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THE M3: HOTEL DEMAND; HIGHER CHINESE BANKS CAPITAL RATIO

The Macau Metro Monitor, April 26, 2011

 

 

EASTER EFFECT FUELS HOTEL DEMAND TILL MAY DAY HOLIDAY Macau Daily News

The Macao Hoteliers and Innkeepers Association says that Macau hotels were fully occupied during the Easter holiday. The room rates did not see a sharp increase and were maintained over last year’s level.  Some three to four‐star hotels raised room rates by 5%‐10% to around MOP1,000 to MOP2,000.


CHINA SAID TO RAISE BIGGEST BANKS' CAPITAL ADEQUACY TARGETS Bloomberg

According to sources, the China Banking Regulatory Commission (CBRC) told Industrial & Commercial Bank of China, China Construction Bank, Bank of China, and Bank of Communications to raise their ratios from 11.5% to 11.8%, while Agricultural Bank of China was told to raise its ratio from 11.5% to 11.7%.


TALES OF THE TAPE: PNRA, BWLD, PEET, SBUX, CAKE, SONC, BJRI, PNRA, KONA, CHUX

Notable news items and price action from the past twenty-four hours along with our fundamental view on select names.

  • PNRA shares gained 3.9% on accelerating volume.  Next to BWLD, PNRA is the best performing restaurant stock over the past thirty days. 
  • PNRA and BWLD report earnings today after the close.
  • PEET was downgraded to “Neutral” from “Outperform” at Robert Baird.  The twelve-month price target is $48 per share.
  • SBUX CEO Howard Schultz, responding to questions regarding his succession at a press briefing in Shanghai, said that he is “not going anywhere soon”.  He also stated that he expects the Via brand instant coffee to be a “billion-dollar” business in a “short number of years”, according to Bloomberg News.
  • CAKE traded higher on accelerating volume while EAT gained 0.9% on flat volume.
  • SONC, BJRI, CAKE, and PNRA were the only four stocks that traded with a gain in volume versus the thirty-day average.  In general, there was little volume in the restaurant space – or broader market for that matter.
  • KONA and CHUX traded down -2.6% and -3.6%, respectively, on accelerating volume.
  • MCD - raises prices by 2% in HK on wages: HKET

TALES OF THE TAPE: PNRA, BWLD, PEET, SBUX, CAKE, SONC, BJRI, PNRA, KONA, CHUX - stocks 426

 

Howard Penney

Managing Director


Currency Rodeos

This note was originally published at 8am on April 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A national debt, if it is not excessive, will be to us a national blessing.”
- Alexander Hamilton

 

Like Keith, I’m a born and bred Canadian.  Despite my nationality of birth, after living in the United States for upwards of the last fifteen years, I can quite confidently say this is a great country.   At Hedgeye, we spend a lot of time critiquing the political leadership in Washington, DC in our research, but that shouldn’t be confused with a general critique of the United States. I’ll say it again, this is great country. 

 

In 1999, the 106th Congress passed a bill that allocated federal funds to renovate the Hamilton Grange, which was Alexander Hamilton’s family home.  In that bill, Congress indicated that this preservation was to “honor the man who more than any other designed the Government of the United States.”  At times, we’ve sided more with the Jeffersonian philosophy as it relates to governing, but there is no disputing Hamilton’s influence on the founding of this nation.  Indeed, as the first Secretary of the Treasury his words continue to have relevance in fiscal and monetary policy discussions.

 

Setting aside the discussion of the extent to which the government should be involved in our lives, I think we would all agree that government does have its place and can, with the right leadership, do great things.  In fact, to Hamilton’s point, based on a government’s ability to tax and borrow (if done prudently these don’t have to be bad words!) it can build infrastructure and provide appropriate social services, which make the outcome of any government debt a “national blessing.” That is, if its use is not “excessive”.

 

Late last week in our Q2 quarterly theme call, we called for a potential crash in the U.S. dollar.  Once again, we didn’t make this call because we lack American patriotism, but rather because of the fundamentals.  Stepping back for a second, though, we should frame up what exactly a crash means for a currency.

 

In the last 30 years, the largest annual decline in the U.S. dollar index was -18.5% in 1985, while the average decline for that period was 0.11%.  In the year-to-date, the U.S. dollar index is down -6.6%.  So, we are four months into 2011 and the U.S. dollar is already down close to 1/3  of its largest annual decline ever.  Our view is that the U.S. dollar could decline potentially another -5% through the course of the quarter and roughly -10%-ish through the course of the rest of the year.  If this occurs, it would be the largest annual decline for the U.S. dollar index in 30-years and that, my friends, is a crash.

 

This morning, we are seeing a continuation of this move with many currencies, once again, trading up close to a percent versus the dollar.  Interestingly, even in Europe, where sovereign debt woes continue to accelerate, the currencies are strong this morning with the British Pound up +0.92% versus U.S. dollar and the Euro up +0.73%.

 

We certainly get that being bearish on the U.S. dollar at this point isn’t exactly a contrarian call, but, to be fair, we’ve traded the U.S. dollar in the Virtual Portfolio 20 times since the firm’s inception and have been right 20 times. In addition, of the 46 currency positions we’ve taken in the Virtual Portfolio over the same duration, we booked a gain on 41 of them. Clearly, this isn’t our first Currency Rodeo. That said, according to a recent survey by Bank of America, all but 6% of their global clients are bearish on the U.S. dollar, which is not inconsistent with some of our internal surveys.  In addition, Barclays reported the commodity assets under management have reached an all-time high at $412BN.

 

Being long commodities is in many respects the same trade as being short the U.S. dollar, and we’d be remiss to not at least factor into our models that the investment community is leaning hard in one direction.  But the question remains: is consensus bearish enough on the dollar?  Our answer on this, until the facts change, is “no”.

 

As we analyze the U.S. dollar versus global currencies, we focus on three key factors: debt, deficit, and interest rates.  Currently, the U.S. dollar lines up negative on all three of these fronts, specifically:

 

1.  Excessive debt – In the last couple of years, it has become cool to quote Reinhart and Rogoff and bandy about sovereign debt-to-GDP ratios, so this isn’t new, but according to usdebtclock.org, the United States has a debt-to-GDP ratio of 96%.  This is negative for GDP growth, which is negative for the U.S. dollar as slower growth leads to longer term accommodative monetary policy and higher than expected fiscal deficits.  Further, the United States’ future debt trajectory is much steeper than any of its “AAA” peers (Canada, United Kingdom, Germany and France) due to a lack of a credible deficit reduction plan.  To add insult to injury, the politicians in Washington will once again debate increasing  the debt ceiling in mid-May while global currency traders watch real-time;

 

2.  Long term deficit – This year the United States federal government will run a deficit north of $1.5 trillion dollars, which is more than 10% of GDP.  (This is slightly better than Sierra Leone.)  The real issue with the deficit is a lack of a credible plan to reduce the deficit going forward.  While many nations globally have already begun austerity programs, the United States has no plan and the recently approved $38 billion spending reduction for the duration of this year is only likely to have a real benefit of some $380 million.  President Obama has given June as the time frame by which he hopes to have an agreement on a long term budget, but our view is that based on how far apart the Democrats and Republicans are on the tenets of the plan, this time frame will be blown threw;

 

3.  Monetary policy bifurcation - Simply put, interest rates and perceived future interest rates move currencies.   Almost every major modern nation in the world has either tightened policy (witness Sweden and China most recently) or is reporting data that suggests tightening is imminent.  In contrast, not only is the United States still implementing Quantitative Guessing Part II, but recent signals out of the Federal Reserve suggest we could see a version of QE-lite after June, so we think the U.S. Dollar will fall victim to additional easing in the face of the world tightening.

 

In order to shift our investment view on the U.S. Dollar we need to believe that these factors will improve absolutely and relatively and, as of yet, it is hard to make that case.  Meanwhile, the U.S. dollar index continues to be in a bear market in our quantitative models.

 

Currently in the Virtual Porfolio we are long the Canadian dollar, long the Chinese Yuan, and long the British Pound. We covered our short position in the U.S. dollar (UUP) yesterday.   This isn’t about politics or patriotism, but risk management.

 

Enjoy the long weekend with your families.

 

Keep our head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Currency Rodeos - Chart of the Day

 

Currency Rodeos - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.49%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 26, 2011


Europe continues to be more right leaning on policy than America; a Bloomberg story says ECB “must solidly anchor inflation expectations.”  As we look at today’s set up for the S&P 500, the range is 21 points or -1.14% downside to 1320 and 0.43% upside to 1341.

 

SECTOR AND GLOBAL PERFORMANCE


The Financials remain the only sector broken on both TRADE and TREND. 

 

THE HEDGEYE DAILY OUTLOOK - levels 426

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -259 (-1211)  
  • VOLUME: NYSE 697.93 (-14.13%)
  • VIX:  15.77 +7.35% YTD PERFORMANCE: -11.15%
  • SPX PUT/CALL RATIO: 1.30 from 1.60 (-18.48%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.29 -1.521 (-6.669%
  • 3-MONTH T-BILL YIELD: 0.07% +0.01%
  • 10-Year: 3.39 from 3.42
  • YIELD CURVE: 2.72 from 2.74 

 

MACRO DATA POINTS:

  • 9 a.m. S&P Case-Schiller, est. (-3.30% Y/y)
  • 10 a.m. Consumer Confidence, est. 64.5, prior 63.4
  • 10 a.m. Richmond Fed Index, est. 20, prior 20
  • 11:30 a.m.: U.S. to sell $30b in 4-week bills
  • 1 p.m.: U.S. to sell $35b in 2-yr notes
  • 4:30 p.m.: API inventories

WHAT TO WATCH:

  • Peru was the worst performing global market overnight after former Peruvian military rebel Ollanta Humala opened a six-point lead in a presidential poll before a June 5 runoff vote.  Concerns are he will strengthen ties with Venezuelan President Hugo Chavez.
  • FDA says it will not appeal ruling that it must regulate ecigarettes as tobacco products, not drug-delivery devices - WSJ
  • Tokyo Financial Exchange considering connecting its computer network with NYSE Euronext's - NQN
  • YouTube to launch movie-on-demand service charging users to stream - The Wrap
  • China raised capital adequacy ratios for its five largest banks in March - Bloomberg
  • US, China to resume strategic, economic dialog 9-10-May in Washington - wires, citing US Treasury statement
  • Yahoo Board Now More Open to Offers: WSJ All Things Digital

COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Platinum Funds Expanding Fastest in Metals as Lonmin Seen Doubling Profit
  • Copper, Zinc Demand in Japan to Climb on Evacuee Housing, Power Generation
  • China May Buy More Sugar to Curb Fastest Inflation in Almost Three Years
  • Commodities Snap Four-Day Winning Streak on Fed Speculation, China Credit
  • Copper Drops Most in Seven Weeks on Concern China Tightening to Sap Demand
  • Oil Supply Climbs in Survey on Forecast for Higher Imports: Energy Markets
  • Gold, Silver Decline From Records as Investors Seek Cash to Protect Gains
  • Wheat, Corn Drop as Some Investors Sell Following Rally; Soybeans Decline
  • Sugar Falls as India May Allow Further Exports; Coffee Drops, Cocoa Gains
  • Copper-Alloy Product Output in Japan Declines 3.7% After March 11 Disaster
  • Investor ‘Euphoria’ to Drive India Silver Demand This Year, Exchange Says
  • Rubber in Tokyo Reaches One-Month Low on China Rate Concern, Car Output

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European markets are mixed and quiet with the holiday shortened week.
  • Greek 2010 budget gap wider than estimated as euro-area debt hits record
  • Indebted Spanish states pay Portugal-sized bond penalty rate: euro credit
  • Trichet says policy makers must avert any jump in inflation expectations
  • Dollar falls on speculation fed may keep supporting economy after qe ends
  • Greece, Ireland, Portugal yields hit records on default concern

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Asian Stocks Drop as Earnings Disappoint; Australia, Malaysia and Pakistan were higher on the day.  Japan and China were the two worst performing markets
  • China Said to Raise Capital-Adequacy Ratios for Biggest Banks to Curb Risk

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director



Gaming Policy

“Conditions never persist. They change. Bureaucrats really hate that.”

-Jeffrey Tucker

 

That’s a quote from a book I read on my family vacation last week, “Bourbon for Breakfast – Living Outside of the Status Quo” (and, no I’m not taking up sipping on Canadian Club by the pool with my morning coffee). Nor do I aspire to ever be a professional politician in America.

 

Never mind understanding how the interconnectedness of the Global Macro market works, most professional politicians in America don’t get how a market works. Most of them still call this game of Big Government Intervention a “free market.”  I call that a joke.

 

The good news is that a lot of people get the joke. Gaming Policy is the new hedge fund game in town – so game or be gamed. There are  higher prices being paid (read: trading commissions) for “one-on-one” access to private meetings with DC bureaucrats than ever before. Sad, but true.

 

You don’t need inside information if you have a multi-factor, multi-duration, risk management process that flags real-time pricing of these “data points.” Anyone who has traded real-time risk capital in markets knows that someone always knows something…

 

We’ve titled one of our Q2 Global Macro Themes, “Indefinitely Dovish” (see yesterday’s Early Look) primarily because we think the market is pricing in Bernanke remaining dovish into and out of tomorrow’s FOMC meeting.

 

When we say “the market”, we mean the globally interconnected one – not just US stocks:

  1. Currency Market – the US Dollar Index is trading down again this week (for the 14th out of the last 18 weeks) and the Euro is making new highs by the day ($1.46 last) because, for the 1st time since Fed head Arthur Burns was attempting to monetize the US Debt and devalue the dollar (1970s), US monetary policy is more left leaning and dovish than even what the ex-Finance Minister of France is delivering. Jean-Claude Trichet’s comments overnight were explicitly hawkish: “it is extremely important to continue to solidly anchoring inflation expectations in a period which is marked  by uncertainties and turbulence.”
  2. Bond Market – global bond yields continue to push higher as Asian and European central bankers continue to back their rhetoric with rate hike action. Meanwhile, US Treasury yields are breaking down through our intermediate-term TREND support lines of 0.71% and 3.46% for 2-year and 10-year UST yields, respectively. Indefinitely Dovish in America is as dovish does…
  3. Commodity Market – higher-highs on rallies and higher-lows on corrections for Gold, Silver, and Oil. This is where the US Dollar Devaluation driven monetary inflation is – not in GDP growth oriented commodity pricing (copper, sugar, etc.). With the Saudis trying to talk down oil prices at these levels (calling them “uncomfortable” overnight), WTI crude oil sold off a whopping 50 cents.

And Equities, well – we’re right back to where we were in mid-February where Asian Equities (growth markets) are starting to negatively diverge versus US Equities (the Gaming Policy market). China, India, and Indonesia are rightly worrying about The Inflation that will be perpetuated by a US Currency Crash.

 

Have no fear however – The Bernank and Groupthink Geithner are here. They have the world’s back on this Currency Crash thing. Having never seen an oil price (including $150/barrel oil) that they thought was inflationary, we don’t think they’re about to start calling $113/oil inflationary now. While Bernanke will acknowledge rising commodity prices tomorrow, he’ll offset that hawkish shift with an incrementally dovish one on US growth.

 

In the Chart of The Day (attached), Darius Dale calls out how super duper the sell-side has become in leading The Bernank and The Groupthinker’s Washington boys to believe that US GDP Growth was going to be all good and fine in Q1 of 2011 – then not so much.

 

The good news here is that Gaming The Sellside is still one of the oldest and most profitable games in town. They haven’t learned much since missing US GDP Growth Slowing in Q2 of 2008.

 

If you are looking for leadership on the Currency Crash thing, the President of the United States had this to say over the weekend on gas prices:

 

“There’s no silver bullet that can bring down gas prices right away…”

 

Really? If The Bernank raised rates at tomorrow’s FOMC meeting, oil prices would break $100/barrel in a day.

 

We’d like to remind all of our friends and foes who are still beer-bonging the Keynesian Kool-Aid that there are 3 things that burning your currency at the stake with generational levels of leverage (debt) does to an economy:

  1. It perpetuates The Inflation priced in US Dollars
  2. It structurally impairs the sustainability of long-term economic growth
  3. It dares institutional investors to chase “yield”

No, we’re not saying that these conditions will persist as a perpetually preferred dividend for those of us who are long of The Inflation. Neither are we saying this will end well. What we are saying is that playing the game in front of us right now is the game of Gaming Policy – and, as sad a state of a “free market” as this is, when this game changes, it will change abruptly.

 

The bureaucrats are going to really hate having to deal with that.

 

My immediate-term support and resistance lines for the SP500 are now 1320 and 1341, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gaming Policy - Chart of the Day

 

Gaming Policy - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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