Last week, 7 of the 8 risk measures registered positive readings on a week-over-week basis and one was negative. This brings to three the string of overall positive sequential weeks.


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies)

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX


1. US Financials CDS Monitor – Swaps were mostly positive last week.  Swaps for 24 of the 29 CDS reference entities tightened, while 5 widened, with an average change of -4.3%.   

Conclusion: Positive.


Tightened the most vs last week: LNC, MET, PRU

Widened the most vs last week: AXP, PMI, RDN

Tightened the most vs last month: MBI, MET, AGO

Widened the most vs last month: TRV, ALL, AON




2. European CDS Monitor – In Europe, swaps for 29 of the 39 reference entities tightened and 10 widened, with an average tightening of 2.2%.    

Conclusion: Positive.


Tightened the most vs last week: Erste Group, Natixis, Svenska Handelsbanken

Widened the most vs last week:  Hannover Rueckversichrungs, Intesa Saopaolo, Aviva

Tightened the most vs last month: Banco Espirito Santo, Alpha Bank, EFG Eurobank Ergasias

Widened the most/tightened the least vs last month: Intesa Saopaolo, Hannover Rueckversichrungs, Caja de Ahorros del Mediterraneo




3. High Yield (YTM) Monitor – High Yield rates fell 14 bps last week. Rates closed the week at 8.30% down from 8.44% the week prior.

 Conclusion: Positive.




4. Leveraged Loan Index Monitor – The leveraged loan index rose 4 points last week, closing at 1493 versus 1489 the week prior. This improvement was a deceleration from the steady rise in July.  

Conclusion: Positive.




5. TED Spread Monitor – Last week the TED spread fell 4 bps, closing at 27 bps versus 31 bps the prior week. Conclusion: Positive.




6. Journal of Commerce Commodity Price Index – Last week the index rose 5.49 points, closing at 18.11 versus the prior week’s close at 12.62.   

Conclusion: Positive.




7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 15 bps, ending the week at 1015 bps versus 1030 bps the prior week.

Conclusion: Positive.




8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads rose very slightly last week, closing at 206 versus 204 the prior week.   

Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur





July total revenues came in at $2.04BN, increasing 70% YoY, while total table revenues increased 73%.  Mass revenues increased 39% YoY while VIP revenues grew 87% YoY, compared to only 55% growth in Junket RC volumes.  Similar to June, easy hold comparison contributed to some of the big growth we saw this month.  Adjusting for direct play levels, we estimate that VIP hold was 3.18% in July vs. 2.64% last year.  If we normalize for hold, VIP table revenues would have been "only" up 55% YoY this month and total market growth would have been 49%.  August will have a tougher comp, as hold for August 2009 was normal at 2.8% and total revenues increased 18% last year.



YoY Table Revenue Observations


LVS table revenues increased 51% with growth coming from a 68% increase in VIP revenues and only a 27% increase in Mass revenues.

  • Sands grew 1%
    • VIP revenues declined 7% despite a 22% increase in Junket RC volume.  Assuming 12% direct play volume on VIP, we estimate that hold for July was only 2.4%.
    • 14% increase in Mass revenues
  • Venetian was up 39%
    • VIP revenues increased 44%
    • Mass revenues increased 32%
    • Junket RC increased 18% YoY.  Assuming 22% direct VIP play volume, we estimate that hold for July was 2.7%.  However, last July, assuming 20% direct play, the hold percentage was even worse at 2.55%.
  • Four Seasons growth was almost infinite this quarter, since they experienced negative hold in July 2009.  Volume was very low back then so a big loss to one player was all it took for that to happen.
    • Mass revenues grew 67%
    • Junket VIP RC increased 323% to $921MM
    • If we assume over 50% VIP turnover came from direct play, hold was 3.27%.

Wynn Macau/Encore table revenues were up 74%, driven by a 82% increase in VIP revenues and a 44% increase in Mass revenues

  • Junket RC volume increased 57% compared to a market increase of 55%
  • This past quarter, direct play volumes at Wynn were roughly 11% of total VIP.  Assuming July had a small uptick to 12% , hold was a high 3.3%.  Last year's hold comp was also easy - 2.7% assuming 13% direct VIP play.  While the Encore addition doesn't appear to be fueling materially above market growth, we can't really complain about +80% YoY growth.

MPEL table revenues grew 42% with the growth fueled by 91% growth in Mass and 36% growth in VIP

  • Altira was up 8%, due to a 8% increase in VIP revenues and a 3% increase in Mass.
    • VIP RC was down 5% YoY.  Despite Altira holding low in July (2.5%), last year's hold was even worse at 2.2%.
  • CoD table revenue increased 63% YoY, driven by 118% growth in Mass and 54% growth in VIP revenues
    • Mass revenues were $37MM
    • Junket VIP RC increased 65%
    • CoD played lucky in July, but they also played lucky last year.  If we assume 18% direct play at CoD, hold was 3.5% in July vs. an estimated hold of 3.7% last year.

SJM table revenues grew 138%

  • Mass was up 34% and VIP was up a massive 250%
  • Junket RC volumes increased 97%
  • SJM's hold was roughly 3.25%, compared to a very low hold 1.84% in July 2009.  August will be another easy hold comparison month since last August's hold rate was only 2.1%.

Galaxy table revenue was up 107%, driven by a 114% increase in VIP win and a 58% increase in Mass

  • Starworld's table revenue was up 120%, driven by 126% growth in VIP revenues and 58% growth in Mass
  • The Group RC volumes were up 76% while Starworld RC volumes increased 95%.  Starworld's July hold was normal -roughly 2.85% vs. 2.45% in July 2009.  Easy hold comparisons through (~2.5%) September should continue to allow Starworld to print outsized YoY growth.

MGM was the only concessionaire to report a decline in YoY table revenue, down 5%.

  • Mass revenue growth was 40%, while VIP fell 14%
  • VIP RC grew 10%
  • The drop in revenues was partly driven by a difficult hold comparison - 3.3% last year - and an estimated low hold in July of 2.5%.  However, RC growth was definitely disappointing as MGM looks to have topped out in the 2.8-3.3BN range for RC monthly volumes since its pickup in May 2009.  Hopefully for them, Mr. Kwong can bring in some new business and return the property to growth.


Table Market Share


LVS table share dropped 280bps sequentially to 18.4% in a reversal of last month's gains - mostly driven by bad luck on the VIP business and share losses across all 3 properties

  • LVS's share of VIP revenues decreased 3.9% to 15.8% in July, while LVS's share of Junket RC only dropped 70 bps to 13.3%. This was LVS's lowest share month since May 2009.
  • Mass share increased by 120 bps to 26.7%
  • Sands market share continued to make new lows at 5%, down 120bps sequentially.  July's sequential share loss was driven by 170bps drop in VIP share to 3.8%
  • Venetian lost 130bps to 9.7% sequentially
    • Venetian's share loss was entirely driven by a 160bps decrease in VIP, while Mass share gained 50bps.
  • FS share lost 40bps of share to 3.6% -  from an all-time high in June

WYNN's table share decreased to 14.6% from the annual high of 17.2% in June, which was still above the TTM average pre-Encore opening market share of 13.8%

  • Mass market increased 130bps to 11%
  • VIP revenue share decreased 4.1% to 15.8% sequentially
  • Wynn's VIP share fell to 4th place behind SJM, MPEL and LVS. Although Steve would say that their share of EBITDA and Net Income on their lower share was no doubt unrivaled.
  • Wynn Junket RC share decreased 60bps to 14.4

Crown's market share increased by 150bps to 14.6% in July

  • CoD's share increased 310bps to 10.4% due to a 4.2% share gain VIP, which was partly offset by 30bps loss in  Mass share
  • Altira's share decreased to 1.5% from 4.2% in May

SJM's share increased by 240 bps to 32.8%

  • SJM's share gain was entirely driven by a 400bps of share in VIP to 30.3%. August should be another good market share month for SJM given the easy August 09 hold comparison
  • Mass share dropped 100bps to 40.7% sequentially

Galaxy's share rose 2.1% to 12.8%, driven by healthy hold compared to low hold in June

  • Starworld's market share increased 120bps sequentially to 9.8%, due to a 130bps increase in VIP share and a gain of 20bps in Mass.
  • Junket RC share increased 110bps to 14% for Starworld. Starworld should have favorable market share gains through September, given easy 2009 hold comparisons.

MGM's share decreased by 60bps to 6.9%.

  • MGM's share loss can be attributed to a 80bps drop in Mass and a 50bps drop in VIP share
  • RC share was flat sequentially at 7.5%


July Slot Revenue Observations

July was a good month for slots - with revenues growing 28% YoY- reaching an all-time high of $90MM

  • Galaxy experienced the largest growth of 97% YoY - granted the base is immaterial at $2MM
  • MGM grew 48% to $11MM
  • Wynn's slot revenue increased by 47% to $21MM 
  • MPEL's grew 29% to $16MM
  • LVS's slot revenues grew 16% to $27MM
  • and lastly, SJM's slot revenues grew 15% to $14MM







The Week Ahead

The Economic Data calendar for the week of the 9th of August through the 13th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cc1

The Week Ahead - cc2

Bear Market Macro: SP500 Levels, Refreshed...

On our Macro Morning Call a client asked "so what's your catalyst on the downside?”


My answer: price - humans will chase it when it cracks.


This is the reality of modern day risk management. Price momentum dominates decision making at the margin. In our risk management model, the immediate term TRADE zone of 1115-1118 that we have been focusing on this week can quickly become resistance again (as quickly as it became support). There is no immediate term support below 1115 to 1095.


What’s interesting about 1115 is that it’s also the line for the 200-day Moving Monkeys. This rarely happens, but our quantitatively driven line being the same line as the 200-day all of a sudden makes for an even scarier picture to the downside. However bad the back-testing is on using the 200-day as your risk management line in a bear market, the reality is that a lot of people use it.


In the meantime, we’ll keep using what we use – our own proprietary research process – and we’ll remain as bearish as the US employment data (jobless claims of 479,000 yesterday and this morning’s unemployment report of 9.5%) continues to look.


Have a great weekend,



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - 1

China's Stress Test(s): Risks to the Global Economy

Conclusion: The Chinese economy has three major risks to it: property prices, the U.S. consumer, and U.S. Treasury holdings – all of which have major implications for the global economy. These TAIL risks should be kept front and center when contemplating the outlook for both the dollar and global growth.


As risk managers, it is our job first and foremost to protect capital – which is exactly what we’ve been doing when it comes to China. Despite our bullish long term bias on China’s economic growth, we are not invested. Sometimes the answer is to do nothing and wait. Everything has a time and a price, and with China backing off of its TREND line of 2,690 at the tail end of its recent rally, policy risks within the Chinese economy continue to weigh on investor sentiment. In our analysis below, however, we look beyond the equity market’s favorite question of, “when will they ease tightening measures?” We highlight some intermediate and long term risks to the Chinese economy that you should keep front and center when thinking about a) investing in China and b) future global growth.


Risk One: China’s “Hot” Property Market


The recent news about China’s latest stress test highlights risks that are not news at all (the Shanghai Composite is down 20% YTD – the 2nd worst performance of any major equity market globally). As we’ve been saying since January, China’s property market is an inflationary by-product of last year’s easy-money stimulus. Moreover, as a result of Chinese tightening policies, we have been expecting further marginal deflation in real estate prices from here – though perhaps not the 50-60% extent China’s banking regulator has asked lenders in the “hottest” cities to stress test for. Results from China’s previous stress tests show the ratio of non-performing real-estate loans within the Chinese banking system would rise by 220bps from the current 1.3% if housing prices dropped 30% and interest rates rose by 108bps. In sharp contrast to “stress” tests done by European and American banks, this latest risk management move by China’s may serve to scare away incremental yield-seeking capital, though few actually believe that prices could exhibit a 60% decline from here.


China's Stress Test(s): Risks to the Global Economy - 1 


Like we’ve pointed out in a previous note titled Chinese Loans… A Crisis of Rumors (7/30), China’s $1.4 trillion in credit expansion last year and an additional target of $1.1 trillion in 2010 obviously brings about a great deal of credit risk to the Chinese economy. As a result, China’s banking industry has been replenishing capital in the form of $54 billion in total IPO’s and bond offerings this year. While we certainly need more data to accurately access the likelihood of a massive meltdown in China’s property market, we can rely on historical datasets provided by Reinhart and Rogoff’s 2008 paper titled: Banking Crises: An Equal Opportunity Measure to make a reasonable assessment of the risk. They conclude that banking crises are more common in countries that: a) have a sustained surge in capital inflows; b) rapid credit expansion in a shortened duration; and c) a boom in real housing prices, whereby the banking crisis occurs just after the bursting of the bubble. By all accounts, China meets all three conditions, though we must be careful to interpret the data property. The probability of a banking crisis is greater when these conditions are met, but that does not necessarily imply a banking crises would ensue. The tables below show both the probability of banking crises related to capital inflows, and historical housing bubbles which led to banking crises.


China's Stress Test(s): Risks to the Global Economy - 2 


The takeaway here is that the risk of a banking crisis is should not be written off without due diligence. We contend, however, that China, more than any other country, has the ability to grow into the right level of demand to meet its bubbly housing market supply. While equilibrium is not likely to be found without the combination of time and further price declines, we do think equilibrium can be found point where real estate depreciation does not facilitate a major banking crisis. The success of that theory, however, hinges largely upon the China’s next major risk.


Risk Two: US Demand Rolling Over


China growth model is very export oriented, which makes its economy particularly vulnerable to external shifts in its demand curve, as manufacturing products for Western consumers accounts for a great deal of Chinese employment. If we are right in our call that the U.S. consumer (and subsequently U.S. growth) will continue to slow, the Chinese economy will slow incrementally as a result. The extent to which it slows will largely depend on its ability to shift its economy towards domestic consumption as a larger percentage of GDP.


China's Stress Test(s): Risks to the Global Economy - 3 


We’ve been vocal recently highlighting wage growth and the prospects of a stronger yuan as bullish for the Chinese consumer. What cannot be overlooked, however, is that China’s transformation will not happen overnight. The process towards rebalancing its economy will be a long, arduous one filled with marginal improvements over time and bumps and bruises along the way. Without going into too much detail, China likely needs to expand its service sector to absorb any potential loss of labor from weakening Western demand. That will be hard to do without public investment in social services including health care, education, and pensions – though it must be done in a way that does not limit investment and consumption in the form of higher taxes. Moreover, based on current population demographics and its one-child policy, China’s dependency ratio is likely to  climb over the next several decades – further stimulating the need for public spending on social services to lower China’s world-leading savings rate and stimulate household consumption.


China's Stress Test(s): Risks to the Global Economy - 4


Regarding China’s high savings rate (+50% of GDP), recent estimates from Michael Pettis of Peking University suggest that because of low interest rates on household deposits (60% of total), Chinese savers may actually be receiving a negative real return (0.65% est.). As a result, Chinese savers are forced to save more to make up from a lack of interest income. That, coupled with a limited range of investment opportunities, further exacerbates China’s shift to consumption. When it’s all said and done, China’s shift to a consumption-driven economy will not happen nearly as quickly as some investors anticipate.


All told, the main global risks to China rebalancing are twofold: 1) higher labor costs among exporters will likely create imported inflation in the economies of Chinese export markets and; 2) China no longer has the current account surplus to finance U.S. deficit spending by way of U.S. Treasury purchases. That leads us to our final major risk to the Chinese economy – its U.S. Treasury holdings.


Risk Three: Concentrated Foreign Exchange Risk


As of the most recent data, China is sitting on $867 billion worth of dollar-denominated U.S. Treasury debt, which is likely to continue to depreciate over time based on the current trajectory of debt supply and dollar demand. In a recent study done by the Congressional Budget Office, U.S. federal debt held by the public as a % of GDP is likely to eclipse 185% in just 25 years under scenarios that we consider aggressive based on assumptions of above-trend tax receipts and below-trend expenditures – which certainly hasn’t been the case of late (see Daryl Jones’ note from 7/13: The Deficit Still Looks Ugly, Normalize for TARP and It Looks Uglier). The results of the mid-term elections may prove to be a positive catalyst on the margin for reigning in the deficit, but a slowing U.S. economy may ultimately prove to trump any form of American Austerity.


On Tuesday, we put out an extensive presentation regarding the future of U.S. sovereign debt (email us if you need the replay), with the key takeaways being: 1) current demographic trends will likely beget further deficit spending; 2) a low U.S. savings rate will necessitate that an increasing amount of foreign buyers will be required to fund new debt issuance; and 3) at current and conservatively-projected near-term debt levels (+90% of GDP), U.S. economic growth will be below-trend for years to come – likely furthering the “need” for additional government spending and investment. All told, the U.S. is likely to issue a great deal more of U.S. Treasury supply in the coming decades and buyers of that supply will be increasingly foreign entities, which increasingly makes the U.S. vulnerable to external shifts in demand for U.S. sovereign debt – which is currently near all-time highs. If we’ve learned anything from Greece’s sovereign debt woes, it is that, ultimately, the market can and will re-price sovereign debt and reset the cost of government borrowing.


China's Stress Test(s): Risks to the Global Economy - 5 


It is important to note that we aren’t suggesting that U.S. Treasuries are following in the footsteps of Greek sovereign bonds. What is likely to happen based on historical precedent set by Japan is that Treasury yields stay low as a result of prolonged near-zero interest rates. From a central bank action perspective, there hasn’t been a threat to Japanese Government Bonds in decades and the United States has already started on that path. What matters to China, however, is converting those debentures into cash upon maturity. The U.S. Dollar Index continues to make as series of lower-highs and lower-lows from a intermediate and long term perspective, meaning that as time elapses, China is likely to receive less and less purchasing power from converting U.S. Treasury debt into actual currency. The U.S. dollar is still the dominant currency as a percentage of world currency reserves, but, as we say, everything that matters in Macro happens on the margin. In the last ten years alone, the dollar has declined over one thousand basis points as a percentage of world FX reserves, falling from 71.9% in 1999 to 61.5% in 2009, according to the IMF. The outlook for the U.S.’s economic growth and debt build-up over the next 20-30 years suggests the dollar will not likely regain any of its lost value any time soon.


China's Stress Test(s): Risks to the Global Economy - 6


China's Stress Test(s): Risks to the Global Economy - 7 


All told, China has become increasingly aware of this risk and has decreased its U.S. Treasury holdings by nearly 8% since its July ’09 peak holdings of $940 billion. De-pegging the yuan to the dollar will help China reduce the need for additional purchases, but any rapid selling to diversify its FX portfolio will be more harmful than good as the market will react negatively to large selling, further compounding China’s problem. Unfortunately for some, China can’t sell them fast enough: according to Yu Yongding, a former Chinese Central Bank adviser, “U.S. Treasuries are not safe from an intermediate-to-long-term perspective”. He continues by saying, “Only God knows how much value that China has stored in the U.S. government securities.” Unfortunately for China, by the time it  finally does need to drain its excessive FX reserves, the whole world will have found out the true value of those securities, which is likely to be a great deal less than anticipated upon purchase.


In summary, the Chinese economy has three major risks to it: property prices, the U.S. consumer, and U.S. Treasury holdings – all of which have major implications for the global economy. These TAIL risks should be kept front and center when contemplating the outlook for both the dollar and global growth.


Darius Dale



China's Stress Test(s): Risks to the Global Economy - 8

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.