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There are signs that WMS may be pulling forward earnings.

WMS will report earnings next week and while we don’t think the bottom line number will be as awful as recent quarters, quality should be low.  More importantly, beyond the quarter, we see cracks in the health of WMS’s underlying business.  It seems like WMS is continuing to pull earnings forward - never a good sign.  Some warning signs are:

  • WMS is booking Revel units in the December quarter – the only supplier to do so.  It seems strange to rush this booking since no cash will be received for several quarters, if not longer.
  • WMS is the only “Big 5” supplier to sell units to Maryland Live rather than lease them, thus boosting near-term profits at the expense of a long-term, steady cash flow stream
  • If our estimates are correct, WMS will be the only supplier to post a YoY decline in replacements
  • WMS was the only supplier to take a material charge in Mexico.  Either WMS was operating in some grey areas or everyone else’s accounting is that much more aggressive.

Turning to the December quarter, this quarter may mark the 5th straight quarter that WMS misses Street expectations.  Our best guess is that WMS reports $0.28, falling 2 cents short of consensus, although it’s possible they make the quarter through the cost side. 


FQ2 2012 Projections:

$103MM of product sales at a 51% margin

  • 5.3k new unit sales with 3.2k from NA
    • 680 new units and 2,500 replacements
    • WMS shipped just over 300 units to Revel in the December quarter. We believe that it may be the only large manufacturer recognizing revenue from Revel in that quarter. We’re pretty sure that WMS will also be booking receivables rather than collecting cash for their placement (as are all the other manufacturers shipping to cash poor Revel).  The only other opening/expansion of any size is the Northern Edge Navajo Casino in AZ.  WMS booked shipments to both Kansas facilities and Miami Jai Lai last quarter.
    • While replacements will be up sequentially, we’re pretty confident that they will be down YoY
  • ASP of $16.1k, down 3% YoY and QoQ.  With higher pricing than the other products, the xD platform contributed 32% of sales in the September quarter.
  • $17.5MM of other product sales
    • Conversion kit sales will be down materially QoQ as September was an ‘unusual’ quarter for WMS.  We assume that WMS sells 2,500 kits
    • WMS also noted that used game sales have plateaued.  We assume that 2k used games were sold in December – but at more ‘normal’ prices then what was realized in the September Q.
  • Despite realized cost reductions in the production of BB2 and xD cabinets, margins should be roughly flat sequentially.  September benefited from an outsized number of conversion kits sales which have over 90% margins.

Projecting $68MM of gaming operations revenue at a 79% gross margin:

  • We expect a small decline in the install base (45 units) and slightly lower yields due to seasonality

Other stuff:

  • R&D: $26MM
  • SG&A: $35MM
  • D&A: $23MM
  • Interest and other income: $2MM
  • Tax rate: 35.5%


No change to January projection


Average daily table revenue (ADTR) dropped from HK$782m per day in the first 8 days of January to HK$546m this past week.  However, volumes typically fall off dramatically prior to the Chinese New Year (CNY) celebration.  While the second week of January’s ADTR only increased 3% this year versus last year, ADTR was an estimated 30% higher than the corresponding lead-in week to CNY last year.  Our HK$23-24 billion (+32-40% YoY growth) January forecast remains unchanged.




Market shares were relatively consistent with last year with the exception of a shift of about 200bps back to SJM from LVS.



Resenting Success

This note was originally published at 8am on January 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"America should be lifted up by our desire to succeed, not dragged down by the resentment of our success."

-Mitt Romney


In what I thought was the most progressive Strong Dollar, Strong America speech I’ve heard in the last 3 years last night, Mitt Romney hammered that Red, White, and Blue point home like maybe only Obama could. Strong.


Romney was alluding to crushing the “Most Popular” (most read) story on Bloomberg yesterday titled “Gingrich Attack Film Shows Romney As Ruthless Rich.” I don’t know one person (whose financial industry expertise I respect) who considered that Bain commercial anything short of a Michael Moore production. Apparently the State that says “Live Free, Or Die” agrees.


To be clear, I’m not a Republican or a Democrat. I simply want to get this country’s economics right. Clinton should have provided as much inspiration to President Obama to balance a budget as Reagan may have inspired Romney’s great hair. When it comes to the economic policy in America, Keynesian Academic Dogma failed both Bush and Obama. It’s time for change.


Can Obama be the change that Ron Paul is with the Youth/Change Vote in this country? Yes He Can. Will he? I have no idea. He’s certainly not going to get any non-groupthink ideas on economics from Tim Geithner. As of this Romney win in New Hampshire last night, this ½ Clinton ½ Reagan race to the US Presidency is officially on.


Back to the Global Macro Grind


Game on. I love this. I really do. I’m going to light up our 11AM EST conference call line like a Christmas tree this morning as Big Alberta and I officially roll out our Q1 Global Macro Themes for 2012.


Our clients already know what our Q1 Themes are, but if you’re new to this Canadian-American tire pumping game, here they are:


1.       Strong Dollar = Strong Consumption

2.       Deflating The Inflation, Part Deux

3.       Growth Slowing’s Bottom


Yesterday’s breakout in US Equities confirmed a lot of what we have been signaling for the last 3-4 weeks. We’ll go through this in depth (45 slides) on our call this morning, but the data doesn’t lie – perma-bulls forced to perma-change their bullish theses do. A Sustainably Strong and Stable US Dollar provides a coincident benefit to Employment, Confidence and Consumption.


That’s the fundamental research view – our quantitative risk management view supports this fundamental shift:

  1. SP500 closing above its October 29th, 2011 closing high of 1285 yesterday (1292 close) puts 1363 in play
  2. US Equity Volatility (VIX) is already down -11.6% for 2012 YTD (bearish TRADE and TREND)
  3. US Equity Volume studies are starting to change (up +31% day/day on yesterday’s up move, down on down moves)

Backcheck, Forecheck, Paycheck – that’s a PRICE, VOLATILITY, and VOLUME win in my model – and my model has not changed.


People who didn’t see our team make the shift from bearish to bullish on US Equities in early 2009 are still insecurely scrambling to put me on their Top 10 People Not To Listen To List of 2012 (some journalist from the Old Wall yesterday at Marketwatch). Why? They want to (or should I say need to) put me in the perma-bear box in which they need to think.


Thinking inside of a box is no way to live. Being perma bullish or bearish doesn’t work. What works is having a repeatable process that allows you to make money in both up and down markets.


What would make me go back to bearish on US Equities?

  1. President Obama not engaging in the ½ Clinton ½ Reagan strategy and imposing more of what didn’t work in 2011
  2. Ben Bernanke implementing a QE3, stoking inflation
  3. Geithner convincing his cronies of some socialized “mega refi” idea for US Housing (blowing up the MBS market)

Our desire to succeed in this country is based on having prior successes. If you’ve won a few games in your life, but have not yet won a Championship, you’re not thinking about the standard of success I am. America has an opportunity to be great again.


My economic strategy message should resonate as much with Democrats as it does Republicans. Both the US Currency and Equity markets are getting fired up about change in this country. That’s what real winners in real-life do. They don’t Resent Success.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1596-1655, $111.91-116.01, $1.26-1.29, $80.55-81.53, 2239-2297, and 1273-1298, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Week Ahead

The Economic Data calendar for the week of the 16th of January through the 20th 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. calendar

The Week Ahead - 2. calendar

Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message

No Current Positions in Europe


European capital markets and the EUR-USD turned sharply this morning on rumors that Standard & Poor’s would downgrade numerous Eurozone countries today, including France.  We authored a note on 10/18/11 titled “France is Going to Get Downgraded”, so today’s action by S&P to cut France’s AAA sovereign credit rating one notch to AA+ didn’t come as a huge surprise, and was well anticipated by the market over the last weeks. S&P stated, "we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013."


However, as Moody’s and Fitch join the downgrading club, Eurocrats will have to answer to the AAA-rating of the EFSF, a facility built on the collateral of its largest contributors, Germany and France, at 27% and 20%, respectively. This portends that yields should rise on EFSF bond issuance going forward, which of course runs squarely counter to the purpose of this funding facility issuing “cheap” debt to ailing sovereigns. In essence, the EFSF should be downgraded to AA as well. The French Finance Minister said today’s downgrade is not a catastrophe, yet stated plainly, downgrades will increase the debt servicing costs which will put pressure on already bloated deficit and debt levels of France, and many European sovereigns like them. France in particular is running against a 90% debt to GDP ratio. Further, expect France’s downgrade to increase the already loud calls that the size and strength of the EFSF is insufficient to handle sovereign and banking bailout needs.


Announced today at 4:30pm EST, S&P placed the ratings on all but 2 of the 16 Eurozone sovereigns of negative and all 16 have been removed from creditwatch.


Summary of downgrades:

Austria to AA+/Negative from AAA/Watch Negative

Cyprus to BB+/Negative from BBB/Watch Negative (now junk)

France to AA+/Negative from AAA/Watch Negative

Italy to BBB+/Negative from A/Watch Negative

Malta to A-/Negative from A/Watch Negative

Portugal to BB/Negative from BBB-/Watch Negative (now junk)

Slovak Republic to A/Stable from A+/Watch Negative

Slovenia Republic to A+/Negative from AA-/Watch Negative

Spain to A-/Negative from AA/Watch Negative


Summary of affirmations:

Belgium AA/Negative

Estonia Republic AA-/Negative

Finland AAA/Negative

Germany AAA/Stable

Ireland BBB+/Negative

Luxembourg AAA/Negative

Netherlands AAA/Negative 



Asset Class Performance:

  • Equities: European indices had a mixed week largely within a tight +/- range. Top performers: Hungary 7.7%; Italy 2.5%; Cyprus 2.2%; Spain 1.9%; France 1.9%. Bottom performers: Portugal -2.1%; Slovakia -1.0%; Ukraine -1.0%; Netherlands -0.6%; Greece -0.4%
  • FX: The EUR/USD -0.27% week-over-week. Divergences: PLN/EUR +1.9%, Hungarian Forint/EUR +1.31%%, Iceland Krona /EUR -0.72%
  • Fixed Income: 10YR sovereign yields broadly decreased w/w, led by Greece -107bps to 34.36%; Portugal -90bps to 12.46%; Italy -50bps to 6.64%; Spain -47bps to 5.22%. In context, Italy’s 10YR was as high as 7.14% (on 1/10) this week. 

Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. yields



Contextualizing Europe’s Standing:

What’s additive to this week’s discussion of Europe is Draghi’s positioning of the LTRO as a facility that’s helping banks buy time to improve their liquidity standing and his optimism that the credit markets are beginning to loosen on the margin. To the latter point and the naysayers, it’s suggested that the funds borrowed from the LTRO at 1.00% are simply being deposited at the ECB’s overnight facility at 0.25%, indicative of the defensive outlook of banks [to actually take a 75bps hit on the spread] and therefore the continuation of a frozen credit market. Draghi, however, stressed in the press conference following Thursday’s decision to leave main rates unchanged that the banks participating in the LTRO were not [all] the same banks that are re-depositing with the overnight facility. (For more on Draghi’s positioning see our note on 1/12 titled “ECB Press Conference Notes: Draghi Stands Strong Behind LTRO”). And in so many words he concluded that we’re beginning to see the initial signs of credit flowing. 


The key risks for European markets, however, remain in two channels: the banks and sovereigns. In the Q&A of the ECB’s press conference, Draghi made some important comments on both fronts. While the ECB is not the sole leader in sorting out Europe’s fiscal imbalances (we’d argue that German Chancellor Merkel plays one of the key roles), the ability of the ECB to take leverage/debt on its balance sheet is of critical concern, and again Draghi reiterated that the EFSF is its own independent facility. In essence, the ECB will not contribute to the facility in any form, or directly aid sovereign or banks, outside of its “temporary” SMP facility to buy secondary sovereign bond issuance. [Since May 2010, the SMP has purchased 213B EUR].

While sovereigns may have some relief from the SMP program, there’s no facility to directly aid/address Europe’s banks. A good preview of potential dark clouds for banks that need to raise capital is Italy’s Unicredit. Its equity shares fell -36% last week after the bank announced a €7.5B rights offer on January 4th, equating to a market cap drop of €8B, as new equity shares were deeply discounted. Along these lines, we want to highlight that Commerzbank has a January 20thdeadline to present a credible plan to fill €5.3B capital gap. For anyone who says that risk is fully priced in on European bank stocks, we’d reference Unicredit.


As we look out over the next weeks, we think the yield and demand of new sovereign debt issuance will continue to be held under a spotlight and markets will run off headline risk. Markets may well find comfort in the LTRO to provide the needed liquidity to banks, which has been reflected in decreases in the Euribor-OIS spread over the last 10 days. While the LTRO may prevent insolvency issues in the near term by boosting liquidity, it may only mask the issues, and surely does not offer insurance that equity holders don’t get wiped in the process. Between now and the mid-year, which is the deadline for banks to meet the 9% Tier 1 capital ratio, we may see dark clouds for banks that need to raise capital. From a policy perspective, it appears Draghi may well hold interest rates unchanged until at least March to gauge the progress of the LTRO program, and the second instalment on 2/29.



Call Outs:

  • Overnight deposits at the ECB continue to make higher highs (€489.9 billion).
  • Fitch says that 60% PSI won’t lead to sharp reduction of debt burden. Talks resume next week.
  • Germany to lower GDP outlook to 0.75% from 1.0% for 2012, according to Handelsblatt.
  • Commerzbank says it does not need more government money and will present its capital plan next Friday.
  • Italy sold €4.75B of debt today (€3B of 2014 bonds with an average yield of 4.83% vs 5.62% on Dec 29, but bid-to-cover was not good at 1.20 vs 1.36 prior). 
  • Switzerland - Thomas Jordan, 48, emerges as the frontrunner to replace Philipp Hildebrand at the SNB following a currency trading scandal with Hildebrand’s wife. Jordan must show that he can defend the 1.20 floor in the EUR-CHF, which intraday stood at 1.2081 CHF, or -0.6% w/w.


Germany (EWG) 

We’re getting more constructive on Germany on recent data, however are very aware that despite Germany’s strong fiscal position (budget deficit = 1% in 2011 vs -4.3% in 2010) and employment base (Unemployment Rate = 6.8%), the country’s capital markets are not immune to the region’s sovereign and banking contagion risk. After all, German equities were down last year -20% despite a similar strong fiscal and employment position.


The DAX, like the FTSE MIB, IBEX, and CAC, looks good from an immediate term TRADE perspective. We’d buy the DAX on a pullback.



Key Regional Data This Week:


Positives (+)

Eurozone Sentix Investor Confidence -21.1 JAN vs -24.0 DEC

Germany Exports 2.5% NOV M/M (exp. 0.5%) vs -2.9% OCT

Germany Trade Balance 16.2B EUR NOV (exp. 12B EUR) vs 11.5B EUR OCT

Germany Budget Deficit (as % GDP) for 2011 = -1% versus -4.3% in 2010

Russia Trade Balance $17.4B NOV vs $16.6B OCT

UK PPI Input 8.7% DEC Y/Y vs 13.6% NOV

UK PPI Output 4.8% DEC Y/Y vs 5.4% NOV


Negatives (-)

Russia CPI 6.1% DEC Y/Y vs 5.6% NOV

Greece Unemployment Rate 18.2% OCT vs 17.5%



Interest Rate Decisions:

(1/11) Poland Base Rate Announcement UNCH at 4.50% (expected UNCH)

(1/12) BoE UNCH at 0.50%; Asset Purchase Target UNCH at 275B GBP

(1/12) ECB UNCH at 1.00%



CDS Risk Monitor:

On a w/w basis, CDS was down across Europe, with a positive divergence from the periphery. Spain saw the largest decline at -40bps to 408bps; followed by Ireland -36bps to 675bps, and Portugal and Italy both down -25bps to 1088bps and 504bps, respectively. 


Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. cds a


Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. cds b




We’d short the cross at $1.28 for an immediate term TRADE. The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 



The European Week Ahead:


Monday:  Dec. Germany Whole Sale Price Index; Dec. UK Nationwide Consumer Confidence (Jan 16-20); Dec. Italy CPI – Final; Nov. Italy General Government Debt


Tuesday:  Jan. Eurozone ZEW Survey Economic Sentiment; Dec. Eurozone CPI; Dec. UK CPI and Retail Price Index


Wednesday:  Nov. Eurozone Construction Output; Dec. UK Jobless Claims Change and Claimant Count Rate; Nov. Italy Trade Balance and Current Account


Thursday:  Eurozone Publishes Monthly Report; Nov. Eurozone Current Account


Friday:  Germany Deadline for Commerzbank to Present Credible Plan to fill 5.3B EUR Capital Gap; Dec. Germany Producer Prices; Dec. UK Retail Sales; Nov. Italy Industrial Orders and Sales




Matthew Hedrick

Senior Analyst

Weekly Asia Risk Monitor: China’s Bottom Is Showing

Conclusion: As China draws closer to the end of a multi-year, structural deceleration in growth rates, credit conditions, which are a lagging indicator, are sending both bullish and bearish signals. Elsewhere within the region, growth continues to slow at a slower rate and inflation continues to trend down generally.


Positions in Asia: Long Chinese equities (CAF); Long Hong Kong equities (EWH); Short Indian equities (INP).



All % moves week-over-week unless otherwise specified.

  • EQUITIES Median: +1.8%; High: Vietnam +5.2%; Low: New Zealand -0.8%; Callout: Philippines and Indonesia up +13.4% and +10.4%, respectively over the LTM vs. regional median of -14.3%
  • FX (vs. USD) Median: +0.2%; High: Indian rupee +2.3%; Low: Thai baht -0.4%; Callout: Indian rupee +3.1% YTD vs. regional median of +0.3%
  • S/T SOVEREIGN DEBT (2yr yields) High: Philippines +7.9%/+21bps; Low: Hong Kong -18.4%/-8bps; Callout: Australia -25.5%/-114bps over the last six months
  • L/T SOVEREIGN DEBT (10yr yields) High: Singapore +3.2%/+5bps; Low: Japan -3.5%/-3bps
  • SOVEREIGN YIELD CURVE High: Hong Kong/Singapore +5bps; Low: Philippines -32bps
  • 5YR CDS Median: +0.3% High: Australia +4.2%/+3bps; Low: Japan -4.7%/-7bps; Callout: Japan +24.9%/+29bps over the last three months vs. regional median of -3.3%
  • 1YR O/S INTEREST RATE SWAPS Median: +0.7%; High: Indonesia +4.5%/+25bps; Low: Singapore -23.6%/-13bps; Callout: China -12.5%/-44bps over the last three months vs. regional median of -0.8%
  • O/N INTERBANK RATES Median: flat; High: China +16%/+64bps; Low: Hong Kong -33.6%/-5bps; Callout: China +57.1%/+169bps over the past month vs. a regional median of +0.0%
  • CORRELATION RISK Asian currencies continue to trade on inflation expectations, with the JPM Asia Dollar Index correlating +72% with the CRB Index on an immediate-term TRADE duration and +93% on a six-month basis. We are dovish on the slope of inflation throughout the region over the intermediate-term TREND and, thus, remain generally negative on Asian currencies vs. the USD as a result.

Full performance tables can be found at the conclusion of this note.



Chinese FX reserves are indicating a slight degree of capital outflow as dovish policy speculation is clouding the outlook for yuan appreciation.


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 1


Chinese inflation data still does not auger well for dovish policy at the current juncture, however:


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 2


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 3



Growth Slowing’s Bottom:

  • China: DEC economic data came in better than bad: New Loans accelerated to CNY640.5B MoM vs. CNY562.2B prior; M2 Money Supply growth accelerated to +13.6% YoY vs. +12.7% prior; Export growth slowed marginally to +13.4% YoY vs. +13.8% prior; Trade Balance growth accelerated to +$3.4B YoY vs. -$8.4B prior.
  • China: While the high-frequency growth data appears to be basing, economic concerns continue to weigh on Chinese credit markets. The corporate A/AAA spread widened to a record high of 517bps earlier this week, per Chinabond.
  • Japan: The DEC Economy Watchers Survey was better than bad. The “Outlook” Index ticked down slightly to 44.4 from 44.7 prior. The “Current” Index actually accelerated to 47 from 45 prior.
  • Taiwan: Export growth slowed in DEC to +0.6% YoY vs. +1.3% prior.
  • Indonesia: The Danareska Consumer Confidence Index ticked up in DEC to 91.6 vs. 91.4.

Deflating the Inflation II:

  • China: CPI and PPI slowed in DEC to +4.1% YoY (vs. +4.2% prior) and +1.7% (vs. +2.7% prior), respectively. The former series is at a 15-month low, but still 10bps above target.
  • South Korea: PPI slowed in DEC to +4.3% YoY vs. +5.1% prior. Import Prices also slowed in DEC to +7.1% YoY vs. +11.8% prior.

King Dollar:

  • China: The combination of an outlook for dovish policy, slower international trade, and USD appreciation (vs. EUR, GBP, etc.) has China’s FX reserves continuing to decline, falling -$20B to $3.18T in DEC. The implications of this slight degree of capital outflow – which Premier Jiabao is working to prevent – is that China requires less Treasury purchases to limit yuan appreciation.
  • India: Indian corporations have a record $11.4B in dollar-denominated debt due in 2012. The large sum has weighed on the INR/USD exchange rate (-13.6% over the last six months) and dollar-denominated debt yields, which are a mere -6bps off the highs established during the thralls of OCT (vs. -97bps for Chinese corporations).
  • India: The sovereign has $64.3B in rupee-dominated notes due in 2012 (vs. only $15.3B in 2013) – a sum that will likely necessitate another year of heavy issuance and may force the central bank (RBI) to continue with its QE program beyond current expectations in order to sustain liquidity in the banking system; that outcome is incrementally bearish for the rupee. On the flip side, rate cut speculation is spurring record international inflows into India’s fixed income markets (+$3.9B in DEC). Even domestic investors are spurning gold in favor of fixed income mutual funds; assets managed by fixed income funds increased +17% MoM in DEC vs. -4.3% for gold funds. Our models don’t point to much room for the RBI to ease meaningfully in the near term, but if the RBI satisfied market expectations, we would eventually expect to see incremental downside for the rupee.
  • Indonesia: Bank Indonesia held its benchmark interest rate at 6%, citing weakness in the rupiah as a threat to their inflation outlook (IDR/USD -3.5% over the last three months). One-year interest rate swaps widened +25bps wk/wk and are now only pricing in a -25bps cut over the NTM.
  • Philippines: Central bank governor Amando Tatangco said that he anticipates easing monetary poicy this quarter – particularly if conditions in Europe deteriorate: “Given benign inflation conditions and a favorable inflation outlook, we have room to support domestic activity should the global economy deteriorate significantly.” Two-year sovereign debt yields actually jumped +21bps wk/wk, suggesting to us that the market had been pricing in some degree of easing irrespective of Europe.


  • South Korea: The Bank of Korea held its benchmark interest rate flat at 3.25%, actually threatening to hike if “price gains become chronic”. Both our models (accelerating growth and inflation in 1H12) and Korea’s interest rate swaps (1yr tenor 20bps > than benchmark rate) market view this as a very credible threat.


  • China: The China Securities Regulatory Commission stated that it will encourage long-term investors (namely insurers and pension funds) to invest in the nation’s equities. Per Chairman Gou Shuqing, “China should make investments using the 2 trillion yuan in provincial pension funds assets and 2.1 trillion in household pension fund assets.” The free-float market cap of the Shanghai Composite Index is on 4.4 trillion yuan, so any success in convincing these entities to participate in equity investing (they currently do not to any meaningful degree) could be rather bullish for Chinese stocks.
  • China: The China Banking Regulatory Commission has banned banks from transferring commercial bill assets to trusts – a common practice used to circumvent capital requirements and extend more credit. The move had a profound effect on interbank liquidity in China, with overnight Shibor increasing +116bps day/day! This move will weigh on Chinese credit growth on the margin.
  • China/Japan: Chinese officials sent Treasury Secretary Tim Geithner to Japan empty handed, as he failed to convince the Chinese to cut back on Iranian crude oil imports. Japan did, however, agree to take steps to reduce Iranian imports. Iran is a key supplier of crude to both countries.
  • Japan: Bank of Japan Governor had some fairly hawkish commentary earlier in the week: “There are limits to what monetary policy can achieve and governments must implement necessary reforms to aid the global economy. Providing liquidity as a lender of last resort is, in essence, a policy to buy time. It is essential that the necessary structural reforms take place while time is being bought, as the time that we can buy becomes progressively more expensive.” While being careful not to read too much into these words (i.e. no rate hike anytime soon), they do suggest to us that the central bank of Japan, which has been the poster child for failed Keynesian policy, is nearing the end of the rope in this regard. Shirakawa’s explicit call for Japanese fiscal policymakers to back away from their own brand of Keynesianism is a noteworthy change on the margin.
  • India: The ability of Indian companies to return capital to shareholders will be severely challenged in 2012, as they face a record $5.3B in convertible bonds due this year. Average corporate dollar-denominated debt yields are just -6bps off the high of 6.99% reached in OCT, suggesting it will be costly to refinance. The SENSEX’s -15.8% LTM drop heightens equity dilution risk as well, should corporations ultimately turn to conversion.
  • Taiwan: Tomorrow, Taiwan will host its presidential election. The market is pricing in a victory for progressive, pro-Chinese relations incumbent Ma Ying-jeou of the Koumintang Party, as the EWT put/call ratio has risen to 3.4x – just off four-year highs last reached two months prior to his first term. He is challenged by the Democratic Progressive Party’s Tsai Ing-wen and the Koumintang Party’s James Soong. Ing-wen is opposed to closer ties with the mainland and Chinese officials have stated publically that relations would suffer if Tsai wins.

Darius Dale

Senior Analyst


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 4


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 5


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 6


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 7


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 8


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 9


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 10


Weekly Asia Risk Monitor: China’s Bottom Is Showing - 11


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 80.48%
  • SHORT SIGNALS 78.35%