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Notable news items and price action over the past twenty-four hours.

  • MRT said this morning that it may sell the company as part of an effort to enhance shareholder value.  The two largest shareholders of the company, affiliates of Castle Harlan, Inc., and Laurel Crown Partners LLC, authorized the move.
  • PEET shares gained post-market on a story from DealReporter stating that the company has seen takeover interest including from SBUX.  As we wrote in our 2/15 note, “PEET – WHY SBUX SHOULD BUY PEET”, we believe such a transaction would make sense for Starbucks.
  • SBUX said 100 stores in Japan were closed
  • CPKI was raised to Buy from Neutral at Buckingham Research.
  • CPKI gained 4.5% on accelerating volume.
  • CBRL was raised to Buy from Hold at Standpoint Research.
  • CBRL gained 1.2% yesterday, also on accelerating volume.
  • JACK, THI, and KKD all declined on accelerating volume.




Howard Penney

Managing Director

CHART OF THE DAY: The Keynesian Endgame



CHART OF THE DAY: The Keynesian Endgame -  chart


Business as usual




  • Gaming revenue for 2010 grew by 67.9% to HK$57.2BN and Adjusted EBITDA grew 113.2% to HK$4.8BN
    • VIP gaming operations revenue: HK$38.9BN
    • Mass table revenue: HK$17.2BN
    • Slot revenue: HK$1.2BN
  • Grand Lisboa Adjusted EBITDA was HK$2.6BN in 2010; and had an Adjusted EBITDA margin of 16.4% based on HK GAAP or 26.4% based on US GAAP calculations
  • "Casino Grand Lisboa’s daily net-win per mass market gaming table increased by 23.5%, net win per VIP table increased by 7.8% and net-win per slot machine increased by 12.2%."
  • "New VIP gaming areas opened on the 38th and 39th floors of the Grand Lisboa in September 2010 and the new Grand Lotus gaming area for premium mass market customers opened in February 2011."
  • 4Q2010 gaming revenue grew 19.3% sequentially
  • "SJM continued to lead in market share of the Macau casino gaming market, with 40.1% of mass market table gaming revenue and 29.5% of VIP gaming revenue, and increased its overall market share to 31.3% from 29.4% in 2009"
  • Cash and equivalents at YE were HK$15.3BN
  • The Board recommended the payment of a final dividend of HK30 cents per ordinary share. If approved, the dividend is expected to be paid on May 18, 2011 to the shareholders of the Company whose names appear on the register of members of the Company on 29 April 2011


  • Especially pleased that they exceeded that of the Macau market in 2010
  • New casino Oceanus has ramped up nicely and new third party model is working well
  • 2011 has started off strongly. Launched new floors at Grand Lisboa
  • Cotai: Currently awaiting the formalization of their license.  They plan on building an integrated resort that will include a state of the art Mass Casino and non gaming facilities
  • Ho family dispute: reiterated that there will be no impact on SJM holdings and no change in management


  • Will there be any change in the Board of Director?
    • No - the number of board members will stay the same
  • Cotai timeline? Land grant must be given first. Once that is approved then the final engineering drawing get done. Traditionally the government lets the market decide who gets to develop first depending on each concessionaire's ability to get financing.  Won't start building until they have an understanding on where the table cap will go in 2 years from now
  • Cost of the project?  There is a shortage of unskilled labor which has caused the minimum wage to rise.  On the technical side - there is also some pressure.  There hasn't been as much pressure on the gaming employee side.  They do have a 5% salary inflation pay raise in place to retain good people.
  • Is 4Q2010 EBITDA a good run rate for 2011 EBITDA?
    • There are no one time items in the 4Q... EBITDA was just a hair above 3Q EBITDA.  So yes its a good base
  • Oceanus: began the year with 269 tables, today its running with a 172 tables and 27 tables at the Jai Lai.  They are doing about 2.5x per table of what they were doing - part of that is due to trimming tables.
    • There are a lot of shared costs between Grand Lisbao and Oceanus which is why they don't break out EBITDA between the properties
  • The premium Mass has been very strong for the first 2 months of 2011 at the Grand Lisboa in 2011 but the hold rate has been very soft as well in VIP.
  • Cotai - they would not raise cash from new stock issuances or convert sales.  They do have over HK$15BN of cash on hand which would take a while to draw down
  • Why was the 4Q EBITDA margin down? There was a greater mix of VIP than Mass. High 3%-4% range is a good range for margin
  • There has been a lot of work and some construction disruption at the Lisboa
  • Don't anticipate that the opening of the Galaxy World will have a large impact on their market share. They are going to be doing a pre-emptive campaign in advance of the Galaxy opening.
  • Are they hitting capacity constraints at Grand Lisboa?
    • During the big holiday periods they are capacity constrained on the main gaming floor but have managed to migrate a lot of that traffic to the second floor.
    • If they add tables they need to remove tables from other properties
  • Any impact from the Japan earthquake?
    • they have very few Japanese players at their casinos

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TODAY’S S&P 500 SET-UP - March 16, 2011


The Hedgeye models have all 9 sectors broken from an immediate-term TRADE perspective.  The last time the the models signaled this was in May of 2010. As we look at today’s set up for the S&P 500, the range is 36 points or -0.69% downside to 1273 and 2.12% upside to 1309.



  • MBA mortgage applications index fell 0.7% week ended March 11; purchases down 4%, refis gain 0.9%
  • 8:30 a.m.: Housing starts, est. 566k, prior 596k
  • 8:30 a.m.: Building permits, est. 570k, prior 562k
  • 8:30 a.m.: Producer price index, est. 0.7%, prior 0.8%
  • 8:30 a.m.: Current account balance, est. (-$110b), prior (-$127.2b)
  • 2 p.m.: Geithner talks to House subcommittee on budget


  • Netflix is said to be looking at original programming
  • Portugal’s sovereign credit rating cut two steps to A3
  • GE’s target of broadening its $1 billion nuclear service- and-parts business may be under threat after Japanese turmoil
  • Japanese carmakers start to reopen factories.


As of the close yesterday we have 0 of 9 sectors positive on TRADE and 6 of 9 sectors positive on TREND.  Utilities, Materials and Technology are broken on both TRADE and TREND. 

  • One day: Dow (1.15%), S&P (1.12%), Nasdaq (1.25%), Russell 2000 (0.86%)
  • Month-to-date: Dow (3.03%), S&P (3.42%), Nasdaq (4.13%), Russell (3.90%)
  • Quarter/Year-to-date: Dow +2.40%, S&P +1.93%, Nasdaq +0.55%, Russell +0.98%
  • Sector Performance: - Utilities (1.90%), Tech (1.48%), Financials (1.16%), Healthcare (1.17%), Industrials (0.94%), Consumer Spls (0.88%), Consumer Disc (0.83%), Energy (0.75%), Materials (0.0%)


  • ADVANCE/DECLINE LINE: -1742 (-638)  
  • VOLUME: NYSE 1288.05 (+33.64%)
  • VIX:  24.32 +13.10% YTD PERFORMANCE: +37.01%
  • SPX PUT/CALL RATIO: 1.69 from 1.80 (-6.07%)


Yesterday, treasuries were mostly higher on flight-to-quality buying.

  • TED SPREAD: 22.08 0.101 (0.461%)
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 3.33 from 3.36
  • YIELD CURVE: 2.70 from 2.75


  • CRB: 338.14 -3.56% YTD: +1.60%  
  • Oil: 97.18 -3.96%; YTD: +6.08% (trading +1.55% in the AM)
  • COPPER: 413.70 -1.18%; YTD: -4.76% (trading +2.26% in the AM)  
  • GOLD: 1,394.75 -2.15%; YTD: -1.37% (trading +0.28% in the AM)  


  • Commodities Advance, Snapping Four Days of Losses, as Oil Gains on Mideast
  • Rubber Rallies From Four-Month Low in Tokyo as Bridgestone Resumes Output
  • Copper Advances on Prospects for Japan Rebuilding After Quake: LME Preview
  • Sugar Rises on Reduced Concern Commodities Demand May Slow; Coffee Gains
  • Corn Importers in Japan Delaying Purchases After Quake, Unipac Grain Says
  • WHO Says No Evidence of Significant Radiation Spread from Japan Reactors
  • Cotton Advances by Limit as 6.8% Slide Over Past Two Days Attracts Buyers
  • Gold Rises on Decline to a One-Month Low, Concern About Bahrain and Japan
  • Oil Rises as Bahrain Violence Spurs Concern Middle East Supplies at Risk
  • Japan’s Rebuilding Process to Trigger Demand for Rubber, Budhraja Says
  • Hong Kong Moms Empty Shelves of Japanese Baby Formula Amid Nuclear Scare


  • EURO: 1.3977 +0.09% (trading -0.35% in the AM)
  • DOLLAR: 76.328 -0.03% (trading +0.27% in the AM) 


Europe is trading mixed today, with the exception of Eastern Europe.

European inflation accelerated to the fastest in more than two years in February

Moody's downgraded Portugal's long-term debt rating to A3 from A1

  • United Kingdom: -0.67%
  • Germany: -0.15%
  • France: -0.80%
  • Spain: -1.02
  • Italy: -0.70
  • Greece: +1.95%


Most Asian market traded higher. 

Vietnam was the standout to the downside trading down 1.1%.

  • Japan: +5.68%
  • Hang Seng: +0.10%
  • China: +1.19%
  • India: +1.05%
  • Taiwan: +1.09%

Howard Penney

Managing Director

Footwear Looking Good


There are a few datapoints out of the footwear space worth noting over the past 24 hrs. They generally point to continued health in the space, and give us added confidence in our call on Athletic Footwear overall, as well as on Collective Brands (PSS).


First off, NPD data shows that we’re ‘comping the comp’ with +5% growth this February versus +14% a year earlier. Average price point was up +1% for the second consecutive month. Not huge, but more often than not this metric tracks the Gross Margin trends in the space.


The Athletic Specialty space continues to outperform, which definitely synch with recent results out of Dick’s, Foot Locker, etc…  The Family Channel looks good as well, holding steady from recent months. The channel that disappointed was the department stores, which is not a big shocker, and does not concern us. Actually, any weakness in footwear in department stores will only add to the margin pressure we should see as it relates to our call on Apparel for a 4.5pt industrywide margin decline.


Some nuggets out of Brown Shoe (BWS) and DSW:


BWS: This company is pretty much a disaster. Let’s not mistake it as a proxy for PSS – or anything else for that matter. Its wholesale business did not look good, which doesn’t shock us. Famous came in at +4.9% and sequentially unchanged on a 2-year basis, and 1Q comp guidance looks beatable at +low-msd.


DSW: This one had a rather solid quarter, but its guidance suggests a 1,000bp erosion in 1Qcomps. Are they up against some wicked y/y compares? Yes. Do they plan on beating expectations? Yes. But you can’t go guiding to comps like this and expect to walk away squeaky clean.


One thing to note is that it was about a year ago where we saw a 5-6 point negative diversion in comps at PSS vs BWS, DSW, and SCVL. Yes, this also led to PSS getting completely clocked (a painful day for us, a vindicator for the perma-bears, and an opportunity for the opportunist to buy on the capitulation). The point is that we’re about to comp up against those quarters. This is at a point where PSS’ has a better sourced-ratio, and has more boots, toning footwear, and believe it or not, higher prices. We’re not making a bull call on Payless, as we simply like the stability of its cash flow to fund growth in other brands. But let’s not be ignorant or wishful. The stock is going to trade on outsized changes in performances at Payless.


Footwear Looking Good - FW Monthly Trends 3 11


Footwear Looking Good - MonthlyFW SalesByChanl 3 11


Footwear Looking Good - ShoeChain Comp Trends 3 11



Japan’s Keynesian Crisis

Conclusion: It’s obvious that growth will continue to slow on the island economy. What is becoming more obvious by the day is Japan’s fiscal and monetary policy ineptitude, which, for the first time in recent years is being fully exposed to global investment community. In the report below, we detail how to manage risk around this tragic event.


Position: Bearish on Japanese equities for the intermediate-term TREND. Bearish on JGB’s for the intermediate-term TREND and long-term TAIL. Bullish on the Japanese yen for the intermediate-term TREND; bearish for the long-term TAIL. Bullish on Japanese CDS for the long-term TAIL.


It goes without saying that the situation in Japan is frighteningly tragic and our thoughts and prayers go out to the victims of this crisis, both surviving and deceased.


With that said, the critical risk management task to focus on is determining what to buy and what to sell – and at what levels. To do that, one must have a proactive risk management strategy that understands full well that risk is always “on”.


As Rahm Emanuel famously said in the wake of the collapse of Lehman Bros., “You never want a serious crisis to go to waste.” In the spirit of this quote, we were marginally encouraged by the occurrences in Japanese financial markets over the past two days, as consensus finally starts to come to grips with Japan’s Keynesian Debt & Deficit Crisis

  • The Nikkei 225’s (-16.1%) decline since Friday is the largest two-day drop since 1987 and today’s (-10.6%) drop is the largest since October 2008;
  • Bucking consensus’ “flight to safety” trend, JGB yields backed up across the maturity curve today as investors sold amid speculation of greater supply; and
  • Japan 5Y CDS climbed +26bps to a record 122bps – in spite of the widely held belief that Japan would never default on its sovereign debt obligations. 

Consensus will tell you that this price action is largely driven by hysteria surrounding Prime Minister Kan’s warnings of a possible nuclear disaster just 137 miles north of Tokyo, and, while we agree with that premise to an extent, we don’t think these moves are something to be written off as “panic selling”; nor do we think it’s wise to “buy the dips” here. Some dips are not to be bought – especially those that are broken TRADE, TREND, & TAIL. Today reminds us all that the “flows” work both ways:


Japan’s Keynesian Crisis - 1


We’ll need to see the prices confirm over the next three days or so before we feel comfortable shorting Japanese equities.   There will be a throng of investors trying to get ahead of the Japanese recovery story, some that will buy the dip on valuation, and a few others that will buy them on the global growth story – which the data now suggests is increasingly eroding.


Of course, there will be an opportunity to get long the Japanese recovery trade eventually. As always, duration matters, however; after the January 17, 1995 Kobe earthquake, Japanese equities lost (-24.7%) before bottoming out nearly six months later on July 3. The Nikkei 225 did not break even until nearly 11 months later on December 7 of that year.


Addressing the point we made earlier, we think this most recent natural disaster serves as a wakeup call to the global investment community regarding the state of Japan’s finances. While certainly not “new news” to our Hedgeyes or to investors such as Kyle Bass and Marc Faber, we do think the broad-based weakness across Japanese asset classes exhibited today suggests that, on the margin at least, the world now understands that Japan is on the fast track to what we’ve termed the “Keynesian Endgame”.


To be clear, the Keynesian Endgame is a scenario whereby Big Government Intervention (known in academic circles as “countercyclical government stimulus”) in the form deficit spending, debt buildup, and cheap money monetary policy fail to produce the desired results. Instead, it produces depressed growth rates, which we have seen from Japan over the past two decades.


It’s important to highlight Japan’s fiscal and monetary policy response to this recent natural disaster and thus its latest contributions to its Keynesian Debt & Deficit Crisis:


Fiscal Response

  • Japan, which has yet to pass financing legislation for the government’s record ¥92.4 TRILLION yen ($1.1T) budget, currently has roughly ¥1.3 TRILLION yen in discretionary funds from the current budget that can be allocated to the recovery efforts;
  • By comparison, the ¥1.3 TILLION is less than half of the ¥2.7 TRILLION the government pulled together in the wake of the 1995 Kobe earthquake. Normalizing for the different JPY/USD exchange rates, current on-hand funding is roughly (-42.5%) smaller than it was sixteen years ago;
  • Going back to the budget specifically, which will take effect in two weeks, proposed measures to finance the budget, including a proposal to raise the consumption tax, were largely the source of recent political tension and the cause of a rift within the DPJ, as well as a growing divide between Japan’s central government with its local government officials;
  • The current natural disaster combined with severely depressed approval ratings for Kan and the ruling DPJ (81% of voters and 75% of local government heads disapprove of the current leadership) all but guarantee there will be no tax and fee hikes to help finance the budget;
  • Much like the US, the Japanese government will potentially face a shut down as early as July once all revenues are exhausted and a potential ¥20 TRILLION of short-term JGB debt is issued via a special provision to cover expenses; and
  • While we don’t think the Japanese government will stop functioning given the need to respond to this latest disaster, we do think its growing inability pay for what it spends will result in an serious acceleration of JGB supply growth over the intermediate-term. This will likely push Japan’s Debt/GDP ratio above 210% in FY11, from the current 208.2% using the most current debt balance and GDP figures. For those that prefer the Debt/Revenue metric, that’s 1,971.7% or 19.7x. 

Monetary Policy Response

  • Given the Japanese government’s inability to adequately fund the relief efforts, the Bank of Japan did exactly what they’ve been doing for years after having been encouraged by the likes of Paul Krugman and many other Keynesian academics (including Ben Bernanke) to “PRINT LOTS OF MONEY”;
  • In the last 48 hours alone, the BOJ created ¥42 TRILLION yen (~$520B) in newfound liquidity and BOJ Governor Masaaki Shirakawa pledged more “aid” should financial conditions warrant it (*i.e. if the equity market continue to plunge);
  • Breaking down the allocations specifically, we see that the BOJ pledged ¥15 TRILLION in same-day funds on Monday and an additional ¥8 TRILLION today after the overnight call loan rate rose to 0.13% from the target 0.0%; ¥5 TRILLION to buy JGBs via reverse repo agreements; ¥5 TRILLION in one-week loans; ¥5 TRILLION in one-month loans; and it doubled the size of its current Asset Purchase Program (think: Quantitative Guessing) to ¥10 TRILLION; and
  • This latest round of Big Government Intervention in attempt to fuel a publicly-levered stock market rally is on top of the BOJ currently monetizing JGB debt at a rate of ¥21.6 TRILLION ($267.2B) annually. 

It’s clear that Japan, much like the US, cannot afford to finance event risk – which includes things like recovery from natural disasters and war. Given, that shifts much of the burden to the central bank to print money. It’s worth noting that this concept is near the core of our bearish long-term thesis on the yen; this recent earthquake and tsunami merely inches Japan closer to a demographic fueled JGB supply/demand imbalance.


Further, one has to wonder how much the Bank of Japan can shower the financial system with yen before people stop bending over to pick them up. To this point, it comes as no surprise to us that only ¥8.9 TRILLION of the ¥42 TRILLION yen offered by the BOJ was actually met with demand from financial institutions. Japan has been in a classic liquidity trap for many years and we don’t expect the BOJ’s latest attempts at printing money to be met with a commensurate pick-up in private sector growth.


Japan’s Keynesian Crisis - 2


Our view is in sharp contrast to current consensus expectations, as many Japanese investors have been trained to beg for stimulus at the first sign of a market crack after many years of Big Government Intervention. Consider the commentary offered to Bloomberg by the following investment professionals as a gauge of where Japanese investor sentiment is:


“If stocks continue to drop more and the yen gains further, it will probably have an adverse effect on corporate sentiment and household consumption… So the BOJ may need to take further action.” – Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co.


“The Bank of Japan is missing the chance of doing something more aggressive… What the BOJ should do now is to anchor investors’ sentiment with accelerated purchases in its program” – Masaaki Kano, chief Japan economist at JPMorgan Chase & Co.


“The liquidity supply was a normal response to make sure the markets function in an orderly fashion. It was nothing more than standard operating procedure.” – Richard Jerram, chief economist at Macquarie Securities Ltd. in Singapore.


Phrases like “normal response” and “standard operating procedure” are exactly why we think the recent bullish bid across the US Treasury curve is supportive of the case for QE3. That is, if UST yields continue to trade below what used to be their intermediate-term TREND lines of support, we’d contend that the bond market is forecasting another round of Quantitative Guessing here in the US.


Of course, we’d expect to see those same yields eventually back up on the inflationary impact of QE3 policy; until that occurs, however, a compressing spread between UST 2Y yields and JGB 2Y yields is bullish for the JPYUSD exchange rate  – on top of any repatriation that will be done by Japanese nationals to help with relief efforts at home.


Japan’s Keynesian Crisis - 3


Given this setup, we can foresee a scenario whereby the yen continues to appreciate over the intermediate term even in the face of accelerated easing out of the BOJ. For this reason, we think the Japanese yen will continue to strengthen over the intermediate-term TREND. Understanding full well that consensus will likely continue using the same one-factor model of yen up/Japanese stocks down, we remain bearish on Japanese equities over that same duration.


Monitoring the slope of the aforementioned spread and QE3 expectations will be crucial to a timely exit from this position. An additional risk to highlight here is outright intervention in the FX market by the Japanese government – which will come at time when Japan can least afford a weaker currency, given its raw material needs over the intermediate term. For reference, Japanese Import Price growth continued to accelerate in Feb, advancing to +7.6% YoY.


Japan’s Keynesian Crisis - 4


On the other side of Japanese trade, we expect a continuation of slowing export and manufacturing growth as the damaged infrastructure and rolling blackouts delay both production and shipping – much like we saw in 1995 after the Kobe earthquake.


Japan’s Keynesian Crisis - 5


Currently, Japan supplies about 20% of the world’s technology products – many of them key components that cannot be done without, such as the silicon wafers used in manufacturing microchips and batteries used in the production of everything from autos to tablet PCs. The lack of Japanese supply on the margin is likely to put upward pressure on technology and industrial input prices globally – a supportive data point for our current short XLI position in the Hedgeye Virtual Portfolio. Recent commentary offered by global multinationals like Boeing Co., Korea’s Samsung Group, Germany’s BMW AG, Sweden’s Volvo AB, and Taiwan’s HTC Corp. (among many others) lend credence to this concern.


All told, it’s obvious that growth will continue to slow on the island economy and that the fiscal and monetary levers that Japan can pull in the event of further crises continues to grow increasingly inadequate by the day.


Risk is always “on”.


Darius Dale


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