The Macau Metro Monitor, September 14th 2010



IM believes that the positive economic data coming out China and the bet that the government will not put additional curbs on property prices, can be both good and bad for the gaming growth in Macau. With markets recovering and property prices growing, Chinese investors may be more likely to keep money onshore instead of giving it to the junkets to earn a return.  Therefore, will the Mass market and direct VIP sub sectors should do well with a strong property and stock market, the junkets may see a pull back in available capital.




On September 13, 2010, Viva Macau was declared officially bankrupt following a creditor's meeting where it was decided not to put forward any rescue plan to try to save the company.  Viva Macau's debt is estimated to be in excess of MOP$1BN.




The Macau SAR government announced that beginning January 2011, compensation for workers on long term disability will be adjusted to a range of MOP$375,000 to MOP$1,250,000.  Accidents that result in a fatality will result in compensation to the workers family of MOP$300K-$1MM.




Visitor arrivals in package tours to Macau surged by 75.6% year-on-year to 458,968 in July 2010.  Visitors from Mainland China (323,849); Taiwan, China (24,519); Japan (24,081) and the Republic of Korea (12,370) rose substantially by 98.4%, 23.3%, 64.7% and 260.1% respectively, while those from Hong Kong (24,165) decreased by 7.6%. In the first seven months of 2010, visitor arrivals in package tours increased by 39.0% year-on-year to 3,523,907.


At the end of July, the total number hotel rooms rose by 1,564 (+8.6%) year-on-year to 19,759 rooms.  A total of 654,999 visitors checked into hotel rooms in July, up by 24.6% year-on-year, with the majority coming from Mainland China (51.9% of total) and Hong Kong (21.3%). The average occupancy rate was 79.9%, up significantly by 12.2% year-on-year.  In the first seven months of 2010, hotel patrons accounted for 60.5% of the total number of tourists, down from 61.4% in the same period of 2009.


TODAY’S S&P 500 SET-UP - September 14, 2010

As we look at today’s set up for the S&P 500, the range is 26 points or -1.33% (1,107) downside and 0.99% (1,133) upside.  Equity futures are trading below fair value in what has been a quiet pre-market session with August Retail Sales being today’s primary market focal point.

  • AllianceBernstein (AB) said preliminary AUM fell 3.1% to $467b in August
  • Eli Lilly (LLY) said results from a Phase 2 trial showed patients with an acute coronary syndrome demonstrated “a statistically significant greater reduction” in platelet aggregation after taking Effient than anti-clotting drug Plavix
  • Ironwood Pharmaceuticals (IRWD) said a Phase 3 trial Linaclotide that showed the drug has the potential to reduce stomach pain or discomfort
  • Power Integrations (POWI) cuts its 3Q sales forecast
  • THQ (THQI) cut its forecast, saying it expects an adjusted loss for the year of at least $0.10
  • UIL Holdings (UIL) will sell 17.7m shares
  • Wabash National (WNC) said stockholder Trailer Investments plans to sell 9.35m shares


  • One day: Dow +0.78%, S&P +1.11%, Nasdaq +1.93%, Russell +2.48%
  • Month-to-date: Dow +5.29%, S&P +6.91%, Nasdaq +8.14%, Russell +8.31%
  • Quarter-to-date: Dow +7.88%, S&P +8.84%, Nasdaq +8.39%, Russell +6.99%
  • Year-to-date: Dow +1.12%, S&P +0.6%, Nasdaq +0.75%, Russell +4.27%


  • ADVANCE/DECLINE LINE: 1586 (+762)
  • VOLUME: NYSE - 935.94 (+23.66%)  
  • SECTOR PERFORMANCE: Every sector was positive lead by XLF
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Micron +8.29%, Xerox +7.68% and Zions +7.41%/Laboratory -4.70%, Visa -3.83% and Quanta -2.74%
  • VIX: 21.21 -3.55% - YTD PERFORMANCE: (-2.17%)             
  • SPX PUT/CALL RATIO: 0.92 from 1.95  


  • TED SPREAD: 16.00, 0.476 (3.066%)
  • 3-MONTH T-BILL YIELD: 15% +0.01%
  • YIELD CURVE: 2.21 from 2.23


  • CRB: 277.56 +0.88%
  • Oil: 77.66 +0.97% 
  • COPPER: 347.90 +2.13%
  • GOLD: 1,247 +0.27%


  • EURO: 1.2861 +1.44%
  • DOLLAR: 81.912 -0.95%



  • Nikkei (0.24%); Shanghai Composite +0.01%
  • Markets closed mixed in a tight range; attention was focused on Japan where the incumbent PM Naoto Kan retained office by winning presidency of Democratic Party of Japan
  • Beijing Aug housing prices +20.4% y/y vs. +22.0% seq
  • Japanese Jul industrial production revised down to +0.2% from +0.3%  


  • FTSE 100: -0.18%; DAX -0.21%; CAC 40 -0.27%
  • Major indices remain locked in a narrow trading range with investors shrugging off disappointing German ZEW economic sentiment reading and waiting for today's US economic indicators.
  • Volumes thus far have been low.
  • Utilities are the main drag on indices with chemicals generally outperforming.
  • Greece sold €1.17B of 26-week T-bills; auction shows yield of 4.82% vs. previous 4.65%; bid-cover ratio 4.5 vs. previous 3.64
  • Germany Aug Wholesale Price Index +1.6% m/m vs. cons +0.2%
  • France Aug CPI +0.2% m/m vs. cons +0.4%
  • UK Aug RPI +0.4% m/m vs. cons +0.3%; Aug CPI +0.5% m/m vs. cons +0.3%
  • Eurozone Jul Industrial Production +7.1% y/y vs. cons +8.0%
  • Germany Sep ZEW survey 59.9 vs. cons 48; business indicator (4.3) vs. prior +14.0 and cons +9.0
  • EuroZone Q2 Labor Costs +1.60% y/y and prior revised 1.90% 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Match Point

“I don’t have good luck in the match points.”

-Rafael Nadal


Shakespeare considered youth ambition’s ladder – I love that thought and I love watching winners play with confidence. If the younger players on my team don’t end up being better than me, it is I who has failed. Our congratulations to Spain’s Rafael Nadal for becoming the youngest player in the modern history of professional tennis to complete the Grand Slam.


The US stock market is all of a sudden starting to hit a few Grand Slams of its own. Yesterday the SP500 closed up for the 4th consecutive day and its 8th out of the last 9. At 1121, the SP500 has carried itself on the back of the Pain Trade (volume +25% day-over-day concentrated in 112 stocks) all the way back to the plus column for 2010 year-to-date.


To be clear, a YTD SP500 return of +0.5% isn’t even in the area code of challenging the 2010 global equity market leader-board (Sri Lanka leads with a +78% YTD gain, followed by Bangladesh and Latvia at +50% and +45% YTD, respectively), but it’s making the turn in the loser’s bracket that we call the Fiat Republic.


The structural impediment to long-term US economic growth isn’t very difficult to understand. It starts and ends with debt-financed-deficit spending that professional politicians call “stimulus.” We’ve beaten this Match Point into your inbox hard throughout the last few years. There is no such thing as luck when we unearth a Perceived Wisdom coming out of Washington, DC and take the other side. It’s called math.


The math in markets doesn’t lie; politicians do. As repetitive as that go-to baseline shot from the Hedgeye backhand is going to sound is as verbose as Paul Krugman is starting to sound trying to return it in bounds. There really is no refutation to the economic experience of the Fiat Republic of Japan – and the Big Government Spending fans of a former colony of “smart people” know it.


As a reminder, we have attached the most important global macro chart in Hedgeye’s current risk management slide deck this morning. This is the backhand that we want to see Krugman’s Kryptonite of piling-debt-upon-debt-upon-debt return. We call this chart “Crossing the Rubicon of Sovereign Debt” and overlay the growth of Japanese General Government Debt as a percentage of GDP with the Average Annual GDP growth of Japan by decade.


Here are the mathematical conclusions about growth in a losing country that saturates itself with debt:

  1. Japan Average y/y GDP growth: 1 = 4.6%
  2. Japan Average y/y GDP growth: 1 = 1.5%
  3. Japan Average y/y GDP growth: 2000-2009 = 0.8%

These last two decades have been pretty pathetic when you consider growth and innovation in this world like say, China and the Internet. In the moment however, how could Japanese bureaucrats being advised by Krugman in 1997 have known not to “PRINT LOTS OF MONEY”?


Our best answer to why is pretty straightforward – ambition’s ladder provided emerging global economies to take share from the world’s oldest and aging economy because it made itself most vulnerable to creative destruction. Capital chases yield – not zero growth, zero coupon, complacency.


Back to the Pain Trade that I mentioned earlier on but need to expand upon. When you read a missive like this, it’s pretty easy to get all beared up about America and its failed economic policy of printing moneys. That’s exactly the problem though. When something becomes this obvious, and it is, market participants tend to lean too far and too fast to the bearish side of the TRADE.


Since bear market bounces are usually more vicious than bull market ones, you need modern day risk management tools to defend against the machine like Nadals that are constantly going to grind you during every market minute of every market day. This isn’t to say managing money in modern days of an American Roman Republic that’s under siege is easy. This is just to say that this is the game that’s in front of you – so play it.


The Pain Trade is what’s carrying the US stock market higher, not some rah-rah speech from the Oracle of Government’s Got My Book. The America he built Berkshire out of didn’t have this debt. He has his own conflicts of interest. Don’t get upset about them – understand them, and take advantage of every market point you can get.


Understand the US stock market’s intermediate term bearish TREND has every opportunity to see smashing winners of bullish immediate term TRADEs. The TRADE (3 weeks or less) and the TREND (3 months or more) are two different Hedgeye durations and the real match points being made out there in the market every day have nothing to do with luck. They have everything to do with understanding Duration Mismatch.


Our intermediate term TREND line of resistance for the SP500 remains 1144, but a very convincing line of bullish immediate term TRADE support has asserted itself at 1085. Watch both of these lines very closely and play like a winner out there today.




Keith R. McCullough
Chief Executive Officer


Match Point - Japan

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UA/NKE: Li-Ning Has More Skin in the Game

Few people likely noticed that Li-Ning – the largest Chinese athletic footwear brand – announced a partnership this morning with Skins, an Australian-based sports compression apparel brand. Formerly footwear-only, a few weeks ago Li-Ning dove into swimming…now compression. Watch this one, folks. Consider the following:

  • If opening a flagship store in Portland, Oregon earlier this year didn’t catch the attention of domestic athletic footwear companies, this move will. The partnership of a leading compression company by arguably China’s most vaulted footwear brand puts it squarely in the crosshairs of Nike and Under Armour.
  • A brief look at the company’s site (check it out here) reveals its heritage in cycling, however, the product has since transformed into multisport use. Most similar to Under Armour’s Recharge compression suit, both in price and function (think $75+), Skins doesn’t currently offer a compression product for the masses that competes at the $25-$50 level that both Nike and Under Armour offer – yet. See the examples below.
  • Recall that this also follows a move by Li-Ning on August 31st to get into the swim apparel market by becoming the official USA Olympic Diving Team’s apparel sponsor through 2012. In addition to the company's first U.S. sponsorship, it's a major indication of the brands intentions of becoming an apparel brand as well.
  • Skins’ most direct global competitor is Under Armour. With less than 5% of UA’s revenues (~$50mm) generated from outside North America, which is almost entirely derived from Japan, the company has taken a measured approach expanding into the Far East thus far. As a point of reference, the company has been in Japan for more than 10-years now and the business is now just approaching $100mm in sales at retail.  
  • On the other hand, Li-Ning’s distribution spans over 7,500 stores across China and is unquestionably one of the key benefits to the partnership for Skins with immediate access to the Chinese market.

What does this all mean? Under Armour and Nike will have to be more aggressive about their respective growth plans in China – period. Back on the Q1 earnings call CEO Plank noted that, “We are also taking initial steps into China, currently working to understand the consumer and how we need to organize to insure success.” While there’s plenty of share to be had in China, with Li-Ning making a bigger push in its local market with a better asset, we wouldn’t be surprised to see UA to step up its SG&A in a defensive way to protect its existing strat plan.  


UA/NKE: Li-Ning Has More Skin in the Game - Skins 9 13 10


Casey Flavin



U.S. August Budget . . . Marginal Improvement

Conclusion: The August U.S. budget numbers released earlier today showed marginal improvement versus July.


We continue to remain alarmed about the U.S. budget deficit as the U.S. government printed its record 23rd straight monthly budget deficit.  That said, while we aren’t ready to reduce our estimate for the U.S. government deficit, the August results did show marginal improvement versus July, specifically on the expense side. 


Normalizing for a 1-time FDIC payment, outlays in the year-to-date, excluding TARP, payments to GSEs, and interest payments, were up 9.4% for the first eleven months of the government’s fiscal year.  This is an improvement from the July results that showed outlays, on an apples-to-apples basis, up 10.4% for the first 10-months.  Expenses are outlined directly in the chart below and, once again, all line items are up on a year-over-year basis, though the sequential decline in expenses from July to August is noteworthy.


U.S. August Budget . . . Marginal Improvement - 1


On the revenue side, government revenues in the year-to-date are up about 1.5% for the first eleven months of the fiscal year.  While this is a positive, if we normalize this for revenue from the Federal Reserve, Federal revenue actually declined about 0.1% year-over-year.  In the statement today, the Treasury Department explained the increase in revenue from the Federal Reserve by stating the following:


“The larger remittances stemmed from higher profits earned by the Federal Reserve, which primarily reflect the central bank’s much larger portfolio and its shift to riskier and thus higher-yielding investments in support of the housing market and the broader economy.”


We’re not sure that the Fed having a riskier portfolio is a long term trend of income we would want to bet on.


In aggregate, revenue is up small on a year-over-year basis and outlays are up almost double digits, which is quite negative as it relates to the fiscal future of the United States.  But on the margin August was an improvement from July . . . if only marginal.


Daryl G. Jones

Managing Director


Within the next few days the street will get the most recent data on sales trends in the casual dining industry. 


If the whispers are to be believed, it appears the casual dining industry (according to Knapp) will see sales trends improve sequentially to 1% or slightly better.  The implication here is that two-year trends will improve 135 bps from -3.70% to -2.35%. 


I continue to favor EAT and PFCB on the long side and have my concerns with BWLD, but I don’t want to press the BWLD bet yet.


KNAPP AUGUST (RUMORED) SALES DATA - knapp aug whispier


Howard Penney

Managing Director

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