The Macau Metro Monitor, June 23rd, 2010


ADELSON COMMENTS Asia One News, Reuters, Bloomberg, Channel News Asia, SCMP,


  • MBS could generate +$1 billion a year in EBITDA.
  • Expects between 125,000 to 150,000 daily visitors to MBS once the casino is fully open by 2011. On average, there are 25,000 MBS visitors daily.
  • MBS will primarily target customers from Singapore, Malaysia and Indonesia, with an eye on other Southeast Asian countries like Thailand and Vietnam.
  • Company officials said MBS received 500,000 visitors this month. (~550,000 people visited MBS in the first 25 days of May).

On Macau:

  • “Macau is serving Hong Kong, Taiwan and southeast China... They are two different markets and they appeal to two different constituencies.”
  • The Venetian Macao gets about 40,000 visitors to its shopping malls during the week and about 65,000 on weekends.

Other comments:

  • Gaming in Las Vegas should return to pre-crisis levels within two years.  "Gaming activity in Las Vegas will return to “+80%” of pre-crisis levels in 2011 and “probably about 100% in 2012.”
  • "I am really keen on setting up an integrated resort experience on the lines of the Las Vegas strip in India, anywhere Mumbai, Chennai, Bangalore or Delhi. But the government is sadly not keen.”
  • Expressed interest in building Las Vegas-style casino strips in Greece, Italy, and Spain.
  • “I believe we can put the equivalent of five plus Las Vegases, with 140,000 hotel rooms each in five different locations in Asia, and it still won’t saturate the demand"--referring to Asians' propensity to gamble.
  • Expects 90% of LVS's revenue to come from Asia by 2020. (Asia accounted for 73% in 2009).


 “Regarding the hotel [Four Seasons], the case will be carried out according to the law and the Government’s policies,” secretary for Transport and Public Works Lau Si Io yesterday told reporters.  Secretary Lau has stressed that the apartment-hotel is not a housing complex and is subject to regulations similar to those of hotels.


 Total visitor arrivals surged by 31.8% YoY to 2,098,267.  Visitors from Mainland China soared by 43.5% YoY to 1,135,430 (54.1% of total visitor arrivals), with 450,037 traveling to Macao under the Individual Visit Scheme (42.4% YoY). Visitors from Hong Kong (589,644); Taiwan, China (103,862) and Japan (36,778) rose by 20.5%, 6.0% and 39.5% respectively; visitors from India (25,631) and the Republic of Korea (25,341) also registered remarkable increases.



Singapore's consumer prices climbed 3.2% on-year to a 14-month high in May.  CPI rose 0.6% MoM.


For the second day in a row the USA was one of the worst performing markets in the world.  The worst performing market was Luxembourg, which was down 2.8%, as compared to the Russell 2000 down 2.1% and the S&P 500 down 1.6%.  Volume on the NYSE was up 5% day-over-day, but remains at very low levels.  All of the major indexes closed around their worst levels for the session, with the S&P 500 back below its 200-day moving average.


All nine S&P 500 sectors declined yesterday and it was a nasty day for the Hedgeye S&P 500 Sector Risk Management model; four sectors broke their intermediate term TREND lines (XLY, XLP, XLI, and XLF) and there are currently no sectors positive on TREND. 


There are some key MACRO data points coming up in the next 10 days.  First, we have today’s FOMC meeting.  The FOMC is widely expected to leave the federal funds rate unchanged at 0-0.25% and reiterate its long-standing compromised policy that rates will remain exceptionally low for an extended period.  The FED’s policy statement will likely point to the recent weakness in inflation and the MACRO headwinds from Europe as the primary reason to keep rates low.  Second, there is a G-20 meeting this weekend and third, next Friday we have the release of June employment data.  Following that we kickoff Q2 earnings season.


In Washington the Obama administration is appearing more dysfunctional by the day and there continues to be lingering uncertainty surrounding some of the more onerous provisions in the financial reform legislation, which remain an overhang on sentiment.  Also hurting the Financials (XLF) and Consumer Discretionary (XLY) are the heightened concerns about a double-dip in housing following another round of weaker-than-expected May data.  Existing home sales fell 2.2% to a 5.66M unit annualized pace in May, well below the 6.2M consensus.


Of the four sectors that are broken on TRADE and TREND, two are consumer related - XLP and XLY.  Over the past week the XLY is down 4.9%, as compared to the S&P 500 down 1.8%.  Yesterday, for the fifth straight day, housing-related stocks finished lower, with the S&P Homebuilders index down 2.9%. In addition to the home builders, companies leverage to housing were notable decliners; USG (6.9%) and AWI (4.5%), LOW (3.3%) and HD (2.6%).  In addition, the S&P Retail Index (2%) finished lower for a fifth straight session, highlighting some concerns about a recent slowdown in discretionary spending.


Restaurant stocks were among the worst performers in the consumer discretionary sector today. Notable decliners included casual diners RT (5.4%), RRGB (5.1%), PFCB (4.4%), BWLD (3.6%) and TXRH (3.2%).  The underperformance was triggered on Monday after CPKI (2.4%), said that May-June comps fell considerable from the trends in Q1.  In the QSR space SONC declined (8.3%) also after posting some disappointing numbers. 


Treasuries rallied today with the weaker-than-expected housing data, an afternoon selloff in stocks and a strong two-year note auction.  The DXY rose by 0.2% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.07) and Sell Trade (86.67).  The VIX moved higher for the second day in a row by 8.7%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.56) and Sell Trade (31.92).


The Euro is starting to stabilize on the immediate term risk management model; 1.22 is an important support that needs to hold.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


The best acting sector yesterday was Technology (XLK), down only 0.9%.  The outperformance was driven by AAPL +1.4%, as the company announced that it has shipped 3M iPad units in the 80 days since its early-April launch.


The Energy (XLE) sector was the worst performing sector yesterday, down 2.9%.  Both crude and natural gas declined yesterday; with natural gas down for a third straight day.  The E&P group was a notable decliner, with the EPX down 4.5% and the OSX declined 3.5%.  The group failed to garner any reprieve from news that a federal judge in New Orleans lifted the Obama administration's six-month moratorium on deepwater drilling.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($77.09) and Sell Trade ($79.54).


In early trading Copper is directionless, after yesterdays 1.7% move to the upside.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.05).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,233) and Sell Trade (1,256).  


As we look at today’s set up for the S&P 500, the range is 42 points or 0.8% (1,087) downside and 3.1% (1,129) upside.  Equity futures are trading above fair value after an ugly day yesterday.  Today's highlight is the FOMC rate decision although no material change to the Fed's "extended period" language is expected.


Howard Penney













Rigorously Frugal

“I am for a government rigorously frugal and simple, applying all the possible savings of the public revenue to the discharge of the national debt; and not for a multiplication of officers and salaries merely to make partisans."

-Thomas Jefferson


In the spirit of searching for historical answers to the current problems in my head, I have started reading “Founding Brothers: The Revolutionary Generation” by Joseph J. Ellis. Suffice it to say, some of these common men rose up in the most American of ways – in a meritocracy.


American political history, like Washington and Wall Street storytelling, can be romantic. After all, for many, it’s all about twisting facts to fit a certain fiction that consensus can consume as believable. The reality of life seems to be that we never quite realize we are making history in the moment.


If Jefferson wasn’t partisan in his politics, John Adams wouldn’t have lost his marbles as many times as he did going off on Jefferson’s duplicity. Watch what people do, not what they say – we all have some form of partisanship in our lives. We are human. With that understood, it’s easier to consume the quotes of great leaders and storytellers at face value. The aforementioned Jefferson quote is brilliant when I consider it in the context of today’s conflicted professional politicians.


George Washington, John Adams, and Thomas Jefferson certainly had their political differences. Most men with a point of view do. One thing these “Founding Brothers” had in common, however, was their concept of frugality.


Per our friends at Wikipedia, frugality “is the practice of acquiring goods and services in a restrained manner, and resourcefully using already owned economic goods and services to achieve a longer term goal.”


You can tell stories about how frugal you may be but, within the context of our fore-fathers definition of the word, as an American society we have veered far from it. Being Rigorously Frugal is a solution that I’d like to put forth to this colossal American balance sheet mess. Everything starts with respecting the cost of capital and savings.


In the chart of the day, we’re showing the long term TAIL of the US Savings Rate going back to 1971 (when America was endowed with the world’s reserve currency). Today, US Savings are only 3.6% of GDP and, never mind “applying all the possible savings of the public to discharge the national debt”, our professional politicians get overly paid to perpetuate a levering up of our diminished savings!


As a reference point, Brazilian and Chinese savings as a percentage of GDP are approximately 4x and 10x America’s, respectively. Throughout the global economic downturn of 2008, neither of these countries fear-mongered their citizenry into believing that we were experiencing a “great depression.” Throughout the global economic upturn of 2009, both of these countries had the political spine to tighten monetary policy in the face of inflating prices.


Hopefully, you are already murmuring that China and Brazil are different than the US. From a growth perspective, they are – we get that. There is a huge difference between unlevered organic growth and levered deficit Spend-And-Hope growth.


Chinese savings (including corporate and household) have amassed to 49.5 TRILLION Yuan. Yes, that’s a lot of Yuan ($7.3 TRILLION US Dollars) – and guess what the wealth effect is for anyone bearing that Chinese Yuan is when China allows their currency to appreciate?


A large number of Americans living in the modern day Roman Empire of Fiat Fools don’t win here. If they aren’t Rigorously Frugal, that is. Gluttons of government sponsored over-consumption get taxed on anything we import from China or Brazil as the value of their respective economies and currencies appreciate. It doesn’t have to be this way, but until we change ourselves, the world will likely change us.


America is not alone in its addiction to cheap fiat moneys and over-consumption. The difference between America and the UK as of the past few months however is that the British are making the hard decisions that the “multiplication of officers and salaries” in the Officialdom of Washington aren’t willing to make.


Both Adams and Jefferson were more than half a decade dead by 1886 (they actually both died within 5 hours of one another), but that was the last time Britain had a Chancellor of The Exchequer as young as recently appointed George Osborne.


Osborne is my age and apparently agrees with my solution to this mess. This is what he had to say last night after he made cuts to healthcare spending, public salaries, housing subsidies, etc:


“I’m not going to hide hard choices from the British people… This is an emergency budget, so let me speak plainly about the emergency that we face.”


Maybe Osborne and newly elected PM, David Cameron, aren’t as Rigorously Frugal as implied by the 79% asset allocation to cash I moved us to on June 9th, 2010; certainly not as Rigorously Frugal as the 96% cash position I moved to on September 18th, 2008; but, directionally at least, frugality is as frugality does.


The beauty of having cash savings is that you can invest those hard earned moneys opportunistically. Since June 9th, the SP500 is +3.6% higher. I have been investing opportunistically. I have been picking my spots. This morning the cash allocation in the Hedgeye Asset Allocation Model is down to 61%.


I’ve always been conservative in my finances. I’ve never used leverage in running a fund. This doesn’t make me the Street’s favorite hedge fund manager, but it certainly keeps me alive. That’s all this Rigorously Frugal believer of what I think I will call a “Revolutionary Generation” 30 years from now has to say about that.


My immediate term support and resistance lines in the SP500 are now 1087 and 1129, respectively. Yesterday, on market weakness, we raised our asset allocation to International Equities from zero percent to 3% by buying a country that has a very respectful savings rate - Singapore (EWS).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rigorously Frugal - hilt

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Darden is scheduled to report fiscal 4Q10 earnings after the close tomorrow.  Casual dining names, in general, have traded lower in response to CPKI’s revised calendar 2Q10 guidance issued yesterday.  CPKI provided the first real glimpse of May trends and it was not good.  CPKI announced that May same-store sales declined 7.9%, following a 2.7% decline in April.  For reference, CPKI was facing its easiest monthly comparison of the quarter in May so 2-year average trends decelerated rather significantly for the concept as well.   We have yet to hear how the industry as a whole fared in May as Malcolm Knapp will likely report industry data soon after Darden reports its quarterly numbers, but judging from CPKI’s May numbers, the Knapp May whisper-number of -1%, which implies flat 2-year average trends, seems aggressive. 


Darden widened its gap to Knapp performance during its fiscal 3Q10 and I would expect the company’s outperformance to continue in the fourth quarter.  Through April, the industry on average, as measured by Malcolm Knapp, improved about 100 bps sequentially on 2-year average basis from Darden’s fiscal 3Q10 timeframe.  May is obviously the big question mark for both Darden and the industry but my same-store sales estimates for Darden assume that 2-year average trends during 4Q10 held steady to improved slightly sequentially from 3Q10, excluding the estimated holiday and weather impacts, across all of the company’s concepts.  My -0.1% blended same-store sales estimate is slightly better than the street’s -0.4% estimate, reflecting my expectation for a stronger LongHorn performance (+2.0%) and slightly weaker Red Lobster number (-3.0%) relative to the street's estimates.  For reference, DRI guided to a -2.5% blended same-store sales number for the full year, implying -1% in the fourth quarter. 


Based largely on my slightly better than expected same-store sales estimate, I think the company’s earnings will come in at $0.90 per share, better than the street’s $0.88 per share estimate.  That being said, I expect both restaurant level and EBIT margins to decline about 40 bps YOY during the quarter as a result of sequentially more difficult comparisons; though EBIT margin should remain above 10% in the quarter.  It is important to remember that DRI reported a 10.8% EBIT margin in 3Q10 (excluding the $0.04 charge related to the company’s decision to adjust gift card redemption assumptions), a near peak margin, but management commented that it has “new targets for peaks at this point.”


Outside of May trends, investors will be most focused on what management has to say about FY11 guidance.  Darden provided its long-term EPS guidance of up 10% to 15% and said it was comfortable with this range on its last earnings call, but did not give a specific range for FY11.  It will be important to hear what the company says about its outlook for same-store sales growth and commodity costs.  The company’s long-term earnings guidance assumes +2% to +4% same-store sales growth which, depending on how the company fared in May and into June, could be a stretch as it assumes a continued improvement in 2-year average trends.


I am expecting there to be a lot of investor questions about the company’s food cost outlook in response to all of the media focus on the expected increase in seafood costs as a result of the oil spill in the Gulf of Mexico.  Just yesterday, it was reported that as a result of the oil spill, Red Lobster was removing oysters from its menu in a few weeks when the current supply runs out.  Although oysters only make up a small percentage of Red Lobster’s menu, potentially higher shrimp costs would have a greater impact on the concept’s margins.  This is not a concern for 4Q10 as the company is 100% locked in on all of its seafood costs for the quarter and guided to a mid-single digit decrease YOY.   As of February, however, the company was only locked in on 23% of its seafood costs through December 2010 or about halfway through fiscal 2011.  Seafood costs represent DRI’s largest ticket food item, accounting for 30% of total food costs. 


We will have to hear what Darden says on its earnings call on Thursday morning but, for now, I am comfortable with the company’s ability to grow EPS by at least 10% in FY11, within its long-term guided range of +10% to +15%.  The street is currently estimating 12% EPS growth.  I would not be surprised, however, if same-store sales fall slightly short of the 2% to 4% range. 


I continue to believe that DRI is one of the best positioned restaurant companies going forward and that return on incremental invested capital is moving higher in FY11.







Howard Penney

Managing Director


Bear Market: SP500 Risk Management Levels, Refreshed

After an unconvincing, low volume, 2-week rally in US Equities, the intermediate term TREND remains bearish.


The intermediate term TREND line of resistance was not tested to the upside and now we are seeing short term (immediate term) TRADE lines of resistance develop inside of 1144. In the chart below we outline an important updated line of resistance at 1130. The one-factor 200-day moving monkeys are obviously grappling with a breakdown through that line today as well.


There is an important immediate term TRADE line of support at 1093 that needs to hold. Our go forward outlook on a double dip in both US growth and US Housing remains.



Keith R. McCullough
Chief Executive Officer


Bear Market: SP500 Risk Management Levels, Refreshed - 1


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.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%