The Macau Metro Monitor, November 26th, 2010


Secretary Tam announced that to help local SMEs, the government has set a two-month deadline for 2011 for the approval of imported labour requests.  There will be no changes to its current imported labour policy.  Tam reiterated that the import of workers will only be approved after the local human resources are being “used properly”.  As of September 2010, some 4,100 skilled workers have obtained residency in Macau


Changi airport handled 3.58 million passengers in October 2010.  October's 7.9% YoY increase is the slowest growth this year.



Macau authorities found 21 illegal workers during a raid on the Galaxy Macau construction site.


Tang Nai Soon, a Malaysian lawmaker, said in the state assembly that he wants S'pore casinos to stop offering free trips to Malaysians and to discourage them from gambling across the Johor-Singapore Causeway.  He thinks an entrance fee should be levied on Malaysians and a limit should be imposed on the number of trips. 

Thinking Quant

This note was originally published at 8am this morning, November 24, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I think a model works if it’s a useful way of thinking about things.”

-Emanuel Derman


Some of the “quants” make money. Some of them blow up. Thinking Quant is probably the most important shift I’ve made in my young investment career. I’ll always give Alec Litowitz at Magnetar credit for that. He helped me bridge the traditional long/short equity stock picking approach of the Dawson-Samberg era with some serious math.


That doesn’t make me a “quant.” However it ensures that I don’t confuse qualitative “channel checking” on Coach handbags with a repeatable risk management process. It makes me aware of quantitative facts that are occurring in this globally interconnected game of chaos theory. Awareness is important.


Emanuel Derman’s quantitative thought process was introduced to me in a book that I’ve cited in recent months called “Lecturing Birds On Flying” (by Pablo Triana). Goldman alums should be quick to ask me if I’m kidding – you don’t know Derman? (Derman ran Quantitative Strategies at GS from 1990 to 2000).


Nope, I didn’t know who Derman was and I’m thinking some of you don’t know who Gunner is either. That’s the most beautiful part of life – waking up every day knowing what you don’t know.


What some of the perma-bulls didn’t know about this globally interconnected marketplace is that there was an extremely high level of what we people who are sometimes Thinking Quant call Correlation Risk to the immediate-term price movements in the US Dollar Index.


Since we bought the US Dollar (UUP) on November 4th, you can see what asset prices from Chinese stocks to commodities like Copper have done. If you didn’t know they had extremely high immediate-term inverse-correlations to a Buck that stopped Burning, now you know…


With the US Dollar up for the 4th consecutive week, it’s realized a mean-reversion move to the upside of +5%. Since we like to consider risk on a Duration Agnostic basis, here are the two levels that currently matter most for the US Dollar Index in my macro model:

  1. Immediate-term TRADE support = $77.31
  2. Intermediate-term TREND resistance = $79.71

After globally interconnected risk to an UP Dollar has been revealed, THE questions on reactive risk managers’ minds this morning is trivial. They’ll be hyper focused on the risk that’s occurred in the rear-view mirror. Can we see a Buck Breakout above the TREND line? And if we do, should we sell everything that’s been inversely correlated to the US Dollar for the last 3 weeks?


Fortunately, this is where both the myopic modeling quants run into the same problems as the channel checkers who saw none of this coming to begin with. I say fortunately because making what we call “the turn” on big macro moves is where the big bowls full of alpha start barking.


RULE #1 about immediate term Correlation Risk: it’s never perpetual!


What this means is that you effectively have to have risk management systems that refresh real-time or you run the risk of getting run-over. When Correlation Risk reverses, the Chuck Prince music stops, and the macro moves turn quickly.


The best way to illustrate this investment point this morning is to refresh the THEN and NOW looks I gave you in my “Stepping On Cocaine” Early Look note from November 16th where I outlined the immediate-term inverse correlations vs. October 16th:


THEN (immediate-term TRADE correlations to USD on October 16th):

  1. SP500 = -0.80
  2. CRB Commodities Index = -0.88
  3. Brazil’s Bovespa Index = -0.92
  4. Oil = -0.91
  5. Gold = -0.96
  6. Copper = -0.95

NOW (immediate term TRADE correlations to USD this morning):

  1. SP500 = -0.58
  2. CRB Commodities Index = -0.51
  3. Brazil’s Bovespa Index = -0.91
  4. Oil = -0.56
  5. Gold = -0.37
  6. Copper -0.38

In other words, for the immediate-term DOLLAR UP TRADE, the easy risk management money has been made and now these immediate-term correlations are starting to burn off.


Thinking Theoretically, this makes a lot of sense to me. Using 8 centuries of data, there has never been a wealthy and prosperous country that has sustained living off of plundering their citizenry’s savings via a debauchery of their currency. Strong currency is good. In Thinking Quant, I see a US Dollar that’s starting to look strong like bull.


My immediate term TRADE lines of support and resistance for the SP500 are 1171 and 1193, respectively. I currently have a ZERO percent allocation to US Equities and a 6 % allocation to German Equities (which, incidentally, now have a POSITIVE correlation to the USD of +0.29).


Best of luck out there today and Happy American Thanksgiving,



Keith R. McCullough
Chief Executive Officer


Thinking Quant - quant


Breaking headlines on O Globo tell of escalating violence.  After overnight incidents left buses and cars burning, it is now reported that attackers set a bus on fire with the driver and passengers on board and prevented them from exiting.  The occupants of the bus survived but suffered burns.


A note was found by police on one of the buses burned last night, reading “if the police keep this up there won’t be any World Cup, and there won’t be any Olympics.”


Twitter reports “ipanema” and “Sergio Cabral” (the governor of Rio state) are global Trending Topics, as violence continues across the city of Rio de Janeiro.


Today’s police operations in the favelas have resulted in 13 deaths so far.  About 13 persons have been taken into custody and small arms and explosives have been confiscated. That brings the death toll to 21 dead since Sunday including a 14 year old girl. Over 150 have been detained in the last 3 days.


Speaking in a press conference right now a police colonel says there are currently 7,000 police in the streets of Rio, including helicopter and armored vehicle support.  This is a serious military action.


The criminal groups are promising a “Super Saturday.”  As bad as things hings could get truly ugly.


From a quantitative perspective, Brazil's Bovespa is bearish TRADE and bullish TREND - for now. Last night it tested a TREND line breakdown, closing below its TREND line of 68,826. It is trading slightly above that intraday, but we'll need to see it close above the TREND line for bullish confirmation.


Moshe Silver

Managing Director / Chief Compliance Officer



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Thanks For Giving Us A Society Gone Wild

For this Thanksgiving, on behalf of my teammates here at Hedgeye, I'd like to thank all of you - our subscribers, partners, and friends - for giving us all of the research feedback that you do.


Without you, there is no us. Long live the democratization of real-time research.



On the topic of this week's ugly housing data, here's some real-world, real-time, feedback from a debt-free American who is very much worried about how this all ends.


Dear Hedgeye,


I read your great articles on the consumer and on housing.  I live in Phoenix and what I see are people that have houses worth 50% of what they were a few years ago.  They are not motivated by lower interest rates, not when they see a $200-$400K loss.


At the peak of the housing bubble there was a time when there was no home on the market in Scottsdale and any home put on the market sold for a minimum of $500K.  My friend, a realtor, received earnest money down on homes, sight unseen.  Those same homes are now $200-250K if you can get a buyer.  Many of those people should have never bought those properties and the loss they are looking at is more than they make in many years.  But worse, there are a growing number of people that can afford to make payments that are deciding not to.  The neighbors on both sides of a friend of ours bought second properties in the same development (1/2 the cost of their 1st property), then, after closing, foreclosed on the first property.  These are $850K homes and people that can afford them.  They said it was a “business decision”.  Their attitude is that their credit will recover faster than their loss would go away.  My friends are now living in an $850K house (they paid cash for) with two homes next door that just sold for $350-400K. They won’t pay cash again.   Another friend of mine foreclosed and defaulted on close to $1M in debt.  One and half years later they bought an even more expensive home at a lower interest rate.    A neighbor’s brother was current on his mortgage and just wanted the interest rate refinanced.  His bank told him to stop making his payments.  This is one of our top five TBTF banks.  I know people living on unemployment for 2 years yet unwilling to take a job for less pay than what they get on unemployment.  I saw someone drive to the supermarket in a new Cadillac and then use food stamps.  I know people that haven't disconnected their cable, traded in the two BMWs, or stopped going to happy hour while defaulting on their loans.


What I see in the US is a society gone wild.  You pay for your home or credit cards until you decide it isn’t worth it anymore.  People have multiple foreclosures and bankruptcies yet get low interest rates guaranteed by the taxpayer to do it all again and again.  We care more about whether people spend more than whether they will or even can pay it all back.  The more people that break their contract to pay back loans, the more acceptable it is perceived to be.  It is a snowball gathering momentum.  My question is why do banks report "credit conditions easing".


Maybe I am just seeing the worst of it, but for what it is worth I agree with your housing assessment.  I think it has further to fall.  The people sitting in underwater loans probably won't sit there longer when they see others defaulting and living in their homes for a couple years before eviction or buying the same house they own but at a much cheaper price. 


People have an intolerance for losses. Our system doesn't hold anyone accountable except the taxpayer. You can't build a responsible financial system and country without rules. I give up trying to understand why this ship is still floating.  So please keep up the hard work and keep us safely invested.  We greatly appreciate your reports and investment decisions.



Anonymous Subscriber

Crossfire in Europe



-Today Ireland’s PM Brian Cowen released the country’s four year budget plan to cut €15 Billion from the deficit. The plan hopes to cut €10 billion from spending and raise €5 billion in extra taxes, and includes:

  • 24,750 public sector job cuts
  • €2.8bn reduction in social welfare spending
  • Plans to raise an additional €1.9bn from income tax
  • The minimum wage will be cut by €1 cut to €7.65 an hour
  • VAT will be raised from 21% to 22% in 2013, with a further increase to 23% in 2014
  • A property levy, called a site tax, will be introduced
  • Unemployment is expected to fall from 13.5% to below 10% over the four years
  • The government forecasts the economy will grow by an average of 2.75% in the years from 2011 to 2014
  • Corporate rate of tax of 12.5% will remain untouched
  • Target to narrow the budget deficit to 3% of GDP by end of 2014

Catalyst: On Dec. 7th lawmakers are scheduled to vote on the country’s 2011 budget in parliament, which is expected to shave €6 billion from the budget through spending cuts (~€4.5 Billion) and tax hikes of ~€1.5 Billion. Passage of the package should ensure a funding (bailout) agreement from the EU and IMF, projected at €85 Billion.


PM Cowen, who publically stated on Monday that he is prepared to dissolve his government following the passage of the 2011 austerity package and EU/IMF bailout, is standing on pins and needles as opposition parties are demanding snap elections. Further, Cowen’s narrow 3-seat parliamentary majority with his junior coalition partners, the Green Party, threatens to vote against him in a by-election vote tomorrow, which could further turn sentiment against him. [For more, see our post on 11/23 titled “Voted Off the Island”.]


Main Issue: while the Irish may meet the demands of the EU/IMF to find savings worth €6 billion next year to secure a bailout, the government makes a rather lofty growth estimate for the country given the severity of austerity measures, which we believe should choke off growth to levels far below the government’s projections.





-Workers are on striking across the country protesting austerity measures today; infrastructure ground to a halt.


Catalyst: On Friday (11/26) PM Jose Socrates and his Socialist government attempt to pass the final round of legislation on its 2011 spending plan, with austere measures including:

  • 5% wage cut for public workers earning more than $2,005/month
  • Hiring freeze of government jobs
  • Raising VAT 2% to 23%

All these measures are designed to shave down the country’s budget deficit that stood at 9.3% of GDP in 2009. While the OECD thinks Portugal can reduce its deficit to 4.6% in 2011, markets are telling a lot less convincing story with yields and credit spreads rising to higher highs (chart below). Further, data suggests its budget gap has increased +1.8% in the first 10 months of this year. One bullish point to note is that the country does not have a bond redemption until April 2011 and has completed this year’s bond sales.  


Crossfire in Europe - eyield


Main Issue: while the country did not experience a housing bubble like Ireland or Spain, Portugal has not shown real growth prospects, with Real annual GDP growth up a mere +0.4% on average over the last 7 years.  The country’s inability to grow could severely weigh on investor confidence that it can clean up its fiscal imbalances short of a EU/IMF bailout, similar to the cases of Greece and Ireland. It’s estimated that 80% of the country’s debt is held by foreigners, which further compounds the country’s ability to “internally” fix its fiscal imbalances. 





-An estimated 10,000 students held protests across the U.K. over plans to cut funding for education and increase university tuition fees.


Main Issue: As part of the effort by UK PM Cameron’s government to slash 81 billion pounds from public spending by 2015 to reduce the country’s deficit , Cameron is allowing British universities to charge as much as 9,000 pounds ($14,218) a year for tuition, compared with the current 3,290 pounds, as the government seeks to cut subsidies to colleges.


Take Away: We continue to believe that fiscal austerity measures will equate to social unrest.



And on that cherry note, Happy Thanksgiving!


Matthew Hedrick


PSS: Ammo for the Qtr

In looking at the upcoming quarter for PSS, we like what we see. The bottom-line is that we believe earnings are more likely to start with a ‘6’ than a ‘5’ as suggested by consensus expectations of $0.51 when the company reports next week. That said, there’s a reason why the stock is just now back to its pre analyst day price on October 20th while peers have surged 20% higher on average over the same period. In short, a disappointing long-term outlook for Payless domestic coupled with the reality that management is more actively vetting acquisition candidates spooked investors – as we hit on in detail in our “PSS: Ready, Shoot, Aim” post on 10/26. After walking away last month thinking the story was intact with room for upside compared to management’s outlook, we’re even more confident this is indeed the case due to both underlying industry strength confirmed in peer results and strong mid-quarter trend data.


Here’s a detailed look at how we're getting to $0.60 in EPS this quarter:



  • In taking a look at our monthly NPD POS footwear data, we can get a sense of what brands are doing from a directional standpoint. While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends. Since Q2, three of PLG group’s four brands have accelerated sequentially. In addition, with Q3 backlog up +70% compared to +50% in Q1, we expect revs up +21.5% on the heels of +20.3% growth last quarter.
  • In the domestic business, the river cards have all have all been revealed in the form of peer results and the results are exceptional. However, since Q4 last year – this has mattered little with PSS decoupling from its peers and significantly underperforming on comp. The primary reason -  the company missed the the boat on BOTH the boot and toning trends last year, which for a few quarters each contributed +4%-5% to peer comps alone. With boots accounting for roughly 20% of the fall assortment well above the single digit presence it’s had in the recent past and toning now contributing as well accounting for a +2.5% boost in Q2, we expect the comp performance gap to start narrowing this quarter.
  • We expect a comps to come in down -6% driven by more positive traffic seen across the channel as well as mix, which is likely to drive ticket up LSD. Simplistically, if we take 5% of the portfolio with an average ASP of $18 and shift it to boots/toning with an ASP of $30, this would increase the average ticket by +3%-4% alone. 

Gross Margins:

  • Headwinds in the quarter consist primarily of product costs and channel mix. With product costs expected up LSD in the quarter we estimate an -80bps impact in addition to another -50-60bps headwind from mix (greater PLG sales) assuming ~$45mm in incremental PLG sales at say an average margin below 30%.
  • More than offsetting these factors will be several tailwinds in the form of lower promotional activity (Oprah alone impacted GMs by roughly -200bps in Q3 last year), rent/occupancy with mid-to-high-teen reductions on 20% of the portfolio renegotiated annually equating to +30-40bps, and product mix by category with addition of toning and boots.


  • With another ~$10mm of expense related to building out both PLG wholesale and international similar to what we saw in Q2, marketing spend up slightly to support new lines/product, and Payless domestic and PLG retail to be kept relatively flat, we expect SG&A to be up a modest +3% in the quarter.


Given the company’s recent performance, it’s going to take more than a quarter to convince investors that this story is on track. However, we expect to see clear signs of progress when the company reports next week. With shares barely responding to strong peer results again yesterday, PSS is clearly in “show me” mode. As such, shares are likely to move higher on any results that come in less bad presenting investors with one last play on footwear before year end.


Casey Flavin


PSS: Ammo for the Qtr - PSS PLG Q3 trends 11 10


PSS: Ammo for the Qtr - Comp Table 11 10


PSS: Ammo for the Qtr - Comp 1yr 11 10


PSS: Ammo for the Qtr - Comp 2yr 11 10


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