The Macau Metro Monitor, July 13th, 2010



150 foreign workers from the Galaxy Macau construction site claimed that the contractor owes them around MOP2MM in overtime pay.  DSAL has ordered Galaxy Macau’s contractor to reimburse the outstanding pay before this Friday.


China has denied any changes to lending restrictions.  The China Banking Regulatory Commission said that there had been no policy changes or revisions to mortgage requirements for second and subsequent home purchases despite media reports that suggested first-tier cities have resumed lending to buyers of third homes.


Also, according to a statement, The Ministry of Housing and Urban-Rural Development urged local governments to strictly comply with lending policies designed to curb speculative investment in property.  The ministry acknowledged that "positive changes had emerged in the property market" and repeated it would increase the supply of affordable homes.



The Macau Consumer Confidence Index dropped 1.77% QoQ and 0.17% YoY in Q2 2010.  The survey found inflationary pressures affecting living standards.  Confidence in the local economy dropped 2.96 points, but still above the optimism level of 100. “Employment situation” also reported a decline of 3.92 to 93.37, suggesting job pressures remain. 


TURBOJET, CHU KONG TO MISS FERRY DEADLINE Macau Daily Times, Intelligence Macau

According to a spokesperson for the Maritime Administration, three route permits, Turbojet's routes from the Outer Harbor to Zhuhai and Dongguan, and Chu Kong's route between Pac On terminal and Zhuahi, have been revoked due to "a failure to be operational before the ferry deadline."  Meanwhile, Sands China's CotaiJet beat the deadline and will launch services between Hong Kong and Macau Outer Harbour Terminal. 


Meanwhile, IM doesn't see much impact from the opening of the Pac On Ferry Terminal some time in 2012, as the biggest entry point to Macau is still Gongbei, an arrival point that the Venetian dominates.


Visitor arrivals in package tours climbed 132.9% YoY to 569,803 in May 2010, as visitors in package tours for May 2009 was adversely affected by the human swine influenza pandemic.  Visitors from Mainland China (422,204); Japan (22,645); Taiwan, China (21,293); and Hong Kong (20,368) rose substantially by 168.0%, 85.9%, 38.1% and 14.5% respectively.  650,849 guests checked into hotels and guest-houses in May 2010, up 46.3% YoY.  Occupancy increased 18.6%YoY to 77.9%.



MasterCard said its cardholders, both Singapore-based and foreign, spent $633.8 million from May 28 to June 26, a 23% YoY growth.


Heading into yesterday’s close the US market was mixed on extremely light volume.  The S&P 500 closed up one point to close at 1078, while the Russell 2000 closed down 1.2%, to close at 621.  The RISK trade continues to fade despite optimism over corporate earnings and waning concerns over budget deficits in Europe.   


After the close, Alcoa beat recently lowered EPS estimates and commented that demand will remain strong in 2H10.  The news out of Europe is also supportive of higher equity prices as Greece sold bills today at a yield lower than it pays the European Union for emergency loans, although Moody’s cut Portugal’s credit rating on the nation’s growing debt burden and “weak” economic outlook.


Yesterday, strength was seen primarily in Technology (XLK), on the back of Software stocks and a 1.1% rise in the SOX ahead of earnings from INTC +1.6% and AMD +0.3%, which report on Tuesday and Thursday, respectively.  Yesterday, MSFT rose 2.3% on a sell-side upgrade, while AAPL declined 1.0% on the negative Consumer Reports commentary on the iPhone 4.


 Yesterday, Treasuries were mixed and the VIX declined for the seventh day in a row. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.73) and Sell Trade (29.15).


The dollar index traded up 0.3% on the fading RISK trade.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.10) and Sell Trade (85.67).


Despite waning debt concerns in Europe, the euro declined slightly on Monday and looking to trade lower for the third day in a row.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.28).


Yesterday’s weakness was centered in commodities and commodity-related stocks.  The three worst performing sectors yesterday were Materials (XLB), Industrials (XLI) and Energy (XLE).  In addition, Oil, Copper and Gold declined yesterday; Natural Gas outperformed but still declined. 


Copper prices fell for the first time in six days after a report showed imports fell in China.  Shipments of copper and products into China declined 17% earlier to 328,231 metric tons in June.   Imports have now fallen for three straight months.  The S&P Metal & Mining Index declined 2.6% and coal stocks were down 1.6%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.86) and Sell Trade (3.07).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,226). 


Crude oil dropped for the first time in four days as the dollar strengthened against the euro; yesterday Oil fell 1.5% to close at 75.28.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.36) and Sell Trade (77.58).  


As we look at today’s set up for the S&P 500, the range is 44 points or 2.9% (1,048) downside and 1.2% (1,092) upside.   Equity futures are trading above fair value, supported by AA earnings trends.  The MACRO calendar heats up toward the end of the week.    


Howard Penney













Touch of Genius

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction.”

-Albert Einstein


A lot of political courage it would take to get this global deficit and debtor nation under control Sir Einstein; a lot of courage indeed…


Fortunately, as the US citizenry braces for American Austerity, we are starting to see the early stages of political courage emerge. In the aftermath of President Obama’s “Debt and Deficit Commission” warning him of a “fiscal cancer that could destroy the country from within”, popular websites like Drudge are carrying this as their top story this morning (Drudge Report’s “Debt Like Cancer” at #1


As the Fiat Fools of the Krugman Empire attempt to make our deficit and debt problems “more complex and more violent”, a Touch of Genius that has always been America’s resolve seems to be finding its way into the daily dialogue of Washington’s Officialdom. This is progress. After 5 consecutive down weeks for the US Dollar, apparently Mr. Macro Market has the world’s attention.


Recognizing risks and TRENDs as they emerge on the margin is the art of global macro. While it’s politically convenient for the perpetual bull market machine to say that “no one saw the sovereign debt crisis coming 6 months ago”, readers of this daily diatribe know better. Our call 6 months ago was the same for the Euro as it is for the US Dollar now. The currencies of countries with burgeoning deficit and debt to GDP ratios are leading indicators for their domestic stock markets.


Fundamentally, our Hedgeyes here in New Haven are chaos theorists. We believe that there is a deep simplicity that governs the global ecosystem and that it manifests itself in high correlations and r-squares. Our daily risk management task is to recognize when immediate term TRADEs (3 weeks or less) are going to become intermediate term TRENDs (3 months or more). Then we call these out as quarterly Macro Themes.


Our Q3 Macro Theme of American Austerity has already hit the tipping point of political consensus. With mid-term elections pending and no recovery in US employment in sight, we don’t think that it is politically palatable for Bernanke and Geithner to take Paul Krugman’s word for it. In the last week we have heard leaks coming out of both the Fed and Treasury that another “bigger, more complex” stimulus is not going to be put on the table. God Bless America for that.


The alternative is that we literally become the Japanese experiment which, by the way, still doesn’t seem to be going too well. In the last 3 days, here’s the news that’s come out of the island nation gone lost decade(s):

  1. After being in office for less than a month, newly appointed Japanese Prime Minister Naoto Kan has already lost support of the upper house.
  2. Japanese equities have lost ground relative to global equities, closing down on both days this week, moving the Nikkei to -9.6% YTD.
  3. Japan’s Public Pension Fund (which holds 12% of all JGBs) sold more government bonds than it bought last month for the 1st time in 9 years.

You see, unlike the USA who levered up their citizenry with the American Mortgage Dream, Japan has opted to suck down the savings base of their people in order to continue to fund their Great Bureaucracy. As baby boomers get older, they have less savings to give and now the Japanese well is running dry. Sound familiar?


Both Japan and Europe have already trekked the road to perdition that the Big Keynesians in America want us to travel. While hope is not an investment process, I do see glimmers of it now that America is learning more than just fear-mongering lessons about great depressions. Americans don’t want to be Japan or Spain.


If American Austerity starts to take hold, it won’t be a bed of roses for all things in your portfolio. The United States of America runs an over-consumption economy that dares the citizenry to lever themselves up and go buy a house or car. That needs to stop. It’s time for some frugality.


Short term pain for long term gain is something that the Chinese, Brazilians, and Australians seem completely in agreement with. To a degree, some European countries that are far more mature than America are getting this too.


The UK is one of those countries that is starting to look interesting to us on the long side – not so much from an equity market perspective yet, but certainly from a currency perspective. Remember, our baseline macro model currently sees currencies as the lead indicator for a country’s budget and balance sheet health.


We bought the British Pound (FXB) in the Hedgeye Asset Allocation Model yesterday taking our allocation to international currencies to the highest of all our asset classes other than cash. We have an 18% allocation to international currencies with a 15% position in the Chinese Yuan and a 3% position in the British Pound.


Until Professional Politicians in the US start to implement the kind of austerity measures that PM David Cameron and Chancellor of the Exchequer, George Osborne, have, we’re going to maintain our short position in the US Dollar (UUP) and US Equities (SPY) against our Chinese (CYB), Singaporean (EWS), and British (FXB) longs.


My immediate term support and resistance levels for the SP500 are now 1048 and 1092, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Touch of Genius - japan

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Recently hired a top-line focused, senior manager away from Altira.



The management situation at MGM Macau continues to evolve.  The Joint Venture recently hired Mr. Kwong away from Altira to run the VIP operation for the property.  Mr. Kwong has deep junket relationships and should bring significant volume over to MGM.  He was responsible for the AMAX relationship at Crown/Altira.  The knock on Mr. Kwong is that he is too top-line focused so there is a question of how profitable these incremental revenues will be to the property.  We suspect MGM may be pursuing market share ahead of the IPO and hoping investors believe that margins will follow. 


The second item of note is a potential change at the top.  Our reconnaissance leads us to believe that Grant Bowie's stint at the company may be coming to an end.  His contract is expiring soon and neither MGM nor Pansy Ho appears to be keen on renewing.  We are also hearing that City of Dreams is targeting Bowie to replace the retiring Greg Hawkins at the end of the year.


It looks like VIP volume has improved in the last four days as World Cup betting came to a close. 



Macau is at a potential inflection point given 1) the beginning of tough monthly comparisons, 2) the slowing China economy and steep drop in the stock market there, and 3) the end of the World Cup.  We are hoping for some clarity on what was actually responsible for the early July slowdown.  If it was just the World Cup, then that would obviously be a positive.  We should be getting mid-month figures by the end of the week for your consumption.  We apologize for focusing on the short term but these are volatile stocks, after all, where upside/downside price target durations are measured in weeks not years. 


Street estimates and management guidance look beatable. Relative valuation looks good.  If only we were sold on this economic recovery.



We’re not buyers of this economic rebound so the defensive MAR looks more attractive to us than most lodging stocks.  Unfortunately, MAR seems only to get relative respect in downturns.  MAR is trading at 10.5x our 2011 EV/EBITDA estimate despite generating 90% of gross profit from fees; 86% of those fees are derived from franchise and base management revenue streams.  As we’ve written about in the past, franchise fees and base management fees deserve a much higher multiple than volatile incentive fees although it doesn’t appear that the Street sees it that way.  Analysts seem perfectly willing to slap on a 14x multiple on total fees generated by HOT regardless of whether they are base, franchise, incentive, or even non-cash fees!  Still, we’d love to get MAR below 10x.


2Q2010 Detail


We’re ahead of the street for 2Q2010 and for the 2H2010 assuming current RevPAR trends continue into the back half.  Our projections are for MAR to print $275MM of EBITDA and $0.30 cents for the quarter, which correspond to 6% and 9% higher than consensus, respectively.  Here are the assumptions.



  • Worldwide RevPAR growth of 6.6%, with ADR flattish across the board but positive for some brands like Ritz Carlton
  • 5.4% YoY increase in system-wide rooms with a 2% increase in managed rooms and an 8.4% increase in franchised rooms
  • Total owned and leased revenue of $261MM and gross margin of $32MM
    • Ahead of the $25MM gross margin explicit in MAR’s guidance
    • We assume that the margin excluding branding and termination fees increases to 4.6%
  • Total fee income of $286MM which would be just above the high end of MAR's guidance
    • Management fees up 10% to $138MM
    • $40MM of incentive fees
    • Franchise fees of $107MM, up 15%
  • Timeshare segment results of $25MM and gross margins of $45MM, at the high end of company guidance
  • Other:
    • G&A of $150MM, in-line with guidance
    • Interest expense of $40MM and interest income of $5MM (below management guidance of $40MM, net)
    • 36% tax rate, in-line with guidance

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