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THE M3: S'PORE VISITOR GROWTH SLOWS; 57% MODEL; MGM PROPOSED IPO

The Macau Metro Monitor, September 28th 2010

 

VISITOR ARRIVALS TO SINGAPORE GROW 18% IN AUGUST STB, Channel News Asia

Visitor arrivals to Singapore registered 18% growth in August to 996,000.  It is also the ninth consecutive month of record visitor arrivals.  STB stated that the two IRs, Youth Olympic Games, and the strength of the Asian economy attributed to the growth.  The top markets--Indonesia, China, Malaysia, Australia and India-- gained 25%, 51%, 22%, 2%, and 4%, respectively.

 

STB also said average occupancy rate in August rose to 85%, a gain of 7.6% points YoY. ADR increased 24.7% YoY to S$218.

 

THE M3:  S'PORE VISITOR GROWTH SLOWS; 57% MODEL; MGM PROPOSED IPO - spore1


NEW VIP COMPETITION WAR IN MACAU? Asian Gaming Intelligence

According to AGI, one Macau operator is now offering a 57% share of the VIP profit to junkets, keeping only 3% for itself.  This would be 15% more than Wynn Macau has reportedly being offering junkets under its profit share set up.  AGI believes the 40:57:3 model could bring about a price war as aggressive as those seen in late 2007 and the autumn of 2009.  The 40:57:3 model probably only makes economic sense for the operator if the operator no longer has to staff and directly manage the VIP rooms involved and passes that responsibility instead to the junkets.

 

MGM MACAU GETS CLOSER TO HONG KONG IPO MGM, macaubusiness.com

MGM China Holdings Limited, yesterday filed a proposed listing application with the HKSE.  According to MGM Resorts International, “there have not been any decisions made regarding the timing or terms of any such listing or whether MGM China Holdings Limited will ultimately proceed with such a transaction or whether the proposed transaction will ultimately be approved by the Hong Kong Exchange.”  According to previous media reports, to goal of the IPO is to raise US$500 million (MOP4 billion).


MACAU COMMISSION ADVANCES

Higher commission rates are only part of the more competitive VIP environment.

 

 

We are pleased investors are finally focused on the increasing competition for Macau junkets.  Wynn’s market share was ripe for the taking as Four Seasons recently figured out.  MGM’s strategy has been clear for months and MPEL has been very aggressive on the VIP side for a few months.  Higher commissions are only part of the story.

 

With a huge book of junket business, the lowest junket commissions in Macau, and a conservative credit issuance policy, Wynn’s VIP business remains vulnerable.  We’ve been making that call for months.  The other call we’ve been making is MPEL and MGM gaining share.  With these guys, it’s not just about aggressive commissions.

 

Both MGM and MPEL may be advancing commissions to junkets for up to 3-4 months versus the former standard 15-30 days.  Wynn advances commissions to junkets in the beginning of each month for roughly 30 days. We're hearing that even Venetian has moved up to 2 months recently.  Market share data for September will again show strong market shares from MGM (despite low hold) and MPEL and weak share for Wynn (partly due to low hold); so clearly junket credit matters.  It may start to matter enough for Wynn.  We believe Wynn may be considering a more aggressive junket strategy for the first time to offset the competitive onslaught.

 

The sell side has finally figured out that the environment has gotten more competitive.  They’ve focused only on higher commission rates.  That may certainly impact margins so the explosive VIP growth is not all good news.  We are starting to worry a bit that a credit bubble could be forming.  Current volumes may be unsustainable.  How long can the operators continue to provide this duration of liquidity?  What happens when a junket can’t pay?  We’re not sure this level of credit is sustainable.

 

Over the near term, the credit bubble is still building.  Volumes will remain strong as long as liquidity remains.  Even though MPEL has been an aggressor, the stock remains the one with the most near term upside, in our opinion.  The good news for near-term investors in MPEL is that it appears to be driving VIP through commission advancement rather than further hikes in commission rates.  Near term margins will look better under this scenario and the company should finally be able to put up estimate beating quarters until the credit dries up.


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 28, 2010

As we look at today’s set up for the S&P 500, the range is 17 points or -0.71% downside to 1134 and 0.77% upside to 1151. Equity futures have turned higher following comments by Fitch that Ireland may avoid further downgrades if it comes out with a credible cost plan for Anglo Irish Bank.  Earlier today, Ireland reiterated it would not default on ANGL senior debt.

  • American Capital Agency (AGNC) plans to sell 10m shares in secondary offering
  • Cognex (CGNX) raises 3Q rev. forecast to $74m-$76m vs estimate $66.7m
  • Entropic Communications (ENTR) plans to offer 10m shares
  • LaSalle Hotel Properties (LHO) said CFO Hans S. Weger will leave the company by February 28
  • Pfizer (PFE) discontinued phase 3 trial evaluating Sutent drug with prednisone for castration- resistant prostate cancer
  • Viacom (VIA/B US) CEO Philippe Dauman, told CNBC that ad market is “strong,” sees “sequential growth” over next two quarters 

PERFORMANCE

  • One day performance: Dow (0.44%), S&P (0.57%), Nasdaq (0.48%), Russell (0.41%)
  • Month-to-date: Dow +7.96%, S&P +8.85%, Nasdaq +12.1%, Russell +11%
  • Quarter-to-date: Dow +10.62%, S&P +10.81%, Nasdaq +12.35%, Russell +9.65%
  • Year-to-date: Dow +3.68%, S&P +2.43%, Nasdaq +4.43%, Russell +6.86%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -485 (-2465)
  • VOLUME: NYSE: 920.44 (-14.04%)  
  • SECTOR PERFORMANCE: Other than continued M&A there was not much news flow yesterday; neither major economic data points nor big corporate releases. European bank/credit concerns pressured the financial sector, which was the worst performing sector. Technology and utilities were positive and Financials was the worst performing sector.  
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Southwest Air 8.71%, Juniper +4.20% and Pulte +3.56%/M&T Bank -7.04%, Intuitive -5.01% and Monsanto -4.17%
  • VIX: 22.54 +3.82% - YTD PERFORMANCE +3.97%
  • SPX PUT/CALL RATIO: 1.73 from 1.57 +9.93%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.84 -1.116 (-6.997%)
  • 3-MONTH T-BILL YIELD: 0.16% +0.1%
  • YIELD CURVE: 2.10 from 2.17

COMMODITY/GROWTH EXPECTATION:

  • CRB: 284.14 +0.18% - up 4 days in a row.
  • Oil: 76.52 +0.04%
  • COPPER: 359.70 -0.58%
  • GOLD: 1,297.02 +0.08%

CURRENCIES:

  • EURO: 1.3479 -0.10%
  • DOLLAR: 79.338 -0.07%

OVERSEAS MARKETS:

Europe

  • FTSE 100: (0.40%); DAX (0.16%); CAC 40 (0.19%)
  • Equities are trading lower as concerns over the economies resurface following negative news flow concerning Spain, Greece and Ireland.
  • Automobiles, Construction & Materials and Banks are among the worst performing sectors.
  • UK Q2 Final GDP +1.2% q/q vs consensus +1.2%
  • UK Q2 Final GDP +1.7% y/y vs consensus +1.7%
  • France August Consumer Spending (1.6%) m/m vs consensus +0.2%
  • France July Consumer Spending +2.7% m/m vs consensus +0.6% and prior revised (1.5%) from (1.4%)
  • Germany Oct GfK Consumer Sentiment Indicator +4.9 vs consensus +4.2 and prior revised +4.3  

Asia

  • Asian Markets: Nikkei (1.12%); Shanghai Composite (0.63%)
  • Most Asian markets followed Wall Street down today.
  • Australia was also flat.
  • South Korea slipped as carmakers and tech stocks gave up recent gains.
  • China declined when weakness in financials and profit-taking in airlines outweighed strong performances by agricultural stocks.
  • The combination of a weak performance by Wall Street and a strong yen sent Japan lower, though expectations for further monetary easing by the Bank of Japan provided some support.
  • The yen is trading at 84.20 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

 


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EARLY LOOK: Macro Forces

 

"The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

-David Einhorn

 

 

 

There was an article in the Wall Street Journal on Friday that was forwarded to me hundreds of times over. The article was titled “Macro Forces In Market Confound Stock Pickers.” There was nothing particularly new in the article. Everyone who has protected their client’s hard earned capital in the last 3 years gets that macro matters. But what about those who don’t get it? What’s their answer to David Einhorn’s mental flexibility? Do their answers matter?

 

Macro Forces certainly matter. As Risk Managers, it’s our job to both identify their market impact and proactively prepare for their most “improbable” outcomes. I have a great deal of respect for someone like Einhorn because he can skate circles around Captain Stock Picker out there but, at the same time, acknowledge that he needs to continually evolve his investment process to incorporate the macro frontier.

 

If you are a bloodhound who trades merger arbitrage or your job is to be long of the next stock to hit this market’s broadening “rumor mill” of takeout targets, that’s fine. Maybe you don’t do macro until, as Mike Tyson would say, it “punches you in the face.” For the rest of us, “it isn’t reasonable to be agnostic” about global macro market risk anymore. October 1987 mattered.

 

Being Duration Agnostic is also something we evangelize a lot here in New Haven. My sense is that the Buy-And-Hope model of yesteryear isn’t going to be emailed to me 100 times over via a WSJ article anytime soon. Legacy print media has a funny way of being a lagging indicator. All that said, we need to focus intensely on compartmentalizing calendar catalysts that are macro in nature. It’s unreasonable to actively manage risk otherwise.

 

During Friday’s US stock market short squeeze I was also getting a lot of emails asking me when I was going to short the SP500 (SPY). After 3 consecutive down days (Tuesday, Wednesday, and Thursday), the illiquidity rally was broad based and I think the questions were well timed.

 

Unfortunately, I’m not enough of a cowboy anymore to stand on the other side of this market’s intermediate term TREND line and call it anything other than what it became on Friday – what was 1144 resistance in the SP500 is now support.

 

It’s not my job to be bearish or bullish. It’s really not my job to be anything other than a student of whatever it is that Mr. Macro Market throws at me each and every day. There certainly were more bearish than bullish fundamental research data points in my notebook last week but at the end of the week they were all trumped by Mr. Macro’s market price. The US Dollar has been demolished (down 14 of the last 17 weeks) and the reflation trade is back on.

 

To be crystal clear, there are no rules in this game suggesting that the 1144 line cannot become resistance again. The Macro calendar of catalysts for the early part of this week that could easily be construed as bearish are:

  1. Monday: A breakdown close through 1144 on the SP500 combined with a failure of the VIX to breakdown through its critical 20.77 line of support.
  2. Tuesday: A reminder that Housing Headwinds remain in the US economy with the Case Shiller report for July.
  3. Wednesday: An acknowledgement by both Japan (Tankan Survey) and the US (Obama speaks on joblessness) that Fiat Republics are not stable.

Then, of course, you have month and quarter-end on Thursday for the hedge fund business on top of a Chinese PMI report for September that could go either way. No one said that doing macro is easy. The way we all get paid in this business, it shouldn’t be…

 

The Macro Forces that are bullish out there are fairly straight forward at this point:

  1. Prices: The SP500 is up +9.43% for September-to-date!
  2. M&A: Unilever buys Alberto Culver this morning for $3.7B making at least 1 of the 67 rumors of takeouts we are tracking true…
  3. Mid Terms: If you didn’t know the Republicans are going to take the House, now you know.

“Republican House” being on the cover of Barron’s this weekend certainly doesn’t make this a new Macro Force to consider. That’s why we did our risk management call with Karl Rove last month to get ahead of this. As always, the better questions in our risk management lives surround what people aren’t talking about. These factors, too, need to be considered on a Duration Agnostic basis.

 

Whether or not the intermediate term TREND line in the SP500 of 1144 holds or not definitely matters to me in the immediate term. At the same time, out on the long term TAIL, the biggest question is why won’t the US stock market continue to make a series of lower-long-term-highs like the Nikkei in Japan has?

 

 

EARLY LOOK: Macro Forces - nikkei

 

 

There are only 7 countries in the world who have underperformed Japanese equities for the YTD at this point (in order of worst to Japan: Greece, China, Slovakia, Italy, Portugal, Spain, and Ireland). Sadly, in response to another lower-long-term-high in the Nikkei, this morning the Japanese have introduced another 4.6 TRILLION Yen in stimulus. Shame on those who don’t learn history’s lessons. They deserve to lose.

 

My immediate term support and resistance lines for the SP500 are now 1131 and 1150, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

 

This note was originally published at 8am this morning, September 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


Japanese Exports - The Storm Before the Flood?

Conclusion: Japanese Exports slowed again in August, highlighting additional concern that the island’s recovery is faltering. Moreover, the confluence of the strong yen and slow growth from the U.S. and Western Europe will continue to be a headwind for Japanese exports over the next 3-6 months.

 

Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)

 

If you didn’t know, now you know: Japanese exports rose 15.8% YoY in August – the slowest growth since last Deceber. August marks the sixth consecutive month of sequential deceleration of export growth on a YoY basis. On a seasonally adjusted basis exports fell (-2.3%) MoM. This marks the fourth consecutive decline on a monthly basis and the largest MoM decline since January 2009.

 

Japanese Exports - The Storm Before the Flood? - dd1

 

On a more granular level, Japanese exports to the U.S. – its second largest export destination at 16.4% to total – fell substantially on a sequential basis: +8.8% YoY in Aug. vs. +25.9% YoY in July. August also marked the first YoY decline in shipments of autos to the U.S. since October of 2009. This highlights two headwinds that will continue to restrict Japanese growth going forward – waning U.S. consumer demand and the painful appreciation of the yen.

 

Regarding the yen, Japanese exporters believe they can remain profitable if the yen trades at 92.90 per U.S. dollar or weaker, according to a Japanese Cabinet Ministry report. Since the start of the Japanese fiscal year on April 1st, however, the yen has traded an average of 89.02 – 3.88 less than their forecast. The spread, which we track using our proprietary Japanese Exporters Margin Kitty has been trending down throughout the entire period and closed at (-8.67) on Friday.

 

Japanese Exports - The Storm Before the Flood? - dd2

 

While we continue to have conviction that the yen will continue to weaken over the next 3-6 months due to (if nothing else) Japanese government intervention, we do not think intervention alone will be able to reverse the damage brought on by the yen’s recent strength. Speaking of, the strong yen is driving Japanese investment abroad, as exporters attempt to shield their profits from currency risk. Nissan is one of many Japanese exporters considering additional plants in Indonesia, Thailand, and other parts of SE Asia to counter this trend of currency strength. While it may provide reprieve for Japanese corporate profits, it will do so at the cost of exporting Japanese jobs to other countries further compounding the economies struggle to revive domestic demand.

 

In effect, both Japan’s exports and currency are likely to struggle going forward on a TREND duration. With trade accounting for more than half of Japan’s meager 1.5% expansion in 2Q10 (according to the Japanese Cabinet Office), we expect Japanese GDP growth to slow meaningfully from here.

 

To address the potential for a severe slowdown in the Japanese economy, Japanese politicians are likely to do what they’ve always done for the past two decades (to no avail, of course) – fire up the ‘ol stimulus. This morning, they are said to be considering an additional package worth 4.6 TRILLION yen ($54.6B). Prime Minister Naoto Kan’s administration is particularly excited about this round of stimulus, as it is unlikely to warrant any additional issuance in government debt:

  • 2 TRILLION yen from greater-than-forecast tax receipts
  • 1 TRILLION yen from savings on debt servicing
  • 1.6 TRILLION yen from the previous fiscal budget

While we certainly applaud their relative fiscal restraint, we don’t think piling another 4.6 TRILLION yen of stimulus on top of the most recent 915 billion yen of stimulus will achieve the desired effects of avoiding slow(er) growth.

 

All said, Japan’s fiscal situation is in an “emergency state”, according to Japan’s Vice Finance Minister Fumihiko Igarashi. At Hedgeye, we have added the Japanese economy to the growing list (politicians, bureaucracy, demographics, pension funding ,etc.) of things in an “emergency state” within Japan. It should, then, come as no surprise to see the Nikkei 225 down 9.3% YTD, trailed only by the PIIGS, China, and Slovakia.

 

Darius Dale

Analyst

 



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