The Macau Metro Monitor, June 17, 2011



MPEL CEO Lawrence Ho says that Macao Studio City (MSC) will open with 300 to 400 gambling tables and 1,200 slot machines, pending government approval.  Ho also said that the project would cost a further US$1.7 BN (MOP13.6 BN).  It will include 2,000 hotel rooms, 200,000 square feet of retail space and entertainment offerings.


Regarding the opening date, Ho remarked that MSC will not open by 2013 as stated in the land concession contract but said that "we wouldn't have done this without the Macau government's blessing.”  The tentative deadline to open the property is the first half of 2015.



Singapore's Casino Regulatory Authority (CRA) will launch a full-scale inspection on MBS and RWS at the end of the year to make sure that the operators are complying with all the rules and regulations.  Richard Magnus, chairman of the CRA, said that checks are necessary to determine whether the casino operators are complying with the Casino Control Act, its regulations and licensing requirement, internal controls and approved game rules.

Bullish Bears

This note was originally published at 8am on June 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I was just saying on that particular play, I would have played it different.”

-Roberto Luongo (Vancouver Canucks)


If you’re going to get paid to play this game at the highest level, whether you like it or not, you will be held accountable to both your words and performance. I’m not just talking about the Stanley Cup Playoffs. I am talking about the Future of Finance.


Last night in Boston, the Bruins chased Vancouver Canucks’ goalie Roberto Luongo to the bench within the first 10 minutes of the game (to chase de goalie means to pull him from de net – and make him feel shame). At that point, the score was already 3-0 en route to a big Bruins’ Game 6 win. Boston goalie Tim Thomas played the 1st period “differently.”


I played against Tim Thomas in college. He was at Vermont. I was at Yale. They were a national powerhouse. We were in the dog house. I’ll never forget coming onto the ice for the warm-up in their barn. I was like a Thunder Bay deer in headlights facing a full student section of kids clanging cow bells and playing some version of the Smurfs song while I tried to pretend they weren’t there.


You can pretend your competition isn’t there, but you’ll have a really big problem if they’re really good and Proactively Prepared to beat you. From Boston last night to Vermont in 1995, that’s what winners do – they wake-up every morning expecting to win.


I don’t expect to be Bullish inasmuch as I don’t expect to be Bearish. I expect my teammates and I to execute on our research and risk management process to the best of our ability every day. When we fail, we learned. When we win, we expected to.


This morning’s economic data and, more importantly, the market’s reaction to it, is bullish:

  1. Chinese Data – Growth Slowed at a SLOWER RATE as Inflation Accelerated at a SLOWER RATE (May data)
  2. Deflating The Inflation (Q2 Hedgeye Macro Theme) – oil prices falling to a 1 month low deflated the CRB Index by 1.1% yesterday
  3. Stock Markets – after 6 consecutive down weeks, around the world, they stopped going down

But can you be a Bullish Bear?


Yes We Can. Our risk management task every morning isn’t to be either Bullish or Bearish – it’s to be right.


That’s the American (and Canadian) Optimism we’re looking to champion. That’s the winning attitude we can believe in.


Are there bearish data points in my notebook this morning? You bet your Madoff there are:

  1. United Kingdom Stagflation – continued in May with Consumer Prices (CPI) remaining in-line with April’s print of +4.5%
  2. Hong Kong Property Bubble Popping – in motion now that HK Industrial Production has dropped to 3.5% (versus 5.7% last quarter)
  3. Spanish/Greek Piggies Don’t Fly – both countries issued more Pig Paper (fiat debt) this morning at higher yields than last auction

But what trumps what? In the aggregate, are these 6 bullish and bearish data points more bullish or bearish? Do you have an investment mandate to be bullish or bearish, regardless? Or are you tasked with neither being a Perma-Bull nor a Perma-Bear?


My answers to these questions are already in print. I think this morning’s Global Macro Grind flushes out as bullish as last night’s Bruins win. That doesn’t make me un-Canadian. Neither does it pigeon hole me into not being able to change my mind within the next 24 hours. The only rule in this game is to say what you think – take your position – and be accountable to it.


Across our 3 core risk management durations, the Bullish Bear’s view of US Equities from yesterday’s closing price is as follows:

  1. Immediate-term TRADE upside in the SP500 to 1290
  2. Intermediate-term TREND upside in the SP500 to 1320
  3. Long-term TAIL upside in the SP500 to 1377

Wow. Maybe on The Kudlow Report tonight (I’ll be on with Larry at 7PM EST) I’ll pretend I am Don Luskin and only be bullish. Maybe not.


Across our 3 core risk management durations, the Bearish Bull’s view of US Equities from yesterday’s closing price is as follows:

  1. Immediate-term TRADE downside in the SP500 to 1259
  2. Intermediate-term TREND downside in the SP500 to 1223
  3. Long-term TAIL downside in the SP500 to 1223

You see, if you are Duration Agnostic, there are two sides to every market debate – and, not surprisingly, two sides to every bid-ask spread across different times and prices. Sometimes durations converge (my intermediate and long-term support levels are the same right now). Sometimes they diverge. Sometimes you should be bullish; sometimes bearish.


Sometimes your competition is sleeping. All of the time we need to keep changing our positioning as the market’s time, price, and expectations do. As my great hockey Coach and mentor at Yale, Tim Taylor, taught me – you have to keep moving out there.


My immediate term support and resistance ranges for Gold (bought more yesterday), Oil (we remain bearish; Goldman bullish), and the SP500 (we have no long or short position here) are now $1517-1538, $97.60-100.03, and 1259-1290.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bullish Bears - Chart of the Day


Bullish Bears - Virtual Portfolio


TODAY’S S&P 500 SET-UP - June 17, 2011


Politicians may be market morons, but they understand career risk management. The Euro finding a bid this morning tells us the immediate-term TRADE coming out of this weekend's European meetings is UP to 1.43-1.44.  That's why we sold our long USD position yesterday (I want to buy it back lower).


Overall, the dominating intermediate-term TREND of Deflating The Inflation (housing, stocks, commodities) remains - but today's prices finally started to show some quantified exhaustion in the Hedgeye immediate-term TRADE models (VOLATILITY = overbought; VOLUME studies = oversold). I'm looking for the SP500 to hold 1260 - and if it does, we could easily see another immediate-term +2.5-3% short covering rally.


Our favorite 3 sectors remain (in this order):

1.       Healthcare (XLV)

2.       Utilities (XLU)

3.       Consumer Staples (XLP)


On the short side, we covered Basic Materials (XLB) on the down move and wouldn't short any sector until we see 1260 tested and the bounce. All of the Hedgeye TRADE and TREND levels are attached in the spreadsheet.  Call if you have any questions.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.60% downside to 1260 and 0.82% upside to 1278.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -320 (+1778)  
  • VOLUME: NYSE 1050.56 (-1.71%)
  • VIX:  22.73 +6.61% YTD PERFORMANCE: +28.06%
  • SPX PUT/CALL RATIO: 1.92 from 2.86 (-32.95%)



  • TED SPREAD: 21.09
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2.93 from 2.98
  • YIELD CURVE: 2.55 from 2.60 



  • 9:55 a.m.: UMich Consumer Confidence, est. 74.0, prior 74.3
  • 10 a.m.: Leading indicators, est. 0.3%, prior (-0.3%)
  • 1 p.m.: Baker Hughes Rig Count


  • Texas state court hearing in suit between AMR/Sabre over Sabre’s attempt to move entire action to federal court
  • Basel Committee considering extra capital requirements of as much as 3.5%: two people familiar with talks
  • Vice President Biden and U.S. lawmakers determined to find $4t in savings, Biden tells reporters after group’s third closed-door meeting this week



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • UBS Limits Commodities Hiring Expansion as Boom Leaves Scarcity of Talent
  • Food Prices Will Stay High for Next Decade on Slowing Output, UN, OECD Say
  • Oil Heads for Biggest Weekly Decline in Six on Concern Over European Debt
  • Soybeans Fall to Lowest Price in a Month on Slowing Chinese Import Demand
  • Gold Drops on Strengthening Dollar, Selling to Cover Losses in Commodities
  • Sugar Advances on Increasing Demand Before Ramadan; Coffee Prices Climb
  • Copper May Decline for a Third Day on Concern About Greece’s Debt Crisis
  • India Rules Out Ending Ban on Wheat, Rice Exports as Food Demand Increases
  • Oil’s Declines in Middle East Show No End on Saudi Offers: Energy Markets
  • Commodities May Decline 3.3% as S&P Index Falls Short: Technical Analysis
  • Mongolia to Offer Tavan Tolgoi Coal Mine to ‘3 or 4’ Bidders, Batbold Says
  • Defunct Gold Mines Lure Investors on New Technologies, Record Price Gains
  • Blood-Diamond Curbs Imperiled for De Beers, Tiffany by Zimbabwe Violence
  • Gold May Climb Next Week as Europe’s Debt Criss Spurs Demand, Survey Shows




THE HEDGEYE DAILY OUTLOOK - daily currency view



  • EUROPE: gong show continues; we're covering all shorts into the weekend though and going naked long (and worried) Germany; Greece crashing.


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: end of darkness? awful week for Asian equities; we are getting long China on fear; staying short Japan on reality 


THE HEDGEYE DAILY OUTLOOK - asia performance







Howard Penney

Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Infinitesimal Truth

“Measured objectively, what a man can wrest from Truth by passionate striving is utterly infinitesimal.”

-Albert Einstein


What’s the truth? Greek politicians lied.


Market prices don’t lie; politicians do. We have politicians running countries and banks. Everyone but them realizes that most of them are market morons. Use that truth to your risk management advantage.


While professional politicians wouldn’t even know what Excel sheet to launch alongside a real-time market price to measure market risk, you can bet your Madoff that these people know how to manage their political career risk.


That’s what I expect to see coming out of this weekend in Europe. That’s why I think the Euro has an immediate-term bid this morning. That’s why I have looked at the 7th consecutive week of down Global Equities as a Short Covering Opportunity (moving to 12 LONGS, 7 SHORTS in the Hedgeye Portfolio).


What’s the truth?

  1. The US Dollar is finally stabilizing above our critical $74.41 support line
  2. The US Dollar going UP = Deflating The Inflation
  3. The Euro (and the Fiat Fools who back it) are perpetuating 1 and 2

To say that’s not the truth would imply that Mr. Macro Market is lying. There is Infinitesimal Truth in the market’s prices if you accept that A) uncertainty and B) interconnectedness can lead you to it.


What’s the truth?

  1. For June 2011 to-date, the SP500 is DOWN -5.8%
  2. For June 2011 to-date, the Russell2000 is DOWN -7.9%
  3. For June 2011 to-date, the CRB Commodities Index is DOWN -4.6%

At Hedgeye we’ve called this Deflating The Inflation (Q2 Macro Theme). It’s occurring in the price of your home, stocks, and commodities. And yes, in the end, Deflating The Inflation is going to be very bullish for Global Consumption (70% of US GDP).


What’s the truth?

  1. Week-to-date, the price of Oil (at $93, which was our target) = DOWN -6.1%
  2. Week-to-date, the price of Cotton = DOWN -10.1%
  3. Week-to-date, the price of Wheat = DOWN -9.9%

And the truth about Deflating The Inflation in commodity prices is that 99% of the free, socialist, and communist world likes it. As for the other 1% of us who are chasing monthly performance metrics to manage our own career risk, I don’t think God cares.


I’m not trying to be trite. I like God a lot – but he doesn’t owe me a return. From the day that I started this business, I have been focused on transparency, accountability, and trust. All encompassing in these principles is the truth.


Whether people who want to see me fail like it or not, the truth is that Hedgeye has been right on 16 of 17 closed positions (LONG and SHORT) in the Hedgeye Portfolio in June. The truth is that’s called alpha – and we want you to embrace the process that generated it.


We are passionately striving for Macro Market Truths. They are very different than political realities. Since the US Federal Reserve was created in 1913, the world has had to deal with the market volatility caused by Fiat Fools implementing short-term career risk policies.


I have been on the road talking about this chart for the last 10 weeks, so many of you who have given me some of your time will be familiar with it (see Chart of The Day attached). This is a Reinhart & Rogoff chart from “This Time Is Different” (by the way Mr. Greek Politician man, it’s not) that tracks the median inflation rate going back to the year 1500.


This is a Global Macro chart. And yes members of the Keynesian Kingdom, markets are now Globally Interconnected. Ever since the world allowed professional politicians to decide what the perceived “value” was for fiat currencies (the post Gold Standard period, 200 years of Global Industrialization, 1740 to WWII – see chart), we have done nothing but:

  1. Shorten economic cycles of inflation/deflation
  2. Amplify the volatility of those inflating/deflating prices

If La Bernank et La Trichet have an answer to the causality embedded in this 510 year picture, I think the 99% of us would be more than happy to hear their version of the truth.


My immediate-term support and resistance ranges for Gold (we are long), Oil (Goldman has been bullish; Hedgeye Bearish), and the SP500 (we have covered all sub-sector S&P ETF shorts), are now $1, $93.01-98.98, and 1, respectively.


Best of luck out there today and enjoy your weekend. Happy Father’s Day, Dad.



Keith R. McCullough
Chief Executive Officer


Infinitesimal Truth - Chart of the Day


Infinitesimal Truth - Virtual Portfolio

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


Early Look

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