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THE M3: IMPORTED WORKERS; PACKAGE DATA

The Macau Metro Monitor, May 13, 2011

 

 

MIGRANT WORKERS TO RISE 20,000 IN 2011 Macau Daily Times

Secretary Tam said that the number of imported workers in Macau will increase by around 20,000 for 2011.  "Starting now it's appropriate to increase 1,000 to 2,000 [migrant workers] per month, which coincides with what I've said earlier that the employment population is expected to grow about 10% this year. This figure [10%] corresponds with Macau's economic development at this stage.  With the opening of a large-scale project [Galaxy Macau], the increase in imported laborers is going to be reflected in the statistics in the coming few months."

 

GRH has approved altogether 106,354 non-locals to come to work in Macau as of the end of March, an increase from 104,407 and 102,857 respectively at the end of February and January this year.  Yet, only about 76% of these people have already arrived in Macau and obtained a work permit (blue card).  As of the end of March, there were 81,416 blue card holders, and in February and January the figures were 79,467 and 77,903, respectively.

 

He stressed the 1:1 ratio is still one of the major considerations of GRH when approving imported workers for Sands China's Parcels 5 and 6 construction on the Cotai Strip. Also, there are no plans to change the 6-month entry ban stipulated in the Law for the Employment of Non-resident Workers.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MARCH 2011 DSEC

Visitor arrivals in package tours decreased by 2.3% YoY to 498,972 in March 2011.  Visitors from Mainland China (364,333); Taiwan (26,760); and the Republic of Korea (19,912) increased by 2.5%, 6.1% and 40.5% respectively. However, a decrease was observed in the visitors coming from Japan (19,452), Hong Kong (19,125), Thailand (10,072) and Malaysia (9,305).



Year of the Chinese Bull

“If you do not change direction, you may end up where you are heading.”

-Lao Tzu

 

Lao Tzu, born in the sixth century B.C., is known as the founder of Taoism and the author of Tao Te Ching.  In this book, Lao Tzu describes the Tao “as the mystical source and ideal of all existence”.   Interestingly, in some legends he was born after being in the womb for 62 years – as a grown man with a grey beard and long ear lobes (a sign of wisdom).

 

The quote above from the founder of Taoism is apropos as it relates our investment views of China over the past couple of years.  Early last year we introduced the Chinese Ox in a Box theme, which encapsulated our view that Chinese central banking authorities would be forced to raise interest rates due to broad measures of inflation, which would lead to a negative delta in Chinese growth and the likely underperformance of Chinese equities.

 

This theme played out according to plan as China led the world in tightening monetary policy and the Chinese stock market was one of the worst performers last year, finishing down -14.3%.  Of course, markets trade on future expectations, not trailing facts.  With China’s dismal equity performance in the rearview mirror, it is now time to focus on those future expectations.  Our view is that those expectations are sufficiently low versus the potential upside in Chinese equities.  That is, we see asymmetric risk / reward in being long of China.

 

This “change in direction”, has also led to change in theme name, which we introduced in April on our Q2 Theme Call as Year of the Chinese Bull.  That’s right, the hockey heads in New Haven are all bulled up on China.  Giddy up! On a serious note, as our subscribers well know, we are far from being cowboys when it comes to managing risk and making recommendations.  In fact, there is an omnipresent sense of accountability standing behind all of our research at Hedgeye.  As such, the key tenets of our latest thesis on China are outlined below and predicated on a lengthy research trip that Analyst Darius Dale took to Asia last fall.

 

Firstly, expectations are subdued for Chinese equities.  This is reflected in two measures, the performance of the Chinese equity market last year and the valuation, broadly speaking, of Chinese equities.  Last year the Shanghai Composite was down -14.3%, which was a negative outlier amongst the world’s largest economies.  Despite this, China continued to grow, and so did the earnings of Chinese companies.  As a result of lower prices and higher earnings, the Chinese stock market, based on the Shanghai Composite, is trading at roughly14x NTM earnings, which is at the bottom of its long run valuation range.

 

Second, China is at an inflection point in growth versus global growth more broadly.   After five quarters of Chinese growth narrowing versus global growth, Chinese growth bottomed on comparative basis in Q3 2010 and is now reaccelerating versus the rest of the world.  In our view, this will primarily come from global growth slowing, as seen in the United States last quarter, versus Chinese growth necessarily accelerating.  Even so, as global growth slows, Chinese growth will become much more attractive on a relative basis.  In the Chart of the Day below, we highlight this graphically.

 

Finally, we believe both of the key factors of monetary policy and inflation will begin to work to benefit equities.  On the first point, China is not starting to tighten monetarily, but in fact is likely closer to the end of its tightening regime.  In fact, as of yesterday’s increase, Chinese banks’ reserve requirement ratios are now at an all-time high of 21.5%, with some exceptions.   In addition, China has been raising rates steadily since October 2010.  The impact of this proactive tightening can be seen in declining money supply growth in China.  Not surprisingly then, our models see tightening being reflected in a gradual decline in the year-over-year growth rates of Chinese CPI.

 

Now we certainly get that there are risks to being long of China, but on our factors of growth, monetary policy, and inflation, the Chinese equity outlook looks promising over intermediate term.  The obvious pushback we get on this thesis relates to our willingness to be long of a Communist nation that formally utilizes central planning.  We get that, but also get that things aren’t all that different in many Western nations as it relates to governments trying to influence the economy.  In fact we stumbled upon the following quote in our morning grind this morning:

 

“I absolutely see a continuation of QE2 in some form; the economy certainly isn’t strong enough to survive on its own.”

 

This quote came from Keith Springer, president of Springer Financial Advisors.  Now we don’t know Mr. Springer, so we’ll leave it at that, but admittedly we do find it sad that this nation has gotten to a place where investors legitimately believe the “economy can’t survive” without another dose of Keynesian Kryptonite.  Last time I checked my Yale history books, the economy of this great republic has survived – and thrived – over the 230+ years that preceded The Quantitative Easing.

 

As you head off into the weekend, I’ll leave you with a quote from Confucius to contemplate:

 

“Men's natures are alike; it is their habits that carry them far apart.”

 

Or in hockey speak: back check, fore check, pay check.

 

Enjoy the weekend with your friends and family,

 

Daryl G. Jones

Managing Director

 

Year of the Chinese Bull - Chart of the Day

 

Year of the Chinese Bull - Virtual Portfolio


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TALES OF THE TAPE: SBUX, KKD, PEET, GMCR, MCD, DPZ, WEN, YUM, BKC, COSI

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

  • SBUX was initiated “Market Perform” at Wells Fargo.
  • SBUX has stopped buying coffee as it waits for price to pull back from a 34-year high, according to John Culver, President of Starbucks International.  Culver was quoted in Swiss newspaper Tages-Anzeiger as saying, “these prices are not based on facts given there is no supply problem.  Speculators are at work here”.
  • Coffee production in Columbia fell 19% to 523,000 bags in April, year-over-year, after storms last year hampered plants from flowering.  Output was 647,000 bags in April 2010.
  • KKD, PEET, GMCR, MCD, DPZ and WEN all made significant gains on accelerating volume. 
  • CBRL, BOBE, MRT, and DRI were the gainers on the casual dining side that traded with high volume yesterday.
  • YUM has offered to pay HK$6.50 per share for most of the shares it does not already own of Little Sheep, the Chinese hot pot restaurant operator.
  • Burger King has struggled of late, with first-quarter same-store sales falling 6 percent in the United States and Canada.
  • OSI Restaurants reported Q1 comps. Comps by concept (systemwide):
    • Outback Steakhouse +4.1%
    • Carrabba’s Italian Grill +3.9%
    • Bonefish Grill +9.6%
    • Fleming’s Prime Steakhouse and Wine Bar +11.4%
  • COSI reported a loss of $0.04 per share for 1Q and company same-store sales of +3%.

 

TALES OF THE TAPE: SBUX, KKD, PEET, GMCR, MCD, DPZ, WEN, YUM, BKC, COSI - stocks 513

 

 

Howard Penney

Managing Director

 


Who Plans Whom?

This note was originally published at 8am on May 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Who plans whom, who directs and dominates whom…?”

-F.A. Hayek

 

As long as our central planning overlords keep coming up with new plans for our said “free markets” (regulating oil margin requirements, compromising a Constitutional debt-ceiling debate for political favors, etc.), I guess I’ll just keep rolling through a full frontal review of their Keynesian dogma.

 

This isn’t to say that the Austrian and Chaos Theory schools of math & economics don’t have their faults. All schools do. It is simply a reminder that all independent research starts and ends with finding the right answers. Sometimes those answers are different, depending on who you are, and who dominates you…

 

Being directed and dominated by bureaucrats isn’t cool. That’s why hard core American patriots are so upset. If you live in a different country where socialist planning isn’t new, you’ve probably been bitter for a while now and this email is likely regulated away from your inbox too.

 

The aforementioned quote comes from a chapter Hayek wrote in 1944 titled “Who, Whom?” He borrowed this metaphor from Lenin in order to ask some very basic questions about individual freedoms and liberties: “Who, whom? - during the early years of Soviet rule the byword in which the people summed up the universal problem of a socialist society.” (“The Road To Serfdom”, page 139)

 

Something to think about while you watch The Price Volatility trade in your increasingly planned markets this morning…

 

Evidently, markets that are rigged, planned, or regulated inspire lower and lower trading volumes and/or higher and higher levels of volatility. If this is what the end-game for the Keynesian Kingdom is supposed to look like, no one should be surprised.

 

Whether or not I like it, I have to deal with managing risk around it this morning. I know it won’t end well, but that’s not what I’ll get paid for saying today.

 

Sadly, what we are all getting paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero % rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero % short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero % expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

Bloomberg data quantified The Dare and The Delay in their “Weekly Commitments of Traders Report” yesterday with the following data point on short-term US Treasury speculation:

 

“Non-commercial accounts purchased 48,460 con­tracts on two-year Treasury notes during the latest reporting period. The long position of 235,621 con­tracts is 3.4 standard deviations above its one-year average.”

 

In other words, never mind who is planning whom for a minute and realize that the entire Institutional Investor community is getting paid to beg The Bernank to keep the status quo on remaining what we’ve labeled as being “Indefinitely Dovish” (Q2 Macro Theme).

 

Again, I may not like it – but I do have to deal with it. So here’s the read-through so far this morning, alongside our positioning across asset classes (which you can see daily in the Hedgeye Portfolio at the bottom of the Early Look):

 

Currencies

  1. US Dollar = down for the 15th week out of the last 20 (we’re short)
  2. Euro = flat for the week, holding immediate-term TRADE line support of $1.43 (no position)
  3. Chinese Yuan = hitting new all-time highs this morning at $6.49 (we’re long)

Equities

  1. US Equities = up for the 2nd day out of the last 6 making lower-highs on almost record low volume (we’re short SPY)
  2. US Tech = up in the pre-market on the heels of big M&A (MSFT for Skype) – we’re long Tech (XLK)
  3. Chinese Equities = up for the 5th day in the last 7 after an outstanding trade balance report (we’re long)
  4. Indian Equities = down again overnight to -9.8% YTD as USD debauchery driven inflation is forcing rate hikes (we’re short)
  5. Germany Equities = up a full percent this morning to +8.3%, outperforming SP500 like they did last year (we’re long)
  6. Greek Equities = up a full 2 percent this morning after crashing in the last few weeks (down -19.7% since February 18th)

Commodities

  1. WTI Crude Oil = down small this morning on margin whispering, and up +4.1% for the week (we’re long)
  2. Gold = up again this morning, recovering from its -4.2% down week, up +1.8% week-to-date (we’re long)
  3. Copper = up over +2% for the week-to-date but still bearish/broken on both our TRADE and TREND durations (no position)

So what do I plan on doing with all of these moves and positions? Who is planning to plan moves on me next?

 

I really don’t know.

 

And I guess that’s probably a good thing to admit, given that US stock centric cheerleaders of “Dow 13,000” from early 2008 are still telling you with 100% conviction that they know exactly where this baby is going next.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1488-$1522, $98.63-$109.11, and 1334-1351, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Who Plans Whom? - Chart of the Day

 

Who Plans Whom? - Virtual Portfolio


Retail: Spread 'Em

Focus on the CPI all you want…but the government’s Office of Textile and Apparel printed its import/export numbers for the Month of March (it lags CPI by a month). The total price index came in +9.14% yy – a simply stunning sequential increase from the +3.55% number we saw in Feb.  No revelations here, as the world knows that higher costs are on the way. But these readings are going to test – if not go over – 20% within 4 months.

 

These goods were at BEST on shelves in late April, but more realistically are being put out there for us to buy right now – just in time for what Kohl’s and Macy’s both said was ‘pent up’ demand into May.  They’d better be right – especially given Gap’s comment that price increases being accepted by consumers less than expected. Again, this was before the acceleration in inventory costs.

 

Yeah…I know. This sounds so consensus. But check out the following charts.

 

1)      The MVR and the RTH won’t acknowledge the simple fact that the industry is about to face its largest margin deficit in history. 

Retail: Spread 'Em - Snag2

 

 

 

2)      Industry margins vs the spread in CPI/Import price is extremely distorted. We think it will get worse, which is unfortunate given the historical relationship that exists (and flow through to stock prices).

Retail: Spread 'Em - Snag

 

 

3) The industry is sitting at peak margins. The consensus – which is thinking in baby steps – has margins down about 30bps this year. We, however, calculate $8bn in margin risk, or about 4.5points for the year.  

 Retail: Spread 'Em - Retail Operating Margins

 

 

 

 

In our black book presentation “4.5 Below” we presented the following table demonstrating the math. Email Sales@Hedgeye.com if you are interested in receiving a copy or would like a larger of the [probably tiny and illegible] table.

Retail: Spread 'Em - Margin Table

 

 

Brian McGough

Robert Belsky


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