The Macau Metro Monitor, October 5th 2010



On October 3rd, 126,700 people arrived in Macau via Zhuhai-Gongbei central cross border, of which 58,700 were traveling visitors.  Meanwhile, the occupancy rate for 3-star hotels was 99.91%, 4 star hotels 96.37%, and 5 star hotels 99.08%.



Michael H. Chen has left his position as President for Asia for the American gaming giant Harrah's Entertainment Inc. and started a sabbatical year on October 1.  "I was offered a position in Las Vegas at Harrah's which is great but I need some time off and they agreed to it", said Chen. Chen was responsible for the development of Harrah's business in Asia and had served as a corporate director and executive associate to the chairman, president & CEO, Gary Loveman.

EARLY LOOK: Japan's Jugular


“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein


EARLY LOOK: Japan's Jugular - Einstein





I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.


Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).


Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.


At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email ).


For Q4 2010 our Hedgeye Macro Themes are as follows:


EARLY LOOK: Japan's Jugular - 0 q4 THEMES


In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.


I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.


Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.


Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.


We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.


In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).



EARLY LOOK: Japan's Jugular - japanchart



The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.


I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?


My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


While there is a decent amount of literature available for investor consumption on the topic of iGaming, we thought some cliff notes on the topic could be helpful.  Look for more detailed notes in the near future.



We think some form of legalized internet gaming in the United States is inevitable.  While it will likely be a couple of years before it's commercial, investors could begin to discount this potentially large opportunity so we are going to start talking about it.  Poker is where it will all likely start (or should I say resume).  Given its critical mass of players, PartyPoker seems to have a competitive advantage in reentering the US.  For the "brick and mortar" guys, Harrah's with its World Series of Poker seems best able to capitalize.  We will have more on these topics in upcoming posts. 



Here are the cliff notes:


Why is iGaming interesting?

  • Aside from Macau and Singapore, iGaming is one of the few subsectors in gaming that’s actually been growing. According to H2GC, the online gaming market has grown at a 23% CAGR from 2001-2008 to an estimated size of $22BN in 2008 and expected to reach $34BN by 2012.  In 2008, internet gaming accounted for 7% of the global gaming market.

What are the forms of iGaming?

  • In 2008, sports betting comprised the largest slice of the iGaming market with $10BN of revenues, followed by casino online gaming, poker and lastly bingo

iGAMING: "CLIFF NOTES" - igaming1


What are the biggest iGaming markets?

  • Even though internet gaming is illegal, US is still the single largest gaming market, estimated at roughly $6BN in size today
  • Regionally, Europe is the largest iGaming market, followed by Asia and North America

iGAMING: "CLIFF NOTES" - igaming2


Who are the players in the space?

  • Some of the public market igaming players include:
    • Partygaming/Bwin
    • Sportingbet
    • 888
    • Unibet
    • Playtech
    • Betsson
  • There are also a host of private companies, like Betfair (seeking IPO), Full Tilt Poker and PokerStars

iGAMING: "CLIFF NOTES" - igaming3

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TODAY’S S&P 500 SET-UP - October 5, 2010

As we look at today’s set up for the S&P 500, the range is 18 points or -0.97% downside to 1126 and 0.61% upside to 1144. Equity futures are trading above fair value in the wake of the Bank of Japan's decision to cut its interest rate to almost zero and announced intentions to set up a ¥5TN QE fund to increase liquidity in its financial system. Today's macro highlights include; September ISM Non-Manufacturing Index and related sub-components.

  • Chevron (CVX) said it will begin buybacks in 4Q under previously announced repurchase program
  • Equifax (EFX) completed purchase of Anakam on October 1; terms not disclosed
  • First Midwest Bancorp (FMBI) said CEO Thomas J. Schwartz plans to retire by 1Q 2012
  • MaxLinear (MXL) gave preliminary 3Q revenue forecast $18.4m-$18.6m vs previous $20m-$20.5m forecast, estimate $20.3m
  • MEMC Electronic Materials (WFR) subsidiary SunEdison sold plant in Italy to First Reserve; sees total price EU276m 
  • Mosaic (MOS) posted 1Q EPS 67c vs estimate 71c


  • One day: Dow (0.72%), S&P (0.80%), Nasdaq (1.11%), Russell (1.45%)
  • Month/Quarter-to-date: Dow (0.37%), S&P (0.4%), Nasdaq (1.03%), Russell (0.97%)
  • Year-to-date: Dow +3.07%, S&P +1.94%, Nasdaq +3.31%, Russell +7.06%


  • ADVANCE/DECLINE LINE: -1347 (-2460)
  • VOLUME: NYSE - 943.71 (-11.99%)  
  • SECTOR PERFORMANCE: Every sector declined yesterday - European debt worries remain elevated as Ireland’s central bank cut growth forecasts for 2010 and 2011 and as the government’s budget proposal in Greece showed expectations of GDP contractions in 2010 and 2011.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Sara Lee 7.22%, Ford +4.73% and Wynn +3.93%/CCE -30.79, American Express -6.53% and Micron -4.12%
  • VIX: 23.53 -4.58% - YTD PERFORMANCE: (8.53%)
  • SPX PUT/CALL RATIO: 1.48 from 1.32 +12.18%


  • TED SPREAD: 17.40, 3.043 (21.199%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.03%
  • YIELD CURVE: 2.09 from 2.19


  • CRB: 283.99 -0.60%
  • Oil: 81.75 -0.13%
  • COPPER: 366.40 -0.72%
  • GOLD: 1,314.70 -0.06%


  • EURO: 1.3691 -0.73%
  • DOLLAR: 78.44 +0.46%




  • European Markets: FTSE 100: +0.27%; DAX: +0.10%; CAC 40: +0.66%
  • European markets after a cautious open have moved higher.
  • Fixed income markets were initially helped by Bank of Japan cutting interest rates and setting up an asset purchase fund, though this was tempered by Moody's comments that they may downgrade Ireland's sovereign credit rating further.
  • EuroZone economic leaders met with China's Prime Minister and in a news conference indicated they had urged China to allow an orderly and broad-based appreciation in the yuan though say China doesn't share the regions view for quicker yuan appreciation.
  • Major indices moved higher supported by generally constructive revisions to the regions Services PMI data with financials amongst the leading gainers and all sectors trading up on the day.
  • French Sep Final services PMI 58.2 vs preliminary 58.8
  • Germany Sep Final Services PMI 54.9 vs preliminary 54.6
  • EuroZone Sep Final Services PMI 54.1 vs preliminary 53.6
  • UK Sep Services PMI 52.8 vs consensus 51.0 and prior 51.3


  • Most Asian indices ended the day higher after the Bank of Japan cut its overnight rate target to between zero and 0.1%, from 0.1% and announced that it will create a fund to buy JGBs and other assets. It will buy up to ¥3.5T ($42B) of long-term JGBs and Treasury bills within one year of beginning the fund and will buy approximately ¥1T ($12B) of commercial paper, asset-backed commercial paper, and corporate bonds within one year.
  • The Reserve Bank of Australia unexpectedly kept its cash-rate target unchanged at 4.5%. Many economists had expected the RBA to raise rates following a hawkish speech by RBA Governor Glenn Stevens last month. Shanghai markets are closed
  • Euro area urged China to allow an orderly, significant and broad-based appreciation of its currency and added the Chinese authorities do not share the same view

Howard Penney
Managing Director


THE DAILY OUTLOOK - levels and trends















HST should handily beat, as everyone knows, but the lack of a big forward guidance raise could disappoint



Host Hotels reports its 3rd quarter results on Oct 13th.  We are projecting $1,019MM of revenue, $159M of EBITDA and FFO of $0.13 - handily beating consensus numbers.  HST should modestly raise guidance for FY2010, which may imply in-line to slightly lower guidance for Q4.  We do think that the 3rd quarter will mark the last big beat and raise quarter. 


We’re below the street for most lodging company results starting in 2Q2011.  Our thesis is that the April-July period of 2010 benefitted from pent up demand and we've seen a sequential slowdown since July.  The seasonally adjusted dollar RevPAR figures for August and September support our thesis.  Q2 2011 RevPAR may actually turn negative.  Up until then, however, analysts' estimates look reasonable but full year 2011 looks high to us.



3Q2010 Detail:

*** Note our numbers aren’t same store

  • Property revenue of $949MM
    •   Room revenues of $627MM growing 8.2% YoY
      • RevPAR up 10.8% YoY to $120.09
      • Occupancy at 74.6% and ADR at $161.09
    • Food and beverage revenues growing 6% YoY to $257MM
    • Other revenues up 3% YoY to $66MM
      • We assume lower cancellation and attrition fees negatively impact this quarter’s results by $5MM
    • Rental income of $20MM; $60MM of revenues from leased select service hotels & office buildings and a $10MM charge for hotel sales for property which HST records rental income
    • $741MM of property level expenses, broken out as follows:
      • $179MM of room expenses, amounting to a 6% YoY increase and a CostPAR increase of 2%
      • $213MM of food & beverage expenses, representing a 4% YoY increase
      • $271MM of hotel departmental expenses
      • 2% YoY increase in other property level expenses to $78MM, which equates to a 1.9% CostPAR
    • Management fees of $39MM, increasing 18% YoY
    • $169MM of property EBITDAR
    • Rental expense of $14MM; $61MM of expenses from leased select service hotels & office buildings and a $10MM credit for hotel sales for property which HST records rental income
    • Other stuff:
      • $24MM of corporate expense
      • $138MM of D&A
      • Net interest expense of $82MM
      • $13MM of taxes
      • 675MM share count  for FFO calc

EARLY LOOK: What Makes It So Hard


“What makes it so hard is not that you had it bad, but that you're that pissed that so many others had it good.”

-Melvin Udall


EARLY LOOK: What Makes It So Hard - Jack Nicholson



In 1997, Jack Nicholson won the Oscar for Best Actor for his portrayal of an obsessive-compulsive Melvin Udall in “As Good As It Gets.” Particularly for anyone who has ever lived and worked in New York City, this movie really resonated. It was human.


As the Street makes its final push into year-end bonuses, this Melvin quote may not speak as loudly to some of us, but it’s ringing loud and clear across America. How else could the US stock market have its best September in 71 years and US Consumer Confidence readings go DOWN month-over-month? While Americans may not know what “QE” means, they’re pretty sure they should be pissed about it…


Let’s set aside the Manic Media begging Bernanke for more of what he himself has no idea will perpetuate and consider 3 intended consequences that make this so hard for common sense people to accept:

  1. Debauchery of America’s currency.
  2. Record low rates of return on savings accounts.
  3. Economic stagflation.

Now now, don’t get all in a heat here if you are in the perma-deflation camp. At lower prices, we’ll be right there with you. For now prices are inflating. Last week saw gold hit another record high. Oil and copper prices were up another +6.7% and +2.2% week-over-week, respectively.





EARLY LOOK: What Makes It So Hard - Federal Reserve



Consequence #3 is a direct function of the US Federal Reserve being willfully blind to points #1 and #2.


What makes this so hard is the truth.


The truth is that Americans don’t have to buy into Officialdom’s portrayal of the truth. In “A Few Good Men”, Nicholson’s character tried pulling rank by suggesting “you can’t handle the truth!” Sometimes the “authorities” on critical American matters are wrong about the definition of truth.


Americans know the truth. Americans don’t like being lied to. The truth is marked-to-market on their desktop and in their bank accounts every single minute of the day.


For the 1st week in the last 5, the SP500 was down last week. It was barely down, but the point is that it was down. My submission on why is very straightforward. The Burning Buck starts to morph into a very bad thing, turning reflation into inflation, at a price.


Now slowing US economic growth + accelerating inflation growth = economic stagflation for those countries who have a higher nominal rate of inflation than they do economic growth. For countries that have to implement austerity measures, this problem will compound itself by real-wage growth starting to go negative year-over-year. The only thing worse than not having a job is getting a pay cut.


Back to a real-time update on the intended consequences of Bernanke’s plan:

  1. US Dollar = down another -1.64% last week; down for the 15th week out of the last 18; and down -11.8% since June!
  2. US Treasury Yields = down another -6.8% last week to 0.41% 2-yr yields; and down again this morning to a record low 0.40%


EARLY LOOK: What Makes It So Hard - 2yryield



Again, that’s just the truth. And the truth is that a country has never devalued its way to prosperity. Sure, in the short term, inflation makes this good for some of us. But, in the long run, some of us need to remember that it’s the rest of us that matter most.


My immediate term support and resistance lines for the SP500 are now 1141 and 1155, respectively. I currently have a 52% position in Cash in the Asset Allocation Model (down from 55% on Friday as I added a 3% position in corn). In the Hedgeye Portfolio, I’ve moved to 13 long positions and 11 shorts.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer



This note was originally published at 8am this morning, October 04, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

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