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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


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%.





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):



  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)


  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)


  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,



Keith R. McCullough
Chief Executive Officer


Who Plans Whom? - Chart of the Day


Who Plans Whom? - Virtual Portfolio

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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

R3: Pent-up demand, KSS, TGT, Topshop, Vente Privee



May 12, 2011






  • Kohls was the second department store retailer to set strong expectations for May sales due to ‘pent up’ demand in as many days following similar comments out of Macy’s yesterday. While we never like to highlight weather, the reality is that it April was the wettest in 20-years nationwide. Sure, we could see a rebound to some extent in May, but this only adds to our concern that consumer demand will turn sharply downward in the 2H. The bottom line is that consumer behavior is utterly unpredictable. Banking on ‘pent up’ demand is poor risk management.
  • e-Commerce sales were up +47% at KSS in the quarter. A strong start for the year in which the company expects to grow nearly 40% and achieve sales in excess of $1Bn in the channel. If e-commerce sales continue at this pace it would add another 50bps on top of consensus expectations for 5% sales growth this year.
  • With average selling prices increases for a t-shirt up +26% since last July, management at Gildan commented that increases to date are expected to pass through higher cotton costs up to $1.50/lb. including $0.25 of added basis cost, which is actually lower than the $1.60 projected at the end of 2010.



Target to Launch New Fashion and Homeware Collections - Target is working with Missoni for its next designer collaboration, which will be launched this fall, sources reported. The partnership is Target’s biggest to date and will not only include clothes but also homeware products, ranging from women’s, kids’ to bed sheets, to dinnerware. It was reported that a total of 400 items are in the works.. <FashionNetAsia>

Hedgeye Retail’s Take: Best known for their vibrantly colored fabrics and home collection line, Missoni is the next in what has been a line of recent multi-category collaborations. The highly publicized Liberty of London pairing last year and again last week with Calypso, Missoni is likely to be the latest line to get Target back on track with designer collaborations.


J.C. Penney Leads Internet Explorer Availability Ratings in April - JCPenney.com and Williams-Sonoma.com placed first among large retailers in April availability tests, says Compuware Gomez. Last month, online shoppers using Internet Explorer could access JCPenney.com 100% of the time. The site posted a 99.89% score in Firefox availability. Williams-Sonoma.com averaged 99.98% availability in Firefox testing last month and 99.75% in Internet Explorer tests. Six other retail sites (Amazon.com, LLBean.com, Newegg.com, OfficeMax.com, Target.com and Walmart.com) tied with the second-highest Internet Explorer availability score (99.98%). <InternetRetailer>

Hedgeye Retail’s Take: Given Kohl’s focus on driving e-commerce sales over $1bn this year, the call out here is their absence from the list.  Cynically, we can question whether such wide open ‘availability’ suggests lack of utilization. We’ll give them a pass for now.


Louis Vuitton Files Trademark Suit Against 182 Website Operators - Luxury retailer Louis Vuitton is suing the operators of 182 websites, charging they’re selling counterfeit goods and infringing on Louis Vuitton trademarks. Attorneys for Paris-based Louis Vuitton Malletier S.A. filed suit Monday in U.S. District Court for Nevada in Las Vegas, charging the defendants "directly target business activities towards consumers in Nevada and cause harm to Louis Vuitton’s business" in Nevada. One of the attorneys, Stephen Gaffigan of Fort Lauderdale, Fla., is involved in a similar suit filed April 18 in the same court against 223 defendants by luxury goods company Tiffany. In the Louis Vuitton suit, the lawsuit alleges the defendants are likely from China or other foreign jurisdictions with lax trademark enforcement systems and use their websites to sell counterfeit goods of inferior quality including handbags, wallets, luggage, shoes, belts, scarves, sunglasses, watches and jewelry "bearing trademarks which are exact copies of the Louis Vuitton marks." <VegasInc>

Hedgeye Retail’s Take: While U.S. customs and regional associations including several in China are stepping up anti-counterfeiting efforts, stronger brands like Tiffany’s, RL, and now LVMH continue to step up and take matters into their own hands to ensure trademarks are protected. A near-term cost, this will pay off in the long run as brands recapture a greater percentage of real consumer spend.


Vente Privée to Unveil U.S. Partner - The competitive landscape for the flash sale concept is getting more crowded every day. Paris-based Vente-Privée.com, the largest flash sale company in the world, is expected on Thursday to unveil a partnership with a U.S.-based firm, likely serving as its entrée into the American market. Officials at Vente- Privée declined to provide details, but Jacques-Antoine Granjon, the site’s chief executive officer and co-founder, will be in New York Thursday for the unveiling of its U.S. partner, according to U.S. and overseas sources. Summit Partners, which has offices in Boston, Palo Alto, Calif., and London, has held a 20 percent stake in Vente-Privée since 2007. <WWD>

Hedgeye Retail’s Take: The originator of online private/flash sales back in 2001, Vente announced it will enter a 50/50 JV with American Express in the domestic market. This deal makes a lot of sense for a site that’s well known globally (it has 13 million members), but is entering a much more competitive market here domestically. Instead of having to fight tooth-and-nail to build its member base,  American Express members are in the right demographic and are far more likely to opt-in for the service. Expect to see some creative tactics from incumbents like Gilt Groupe and Ruelala to maintain share ahead of the Vente launch.


Prada Plans To Seek Listing Approval May 19th For Planned HK IPO - Italian fashion house Prada SpA plans to seek listing approval from the Hong Kong stock exchange May 19 for its planned initial public offering that could raise as much as US$2 billion, a person familiar with the situation said Thursday.  The company aims to list on the exchange in late June, the person said. Prada is planning to sell a 20% stake in the family-run company during the IPO, which Prada hopes will raise between US$1.5 billion and US$2 billion, another person familiar with the matter said earlier. Once the application is approved, the next steps typically involve informal meetings to gauge potential interest, followed by formal pitches to investors and a listing, all of which is usually completed within a six-week period. Prada said in January its board hired Goldman Sachs Group Inc., Intesa Sanpaolo unit Banca Imi, Unicredit SpA and Credit Agricole SA to handle the deal. <WallStreetJournal>

Hedgeye Retail’s Take: Recall that Prada has gone through this process on three seperate occasions over the last 10-years only to have it put off so it would be wise to see the company list in June before getting too worked up over adding another luxury brand to the mix in public markets.


Men's Stores Anticipate Strong Father's Day - There’s been no hiccup in the men’s wear business. After a strong holiday season in 2010, men’s wear sales have continued to gain steam this year, outpacing women’s. According to MasterCard Advisors SpendingPulse, men’s apparel sales rose 12.4 percent in April, more than the 7.4 percent gain posted by women’s wear and the strongest growth in the category since May 2007. The NPD Group Inc. reported men’s sales rose 12 percent for the three months ending Feb. 28, on top of a 3.3 percent gain for 2010. “This is a very healthy growth rate and a clear sign men are looking to rebuild their wardrobes,” said Marshal Cohen, chief industry analyst for NPD. “Based on what we are seeing in the recent market data, the categories that are going to prosper are those that are a combination of basics and replenishment as well as some impulse and fashion categories.” <WWD>

Hedgeye Retail’s Take: Men’s apparel sales have been strong for the better part of a year now, but the catch with a direct read-through for Father’s Day is that sales are driven primarily by wives and kids, not men.


Topshop to Open Chicago Unit - Topshop is getting ready to open its second American store at last. After opening a flagship in New York’s SoHo in March 2009, the London retailer is poised to unveil its second and largest U.S. store along Michigan Avenue Sept. 7. The 49,000-square-foot location, with just less than 35,000 square feet of selling space, is slightly larger than the unit on Broadway, which has 28,000 square feet. The newest high-profile corner location at 830 North Michigan Avenue represents a $10 million to $12 million investment, confirmed Sir Philip Green, the owner of Arcadia Group, parent company of Topshop and its men’s sibling, Topman. The Windy City opening will coincide with ongoing international expansion for the British fast-fashion retailer, which plans to launch a 12,000-square-foot store in Toronto later in September, and a São Paulo location in February 2012. All Topshops outside of the U.K. are franchised except for the U.S. stores. <WWD>

Hedgeye Retail’s Take: The battle between British rivals H&M and Topshop on domestic soil will be intriguing to watch unfold. With only its second store in the U.S., Topshop would need to drastically accelerate its efforts to keep up with H&M expansion – perhaps this is just the beginning? US retailers have a lot to learn.




A great Q on the surface but disappointing volumes and non-gaming revenues.



Genting Singapore reported net revenues of S$914MM and Adjusted EBITDA of S$538MM, which blew away our estimate by 5% and 17%, respectively, and beat consensus by even more.  However, after stripping away the impact of high hold, numbers would have been softer than our estimates.  By our math, high VIP hold of 3.8% boosted net casino revenues by S$139MM and EBITDA by S$132MM.  We are still waiting to speak to the Company to get more color on the quarter, but below are some preliminary thoughts on Genting’s quarter.




  • VIP gross win of S$707MM and net win of S$434.5MM
    • Genting disclosed that they had 59% market share RC volume in Singapore, which comes out to S$18.6BN
      • MBS reported RC volume of S$12.9BN, implying total market RC of S$31.6BN
  • Assuming, 3% normal hold, gross VIP revenues would have been S$149MM lower.  Post Goods & Services Tax (GST) and player rebate, the net revenue impact would have been S$139MM.  The only other variable expense is the 5% tax rate, which gets us to an EBITDA impact of S$132MM
  • Our gross VIP number also jives with Genting’s affirmation of having 68% market share of VIP win
    • MBS reported gross VIP win of S$330MM, implying a market size of S$1.03BN
  • Our gross VIP number is 64% of GGR vs. management’s assertion of 62%
  • Our net VIP number is 54% of net casino revenues vs. management’s assertion of 50%
  • We estimate that the rebate rate was 1.3%
  • We have less information on Mass table win and slot win, so we will address those details in a subsequent note.  However, our sense from the call was that Mass drop was lower than we estimated (flattish QoQ) with higher hold.
  • Non-gaming revenues were disappointing missing our estimate by $20MM
    • RevPAR was down sequentially, we were led to believe that it would be up.  Room revenues estimated at S$26MM, were $3MM below our estimate.
    • F&B and other was S$25MM about $7MM lower than our estimate
    • USS revenues fell S$10MM short of our expectations.  Despite Battlestar Galactica opening on Feb 21st, daily visitation actually decreased QoQ and were even a little lower than 3Q2010 volumes.  This was somewhat offset by better spend per visitor.
  • On the bright side it looks like fixed expenses declined by about S$15MM sequentially

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