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The Macau Metro Monitor, November 12th, 2010



The Macau Theme Park and Resort Ltd, led by Angela Leong On Kei, Stanley Ho Hung Sun's fourth wife and local businesswoman,  will build a MOP10.4BN Cotai theme park. Pending approval from the Land, Public Works and Transport Bureau, the resort project will consist of 3 phases, each taking around 2-3 years to complete.  The entire family resort will consist of one 5-star, four 4-star and one 3-star hotels with over 6,000 guest rooms, shopping malls, convention facilities, an indoor beach and wave pool, amusement rides, a 4D theatre, an equestrian centre, a horse carriage trail, and a water sports performance centre.


7,500 construction jobs are expected and once the theme park becomes fully operational, about 9,000 employment opportunities will be added to the job market.  Director Angela Leong disclosed that the project is for now only financed by Industrial and Commercial Bank of China (ICBC) and to date MOP 1BN has already been secured.  Of the MOP 10.4BN total investment, MOP 9.4BN is for the hotel development and MOP 1BN is for the theme park. The amount will be divided into MOP 4.4BN for the first phase construction, and then MOP 3BN each for the second and third phases.


CPI rose 4.4% YoY, beating estimates of 4%.  This has led to speculation of further tightening measures by the Chinese central bank.



According to the Securities Times, China plans to limit foreigners from investing in its real estate market.  The Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange have issued a notice to outline the rules, which will only allow individuals to purchase one housing unit for their personal use.  Foreign companies can only acquire non-residential office facilities in their registered cities, the newspaper said.

Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth

Conclusion: The latest Chinese economic data suggest China may continue with its latest round of tightening measures, as inflation and speculation continue to be a concern. Further, we are starting to see confirmation that QE2 will incrementally slow global growth.


Position: Long Chinese Yuan (CYB); Long the U.S. Dollar (UUP); Short U.S. Equities (SPY); Short Emerging Market Equities (FFD)


Chinese October inflation data came in hot this morning. CPI accelerated to a 25-month high of +4.4% YoY and PPI also quickened substantially to +5% YoY. In line with our call since late-August, we’re seeing more confirmation of accelerating inflation globally as a result of the Fed’s weak-dollar policy (QE2). Moreover, we’re seeing central bankers across the globe lash out against Quantitative Guessing, and judging by this morning’s data release, it’s no surprise that China has been the leader in anti-QE rhetoric of late.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 1


While economists could spend hours debating whether China’s “artificial devaluing” of the yuan is perpetuating inflation within its borders, the real truth that matters to market practitioners is that inflation is accelerating globally, across a spectrum of currency policies. Don’t take our word for it, however; pull up a chart of Brazilian, Indian, or Korean CPI (just to name a few countries).


Turning back to China specifically, we are inclined to suspect further tightening may be on the horizon. China has been varied in its efforts to combat inflation and speculation YTD, including raising bank reserve requirements (as recently as yesterday) , restricting home loans, forcing banks to hold more FX, and raising interest rates (10/19). Despite these measures, we feel China may be running out of room for further “cuteness” and that additional interest rate hikes are on the way.


Looking at real 1-year deposit rates, we see that inflation is consuming Chinese savings at an accelerating rate. In October, Chinese savers effectively paid a 1.9% tax on their 1Y savings deposits - even with the recent 25bps rate hike factored in.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 2


Considering that inflation has been, on the margin, eroding China’s high household and corporate savings (a combined 42.2% of GDP), it’s no surprise to see that China continues to struggle to rein in property prices as those savers turn to real estate investment on the margin. National Property Prices (70 cities) continued to grow in October, climbing +0.2% MoM. While the pace of YoY growth has been slowing lately (+8.6% YoY in October vs. +9.1% in September), the absolute level of YoY growth and the continued MoM gains continue to defy China’s efforts to dampen speculation in its real estate market. Further resiliency of property prices will likely necessitate incremental rate hikes or the implementation of the oft bandied about national property tax trial.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 3


Further compounding China’s inflation woes is the rate at which new loans are accelerating, gaining 587.7B yuan in October vs. advancing 595.5B yuan in September. While the second-derivative slowdown is welcomed by Chinese officials, the rate of growth in October far exceeds the average monthly growth needed throughout 4Q10 to achieve China’s official loan growth target of +7.5 trillion yuan ($1.1 trillion) for full-year 2010 (+402B yuan). On a positive note, new loans do show a bit of seasonality and typically slow into year-end, so the +309B yuan average needed in November and December to meet the target is not as big of a stretch as the headlines make it appear to be.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 4


Nevertheless, we feel the confluence of inflation eroding savings (which causes Chinese savers to speculate with their assets on the margin) and robust loan demand will continue to put upward pressure on Chinese inflation data, absent any meaningful policy changes. Layer on the global commodity reflation brought on by Quantitative Guessing and it’s evident to us that further rate hikes may be on the horizon in China.


It’s important to keep in mind that China is not alone in its bout with inflation. As Bernanke and the Fed continue to pursue a weak-dollar policy via QE2, there’s no reason to expect commodity prices to come down meaningfully in the near term, which will put upward pressure on both core and headline CPI readings globally (COGS inflation will likely get passed through to citizens, lest firms suffer margin compression). In turn, that will continue to lead to further tightening globally, which will weigh on global growth going forward. Keep the equation below in mind as you ponder the real effects of QE2 vs. what the Fed would have you believe:


QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


No wonder Bernanke is playing one vs. nineteen at the G20 Summit.


Darius Dale


No Money, Need Crisis

This note was originally published at 8am this morning, November 11, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“This country’s out of money and we better start thinking.”

-Erskin Bowles


Erskine Bowles is a Democrat. He was Bill Clinton’s Chief of Staff the last time this country ran a budget surplus. Now he’s President of the University of North Carolina and Co-Chair of President Obama’s Debt and Deficit Commission.


If you already haven’t, google ‘Bowles Pelosi’ this morning and you’ll see why professional US politicians are tee’ing up America’s balance sheet to implode. The good news is that this isn’t “new” news. Those who aren’t paid to be willfully blind get it at this point. The American political machine has crossed its proverbial Rubicon.


This is going to be critical news for the next few weeks because yesterday afternoon Messrs Bowles and Alan Simpson (former Republican Senator from Wyoming), released a “draft” of their debt and deficit report that’s due out on December 1st.


Commenting on the draft, compare and contrast these views:

  1. “Without tough choices, we’re on the most predictable path toward an economic crisis that I can imagine.” –Erskine Bowles
  2. This is “simply unacceptable” –Nancy Pelosi

Then consider the PR guy’s take from Stan Collender (former Democrat budget analyst): “Mathematically, it apparently works… Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”


Finally, here’s President Obama’s take: “So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts.”



  1. Bowles is calling it like it is.
  2. Pelosi doesn’t know what it is.
  3. PR guy knows what math is.

Question: Does the President of the United States have the leadership to listen, hear, and execute on the toughest fiscal decision of the century?


Ironically enough, as the Debt and Deficit Commission’s draft was being released, I was sitting in Peter Orszag’s office at Princeton University. Orszag, of course, just left Obama’s team after running the OMB (Office of Management and Budget). He’s done the math too.


We’ll send a research report out to our clients later on today that goes through the details of Hedgeye’s discussion with Peter, but the overall takeaway is that he not only agrees with our (and Reinhart & Rogoff’s) conclusions about structural debts and deficits, but he agreed that we’ll likely need another economic crisis in order to rid ourselves of this unbearable political polarization.


Now, to be clear, Orszag introduced and effectively utilized the word “polarization.” At Hedgeye we use words like: fiat, conflicted, compromised, fools, risk, charlatan, dogma, etc… but it’s all one and the same thing. And guess what Washington people? Americans have a Ph.D. in their gut on this too.


This morning Bloomberg released a poll (which I’ll editorialize) that confirmed most of what the objective mind in you has already internalized:

  1. 75% of people think Quantitative Guessing (QG) will be “ineffective”
  2. 60% of people (down from 71%) trust Bernanke at the wheel
  3. 44% of people trust Geithner has a clue on economic matters

Now at least Geithner is on the record admitting that he “isn’t an economist.” So when you read his quotes from the G20 this morning suggesting that the debauching of the Dollar has nothing to do with our professional politicians burning it at the stake, take his word for it – he doesn’t do interconnectedness.


Back to Orszag, Bowles, and the American leaders who remain brave enough to stand up against the tyranny of a compromised Congress…


Fellow citizens, it’s time. On this Veteran’s Day we need to ask ourselves if the time to rid this country of Pretended Patriotism isn’t now, when will it be?


As Peter Orszag stated plainly, the clock has been ticking. Any independent analyst who isn’t trying to snag a banking bonus or Washington consulting fees gets this. US municipalities and states are already in fiscal crisis – they’ll eventually need to be bailed out too (QE3). But who is going to pay for it? Will America allow Congress to raise the US Debt Ceiling in 2011? If America can’t issue debt at these artificially low rates, what happens next?


Maybe Mr. Macro Market is already giving us a preview of the answer – US Dollar UP, and US Treasury Yields UP. This is new as of the last week. We’re seeing immediate term breakouts in both. The Buck won’t Burn forever – particularly if we find a President who gets that this debt and deficit buck stops with him.


My immediate term support and resistance levels for the SP500 are now 1206 and 1239, respectively. I covered some short positions on yesterday’s opening market weakness and now have 10 LONG versus 11 SHORT positions in the Hedgeye Portfolio. I remain short the Euro (FXE) and long the US Dollar (UUP).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Money, Need Crisis - 1

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Bear/Bull Battle: SP500 Levels, Refreshed



For the 2nd day in a row, the US stock market has rallied (intraday) from what we call critical immediate term TRADE lines of support. Today, that line = 1209. This is important and something that should wear on the bears until it doesn’t.


The corollary to barely holding on to support is that eventually markets break support. With time and space, the probabilities of significant mean reversion corrections increase. Then, what was support becomes resistance. If the SP500 were to break down through and close below immediate term TRADE support of 1209, there is no support until 1187 (another -2.5% correction from yesterday’s closing price of 1218).


From a longer term perspective, it’s important to remember that, like the Nikkei 225 has in Japan for the last decade, the SP500 is simply making a series of long-term lower highs versus its leverage cycle-peak of 1565 in October of 2007.


From a more immediate term correlation risk perspective, the US Dollar is now trading bullish on our immediate term TRADE duration as well. This is new and, combined with a very hawkish macro calendar (global inflation data and G20 rhetoric), will have me doing a lot of waiting and watching. Support, after all, doesn’t hold in perpetuity.




Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed - SP500


Conclusion: One of the key factors outlined in my Brinker Black Book was the enhancement of EPS growth in FY11 by the resumption of its share repurchase program.  The company’s announcement that it increased its share authorization adds to my confidence that meaningful EPS growth is on the way at Brinker.

One of my primary reasons for being bullish on EAT has always been rooted in the strength of the company’s balance sheet.  Specifically, the company has the financial flexibility to invest behind Chili’s.  To that end, Brinker reaffirmed its financial strength yesterday when its Board authorized an additional $325 million in share repurchases.


Brinker reaccelerated its share repurchase program during the first quarter after completing the refinancing of its debt facility and closing the On The Border transaction in 4Q10.  During the company’s 4Q10 earnings call, management said, “we look forward to returning to a more rapid share repurchase strategy.”  Brinker bought back 5.3 million shares for $92.7 million during the first quarter.  At the end of Q1, approximately $197 million was available under the company’s share repurchase authorizations and subsequent to the end of the quarter; Brinker bought back an additional 4.3 million shares for $83.1 million.


Given the company’s FY11 guidance of $115 to $125 million in free cash flow, combined with the $215 million of cash on the balance sheet at the end of Q1, the company has ample flexibility to continue to buy back shares during the balance of the year.  This accelerated level of share buybacks will enable the company to partially offset any near-term earnings shortfall that could result from a continued slowdown in comp trends at Chili’s.  That being said, I continue to think that comp growth at Chili’s should begin to turnaround come fiscal 3Q11 when the concept will no longer be lapping last year’s “3 Courses for $20” promotion. 



Howard Penney

Managing Director


Having escaped the quagmire that is Washington’s bureaucracy, Peter Orszag provided some very interesting commentary during our conference call titled, “Out with the Rhetoric and In With the Facts on the Budget” that took place yesterday.  Here I will focus primarily on the insights he provided that pertained most directly to his view of the general outlook for the U.S. economy. 


In terms of GDP, the bottom line is that there are many headwinds coming into play.  Furthermore, if the Federal Reserve’s $600 billion Quantitative Guess does not work (you know where we stand), the outlook will become even less promising. 


First, we need to provide some context around where we have been.  Total private sector borrowing amounted to almost 30% of GDP in 2007 and in 2009 it had fallen to less than minus 15% of GDP, so you're talking about a roughly 45% of GDP swing in private sector borrowing over a two-year period.  This was a traumatic hit to the nation’s economy, not seen in generations. 


The tectonic shifts in the financial sector, housing market, and subsequent (and ongoing) consumer deleveraging pose drastically difficult obstacles for the Federal Reserve to surmount.  Unlike slowdowns that are associated with monetary policy being tweaked in order to address inflation concerns, Orszag stated that downturns triggered by the financial sector tend to take result in longer and more sluggish recoveries. 


As alluded to by Orszag, a recent study by Reinhart and Reinhart of roughly thirty similar instances of economic downturns triggered by difficulty in the financial sector suggests that the average unemployment rate in the decade following such crises is 5% higher than immediately pre-crisis; housing prices being 15-20% lower over the entire subsequent decade versus pre-crisis levels and government debt as a percentage of GDP being 90% higher that the pre-crisis level.  The increase in debt, according to Orszag, reflects the downturn itself and the policy measures that are taken to offset it.


What does the nest 12-to 24 months look like?  First the positives:

  1. Real exports are growing quite rapidly (aided by the debauching of the U.S. Dollar)
  2. (Notwithstanding the CSCO news today)  Investment in equipment and software has been growing nicely.  Firms making significant investments in short-lived assets.  The problem on the investment side is on the long end; assets with longer depreciation schedules are seeing a historically low share of investment allocation.
  3. Corporate profits have improved.  They were ~12% of GDP in 2006 and 2007, falling to 9% in 2009 and are now back up to ~11% of GDP on 2010.  The difference between 9% and 11% represents $300 billion in GDP so it’s significant step up. 


One caveat pertaining to point number three is that the surge in corporate profits is not resulting in significant hiring or long-lived investments.   Rather the profits are being retained as liquid assets.  The psychological impact of the Great Recession is clearly impacting the behavior of the Consumer and Corporate America.  The effectiveness, or lack thereof, of the Federal Reserve’s actions is leaving a huge question mark over the economic outlook.


The factors that supported growth in late 2009 and 2010 will become significant headwinds in 2011.

  1. The inventory cycle is going the wrong way in the first part of 2011; moving to net-neutrality towards impact on GDP growth.  (I recently posted that inventory accounted for 2.6%, 0.08% and 1.4% for the first three quarters 2010, respectively)  As a side note, Orszag noted that the sequential improvement in GDP in Q3 was unintentional as some firms were caught out by the slump in demand during the summer and unintentionally built up inventories in Q3.  That trend, Orszag expects, will reverse itself in Q4 and the early part of 2011. 
  2. The Recovery Act, despite the controversy, added 2%+ to GDP in 1H10.  By design the act was to have all the money “out the door” by the end of September and succeeded in doing so.  Going forward, the cost of the Recovery Act will be net neutral and eventually as it ramps down and, eventually – in terms of cash flow – will be net negative to GDP growth.
  3. The final factor is state and local deficits which are projected to be $100 to $150 billion a year for the next two tears.  Going forward, a much smaller share of which will be offset by federal subsidies, therefore a much larger share will need to be closed through tax increases and spending cuts at the state and local level.  


Taking points two and three, together that added a net 2% to GDP in 1H10 and will be a negative 2% to growth in 1H11.  If you then add the positive inventory cycle in 1H10 of 3.4% and you get the total contribution to GDP growth from the three factors of 5.4% in 1H10.    


Depending on your view of the inventory cycle, we are looking at a potential year-over-year swing in GDP in 1H11 of around 5.4%, which becomes a headwind in the next 12 to 24 months.  At best, we are looking at flat to 1-2% GDP for the next 12-24 months.       


What does all this mean for the consumer and the unemployment rate?  Under a good scenario, it’s going forward it’s going to be a hard slog of 1-2% GDP growth, which will prove to be inadequate in an effort to reduce the unemployment rate.  According to Orszag’s rule of thumb - to get to what the unemployment rate is; take whatever the GDP growth rate is, subtract 2.5%, and divide by two.  So, to get a 1% reduction in the unemployment rate you need GDP growth of 4.5% for one year. 


Given the GDP headwinds outlined on the call, it seems unlikely that the unemployment rate will improve meaningfully any time soon.   This is particularly problematic for U.S. corporations levered to domestic demand.


Howard Penney

Managing Director

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