The Week Ahead

The Economic Data calendar for the week of the 21st of November through the 25th 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.


The Week Ahead - 1. cal

The Week Ahead - 2. cal

Weekly Asia Risk Monitor: Heed the Warnings

Conclusion: China’s banking regulator, China’s sovereign wealth fund, and the central banks of Singapore and Indonesia offered their updated outlooks regarding global growth, assorted domestic banking issues, and Europe’s Sovereign Debt Dichotomy. Hint: They are not constructive.



This week as another bad week for Asian equities, closing down -1.8% wk/wk on a median basis. India, a country still reeling with ill-effects of stagflation, led decliners (-4.8%). Indonesia (-0.6%) and Philippines (-0.2%) – two countries we’ve been positive on from a fundamental perspective over the last few months – outperformed on a relative basis, which is consistent with their performance over the YTD.


Asian currencies also had a weak week, closing down -0.7% wk/wk vs. the USD. New Zealand’s Kiwi Dollar led decliners (-3.5%) on a dovish 3Q PPI report. The Indian rupee dropped another -2.2% wk/wk (down -12.8% YTD) as the RBI announced a fresh round of quantitative easing measures designed to ease financial conditions. This is, on the margin, negative for the inflation outlook in India.


Asian fixed income markets were generally mixed on the short end of the curve; conversely, slowing growth continued to drag the long end of Asian sovereign debt yield curves lower. In Australia specifically, expectations of rate cutting continue to drag 2yr yields lower (-29bps wk/wk), while slowing growth domestically and in key trading partners helped drag down long end yields by another -14bps wk/wk. Turning to the interest rate swaps market we saw muted action across the region – which isn’t a surprise given the resilience of global energy markets. We call out Australia’s -8bps wk/wk decline in its 1yr O/S swap market as a continuation of the dominant trend (down -135bps YTD; -65bps below the RBA’s policy rate).


Asian 5yr CDS continued its general trend upward, widening +4.9% wk/wk on a median percentage basis. Not to pick on Australia (we are short the FXA in the Virtual Portfolio), but their swaps widened the most in the region by nearly a double on a percentage basis (+16.2%; +12bps) to 87bps. While hardly signaling any risk of a medium-term credit event, this is a noteworthy delta, on the margin, for a generally well-received sovereign (debt/GDP = 28.8%; deficit/GDP = -5.9%).



Growth Slowing:

  • Zoomlion Heavy Industry Science & Technology Co., which is China’s second-largest maker of construction equipment, talked down guidance in an interview this week, saying the country’s demand for cranes and excavators will continue to slow next year. “Meeting the company’s 50 billion yuan ($7.9 billion) sales target this year will be challenging,” per CEO Zhan Chunxin.
  • Hong Kong, which continues to struggle economically as a result of an assortment of domestic and international headwinds, saw its unemployment rate back up +10bps to 3.3% in October. Healthy still, but negative from a directional standpoint.
  • Indonesia’s central bank lowered its 4Q11 and full-year 2012 GDP forecasts to +6.6% (vs. +6.7% prior) and +6.5% (vs. +6.7% prior), respectively, saying, “The impact of the global crisis will be more significant in 2012.”
  • Singapore had a nasty week of economic data and the resulting commentary out of the Monetary Authority of Singapore speaks volumes to the potential for these trends (which are leading indicators for the global economy) to continue.  Retail sales growth slowed in September to +3.1% YoY vs. +7.8% prior. More importantly, non-oil domestic export growth slowed in October to -16.2% YoY vs. -4.6% prior. Electronics exports (think AAPL) tanked -31.2% YoY vs. -13.6% prior. This is not what U.S./E.U. growth bulls want to see heading into the holiday season. If Singapore, which is home to the world’s most busy container port, isn’t shipping it, we aren’t buying it. It’s that simple. The MAS followed this sour data up by concluding the week with this very sobering comment: “The world economy and financial system are at their most fragile state since the 2008-09 global financial crisis.” Note: this view is incredibly counter to consensus calls for a year-end “Santa Claus” beta-chase.

Deflating the Inflation:

  • China continues to send subtle signals that it’s in the early stages of easing monetary policy. First, the Ministry of Finance received 6% for 6mo deposits, down from a record 6.83% at the prior auction and the first decline in yields at a gov’t deposit auction since May.  Moreover, the PBOC sold its 1yr bills at a lower yield for the 2nd straight week, (-9bps) to 3.475% - which takes the yield on these securities below the benchmark deposit rate for the first time since January. Not a ton of action, but easing on the margin, nevertheless. China’s reluctance to ease materially in the near-term is in-line with our view and with the views of Chinese officials: “The foundation of price stability is not yet solid… Extremely loose global monetary conditions and rising domestic labor and resource costs may exacerbate inflationary expectations… Current liquidity is in line with the nation’s growth.” (PBOC 3Q Monetary Policy Report)

Sticky Stagflation:

  • India saw its benchmark inflation reading come in at +9.7% YoY in October, which was unchanged from September. Our models point to one more month of sequential acceleration on a YoY basis and then a series of lower-highs in 1H12. This is roughly in-line with the RBI’s latest outlook, which expects CPI to trend down to +7% YoY by March ’12 – a stipulation for them remaining on hold. Unfortunately, they decided to compromise their hawkish lean by deciding to coordinate with the central government and purchase an additional $2 billion of federal debt via POMO at the end of November. Deputy Governor Subi Gokarn said the move was made to “ease a [temporary] cash shortage” in the financial system. We, on the other hand, are inclined to think they are doing this to aid the central government issue additional debt. The last five auctions failed to attract enough bids at desirable yields and 31% of the bids at the latest bond auction were rejected. We have growing suspicion that the Finance Ministry will upwardly revise their FY11 borrowing program for the second time this year – a view supported by their decision to increase the cap on foreign holding of rupee bonds by +20% (hoping higher yields will spur demand from international investors). Moreover, the Finance Ministry has issued $17 billion worth of unscheduled “cash-management” bill sales YTD (up +7x YoY) and on an accelerating basis of late (+$2.2 billon last week).

King Dollar:

  • Indian corporations’ international funding markets have gone completely dry this quarter, with issuance dropping to levels not seen since 2Q09 as average dollar-borrowing costs rose to a 2yr high of +626bps over U.S. Treasuries. Heightened capital markets volatility makes it tougher for EMs to price dollar debt deals, meaning less new USD supply globally and less conversion of USDs into other currencies as a result.

Eurocrat Bazooka:

  • Pardon our lack of groundless optimism, but we continue to see signs that the EFSF will struggle to attract capital – especially on the order of our estimate of $2-3 trillion needed for the upcoming fiscal year. Gao Xiqing, President of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout: “When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.” Additionally, Jin Liqun, Chairman of CIC’s board, had this to say as well: “China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.”  No translation(s) needed.


  • Japanese real GDP growth accelerated in 3Q to flat on a YoY basis (from -1.1% prior). On a QoQ basis, the country finally broke out of recession (started in 4Q10) with a +1.5% growth rate (vs. -0.3% prior).


  • In a bid to help China’s local governments smooth their cash flows and asset/liability management, China’s Finance Ministry recently introduced a pilot program to allow its select local governments to issue debt directly to the market (vs. through LGFVs). Shanghai priced the first issuance of fixed-rate securities in this program, yielding 3.1% on the 3yr tenor and 3.3% on the 5yr tenor – yields at/below China’s sovereign debt.  By comparison, 5yr yields on AA-rated corporate debt (most LGFVs are AA or below per Chinabond) yield 6.73% on average, suggesting to us that there’s an extremely wide disparity in credit quality for China’s sizeable local gov’t debt burden ($1.7 trillion and growing).
  • China Banking Regulatory Commission, the country’s financial services regulator, explicitly warned lenders that some projects backed by local governments would run out of funding as property sales continue to decelerate. Moreover, it told banks to prepare for a rise in NPLs and step up asset sales and debt restructurings for “high-risk” property developers – if not cut them off from additional financing entirely. It also pointed out that the recent trend for property developers to procure credit from non-traditional sources at much higher interest rates heightens the probability they default on their official bank loans… Net-net, we think their stern warning sends a message that China is unlikely to relax property market curbs anytime soon. “Prepare for some short-to-intermediate-term pain, the CBRC is essentially saying to the nation’s bankers.

Darius Dale



Weekly Asia Risk Monitor: Heed the Warnings - 1


Weekly Asia Risk Monitor: Heed the Warnings - 2


Weekly Asia Risk Monitor: Heed the Warnings - 3


Weekly Asia Risk Monitor: Heed the Warnings - 4


Weekly Asia Risk Monitor: Heed the Warnings - 5


Weekly Asia Risk Monitor: Heed the Warnings - 6


Weekly Asia Risk Monitor: Heed the Warnings - 7


Keith bought EAT in the Hedgeye Virtual Portfolio this afternoon as the setup in his quantitative model was favorable.  From our angle, too, the stock looks good on the long side.


From a fundamental perspective, as we wrote in our note titled “EAT – CAN THEY EXECUTE?” on 10/27, we believe that the company is operating well and will continue to improve going forward.  At Chili’s, the remodeling program, kitchen retrofits and other initiatives are going to boost sales and customer satisfaction.  As our note following earnings (10/27) highlighted, we believe that the skepticism among the sell-side community is misguided and would not interpret this negative sentiment as being anything other than a positive for a buyer of the stock.  Having met with the company earlier this week (note titled “EAT MEETING”, dated 11/15), we are further convinced that Brinker is out-innovating the competition and, as a result, will outperform over the longer term TAIL duration.


This stock has been one of our favorite names for some time and is one of our top three long picks in the space over the intermediate term and long term despite it being overbought on the TRADE duration.


EAT: TRADE UPDATE - eat levels





Howard Penney

Managing Director


Rory Green



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Shorting France (EWQ): Trade Update

Positions in Europe: Short France (EWQ); Short EUR-USD (FXE)


Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio today.  We opportunistically shorted EWQ from a quantitative set-up with the CAC 40 broken on its intermediate-term TREND and immediate-term TRADE lines (see chart below).


Shorting France (EWQ): Trade Update - 1. cac


France remains an important EU country in the crosshairs—constrained by fiscal pressures (debt and deficit) and a web of cross-country sovereign banking exposure, the two combined put pressure on the country’s AAA credit rating. On 10/18 we penned a note titled “France is Going to Get Downgraded”, and made the important point that there exists an enormous outsized risk to the entire European bailout project for sovereigns and banks should France lose its credit rating: essentially the entire EFSF would be jeopardized, as France is the second largest contributor of collateral to the facility, at 20%, behind Germany at 27%.


From the fiscal side, France’s public debt as a % of GDP is likely to hit 88.4% this year, near the important 90% (and above) level that Reinhart and Rogoff outline in their seminal book This Time is Different as prohibitive to growth.  Through austerity, the government hopes to bring down the budget deficit, forecast to hit 5.7% of GDP this year, to 3% in 2013, or in compliance with the EU’s Growth and Stability Pact. Nevertheless, there’s been great push-back to Sarkozy’s austerity programs (including the most recent €8 Billion in additional budget cuts), which has also eroded his polling results for elections next April.


On the banking side, France is the largest holder of Italian public debt ($106.8B) and private debt ($309.6B) of any country according to June BIS report, which compounds risk given Italy’s own debt imbalances and investor uncertainty around leadership in the wake of Berlusconi.


Early this month Sarkozy’s government revised GDP to 1.0% in 2012 versus a previous estimate of 1.75%. Politically, Sarkozy remains faced with high unemployment, at 9.2% (vs 7% in Germany), or 22.8% among the French youth, and unlike Germany does not have the ability to cushion slowing growth through exports. 


As a risk signal, we continue to follow the spread between German bunds and 10YR French yields that has maintained a hockey stick pattern (see chart below). 


Matthew Hedrick

Senior Analyst


Shorting France (EWQ): Trade Update - 1. risk rising






Notes below from CEO Keith McCullough


HANG SENG – crashing. Period. Down another -1.7% overnight, down -7.6% since OCT28, and down -24.2% from 2011 peak. Within that nasty Singapore report yest (down -16.2% y/y OCT), Electronics exports were down -31.2%! Apple? I don’t know. But I do know that we’re staying short Hong Kong and Asia’s Growth Slowing.


DEAD CATS – across Europe, from the Euro itself (immediate-term TRADE oversold yest) to French and German Equities, they’re bouncing them right from where they should have. New ranges for the Euro, CAC, and DAX = 1.33-1.36, 3003-3146, and 5. Manage your risk proactively around those ranges w/ a bearish bias.


GOLD – bouncing right off its immediate-term TRADE line of support of $1722 this morning and I like that because we bought more GLD yesterday taking the position to 9% in the asset allocation model. Refreshed range = 1.





THE HBM: GMCR, YUM, MCD, DRI, BWLD - subsector fbr





GMCR: Green Mountain is making headlines on Bloomberg this morning.  An article on the company highlights September 16th, 2012 as the day that Green Mountain loses the main patents on its single-serve K-Cups.  This has obviously been known for some time but worth noting that it is being pointed out by media outlets.


GMCR: Green Mountain can see its shares return to the $60-$70 range over the next few months, according to SunTrust in a report reiterating its Buy rating and $90 PT.


YUM: Yum! Brands’ campaign to have laws changed so that low-income Americans using food stamps at its Taco Bell and KFC restaurants has hit a snag.  The USDA has voiced its opposition and encouraged states not to go along with Yum.


MCD: McDonald’s has been performing well of late, remains one of our favorite names, and GS bumped its PT for the stock to $103 from $100.




DRI: Darden Restaurants was cut to Equal Weight at Morgan Stanley.  The report cited weakness at Olive Garden.


BWLD: Buffalo Wild Wings remains a Buy with a $72 PT, according to Sterne Agee, citing strong same-store sales.


THE HBM: GMCR, YUM, MCD, DRI, BWLD - stocks 1118



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, November 18, 2011




  • Taking account of current market sentiment, MPEL does not intend to carry out a global offering in conjunction with the Proposed HK Dual Listing.
  • Currently aiming to complete the Proposed HK Dual Listing by end of 2011
  • The shareholders' loans initially provided in 2006 by wholly-owned subsidiaries of major shareholders, Melco International Development Limited and Crown Limited, will be converted into ordinary shares of the company on or around November 29, 2011.
    • Following the conversion, Melco and Crown will maintain their interests in the company in equal proportions. 
    • Conversion price will be determined as one-third of the VWAP of the company's ADS over the period of the five trading days immediately preceding the date of conversion, as each ADS represents three Shares.
  • As of September 30, 2011, the combined outstanding shareholders' loan balances due to Melco and Crown by the Company are HK$899.8MM (approximately US$115.6MM). 
  • The dilution impact from the conversion of the shareholders' loans on existing shareholders of the Company (other than Melco and Crown), based on closed price of $8.93, is approximately 0.8%.


Wynn Macau would pay a special dividend of HK$1.20 per share to those shareholders who hold shares through Dec 7.  The dividend will be paid on Dec 19.  This is the 2nd time Wynn Macau has paid a dividend.  Last November, Wynn Macau declared a special dividend of 76 Hong Kong cents per share, and said it would consider paying recurring dividends with a target yield of 1%-3% per year.



Galaxy is looking to beat consensus estimates of 15-20% growth in 2012, said CFO Robert Drake.  “Everyone is looking at the VIP market in particular. We haven't seen any signs of slowing. There is plenty of liquidity in the market and visitation remains strong,” Drake commented.



In the first 10 months of 2011, the Macau government’s total public expenditure was MOP31.3 BN (US$3.9 BN).  That is less than 60% of what it budgeted for the overall year, when there is only two more months to go.  A fiscal surplus of MOP 59.53 BN was recorded in the first ten months of 2011, up by 68.3% YoY, due to the increment in public revenue from the direct taxes on gaming.

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