Trade Update: Covering Hong Kong

Conclusion: We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.


Earlier this afternoon, Keith covered our short position in Hong Kong equities in our Virtual Portfolio for a decent gain vs. our cost basis. We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.


As mentioned in prior notes, we specifically like Hong Kong on the short side (relative to other alternatives) because of the following domestic factors/catalysts: 

  1. Pronounced domestic stagflation will continue to compress corporate earnings growth over the intermediate term;
  2. An inflecting property market will weigh on credit quality across the banking sector; and
  3. Slowing global growth will weigh on Hong Kong economic growth, which is among the world’s top two trade-oriented economies.  

Trade Update: Covering Hong Kong - 2


Trade Update: Covering Hong Kong - 3


Trade Update: Covering Hong Kong - 4


We’ve been bearish on Hong Kong equities in print since May 24th and, since then, that research/risk management has produced a substantial amount of alpha (Hang Seng Index down -19.7% vs. a median decline of only -10.5% across Asia’s other benchmark equity indices).


For those of you less familiar with our thoughts here, we encourage you to review our research on this idea and the associated thematic analyses: 

Lastly, our proprietary quantitative risk management levels are included in the chart below.


Darius Dale



Trade Update: Covering Hong Kong - 5

Shorting France (EWQ): Trade Update

Positions in Europe: Short France (EWQ)

Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio today with the etf broken on its immediate term TRADE and intermediate term TREND lines (see chart below). 


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


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. Moody’s put France’s credit rating on watch back in October; last night La Tribune rumored that within 10 days Moody’s will place France's AAA rating as “negative outlook”; today Moody’s said it may cut EU subordinated bank debt (including a review of SocGen); and in late November Fitch Ratings warned that France’s AAA credit rating would be at risk if the crisis intensifies.


The likelihood of a rating cut comes as no great surprise to us. 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 22%, behind Germany at 29%.


Shorting France (EWQ): Trade Update - 2. efsf


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, and we expect growth to come in below estimates.


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. 


Matthew Hedrick

Senior Analyst

India: Shift in FDI Policy Opens Doors to Retailers


Conclusion: India is easing its policy on foreign retailers. Not huge now, but  10-years ago, no one cared about China. Those successful there today are the ones who invested when no one cared.



India is easing its policy on foreign direct investment (FDI) – a positive shift for global retailers.


For those of you who are tired of talking about Black Friday, Cyber Monday, etc., here’s a big picture point to chew on…


The Indian government has agreed to allow 51% FDI in multi-brand retail and 100% FDI in mono-brand retail in an effort to help buoy the currency. This effectively opens the door to one of Retail’s most attractive international markets to (aspiring) global retailers.


Previously, multi-brand retailing was forbidden in India and the country restricted mono-branded retailers to 51% ownership requiring a local partner. The new shift in policy no longer blocks the likes of Wal-Mart, Carrefour, or Tesco from entering the market and enables mono-brand retailers to pursue more aggressive self-funded expansion plans (ie Nike, VFC, etc…).


As a point of reference, the Indian retail sector is currently worth approximately $450-$500Bn in USD, but has been growing at a HSD-LDD digit rate over the last few years One recent study called for the market to double by 2015.


Sounds like a lot, but keep in mind that India’s per capita GDP stands at US$1,477, while China currently sits at about $4,393. So perhaps not a stretch. No, India is not China, and vice/versa. There are distinct geopgaphical, cultural and idealogical differences that make them both distinct.


Also, keep in mind that with just ~6% of India’s retail distribution organized (i.e. not via stalls, etc.), it will take years for investment from global players – especially multi-brand retailers – to establish adequate supply chains to make meaningful progress so we need to be mindful of near-term expectations.


But 10-years ago, no one cared about China. It was not every other word out of a CEO’s mouth because the core markets are too mature to grow. The companies that are successful there today are the ones who invested when no one cared.


While India accounts for roughly 1% of the global luxury market compared to China at closer to 10%, the opportunity for global retailers is clearly evident. Several companies like VFC, SHOO, and others have already established a foothold with local partners. For a company like VFC, which has clearly outlined its plan to grow sales in India from ~$50mm in 2010 to over $200mm by 2015 accounting for a mere 20bps of growth annually, this announcement could accelerate efforts in the region. Either way, we expect India to quickly become part of the expansion dialog among retailers – particularly with the reality of slowing growth across much of Europe and China.


India: Shift in FDI Policy Opens Doors to Retailers - India China GDP per capita


India: Shift in FDI Policy Opens Doors to Retailers - India China GDP



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.






Beef Prices


An article on today discusses the higher beef prices that the restaurant industry can expect in 2012.  We have been writing about this for some time.  Production and supplies are set to be down in 2012 with demand from emerging markets likely increasing.


THE HBM: SBUX, CAKE, DIN - beef 1129



Notes from CEO Keith McCullough


Fun and games with month-end markups on no volume. Beware of the US economic data Wednesday-Friday. Expectations are too high.

  1. INDIA – stocks decided a 1-day rally to a lower-high was enough. Inflation isn’t going away on EUR/USD up days because Oil prices aren’t going down (Brent $110/barrel last), and Indian stocks don’t like sticky stagflation – down -1% overnight, taking the Sensex to 16,002 (down -22% for 2011 YTD).
  2. ITALY - On its shortest duration (the 2014 bonds) Italy Sells another €3.5B at 7.89%; a few months ago 6% was the "critical" line, then 7%, now I guess its 8%? C’mon. Let’s get as serious as Spread Risk is telling you to be here – Italian stocks are barely up this morning – and more importantly, down -37% since FEB (crashing) – no support for the MIB Index to 13,422
  3. EURO – another day, another hope that a USD selloff and a Euro rally is real. Unfortunately, the math is getting in the way of that; EUR/USD has an important short-term line of resistance that it’s been fighting for 48 hrs at 1.34; ultimately, the bigger lines that matter are TRADE and TAIL resistance of 1.36 and 1.40, respectively.


If you want to get bulled up on something into the start of the new month, go with US Dollar (UUP) or Long-Bond (TLT) on red today.







The ICSC chain store sales index posted its largest weekly gain since April, up 1.7%.  It appears that sales the weekly sales trends benefitted from additional store hours as many chain stores opened earlier; many stores opened late Thanksgiving evening.  The implication is these sales were borrowed from sales in the coming weeks.  According to ICSC, the strength came in the face of much warmer than normal weather, which should be a drag on sales of seasonal apparel.  Year-over-year growth jumped to 4%, the strongest since late July.


As the Hedgeye Energy Team noted today – “AAA reported yesterday that the average US price of regular unleaded gasoline dipped below $3.30/gal for the first time since Feb 2011 (Libyan crisis).  Weak demand has expressed itself in the gasoline market, not in the oil market.  Our read is that the relative strength in WTI is due to the unwind of the bottleneck at Cushing; and the relative strength in the Brent market is because of Egypt/Iran/Israel geopolitical risk.”


While lower gas prices might be helping to keep consumer spending growth at a modest pace the strong Black Friday sales trends suggests that consumers remain very price sensitive, which not a good sign for the balance of the Holiday season.





THE HBM: SBUX, CAKE, DIN - subsector fbr





SBUX: The Starbucks mobile payment app is set to launch on January 5th, 2012. 





CAKE: Cheesecake Factory initiated “New Overweight” at Stephens, with a PT of $34.


DIN: Dine Equity was initiated “New Equalweight” at Stephens, with a PT of $50.



THE HBM: SBUX, CAKE, DIN - stocks 1129



Howard Penney

Managing Director


Rory Green




Free Lunches

“The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”

-Frédéric Bastiat


In Frédéric Bastiat’s 1950 essay, “That Which Is Seen and That Which Is Unseen”, he describes the impact of opportunity costs on economic activity.   In his essay, a small boy breaks a window in a store.  The glazier comes to repair the window and is paid six francs for the job.  Some observers would suggest this is a positive economic event as it increases the money circulating in the community.


There is, of course, no free lunch.  In the case of Bastiat’s essay, the unintended consequence is that the store owner with the broken window must pay for the repair of the window.  In using six francs to pay for the repair of the window, the shopkeeper no longer has six francs to expand his inventory, advertise for the shop, or purchase personal goods.  In effect, the transaction has two sides and it is not even certain to be a zero sum transaction, especially if the glazier does not spend his incremental six francs within the local community.


In modern economic theory, the key current debate relates to the role of the government in transactions.  The Allowance Rebate System (more commonly known as Cash for Clunkers) program is a prime example of this dilemma.   Under this program, car buyers were incentivized to purchase new cars by being given a $4,500 rebate for their old cars, which then had to be scrapped.  Practically, this was a transfer of money from tax payers to car buyers.  In the short term, new car sales skyrocketed. Meanwhile, older vehicles, which admittedly produced more pollution, were taken out of the national car population.


Akin to Bastiat’s essay, the question in the case of Cash for Clunkers Car is whether destroying an otherwise productive asset, such as a working car, actually benefits the economy.   In looking at some key results of Cash for Clunkers, the implication is at best inconclusive.  Specifically,

  • The program led to market share gains for Japanese and Korean car manufacturers at the expense of U.S. manufacturers. (Incidentally, the equivalent Japanese program did not include U.S. produced cars.);
  • A study by the University of Delaware concluded that for each vehicle trade, the net cost was $2,000, with total costs exceeding benefits by $1.4 billion; and
  • A study by economists Atif Mian and Amir Sufi indicated that the 360,000 additional purchases in July and August 2009 were pull forwards that were completely reversed by March 2010.

So, once again, no free lunch.


On the back of rumors of an IMF bailout of Italy, global equity markets rallied in a big way yesterday.  Not surprisingly, the Italian equity market was one of the global leaders yesterday up an impressive +4.6%.  While we would suggest this was more of a short squeeze than anything, there is perhaps a fundamental case to be made if the IMF rumors finally come to fruition . . . or is there?


Our trusty research intern Josefine Allain pulled together some detail around the rumored IMF plan.  According to the rumors, the IMF would provide €400-€600B to Italy at a rate of 4-5%, which would allow Italy up to 18-months to implement reforms without having to refinance. 


Setting aside the fact that the IMF denied it is in discussions with Italy, the plan has two main issues.  First, the IMF only has $285 billion currently available.  Second, an expansion of the IMF, or an explicit Italian bailout fund, would require a substantial contribution from the United States (likely more than $100 billion).  Clearly, given the current political environment in D.C. and on the back of another tacit U.S. debt downgrade this morning from Fitch, the likelihood of the United States stepping up to bailout out Italy is slim to none, absent a global financial crisis.


Indeed, European credit markets continue to signal that no free lunch from either the ECB or IMF is imminent.  Specifically, the Italians “successfully” sold €7.5 billion of bonds this morning versus a maximum target of €8.0 billion.  The 3-year yield was 7.89% versus 4.93% on October 28thand the 10-year average yield was 7.56% versus 6.06% on October 28th.  Success is a relative term.


In the Chart of the Day today, we’ve highlighted the Euribor-OIS 3-month spread, which measures the spread between what banks charge each other for an overnight loan of their excess reserves versus what they could earn by lending it risk free to the central bank.  The key take away is simply that risk, not surprisingly, has accelerated dramatically in the last three months in the European banking system.   In early July this spread was less than 0.20 and it is now at 0.94.  No free lunch there, to be sure.


This afternoon Keith and I are going to take a much needed break from the grind and go across the street to play a quick game of hockey at Yale’s Ingalls Rink.   Ironically, it will cost us $10 each, so there isn’t even free lunch time hockey.

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Free Lunches - Chart of the Day


Free Lunches - Virtual Portfolio

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