• run with the bulls

    get your first month

    of hedgeye free


Philippines: One of the Better Stories in Global Macro

Conclusion: The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.



Position: Long Filipino equities (EPHE).


Today Keith initiated a long position in Filipino equities within our Virtual Portfolio, giving us exposure to one of the few remaining positive fundamental stories out there. Specifically, what we like about the Philippines are accelerating economic growth, slowing inflation, and sound monetary and fiscal policy – the same three factors which cause us to get behind any country on the long side.


On the growth front, our models pin the country’s second quarter real GDP growth rate of +3.4% YoY (reported today) as an intermediate-term bottom. Specifically, we see over 100-200bps of upside over the next two quarters. Even amongst a deteriorating global growth outlook, our view on Filipino economic growth is supported by accelerating domestic demand within the defensive, consumption-led economy (private consumption accounts for just over 73% of GDP).


Philippines: One of the Better Stories in Global Macro - 1


We see demand growth accelerating for two key reasons: 

  1. Inflation is slowing; and
  2. “The Aquino Put” 

To the former point, CPI appears to have peaked in June, with July coming in a +5.1% YoY and our model is pointing to lower-lows from current levels over the intermediate term. This is supported by our Deflating the Inflation thesis and sequentially tougher comparisons across the commodity front in the coming months. 


Interestingly, Fed Head Chuck Evans went on an inflation marketing campaign yesterday on CNBC and attempted to verbally debauch the U.S. dollar to lower all-time lows. Whether the Fed actively pursues such a strategy in the form of incremental policy remains to be seen; we do, however, continue to believe that Bernanke is in a box at least for the next 3-6 months regarding being able to hint at/implement Quantitative Guessing Part III. For now, slowing inflation should provide a much-needed tailwind to Filipino consumption growth.


An incremental tailwind for the Filipino economy at large could come in the form of monetary easing over the next couple of quarters – particularly if we remain correct on the slope of global growth (negative) and global inflation (flat-to-down). Today, Economic Planning Secretary Cayetano Paderanga affirmed our view, saying that the central bank had “more flexibility” regarding the setting of its benchmark overnight borrowing rate, as “inflation is slowing”.


Additionally, Banko Sentral ng Philipinas Deputy Governor said today that “lower economic momentum will be an important consideration” in the next monetary policy meeting (next Thursday). As things continue to unravel in Europe, we expect to see the Banko Sentral ng Philipinas board use popular central banking terms like “uncertainty” when describing the global economic outlook as a reason to hold rates flat (after +50bps of hikes YTD) – joining several other key economies from Asia to Latin America to have done so in recent weeks, most notably Australia and Mexico.


Most importantly, should global growth accelerate to the downside in the coming quarters, Filipino policymakers are well-equipped to weather the storm, with an ability to cut the country’s 4.5% benchmark interest rate, a low and shrinking deficit thanks to President Aquino’s aggressive tactics over the past year (-2.25% of GDP), and a relatively low debt/GDP ratio of 47.3%.


Philippines: One of the Better Stories in Global Macro - 2


Philippines: One of the Better Stories in Global Macro - 3


Philippines: One of the Better Stories in Global Macro - 4


If needed, the Filipino government’s healthy fiscal metrics will allow the country to enact what we have termed “The Aquino Put”. Simplistically, the outspoken president has pledged to increase expenditures on infrastructure in the form of $17 billion worth of investments in the country’s roads, airports, and schools. Specifically, Budget Secretary Butch Abad said today that policymakers may choose to pull forward and implement projects originally scheduled for 2012 “to help the economy recover”.


All told, we are all bulled-up on Filipino equities from a fundamental perspective and our core three-factor quant model is supportive of our bullish thesis. For these reasons, we have chosen to go long of the securities in our Virtual Portfolio.


Darius Dale



Philippines: One of the Better Stories in Global Macro - 5


Overall direct play slowing. So much for eliminating the middle man.



Hidden in the explosive growth in VIP and Mass revenues, direct VIP play growth has been slowing.  Even the direct play king - Sands China - realizes it.  Junkets aren't going away.  In fact, they are growing in power.  Junket VIP remains the fastest growing Macau revenue source.  We've put together the data and here are some of our observations:

  • Direct play growth has slowed down considerably in the 1H of 2011, growing 23% YoY compared to junket RC growing 51% over the same period. 
    • In 1Q11, direct play grew 24% YoY compared to junket RC growth of 55%.  In 2Q11, direct RC grew 22% YoY vs. junket RC growth of 48% over the same period in the prior year
    • LVS direct play volume growth went negative in 2Q11, falling 8% YoY. 1Q 2011 showed 8% growth while 2010 grew 93% YoY.  LVS has made it clear that they will be making a big push with the junkets in 2012 finally putting a nail in the coffin of their strategy to eliminate the junket middle man.
    • MGM also experienced a marked deceleration in direct play growth with 1H11 growing only 4% YoY compared to 32% in 2010 and 114% in 2009.  This is no surprise since Mr. Kwong’s strategy was to grow the junket business which has contributed to the strong growth at the property since he joined last year.
  • As the chart below shows, direct play as a % of VIP RC for the five operators fell to 10% in 1H11 compared to 15% in 2010 and 12.5% in 2009
    • In 2Q11, every operator experienced a decline of direct play as a % of total VIP RC
      • MGM direct play % dropped 10% in 1H10 to just 8.2% from 17.8% in 1H10
      • LVS’s direct play % dropped 6% in 2Q11 to 22% from an all-time high of 27% in 2Q10
      • Wynn’s direct play % dropped 3% in 2Q11 to just 8.4% - an all-time low for the property
      • MPEL’s direct play dropped 1% in 2Q11 to 9% from 10% in 2Q10
      • In 2Q 2011, Galaxy Macau’s direct play as a % of VIP RC was 3.8%.




Sports Apparel - Quantifying Irene


Athletic apparel sales decelerated last week, however, taking hurricane Irene into account there was little change. That said, the facts are the facts and the sales disruption due to Irene’s visit very real. Moreover, next week will reflect the bulk of Irene’s impact giving us further clarity regarding the disruption. As a result, we fully expect storm related commentary to be the callout du jour from retailers tomorrow as they explain sales trends.


In an effort to quantify the storm’s impact on Saturday and Sunday sales when consumers were either hunkered down or redirected in their purchasing, we created the following sensitivity analysis below, which suggests a 40bps-to-220bps impact on the week. Our calculation assumes equally-weighted sales per day based on weekly sales dollars and was then adjusted to reflect the roughly 25%-30% of sales effected by the storm nationwide.


The takeaway here is that based on athletic apparel sales through Sunday, Irene appears to have had a 10bps-60bps impact on monthly August sales. Assuming more significant disruptions both Monday and Tuesday of -25%+, we expect many Softline and Broadline retailers to highlight a 2-3 point hit to August comps as a result of the storm.


Sports Apparel - Quantifying Irene - App Table 8 30 11


Sports Apparel - Quantifying Irene - App ExIrene 8 11


Sports Apparel - Quantifying Irene - august apparel sales weights 8 31 11



Casey Flavin


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Upside driven by Galaxy Macau which bested arguably conservative initial projections.  A standard ramp of the new property should drive solid ROI. 


Galaxy’s 2Q Adjusted EBITDA of HK$1.1BN beat our estimates and the Street’s by about 15%.  Most of the upside – at least versus our numbers – came from Galaxy Macau (GM) which is really what will drive this stock going forward.  GM’s results benefited from high hold to the tune of HK$70-80MM according to management.  However, we and all the HK analysts already knew and should have factored that into their estimates.  If GM ramps as we expect it to do, the property should come in line with the company’s newly revised target of high teens to low 20’s ROI.  



Galaxy Macau reported revenue of HK$2,384MM and Adj EBITDA of HK$376MM, 4% above our revenue estimate and significantly above our EBITDA forecast due to lower overall commissions and expenses.

  • VIP turnover and gross win was 4% above our estimate due to direct play at the property
    • Galaxy Macau direct VIP turnover was approximately 4% of total VIP RC.  Galaxy noted that they would wade slowly into the direct business.
    • If hold was 2.85%, GM would have reported $346MM less in revenue and approximately HK$80MM less in EBITDA.
    • Rebates were 1.2% or 33.4% of win and we estimate that junket commissions were an incremental 25bps or 10% of win
    • Mass win was in-line with our estimate while slot win was 19% better than we estimated (this was offset by a drop off in slot win at Starworld
    • Estimated net non-casino revenue was HK$80MM
    • Estimated that fixed costs were $290MM

Starworld revenue of HK$5BN was in-line with our estimate and Adj EBITDA of HK$685MM was 3% above our estimate

  • VIP and Mass win were in-line with our estimates while slot win was materially lower
  • Estimated fixed expenses were HK$330MM – 13% above our estimate – this is likely due to unfavorable VIP win mix (low hold on RC play) which manifests itself as higher direct cost

City Clubs saw the impact from Rio switching to a top line deal this quarter from a revenue sharing deal.



Based on July and August to date numbers, we estimate that Galaxy will report 3Q revenue of HK$12.9BN and Adjusted EBITDA of HK$1.96BN and FY11 revenue of HK$41.2BN and Adj EBITDA of HK$6.08BN.


Galaxy Macau:

  • 3Q revenue of HK$6.5BN and FY11 revenue of HK$16.6BN
  • 3Q Adj EBITDA of HK$1.2BN and FY11 revenue of HK$3.1BN


  • 3Q revenue of HK$5.9BN and FY11 revenue of HK$22.9BN
  • 3Q Adj EBITDA of HK$757BN and FY11 revenue of HK$2.9BN


Coffee prices led the way over the last week, gaining 4.5% along with Soybeans, Wings, Rice and Corn which all gained roughly 4% over the same period.  Cheese prices gained week-over-week but have declined rapidly from the elevated prices seen for most of the year and are now only marginally above the 2010 peak.  Gas prices gained week-over-week as demand picked up, per the Mastercard data, ahead of Hurricane Irene hitting the East Coast.







Coffee prices gained 4.5% week-over-week, reaching a three-month high in the process, as concerns mounted that global production will fall short of demand.  Inventories of Arabica coffee monitored by ICE Futures U.S. have fallen 4.4% this month and 27% in the past year, according to exchange data cited by Bloomberg.  Coffee has broken the downward trend that was prevailing for May, June, and July with a strong move to the upside.  Prices are now only 6.6% below the YTD high.





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.


PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Without a rising dollar and some stronger supply growth to counteract growing global demand, we expect sustained elevated prices.





Cheese prices gained 0.6% week-over-week but have declined -17% since the end of July.  Sustained higher corn prices should provide some support but prices have been extremely volatile this year.




Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls. 


DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”


HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  It remains to be seen if cheese prices will remain above 2010 levels for the remainder of the year but CAKE’s guidance for inflation in 2011 has suddenly become much more realistic, although not a sure thing.


TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.” 


HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.





Corn prices have been moving higher for the past two months as adverse weather conditions have weighed on sentiment for the planting season after what was a poor growing season.  Russia is increasing its grain exports as crop damage in the U.S. and Europe impacts supply.  U.S. corn and soybeans ranked by the USDA as "good" or "excellent" fell to 54% and 57% respectively last week, down from 57% and 59% in the prior week.





Howard Penney

Managing Director


Rory Green


Month End: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Financials (XLF)


Moving off of ZERO percent asset allocation to US Equities on Friday (bought Utilities) was me acting on a signal that in the immediate-term I was going to be wrong (last week) and we were not going to re-test the prior August closing lows on the no QG3 news.


So now I’m still short Financials (XLF), long Utilities (XLU) and looking for my level to short the SP500 (SPY). Interestingly, but not surprisingly, I’ve had to re-model the upward bound of the immediate-term TRADE range multiple times this week. Primarily that’s because 2 of 3 factors in my core model (Price and Volatility) are pushing the upward bound higher at an accelerating rate.


Gravitationally, this makes sense. The market tends to rise and fall to the most immediate-term point that imposes the most amount of pain on the highest amount of market participants.


With month end markups in motion here (not including August data, since April the SP500 has averaged +0.7% price performance in the last 6 days of the month vs down -4.5% down in the first 6 days of the new month) and the 3rdfactor in my core model (Volume) not confirming this price rally, I’m now in wait and watch mode – selectively shorting single stocks and waiting on my SPY price.


Across all 3 durations, this market is still broken/bearish with the following resistance lines: 

  1. TRADE = 1234
  2. TREND = 1292
  3. TAIL = 1263 

The most bullish news I can give you is that we have taken out the most immediate-term call for a lower-YTD-low (below 1119). My immediate-term TRADE range is now 1, and I’ll manage risk around that range until 1203 is violated on the downside. If it breaks, I suspect the move down from there in the SP500 will be as swift as this 6 day move up.


Big Government Intervention continues to A) Shorten Economic Cycles and B) Amplify Market Volatility.



Keith R. McCullough
Chief Executive Officer


Month End: SP500 Levels, Refreshed - 1