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Chinese PMI Slows – And We Like It

Conclusion: We continue to see signs that inflation setup to moderate in China, whilst Chinese GDP growth looks to accelerate relative to the world and the US in particular. We remain bullish on Chinese equities as a result of these factors.


Position: Long Chinese equities (CAF); Long the Chinese yuan (CYB).


After ticking up to 53.4 in March, China’s Manufacturing PMI inflected once again, falling to 52.9 in April. Breaking down the subcomponents of the index, we see broad-based weakness across the board: 

  • New Export Orders ticked down: 51.3 vs. 52.5
  • Backlogs of Orders ticked down: 50.7 vs. 51.4
  • Output ticked down: 55.3 vs. 55.7
  • Imports ticked down: 50.6 vs. 52
  • Employment came in flat at 51.8; the relative “strength” here is confirmed by a recent Hudson Highland Group survey that showed 77% of Chinese firms intend to increase their staff in 2Q, up from 72% in 1Q. 

While we’d generally greet a soft PMI reading like this with negative sentiment – particularly as it relates to investor’s appetites for equities, we actually receive this report in a positive fashion due to the Input Prices subcomponent falling (-2.1) percentage points MoM to 66.2. Late last week, HSBC’s unofficial PMI gauge confirmed this official deceleration, with its Input Prices subcomponent falling to 62.4 in April vs. 69.5 in March.


While still elevated on an absolute level, the slopes of these series continue to trend positively on a six-month basis, which augments our call for slower reported CPI in the back half of this year. As such, we remain bullish on Chinese equities as the PBOC reins in the pace and magnitude of tightening measures.


Chinese PMI Slows – And We Like It - 1


Shifting gears back to the growth side of the equation, there’s no confusing this weekend’s PMI report for something other than what it is: Slowing Growth. While generally, we want to be short equities/equity markets where growth is slowing, we think we are in a very unique and interesting situation with regard to our Chinese equity exposure.


On a relative basis to the US and the rest of the world, Chinese growth is decelerating at a slower pace, which increases the likelihood that international investors once again look to China as a place to buy growth. We maintain that China’s +9.7% 1Q11 GDP growth looks significantly more attractive when US GDP growth has a 1-handle on it. In addition, bearish sentiment around a confluence of known-knowns supports the mean reversion case – both from an absolute price perspective, as well as on a P/E basis. Relative to its historic valuations, China is quite “cheap”. We like it when our catalysts are supported by valuation.


This confluence of factors has us leaning more positive on Chinese equities than PIMCO, who was out this morning reminding the world that Chinese growth is slowing (known) and inflation is accelerating (also known). If their call for “higher than expected” inflation rates in China is predicated on an increase in the velocity of US dollar debasement/commodity inflation, then we’d just as soon be defensive towards any risk assets. A US Currency Crash is not structurally bullish for any of our long positions (except Gold) – particularly when the dust has settled.


Darius Dale


European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions

Position: Long British Pound (FXB)


As is typical for Mondays, we release our weekly European Risk Monitor. While risk continues to trend higher across Europe’s periphery, Greece experienced a noticeable inflection in sovereign cds late last week (see chart below). Despite the turn, we continue to stress that a restructuring of Greek public debt is a question of when, and not if, and therefore we expect cds and government bond yield charts to trend up and to the right for peripheral countries.


European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bankaa


Our European Financial CDS Monitor (below) shows that bank swaps across Europe were mostly tighter week-over-week, tightening for 31 of the 39 referenced entities and widening for 8.


This week we expect both the EUR and GBP to perform well against the USD as both the ECB and BoE continue to signal a hawkish stance on inflation going into interest rate decisions this Thursday. Meanwhile the USD continues to burn, with the US Dollar Index down another -1.4% week-over-week and down for the 14th week out of the last 18 as a credible plan to reduce US debt and deficits remains uncertain.


For more on our positioning on the GBP-USD, see Friday’s Early Look titled “Royal Awareness”.


Matthew Hedrick



European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bank1

European Risk Monitor: Currency Strength Ahead of ECB and BoE Decisions - bank2

Canada: Leaning Left Large

Conclusion: The left wing New Democratic Party of Canada is making serious inroads in the last few weeks, which leaves the outcome of today’s federal election in Canada highly uncertain.  A victory by the NDPs could negatively impact Canadian equity and currency markets due to their mandate to both increase government spending and raise taxes.


Position: Sold our long position in the Loonie, via FXC, this morning


Canada is not known for its stimulating politicians or interesting elections.  The nature of the parliamentary system is that the leader of a political party, who would potentially go on to become Prime Minister, needs as his or her primary skill the ability to manage the political system.  Current Prime Minister Stephen Harper in many ways embodies this. 


Prime Minister Harper grossly lacks the charisma that is considered a prerequisite for a successful politician in the United States.  A recent article in Maclean’s magazine described Harper as a hologram on the campaign trail.  Each appearance has been managed closely, included limited impromptu interaction with constituents, and is scripted so tightly that he even takes a break at the exact same time in each stump speech to drink water.   In part, this is Prime Minister Harper’s nature and in part this is due to the Conservatives not wanting to make any mistakes as they attempt to attain a majority government for the first time in a generation.


We were in Canada this weekend doing some final due diligence ahead of the Canadian Federal election this Monday and all is not well for the Conservatives.  In fact, we were told by some Canadian political insiders that internal polls heading into the final weekend show the PCs losing substantial ground nationally.  Interestingly,  it is not their arch rival the Liberal Party that is taking share, but the left wing New Democratic Party (“NDP”) led by long time leftist Canadian iconoclast, Jack Layton.  In many ways, this is the worst nightmare for the PCs.


In Canada’s last federal election in 2008, the Conservatives won 143 seats in parliament, the Liberals won 77 seats in parliament, the Bloc Quebecois won 47 seats, and the NDPs won 36 seats.   The Conservatives formed a minority government after that election.  Earlier this year, the House of Commons passed a motion of non-confidence initiated by the Leader of the Opposition, Liberal Michael Ignatieff.  The passing of this motion forced the Conservatives to call an election for May 2nd and end the longest minority government in Canadian history. 


Initial polls at the beginning of the campaign in late March showed that the results of this election would likely be similar to the results of the 2008 election with some potential of the Conservatives to gain more seats, and potentially attain a majority government, due to high unlikable ratings of Liberal Party Leader Michael Ignatieff.  In fact, according to a poll a week before the first major debate, the NDPs were expected to win 13.2% of the popular vote, which was roughly 5% less than in 2008.  Surprisingly, after the first debate, the PCs remained well ahead, but the Liberals and NDPs were deadlocked at close to 25% each.  This dramatic move by the NDPs is attributed to a shift away from the Bloc Quebecois in Quebec and the underperformance of Liberal Leader Igantieff.


In a more recent federal poll in Canada from Nanos Research, the resurgence of the NDP party has continued.  According to this poll, taken over the last three days, the Conservatives have 37% support in Canada, the NDP have 31% support, the Liberals have 22.7% support, and the Bloc Quebecois, which runs candidates only in the province of Quebec, are a distant fourth with 5.5% of the theoretical popular vote.  A more recent poll from Forum Research, which includes decided and leaning voters, gave the Conservatives 35%, the NDPs 33% and the Liberals 19%.


Historically, to obtain a majority of the 308 seats in Canadian parliament, a Party needs to win 40% of the popular vote.   Given this, and the results from recent polls, it is very unlikely that the Conservatives win a majority.   The long shot scenario is that the NDP and Liberals effectively split votes, which potentially allow the Conservatives to gain a majority without 40% of the popular vote.  This scenario is highly unlikely.


The more likely scenario is that either the Conservatives or NDPs win a minority government.  While a minority government is positive in the sense that it creates some limitations on power, the reality is that a NDP Prime Minister and minority government would look dramatically different than a Conservative Prime Minister and government.  (Incidentally, the NDPs have never formed a government in Canada.)


From an economic perspective, it is difficult to argue with the performance of the Conservatives over the past couple of years, especially as this performance has outpaced, and really decoupled from Canada’s largest trading partner, the United States.  As we highlight in the chart below, the Harper-led government has been effective at creating employment with an unemployment rate of 7.7% (versus 8.8% in the United States), the Canadian government has shrunk the deficit by 1/3 over the last 11 months, and Canadian economic growth continues to be strong, expected to come in at north of 4% in Q1 (versus 1.8% in the United States).


At a risk of oversimplifying their mandates, it is fair to say that NDPs and Conservatives have economic policies from two ends of the economic spectrum.  The key “attributes” of the NDP economic platform are an intention to raise corporate tax rates to 19.5% (the Conservatives intend to cut to 15%), the NDPs intend to gradually double the benefits of the Canadian Pension Plan, they propose a budget that contains $30BN in additional spending, and it is likely that the NDPs implement a tougher energy policy, which would be negative for Canada’s energy producing regions and energy producing companies.


The Conservatives have done an admirable job stewarding the economy of Canada over the last couple years.  This has been reflected in the strength of the Loonie, which is near an all-time high versus the U.S. dollar, the economic statistics outlined above, and the performance of Canadian equity markets. The NDP’s economic strategy is widely divergent from the Conservatives and the risk of a NDP-led Canada is that these economic policies are reversed and a reversal of the performance of the Canadian economy and its currency will follow suit.


We sold our long Loonie position via the etf FXC this morning in the Hedgeye Virtual Portfolio with FXC trading immediate term overbought.  We’ll look to buy back the position at a lower price. Our support levels on the FXC for the immediate term TRADE = $103.65 and intermediate term TREND = $102.11.


Daryl G. Jones

Managing Director


Canada: Leaning Left Large - canada unemploy


Canada: Leaning Left Large - 1

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R3: Sales, JCP, TGT vs. Target, Li&Fung



May 2, 2011




  • At the company’s recent analyst day, management at LIZ highlighted that it’s star performer of late Kate Spade is seeing business in Japan return close to prior quake levels. This is the most bullish take we’ve heard yet regarding Japanese-based performance from domestic companies after nearly two months since the event.
  • Following last week’s devastating tornados in Alabama, a call with the management of Hibbett Sports revealed that approximately 12 stores had been directly damaged by the storms, or roughly 1.5% of the total store base. However, this doesn’t include stores that will be indirectly impacted from power outages, road damage, and a myriad of other disruptive factors that will weigh on sales at the end of April. In terms of magnitude, with pre Easter weeks already in the books, the last week of April will likely only account for 5-6% of the quarter's sales.



Retail Crippled in Wake of Tornadoes - Retailers in the South experienced serious damage to many stores and were still trying to communicate with some associates late Thursday in the wake of the killer tornadoes that swept through six states Wednesday, which, according to reports at press time, had left 250 to 300 people dead. Rescue crews were pulling people out of the rubble of devastated neighborhoods, with most of the destruction occurring in Alabama, particularly Tuscaloosa. One off-duty Belk Inc. associate was reported killed and the company was attempting to reach 20 to 30 others late Thursday afternoon, according to spokesman Ralph Pitts. Power outages and downed phone systems are making communications difficult.

Pasted from <WWD>

Hedgeye Retail’s Take: April will show some huge numbers when same-store sales are released this Thursday – with anywhere from 8-14%. But some retailers missing those numbers will point to weather. As it relates to cooler weather in the earlier part of April, it’s debatable. But last week, the tornadoes are clearly a massively identifiable event. Even those areas of the Southeast that were not directly impacted are still subject to that somber mood after being hit by such a devastating event. Retail will need a very solid 1st half of May, otherwise will see heavier promotions kick in to clear spring merchandise and stay clean. 


J.C. Penney Launches Big and Tall Concept - The gloves are coming off in the battle for the men’s big and tall customer. J.C. Penney Co. Inc. today will take the wraps off The Foundry Big & Tall Supply Co., a new retail concept targeted to this growing market segment — one that will pit it directly against the other major players in the men’s industry, all of whom have identified this niche as one ripe for expansion.  The biggest player is Casual Male Retail Group Inc., which operates nearly 500 stores including four Destination XL superstores, which combine all of the company’s concepts: the moderate Casual Male merchandise as well as the more-upscale Rochester Big & Tall, along with shoes. The company will add 10 to 14 additional DXL stores this year and, by 2015, expects to have between 75 and 100 units in operation.<WWD>

Hedgeye Retail’s Take: While this is a tough business, the fact is that it is one of the faster growing segments of retail. Men are not getting taller, but they are getting bigger. While we don’t have statistics to back it up, we’d suspect that JCP’s ‘Middle America’ customer is right in the sweet spot here. This is not enough to impact top line for JCP in any of the next 2-3 years. But if successful, it could at least add a glimmer of hope (and value) to JCP’s Enterprise Value. 


Target Goes to Canadian Court - Target Corp. heads to the Federal Court of Canada on Monday, hoping to win the exclusive right to use its name in Canada, just three months after the retailer unveiled a plan to expand into the country. Fairweather Ltd. owns 15 Target Apparel stores in Canada, including this one in Toronto. Target Corp. plans to open Canadian stores by 2013. The Minneapolis-based discount-store chain is asking the court to impose a preliminary injunction against Canadian merchant Isaac Benitah and his company, Fairweather Ltd., which owns 15 stores across Canada called Target Apparel and has a logo similar to that of Target Corp. "If the defendants are not restrained, the plaintiffs will lose the ability to control their reputation and goodwill in Canada," according to the filing by Target Corp. The court hearing is the latest volley in a battle that Target Corp. and Mr. Benitah have been waging for close to a decade over who owns the rights to the Target name in Canada. <Wallstreetjournal>

Hedgeye Retail’s Take: This is a very political case in Canada. Small time Canadian apparel brand called Target Apparel vs. US goliath Target. The local brand has a bigger presence today, but Target Corp wants to reserve the right to get big in Canada in the future. Interesting, though that Target Corp still plans only 15 stores by 2013. Target Corp claims that Target Apparel’s logo is too similar. That’s pretty much a joke from our perspective. Ask 10 people to design a logo for a company called target, and at least half will draw a bulls eye. Will the Canadian government stick up for the little guy, or will it risk the near term backlash from its citizenry about voting in favor of the Americans and the promise of jobs 3-5 years down the road? We don’t know. But given how important this is to TGT’s growth, we would not bet against it. They won’t be afraid to pay.


Borders Adviser-Fee Pay Bid Should Be Denied - Borders Group Inc. (BGP) hasn’t shown that it can pay the costs of its bankruptcy case and should be denied requests to pay lawyers and other professionals, the U.S. said. The U.S. Trustee, a bankruptcy watchdog for the Justice Department, today objected to monthly statements of compensation and expense reimbursements for 11 professionals working on the case. Andrew Glenn, a lawyer for Borders, said the company will file its financial report today and will pay fees owed to the U.S. Trustee, answering two of the concerns raised in papers filed in U.S. Bankruptcy Court in Manhattan. “There was an issue with a reconciliation of the bill we received,” Glenn, a lawyer with Kasowitz, Benson, Torres & Friedman LLP, said in an e-mail.  The operating report for the period of Feb. 16 to March 31 hasn’t been filed, acting U.S. Trustee Tracy Hope Davis said in the filing. Kasowitz, Borders’s main bankruptcy counsel, has requested $1.27 million in fees for Feb. 16 through March 31. Financial adviser Jefferies & Co. has requested $250,000. <Bloomberg>

Hedgeye Retail’s Take: These advisors had the pleasure of walking Border’s through the bleeding process, and are now being left holding the check. How fitting…


Li & Fung Exec Charged With Bribery - A senior merchandise manager at Li & Fung faced bribery charges on Wednesday, according to Hong Kong’s Independent Commission Against Corruption.  Hong Kong’s ICAC said that Doris Au Yeung Lai-hung, 44, was charged with “six counts of agent accepting an advantage.”  At the time of the alleged offenses, the defendant was responsible for placing purchase orders from Li & Fung with apparel suppliers for children’s wear. Also named as defendants were Guan Xiaoyi, 30, director at Sun Xinfa Arts Manufacture Ltd., and Yeung Wai-sing, 40, finance manager at Shun Fat Arts Manufacture Ltd.  The ICAC said both Guan and Yeung face a joint count of conspiracy to “offer advantages to an agent.” <WWD>

Hedgeye Retail’s Take: On one hand, this happens all the time, but for some reason the government simply chose to take action on this one. On the other hand, with such tight capacity, perhaps the ‘payoff game’ is getting more closely watched.


Online Retailers to Benefit more from Mothers Day This Year - When it comes to seeking that perfect gift for mothers this year, 21.5% of consumers will turn to online retail sites, up slightly from 19.7% last year, according to a survey released this week by the National Retail Federation. The trade group’s 2011 findings are based on surveys of 8,488 consumers conducted between April 4 and April 12. BIGresearch conducted the survey. “This Mother’s Day, the woman who often puts herself last is being put first,” says Matthew Shay, president and CEO of the National Retail Federation. “Americans are in a much better position to spend this year and will push the daily stresses of high gas and food costs aside for one day to celebrate the most important women in the world to them.” <InternetRetailer>

Hedgeye Retail’s Take:  Is it us, or do these numbers still seem low?




Notable news items from the past few days and price action from Friday, along with our fundamental view on select names.

  • SONC reported that its system-wide same-store sales have increased by an estimated 4% to 6% for the first two months of the company’s third fiscal quarter.
  • On Friday, SONC rallied 12.8% on accelerating volume.
  • MCD said this week that its store growth and hiring are about to accelerate in China, with plans to open 700 new stores in the country by the end of fiscal 2013 which will bring its total restaurant count there to 2,000, according to nrn.com.
  • WEN is testing its new chicken sandwich in Columbus, OH. 
  • According to The Times of India, fine dining brands are “hungry for India debut” as the affluent middle class expands.
  • KONA gained 3.4% on accelerating volume while BWLD declined 1.2% on accelerating volume.



Howard Penney

Managing Director


This week's notable callouts include Greek bond yields continuing upward and commodity prices falling.

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 3 of 11 improved / 2 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged




1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 25 of the 28 reference entities and widening for 3. 

Tightened the most vs last week: PMI, RDN, ALL

Widened the most vs last week: MBI, AGO, MS

Tightened the most vs last month: ACE, ALL, AGO

Widened the most vs last month: PMI, MTG, RDN




2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 31 of the 39 reference entities and widening for 8.




3. European Sovereign CDS – Greek CDS reversed their meteoric rise in the middle of last week, leading the overall average to flat for the week (down 2 bps).    



4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 7.66 versus 7.78 the prior week.  




5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose slightly last week to end the week at 1621.   




6. TED Spread Monitor – The TED spread rose last week, ending the week at 23.8 versus 22.3 the prior week.




7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 28.3, 3.8 points lower than the prior week.




8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields jumped a further 76 bps despite the mid-week pullback.




9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  Last week spreads fell to 112 from 123. 




10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows.  Last week it hit its lowest level since early March, then rebounded slightly to 1269. 




11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 6 bps to 268 bps. 




12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.6% upside to TRADE resistance, 1.4% downside to TREND support.





Joshua Steiner, CFA


Allison Kaptur

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