Get Dupe(d)

“The US government has a technology, called a printing press, which allows it to produce as many US dollars as it wishes at essentially no cost.”

-Ben Bernanke


One of the most poignant Hedgeye sayings is “austerity equals civil unrest” and it has become increasingly clear that Obama wants nothing to do with austerity.   It’s also clear, judging by developments at the G-20 weekend, that the US is going to try to go it alone with big fiscal imbalances; our submission is that the USA balance sheet can’t sustain the current trend and one of the biggest losers will be the American consumer.  As the Bernanke & Co printing press continues to roll on and on, piling debt upon debt upon debt, this can only end badly.


As of the close yesterday, Consumer Discretionary was one of only three sectors up year-to-date (XLY up 2.7%).  The other two are Industrials (XLI up 3.3%) and Financials (XLF up 0.7%).   While easy comparisons and “corporate” fiscal austerity have helped the performance of consumer stocks, the best days of this cycle are behind them. 


I know everyone has a view on the consumer, but there are some changes on the margin that should be considered as we look toward 2H10.  One of our 1Q09 Macro Themes was “MEGA” – calling for a MEGA squeeze in consumer stocks with Mortgage Rates going down, the Employment picture turning around, Gas prices declining sharply year-over-year, and Asset prices re-flating.  Looking at the data as we emerge from 2Q10, it is clear that the American consumer is now going to get DUPE (d) and is not going to be happy.


Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 1Q10.  The Hedgeye Risk Management Financials team recently presented a very strong case for why the housing market is in trouble.  We have high conviction that a double-dip in housing is underway and this will have a serious impact on consumer behavior.  Following a decade of out of control spending, the state of the USA’s balance sheet inhibits the country’s ability to navigate the structural issues still present in the economy.   A few points to keep in mind include:


(1)    The benefits from the current Obama stimulus peaked in the 1Q10 - Slowing GDP growth.

(2)    In 2011, taxes are going up and that will hamper economic growth  - Slowing GDP growth.

(3)    Real estate prices are estimated to decline 20% in the next twelve months - Slowing consumer spending.


Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.  Private sector job creation remains a concern; private-sector job creation in May decreased sequentially from April.   While private sector job creation had been growing for four straight months, it has now come to an impasse as businesses have become nervous about the state of the economy.   Unemployment is at an elevated level and indicates a continuing softness in the underlying economy.  As census workers are laid off, the rate could jump higher unless other sources of employment pick up hiring drastically.  Uncle Sam is running out of crutches (or the political will to supply them):


(1)    The Administration failed to get Congress to pony up an extra $50B for unemployment claims - our leveraged balance sheet inhibits the government’s ability to provide stimulus. 

(2)    A strong dollar policy has proven to help job creation – Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies - to be sure Obama is debauching the US currency.

(3)    As the Double-dip scenario pays out, unemployment will remain elevated and may even go higher. 


Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.  Looking out over the next 6-12 months (and even longer) consumers will be paying more to drive their cars, or “bring home the bacon” and to make sure they have health insurance for their family.  The issues that arise from the disaster in the Gulf of Mexico will not be solved by the cash flow from BP.  The government has been sponsoring cheap gas prices in the US for years and that will come to an end.  Once again, the government cannot afford to manage through the issues the country faces due to the leveraged balance sheet.     


(1)    The Hedgeye Inflation Index turned ugly last week.

(2)    The disaster in the Gulf is inflationary and will be a drag on growth.

(3)    The prices paid by the US consumer for gas is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation – this would be a massive headwind for the consumer.  Some commentators are speculating that prices could rise to meet those paid at the pump in Western Europe – some 50% higher than where they are currently.


Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities.  The VIX’s 19% up-move week-over-week, along with the move in the equity market, indicates that political summits are doing little to ease fears.  On Thursday the Macro Team is going through our Hedgeye Risk Management Q3 Themes.  If you would like access to that conference call, please email .


(1)    U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. 

(2)    China declined 4.2% last night and is now down 26% year-to-date. 

(3)    The S&P 500 is down 3.6% year-to-date. 


Last week, the University of Michigan consumer confidence index improved for the month of May and yesterday, the government reported that the consumer is spending less than he/she earns.  In both cases the market ignored the data and has moved lower.  We don’t trust what the government is telling us nor the direction in which the country is headed.  The consumer is not stupid and Washington does not get it.


Function in disaster; finish in style


Howard Penney 


Get Dupe(d) - trust


We expected the 2H of June to slow, but not this much.



The following table shows June Macau gaming revenues through the 27th.  Clearly, business has slowed over the past week or two.  Based on the HK$11.7 billion in MTD table revenues, we are now projecting HK$13.5 billion in total gaming revenues (including slots) for the full month.  Our previous projection was HK$14.0-14.5 billion or 74-80% Y-O-Y growth versus our new projection of “only” 67% growth.  This could be a small negative on the margin for Macau stocks.


Since our mid-month note, LVS gained some share at the expense of SJM and MPEL.



Nederland! World Cup Chart of The Day

Congrats to the Dutch on a big World Cup win!


We’ll see if today’s win for Nederland takes stocks higher in Amsterdam tomorrow. For now, the Netherlands Amsterdam Exchange Index (AEX) remains bearish from an intermediate term TREND perspective and bullish from an immediate term TRADE perspective. Our risk management lines are 339 (SELL TREND) and 324 (BUY TRADE), respectively.


From a European Equity price performance perspective for 2010 to-date, Nederland (-3%) looks better than France (-10%) and Italy (-14%), but worse than Germany (+3%) and Denmark (+20%).


Keith R. McCullough
Chief Executive Officer


Nederland! World Cup Chart of The Day - 1

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Konami has emerged as a real force in the slot world but CYQ1’s ship share is not sustainable. History says BYI and IGT will regain some share back from Konami in CYQ2.



There’s no question that Konami has been steadily gaining ship share over the last 2 years.  The games are popular and the Street is abuzz over the new big “player”.  However, we would caution investors who are using Konami’s March quarterly ship share percentage and absolute number of units shipped to extrapolate results for the full year.  The March quarter is Konami’s fiscal 4th quarter and has historically been its strongest quarter for unit shipments due to timing of new product releases and corresponding special promotions.

As illustrated in the chart below, Konami’s March quarter is typically followed by a very weak June quarter.  In 2008 and 2009, the June quarter saw sequential declines of 49% and 61%, respectively, corresponding to a ship share drop of 7 and 10 percentage points.  Therefore, while we expect Konami’s shipments to be up from 1,038 units last year, we are expecting a material sequential drop this year. 




We’re projecting that roughly 18k units are shipped in North America in the June quarter, which is a little north of the 17k units we estimated were shipped in the March quarter.  If Konami ships 1,200 units less sequentially, that means that 2,200 units are up for grabs for WMS, IGT, BYI and ALL.  Therefore, there should be some sequential share gains amongst the other top 4 suppliers.  In looking at the chart, it appears that IGT and/or BYI could be the prime sequential beneficiaries of the “Konami phenomenon”.

European Call-Outs By the Charts

  1. Bucking the Trend: positive divergence from Germany - DAX breakout with inflation low and stable over the last months. Most recent CPI reading showed a sequential decline to 0.9% in June Y/Y. 
  2. Greece Is Not Done: Greek 10 YR Bond Yield like Greek CDS price indicates no reduction in risk. (For a point of reference, 5/10 marked the issuance of the €750 Billion European bailout “Band Aid”).
  3. PIIGS: excluding a meaningful breakout in Greek CDS, the remaining proverbial PIIGS show no sign of abatement. We expect risk to heighten as the sovereign debt spotlight continues to move across the continent.

European Call-Outs By the Charts - mh1


European Call-Outs By the Charts - mh2


European Call-Outs By the Charts - mh3


Matthew Hedrick



The Macau Metro Monitor, June 28th, 2010


IRs BOOST TOURISTS Straits Times, Reuters, STB

Singapore had 946,000 visitors in May, a 30.3% YoY growth. It is the highest ever recorded visitation number for May. Singapore has now seen record numbers for the months of December 2009 to April 2010.  Arrivals from Indonesia, India and Malaysia continue to lead with 186k, 116k, and 82k, respectively.  Hong Kong (48.8% YoY), Malaysia (48.7% YoY), and Taiwan (47.4%) visitors had the highest growth.


In other news, average occupancy rate grew to 85%, up 17.1% from last year, and hotel room revenue has soared 45.2% YoY. In addition, Singapore's Changi Airport, Asia's fifth-busiest, saw traffic increase 21.6% YoY, its highest monthly percentage growth in six years.  "The increase in passenger traffic was partly driven by the Vesak Day long weekend and the beginning of the mid-year school holidays at the end of May," Changi Airport Group said in a statement.



The Macau government’s “Four Percent Home Purchase Loan Interest Subsidy Scheme” and the “Home Purchase Guaranteed Loan Scheme”, both introduced in June 2009, will expire today.  It is believed that the government will not extend either scheme.


The “Four Percent Home Purchase Loan Interest Subsidy Scheme” was a scheme providing a subsidy for the interest payments on the monthly loan installments, with the highest subsidized rate being 4% per year.  The “Home Purchase Guaranteed Loan Scheme” was a scheme mainly assisting permanent residents of the Macau SAR to purchase their houses by guaranteeing the bank loan.  Both schemes were only available for housing units whose bank evaluated selling price was below MOP2.6 million.


The unemployment rate for March-May 2010 was 2.9%, down by 0.1% over the previous period (February-April 2010).  Total labor force was 326,000 in March-May 2010 and the labor force participation rate stood at 71.5%, up by 0.4% from the previous period.  The number of the unemployed persons held stable at 9,600.

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