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The Economic Data calendar for the week of the 26th of September through the 30th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Weekly Asia Risk Monitor


The Flight to Liquidity trade continues and capital markets are drying up globally as our call for compounding Interconnected Risk plays out in spades. Asia, which had been the last beacon of hope on the economic growth front YTD, is struggling mightily.



Asian equity markets got hammered this week, closing down -5.9% wk/wk on a median basis. Every country closed down on the week led by Indonesia (down -10.7%) – a country we were fortunate enough to book a gain in at the top of the intra-week rally just over a week ago. In addition to New Zealand, China outperformed, closing down “only” -2% wk/wk. China does, however, remain one of the few big mistakes we’ve made YTD (currently down -10.5% from our cost basis within our Virtual Portfolio). If there’s one lesson we’ve re-learned since authoring this thesis back in April, it’s that in these volatile times we must be increasingly cognizant of having our catalysts much closer in duration – on both the long and short side of a security. Being early is being wrong.


Asian FX markets also got rocked wk/wk, as the Flight to Liquidity trade (USD-bullish) continued. As a group, currencies closed down -2.9% on a median basis vs. the US Dollar. With the exception of the Japanese yen, we’ve been generally bearish on Asian currencies (vs. the USD) since we introduced our Deflating the Inflation back in 2Q and that thesis is playing out in spades. It’s not a trend we would recommend fighting, given the US Dollar’s quantitative setup – i.e. a Bullish Formation. The Aussie dollar, which we’ve been the bear on since earlier in the year, fell -5.4% wk/wk and broke parity with the USD for the first time since mid-March.


Asian sovereign credit markets were mixed, as we saw capital pour out of the more illiquid markets (Indonesia, Philippines, Thailand) and into the more liquid markets (Australia, Hong Kong, Singapore) – a phenomenon felt across the yield curve. As it relates to the slopes of Asian yield curves specifically, we are encouraged by what we saw out of China (widened +4bps wk/wk) – a move that would ultimately prove bullish for the Chinese economy if sustained over a longer duration. Conversely, the -29bps drop in Hong Kong’s 10-2 sovereign yield spread is an explicitly negative signal that growth is slowing within the territory, due to it being highly-levered to the global economic cycle (exports account for over 200% of GDP).


Asian 5yr sovereign CDS widened dramatically wk/wk, closing up +23.5% on a median basis! With the exception of Australia, New Zealand, Philippines, and Vietnam, Asian credit default swaps spreads have either doubled or are very near doubling for the YTD. Valuation remains no catalyst with this level of systemic risk spread throughout the global financial system.


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China: Given the country’s managed nature, official rhetoric remains a key factor to analyze in China and the big announcement we received this week was Premier Wen Jiabao’s statement that he remains “concerned about high prices”, as well as his assertion that “the government will continue to take measures to control prices”. We interpret this as the Chinese stimulus bazooka – which consensus continues to speculate on in the absence of positive news – is unlikely to be unleashed absent a major disinflationary shock. This is due to the likelihood that, while slowing, Chinese CPI will remain sticky and comfortably above the government’s 4% target well into 2012.


Elsewhere on the rhetoric front, Yi Gang, the PBOC’s deputy governor, confirmed that Chinese support for troubled European banks/economies will be limited in some regard and that China fully understands how weak many developed economies truly are:


“At the margin, we can do quite a bit to help. At the same time, the real solution of the European sovereign debt crisis has to be done by Europeans themselves… One hurdle is that most nations are constrained in implementing further fiscal and monetary policy measures as they have already used them to recover from the last slump. Fiscal capacity is limited and monetary policy is already used pretty much to the limit.”


China is well aware that Europeans can’t meaningfully increase debt and deficit spending and that the U.S. can’t cut interest rates from ZERO percent.


From a capital flow perspective, we’re seeing some things that certainly make us uncomfortable as holders of Chinese equities. Investors looking to get out of China via Hong Kong (more liquid market) have caused yuan spot rates to be nearly a full percent lower in Hong Kong than in the onshore Shanghai market. Additionally, 1-12 month non-deliverable forward contracts, which investors use to speculate on the currency, are all trading at a discount to the spot rate in Shanghai. The premium paid for yuan in the spot market has widened to the highest level since March ’09 (+0.2%).


As investor capital flows out of the country, we’re seeing corporate capital flood in, though most likely from ailing property developers. We believe mainland Chinese developers, who are largely struggling to secure refinancing domestically (bank credit down -75.1% QoQ in 2Q), are contributing heavily to the recent surge in U.S. and Hong Kong dollar-denominated borrowing (the former up +122.2% YoY; the latter amount of HK$10.2 billion is highest quarterly volume since 3Q10) due to the ~72% discount Chinese corporations are receiving on such external financing.


As this money gets repatriated back into China, accelerated PBOC purchases of foreign exchange have sent Chinese financial institutions’ net yuan positions up +72% in Aug from July – the largest gain in five months. While consensus was quick to speculate on portfolio investment inflows attempting to take advantage of Chinese economic growth, we believe that deteriorating metrics in the real estate space is incrementally driving up the domestic cost of capital for Chinese property developers, forcing them to look abroad for refinancing. Such metrics include: land transactions -14% MoM in Aug; land auction failures up +242% YoY in the year-to-date; and the number of cities posting flat-to-down MoM property price increased to 47 in Aug – the most ever, according to Samsung Securities.


Japan: The new Japanese leadership, headlined by recently-elected Prime Minister Yoshihiko Noda, appears slightly more willing to put up with persistent yen strength than the previous administration. Though details are not yet finalized, Economy Minister Motohisa Furukawa did introduce a new program designed to help companies cope by increasing subsidies for building factories in Japan. This latest round of deficit spending is designed to discourage large exporters like Panasonic (the world’s largest maker of rechargeable batteries) and Elpida Memory Inc. (the world’s third-largest maker of memory chips) from proceeding with recently-announced plans to ship manufacturing capacity abroad to escape FX-based profit erosion.


As with any new fiscal strategy Japan outlines (see: energy reregulation), we have serious questions as to how it will be financed, given the government’s weak fiscal positioning (deficit/GDP = 8.1%; debt/GDP = 225.8%). Higher taxes and slower growth continue to loom on the horizon that is Japan’s long-term TAIL. It’s not at all ironic that Japan’s 5yr sovereign CDS blew out to new wides this week, closing at 140bps. For reference, when we introduced our bearish long-term thesis on Japan in 4Q10 titled Japan’s Jugular, Japan’s 5yr sovereign CDS was trading around ~50bps.


From an intermediate-term TREND perspective, we expect the Japanese economy to continue to get weaker as the capacity restoration we’ve seen in the wake of the March/April disasters comes to a halt. Japanese export growth, which consensus celebrated as the first positive YoY gain since Feb (+2.8% in Aug), did little to actually add to Japanese economic growth, given that a pop in import growth (+19.9% YoY) contributed to the removal of -¥823.8 billion from the Japanese economy when analyzing the trade balance on a YoY basis.


As it relates to the burgeoning Eurozone banking crisis, Japan took even a more hard-line stance than China and stated that Japan won’t be offering the PIIGS a “blank check”, per Finance Minister Jun Azumi:


“While additional aid is a possibility if Europe succeeds in creating a system for dealing with crises, it’s not like we’re going to provide a blank check. This is a Euro-area problem and the Euro-area nations should be the ones to solve the problem.”


Japan is right. It’s got its hands full with trying to prevent a similar crisis from emerging at home over the next 3-5 years.


India: As we forecasted back in March it’s all but set in stone that India misses its budget deficit target in the current fiscal year. Specifically, the rout in the SENSEX (down -21.2% YTD) is preventing the government from unloading state-run companies alongside a boost in subsidies stemming from elevated inflation. Having raised a minuscule 3% of the 400 billion rupee target at nearly the halfway point of the fiscal year, India risks missing its divesting goal for at least the second year in a row (only 57% of the total was raised in the last fiscal year). This is likely to force the Indian government to have to borrow above and beyond their target of 4.17 trillion rupees in FY12 – at a time when foreign demand for Indian assets is dropping like a rock (INR/USD down -4.4% wk/wk).


The rupee’s decline coupled with the recent gasoline price hike out of Indian Oil Cop. (the country’s largest refiner) may serve to push up reported inflation by as much as +7bps in the short term per P.K. Goyal, India’s Oil Finance Director. Still our fundamental models and quantitative signals across the commodities market(s) continue to signal that WPI in India has peaked and that the Reserve Bank of India is done tightening in the current interest rate cycle. This dovish outlook is shared by the RBI itself, with Deputy Governor Subir Gokarn saying:


“You could say that the cycle is nearing its end, given the projection that inflation will start coming down and will continue to move down from December onwards. Oil Prices do not appear to be going higher and we are seeing some deceleration in domestic growth because demand is being moderated.”


Even though the RBI is shifting to a more neutral-to-dovish monetary policy stance, we like that they aren’t using fear mongering to support doing so. This is in stark contrast to the U.S. and Japan whose central bankers tend to depress investor, business, and consumer confidence via the gloomy commentary provided alongside dovish policy actions.


Korea: When an economy reports that its unemployment rate has fallen to a three-year low and its benchmark equity index plummets -7.8% wk/wk, it’s an explicitly bearish sentiment signal insomuch that people believe there is little-to-no good news left on the economic growth front as it relates to South Korea.  This is yet another bearish emerging market story we’ve been ahead of YTD and the KOSPI’s breakdown through any meaningful level of quantitative support this week is an explicitly bearish read-through for where we are within the cycle of global manufacturing, pharmaceutical, and tech demand.


Digging deeper into Korea’s domestic situation, the government aims to pass carbon trading legislation by December, which, per the Korean Chamber of Commerce (120,000 members) will stand to increase costs for Korean corporations by an additional 5.6 trillion won ($5 billion) and force abroad manufacturing capacity to competitor nations without such “punitive” schemes. Korean policymakers, who initially agreed to eventually implement such policies back in 2009, appear pretty set on delivering on their promise, given the country’s unfavorable status as the world’s ninth-largest greenhouse gas emitter (only the world’s 13th-largest economy). All told, such legislation is more than likely to be taken in an unfavorable manner by Korean financial markets, given its negative impact on corporate profits and positive impact on rates of Korean CPI and PPI over the long-term.


Elsewhere in the Korean economy, Finance Minister Bahk Jae Wan vowed to support the Korean won from “herd behavior in financial markets” via further intervention. Ironically, previous intervention designed to artificially limit won appreciation is largely the reason the won (down -4.6% wk/wk vs. the USD) is being especially punished in the global FX markets – not unlike the Brazil’s current predicament with the real (BRL). Recent maneuvers included: forced tightening of currency forward positions, imposing a level on non-deposit foreign currency liabilities held by domestic and foreign banks, and prohibiting financial companies from investing in foreign currency-denominated bonds issued to finance domestic initiatives.


Singapore: The key callout as it relates to Singapore this week is that CPI accelerated to a 34-month high of +5.7% and our models are pointing to higher-highs through October. And given that the Monetary Authority of Singapore doesn’t meet until October for its second of two monetary policy-setting meetings, we could see the MAS revalue the Singapore dollar higher in that meeting (they don’t use interest rates to set monetary policy). That makes Singapore one of the few moderately hawkish stories left in Asia and the +23bps wk/wk widening of Singapore’s 1yr on-shore interest rate swap is supportive of this view. Still, the MAS will have to counterbalance the inflationary situation at home with a slowing global growth outlook (exports > 200% of GDP).


Australia: The key callout from Down Under this week is the near closure of Australia’s kangaroo bond market. Back in early May, we correctly called out the general frothe of this market as a leading capital markets indicator for the topping of the global economic cycle. Sales of kangaroo bonds, which are debt securities issued in Australia by foreign borrowers, have plummeted -72% YoY in September! This general illiquidity rhymes with what we’re seeing domestically (foreign bond issuance in the U.S. is running at less than half the YTD run-rate in Sept.) and up north (Canada’s maple bond market has been “closed” since June).


As capital markets continue to dry up on the uncertainty stemming from the Eurozone and the realization that U.S. growth is likely to come in a lot lower than consensus expects over the long-term TAIL, we would tend to expect the reflexive nature of the global economy to feed upon itself in a negative way – especially given what the Chinese have astutely laid out above:


“One hurdle is that most nations are constrained in implementing further fiscal and monetary policy measures as they have already used them to recover from the last slump. Fiscal capacity is limited and monetary policy is already used pretty much to the limit.”


“Hope” is not an investment process.


Darius Dale


FINL: Sales Strength Intact


FINL reported its Q2 numbers of $0.39 after the close coming in a penny above consensus and our estimate of $0.38E. Despite considerably higher than expected sales on comps of +11% vs. 8.5%E, earnings upside was muted by increased SG&A spend. While this report is likely to be overshadowed by yesterday’s significant market decline and Nike’s blowout earnings, here are a few key takeaways from the quarter ahead of this mornings’ call: 

  • Despite concerns that FINL sales caught the July/August malaise in its entirety based on the timing of its quarter compared to FL (quarter ended in July), comps came in well above expectations. Yes, FINL is still a small fish compared to FL (a name we like better), but this is an unquestionably positive read-through as it relates to continued strength in the athletic specialty channel.
  • In addition, inventories came in up +6% on 10% growth in sales and appear relatively clean. The strength in comps plus lean inventory levels are particularly bullish as it relates to the sustainability of Nike’s US futures, which came in +15% last night. It’s also worth noting that the company has kept the sales/inventory spread consistently positive and stable at +MSD since its ‘little hiccup’ this time last year.
  • Gross margins up +195bps was solid but not surprising given the leverage in the model with higher merchandise margins likely augmenting occupancy leverage.
  • FINL’s use of its balance sheet to drive shareholder value is another callout.
    1. The company acquired an 18 store specialty running chain (for $8.5mm) to grow the business – a move we think also bolsters FINL’s credibility as a leader in running.
    2. It also repurchased 2.1mm shares (~4% of total) while maintaining $5.40/share in cash and another ~4mm left on its authorization that the company can utilize to accelerate earnings growth.
  • Lastly, the latest read on initial September month-to-date comps are bullish up +9%. While notably higher than +4% expectations in Q3, it’s important to keep in mind that October and November comps get a bit tougher (see chart below).

The call is @ 8:30am .



FINL: Sales Strength Intact - FINL S and Mo Comps 9 11



Casey Flavin


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 80.51%
  • SHORT SIGNALS 78.32%




Notable macro data points, news items, and price action pertaining to the restaurant space.




Growing concern over a Greek debt default combined with signs of weakness in China and further erosion in the U.S. economy triggered steep declines in worldwide stocks and commodities (ranging from oil to gold to grains).  I know its 2011 and not 2008, but the chart on gas prices is haunting me; gasoline prices continue to shadow the trend of 2008.






Yesterday, food stocks were the safe-haven of choice and QSR underperformed.  As of the close yesterday, Utilities (XLU) and Consumer Staples (XLP) were the only two S&P sectors that were still showing positive performance year-to-date.  The XLU is positive on both TADE and TREND. 








DPZ - announced that after just three months since its launch, the new Domino's App for iPhone and iPod touch has achieved $1 million in sales over a single week.  The Domino's App also speedily achieved $1 million in total sales – just 28 days after launch. With the app initially available on June 8 and announced to the public one week later, Domino's met both milestones much quicker than it expected.


YUM - agreed to sell Long John Silver's Inc. and A&W Restaurants Inc - "As we continue to sharpen our long-term growth focus on international expansion and improving our U.S. brand positions in KFC, Pizza Hut and Taco Bell, Long John Silver's and A&W no longer fit our long-term growth strategy," said David Novak, Yum chairman and chief executive, in a statement. LJS Partners LLC will buy Long John Silver's and A Great American Brand LLC will buy A&W Restaurants for undisclosed sums.


ARCO - The following is from Hedgeye’s Moshe Silver daily BRAZIL NOTES - In Brazil worker wages highest since 2002 – government statistical office IBGE reports 6% unemployment in August in the six major metropolitan areas surveyed, the same level as in July, and the lowest August reading since the series was initiated in 2002.  Actual wages in August were R$ 1,629.40, the highest level in the history of the survey.  August’s reading was up 0.5% from July and up 3.2% YoY.  The survey also found an increase in documented workers and a decline in the informal sector.  The director of the IBGE labor and wage section said the increase in documented workers contributes directly to a higher level of wages overall.


MCD Japan - is looking to close hundreds of “small” restaurants next year in an on going effort to boost profitability.  SSS have started to increase in September following the end of limits on electric power usage set by utilities after the March 11 earthquake and tsunami crippled some power plants.


MCD - boosts dividend by 15% - Yield now 3.2%


MCD/YUM rated new outperform at Raymond James






DRI - annual meeting was very bullish from a Hedgeye TAIL perspective.  In the short run, the Olive Garden/Red Lobster is still the perceived as the choice of an aging demographic.  Could be the reason why the company is so keen on making an acquisition.   


KONA - has closed its underperforming restaurant in Sugar Land, Texas.


CBRL - adopts shareholder rights plan with qualifying offer exception; rights plan will have three-year term subject to shareholder approval at 2011 annual meeting and does not apply to all-cash, fully-financed tender offers open for 60 business days






Howard Penney

Managing Director



Rory Green



The Macau Metro Monitor, September 23, 2011




Caesars Global Life, the non-casino division owned by Caesars, plans to build a $470MM, 1,000 room non-gambling luxury resort--Caesars Palace Longmu Bay--on the southern Chinese island of Hainan.  Caesars Palace Longmu Bay is designed by Australia-based PTW Architects.  It is a partnership between Caesars and with Guoxin Longmu Bay Investment Holding Co. Ltd., a subsidiary of the Chinese investment and development company Jiangsu Guoxin Investment Group Limited.


The resort is scheduled to open in 2014 with two entertainment venues offering high-profile shows, a 36-hole championship golf course, a marina, spa, shopping and restaurants.  CEO Gary Loveman said his goal is to develop 25 hotels and resorts in China over the next five years.  There are other hotels on the island, but Loveman said he saw demand for a number of competing brands. MGM plans to open a resort dubbed MGM Grand Sanya on Hainan Island later this year.



Visitor arrivals for August 2011 marked a new record of 2,698,003, up 14.4% YoY.  Visitors from Mainland China surged by 24.3% YoY to 1,571,015 (58.2% of total), mostly coming from Guangdong Province (820,743), Fujian Province (92,976) and Zhejiang Province (61,218); while those traveling to Macau under the Individual Visit Scheme totaled 698,625, up by 18.4% YoY.  Visitors from Taiwan (116,152); the Republic of Korea (45,132) and Japan (38,853) increased by 0.3%, 25.1% and 4.4% respectively.  However, those from Hong Kong (754,636) decreased slightly by 0.5%.





S'pore CPI rose 5.7% YoY in August, an acceleration from July's growth of 5.4%. Compared with July's, August CPI was 0.7% higher.  The Monetary Authority of Singapore core inflation measure (which excludes the costs of accommodation and private road transport) was up 0.4% in August MoM and 2.2% YoY.



Macau CEO Chui said his government would continue to adopt measures to control the inflation rate in Macau.  “It is close to October. We hope the inflation will become stable or drop,” Chui added.  Macau government has been trying to open new sources of food supply in the Mainland to stabilize prices, while also subsidizing public utilities.


Angry Shorts

This note was originally published at 8am on September 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Habit will be your champion.”



I covered some shorts and got longer again yesterday (14 LONGS, 8 SHORTS in the Hedgeye Portfolio) because that’s what my process was telling me to do. Coming into the day we were long the US Dollar and effectively long the American Consumption that’s associated with a strong US Dollar.


Strong Dollar Deflates The Inflation. Period.


Habit, discipline, process – these things matter. Since I am a hockey head, our competition likes to think that they can work less hard than us because they are smarter. Smart is as smart does. And as the great Spartan officer Dienekes went on to say in Gates of Fire, “habit is a mighty ally.”


The habit of fear and anger, or the habit of self-composure and courage” (Gates of Fire, page 139). As a professional Risk Manager, what are your habits?


Self-composure in a down market is as critical as not getting angry about getting squeezed on the short side in an up one. This morning’s headline “news” is that Italy is being “downgraded” by one of the most lagging of lagging indicators – a ratings agency. Italian stocks are down -39% since February. S&P’s view is not new “news.” Stocks rallying on the “news” is…


Courage is building a team and a risk management process that includes people other than yourself. In a globally interconnected marketplace, you have to be able to trust and depend on both your teammates and sources – or just get new teammates and new sources. Collaboration of experience is the only path to victory. Individualism dies young in this market’s battlefield.


Back to the Global Macro Grind


Let’s start with what we’ve called The Correlation Risk. That’s the risk that QE2 would inflate asset prices and that a policy to inflate would perpetuate Growth Slowing. Check, check, check. That’s your 2011 Global Growth Slowdown. It’s old news.


What happens if we reverse the causal mechanism in inflating commodity prices? What happens if we strengthen the US Dollar? Bottoms are processes, not points, but yesterday was a very good day not only for American Consumers but for Global ones: 

  1. US Dollar Index held its long-term TAIL of support = $76.45
  2. CRB Commodities Index (asset inflation) got blasted for a -1.8% drop on the day
  3. WTI Crude Oil prices broke my immediate-term TRADE line of support ($86.96) and moved back into a Bearish Formation 

Despite the SP500 being down -1% yesterday, the Consumer Discretionary Sector (XLY) closed up +0.24% on the day (the Energy Sector was down -0.88%). That, and Chinese/Indian equities rallying on the Italy “news”, made perfect sense to me. New “news” to the 95% of this world that couldn’t care less about Ben Bernanke is that prices at the pump are going down.


Is that good for Energy, Financials, or Basic Materials stocks? No. Is it good for Consumer and Healthcare stocks? Yes. What’s best for Americans, Indians, and Chinese? Policies to inflate? Or a strong US Dollar that Deflates The Inflation?


Don’t ask your local Washington/Wall Street revisionist “economist” about that. Ask The People.


From a sentiment perspective, and I highlighted this in last week’s Early Look, the other people (Wall Street consensus) are getting really bearish after global market prices have melted down. This shouldn’t be a surprise. This is the habit of fear and anger that you want to avoid in both your professional and family life.


Last week’s Institutional Investor Sentiment Survey showed the nastiest bear growl that we have seen in 2011. For the first time this year, the Bears outnumbered the Bulls. And not by a little – by a lot: 

  1. Bulls dropped from 39% in the week prior to a fresh YTD low of 35.5%
  2. Bears ramped from 38% in the week prior to 41%
  3. The Bull/Bear Spread flashed a Buy Fear signal at -550 basis points wide (Bulls minus Bears) 

At the same time, both the Volatility Index for US stocks (VIX) broke its TRADE line of support (34.67) and the SP500 rallied above its TRADE line of resistance (1180).  On the margin, that’s more bullish than it is bearish. It would take a 2011 Bear to know.


To be clear, these are immediate-term TRADE signals (3 weeks or less in duration). But every risk management point should have a but, and every TREND is born out of a TRADE. If the US Dollar Index continues to hold TREND line support ($74.62), I’ll continue to have the courage to buy and cover on red days. Selling on green is the easy part.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1769-1819 (Gold’s immediate-term TRADE line of $1819 is broken), $86.03-86.98, 5029-5527, and 1187-11228, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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