I Hate Disco

From: Derek Hillen
Sent: Monday, November 28, 2011 11:15 AM

To: Derek Hillen
Subject: I Hate Disco

“I feel the same way about disco as I do about herpes.” - Hunter S. Thompson

The latest shipping news, or rumor, comes to us from Italy; La Stampa, the influential national daily owned by FIAT, claims the IMF is preparing a 600 bn Euro loan to bail out the Repubblica Italiana. Today’s headline reads:

E l’Fmi prepara una curada 600 miliardi per l’Italia.”

Italy has the third largest bond market in the world and 10 year yields are now above 7%, which, as we all know, was the level where Greece, Ireland and Portugal all cried “Uncle” and had to be picked up off the mat. Also, given that Italy is $2.5 trillion in debt and has over 300 bn Euros of refinancing coming due next year, markets are likely to happily take the rumor as “fatto,” not “falso.” To do so, however, we have to assume that the US has given the nod to this bailout and is coming up with some of the money. Other good news, supportive of a short term bounce in equity markets, comes from pepper-spraying bargain shoppers in the US. Here, another African saying comes to mind, “Never get between a hippo and water.” And the same might be said of recklessly placing yourself between a mace packing mama and a cheap Xbox360. Despite the mace spraying, some opportunistic groping and a few unfortunate parking lot shootings, US Thanksgiving weekend retail sales were surprisingly strong, up 16% to $52 bn. Today is also “Cyber Monday” where online retailers jump on the discount bandwagon and results are also likely to be strong. The “risk on” switch has been flipped and the music is starting to play again.

And that reminds me why I hated disco and I hated “funk.” The music sucked and I didn’t care if those were the “in” things when I was growing up. I liked, (and still like) The Doors and The Who. Disco and funk rapidly went back down the toilet from whence they came but Jim Morrison and Pete Townshend are still being played. Getting back on track (pun intended) I don’t like the music now, either. This music will be strangled as the risk-on switch is switched off at anytime leaving investors groping each other in the dark. As The Who put it, “Don’t get fooled again, no, no!” Proceed with caution, more groping ahead.


Adrian Lowe has initiated on the Macau gaming sector today (report “Favorable Odds” attached) with an Overweight weighting. Casinos are great businesses to own with high barriers to entry and strong returns on investment. Adrian is forecasting average ROE for the six licensed operators in Macau to rise from 22% last year to 35% by 2013. His top pick for the sector is Sands China (1928 HK, Buy), the leading mass market casino operator in Macau and owner of The Venetian. We prefer mass market exposure due to the resilience of the market vs VIPs. Sands Cotai Central opens next year and will be the only major casino property to open in Macau for the next four years. Finally, Adrian thinks it likely that Sands China will be included in the Hang Seng Index in February. Currently trading at 14X 2012 PE with 37% EPS CAGR, Adrian’s target price for Sands is $25.4.


The credit crunch continues in the property sector in Hong Kong, Keith Yeung writes. We have seen local banks increase mortgage rates consistently all year long and now we see corporate lending is tightening quickly, impacting top quality borrowers as well. IFC Development, a JV between SHKP (16 HK), Henderson (12 HK) and HK & China Gas (3 HK), which owns IFC next door to me here in Central, has seen its syndicated loan of HK$17 bn slashed 70% to HK$5 bn. Pricing has also risen to an all in 173-176 bps, from the original 140-150bps. Compare this to Q2 when SHKP secured a 5-year syndicated credit facility of HK$16.75 bn for 100 bps, all in. Meanwhile, in the physical market developers continue to cut prices weekly. Last Friday, Chinese Estates (127 HK) cut another 10% off the prices in One Wanchai raising the total discount to 18%. More price cuts likely.


You can get our research by typing MASR on Bloomberg.


Derek Hillen, CAIA


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