Chinese Bull Riding

Conclusion:  We remain bullish on Chinese equities as the bulk of Chinese and global economic data continues to come in in-line with our estimates. In the note below, we expand our comments from the Early Look today and dig deeper into our investment theme, Year of the Chinese Bull.


Position: Sold our Chinese equity exposure (CAF) on 5/10 due to it being immediate-term TRADE overbought; looking to buy it back on sale. Long the Chinese yuan (CYB).


Inclusive of today’s +1% move, Chinese equities are down -6.1% since reaching a cyclical peak on April 18. While we are not currently long China, as we booked a gain in the Virtual Portfolio on our long CAF position on 5/10, we’d much rather have the Chinese equity market validate our research by outperforming and continue to believe that over the course of 2011 it will do so.


Obviously, though, markets never do exactly what they are supposed to do – irrespective of our modeling outputs, forecasts, and analysis of sentiment. “Markets wait for no one”, Keith likes to say. As such, we thought we’d take the opportunity to highlight one of, if not the most, important skills risk managers must possess in these highly volatile times – the ability to separate the IDEA (research output) from the INVESTMENT (the price you pay to express the research output). Being married to an idea at every price is among the greatest mistakes many investors make; as such, timing and price remain the dominant factors in our models.


We like Chinese equities on the long side. That’s our IDEA, which is being driven by a muti-factor thesis that is best summed up as follows:


1. Chinese growth, while slowing, is slowing at a decelerating rate. In our models, the bottoming of the economic cycle is equally as bullish as the topping process is bearish.


As we called for at the beginning of 2010 via our Chinese Ox in a Box thesis, the rate of China’s YoY GDP growth has slowed from +11.9% in 1Q10 to +9.8% in 4Q10, marking a -210bps slowdown. Even with adopting our model’s most bearish scenario, we see Chinese GDP slowing at only three-quarters of that rate. Within our models, the bottoming of growth rates is a key indicator to increase long exposure to certain economies – a factor which gave us conviction to get long US equities in early March ’09.


2. On a relative basis, Chinese growth rates will widen vs. the rest of the world, creating the illusion of incremental value to growth investors – value we think the market will pay a higher premium for.


From 4Q10 to 1Q11, Chinese YoY GDP growth slowed -10bps. The rate of US YoY GDP growth, on the other hand, slowed by a factor of 5x that of China’s. We’ve been appropriately bearish on US economic growth since the start of the year and we see the current trend of weak domestic growth data continuing over the intermediate term at a magnitude that exceeds China’s own slowdown. Moreover, the US is not alone in this regard – we maintain that growth in the EU, Japan, Brazil, India, and other key emerging markets will slow at a rate greater than China’s over the intermediate term. As China prepares to exit the economic “penalty box”, the large majority of the world’s economies are on their way in.


3. Valuation is supportive; relative to their own historic ranges, Chinese equities are truly cheap.


The last time Chinese growth was accelerating on a relative basis to the rest of the world (2009), the Shanghai Composite peaked at 26x NTM Earnings. Today, they closed at roughly half that (13.2x). While we certainly aren’t making the call that they are going to return to the “bubbly” valuations of 2007 (38x), we do see upside here from a valuation perspective, although valuation is never a catalyst.


4. Mean reversion (to the upside) remains a supportive factor in our quantitative models when factoring in last year’s weakness (down -14.3% in 2010).


The Shanghai Composite finished 2010 down -14.3% and at one point was down -27.9% intra-year. We continue to flag mean reversion as supportive here, as the bear case (slowing growth, accelerating inflation, rate hikes, etc.) continues its transition from “on the horizon” to “in the rear view mirror”. Accordingly, in the latest Bloomberg Global Investor Poll Survey, the percentage of respondents identifying China as the “Market Offering Investors the Worst Opportunity Over the Next Year” dropped -400bps to 16% from January to May. As the bear case becomes fully priced in, we expect this trend to continue in our favor.


5. The net result of the PBOC’s proactive tightening is that we’re very likely to see Chinese domestic inflation peak in the very near term and begin an elongated trend of deceleration, which would alleviate market fears for further tightening.


In line with our forecast, Chinese CPI and PPI slowed in April to +5.3% YoY and +6.8% YoY respectively. In our recent work on China, we have been calling for the start of an elongated down-trend in Chinese reported inflation. As a result, we continue to maintain our view that China is near the end of the tightening cycle, with any additional measures likely coming in the form of less-malignant reserve requirement hikes and currency appreciation.


To the latter point, the PBOC increased reserve requirements yesterday +50bps – the fifth such measure YTD (vs. only two rate hikes). Meanwhile, the Chinese yuan continues to trade within 10-20bps of its all-time high (CNYUSD) and we see the uptrend continuing over the intermediate and long term. If China’s April trade balance shows us anything ($11.4B vs. $3.2B consensus), it’s that Chinese exporters are perhaps more resilient than consensus and/or the Chinese government believes. As such, we should continue to see additional yuan appreciation as the government gets increasingly comfortable with its impact (or lack thereof) on the Chinese economy.


Chinese Bull Riding - 1


Net-net, recent action in China’s interest rate swaps market (lower-highs), its interbank loan market (lower-highs), and its currency forwards market (higher-highs) is supportive of our view that the pace of Chinese rate hikes has slowed dramatically and that vast majority additional tightening will be expressed via the currency market and reserve requirement ratios.


Chinese Bull Riding - 2


From an INVESTMENT perspective, the data is supportive of us remaining bullish on Chinese equities and we will continue to manage risk around this exposure. With this summer’s Global Macro backdrop shaping up to be particularly ominous, we will likely continue to keep this and many of our other long ideas on a short leash.


Darius Dale



Some of it was hold related, but Wynn stole the show in Q1.



As we all know, Wynn Las Vegas/Encore had a great quarter even when normalizing the high hold.  The following chart shows Wynn’s big jump in EBITDA share among the big four Las Vegas operators:  WYNN, LVS, MGM, and Caesar’s.  MGM’s share, including half of Aria, held steady from Q4, although 40% is disappointing relative to previous quarters.  LVS’s new promotional strategy does not appear to be paying off as it saw its EBITDA share drop 400bps to 10% in Q4.  Yes, low table game hold % hurt EBITDA but slot hold % was unusually high and table and slot volume still fell 13% and 36%, respectively.




While we don’t have RevPAR data from Caesar’s, the following chart analyzes the relative quarterly RevPAR of MGM, Wynn Las Vegas/Encore, and Venetian/Palazzo.  Relative RevPAR has been remarkably stable over the past few quarters.  The only noticeable call out is the 6% and 5% fall off of LVS from its Q1 2010 peak the last 2 quarters.




In LVS’s defense, their RevPAR has been more volatile than the other 3 big Vegas Strip operators as can be seen in the following YoY RevPAR change chart.  However, the company’s big Q1 lag as even MGM moved significantly into positive territory is disconcerting and once again brings their promotional strategy into question.



R3: Asian JV is a big (neg) for Athletic Brands

R3: Required Retail Reading

The big story today is that Luen Thai (sports apparel) and Yue Yuen (athletic fw) are teaming up with the intent to make US and European brands lives miserable.



 Research Anecdotes

  • In a sign that mobile commerce is not entirely initiated by the consumer, management at Nordstrom highlighted that less than 6-months after installing WiFi throughout its stores, the company is now in the process of rolling out handheld devices to sales personnel with mobile checkout functionality. While mobile checkout has been a staple (and differentiator) at Apple retail stores for a while now, we aren’t surprised to see JWN lead the charge as one of the retailers most focused on customer service.


    ·         With store expansion a key driver of revenue growth, Management at BODY highlighted that 30% top-line growth in the quarter was driven in equal part to same store sales and unit growth. Interestingly, management sized the benefit of Easter noting that Easter added 2% to the quarter.         






     Yue Yuen and Luen Thai Form Alliance - Two industry giants, Yue Yuen Industrial Limited and Luen Thai Holdings Limited have formed a strategic alliance with the objective of tapping the global sports apparel market. Their 50/50 joint venture Yuen Thai Industrial Co. Ltd will focus on the development of sports apparel in the global market.  While Yue Yuen, the world's largest branded athletic footwear manufacturer, will leverage its close contacts with international sports brands to expand its brand services to the apparel category. Luen Thai, a supply chain services provider for the apparel sector, will leverage its manufacturing and supply chain platform to sports apparel market. Its client base includes Polo Ralph Lauren, Liz Claiborne, Limited, Express, Victoria's Secret, Fast Retailing, Dillard's and Debenhams.  At the commencement of the joint venture, Yuen Thai will serve the apparel supply chain for the international sports brands. The company will engage in design, product development, manufacturing as well as information technology and logistics management. Yuen Thai aims to become one of the largest apparel suppliers in this sector within the next few years. <SportsOneSource>


    Hedgeye Retail’s Take: not only does this deal strenthen Yue Yuen's position against domestic competition, but more importantly it adds an apparel component to the brand. Regardless of how it is pitched, this is not good for US domestic brands – including Nike. It’s hard to stretch out your payables when your primary supplier doubles in strength.  




    Retailers Turn To Facebook To Sell Their Goods - More of the world's biggest marketers are selling their stuff at the place where consumers hanker to hang out: Facebook.  Think of it as the ultimate convenience for a mobile generation that considers it seriously inconvenient to leave Facebook even for a moment in order to go to a retailer's Web site. Now, marketers from Express to J.C. Penney to Delta Air Lines are steering those purchases to their Facebook pages.  Within a few years, social media gurus say, the very notion of shopping on a retailer's Web site will become dated. "Expecting people to come to your Web site is expecting them to make an extra effort," explains Janet Fouts, a social media coach. "They're already on Facebook." The numbers are dazzling. Facebook has roughly 500 million users, 250 million of whom are on the site every day. The average user has 130 friends. Each month, people spend a total 700 billion minutes on Facebook.  <NewsFactor>


    Hedgeye Retail’s Take: To think it took most retailers several years just to build an online presence, adding a facebook component should be considerably easier not to mention more profitable. But building a platform on Facebook is not the real issue here, it’s the ability to evolve alongside the consumers that traffic the site. If you’re not connecting with the consumer in the mall, then you probably won’t connect on-line, either.     




    US Apparel Firms Back Rogue Websites Bill - The introduction of a bill that would help US authorities crack down on rogue websites selling fake and counterfeit goods has been welcomed by US apparel and footwear firms. The 'Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011' (PROTECT IP Act) "provides us with a full arsenal of tools that will be helpful in fighting these rogue websites," notes Kevin Burke, president and CEO of the American Apparel & Footwear Association (AAFA). He adds: "Footwear, apparel, and fashion accessories are some of the most counterfeited goods in the world. As US consumers continue to embrace e-commerce as a key shopping method, rogue websites have emerged as a popular way for counterfeiters to get fake goods into the United States."<JustStyle>


    Hedgeye Retail’s Take: We highlighted the fact that several strong brands are tackling this issue head on privately, but a federal bill would certainly help government associations address the issue as well adding further pressure to site offenders and the counterfeit industry. Basically, it would make counterfeiting really really really tough to stop – instead of impossible.




    Retail CFOs Cautiously Optimistic on 2011-Survey - Retail executives expect only a modest recovery in financial performance in the sector this year as consumers remain cautious and costs rise, according to new survey released on Wednesday. Only 24 percent of retailers around the world expect significant improvement in their financial performance over 2010, according to a KPMG survey of 152 chief financial officers and other financial executives. Fifty-one percent predicted some improvement in financial performance, and 9 percent forecast a decline. The findings come as major retailers from Wal-Mart Stores Inc (WMT.N) to Home Depot Inc (HD.N) prepare to report quarterly results and place their bets on consumer demand leading up to the winter holiday season, when most chains ring up the bulk of their sales. "There is a feeling that there's going to be growth, but that growth will be muted," Mark Larson, KPMG's global head of retail, said in an interview.<Reuters>


    Hedgeye Retail’s Take: only 9% of executives forecasting a decline is down right scary.  This sample must have left out apparel, footwear, and accessories. Expectations heading into the 2H are still too high - see our latest thoughts on this in yesterdays post as to how we quantify the risk.




    PPR Said Eyeing Stake in Pomellato - PPR seems to have a growing appetite for acquisitions. The luxury-to-retail group, which on Thursday launched a cash tender offer for sports firm Volcom Inc., also has its sights on the 18 percent stake in Italian fine jewelry company Pomellato owned by the Damiani family, according to market sources.  A PPR spokeswoman had no comment Thursday. It is understood several companies have expressed interest in Damiani’s minority stake since Pomellato is one of the few global independent companies left on the jewelry scene. Pomellato’s chief executive officer, Andrea Morante, a high-profile entrepreneur-cum-investment banker, is plotting an initial public offering by 2013.<WWD>


    Hedgeye Retail’s Take: We have zero opinion on this transaction – if it comes to fruition. But it supports the fact that Luxury companies that have survived the storm remain acquisitive. Spend it while you got it!






































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 80.46%
  • SHORT SIGNALS 78.35%


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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