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THE M3: APPOINTMENTS

The Macau Metro Monitor, September 20th 2010


STAR APPOINTMENT FOR GALAXY MACAU  Asian Gaming Intelligence

Peter Johns, who was the the Director of Slot Operations at MGM Macau, will start his new job, Vice President of Electronic Gaming at Galaxy Macau, at the end of next week.  AGI believes a possible delay in the opening of Galaxy Macau will mean less risk of MGM Macau losing its VIP slot players.


Nathan Carle, Slot Operations Manager at MGM Macau, will replace Mr. Johns.


SANDS CHINA 'ENCOURAGED' BY NEW CEO CANDIDATES Macau Daily Times

Acting CEO Leven says Sands has enough qualified candidates to hire a new CEO by the end of 2010.  The new CEO must have worked in Asia and is "culturally sensitive."  Meanwhile, local lawyer Leonel Alves has been rehired as a legal advisor by Sands China.


MICE INDUSTRY STILL FACING OBSTACLES: GOVERNMENT macaubusiness.com
The Secretary for Economy and Finance, Francis Tam Pak Yuen, says that the local MICE industry “seems to be on a rise, but there are still problems and obstacles standing in the way of further development.”
Mr Tam stressed that, “in recent years, the government of Macau has been vigorously promoting the MICE industry and other service sectors so as to moderately diversify the economic structure of the economy of Macau.”
“Together with the completion of better hardware, including spacious convention halls, starred hotels and luxury resorts, Macau’s strategic geographical location and tourism resources have made the territory increasingly appealing to organizers of MICE events,” stressed Mr Tam


MACAU'S PUBLIC REVENUE UP BY 43% macaubusiness.com
The increment was attributable to notable increases in direct taxes from gaming and other current revenue, up by 63.9 percent and 50.9 percent respectively, that was contributed by increasing gross gaming revenue.
Direct taxes from gaming totalled MOP40.91 billion.




THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 20th, 2010

As we look at today’s set up for the S&P 500, the range is 24 points or -1.12% downside to 1113 and 1.01% upside to 1137.  Equity futures are trading higher with focus on the FOMC meeting tomorrow. Oil & Gas, Chemicals and Basic Resources sectors are among the gainers in Europe helped by gains in metals prices. Today's macro highlights include: NAHB Housing Market Index.

  • American Apparel (APP) was granted an extension until November 15 by the NYSE Amex LLC to meet listing standards
  • BP (BP) killed its Macondo well in the Gulf of Mexico after creating another cement seal, plugging the source of the largest offshore oil spill in U.S. history
  • Diamond Hill Investment Group (DHIL) will pay a special dividend of $13 a share.
  • Lionbridge Technologies (LIOX) said COO Satish Maripuri resigned
  • Nicor (GAS) agreed to acquire assets of the shipping business V.I. Cargo Services
  • OpenTable (OPEN) may drop after Barron’s said its shares are overvalued, having doubled since February.
  • Petrobank Energy and Resources (PBEGF) may rise as production increases and demand for its efficient drilling technology expands, Barron’s said.
  • Roma (ROMA) said it may buy back as much as 5% of its shares.
  • Ruby Tuesday (RT) entered into a licensing agreement with LFMG International LLC to open and operate up to 200 Lime Fresh Mexican Grill restaurants.
  • Spark Networks (LOV) may be an attractive takeover target as investors discover the value of its business, Barron’s said.
  • Time Warner’s (TWX) “The Town” opened as the top move at the North American box office over the weekend

 

PERFORMANCE

  • One day performance: Dow +0.12%, S&P +0.08%, Nasdaq +0.54%, Russell +0.56%
  • Month-to-date: Dow +5.92%, S&P +7.27%, Nasdaq +9.54%, Russell +8.2%
  • Quarter-to-date: Dow +8.53%, S&P +9.21%, Nasdaq +9.78%, Russell +6.88%
  • Year-to-date: Dow +1.72%, S&P +0.94%, Nasdaq +2.05%, Russell +4.17%

 

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +554 (+1039)
  • VOLUME: NYSE - 1856.09 (+104.83%)  
  • SECTOR PERFORMANCE: Only two sectors up on Friday - XLI and XLK.  Markets initially opened up on carry-over enthusiasm behind RIMM +0.5% and ORCL +8.4%, but indices quickly returned to near flat on the release of MACRO data which provided further evidence of a slower growing economy.  The decline in the preliminary U of Michigan Consumer Sentiment surprised the downside. Materials, Utilities and Consumer Staples lagged.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Oracle +8.28%, Interpublic +4.78% and SLM Corp +4.46%/Massey -7.48%, Tyson -6.87% and MICRON Tech -4.37%
  • VIX: 22.01 +1.34% - YTD PERFORMANCE - (+1.52%)          
  • SPX PUT/CALL RATIO: 2.40 from 1.03 +133.41%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.75 0.304 (2.107%)
  •  3-MONTH T-BILL YIELD 0.16% unchanged
  • YIELD CURVE: 2.27 from 2.29

COMMODITY/GROWTH EXPECTATION:

  • CRB: 279.65 +0.34%
  • Oil: 73.66 -1.22% - Traded down 4 of 5 days last week; down 3.65% for the week.    
  • COPPER: 352.20 +0.82% - Oil and copper are telling different stories; up 3.39% for the week
  • GOLD: 1,276 +0.32% - Treaded up 4 of 5 days last week; up 2.64% for the week

CURRENCIES:

  • EURO: 1.3050 -0.18%
  • DOLLAR: 81.398 +0.19% 

OVERSEAS MARKETS:

Europe

  • European Markets: FTSE 100: +1.18%; DAX: +0.69%; CAC 40: +1.02%
  • European markets opened higher in a broad based move as investors take on more risk. 
  • In an absence of any significant international news flow, M&A continued to dominate headlines after Safran and BAE Systems announced a deal to carve up US securities firm L-1 Identity Solutions.  
  • Rising metal and commodity prices helped lift basic material plays, while BP rose after it said it had finally killed its leaking well in the Gulf of Mexico. 
  • Gold hits another record high of $1.283 an ounce.  

Asia

  • Asian Markets: Nikkei (closed); Shanghai Composite (0.4%)
    Asian markets were mixed today in cautious trade, as every day this week will see at least one market closed for a holiday. South Korea and China will close for three days each.
  • Taiwan went up. Sinopac rose 1% when Taiwan’s financial regulator approved MOUs between it and a Chinese partner.
  • South Korea opened down, but ended posting a small gain.
  • Hong Kong finished little-changed. Large-cap property developers gained 2% as property prices are not falling even as transaction volumes do.
  • In low volume, profit-taking in banks and miners took Australia down, though recouped most of their losses in light trade by the time the day ended.
  • Losses in pharmaceuticals were partially offset by gains in banks in China.
  • Japan was closed for Respect for the Aged Day.
  • The yen is trading at 85.66 to the US dollar.
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER


Apparel: We Just Got More Bearish

An aberrational margin lever turning a 180 should expose the ‘play nice’ posturing we’re seeing among apparel companies today for what it is – smoke in mirrors.  We’re more bearish today on the Global Apparel Supply Chain and its components than we were just one week ago. Favorite names on the short side remain CRI and JCP.

 

Not a conversation goes by without an investor asking about cotton. Most notably, at conferences this week management teams across the board largely downplayed the impact of higher prices on their bottom line. We’re seeing wholesalers (CRI), Retailers (JCP, KSS) and Sourcing companies (Li&Fung) all acknowledge the price pressure, but the consensus amongst them is that the consumer will ultimately pay a higher price.

 

There are several reasons why this absolutely will not happen. History shows how the industry has coped with circumstances like this in the past. But this time, history is history.

a)      We religiously track product spreads at the consumer level vs. import cost level. Like it or not, the positive spread between the two (due to tight inventories and low input costs) has given the industry meaningful pricing power. We are just coming off an event where input cost margin impact was 3 Standard Deviations above the mean. That’s about $10+bn up for grabs in a $280bn industry. Most CEOs don’t acknowledge this (due to no Macro process) even though they unknowingly live it every day.

 

Apparel: We Just Got More Bearish - 9 17 2010 9 10 00 PM

 

b)      While we’re talking 3-SD moves, look at the recent move in cotton. Yes, the recent spike puts it into the ‘statistical aberration’ bucket. Anomalies or not, it is an economic reality, and a 50% boost in the industry’s biggest cost input must be dealt with.

 

Apparel: We Just Got More Bearish - 10 Year Cotton Chart

 

c)       What kind of numbers? As we highlighted in our note where we outlined the bear case on CRI, the recent boost in input costs suggests that a $10 item ultimately needs to sell at retail for closer to $11.50 to keep margins for everyone even. No way that’s gonna happen.

 

d)      Elasticity works both ways. One thing that people often do not realize is that there’s a sea change in the basic economics of this industry. I know that ‘sea change’ sounds sensationalistic, but numbers and facts are tough to exaggerate. Consider this…

  1. This industry works in a highly elastic pricing model. As price comes down, velocity goes up. I know… that’s common sense.
  2. With few exceptions, virtually ALL of the units imported into this country are ultimately bought. It might be at a 90% discount 6 months after they hit the initially hit the floor, but they all sell.
  3. In 1992, 50% of apparel we consumer was made in this country. At that time the average American consumer 42 units per capita.
  4. In 2008, the percent of consumption that was imported hit 99%. By that time Americans purchased 64 units per capita.
  5. What does this tell us? Over nearly 2 decades, savings from outsourcing and offshoring were passed through to the consumer, and we ‘bought more stuff at lower prices.’ When demand eased, the industry still had a $3-$4bn safety net of sourcing savings to pad margin pain. This allowed the velocity to remain high without degrading margins.
  6. Now there’s no more kitty – in fact with the rise in input costs there’s a big deficit. Ideally, the industry would be controlled and rational, and would all take down orders in unison by 5-10% to maintain price. But in an industry that has thousands of brands and millions of SKUs – this would a near-impossible expectation.

 

e)      One of the more common themes I've heard from those in attendance at this week's conferences is that management was much more benign about cost increases than expected. Not a surprise, actually. Seriously...  Are talking heads from all facets of the supply chain going to gather at an investor conference and turn it into a battle royale as to which of their peers are going to pick up the tab on the margin deficit? No. They’ll flash their pearly whites and stand largely as a united front. The battle royale starts when the CEOs don't have to look one another square in the eye. They'll be unified until the first player with any power flinches. Then everyone else reacts.

 

So what have we got? An aberrational margin lever turns a complete 180. Companies are playing nice in the sandbox today, but their behavior is not genuine. We’re more bearish today on the Global Apparel Supply Chain and its components than we were just one week ago. Favorite names on the short side remain CRI and JCP.

 

  

WHAT’s DRIVING COTTON?

While demand from Chinese, American, and European consumers grows for cotton, the core driver to cotton nearing $1.00 per pound is supply (though the fact that just about every commodity is on fire is a big contributing factor).  We all heard management teams talk about how they were hoping August and September crops were going to be wrong, but hope is not an investment process. Here are the issues over the last month that has kept supply well behind demand:

  • Crop quality and quantity has been negatively affected by weather across the globe
    • Low temperature and excess rain in China is dimming the prospects of a strong September harvest
    • Longer monsoon period is causing delays in Indian picking period
    • Floods and landslides destroyed Chinese crops in July and August
    • Mexican cotton output was reduced from fungus killing the crop from excess rain
    • Pakistan floods destroyed nearly 30% of the cotton crop and derailed infrastructure
    • Political/legislative pressures limiting cotton production and exports
      • India halted cotton exports in April to cool domestic prices and bolster supplies but has continued to push back the resumption of exports from September to October

 

Aside from the supply-demand balance we are seeing two other major issues: higher energy and wage costs for cotton production and higher shipping rates to transport finished product to consumption destinations. Cotton inputs of land rent and value of seed increased 17% since 2007 while labor costs are increasing in China and India with those inflating economies.  The shipping industry is experiencing the same supply-demand imbalance driving freight higher and higher as we've heard on numerous conferences calls in 1H 2010.

 

Here’s an overview of the general flow of cotton from production, to manufacture, to end market.

 

 

Apparel: We Just Got More Bearish - Production  Manufacturing  End Use

 

Apparel: We Just Got More Bearish - Cotton Uses

 

Apparel: We Just Got More Bearish - Cotton Production Tree

 

Apparel: We Just Got More Bearish - Cotton Price Growth

 

 

Zach Brown

Apparel Analyst


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The Week Ahead

The Economic Data calendar for the week of the 20th through the 24th of September 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 - c1

The Week Ahead - c2


Ugly European Chart of the Day: Italy’s Industrial Orders

We want to flash this chart of Italy’s Industrial Orders for we think it is representative of a marked inflection (see chart below). On a year-over-year compare we’d expect July orders to be up more than a mere +0.7%, especially off bombed-out levels a year ago. Clearly the demand picture for Italy’s industrial goods is not good.  As a point of comparison, we’ve also graphed industrial production in Italy and Germany. While production has slowed for both countries over recent months, the delta between the two is notable at 9.2%.

 

We’ve called for European fundamentals to slow into year-end as austerity picks up, which we believe should pinch the consumer (higher VAT, government job and wage cuts) and with it tame economic growth out on the curve.

 

While German data has also backed off over recent months, we continue to like Germany from a quantitative set-up and are long the etf EWG in the Hedgeye Virtual Portfolio. Currently the German DAX is up +4.2% YTD, outperforming many of its Western European peers such as Italy (-11.7%), Spain (-11.3%), Ireland (-9.0%), and France (-5.4%).

 

Matthew Hedrick

Analyst

 

Ugly European Chart of the Day: Italy’s Industrial Orders - italy


INSIDE THE HEDGEYE NOTEBOOK: Sept. 17, 2010

 

Another day, another grind…
 
Here are the bullish/bearish DATA and PRICE moves in my notebook from the last 48 hours.

 

 

INSIDE THE HEDGEYE NOTEBOOK: Sept. 17, 2010 - Notebook Image Hedgeye

 


BULLISH:
1.      SP500 continues to hold its immediate term TRADE line of support = 1111

2.      The range in our 3-day probability model for the SP500 continues to tighten (46 points now)

3.      All 9 sectors in our SP500 TRADE/TREND model continue to flash bullish TRADE, confirming the index signal

4.      India raised rates by 25bps to 6%, making its 5th hike of 2010, and the BSE Sensex continued to make higher-highs

5.      Chile raised rates by 50bps to 2.5% on inflation concerns (yes, they are real) and Chilean equities are +32% YTD

6.      FTSE and DAX continue to flash bullish TRADE and TREND

7.      Netherlands reported a better than expected unemployment rate of 5.3% (down 20bps m/m) and now that stock market is bullish TRADE/TREND

8.      Russian and Norwegian stock markets have recovered their bullish intermediate term TREND lines (bullish oil signal)

9.      Both the Euro and British Pound (were long FXB) are back to bullish TRADE and TREND relative to the USD

10.  Both Brazil and Canada continue to trade bullish on both TRADE and TREND durations

11.  Commodity prices continue to be in a Bullish Formation (bullish across all 3 of our core investment durations: TRADE, TREND, and TAIL)

12.  CRB Index and soft/agricultural immediate term TRADE correlations (inverse) continue to be north of .80 across the board

13.  Gold prices continue to make higher-highs and higher lows (fear of US Congress and Japanese Bureaucrats trade)

14.  The Yield Spread (10s minus 2s) has expanded week/week by 8 basis points; bullish immediate term TRADE signal for financials

15.  US CPI and PPI inflation reports came in very much benign for august, support the storytellers at the Fed who never will see inflation

16.  Texas Instruments (TXN) buyback of $7.5B was a beast, stoking the “cash on corporate balance sheet” bull case that we heard in 2007

17.  Spanish Debt sales were both longer duration (30yr) and lower yield (5.07% vs. 5.9% last) than prior auctions

 


BEARISH
1.      SP500 continues to flash bearish from an intermediate term TREND perspective = 1144 resistance

2.      Volatility (VIX) is holding its 21-22 level of intermediate term support = sell signal

3.      US stock market breadth has deteriorated this week = 1st week it has done that in the last 3

4.      US Dollar continues to be a train wreck: down -1.8% w/w and down 13 of the last 16 weeks

5.      Short term US Treasury Yields (2s) have broken their immediate term TRADE line of support again of 0.52% = bearish US GDP signal

6.      Philly Fed survey -0.7 was another miss

7.      University of Michigan Consumer confidence drops to 66.6 here in September (from 68.9 in AUG) despite low-volume stock market strength

8.      Waxman, Weiner, Schumer all picking up the government intervention/fear-mongering from gold to china = bearish US Dollar and bond yield factor

9.      UBS comes out with their super duper “idea” list of “39 Potential M&A candidates” this week; smacks of 2007 sellside hope

10.  Chinese equities closed down for the final 3 days of the week; still bullish TREND, but bearish immediate term TRADE is as bearish does

11.  China is a “manipulator” rhetoric really turning up the volume on anti-Congress commentary in Asian publications

12.  Japanese Yen has finally broken its immediate term TRADE line of support and looks to have locked in a 3-6 month high in the rear-view

13.  Pakistan showing some equity weakness into week’s end; geopolitical risk? its certainly being priced into commodity inflation

14.  Greece continues to act like the dog of dogs after breaking critical TREND line of support at 1575 on the ATG Index (down -29% YTD)

15.  UK Retail Sales dropped sequentially to +0.4% (AUG) vs +1.0% (JUL)

 
On balance, still more immediate term bullish than bearish DATA and PRICE moves in my notebook and I guess that explains partly why I have the longest invested position I’ve had in our Hedgeye Asset Allocation Model in months (cash position has dropped from a peak of 79% to 46% today), but I’m getting very nervous about holding my longs here (13 LONGS, 10 SHORTS). Congress scares the hell out of me.
 

Enjoy your weekend,
KM
 
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT

 

 

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