Weekly Asia Risk Monitor


We’re starting to see some noteworthy bifurcations in the direction of monetary and fiscal policy across the region.



Asian equity markets were largely mixed last week, headed by Vietnam (+5.7% wk/wk) and Indonesia (+4.1% wk/wk) and trailed by Japan (-2.4% wk/wk) and Korea (-2.9%). Asian FX markets declined broadly across the board, with the Kiwi dollar underperforming (-3.3% wk/wk) on the heels of dovish commentary out of the country’s Treasury department.


Speculation around interest rate cuts continues to broadly drag down yields throughout the maturity curve across Asia’s sovereign debt markets. China remains a key outlier with its 2yr yields increasing +4bps wk/wk. This expectation of future hawkishness was, however, not reciprocated in China’s interest rate swaps market (1yr tenor falling -9bps wk/wk).


From a yield curve perspective, it’s worth highlighting the +31bps expansion of the Filipino sovereign 10yr-2yr spread – a leading indicator for accelerating growth in our model. On the flip side, China’s 15bps-wide 10yr-2yr spread has compressed to a record low. Though we continue like the long-term mean reversion opportunity, the current setup is decidedly negative for the net interest margins of Chinese banks and their collective ability to generate internal capital ahead of what many expect to be a broad decline in credit quality throughout the Chinese banking system over the next 2-3 years.


Sovereign CDS widened broadly across the region with China’s +12bps wk/wk expansion leading the way. Interestingly, Fitch warned Thursday that it might downgrade the country’s credit rating (currently the lowest of the big three at A+) within two years should it become evident that China’s banks will indeed struggle with a broad-based decline in asset quality. Interconnectivity remains the dominant theme in global macro markets.


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China: China had a busy week of economic data, which largely came in as we expected and continue to expect: growth slowed at a slower rate; inflation peaking/has peaked. Services PMI ticked down in Aug to 57.6 (vs. 59.6 prior); industrial production growth slowed in Aug to +13.5% YoY (vs. +14% prior); retail sales growth slowed in Aug to +17% YoY (vs. +17.2% prior); fixed asset investment growth slowed in Aug to +25% YoY (vs. +25.4% prior); CPI slowed in Aug to +6.2% YoY (vs. +6.5% prior); and PPI slowed in Aug to +7.3% YoY (vs. +7.5% prior). Net-net, we continue to believe slowing inflation will give the PBOC cover to remain neutral over the intermediate term, though outright dovishness is unlikely to be seen absent a further 100-200bps decline in China’s headline inflation rate. Still, China remains far and away the best positioned of all the major economies to stimulate on a large scale if deemed necessary. We demonstrate this quantitatively in our recent note titled, “Chinese Cowboys Intact”.


Hong Kong: There’s not much to flag beyond the territory’s manufacturing PMI plunging -3.6 points in Aug to 47.8. Much like Singapore, we view Hong Kong status as one of the most open, trade-heavy economies in the world (exports = 204.8% of GDP on a trailing 3yr average basis), and this nasty PMI reading is an explicitly negative signal for the near-term slope of global growth. We remain the bears on Hong Kong equities until our models suggest otherwise.


Japan: One of the more aggressive calls we made recently was that the slope of Japan’s YoY and MoM economic growth data was going to turn decidedly negative in the 2H – a call that is particularly contrary to consensus expectations for reconstruction-fueled accelerating “growth”. Though our call is only just over five weeks old, it the data continues to play out in spades: machine orders growth slowed in Jul to +4% YoY and -8.2% MoM (vs. +17.9% YoY and +7.7% MoM prior); both components of Japan’s Economy Watchers Survey ticked down in Aug: the current situation component fell to 47.3 (vs. 52.6 prior) while the outlook component fell to 47.5 (vs. 48.5 prior). We continue to expect more downside to Japanese economic data over the intermediate term.


An interesting callout we wanted to flag was the revision to Japan’s 2Q GDP, which was revised down nearly 62% to -2.1% QoQ SAAR. It appears the U.S. isn’t the only major economy that has significant trouble reporting key statistics – likely because it’s politically easier to report healthier figures while leaving nasty revisions like these to sneak in just beyond the consensus radar.


Regarding Japan’s currency, the yen, former Vice Finance Minster Rintaro Tamaki confirmed a belief that has allowed us to maintain a bullish bias on the yen over the last few months (with the exception of a one-off short position in our Virtual Portfolio ahead of the latest intervention). Specifically, he said that “members of the G7 have indicated that intervention should be done in agreement with the G7, as opposed to unilaterally.” As we anticipated, the G7 is coming across as less willing to tolerate currency devaluation strategies than they were when they assisted Japan in selling the yen after the March catastrophes – particularly as they each come to grips with slowing growth in their own economies.


India: We continue to stress that accurately predicting the slope of economic growth allows one to correctly predict outcomes across economies (both individual and global) and their financial markets. India has been a poster child for this YTD. Slowing domestic and global growth has been a major factor in various developments throughout the Indian economy.


Specifically, the -17.3% YTD decline in India’s benchmark equity market (SENSEX) has been very unkind to Indian capital markets. For example, share sales in India have declined -53% YoY on a YTD basis and the 338 billion rupees of equity capital raised happens to be the lowest amount since 2006! This is complicating the government’s efforts to monetize 400 billion rupees worth of state-owned assets through share sales, with only 11% of the target amount completed over five months into the fiscal year. As we pointed out very early in the year, this was one of many factors which would ultimately cause India to miss its aggressive and celebrated deficit reduction target.


Furthermore, the inability for Indian companies to finance growth through equity capital has driven up Indian corporate foreign currency borrowing +8% YoY on a YTD basis, which, in turn, has widened spreads on Indian dollar-denominated bond yields +164bps YTD to 489bps more than U.S. Treasuries. Elsewhere, increased provisions for defaults to the tune of +30-80% (depending on the bank) has driven Indian bank CDS to noteworthy levels, closing the week at 276bps, 303bps, and 343bps for State Bank of India, IDB of India, and ICICI Bank, respectively. Though still well below the highs of the Lehman aftermath, we will continue to monitor these swaps closely for evidence of further alarm.


Amid the realization of slowing economic growth, Indian policymakers dropped three separate hints regarding the potential for near-term stimulus. First, RBI Governor Duvvuri Subbarao explicitly stated that the central bank intends reduce India’s “high” reserve requirements “gradually” to “enable banks to boost lending”. Currently, Indian lenders are required to set aside 6% of their deposits to meet the mandatory cash reserve ratio and another 24% must be invested in approved securities to comply with the country’s statutory liquidity ratio. Elsewhere, RBI Deputy Governor Subir Gokarn said that currency intervention is not completely off the table should the central bank deem it necessary to weaken the currency to aid exports. Lastly, India’s commerce ministry is came out today with an official statement claiming that they are preparing proactive and preemptive measures to stimulate exports – which is indeed aggressive, given that export growth is currently at +44.2% YoY.


Australia: Glenn Stevens and his RBA board members continue to fight the market, holding Australia’s benchmark interest rate flat at 4.75%. For reference they’ve been on hold since November – their longest such pause since ‘05/’06. Meanwhile, Aussie economic data continues to come in soft: the unemployment rate backed up another +20bps to 5.3% in Aug; payrolls growth slowed in Aug to -9.7k MoM (vs. -4.1k prior); and while accelerating +10bps to +1.1% YoY in 2Q, the 1.05% YTD run-rate of real GDP remains substantially below the RBA’s already-reduced target of +2% GDP in 2011 (down from a May ’11 estimate of +3.25%).


Though we maintain our respect for his central banking prowess, Steven’s models have been flat-out wrong YTD – much like Bernanke’s and the sell-side’s. We continue to side with the Aussie sovereign bond market, its interest rate swaps market, and the country’s dried up corporate credit market and foresee a continuation of the recent trend of slow economic growth Down Under. Whether or not Stevens finally cracks will ultimately have a large effect on Australia’s currency market (AUD/USD down -1.9% wk/wk).


Korea: South Korea took a step backwards this week from a policy perspective. First, policymakers imposed a 14% tax on interest income from kim-chi bonds (foreign currency-denominated Korean sovereign debt) to slow currency-pressuring capital inflows. We remain negative on governments that aggressively pursue interventionist strategy – such as Korea’s. Secondly, President Lee Myung Bak failed to sell a tax cut plan that would have pumped 2.8 trillion won ($2.6 billion) of fiscal stimulus into the $1 trillion economy. The plan, which was scrapped due to populist claims that it would’ve only benefitted “a few rich people”, underscores President Lee’s drive to spur economic growth and balance the budget by 2013 through a variety of tax cuts, tax deductions for facilities investment, and tax break incentives to hire new employees. If he is ultimately successful in these initiatives, we could see the Korean economy take a huge step forward in the longer term.


Indonesia: The key callout from Indonesia this week was the central bank’s noteworthy decision to favor supporting economic growth over combating inflation. Though CPI accelerated on a both a headline and core basis in Aug (to +4.8% YoY and +5.2% YoY, respectively, vs. +4.6% and +4.6% prior) the central bank decided to keep its benchmark interest rate flat at 6.75% (on hold since Feb). Their choice came amid sour economic data, which highlighted declining consumer confidence (88.2 in Aug vs. 89.6 prior), slowing export growth (+39.5% YoY in Aug vs. +49.1% prior), and slowing trade balance growth (+$1.5 billion YoY in Aug vs. +$2.7 billion prior). Sticky Stagflation continues to keep central banks from Asia to Latin America in a box from a policy perspective.


Philippines: In a shameless pump of our own book, CPI slowed on both a headline and core basis in Aug to +4.7% YoY and +3.4% YoY, respectively. Our models point to further downside over the intermediate term, which should allow the Filipino central bank to start to ease monetary policy if deemed necessary. Their most recent decision (maintaining the hold on their benchmark interest rate at 4.5%) came earlier this week.


Darius Dale


JCP: Shorting Again


Keith just re-shorted JCP again in the virtual portfolio managing near-term risk around a very high conviction TREND and TAIL short idea. There is no change to our thesis on the name.


At $1.60 for the year, we remain 10% below consensus and bearish on the stock over the intermediate-term.


For more info on our thesis, see our Black Book, “JCP: What Ackmanists Are Missing.”


JCP: Shorting Again - JCP levels 9 9 11




TODAY’S S&P 500 SET-UP - September 9, 2011


As we look at today’s set up for the S&P 500, the range is 49 points or -0.41% downside to 1181 and 3.72% upside to 1230.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1699 (2420)
  • VOLUME: NYSE 946.67 (-0.8%)
  • VIX:  34.32 +2.82% YTD PERFORMANCE: +93.35%
  • SPX PUT/CALL RATIO: 1.23 from 1.99



  • TED SPREAD: 32.66
  • 3-MONTH T-BILL YIELD: 0.0102
  • 10-Year: 2.00 from2.05
  • YIELD CURVE: 1.81 from 1.84


MACRO DATA POINTS (Bloomberg Estimates):

  • 10 a.m.: Wholesale inventories, est. 0.7%, prior 0.6%
  • 11:45 a.m.: Fed’s Williams speaks at symposium in SF
  • 1 p.m.: Baker Hughes rig count



  • G-7 finance ministers and central bankers gather in Marseille, France, to discuss the European sovereign debt crisis and outlook for global growth
  • Tropical Storm Nate expected to strengthen to hurricane today as it forces energy cos. to begin evacuating platforms in Gulf of Mexico; final track still in question
  • NLRB holds hearings on Boeing 787 plant in South Carolina
  • Dish Network may be headed for split with ESPN over increasing rights fees: N.Y. Post
  • would drop quest to exempt itself from collecting sales taxes in Calif., state would forfeit ~$200m under pact lawmakers must act on today if it’s to be adopted
  • FDA AdCom on safety of osteoporosis drugs
  • Senate passed biggest change to U.S. patent law since at least 1952 yesterday, now heads to White House for Obama’s signature
  • No IPOs expected to price today





THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Oil Drops a Second Day as Rising Dollar Counters Storm Concerns
  • Corn, Soy May Open Higher on Shrinking Crops; Wheat Seen Steady
  • Soybeans Advance, Reducing Weekly Decline, on Yield Estimates
  • Copper Erases Weekly Gain as Slowing Economies May Curb Demand
  • Gold Drops in New York as Dollar’s Rise Prompts Investor Sales
  • Coffee Falls on Demand Concerns Before Large Crops; Sugar Rises
  • Fortress Commodity Fund Said to Beat BlueGold in August
  • Wheat Supplies From India May Add to Surplus, Pressure Price
  • Refiners in U.S. Most Dependent Ever on Exports: Energy Markets
  • Copper May Decline 5.1% in Next Few Weeks: Technical Analysis
  • Aluminum Usage in Cars Will Double in Four Years, Novelis Says
  • Corn, Soybean Yields Cut on Adverse Weather, Goldman Says
  • Libya Said to Ship First Oil From West as Production Resumes
  • Africa’s New Friend China Finances $9.3 Billion of Hydropower
  • U.S. Soybean, Wheat, Soyoil Exports Fell Last Week, Survey Shows
  • Steelmakers Set to Curb Output as Costs Surge: Chart of the Day
  • India’s Cotton Exports May Jump 21% Next Year, Group Says




THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director


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 80.52%
  • SHORT SIGNALS 78.67%


MCD’s global same-store sales results for August were, across the board, below expectations.


MCD global comparable sales growth in August was +3.5%.  By segment, U.S. comps were up +3.9% versus StreetAccount consensus of +4.7%, Europe comps were up +2.7% versus StreetAccount consensus of +5.5%, and APMEA comps declined -0.3% versus StreetAccount consensus of +3.9%.


The U.S. comparable sales number was a mere 10 basis points below expectations as the McCafé beverage line-up continues to drive strong sales.  Breakfast, including Fruit & Maple Oatmeal, and the new Premium Chicken sandwiches were also highlighted at strong points for the U.S. business.





As macroeconomic concerns weigh on confidence in the Eurozone, MCD’s performance has suffered in the region as evidenced by the +2.7% print for August.  This result implies the lowest two-year average comp (+2.5%) since December 2010 (2.3%) and the steepest sequential decline, of 285 bps, in the two-year average trend since August 2010.  The U.K. and Russia were highlighted as performance leaders in August.  Germany was included, alongside the U.K. and Russia, in the July release but was not mentioned in the August results.





In APMEA, Japan sales weighed on the overall results.  Japan SSS declined -8.2% in August while China, Australia and other markets saw sales growth.  This was clearly a significant miss versus expectations and is likely a key reason why MCD share are trading down pre-market.





Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, September 9, 2011





Delta Corp founder Jaydev Mody said,Delta Corp is in talks with MGM and CZR for a possible strategic investment.  The potential investors are currently studying foreign investment, technical collaboration and licensing norms. 


"We continue to monitor developments in India and we would welcome the day when a legal and regulatory structure emerges that would permit our company to invest there.  It would be inappropriate for us to comment on any discussions we may have had with any specific company," Gordon M Absher, vice-president of public affairs at MGM Resorts, said. 


Delta is the biggest casino firm in India, where the gaming business is growing 50% YoY.  The gaming business has few licenses and is concentrated in Goa, a popular global tourist destination.  But casino owners are now expanding to Sikkim, Daman and even in Sri Lanka, with demand on the rise.


RevPAR growth has started to reaccelerate but not because of the economy.  Hotels look more attractive than gaming or leisure.



While the global markets experienced one of the most volatile months in stock market history, hotel performance—not that of hotel stocks—actually improved throughout the month of August.  Is this because hotels do better in tough and volatile economic times?  Certainly not.  It’s just the sequential math.  We estimate August Upper Upscale REVPAR will come in at $102 or 5.5% YoY growth.  This growth is impressive considering August included a hurricane-battered week and that the 1st half of August averaged a mere 4% growth.   If you look at the chart of 3-week rolling UUP REVPAR YoY change (shown below), REVPAR accelerated in the 2nd half of August, which our math predicted in our note, “IT’S NOT THE ECONOMY STUPID! (8/25/11)”. 




So where do we go from here?  According to our model, which tracks sequential, seasonally-adjusted dollar RevPAR, we still expect a sustained pickup in REVPAR growth for the rest of the year—as long as the US economy continues to chug along at a snail’s pace or better but not double dip.  So far so good.  Last week’s RevPAR increased 8.6%. 


With the stocks down 40% year to date, a RevPAR reacceleration should help investor sentiment tremendously.  Hotel stocks almost across the board are looking attractive to us.  Of course, we would still need a stable or up stock market for hotel stocks to work.  Although MAR doesn’t have the same ownership leverage to RevPAR growth as the REITs or HOT and H, sentiment around MAR is as low as we’ve seen it.  Moreover, MAR has the least downside relative to its March 2009 trough valuation among the lodgers and some potential positive catalysts such as a very aggressive stock buyback and potentially higher than expected FCF growth.

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