The Macau Metro Monitor, July 16th, 2010


SANDS, GALAXY TO HIRE 22,000 Macau Daily Times

According to MSS Recruitment’s Macau Job Market 2010 overview, Galaxy Macau and Sands' sites 5 & 6 need 7k and 15k more workers, respectively.  Sands China's senior vice president of human resources, António Ramirez, stressed, “Even though these projects offer more job openings to the local population, it does not necessarily mean that everyone will be suitable... Non-residents will play a crucial role in transferring their expertise and knowledge to local talents."  Trevor Martin, Galaxy’s senior vice president for human resources and administration, mentioned that the vast majority of the Galaxy Macau personnel would be locals, found through local initiatives and educational sources.


When it comes to local human resources, casinos are “the main competitors” of SME, the Macau Small and Medium Enterprises Association said.  According to the association, most of the 9,600 unemployed have “low education and skills, and some are out of work construction workers.”



IM believes Frank McFadden, Ian Coughlan, and Grant Bowie are the top candidates for the CoD CEO position.  McFadden, SJM’s President of Joint Ventures and Business Developments and the Grand Lisboa boss, has had experience in developing and redeveloping new and struggling properties and played a critical role in SJM's IPO but buying out his SJM stock options might be expensive. Even though Coughlan, president of Wynn Macau, runs the best and most profitable property in Macau and would be highly qualified for the position, it would be difficult to get Coughlan given his relationship with Steve Wynn and he may have golden handcuffs.  The most likely candidate is Grant Bowie, president of MGM Grand Paradise.  Bowie's contract is up for renewal soon and IM believes he would fit in well with the Anglo-Aussie-American-Chinese management team at CoD.  Other candidates include younger guys such as Ciaran Carruthers and Pete Wu.


For the past three days the S&P 500 has treaded water as continued concerns surrounding the momentum behind the global economic recovery are offset by the largely upbeat June quarter earnings and corporate commentary.


Yesterday the concern on the MACRO front was focused on the slowing momentum in the manufacturing sector following the release of the New York and Philadelphia-area manufacturing surveys for July.  These concerns were offset by initial jobless claims which fell 29K to 429K in the week-ended July 10th, the lowest level thus far this year (the improvement was driven by seasonal factors). 


Treasuries fared well again today on the back of the weaker-than-expected regional manufacturing surveys.  The VIX has risen for the past three days, as the S&P 500 has treaded water.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (22.15) and Sell Trade (28.15).


The dollar index continues to get smoked, trading down 1% yesterday and it is trading down again today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (82.56) and Sell Trade (83.79).


The euro is breaking out above our intermediate term TREND line of 1.28; we are long the Pound Sterling.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.29).


As I said before, the MACRO calendar remained a headwind for equities, particularly those levered to the RECOVERY trade.  For a second straight session, the Financials (XLF) was the worst performer, weighed down by the banks. The group failed to garner much support from the Q2 beat out of JPM, which was driven by significantly better-than-expected credit quality.


The three best performing sectors yesterday were Utilities (XLU), Consumer Discretionary (XLY) and Technology (XLK).


Copper traded higher despite concerns for a slowing economy.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.97) and Sell Trade (3.19).


Gold continues to trade higher as the dollar hit a two month low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,191) and Sell Trade (1,218). 


Crude oil declined yesterday on continued concern that the U.S. economic recovery will slow.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (76.02) and Sell Trade (78.44).  


As we look at today’s set up for the S&P 500, the range is 44 points or 1.8% (1,077) downside and 2.2% (1,121) upside.   Equity futures are trading above fair value, despite a miss from GOOG.  On the MACRO calendar today:

  • US CPI m/m June SA  - consensus (0.1%)
  • US CPI m/m ex-food & energy June - consensus 0.1%
  • US CPI Index Level June SA - consensus 218.18
  • TIC Flows (May)
  • U. of Michigan Confidence (July-Prelim) - Consensus 74.5

Howard Penney













3D Risk

“People are nervous about the long term outlook, and they should be.” 

-Paul Volcker


I had a great day of meetings in New York City yesterday. It’s always additive to get the City’s pulse on risk management matters. The biggest risk that I found myself talking about was one that I haven’t spent enough time writing about – the risk associated with the world’s largest current bubble imploding – short term US Treasuries.


This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.


Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.


I could go off this morning on the credit quality of US Treasuries, but Jim Grant has done a much better job than anyone else on this topic and I’ll point you to his most recent “prospectus” for US Treasury bonds as required reading. His conclusions weren’t bullish.


Back to the tail risks embedded in the lowest Fed Funds and Treasury yields ever, I’ve started to frame this up using 3 D’s – The Disguise, The Dare, and The Delay.


What risks are implied when the US government is setting unsustainable and unreasonable expectations that rates will stay at ZERO percent forever?

  1. The Disguise – considering an ever forever disguises financial risk and unintended consequences.
  2. The Dare – both the Fed and Treasury are effectively daring you to get out there and lever yourself up with either “cheap” liabilities or chase “higher yielding” asset classes than the “risk free” rate of zero percent.
  3. The Delay – bad actors who are bad stewards of capital get their bad capital allocation decisions (losses) socialized and this delays much needed restructuring of their balance sheets.

When US interest rates push higher – and they will when you least expect them to – you are going to see a 3D version of massive global asset management blowups. This time, no one can say “no one saw this coming.”


Getting the timing right on this is what it is – difficult. That’s why we call this a tail risk. There is a less than a 3% probability of US Treasuries imploding today, or next week. But… every day that 2-year yields hit their lowest level ever, creates a higher probability over the intermediate to long term that Treasury rates go up.


In terms of immediate term leading indicators for interest rate risk, I think the best one for a country’s fiscal and balance sheet health is its currency. Watching the US Dollar hit lower-immediate-term lows yesterday hopefully got President Obama’s attention.


The US Dollar Index is down for the 6th consecutive week and has lost -6.7% of its value since the beginning of June. For the world’s alleged “reserve” fiat currency, that’s a lot and we, as your Risk Manager, think you should be paying acute attention to this.


As a reminder, our Q3 Macro Theme of American Austerity submits a very straightforward thesis – the US Dollar is going to become what the Euro has been for the last 3-6 months as both the US and the world come to grips with the reality that both the US deficit and debt to GDP ratios are going to look a lot like Spain’s in 2011.


Put another way, assuming that the US Dollar is going to be an American entitlement that we can use and abuse as the world’s reserve currency forever, and that short term US Treasury Bonds will trade at their highest prices ever and forever, is no longer reasonable.


My immediate term support and resistance levels for the SP500 are now 1077 and 1121, respectively. We shorted the US Dollar on June 7th via the UUP etf and remain bearish on both the US’s fiscal position and its balance sheet health.


We’ll be doing a full slide presentation and conference call on American Sovereign Debt and the implications of the aforementioned tail risk that’s mounting on the short end of the Treasury curve in a few weeks.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


3D Risk - 2Y

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


The only surprise will be if HOT doesn’t surprise on the upside and raise full year guidance when it reports next Thursday. 



We’re not sure that there are a lot of mysteries to HOT’s Q2 earnings and outlook, although margins are more uncertain than for MAR.  Like Marriott, we expect HOT to beat the quarter and raise guidance for 2010.  Consistent with history, the company will likely provide pretty conservative guidance for next quarter, in this case Q3.  Our Q2 projection is $217MM of EBITDA and $0.27 in EPS versus the Street at $209MM and $0.25, respectively.  For the full year, we anticipate the company will raise guidance from $810MM and $0.88 closer to our estimate of $847MM and $0.99 in EBITDA and EPS, respectively.


Now more than ever, the macro environment will drive revenues and lodging profits, and investors’ views of the future macro environment will drive stock prices.  Current RevPAR trends are strong but the reported quarterly results and weekly RevPAR numbers just give investors a glimpse into the rear view of the mirror.  We find it amusing listening to the sell-side repeatedly asking questions on 2011 trends and beyond.  Face it, there is very limited visibility in this space and hotels only have pricing power when occupancies exceed 70%.  Lodging trends have historically been lagging indicators, since what’s on the books today was booked at some point in the past.  If sentiment changes or things begin to deteriorate, future bookings are impacted, and by the time the numbers show a slowing trend, it would be already too late.  No matter what these companies report, how they trade depends on people’s outlook. The issue today is that investors’ collective view of the future is dimming and comps get much tougher in 2H 2010.    


Here are the details of our projections:


2Q2010 Detail


Owned, leased & other revenue of $416MM and gross margin of 17.9%

  • We expect room revenue to grow 7%.  Starwood owned room based has shrunken roughly 5% since 2Q09.
  • Non-room revenue growth of 4%, less lost NOI from the sale of the retail space at the NY St. Regis.
  • CostPAR growth of 2.9%.

Management, franchise, and other income of $175MM; $136MM (14% YoY growth) of which comes from real fees with the balance coming from “other stuff”.

  • Base management fees of $68MM, up 13% YoY.
  • Incentive fees of $29MM, up 13% YoY.
  • $39MM of franchise fees, growing 15.5% YoY.
  • $30MM of amortization of deferred gains, termination fees and other one time items.
  • $8MM of miscellaneous other revenues.

$132MM of VOI revenues and $30MM of gross margin

  • Originated sales revenues up 3% YoY with gross margins of 35%.
  • $61MM of other sales and services revenues, which includes $21MM of interest income on securitized and unsecuritized loans with $45MM of associated expenses (27% margin).
  • $8MM of deferred revenues and $6MM of deferred expenses.

Other stuff:

  • $80MM of SG&A.
  • $77MM of D&A.
  • $61MM of net interest expense.
  • 22% tax rate.


While estimates have been rising, LVS should beat consensus EBITDA projections.  Whisper expectations are high though.  For the stock to react, Singapore will be the pivot.



LVS should beat the Street pretty handily and even top the recent high estimates.  At $1.65BN of revenues and $440MM of EBITDA, we’re 5% and 17% ahead of consensus, respectively.  We’re pretty comfortable with our Macau projection but Singapore will be the driver of upside/downside from our estimate.  Singapore represents the pivot for the stock, in our opinion.  If Singapore beats the Street and management provides comfort that Street estimates are too low for Singapore (in other words, our numbers are right), this stock will go higher.  We’re not sure management can provide much incremental insight to Macau and Las Vegas.


Our estimates for FS and MBS are almost double consensus estimates.  We’ve got proprietary property data so we know Four Seasons held very well during Q2.  For MBS, our estimates are partly driven by our analysis of Resorts World Sentosa – namely $78MM of reported EBITDA but closer to $114MM when you add back the pre-opening charges.  We don’t think that MBS numbers will be as strong coming out of the box given that Resort’s World had some distinct advantages including:  1) knowing the market better, for example in electronic games, since it has operating experience next door in Malaysia, i.e. Genting Highlands,  2) opening first and thus having no competition during its first quarter, and 3) a busing program.




  • Net revenues of $280MM and $69MM of EBITDAR, in line with the Street.
  • We estimate a 2% increase in slot handle and slightly higher hold.
  • Table revenues down 6% due to market share losses to MGM.
  • While Venetian had very low table hold in 2Q09, Palazzo had high table hold; net net table hold was about average in 2Q09 at 19.3%.
  • Cost cuts should be lapped by now.




Sands Macau: 

  • Projection of $301MM of net revenues and $74.5MM of EBITDA, in-line with the Street.
  • Slot win of $23MM and Mass table win of $128MM, in-line with the Street.
  • $7.1BN of RC volume and $217MM of VIP win  (3.07% hold).
  • Fixed costs flat sequentially.

Venetian Macau:

  • We expect a huge quarter on the back of high hold and a very easy Y-o-Y comparison. 
  • We’re at $572MM of net revenues and $185MM of EBITDA, $6MM above the Street.
  • Slot win of $50MM and Mass table win of $228MM.
  • We expect RC volume to be down 5.5% YoY to $9.35BN but high hold of 3.4% will produce record VIP revenues of $322MM.  The comp is easy as well since Venetian suffered from low hold of only 2.3% last year.
  • Y-o-Y cost cuts should be lapped by this quarter.

Four Seasons:

  • Results should blow away expectations given its nice ramp up and massive hold percentage.  We expect FS to report $153MM of net revenues and $50MM of EBITDA versus the Street at $28MM.
  • Slot win of $5MM and Mass table win of $26MM.
  • We believe that FS’s junket RC volumes were $2.4BN.  In 1Q2010, Four Seasons direct volume was $1.6BN, 43% of total RC volume or roughly $534MM/month.  If we assume roughly 41% of total RC volume in 2Q2010 is direct, then total RC volume for FS would be roughly $4.1BN.  Assuming our RC estimate is correct, FS appears to have held over 3.7%.
  • Given the high percentage of direct play at this property, commissions have been quite low, so flow through should be good.

Total Macau: 

  • Excluding the cost of ferry operations and some other costs, LVS’s 3 properties could produce $310MM of EBITDA in 2Q on $1.025BN of revenues.
  • Street is projecting $280MM.




Our projection for MBS is $261MM of revenues and $100MM of EBITDA (excluding any pre-opening charges) versus the Street at $73MM.  Our assumptions are as follows:

  • Slot: 1,450 slots at $500/win per day.
  • Mass: 442 Mass tables, $500MM drop, 22% hold.
  • VIP:  75 tables doing $25k/table/day, offering rebates of 90bps in 2Q2010, which we project will steadily rise in subsequent quarters.
  • Hotels: an average of 950 rooms open, ADR’s of $250 and occupancy of 60%.
  • Mall: only 20% of the square footage opened this quarter; we assume straight-line rents of $150/ per square ft.
  • Fixed expenses of $105MM this quarter.

Shorting Mexico . . . Aye Carumba!

Oh, down in Mexico
I never really been so I don't really know
Oh, Mexico
I guess I'll have to go

 - James Taylor


Conclusion:  We are short Mexico via the etf EWW due to its exposure to sequentially slowing growth in the U.S., drug wars that are accelerating, and declining oil revenue.

On July 6th we initiated our short position in Mexican equities.  Currently, we are down -1.8% on the position.  As Risk Managers, we aren’t happy being down on any position, even if just a couple of percent.  Call us lucky, or call us Risk Managers , but we have fortuitously only used one allocation for this position, so we still have the opportunity to average down up to three total allocations.


The short thesis for Mexico is threefold: oil, drug wars, and U.S. exposure.



  • The oil industry in Mexico is nationalized via PEMEX, the Mexican oil conglomerate.  In 2004, Mexico was producing 3.5 million barrels per day and that number is expected to be 2.5 million barrels in 2010, or a 29% decline over six years.  The bulk of this decline has come from the Cantarell field, which has declined ~70% from its peak production in 2004 (2.1MM barrels per day).  In the most recently reported quarter ending March 2010, oil production by Pemex was flat y-o-y, but the long term trend of declining volumes remains intact. 
  • PEMEX funds an estimated ~35% of the federal budget of Mexico, so as the production of oil declines over time, the federal government will be required to find other sources to fund its budget, or will be required to cut government spending.  In terms of general economic growth, the declining aspect of this national funding mechanism will be a sustained headwind well into the future. The chart below of Mexican oil production on a daily basis shows this clear trend of declining production. 

Shorting Mexico . . . Aye Carumba! - Mexico Oil Production


Drug Wars:

  • In 2009, there were more than 6,500 fatalities attributed to Mexican drug wars.  To put this in perspective, in the totality of the Iraq War, over an almost six year period, less than 4,500 U.S. troops were killed.  Based on year to date results in the Mexican drug war, the number of fatalities is expected to exceed 10,000 in 2010.  Currently, the Mexican government has over 45,000 troops directly focused on the drug war.  As the drug war continues to accelerate, alongside the headlines of murders, it will have a direct and significant impact on one Mexican industry: tourism. 
  • Tourism is one of the most important industries to the Mexican economy.  Globally, Mexico ranks tenth in tourism with more than 23 million tourist visitors every year.  In 2008, U.S. dollar spending by tourists was north of $13 billion.  In aggregate, tourism contributes roughly 13% of Mexico’s GDP.  Clearly as drug war violence accelerates, as it is, it will have a negative future impact on the tourism industry, a key driver of the Mexican economy. 

Trade with the United States:

  • Given the massive shared border and the nature of the North American Free Trade Act, Mexico is inextricably tied the economic fortunes of its largest trading partner, the United States.  Mexico is the United States’ third largest supplier of goods at ~$177 billion in 2009, which is more than 15% of Mexican GDP.  The United States is Mexico’s single largest export market.  Therefore, as the United States slows, so too will Mexico. 

  • In an attached chart we’ve outlined GDP growth in Mexico versus the United States.  The data for the past few years show us, not surprisingly, that there is a high correlation of growth rates between the two countries.  Additionally, the last down turn indicated that the Mexican economy has a tendency to overreact to the downside versus the United States.  Specifically, in 2009 Mexico experienced negative growth of -7.9% and -10% in Q1 and Q2 of 2009, which lagged the troughs in U.S. GDP growth of -5.4% in Q4 2008 and -6.4% in Q1 2009 by one quarter.

Given these systemic risks to Mexican GDP growth, we continue to like Mexico on the short side and will average in as prices permit.


Daryl G. Jones

Managing Director


Shorting Mexico . . . Aye Carumba! - Mexico GDP

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.