Chinese GDP Outlook: Are We Bullish Enough?

We continue to exhaust the bears with our new found bullishness on China. It would be hard to be as bearish as we were on Asia 9 months ago, so it's rather amusing to get this kind of feedback. Trust me, we get the bear case – we used to annoy everyone with it!

Below is a 3 year chart of Chinese GDP. Notice the seasonal pickup in the January period for each of the last 2 years. It could very well happen again. Anything can...

We wrote this morning that we see a Chinese recovery in 6-9 months. We question all of our positions, all day, every day... the question on this seasonality point is, are we bullish enough?



There are a number of reasons to believe that MCD’s domestic business is slowing. First, a recent franchise survey estimates that MCD’s U.S. September same-store sales have slowed to 3.1% from August’s 4.5% number. According to the survey, the October number slowed even further. On a 2-year basis, this slowdown is even more apparent with 2-year average trends falling to 3.3% in September from 6.0% in August.

  • Second, the most recent data from WMT signaled that its sales trends have slowed. We have not heard from MCD since WMT reported its sales for September.
  • Third, we have posted in the past that MCD is getting more aggressive with coupons, which is another sign that MCD is struggling to generate traffic trends!

  • Fourth, we recently posted some data on industry discounting (please refer to my October 18 post titled “Deal or No Deal”). The data pointed to a significant increase in discounting. The combination of slowing sales trends and increased discounting will lead to lower levels of profitability.

  • Fifth, nobody is immune!

  • There are a number of reasons to be bullish on MCD, but I’m not in that camp. I have posted about franchise anxiety, which is at levels we have not seen in years. The currency benefit the company has enjoyed for the past years slowed significantly in 3Q08 and will be a drag to EPS in 4Q08. The bulls point to the new coffee program as being the savior for top line sales over the next 18-months. I believe that there are clear signs that MCD will need to adjust expectations down for that program as we enter 2009.

    One of the biggest issues for the stock is that the street is hiding in MCD as a “safe haven.”


Sorry but I’m just not comforted by the United Nations announcement that its tourism arm is creating a Resilience Committee to combat the travel downturn. If you think the UN will be productive in this arena, buy Las Vegas. I’m not.

This is the same group that was very publicly positive on global tourism as recently as April. At the same time my partner, Keith McCullough was taking the exact opposite macro view.

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We continue to believe that MPEL’s City of Dreams will be the only new casino/hotel to open in 2009. The LVS construction delay on Lots 5 and 6 that came to light this weekend certainly bolster our case. While Galaxy Entertainment hasn’t announced any pushback on the planned 2009 opening of its Cotai Megaresort, I believe that is forthcoming. There is nothing like a trip to Macau to get the full picture. Having guys permanently stationed on the ground there doesn’t hurt either.

Macau supply growth is slowing down. That is good for Macau operators. Despite its inability to pull in the financing, this is good news for LVS as well. They still have their covenant issues in Q4 but one step at a time. WYNN looks to be in the driver seat here. All we need is for Beijing to loosen the reins in visitation and/or the Macau government to tighten the reins on junket commissions. Following my trip to Macau, I believe both will happen.

Two 900 lb Gorillas Drop the Gloves

There’s yet another patent infringement suit on the tape. This one is Nike and Wal*Mart – and predicting the outcome is a slam dunk.

Nike is suing Wal*Mart for patent infringement as it relates to its Shox design. So many of these cases are in the gray area that could really go either way – but this one is a no brainer. Check out the image below. The interesting thought here is whether or not Nike brought this upon itself when it bought Starter and took the product to Wal*Mart at reduced price points on shared Nike designs. One could argue that perhaps Nike gave Wal*Mart a taste of improved profit offering before it pulled the plug, and WMT wants to keep the torch lit. You can just as easily argue that WMT attempted to stick it to Nike by selling replicas of Nike Shox at $13 – an 80% price cut from the real McCoy. Either way, the McCoy is, in fact, real.

Nike will probably end up netting $50-$100mm in a settlement out of this one (similar to recent Adidas and Payless precedents), but more importantly it will have its designs yanked out of WMT


Lead, follow or get out of the way!
-George S. Patton

During times like this, it doesn’t get much simpler than that quote. During times of crisis, winners and losers emerge. Adversity makes the winners stronger, and the circle of support for new leaders fortifies itself. Republican military General, Colin Powell, gets this as clearly as General Patton did. When Jack Nicholson asked in, ‘A Few Good Men’ (1992), “Are We clear?”… Tom Cruise replied, “crystal.” We are seeing things crystal clear this morning. It’s a great day for trading.

Whether it’s Powell supporting Obama or Yankee fans supporting the Tampa Bay Rays, it’s all one and the same. At the end of the day, Americans love winners. Last week, the S&P500 was a winner, closing +4.6% on the week at 940. This was the first positive week of performance for the US market in a month, and it certainly put a smile on my face. We’re charging towards the +9% gross performance line for the year to date, and there is nothing quite like having the positive energy associated with momentum at your back.

Asian stock markets have diverged from US trading as of late, and this is something that we find fascinating. Asian economies are finding a way to be self sufficient. They better, because America’s balance sheet doesn’t have much to give them anymore. While the cover of this week’s ‘The Economist’ is titled “Capitalism At Bay”, and everyone from the media to Wall Street is begging for socialist government supports, the Chinese are marching to the beat of their own drums.

Remember those Chinese drum beaters during the opening ceremonies of this summer’s Olympics? I do… this is not a country that should be underestimated, ever. Those Chinese synchronized divers don’t miss! Are they our partners? Are they our creditors? Could they be neither? Whose call is it if they want to change course? So many questions… and the answers are not “crystal clear”.

What is “crystal” this morning is their performance. Hong Kong led Asian stock markets higher overnight, closing +5.3% at 15,323 on the Hang Seng, while China closed up for the second consecutive day at +2.3%. We are long both of these geographies via the EWH and FXI exchange traded funds. Interestingly, these two markets rallied out of what was a negative Chinese GDP report. China reported Q3 GDP of +9% - this was a good 100 basis points below consensus, and marks the 5th straight quarter of economic growth slowing, but guess what? This isn’t new news! We have been calling for China’s growth to slow for all of this year, so we think we can own the debate as to when this will turn. We think that sequential acceleration in Chinese GDP growth could be less than 9 months away. Don’t wait until then to get long.

Asian trading was also stoked by India cutting interest rates by a full percentage point to 8%. This is not a wise move by India’s government, but it’s a move that they are hostage to making. In a politicized world of central banking manias, there is little that a bureaucratic government like this can do but be who they are – populist bureaucrats. Despite making moneys easier to find, India’s Sensex Index still underperformed Hong Kong, closing +2.5%. We covered our short position in the India Fund (IFN) profitably last week, so look for us to re-short it on strength. India’s inflation rate is running +11.4% year over year as of their last weekly report. China’s inflation (reported this morning) has dropped to +4.6%. Hopefully, the broker who sold you the “Chindia” idea last year isn’t your broker today. China and India are not the same. Email those “it’s global this time” savants a map.

European stock markets look good for the second trading session in a row. The problem, of course, is that they can’t string together a “Rays rally” of 3 days. We like 3’s here at Research Edge because the laws of mathematics do. We do not like European stock markets generally. We are long Germany via the EWG etf and short the UK and Austria via the EWU and EWO etfs. Germany printed a surprisingly high producer price inflation level this morning of +8.3% year over year growth. This was well ahead of our estimate, but upon further review doesn’t surprise us given the currency oriented inflation Europe is being forced to swallow right now. The Euro was actually flat week over week at 1.34. Stability instead of volatility is what currency markets are in need of right now, globally.

The US Dollar is the currency we have recently taken a short position in via the UUP exchange traded fund. We are looking to buy Canadian Dollars, and we posted a note on as much to our Research Edge Macro clients this weekend titled “Going Loonie” (, 10/19/08). Not all cash is created equal, and since we are so exposed to US denominated cash (in the Hedgeye Portfolio Allocation model we have a 76% cash position), we need to find ways to diversify. This is by no means an easy exercise.

That said, the easiest path for us to take this morning is to stay the course and lead by example with our process. “Great calls” may win games in this business, but repeatable processes win championships. “Lead, follow, or get out of the way.”

Have a great week,

Early Look

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