The Macau Metro Monitor, August 18th, 2010



David Sylvester, senior vice president of Sands' Asia retailing operations, said retail outlets at MBS could generate annual S$1 billion sales when the complex is fully operational.  Sylvester said about 50 more shops will open at MBS in September; MBS will have more than 300 stores and restaurants.  To date, the company has signed contracts with future tenants for around 95% of the mall's capacity, said Sylvester.  Sands China has just finished renewing retail contracts at the Venetian with "everybody we wanted to renew," said Sylvester, adding sales in the resort's 1-million-square-foot mall have improved recently.


Sylvester also said he will begin marketing Sites 5 & 6 to mid-range retailers in a few weeks.  



At its general meeting, Genting Singapore stated that shareholders will not be receiving dividends this year because the company is bound by a bank loan agreement not to dispense dividends until it has fully repaid its loans.  Also the shareholders voted in favor of the UK divestment. 



The opening sale of One Oasis drove up the average transaction price of residential units in Coloane island by 1.3 times QoQ (191% YoY) to 59,509 patacas per square metre of usable area in 2Q.  According to DSEC, the average transaction price of residential units in the whole region of Macau rose 69.2% YoY. 

Winner's Tranquil

“To play well you must feel tranquil and at peace. I have never been troubled by nerves in golf because I felt I had nothing to lose and everything to gain.”

-Harry Vardon


Having tired of reading about the collapse of societies, currencies, and politicians, I have shifted gears in my mid-August reading schedule to something I am much more proud of pursuing in this good life than the fate of the Fiat Fools – winning.


What’s most interesting about the aforementioned quote isn’t that it comes from one of the world’s all-time great golfers, it’s that it comes from a man who had a nerve in his right hand that had been impaired by tuberculosis.


Despite the obvious disadvantage Harry Vardon had in a critical component of his game (putting), the man didn’t whine or complain. He didn’t point fingers either. He focused his mind and energy on what he could control.


In “The Grand Slam – Bobby Jones, America, and the Story of Golf”, Mark Frost wrote, “opponents felt as if Harry wasn’t even aware of their presence, and they weren’t wrong; experience had taught him that his opponent was the golf course, not the other guy.”


Vardon graced this good world between May 9th, 1870 and March 20th, 1937, winning the British Open Championship a record 6 times along the way. He was never the longest off the tee. He was never the flashiest player either. Harry Vardon was a Risk Manager.


On avoiding losses, Vardon once said that “more matches are lost through carelessness at the beginning than any other cause.” When it comes to modern day US monetary and fiscal policy doesn’t that ring in your ears?


Unfortunately it’s a lot easier to read that lesson than to execute on it. President Obama definitely has his work cut out for him on this score. After coming back from some much deserved peace and tranquil with his family on vacation, the President of the United States stepped right up into the tee-box of US mid-term election qualifiers delivering the following shot:


“We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”


OK. Shot made. Predictably, all replays of this opening shot have been recorded by partisan pundits on both sides of the gallery. But can’t Americans do better than this?


I’m certain that we can. Both Bush and Obama signed off on empowering a losing economic ideology that’s taken this country and its balance sheet to its knees. It has been all about fear-mongering and now it’s playing on America’s nerves. Confidence is abysmal and spending is slowing. America’s winners are deeply troubled about a colossal “mess” in American politics – not about “the other guy.”


With all due respect Mr. President, it’s your ball now and you need to play it as it lies. Planning to have our central government’s economic planners come up with more plans to change the rules won’t work.


The solution here is to find a message that doesn’t focus on insulating America’s losers. We have to find a way to get back to winning. That starts with confident messaging. Confidence breeds success. Success builds confidence.


My immediate term supports and resistance lines for the SP500 are now 1062 and 1099 respectively. For now, we remain most confident in our short positions. We shorted the SP500 (SPY) at 1098 yesterday and we remain short the US Dollar (UUP).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Winner's Tranquil - dd1

CHARTS: 2008 Crash, 2010 Set-up

These charts were extracted from a larger MACRO SELECT post (available to RISK MANAGER SUBSCRIBERS), dubbed "CHINESE DEMAND CONTINUES TO SLOW . . . COULD THE CORRECTION TURN INTO A CRASH?"  from August 11, 2010.



CHARTS: 2008 Crash, 2010 Set-up - chart1



CHARTS: 2008 Crash, 2010 Set-up - chart2

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%





CHINA FOREIGN DIRECT INVESTMENT YOY - Screen shot 2010 08 17 at 6.53.35 PM


We think current RevPAR dollar levels are unsustainable. While YoY growth rates may stay strong that won’t tell the whole story.



RevPAR is at an unsustainable dollar level, in our opinion.  Lodging should be in recovery mode given the depth of the recession last year.  However, the macro variables do not support a continuation of these current high levels.  So why is RevPAR so strong? 


We believe in the pent up theory of recent lodging demand, for lack of a better phrase.  Essentially, business transient travel was restricted for a long enough period that business suffered and people had to play catch up.  Pent up demand was apparent in April through July.  August will look stronger but in absolute dollar terms, seasonally adjusted, will mark a slowdown unless growth exceeds 13%.  See our 08/10/10 post, “DOLLAR REVPAR MORE RELEVANT THAN %” to see why.


The recovery bulls are quick to point out the strong and lasting RevPAR growth during the last recovery.  Indeed, from Q1 2004 to Q4 2007, quarterly RevPAR ranged from 5-11% and an average of 8%.  Good stuff.  Even the current high valuations would grow into those numbers.  The problem is that the macro environment isn’t supportive this time.  During that nearly 4 year mega recovery, quarterly nominal GDP growth YoY was 5-7% and averaged 6%.  Q2 2010 YoY nominal GDP growth was only 4.0%.  Looking ahead, 2H consensus expectations is for 3.3% GDP growth and only 2.8% for 2011.  Hedgeye is projecting even less, 1.7% next year and our Macro team has been much better than consensus.


What else is missing this time versus last time?  Housing for one.  The peak of the housing bubble helped propel GDP and lodging demand.  Unemployment – which we’ve proved was a more important driver of lodging demand over the last few years – does not look like it is coming down anytime soon, certainly not to the 5% average from 2004-2007.


Evidence of Pent Up Demand

  • Q1/04 to Q4/07 RevPAR range was 5-11% (ave 8%), GDP range was 5-7% (ave 6%) – current recovery GDP growth is significantly lower yet Q2 RevPAR growth was 8.3%. 
  • The spread between occupied rooms and employment has never been higher
  • Occupied room nights are only 7.5% below the prior peak
  • August RevPAR is up 9%YoY through the first two weeks – a sequential increase in growth but an actual deceleration of seasonally adjusted dollar RevPAR
  • Conversations with private owners

Here are some charts to back up those assertions:








So if we are right about pent up demand when will it show up in the numbers?  Certainly not August.  The sell side cheerleaders will no doubt roll out the pompoms and dance moves to celebrate “accelerating growth”.  In terms of estimates, 2H guidance and consensus look reasonable.  However, whisper expectations are significantly higher.  Moreover, 2011 RevPAR estimates actually look aggressive.  Street consensus is 6.0-6.5%.  Assuming April-July represented a period of pent up demand and the inevitable RevPAR correlation to the typical macro drivers returns, 2.5-4.0% might be the better range.  Given the valuations, we don’t want to be around when numbers start coming down.

The Chinese Consumer: Capital Chases Yield

Conclusion: We like countries that have proactively prepared themselves to grow organically in light of a slowdown in global trade. China is one of those economies.


Position: Long the Chinese yuan via the etf CYB. Short the U.S. dollar via the etf UUP. Short 1-3 year U.S. Treasuries via the etf SHY.


As we pointed out a few months back, China’s organic growth story will matter more to investors when consensus finally comprehends the downside risk associated with the U.S.’s 12-18 month forward economic outlook – which we are starting to see signs of, but not nearly in the area code of bearish enough. As easy money brought on by REFLATION, accelerating trade, and industrial production slows globally, organic growth stories will move to the forefront of investment opportunities. Those economies that have proactively prepared themselves to grow organically will see their equity markets and currencies strengthen in 2H10 and 2011, and beyond. China (along with Singapore, Indonesia, Thailand, and Brazil) is one of our favorite economies in which to play this theme.


For the 12th consecutive month in July, Foreign Direct Investment (FDI) in China increased on a Y/Y basis. Though down sequentially from June’s near peak inflows, the upward trend continues – on a YTD basis, FDI accelerated in the seven months through July, up 20.7% vs. +19.6% from January through June. China, the world’s second largest recipient of foreign investment behind the U.S. ($95 billion vs. $130 billion in 2009), continues to take share amid the current global search for yield. What is important here is not just the nominal uptrend, but rather the tonal shift from investors. For years, foreign companies poured capital into China to take advantage of cheap labor to sell cheap products to American and Western European consumers. Now with both of those markets poised to slow for the foreseeable future, investor attention has turned towards China as a place where yield-seeking can and likely will be met with ample growth opportunities. Globally, companies ranging from Volkswagen AG to Tesco to Merck & Co. are increasing investments in China to take advantage of a growing Chinese consumer base.


The Chinese Consumer: Capital Chases Yield - 1


This year, China has increased minimum wages in as many as 21 provinces and municipalities as part of a longer term trend to wean the country off of exports and real estate investment as the main drivers of growth. To be clear, however, the path towards rebalancing China’s GDP composition towards a more sustainable model is a long road that will not be trekked as quickly as things will unravel in the U.S. and W. Europe – there will be bumps along the way as a result of slowing consumer demand from those markets. With that said, however, China has made some serious headway and those gains are set to accelerate given the administration’s resolve to make its economy more defensive.


Currently, roughly 40% of China’s labor market is agricultural, which implies 40% of workers are living on subsistence incomes that do not support a meaningful increase in consumption in the near term. Moreover, the fall in agricultural employment has been modest according to the OECD, with a trend decline of less than 1.5% per year. This suggests it would take another decade at the current pace for China’s share of agricultural labor to fall to 25% – the level at which Japan’s wages of those that move from rural to urban settings began to rise substantially (OECD). As we say at Hedgeye, however, everything in macro happens on the margin. And, on the margin, the Chinese consumer’s purchasing power is growing. Moreover, further marginal shifts in China’s employment composition will continue to supply upward pressure on the price of agricultural commodities (corn, sugar, soybeans, etc.), as China produces less produce for itself.


As previously noted, the improvement is not likely to come without a bump in the road here and there. Looking back over the last 4-5 years, we’ve seen that employment growth has been largest in the coastal regions – where factories and exporters dominate the labor market. That region is also home to the greatest percentage of migrant workers, as the restrictive hukou rules are less enforced there vs. larger cities like Shanghai and Beijing. As expected, a negative shift in the external demand curve greatly disadvantages this region over any other, as evidenced in the relatively large slowdown in employment from 3Q08 to 1Q09 (see chart below). To combat future slow-downs in external demand and the negative implications that would have on migrant workers, the government is expanding its program in which unemployed migrant workers, college graduates, and laid-off workers receive subsidies to undergo vocational training. Net-net, although a slowdown in the U.S. and Western Europe economies is negative for Chinese employment in the intermediate term, China is taking steps to reduce this risk over the longer term.


The Chinese Consumer: Capital Chases Yield - 2


What would likely allow China to expedite this risk management and beef up its consumer base more quickly is any incremental increase in policy shifts towards urbanization, which is limited by the restrictive hukou system. Further loosening of these rules will allow China to urbanize even quicker than the rapid pace at which it is currently. From 2000-2008, China’s urbanization increased to 46% from 32%. Contrast that with a similar increase in the U.S., which happended over a 25-year period from 1 (OECD). The 60% mark was not eclipsed in the U.S. for another 35 years, whereas in China, that level could be reached in less than a decade at the current rate. All told, policies directed at improving urbanization in conjunction with changing the employment composition towards a more urban profile will allow wages in China to accelerate meaningfully over the long term. We will continue to monitor the Chinese government’s sentiment towards these policies as indicators of acceleration in the growth of the Chinese consumer.


The Chinese Consumer: Capital Chases Yield - 3


Interestingly, policy shifts bring me to our next topic – investment recommendations. In conjunction with today’s release of China’s foreign direct investment data, the People’s Bank of China announced that it will let overseas financial institutions invest their yuan holdings in the Chinese interbank market bond market. The pilot program will start with foreign central banks, clearing banks for cross-border settlement in Hong Kong and Macau, and other international lenders involved in trade settlement. By implementing this program, China sets out to accomplish two things: 1) to accelerate capital flows from abroad by opening up its domestic securities market and 2) to make its currency more attractive to foreign central banks by broadening its use globally. Traditionally, trade has been the main way for foreign holders of yuan to return money to China. By opening up its $2.1 trillion interbank market, China is now creating new avenues for foreign investors to invest in China.


Make no mistake, in ten years we’ll likely look back at today’s policy announcement as one major catalyst for the yuan gaining major share as a percentage of global FX reserves. Furthermore, we continue to have conviction that the yuan’s gain will be at the U.S. dollar’s expense and we have expressed this conviction in our Virtual Portfolio via long CYB and short UUP. Acknowledging the deep simplicity that is the chaos theory model by which we research, it’s really not a shock that this policy announcement came just one day after the world learns that China reduced its FX exposure to dollar denominated U.S. Treasuries by the most ever.


Darius Dale


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