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.
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%).
THE LEAST YOU NEED TO KNOW
Deflating the Inflation:
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.
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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).
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).
THE HEDGEYE BREAKFAST MONITOR
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.
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 Macau Metro Monitor, November 18, 2011
PROPOSED LISTING ON THE STOCK EXCHANGE OF HONG KONG LIMITED AND CONVERSION OF SHAREHOLDERS' LOANS Melco Crown
WYNN MACAU: TO PAY SPECIAL DIVIDEND OF HK$1.20 PER SHARE WSJ
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 LOOKS FOR 20 PERCENT-PLUS GROWTH IN 2012 Macau Business
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.
MACAU GOVT UNABLE TO SPEND AS MUCH AS BUDGETED Macau Business
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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