The Macau Metro Monitor, July 22nd, 2010


HSBC is no longer a joint global coordinator for the planned Hong Kong IPO of MGM Mirage, having pulled out of a

US$850m loan for the gaming firm’s Macau unit, according to a source familiar with the deal.


In June, ~3.6 million passengers passed through Changi airport, YoY growth of 19%.  In the 1st half of 2010, Changi Airport saw traffic increase 17% YoY to 20.2 million.



According to a report on, a Netease website, China's finance ministry plans to start implementing a property tax in 2012 on a trial basis.  Shanghai and Chongqing have already drawn up plans for a property tax.  Chongqing Mayor Huang Qifan said the city wants to impose a 1% levy on homes that are three times the average market price.

Trading In A Range . . . President Obama's Approval Rating

We’ve outlined the Rasmussen Presidential Approval Index going back 18-months below and the interepretation is quite clear.  Since the start of the year, President Obama’s approval has been mired between -10 and -20 on this index (a comparison of Strongly Approve versus Strongly Disapprove), which indicates that between 10 and 20% more Strongly Dissapprove of the job President Obama is doing.  At this point, it seems very unlikely that this range bound negative approval rating will change much heading into the midterms this Fall.  This will not help the Democrats in defending their majority in both houses. 

  • Battle for the House – Currently the Democrats hold 255 seats, the Republicans hold 178 seats, and there are two vacancies.  If the midterms were held today, according to a Real Clear Politics poll aggregate, the Democrats would win 202, the Republicans would win 202, and 31 would be toss ups.  In effect, there is a jump ball for the house, which is huge shift from 2008. 
  • Battle for the Senate – Currently the Democrats hold 59 seats and the Republicans hold 41 seats.  According to a Real Clear Politics poll aggregate, if the election were held today the Democrats would have 48 seats and the Republicans would have 42 seats, with 10 seats being a toss up.  Since only 1/3 of the Senate is up for re-election very two years, this is actually a meaningful shift and once again suggests the potenital for change in power. 

While the potential shift in Congress has been widely bandied about, what is more interesting is the threat to President Obama in 2012.  According to a poll out from Quinnipiac University today, if the 2012 Presidential election were held today 36% of those polled would vote for Obama, 39% would vote for a generic Republican candidate, and the remainder are either undecided or it would depend on the candidate.


In aggregate, the point, which is probably somewhat obvious, is that the Democrats are currently in a world of potential electoral hurt.


In another poll by Fox News (and we do get that Fox News may have some biases), the key issues that Republicans are seen to have an advantage with are outlined below.  According to the poll:


“By double-digit margins, Republicans are seen as the party that would do a better job on terrorism (+16 points), the size of government (+16 points), the federal deficit (+15 points) and immigration (+13 points).”


The implication of this poll, and others that mirror it, are that the Democrats, and President Obama specifically, may try to overcompensate to make up ground in the areas in which they are being perceived poorly.  From our perspective, one key area is likely to be American Austerity. As the drum to cut the budget and narrow the deficit beats louder, the more likely it is that the Democrats shift their stance in attempt to regain approval in these areas.  Politics and the need to get re-elected will ultimately trump the strict adherence to Krugman orthodoxy.


While not technically a politician, Chairman Bernanke sounded the American Asuterity horn today when he introduced the idea of beginning to reduce the balance sheet of the Federal Reserve, which is certainly a slight change of tone, especially versus expectations of further quantitative easing.  In our view, this is likely a precursor to a more gradual political shift from the Democrats towards supporting broad based spending cuts and deficit reductions.


The short term implications of this change in policy would ultimately be a potential for slower economic growth in the short term and it is increasingly looking like the Democrats will need to dramatically shift sentiment in the coming months to retain political control.  A hail mary  pass of American Austerity policy could well be the catalyst.  Certainly though, President Obama needs to do something to break out of his range and help his party’s fortunes in the upcoming midterms.


Daryl G. Jones

Managing Director


Trading In A Range . . . President Obama's Approval Rating - 1


After last quarter, I was somewhat concerned about the company’s ability to continue to surprise to the upside.  And, although SBUX reported an in-line quarter from an EPS standpoint after five consecutive quarters of earnings surprises, the reported 9% growth in U.S. same-store sales relative to the street’s 6.0% comp estimate did not disappoint. 


This 9.0% growth implies a 200 bp sequential improve in 2-year average trends (following the 250 bps of sequential growth in the prior quarter), which was driven entirely by better traffic trends as average check growth held steady on a 2-year average basis.  Traffic was up 6.0% in the quarter in the U.S., which is impressive in this current economic environment.  We will hear from MCD on Friday, but I would venture to say that even with the McCafe Frappes (smoothies were not launched until July) that MCD will not come close to matching Starbucks’ sequential improvement.  International same-store sales growth was up 6.0%, in line with expectations, and flat with the prior quarter on a 2-year average basis. 


U.S. operating margin was up 350 bps to 16.5%, in line with the street’s expectation, whereas International margin came in better than expected, up 280 bps to 10.9% (vs. street’s 9.4% estimate).  As I said after the second quarter, the rate of improvement will slow, but margin growth should continue to materialize from here.  To that end, SBUX is now guiding to the high end of its previously-stated 15%-17% U.S. operating margin range and expects another 100 to 150 bps of growth in FY11.  In the International segment, the company guided to 100 to 200 bps of margin growth in FY11 on top of the 8% to 10% range maintained for this year.  To be clear, these FY11 margin growth goals follow on about 600 bps of YOY growth in the U.S. in FY10 at the high end of the guidance and 180 to 280 bps in the International segment.


Starbucks continues to surprise but my biggest concern here is that expectations have caught up with the company.  Although the company raised its FY10 EPS guidance to $1.22 to $1.23 (from $1.19 to $1.22), the street was already at $1.23 going into the earnings report.  For FY11, SBUX guided to 15% to 20% EPS growth to $1.36 to $1.41 and again, the street is already at the high end of the range at $1.40.   


Howard Penney

Managing Director



Early Look

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Relatively cheap but not that exciting. We see a small Q2 miss relative to consensus.



MPEL may report a small Q2 miss, driven by low hold at City Of Dreams.  We estimate that MPEL will report $567MM of revenue and $84MM of EBITDA, 1% above but 6% below the street consensus, respectively.  MPEL has been quite aggressive with junket commissions and giveaways which probably explains why we are higher on revs but lower on EBITDA, along with the low hold at CoD.  We’re about 2% below consensus EBITDA for the year but in-line with 2011 estimates.  MPEL is trading at 10.3x 2010 and 8.7x 2011.  Not exactly rich, but with all the supply coming online next door to them in 2011 & 2012, there remains a lot of uncertainty.


2Q2010 Detail:

We estimate that CoD will report $314MM of revenues and a disappointing $50MM of EBITDA as their good luck from last quarter did a 180 degree turn this quarter.

  • $11.8BN of Rolling Chip, with 15% coming from direct play, at an estimate hold of 2.3%, producing gross VIP win of $274MM
  • Mass win of $106MM and slot win of $29MM
  • Consensus is $70MM in EBITDA

Unlike its sister property, Altira had good luck for a change this quarter.  This will be the first quarter since 1Q08 where the property held over 3%.  As a result, we estimate that Altira will report $227MM of revenues and $40MM of EBITDA.

  • $9.45BN of RC volume which held roughly 3.2%, producing gross VIP win of $300MM
  • Mass win of $11MM
  • Consensus is $21 MM

Bear Market Macro: SP500 Levels, Refreshed...

Yesterday’s rally was based on a rumor that Bernanke was going to implement quantitative easing (or QE2). That rumor has rendered itself just that – a false rumor.


I’ll give Ben Bernanke some credit here. He didn’t fold like a tent to the “once in a lifetime” levered-long community’s “buying opportunity” and expand quantitative easing. As I wrote in my Early Look this morning, additional Japanese style QE would be devastating for both the US Dollar and the citizenry that holds it in whatever is left of their zero percent interest bearing savings accounts.


What was immediate term TRADE support this morning (1081) is now resistance again and there is no support for the SP500 down to 1059. Tomorrow morning’s US Existing home sales print is next. That will be as bearish as the Housing Headwinds in Q3 have become.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

In a Sorry State Indeed

Conclusion: Bearish data points regarding state and local government budgets spell incremental trouble for U.S. GDP growth in 2H10 and 2011.


The first sentence of the executive summary of the latest National Association of State Budget Officers (NASBO) Fiscal Survey of State Budgets reads: “Fiscal 2010 presented the most difficult challenge for States’ financial management since the Great Depression and fiscal 2011 is expected to present states with similar challenges.”


 The reason many (if not all) States around the country have such long faces is because they are having to do just the opposite with their budgets: shorten them. As mandated by federal law, every State except Vermont is required to balance its budget and as a result of declining sales, personal income, and corporate income tax collection (80% of States’ general fund revenue) States and municipalities have had to undertake very drastic measures to combat this – including laying off over 200,000 state and local government employees since June 2009.


In a Sorry State Indeed - State   Local Government Jobs Shed


The pain is likely to intensify, with States facing a $140 billion budget gap in fiscal 2011, according to the Center of Budget and Policy Priorities. Federal stimulus is expected to fall by $55 billion and recently, the Senate failed to pass a measure to provide States $16 billion for extra Medicaid funding. Furthermore, States have already spent 89% of their American Recovery and Reinvestment Act of 2009 funds, which accounted 30% of state spending in 2010.


Despite the erosion of Federal government spending tailwinds, Governor’s recommended budgets imply a 3.7% Y/Y increase in spending, which, by law, has to stem from their estimates of an 3.9% Y/Y increase in tax collections in 2011. Easy comps are what they are (tax collections declined  -2.3% Y/Y in fiscal 2010), but the fiscal 2011 budget implies a 2Y-trend increase of 0.8%.


An increase of any magnitude seems lofty based on current trends regarding state level personal income taxes (see: 9.5% unemployment and jobless claims hovering well above the 400,000/week needed to see improvement in employment). Perhaps that’s why fiscal 2010 revenue collection from sales, personal income taxes, and corporate income taxes are below original projections in 46 States. Expect that trend to continue in fiscal 2011 if we have any semblance of slowing growth and/or federal government austerity in 2H10.


Luckily for local governments, which have been feeling the negative effects of State budget balancing, they mark revenue collection to model, particularly regarding property taxes. As I pointed out in a note back in April, home appraisals for municipal property tax collection (roughly 35% of local government revenue) lag market prices by 2-3 years. As a result, property tax revenue has been positive throughout the housing downturn.


Well, that tailwind is becoming a headwind and a rather large one at that. Recent data shows that 1Q10 marks the first time property tax receipts declined on a Y/Y basis since 2Q03. Backtrack three years from 1Q10, and we see the first of an accelerating series of declines in housing prices. Again, this will become a major 3-5 year headwind for local government tax receipts – especially when factoring in our bearish outlook for housing prices in the next 12-18 months (see: Hedgeye’s Q3 Macro Theme of Housing Headwinds). Expect this to be a double tax on the consumer as falling home values are paired with rising property tax rates as municipalities across the country hike property taxes to try to hold flat income from this important source of revenue.


In a Sorry State Indeed - Property Tax Case Shiller


In summary, waning federal funding, slowing tax receipts, and declining home prices will put additional strain on State and local government budgets, which have an incremental negative effect on the U.S. economy at large. Job cuts at the state and municipality level are affecting all areas of the economy – from public transportation to private companies that work with state governments. Research from the Center on Budget and Policy Priorities suggests that a total of 900,000 private sector jobs could be lost as a result of State and local government cost shedding. All told, further job losses will make it even more difficult for State and local governments to meet revenue estimates, which will force them to cut even further.


As a result of this self-perpetuating cycle, U.S. GDP growth in 2H10 and 2011 may end up even lower than our current 1.7% forecast.


Stay tuned.


Darius Dale


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