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The MACRO news flow on the health of the consumer has been less than robust.  At best the numbers on the consumer this week point to sluggish underlying trends, but the reality is that government continues to prop up the overall consumer picture.  This has been the case for some time, and may continue, but a potent cocktail of slowing growth and accelerating inflation – we call it Jobless Stagflation – is starting to muddle the thoughts of the Central Planners in Washington, D.C.





Say what you want about the weekly gyration in Initial Jobless claims, but nearly eight million unemployed people remain on the regular unemployment insurance program and extended and emergency benefits.  Every week more and more continue to run out of the government handouts, making it all the more important that the private sector pick up the slack.  Continued improvements in wage income are needed to replace falling government transfer payment income.


This week, the headline initial claims number fell 40,000 week-over-week to 434,000 (44,000 after a 4,000 upward revision to last week’s data); rolling claims rose 4,500 to 437,000 (are now up for the past 10 weeks) and even more importantly we are now at the YTD high.  The Labor Department had attributed part of last week’s gain to a spring break holiday in New York that was not anticipated by seasonal factors.  


As Josh Steiner pointed out in a Financials post this week, there is a tight correlation between jobs and the S&P 500 but, at present, a significant divergence has opened up.  “The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.”







For the second straight month, the NFIB small business index fell to 91.2 from March's 91.9; the index is up 10 points from the low of 81 set in March 2009.  April's 91.2 print puts the index below its first quarter average of 93.5, and even below the fourth quarter average of 92.5.


Looking at some of the detail in the survey, expectations for the economy to improve over the next six months took a further step back, falling from -5% to -8%; the second straight month expectations have been negative and the lowest since August 2010.  The net percent of small businesses planning to hire was 2% in April, unchanged from a month earlier. While hiring plans have been positive for seven consecutive months, progress has stalled.


When looking at a potential growth driver there are some contradictions.  The NFIB assessments of credit conditions deteriorated in April; a net 9% of small businesses said credit was harder to obtain, down from March's 8%.  This is in stark contrast to the latest Federal Reserve loan officer survey which reported its best readings on small-business loans supply and demand since 2005.





Although consumer spending growth remains healthy, the latest retail sales data suggest that growth may be slowing on the margin (including the issues with seasonal adjustment for Easter).  The government reported that sales growth in April disappointed, with core sales growing 0.2% (the weakest result since December 2010.  Yes, rising gasoline prices are taking a toll on sales at retailers and there are some signs that discretionary purchases are beginning to slow.  Department stores and housing related retailers had a poor showing in April, while restaurants may be losing some share to the grocery store channel.  The government’s attempt to increase take home pay from reduced social security withholding is being fully absorbed by higher gasoline prices.  As noted above, the recent job picture is not good and wage income is growing only modestly and that growth is largely dependent on government.  Therefore, the outlook for retail sales has become less certain and the risk to the downside is growing every week.





This week, the Bloomberg Consumer Comfort Index dropped to -46.9 in the period to May 8, the worst reading since March, from last week’s -46.2.  Interestingly, sentiment suffered the most in the West, where gas prices are the highest in the country.


Although we are ending the week on a high note as the University of Michigan preliminary consumer sentiment index rose to 72.4 for May from a final reading of 69.8 in April.  The increase was lead by the outlook for economic conditions which rose to 67.4 from 61.6.  The barometer of current conditions declined to 80.2 from 82.5 in April.  The decline in current conditions is reflective of the stagnant jobs picture and slowing wage growth. 





Howard Penney

Managing Director


Keeping Tabs on Consensus

Since October 2009, Bloomberg Finance L.P. has intermittently conducted a survey using a random sampling of ~1,000 of their 300,000 subscribers worldwide. Yesterday, the results of the seventh installment of this survey were released. Though we lack enough data to comprehend the implications of these figures in their entirety, we can, however, make educated inferences based on the deltas between surveys. As such, we’ve taken the liberty to analyze the (albeit limited) data on your behalf in an effort to help you stay on top of the major trends in consensus sentiment.


Keeping Tabs on Consensus - 1

Keeping Tabs on Consensus - 2

Keeping Tabs on Consensus - 3

Keeping Tabs on Consensus - 4


Darius Dale



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.



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).

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CHART OF THE DAY: Year of the Chinese Bull


CHART OF THE DAY: Year of the Chinese Bull - Chart of the Day

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


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