Identifying Investment Opportunities throughout Asia

Conclusion: The bulk of recent economic data points continue to support our long-standing thesis that Growth is Slowing as Inflation Accelerates throughout Asia. When combined with our proprietary bottom-up country analysis, this top-down outlook creates both volatility and consternation – a confluence that allows us to identify alpha-generating investment opportunities across asset classes.


Below we list our highest conviction intermediate-term TREND ideas throughout the Asian geography with a particular focus on Macro/Asset Allocation. Next to each idea, we briefly touch upon the rationale behind the thesis and recent supporting/rebutting data points. This report isn’t intended to be a chronicle; rather it is a compendium of recent internal and external research we’ve done on the region. For more details or copies of related research reports, feel free to follow up with us at your convenience ().


Lastly, but certainly not least, time and price will continue dictate how we chose to express any of these ideas at any given moment within our Virtual Portfolio or Dynamic Asset Allocation.


Bullish on Chinese Equities: While we continue to favor Chinese equities from a research perspective, both our index-specific quantitative model and our 27-factor global macro model have rightfully kept us out of the way on the long side. Still, there’s no denying that our call for Chinese growth to decelerate at a slower pace (i.e. avoid the so-called “hard landing”) is playing out in spades with the recent industrial production, fixed asset investment and retail sales data (May #’s).


As we’ve previously outlined in our Year of the Chinese Bull thesis, we expect Chinese CPI to put in its YTD highs over the next month or so, with June being the most-likely scenario. As our Q2 Macro theme of Deflating the Inflation gathers steam across the commodity complex, we’ll see a measured reduction in Chinese tightening expectations – paving the way for investors to bid up the few pockets of global growth that are likely to be left standing over the intermediate term. As such, we’ll continue to trade China in our Virtual Portfolio with a bullish bias until we see a sustained breakout above the intermediate-term TREND line of resistance at 2,791 on the Shanghai Composite Index. To that point, we’ve just added the CAF to the VP on the long side earlier this afternoon.


Bullish on the Chinese Yuan (CNY): A core long-term position in our Virtual Portfolio, we continue to believe the yuan will benefit in the near term from market fears of incremental tightening in China. While we are not of the consensus belief that the PBOC will continue hiking rates in 2011, what we think China will do and what it does can be two very different things. Even still, a near term rate hike might just make for a very attractive entry point on the long side of Chinese equities (see above) given that our models suggest Chinese CPI is likely to peak in June. Regarding the yuan specifically, we continue to welcome lagging media coverage of China’s inflationary headwinds as supportive of our current long CNY position.


Bullish on the Japanese Yen (JPY): As Global Growth Slows, we expect both compressing interest rate differentials and growing Japanese investor risk aversion to weigh on the yen over the intermediate-term. While we remain bearish on Japan’s currency from a long-term perspective, we do believe the next few months’ worth of global economic data will look sour enough to keep the downward pressure on key global interest rates and the supply of Japanese yen on the global FX market.


Additionally, the Bank of Japan continues to show they aren’t necessarily willing to meaningfully step up monetary easing via its new lending program designed to prevent any potential capital shortage stemming from the recent natural disasters (“only” $6.2B vs. an existing $37.4B credit program). The BoJ’s refusal to cave in to political and investor demands for “shock and awe” sized increases to its current asset purchase facility is a measured delta relative to market expectations (and in some cases, begging) for the short-term elixir of debt monetization. This marginally hawkish lean out of the BoJ is bullish for the yen – so long as Governor Shirakawa can maintain his fortitude.


As always, any exposure to Japan comes with the risk of Big Government Intervention. Back in March, the G7 jointly intervened to stem the yen’s advance to a post-WWII record of 76.25 per USD. To the extent there is the political will to do so on such a large scale remains to be seen (the world has bigger issues to deal with now: Greece, US growth/housing, etc.). Japan’s former senior FX official, Eisuke Sakkibara (a.k.a. “Mr. Yen”), doesn’t seem to believe there will be any intervention this time around, as fundamentals, not speculation, drive the yen higher. We cautiously concur.


Bullish on the Singapore Dollar (SGD): On a long-term basis, we continue favor the equities and currencies of countries where sober fiscal and monetary policy contribute to higher rates of economic growth and lower rates of inflation. Singapore continues to demonstrate what we’re looking for in this regard and recent economic and monetary policy decisions continue to support growth (particularly in the consumer sector via accelerating retail sales and a falling unemployment rate) and slowing inflation readings. As we’ve penned in our recent work on Singapore, we think the outcome of the recent election (PAP winning by less than they’ve ever done so) will result in increased attention paid to the populace over the intermediate-to-long-term. For now, that indirectly translates into the Monetary Authority of Singapore stepping up its hawkishness to get inflation firmly under control.


Bearish on Japanese Equities: While the tragic events which took place in Mar/Apr of this year certainly deserve a great deal of credit/blame as it relates to Japan’s current depressed growth rates we cannot stress enough that Japanese growth was slowing even prior to the earthquake when we were appropriately bearish.


As a function of our Japan’s Jugular thesis, we’ve been quite vocal about Japan’s world-beating debt and deficit issues continuing to structurally impair economic growth over the long term. What is perhaps lost on the market now is its effect on near-term growth. The political instability surrounding the future resignation of current prime minister Naoto Kan following this month’s no-confidence vote only amplifies the damaging psychological effects of fiscal and regulatory uncertainty on consumer and business confidence throughout the nation – at a time when confidence is needed most throughout the island nation. Lastly, we continue to stand counter to the intellectually-lazy thesis that “quake rebuilding is bullish for GDP growth”. In our models, all disasters – be they natural, fiscal, or sovereign debt related – are explicitly bearish for economic growth.


Bearish on Indian Equities: The thesis here is as simple now as it was when we first outlined it in back in early November: Growth Slows as Inflation Accelerates as Interconnected Risk Compounds. Regarding growth specifically, 1Q11 Real GDP growth came in in-line with our bearish estimates and we see further downside from a sequential perspective over the intermediate term. Both industrial production growth and car sales growth (a widely-followed proxy for retail demand) have slowed to multi-quarter lows alongside the most recent services PMI reading (May) falling 4.2 percentage points MoM. Inflation continues to make higher-lows and recent energy price hikes and a highly likely crop price hike of +20%-30% in 2H11 are supportive of this trend continuing. The Royal Bank of India agrees with this outlook, hiking rates overnight by another +25bps citing “high domestic inflation risks”. Net-net, earnings in India over the intermediate term are likely to come up short of what typically are overly optimistic expectations for members of the “BRIC” community.


From an interconnected risk perspective, corruption headlines, the growing likelihood India misses its deficit reduction target by a wide margin in the current fiscal year, and the potential for destabilizing capital withdrawals pose a threat to both India’s equity market and currency (the two have traded in near lock-step over the years). Pardon our sobriety, but we think it’s important to reiterate that the flows work both ways.


Bearish on the Indian Rupee (INR): When screening for FX opportunities, we like to be long of currencies of countries that: 1) have accelerating growth prospects; 2) have a little bit of inflation so that 3) monetary and fiscal policy are proactively hawkish and correspondingly sober. India has nearly the opposite occuring in all three categories: 1) slowing growth; 2) a lot of inflation; and 3) arguably the world’s most misguided monetary and fiscal policy. Recall that (much to our bewilderment) the Royal Bank of India paused hiking rates and embarked on a quantitative easing program late last year – at a time when they should’ve been proactively raising rates to ward off the inflation that has consistently forced them to revise up their WPI targets after the fact. Additionally, recall that we called out the current budget as one rife with pollyannaish economic growth and subsidy expense estimates that was ultimately doomed to fail in meeting its deficit reduction target.


Bearish on Indian Rupee denominated Short-term Corporate Debt: We continue to be of the view that the RBI will continue on its tightening path and could potentially step up the pace and magnitude of rate hikes in an effort to preserve its eroding credibility. To that effect, RBI governor Duvvuri Subbarao’s recent commentary has indicated that the central bank is okay with aggressively combating inflation “even at the cost of some growth in the short run”. As such, we expect decelerating profit growth (see above) and higher interest rates be prove bearish for Indian corporate credit over the intermediate term.


Bearish on Hong Kong Equities: From our vantage point, the conditions which have been supportive of the Hang Seng Index off the March ’09 lows (accelerating growth, abundant liquidity, a perhaps overly robust property market) are eroding on the margin and are being replaced by negative catalysts such as: slowing growth, accelerating inflation (at a 32-month high), and the puncturing of a property bubble. Furthermore, Hong Kong officials remain trapped in a box from a monetary policy perspective, unable to raise rates to cool the overheating economy. Instead, the Hong Kong Monetary Authority has taken to directly to targeting the property market with specific curbs that appear to have significantly slowed the pace of transactions in the real estate market.


At Hedgeye, we commend policy efforts designed to prevent the buildup of asset bubbles; in this scenario, however, the HKMA is about +70% too late with regard to the latest two-year advance in Hong Kong’s real estate prices. As such, we expect bank and property developer stocks to lead the broader market lower over the intermediate-term TREND.


Bearish on Korean Equities: Of all the Asian countries where we find ourselves explicitly bearish on their equity markets, Korea poses the most risk to the upside – particularly if Korea’s GDP growth hangs in there.  Of the three algorithms we use to model country-level economic growth rates, the spread between the highest and lowest outputs for Korean GDP growth is the widest throughout Asia. Given this setup, we remain cautiously pessimistic on Korean equities and though we may not necessary be inclined to short them at this juncture, we would be sellers of strength were we long of them in the Virtual Portfolio.


Our negative thesis on Korea hinges on incremental tightening out of the Bank of Korea in an environment whereby economic growth is likely slowing. Additionally, we are bullish on Korea’s core CPI readings over the intermediate-term TREND, and, as such, we are correspondingly bullish on Korean rate hikes over that same duration. Still, should the BoK relent in its hawkishness, we do find waning domestic and global demand as a risk to Korean profit growth over intermediate term. Given how resilient the Kospi has been in recent months (+8.5% on a three-month basis prior to today’s sell-off), we find the potential for an upcoming bifurcation in equity performance and corporate earnings trends as a catalyst for mean reversion to the downside.


Bearish on Thai Equities: Simply put, Slowing Global Growth will continue to weigh on Thailand’s manufacturing sector (industrial production growth is negative and accelerating to the downside recently) and Accelerating Inflation will weigh on Thailand’s domestic demand (retail sales growth slowing; the latest business sentiment reading registered a contraction) as the central bank continues hiking rates. Specifically, recent hawkish central bank commentary expressing concern over core inflation, the removal of diesel subsides, and populist measures support our view that Thai interest rates are headed north over the intermediate-term TREND. Mix in the political equivalent of a Molotov Cocktail with the upcoming elections and we have what continues to be a strong three-factor short thesis.


To the latter point specifically, all signs point to social instability as a result of the upcoming parliamentary election scheduled for July 3. This is due to the likelihood that radical supporters of the opposing parties (Democrats/Yellow Shirts, which are the political elite of Thailand vs. the Puea Thai/Red Shirts, a for-the-people party with a populist agenda) take to the streets in what have historically been violent protests. If the Yellow Shirts win a majority, we can be reasonably assured that Red Shirt supporters will once again march on Bangkok – just as they did last spring. If the Red Shirts win a majority, we are likely to see a second consecutive military coup, which would be implicitly endorsed by the Yellow Shirts. Such an outcome almost guarantees that a major protest takes place in the coming months. As a result of well-crafted political messaging blaming current officials for rising inflation and promises of extraordinary populism, the Puea Thai party has positioned themselves for victory according to the latest poll results (43% vs. 37% for the Democrats) – putting the latter, potentially more violent of the two protest scenarios in play.


Bearish on the Thai Baht (THB): As Slowing Global Growth and Deflating the Inflation continue to get priced into global macro markets over the intermediate term, we expect the demand for Thai bahts to wane (rubber and rice are key exports). We’re already seeing signs of this reflected in Thailand’s trade data with its April trade balance falling -$276M on a YoY basis vs. an increase of +$890M YoY in the prior month. Accelerating global risk aversion driven by the confluence of Thailand’s political uncertainly, the Eurozone’s debt crisis, and a US economic slowdown is something we believe will auger bearishly for baht demand as well over the intermediate term.


Bearish on Thai Short-term Sovereign Debt: By now, it’s pretty clear we really dislike Thailand over the intermediate term – and India and Japan, for that matter. Beyond reiterating our call for more rate hikes and political instability, not much else needs to be said here. Unless you’re at a multi-strategy fund or happen to manage a portfolio of emerging market bonds, it’s probably tough for the typical institutional investor to find a borrow on Thai sovereign debt. Still, on the off-chance you can find some exposure in the OTC market, short away.


Bearish on the Aussie Dollar (AUD): Of all the worthwhile investment opportunities across Asia we have chosen highlight, this position is perhaps the most risky. Not risky in the sense that we haven’t done the work and lack conviction, but rather in the sense that if this trade works in any meaningful way, it’s likely going to be concurrent with some level of investor deleveraging across the global equity and commodity complex (a la Deflating the Inflation). For reference, the trailing-one year positive correlations of AUDUSD to the S&P 500 and CRB Index are r² = 0.86 and r² = 0.84, respectively. While correlation implies neither causality nor future performance, we do believe that all three have been recipients of the now-unwinding Inflation Trade over the last 10 months or so.


Looking at Australia specifically (which is what we must do if we’re going to have any reasonable level of conviction in authoring such a thesis), we continue to stress that market and sell-side expectations of 1-2 rate hikes over the intermediate term are borderline irrational. By talking hawkishly in recent commentary, we feel Australian central bank governor Glenn Stevens is simply doing what any credible central banker would do in such an uncertain economic environment where a rate hike may actually prove to be a dagger to the ailing Australian economy.


To the latter point specifically, the bulk of Australia’s recent economic data has come in light – particularly in key areas such as employment, PMI surveys, and consumer and business confidence. We find the Australian economy to be at/near a point where a rate hike might actually prompt a sell-off in the Aussie dollar as the market looks forward to: a) that being the end of the RBA’s tightening cycle over the intermediate term; and b) the increasingly likelihood of slowing growth prompting the RBA to speak and/or act in a dovish manner.


All told, we hope you find something that fits your investment mandate in the list of ideas above. As mentioned before, these brief synopses are by no means all-inclusive of the research we have done and continue to do in support of these theses and the geography at large. As always, feel free to follow up with us for additional details and dialogue.


Best of luck out there,


Darius Dale



Following management’s recent visit to NYC, I spent some quality time with the CAKE model and here are some of my initial thoughts.


Keith covered CAKE in the Hedgeye Virtual Portfolio today.  I remain bearish on the fundamental side of the stock.  Below are some key details to my perspective:

  1. I am coming in a little higher than guidance for Q2 and then closer to the low end of guidance for the FY.
  2. I think they can probably do more than their guidance of "at least $100M in share repurchase” given that high ending cash balances.
  3. Relative to recent trends, CAKE's comparable restaurant sales guidance seems reasonable.
  4. The bakery sales line slowed significantly in 1Q (on a 2-year average basis); the economy is keeping this business at bay. 


Here a few other important things to remember: 

  1. CAKE has an extra week in Q4
  2. They are doubling openings in FY11, which will impact preopening expense and capex; two important items that are hardly ever factored in correctly by consensus.


I still favor cake on the short side, particularly on any strength.





Howard Penney

Managing Director


Everyone has to eat.  The question is, do they eat at home or eat out?


On today’s Kroger conference call they stated the obvious; “[during the first quarter] the higher income customers are spending more”.  This should come as a surprise to no one.  The stock-market recovery over the past two years has seen a pronounced divergence emerge between the consumer confidence indices for higher and lower income households. 


KR management went on to say, “just the last few weeks, we are starting to see some behavior changes even in the higher income customers, our data is showing that people are eating out less. Obviously when people eat out less, that's a benefit for us because, you know, they are going to get their meals from us, versus going out to a restaurant.”  CPI data shows that, as inflation has ramped up from the trough in 2009, inflation in “Food at Home” has outstripped inflation in “Food Away From Home”.


The Kroger management team – like any other management team speaking on an earnings call – is always going to frame their situation in the best light possible and stated that KR’s price checks “show that most competitors are passing higher costs on to customers”.  However, as the charts below indicates, restaurants may have seen a benefit from – on a relative basis – raising prices less than their “Food at Home” competitors, if the BLS data is anything to go by.







What the data suggests is that supermarkets and other retailers whose prices are represented by the “Food at Home” Consumer Price Index are increasing prices at a faster rate than core CPI is climbing.  The “Food Away from Home” Consumer Price Index, on the other hand, is increasing at a slower rate than core CPI.  This could be aiding traffic trends in the restaurant industry, which, have generally been robust over recent quarters.  Additionally, the price action in the space – on a relative basis – has been particularly strong of late.


With KR comps this quarter at 4.6%, clearly the business is healthy whereas overall, restaurant industry is seeing comparable store sales running at around 2%.  Within the restaurant space, the chains focused on the higher end are running same-store sales that are above KR.


The CPI data published by the BLS would suggest that the restaurant industry has been more cautious about taking price, as it should be.  At this point, the main question in this area of the consumer space is, “when might the supermarkets’ aggressive stance with regard to pricing backfire?”  As yet, it seems that customers are still being cautious about spending and perhaps manage their own food consumption more closely by eating at home.  However, to the degree that price increases begin to turn away traffic from the grocers, restaurants would be the primary beneficiaries.  As things stand, the restaurant industry is poised to transition into a more competitive position.



Howard Penney

Managing Director

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Greek Hysteria

Positions in Europe: Long Germany (EWG); We covered Spain (EWP) in the Hedgeye Virtual Portfolio today


Uncertainty reins in Greece—at least Greek government bond yields and cds spreads are indicating this as they make higher highs today.


Uncertainty has compounded along the lines of another temporary fix for Greece’s debt problems. The downturn in European equity markets, especially from the PIIGS, and the rise in bond yields over the last two days, alongside the -2% plunge in the EUR-USD yesterday (currently at $1.4143) reflect rising indecision on the fate of Greece following the inability of the Eurozone’s 17 Finance Ministers’ meeting to come to consensus on a solution; the downgrade of Greece’s credit rating to CCC by S&P; Greek protests against austerity yesterday; and calls from PM Papandreou late yesterday that he may step down, reshuffle his cabinet, or both, in the next day (or perhaps as soon as later today) as a handful of members from his slim majority ruling PASOK party have resigned over the last days (see chart below).


Greek Hysteria - meeeee1


Greek Hysteria - meee2


If confusion breeds contempt, market participants want clarity over the near term on 1.) an agreement for a bailout package for Greece, and 2.) a restructuring of the PASOK party with the minority conservative party.


Regarding point 1.), we think it’s highly probable that troika (ECB, EU, and IMF) steps in once again to fund Greece’s short term debt issues. Despite the higher highs in yields and CDS in Greece, which among “normal” conditions would clearly indicate default, the backing of Eurocrats to prevent a country from defaulting (here the ECB has the loudest voice), a currency crash, or a country exiting the Eurozone, should not be overlooked. We think this is why we’re seeing a floor in the EUR-USD around $1.40, and not freak-out levels to $1.20 or lower.


The debate now centers on a second bailout package for Greece to the tune of ~ 90 B EUR, complicit with the Greeks selling off state assets worth ~ 30-50 B EUR and more strict enforcement of austerity measures.  The Germans, under the voice of Finance Minister Wolfgang Schaueble, have proposed for investors to exchange all the Greek bonds currently in their portfolios for new ones with maturities extended by seven years. This presumes lower interest rates, with the original principal paid in full at the new maturity. The extent of this haircut, however, is not known, and obviously a very substantial risk. The ECB, on the other hand, is vehemently against investors (namely private) taking on any losses, which would imply under technical definitions (from the rating agencies) default/restructuring. The ECB advocates a straight bailout for Greece.


Regarding point 2, in the larger context we don’t think a reshuffling of the ruling party is material in terms of overall market direction. The opposition conservatives’ position against austerity (~6.5 Billion EUR in tax hikes and spending cuts) doesn’t address the country’s current outside funding needs to pay off maturing debt, nor are there white horse candidates to fix years of fiscal imbalances in Greece.


In our minds, Troika holds the reins in keeping Greece half-way “solvent” as it pushes the can of debt further down the road. As we’ve stated numerous times, Greece (and some of its peripheral peers) should be allowed to default and leave the union, for under the current structure there is no way for countries like Greece to use monetary policy to maneuver around weak growth and rising debt. Further there’s no mandate from the ECB on fiscal policy for the individual members to discourage fiscal excesses. This has created relative winners and losers under one currency, a paradigm that isn’t going to change, and is most clearly evident when regions (or the globe) enter a downturn in growth. 


Below is a calendar of critical meetings to address Greece’s debt issues, any of which may be a catalyst for an announcement of a new bailout package and/or a reshuffled Greek government. Among all this confusion, we remain grounded in the opinion that big brother (Troika) will once again fund Greece’s fiscal excesses. While this is no long-term solution, it should serve to cool near term market fears, support the common currency and reduce risk metrics from their highest highs to the more elevated levels we’ve seen year-to-date.  


New Greek cabinet – could hear of a reshuffling as soon as later today

Greek confidence vote – could occur soon after a new cabinet is named


Sun June 19 – a pre “emergency” Finance Ministers’ meeting will be held to discuss Greece

Mon June 20 – official Eurozone Finance Ministers’ meeting in Luxembourg

Thurs June 23-Fri June 24 - summit of EU leaders to assess the 18-month-long debt crisis



Matthew Hedrick


Price seems reasonable. Given low borrowing rate, deal should be very accretive, particularly with synergies included.




  • Property generated $41 EBITDA as of May 11 2011; in addition, at least $5 MM in purchasing synergies (e.g. insurance) is expected, which can improve margins.
  • $1BN market; market grew 2% in 1Q 2011.
    • #2 property in the market; similar customer type to Beau Rivage
  • 13 acres of undeveloped land on the property - can be used for additional hotels/retail facilities
  • Priced at 7.2x multiple including synergies and $44m in incremental capital
  • Net debt will increase by 150-200MM to fund purchase net of jai lai sale in FL 
    • 560MM in RC availablity: 64% of commitments related to extended portion 
    • Plans to use extending portion of debt to fund purchase; non-extending portion of credit facility (330MM) will mature in May 2012.
  • Completely unrelated to whether or not they buy Borgata
  • 2,500 lot parking garage
  • B Connected program will be deployed immediately after the acquisition is approved.
  • Other BYD properties impact:
    • Treasure Chest will benefit the most from this acquisition since it's pretty close and IP can give the local New Orleans customers a more destination-type experience.
  • Shreveport property (Sam's Town) under pressure from Native American gaming in Oklahoma.
  • Insurance market: stable to slightly decreasing
  • $20MM D&A run rate; should use Blue Chip as a proxy
  • $44MM Capex used:
    • Will be spent across 10-12 months
    • Slot product--pretty up-to-date; don't see much need for replacements
  • De-leverages balance sheet by 50 bps
  • Property Maintenance capex: 5-8MM
  • Covenant risk not an issue

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