw positive growth, but a slowdown from doubt digits to midsingled-digits. <>

Hedgeye Retail’s Take: We can’t say this catches us by surprise given the dynamic of improved consumer confidence and pent up demand still for certain wardrobe items with men’s dress-wear near the top. For the first time in a long time, the customary Father’s Day shirt or tie was probably met with uncharacteristic appreciation this year.


Asia Drove Swiss Watch Export Gains in May, Europe Slows Down - Swiss watch exports posted another double-digit gain in May, though the increase was driven mainly by Asian markets as key European economies recorded sluggish to negative sales. Foreign sales of Swiss watches were up 13%. Sales in Hong Kong, the largest market for Swiss timepieces, rose 30.2% while China practically doubled in May, with a 98.8%. However, sales in Italy crept up just 0.2% while France progressed by 3.4 %. Germany again saw sales slide, with a 24% drop that saw it slipping to the eighth position among leading markets. <>

Hedgeye Retail’s Take: Given the pace of appreciation of both the Hong Kong Dollar and Chinese Yuan versus the Franc since May, we’d expect demand to remain strong through June as Swiss timepieces remain on ‘sale’ on a relative basis in the largest markets.


Bottom line

May existing home sales were much worse than expected in spite of the continued effect of the April 30 tax credit expiration pull-forward. May sales came in at 5.66 million (seasonally adjusted annualized rate) down from 5.79 million in April (revised a tad from 5.77 million). Expectations were for sales to rise north of 6.2 million units. Sales coming in 9% below expectations reflects a major incremental negative datapoint.



Remember that this May print is a lagging indicator as it reflects deals closed two to three months ago (Mar/Apr) because of the 30-60 day lag between signing and closing.


In our view, the relevant benchmark is how it compares with October 2009's print of 5.98mn. Against that measure, it's down considerably (5.66). The original tax credit expired in November, 2009, putting October 1 month ahead of that expiration. The current credit (for closing) expires June 30 (April 30 for signing), which means 1 month ahead equals May.


In other words, it's now clear that tax credit round two is having a less substantive effect on sales than round one did back in late-2009.






Inventory, on a units basis, fell a modest 3.4% to 3.89 million units from 4.04 million units in April.




Inventory, on a months supply basis, fell slightly to 8.25 months from 8.4 months last month. While inventory is down nominally on a months supply basis, this is somewhat misleading because its keying off an artificially high May 2010 sales rate. If we assume that the same dropoff in sales occurs following this tax credit expiration as followed the last tax credit expiration we can expect to see a sales rate of 4.25-4.5mn a few months from now. Meanwhile, inventory is at 3.89mn units. In other words, inventory could rise to 10-11 months or higher very shortly.




Our view is that this pull forward of activity is setting the stage for a much weaker-than-usual summer housing environment. Housing-sensitive stocks could be at risk heading into the 2H10 and 2011 time frame.


We have an extensive report coming out on this topic on Friday for subscribers and prospects of our Financials Vertical, which we will summarize on a conference call at 11am on Friday.



Joshua Steiner, CFA


Allison Kaptur

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The Macau Metro Monitor, June 22nd, 2010



According to IM, yesterday's MOP10BN revenue number from Macao Daily was for 20 days, not 16. Extrapolating this run rate would result in MOP 14BN for June.  In addition, unsurprisingly, the baccarat tables have cooled since the Dragon Boat Festival.



Two Macau economists, Sales Marques and Henry Lei, warned that even though a stronger Yuan would translate into higher purchasing power for Chinese tourists, the imports from mainland China would be more expensive, pushing up Macau’s inflation.


On one hand, the gaming, restaurant, and retail sectors would all gain from a stronger Yuan.  Marques explained that the local currency is pegged to the Hong Kong dollar and, consequently, loosely pegged to the US dollar. With a more flexible Yuan-US dollar exchange rate, the Pataca would “lose value” in comparison with the Yuan; as such, Macau would become “an even cheaper destination” for mainland Chinese tourists, he said.


On the other hand, higher prices “could discourage the consumption of Mainland tourists,” Henry Lei said. Lei said that over 50% of products in Macau come from China; in 1Q 2010, mainland China represented more than 30% of the total Macau imports.



In the first quarter of 2010, 230 new workers were admitted.  As of the end of March 2010, Macau had 22,226 public sector workers (half with temporary contracts).




"We were encouraged to see revenue yields turn positive for the first time since late 2008. Improving revenue yields combined with an 8 percent capacity increase and ongoing cost control efforts offset significantly higher fuel prices. Advance bookings are holding up reasonably well and remain in line with our expectations. We believe this will lead to earnings growth in both the third and fourth quarters. The summer season, which is our strongest and most important quarter of the year, is shaping up particularly well.”

- Micky Arison, Carnival Corporation & plc Chairman and CEO




  • Since March, booking volumes for 2H2010 have been running slightly ahead of the prior year at higher prices.
  • 2010 Guidance
    • Net revenue yields (constant dollar):  +2 to 3% (unchanged from previous guidance)
    • Net cruise costs excluding fuel per ALBD (constant dollar): -2.5 to -3.5%  (- 0.5% from prior guidance)
    • EPS: $2.25 to $2.35 (unchanged guidance, Consensus is $2.31)
    • Fuel costs: increasing $440MM YoY or $0.55 per share (previous guidance: $483MM or $0.60 per share)
  • 3Q 2010 Guidance
    • Net revenue yields (constant dollar): +5 to 6% (0 to 1% on a current dollar basis)
    • Net cruise costs excluding fuel per ALBD (constant dollar): 1 to 2%
    • EPS: $1.43 to $1.47 per share (Consensus is $1.50)
    • Fuel costs: increasing $74MM YoY or $0.09 per share


  • Volcano ash disruptions impacted yields by half a point
  • Capacity for European Brands grew 13%; NA brands grew 4%
  • Net onboard/other revenues yield: increased 3.1%
  • Given 2Q performance, onboard & other revenues yields expected to increase sequentially for reminder of the year.
  • Decline in ex. fuel net cruise cost per ALBD attributed to lower dry dock expenses, economies of scale, a low inflation environment, and timing of SG&A expenses
  • Fuel consumption per ALBD declined 3.3% in 2Q
  • $39MM charge for British pension fund drove down 3Q projections for net cruise cost excl. fuel ALBD.
  • Double-digit price increases in NA;  strong volumes for Caribbean; Alaska had lower booking volumes but higher pricing and low levels of inventory remaining
  • European: booking volumes strong with little remaining inventory
  • For last 6 weeks overall bookings are up YoY. With NA brand trends trailing those of Europe.  European consumers seem more resilient to geopolitical and economic risks
  • For 3Q
    • fleetwide capacity up 6.3%
    • Pricing in Mexican Riviera is improving
    • Expect pricing to be flat in for European brands
  • For 4Q
    • fleetwide capacity up 6.1%, up 1.7% in NA, and up 10% in Europe
    • occupancy slightly lower
    • European brands local pricing will be higher YoY.
    • revenue yields should be up 3% in current dollars
    • North American brands in the fourth quarter are 50% in the Caribbean with all other itineraries individually below 10%.
    • European brands are 73% in Europe in the fourth quarter with all other itineraries individually under 10%.
  • For 1Q 2011:
    • Overall, pricing higher YoY; occupancy slightly behind (similar to 4Q 2010 trends)
    • Caribbean pricing: higher prices on higher occupancy; same with Mexico Riviera.


  •  For 4Q, surprised at lower occupancy YoY?
    • Bookings pace is good without giving away any price, less concern on occupancy; pretty confident on yield guidance; pace has picked up up since a hiccup in May. Focused on getting better pricing.
  • Bookings trend since close of 2Q:
    • All categories except for casino were up in 2Q; expect trend to continue for rest of year.
  • Pension charge in 3Q: has been in guidance since December--may have been changed by a few million though
  • Gulf (Florida)/ Southern Europe bookings trend:
    • Gulf cruises unaffected by oil spill; slight increase in fuel consumption; no slowdown in booking pattern
    • Italy market: no change in demand; "Europe is performing fantastically"
  • Low bond yields, refinancing in future?
    • 7 export credits--even lower yields than most bonds; not interested in refinancing at this time.
  • Advance bookings breakdown:
    • As we get bigger in Europe, business will be more seasonal; lower earnings in 1Q and higher earnings in 3Q for European business
  • New build and domestic brands:
    • two orders for Carnival cruise line and two orders for Princess
    • plenty of capacity coming for NA brands
  • Premium brands in NA were a little affected by adverse environment in May (e.g. stock market decline) but not in Europe. On-board revenue yields higher - with NA brands doing better than European brands in the midst of European concerns.
  • North America new deal standards (Emissions Control Area) in middle of 2012--potential impact on fuel costs:
    • fuel costs impact will be $50-70MM dollars (worst-case scenario). (unchanged from previous guidance)
  • Discontinuing air transportation bookings:
    • Carnival cruise lines discontinued only one part of the air service--but very small impact. (other brands did not change air transportation bookings)
  • Booking curve for European and NA customers (length, inventory):
    • About same levels as last year.
    • For 3Q 2010, historically, 85-95% booked; 4Q 2010: historically, 55-75% booked; 1Q 2011: historically, 30-50% booked--still in those historical ranges.


Yesterday, of the 57 global markets we track, the USA was the worst performing.  On a 40% decline in volume the S&P 500 finished lower by 0.4% ahead of very busy week of MARO data points, despite surging overseas market.  There were only two sectors up on the day and the Hedgeye Risk management models have all nine sectors positive on TRADE; the Utilities sector (XLU) is the only sector positive on TREND. 


News flow was essentially limited to the news that China would move towards a more flexible approach to the Yuan’s exchange rate; the Yuan’s yawn faded as the day wore on.  Few specifics were offered, other than that a large one time revaluation was ruled out. This news seemed to be offered as a reason for anything and everything that took place in the markets on Monday - retailers were down because of the possibility of increased expense due to a stronger Yuan; miners and other commodity related companies were up on the possibility of increased Chinese purchasing power; treasuries were off on a possible reduction in Chinese demand.


Treasuries were weak after China's announcement, but recovered much of their early losses throughout the day.  The DXY rose by 0.27% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.92) and Sell Trade (86.65).  The VIX moved higher by 3.9% yesterday but is still down 38% over the past month.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.47) and Sell Trade (31.91).


The euro’s rally stalled yesterday, the currency finishing down 0.34% on the day.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.25).


The three best performing sectors were Materials (XLB +0.6%), Industrials (XLI +0.2%) and Financials (XLF -0.1%). The bottom three were Utilities (XLI -0.7%), Technology (XLK -0.7%) and Consumer Discretionary (XLY -0.8%).


The XLI and XLB were the only two sectors up on the day, although well off the highs of the day.  Copper traded higher by 2% on the day on the news from China and improved Chinese demand would help RECOVERY/REFLATION story.  Notable outperformers were AA +5.5%, DE +2.0%, CAT +0.3% and ITW +1.9%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.05).


Crude is trading lower for the first time in three days, on renewed concern that Europe’s sovereign-debt crisis will slow the RECOVERY trade.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.82) and Sell Trade ($79.57).


Yesterday, Gold did not benefit from the Chinese announcement, with the S&P Global Gold Index down 3% and the XAU (down 2.2%) was weaker as gold and silver moved lower, with notable underperformers being AEM (3.5%), SSRI (4.2%) and PAAS (3.9%).  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,220) and Sell Trade (1,255).    


For the past four days, the Consumer Discretionary sector (XLY) has been the worst performing sector.  The XLY is now down 0.4% over the past week, with the S&P 500 up 2.2% over the same time period.  Yesterday, the S&P 500 Retail Index declined 1.9% and the S&P 600 restaurant index declined 2.2%.  The retail concerns were centered on the impact of a stronger Yuan on their top-line growth and margins.


As we look at today’s set up for the S&P 500, the range is 44 points or 1.6% (1,095) downside and 2.3% (1,139) upside.  Equity futures are trading above fair value following Monday's decline.  Today will see more important MACRO data points, including Existing Home Sales due at 10:00 AM.


Howard Penney














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