Watered Down Printers

“While it is true that you can fight fire with fire, it has never been suggested that you can fight water with water.”

-Richard Duncan


In a newsy weekend headline that was reminiscent of Paul Krugman’s infamous “PRINT LOTS OF MONEY” advice to the Bank of Japan in 1997, Barron’s Jonathan Laing told Americans that it’s “TIME TO PRINT, PRINT, PRINT.” Scary.


While it’s no longer shocking to see perma-bulls beg Bernanke to print moneys and debauch the long term value of America’s currency, it is becoming quite sad to watch. ‘Government Is Good’ monetarists have apparently learned nothing from history’s lessons.


On the topic of “quantitative easing”, rather than take the manic media’s word for it as they perpetuate a US stock market plea to perpetuate our traverse to economic perdition, I highly recommend reading Richard Duncan’s “The Dollar Crisis.” It was first published in 2003 and while it would be much more powerful if it was re-published alongside Reinhart & Rogoff’s “This Time Is Different” with today’s data, it’s still a critical analysis.


To save you some summer reading time, you can skip right to chapter 11. It’s titled Monetarism is Drowning and introduces some clever, non-consensus, thoughts like “Irrational Monetarism” that I think are well worth your time to consider. We are not going to solve America’s problems by printing more money and daring Americans to lever themselves up again to chase some yield. It’s time to get serious here.


The US Dollar has seen some serious destruction in the last 9 weeks. On the heels of another nasty unemployment report on Friday, the US Dollar closed down for the 9th consecutive week, taking its cumulative decline to -9.2% since the first week of June (we remain short the Dollar via the UUP).


At the same time, short term US Treasury yields closed out the week at their lowest weekly level EVER (0.51% UST 2-year yields) – and ever, as our Hedgeyes in New Haven like to say, is a very long time.


Don’t worry though, the CNBC and Barron’s stock market cheerleaders of a Destroyed Decade are still peddling you stories from their Watered Down Printers  into whatever media outlet they have left to drive an advertising dollar. In their perverse world, Dollar DOWN + Treasury Yields DOWN = a great case for stock market “valuation.” It’s a good thing we didn’t pay attention to them when this was happening in 2008.


Obviously no country has ever devalued its way to prosperity, and I don’t think Groupthink Inc. in Washington is teeing America up to set a new precedent time around either. I don’t believe in using the US stock market as a single-factor measurement tool for American progress. In an Early Look from a few weeks ago titled “Growth and Progress”, I introduced the following multi-factor scorecard for a sustainable American recovery:

  1. Strong Employment
  2. Strong Currency
  3. Strong Rates of Return

This isn’t political commentary. This is a pragmatic plan. If you’re a professional politicians who has been forwarded this email and you don’t like being called names or being called out – too bad. Quit whining, pointing fingers, and fear mongering and fix these 3 things instead of printing moneys. Then maybe we won’t continue to hit record all-time monthly highs in the number of Americans in line for food stamps (latest reading = 40.8 MILLION)…


The US stock market futures are up this morning, and they should be. After Friday’s unemployment report, US stocks rallied from their intraday lows to give the bulls hope. Hope might work for an immediate term TRADE, but for the intermediate term TREND, ignoring both the US currency and bond markets is for a buy-and-hope crowd far braver than we.


The SP500 has immediate term TRADE upside to 1135 and our Bear Market Macro line of resistance remains up at 1144. In the immediate term, the Watered Down Printers of money better hope and pray that “print, print, print” chant keeps the SP500 above 1114 support. Praying at least has a better track record than hoping water can fight water.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Watered Down Printers - DDEL


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

Early Look

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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

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