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THE M3: GOLDEN WEEK VISITATION

The Macau Metro Monitor, October 11th 2010

 

MORE VISITORS DURING THE NATIONAL DAY GOLDEN WEEK macaubusiness.com, Intelligence Macau

Golden Week (October 1-7) visitors surpassed 680,000, an increase of nearly 13% YoY. More than 470,000 were from Mainland China, a 12.38% YoY growth.  The average occupancy rate of three-to-five-star hotels during the National Day Golden Week holiday reached 90%, a 2.7% point increase YoY.  The ADR of three-to-five-star hotels was MOP1,422 (US$178), up 16% YoY.

 

IM is concerned about the the overflowing traffic at the Gonbei immigration checkpoint.  The capacity limit at the facility is only 300,000 visitors per day.  The very long wait lines may deter visitors to Macau for next year's Golden Week.


Defend Yourself

“Defense is superior to opulence.”

-Adam Smith

 

Thankfully, I didn’t waste much of my time this weekend listening to professional politicians at the IMF meetings in Washington make their proactively predictable protectionist comments about global currencies. As the aforementioned Scottish moral philosopher aptly put it, “all money is a matter of belief.”

 

Neither Adam Smith’s ideas about free market capitalism, nor his citations from “The Wealth of Nations” get much air time in the manic media these days. US stock market cheerleaders are much more focused on “New Keynesian” economic theories of Big Government Intervention that  are allegedly going to help policy makers save themselves from adhering to the laws of gravity.

 

Rather than engage in a philosophical or ethical debate about ideas coming out of the Scottish Enlightenment this morning, I’m going to give you some advice in modern day plain English – Defend Yourself. That’s right and that’s it – defend yourself because, unless you have a legitimate Global Risk Manager managing your money, no one else will.

 

Notwithstanding the obvious protectionist commentary coming out of the world’s top 3 economies this morning (USA, China, and Japan), here are a few other representative central banker quotes that came out of the IMF meetings:

  1. Brazil: “Brazil won’t pay the price for several countries’ imbalances. Our position is: Brazil will protect its economy regardless.”
  2. Philippines: “In the face of possible further weakness in the US Dollar, the central bank continues to assess investment diversification options.”

At the end of the day, the world is still too long of the US Dollar and the broken promises that back it. This isn’t new (we’ve been short the US Dollar since June 7th). It’s simply becoming consensus. And, unlike stock market consensus, global political consensus is much more difficult to reverse.

 

The “consensus” 2-2.5 month direction of the US stock market has been often reversed in 2010. Students of the Real-Time Market Enlightenment get this. As a result, they will likely continue to profit from the Mathematical Enlightenment called mean-reversion.

 

Since we made our call for May Showers on April 16th, I haven’t seen such obvious signals to suggest you defend yourself from a US stock market exposure perspective. Never mind what the dude at Citi thinks about our levels, Newton and Einstein would most likely love this call as our Hedgeyes are intensely focused on measuring both time and space.

 

Time (duration) and price (space) aren’t very useful for economic theoreticians who have never traded a market in their life. Today’s selling opportunity is really amplified by the Academic Dogma that is driving US political consensus that QE2 is going to end well. As your local professional politician Burns the Buck, global politicians are becoming increasingly protectionist about what it means for their constituencies.

 

Admittedly, we were a little early with the April Flowers/May Showers macro call by about a week (the SP500 topped for 2010 YTD at 1217 on April 23rd). But early is as early does – seeing something coming before it actually occurs and having the patience to wait for your entry point (or in this case, selling point) is easily the most challenging aspect of my risk management day.

 

In the spirit of keeping the accountability pants on, as a reminder here are the market factors I’ve been looking for since the morning of September 29th when I wrote a note titled “A Heavier Crash”:

  1. We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.
  2. We need to see volatility (VIX) get oversold towards 20.
  3. We need to continue to see the world’s said “reserve currency” lose its credibility.

And no matter where we go this morning, here we are. Check, check, and check on the levels. Fellow Risk Managers, ‘tis time to defend yourself.

 

I started buying protection by investing in volatility (VXX) on Friday. I get that it’s not a perfect instrument when considered alongside the volatility index (VIX), so we model the risk/reward and probability in the VXX from the bottom-up on its own historical price, volume, and volatility merits.

 

I have not yet shorted the SP500 (SPY) as my risk management model was flashing amber lights on Friday to wait and watch for the 1169 line in terms of the US stock market being immediate term overbought.

 

Yes, Dear Theoretical Dogmatists, Hedgeye reserves the unalienable right to change our game-plan as the game changes. Defending ourselves against your Ivory Tower economics is our advice as we drift ominously higher toward 3 more Fridays in October.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Defend Yourself - EL heute


GOLDEN WEEK DELIVERS AS PROMISED

The first 10 days of Oct were off the charts in Macau. Normalizing the rest of the month produces full month estimated growth of 63-72% YoY growth.

 

 

Macau produced HK$8.6 billion in table revenues in the first 10 days of October.  Of course, while stunning, this number was impacted by the Golden Week celebration.  After normalizing the rest of the month and adding slot revenue, we arrive at a full month revenue projection of $20-21 billion or YoY growth of 63-72%.  This seems stronger than general consensus.

 

In the chart below, we list the market shares for the first 10 days of the month.  We have been hearing Wynn’s hold percentage has been running high the last few weeks and that seems to be corroborated in its October market share.  While 14.2% is better than the low hold impacted September at 12.0%, October is so far only in-line with its substandard summer share. 

 

LVS share moved over the 20% mark thus far in October.  We suspect The Venetian’s VIP push is paying off.  The property appears to be advancing commissions to junkets for up to two months.  Another positive is MPEL, which is on its way for a fourth straight month of above trend market share.  MPEL has been even more aggressive with junket credit than Venetian and the property’s Mass business continues to ramp.  Do these guys finally have their act together?  We may have to conclude that they do.

 

As expected, MGM’s share continues to strengthen as it readies itself for the IPO.  MGM has been as aggressive as MPEL in advancing commissions on a 3-4 month basis.  In terms of losers, it looks Galaxy is taking one on the chin.  We’ve heard they have been mauled on the tables.

 

GOLDEN WEEK DELIVERS AS PROMISED - macau1


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IT'S NO MIRAGE BUT PENN IN VEGAS BABY

Still a work in progress but PENN takes a major step to a Vegas presence

 

 

Earlier today, Penn announced it has purchased all of The M Resort bank debt plus $160MM of subordinated debt formerly held by MGM, from Bank of Scotland for $230.5 million.  Since M Resort's TTM EBITDA is in the "teens" and cannot service its debt, the property has no equity value and therefore Penn effectively purchased M Resorts for $230.5MM.  That said, a few things need to happen before Penn can take the keys and begin operating this property.

 

While Penn was licensed in Nevada this summer when they took a minority stake in a slot manufacturer headquartered in the state, they still need to get a license to operate the property.  According to our sources, securing an operator license in Nevada takes approximately 6 to 12 months.  Until Penn gets licensed, they need to play nice with the Marnell family, who currently holds the license.  It's likely Penn will pay Marnell to operate the property during its licensing period.  We also believe that during this period, Penn will likely file the property for bankruptcy to clear it of any outstanding claims and liens.  The bankruptcy process should be rather painless but is good precaution to make sure that once they take over the property they are free and clear.

 

So what do we think of the deal?  Well, it's probably one of the cheapest ways for Penn to get a foothold in Vegas and takes away any overhang of them doing an expensive 'bad deal.'  While on the surface the purchase price was expensive, it's actually not a terrible deal when taken into account that:

  • The property will be debt free
  • Is brand new and requires minimal capital expenditures for the next few years
  • No taxes will likely be paid any time soon
  • EBITD is at trough levels

In addition, Penn believes that it can operate the property more efficiently and get rid of some of the overpaid executives at the property which will help lift EBITDA.  Over time, Penn will also be able to use this property to cross market and offer their best customers a place to gamble in Vegas a la the Harrah's model.  While we wouldn't characterize this deal as a game changer and it will take some time for the payoff, it seems like a smart strategic move for PENN


The Week Ahead

The Economic Data calendar for the week of the 11th of October through the 15th 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 - caly1

The Week Ahead - caly2


Shallow Charlatans

This note was originally published at 8am this morning, October 08, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"A modern philosopher who has never once suspected himself of being a charlatan must be such a shallow mind that his work is probably not worth reading."

- Leszek Kołakowski

 

Listening to Bloomberg’s Tom Keene interview Alan Greenspan last night gave me clarity on something that I haven’t quite been able to put my finger on for a long time. On the topic of US economic policy, the world has been transfixed by Shallow Charlatans.

 

Now let’s not confuse the word transfixed with convinced. Per the Merriam-Webster definition, to be transfixed is “to become motionless with horror, wonder, and astonishment.”

 

I became motionless last night – literally - as I was driving home down the Merritt Parkway listening to their discussion, I had to pull over to make sure I wasn’t selectively being astonished. Maybe it was my own personal prelude to listening to what I was hearing. Maybe it was meant to be listened to, rather than watched. I’m not sure. I’m still young enough to know what I don’t know.

 

What I do know is that I don’t surround myself with politicians or sell-side “economists” who are prone to groupthink. After yesterday’s market close I left the office for New Haven’s Owl Shop to have a cigar with some of the most sophisticated European buy-side investors I know. After that, I had a nice dinner at Mory’s with some colleagues who are trying to figure out how to not repeat history’s risk management mistakes.

 

Then, no matter where I wanted to be, there I was… in my car… parked at the Mobile station in the dark…. left in horror with what I thought would be this morning’s headline news…

 

When I woke up this morning, it was still dark… and I was still astonished – but the best news was that Greenspan’s revisionist history from last night wasn’t a top 3 Bloomberg headline. This is progress. Americans aren’t as stupid as the professional politicians who have been pillaging their savings with ZERO percent interest rates purport them to be.

 

HEADLINE: “Greenspan Says U.S. Creating `Scary' Deficit as Borrowing Rises”

 

The only thing that’s “scary” here folks is that an 84 year old man still fails to realize that what he’s scared of are the problems he perpetuated.

 

Even though Keene and Greenspan weren’t focused on it last night, the #1 factor in global markets today is the US Dollar. Yes, that could very well change next month or next year, but for those of us who are accountable to what comes out of our mouths, today’s prices are what matter most.

 

While it’s kind of astonishing to hear a Shallow Charlatan talk about the market when he’s never traded one, this remains the contrarian investor’s greatest opportunity – fading the sell-side and groupthink consensus. Consensus is that QE is a must and Burning The Buck is ok (until it isn’t). Consensus has given birth to some of the highest inverse correlations to the US Dollar that I have ever seen.

 

Rather than being transfixed by the radio or television, take 30 seconds out of your day to stare at this math embedded in correlations to US Dollars:

  1. High Grade Copper = -0.98
  2. Gold = -0.97
  3. Silver = -0.97
  4. Platinum = -0.93
  5. Reuters CRB Commodity Index = -0.96
  6. India’s Sensex Index -0.92
  7. Brazil’s Bovespa = -0.91
  8. SP500 = -0.88
  9. Rough Rice = -0.87

Now the way Keene whipped around his “7-standard deviation” jargon and Greenspan found a way to obscure just about the most basic of algebraic relationships, understand this folks – there are a lot of market practitioners out here who are playing this game with live ammo who get the math. Our job isn’t to talk over you. We have your back.

 

The basic math that I am showing you here is on our immediate term TRADE duration. In the immediate term is where you’ll find critical market risk. Yesterday the US Dollar was up a mere +13 basis points, or 0.13%, and the deleverage on the price of gold and oil were huge.

 

If this government and the Shallow Charlatans that advise it want to pretend that they aren’t perpetuating volatility and systemic risk, they can go do that. But I have a funny feeling that the nasty US Consumer Confidence readings we’ve had as of late (ABC/Washington Post weekly reading down to minus 47 this week) already tell you everything you need to know about Americans and their money – they know a ponzi-scheme when they smell one.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1148 and 1164, respectively.

 

Have a great weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shallow Charlatans - greenspan


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