Demographic Reckoning

“Demography is destiny.”

-Auguste Comte


This Friday we are hosting a conference call for our macro subscribers on Japan titled, “Japan’s Debt, Deficit and Demographic Reckoning”.  (If you aren’t a macro subscriber and want to get access to the presentation, email  for subscription details.)  During the presentation, we will spend a fair amount of time framing up the economic history of Japan starting with the American occupation post World War II.  When contemplating economic history, I’m often reminded of George Santayana’s quote:


“Those who cannot learn from history are doomed to repeat it.”

Certainly, history provides a critical frame of reference for Japan.  In particular, the last twenty years of economic history in Japan, which witnessed a massive build up in Japanese sovereign debt (currently 220% debt to EBITDA) and stagnating economic growth (just +8.5% nominal growth over the last 20 years), have set the table for Japan’s future.  But as my colleagues (hat tip to Darius Dale and Josefine Allain) and I have been grinding through this 80+ page presentation, the idea that Demography is Destiny truly represents the next chapter for Japan.


Currently, according to estimates from the CIA fact book, 23% of the Japanese population is over 65 years old.  This compares to only 13% in the United States and approximately 8% for the rest of the world.  As one of the world’s oldest countries, the burdens of supporting this aging population are seen directly in the Japanese federal budget.  In the 2012 Japanese federal budget, social security spending will be just over 29% of the entire budget.  This compares to 17% of the federal budget in 1990.


Due to a low fertility rate, the Japanese death rate currently exceeds the Japanese birth rate.  In the absence of meaningful immigration, this implies that the Japanese population is in decline.  As I outline in the Chart of the Day, based on the Japanese government’s own projections, their population will decline by more than 25% by 2050.  In conjunction with said declines, the Japanese population is aging and by 2050 more than 40% of the population will be over 65. (And to think at 38 I thought I was getting old!) The demographic future of Japan will only accelerate social security entitlement spending. 


The other concern with an aging population is growth.  Robert Arnot and Denis Chaves recently wrote a paper for the Financial Analysts Journal called, “Demographic Changes, Financial Markets, and the Economy”, in which they attempt to quantify the relationship between demographics, growth and capital market returns based on 60 years of data.  They conclude that:


“ . . . senior citizens contribute to neither GDP growth nor stock and bond market returns; they divest to buy goods that they no longer produce.”

Based on their projections, the aging population will negatively impact Japanese growth over the next decade by ~-5% in aggregate. 


In theory an aging Japanese population, even if a major headwind for growth, could be overcome by the appropriate mechanisms and policy.  Unfortunately, after more than twenty years of deficit spending, Japan’s proverbial hands are increasingly tied by debt.  Specifically, Japan has massive non-negotiable financial burdens due to the second largest component in the proposed 2012 Japanese budget being debt service.


Servicing and interest on sovereign debt outstanding are projected to total 24% of Japan’s federal budget in 2012.  This line item has almost doubled since fiscal 1980, when it was at 13%.  I may not have a PHD in economics, but even I can tell you that if 1/4thof the Japanese federal budget is going towards debt service that spending is not generating an incremental return, either in the way of GDP growth or a higher standard of living, for Japanese society.


In a scenario analysis, we used a more normalized interest rate of 5.5%, which last occurred back in 1995, and applied that interest rate to the current debt servicing burden.  At this interest rate level, the Japanese debt servicing burden would be 100% of the current federal budget.  Clearly, increasing interest rates would squeeze out the government’s ability to more proactively invest in the nation and/or support rising social security expenditures.


To be sure, we are not projecting an imminent Japanese default, but in the short term with Japanese maturities accelerating in 2012, and specifically in March, there is increased concern as to Japan’s creditworthiness.  Based on the scenario I described above, the longer term question is whether Japan will be able to fund its future.  For the last twenty years, this funding has been enabled by a combination of high savings rates (both corporate and individual) and a current account surplus. Currently, we are seeing negative inflection points in both areas.


Ultimately, as Shakespeare wrote, “What is past is prologue”, and as it relates to Japan the past is indeed written.  Increasingly, Japan’s future is also already largely written by her Demographic Destiny.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), USD/JPY, and the SP500 are $1, $122.01-126.19, $79.71-80.98, and 1, respectively.


Keep your head up and your aging stick on the ice,


Daryl G. Jones

Director of Research


Demographic Reckoning - Chart of the Day


Demographic Reckoning - Virtual Portfolio

Wobbly Understanding

This note was originally published at 8am on February 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Even sophisticated researchers have poor intuitions and a wobbly understanding of sampling effects.”

-Daniel Kahneman


That quote comes from Chapter 10 of “Thinking, Fast and Slow” where Kahneman discusses both the Law of Small Numbers and what he calls a Bias of Confidence Over Doubt. After a day like yesterday, I had to re-read that.


Reading and re-reading my notes is what I do. I don’t read books without marking them up. I haven’t gone a market day in almost 13 years where I didn’t systematically take notes by hand on market prices. It’s not perfect. But I have yet to find a better learning process.


Re-think, Re-build, Re-learn. It’s not only my advice for the political leaders of this country, it’s the advice that I rinse and repeat with my team each and every risk management day. If you’re not finding a better way, you’re falling behind.


Back to the Global Macro Grind


I was almost certain that the SP500 was going to finally snap my immediate-term TRADE support line of 1345 yesterday. It did, but it didn’t close there. Closing prices matter more in my model than intraday ones.


Math matters. So do emotions. If you can find a way to harness both, you’ll probably make less mistakes than I did earlier in my career.


Dan Kahneman and his former thought partner, the late Amos Tversky, came up with what they contextualized as “strongly worded” advice for researchers like us. They suggested we consider our “statistical intuitions with proper suspicion and replace impression formation by computation whenever possible.” (Thinking, Fast and Slow, page 113)


Re-read that. It’s really good.


I can’t count the amount of investment research meetings that I have been in over the course of my career where someone just goes off with their qualitative observations. It’s probably endemic to the industry I follow most closely (Global Consumer), but I still don’t get how a billionaire can sit across the table from me talking about the deal he got on a fire-pit at Costco.


Over the years, after making plenty of qualitative assumptions that turned into quantified P&L mistakes, I’ve tried to cleanse myself with the “proper suspicion” of pretty much everything I think. My risk management governor is a repeatable quantitative overlay that captures real-time price, volume, and volatility signals.


No matter what we think we know, the market often has a not so funny way of thinking otherwise.


Obviously if you change the duration embedded in that thought, you come up with price disconnects that you, the great researcher, can capitalize on. But if your process aspires to be Duration Agnostic (measuring risk across different durations, all at the same time), you’ll see that you probably don’t know what you don’t know about a lot of things. That’s why I usually defer to last price.


Let’s isolate the SP500 and consider it across our 3 core durations (TRADE, TREND, and TAIL):

  1. Immediate-term TRADE support = 1345 and resistance = 1360 (we call this our immediate-term range)
  2. Intermediate-term TREND resistance = 1363 (April 2011’s closing high)
  3. Long-term TAIL support = 1267

Now if you are day trader or Warren Buffett, you could very well read into my risk management conclusions in completely different ways. If you are not Duration Agnostic, you probably should. Unfortunately, the market doesn’t care about our individual investment styles.


What happens when you overlay a fundamental Global Macro Research View

  1. US, European, and Japanese fiscal and monetary policies drive currencies
  2. Currencies drive immediate-term correlations in market inflations/deflations
  3. Inflations/Deflations drive real (inflation adjusted) Consumption Growth (71% of US GDP)



What if you have to think, fast – and slow, about all 3 durations (TRADE, TREND, and TAIL) and all 3 fundamental factors (Policy, Inflation, and Growth) – all at the same time?


I call that being Multi-Factor, Multi-Duration. I also call that Wall St 2.0.


Embracing Uncertainty and accepting that (unless we are trading on inside information) we all have a Wobbly Understanding about what is going to happen to our positioning next is what gets me right fired-up every morning. It’s my opportunity to improve the process.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Nikkei225, and the SP500 are now $1709-1757, $116.35-119.95, $1.30-1.33, 78.86-79.79, 8952-9397, and 1345-1360, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wobbly Understanding - Chart of the Day


Wobbly Understanding - Virtual Portfolio

CRI: Validating Print

Monster quarter relative to expectations. Nothing to make it shortable today, except sky-high valuation. But today’s earnings validated high pe. We think there will be a day of reckoning w/earnings as price compression looms.


This CRI quarter is a monster relative to expectations. It is still not one of the elusive few that actually beat and did not post a decline in EBIT yy, but impressive nonetheless for the following reasons.

  1. The top line accelerated across the board. Guidance of 15-17% (which we didn’t think was a slam dunk) ended up coming in +22.5%. This includes about 7% from Bonnie Togss, which was acquired two quarters ago, but that was already in our estimates. There was no single piece of business that drove the results. All divisions accelerated sequentially.
  2. Notably, the company did this while clearing out inventory, as the sales/inventory spread is at the best level in 6-quarters, and is looking at its best trajectory in about 3-years.
  3. One thing to keep in mind is that in addition to 7% growth from Bonnie Togs, there was 7-8% growth from Carter’s own square footage growth vs last year. It’s currently sitting at 359 stores (ie, a lot), and the company plans to go upwards of 600. The caveat is that they’re gonna build what they’re gonna build. But in order to get to the consensus estimates (which are presumably headed higher today) we need to assume that they return to the 18-19% operating margin level they saw as a smaller growth company over the past decade. We don’t think that’s doable on a meaningfully higher store base where they step on wholesale partner’s toes.
  4. We think that people are not getting the competitive dynamics out there. They’re saying that ‘retail is so important now, so I’m not as concerned about wholesale overlap at JCP, KSS, etc…’
  5. That’s borderline wreckless… Selling channels are product-agnostic. Ultimately, if the product at your own store looks too similar to what is at Wal-Mart, WMT will boot you. (HBI is evidence of that). All wholesale channels will squeeze CRI this year, and while their guidance represents costs easing – it does not represent pricing pressure from irrational competition and supply chain partners.
  6. Case in point… Can anyone find me an apparel company that is not banking on a 2H margin recovery? There’s not enough for everyone to go around, unless the consumer is willing to allow retail to print higher margins. If we (consumers) do, then it will be a first. This should be a key theme this year.


Think about some potential outcomes as things heat up out there.

  1. Carter’s signs a deal with JC Penney to occupy one of the 100 shops. But in doing so, it upsets KSS (who it already had accounting issues with) Macy’s (who already has a beef with JCP over Martha Stewart), and probably even Wal-Mart and Target. That JCP deal better have some extremely good economics.
  2. If there’s no deal at JCP, then CRI gets booted from JC Penney.  That’s not good, either.


The first one would be a disaster – a la Macy’s/JCP/LIZ in 2007. But neither help CRI.


Net/net, this is an extremely expensive stock that will stay expensive until there’s a catalyst to take it down. Obviously, it wasn’t 4Q earnings, and it wasn’t 2012 guidance. The company even gave themselves wiggle room with 1Q – so expectations are low there. Being short this name will likely continue to be an uphill battle – until it’s not. We think that will be the impact of price compression starting in mid-2Q, when operational leverage swings the other way for CRI. Our 2H estimates are likely to remain well below the Street. Wait this one out and revisit (along with us) in the coming months.


Brian P. McGough
Managing Director

CRI: Validating Print - CRI SIGMA


CRI: Validating Print - CRI Sentiment

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TODAY’S S&P 500 SET-UP – February 29, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.81% downside to 1361 and 0.28% upside to 1376. 












  • VOLUME: NYSE 754.69 (3.04%)
  • VIX:  17.96 -1.26% YTD PERFORMANCE: -23.25%
  • SPX PUT/CALL RATIO: 1.33 from 2.36 (-43.64%)


MONTH-END – with an oversupply in the asset management industry we continue to see the last 6 days of the month, trade significantly higher than the 1st 6 days of the new month – this was the case on the way down (May-Sep 2011) inasmuch as it is on the way up. The SP500 has been up for 4 consecutive days, so they may as well make it 5 into month-end and get it over with. AAPL is only up +17.5% for the month. Probably doesn’t impact the indices, right?


US DOLLAR – the next move here will be as critical as the down move has been since Bernanke signaled his Policy To Inflate on January 25th. Don’t forget that the USD is down -4.3% from its YTD high (that’s a lot) and that has had a huge impact on inflation expectations (TIP, GLD, OIL, etc). As we push past the LTRO (530B this morn) and into the March sovereign debt maturity spike in Japan (53T Yen), the USD should start trading on fresh factoring. 

  • TED SPREAD: 39.09
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 1.93 from 1.94
  • YIELD CURVE: 1.65 from 1.65 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Apps, week of Feb. 24, (prior -4.5%)
  • 8:30am: 4Q GDP (second revision), est. 2.8% (prior 2.8%)
  • 8:30am: Personal Consumption (second revision), est. 2.0% (prior 2.0%)
  • 9:30am: Fed’s Fisher speaks on U.S. economy in Mexico City
  • 9:45am: Chicago Purchasing Managers, Feb., est. 61.0 from 60.2
  • 10:00am: NAPM-Milwaukee, Feb., est. 58.8 (prior 58.4)
  • 10:00am: Fed’s Bernanke delivers semi-annual monetary policy report in Washington
  • 10:30am: DOE inventories
  • 1:00pm: Fed’s Plosser speaks on economy in New York
  • 2:00pm: Beige Book 


  • President Obama hosts dinner for armed forces personnel in Operation Iraqi Freedom and Operation   New Dawn
  • 8am: Transportation Secretary LaHood speaks at high speed rail summit in D.C.
  • House, Senate in session:
    • 10am: House Transportation panel hearing on cruise ship safety and lessons from the Costa Concordia accident
    • 10am: House Agriculture holds hearing on CFTC agenda
    • 10am: House Ways and Means hearing on Obama trade policy 


  • Fed Chairman Bernanke gives testimony on monetary policy, U.S. economy; watch comments on labor mkt, any indication of QE3, 10am
  • Romney wins Michigan narrowly, triumphs easily in Arizona; Republican primary now moves to 12 states in March
  • ECB lends banks EU529.5b for 3 yrs; est. EU470b. Total number of bidders: 800
  • Apple says giving Proview iPad brand would hurt consumers
  • Apple is poised to break $500b market cap; will hold March 7 event to unveil new iPad
  • Rule that may require all cars, light trucks sold in the U.S. to have rear-view cameras won’t be issued until the end of the year: U.S. regulators
  • Goldman Sachs, Wells Fargo, JPMorgan Chase are among banks that may face civil claims tied to sales of mortgage-backed securities.
  • NY Comptroller Thomas P. DiNapoli to discuss Wall Street bonus figures at 8:30am on MSNBC
  • Beige book released at 2pm; watch for comments on labor market
  • India GDP grows the least since 2009, adding rate-cut pressure
  • Japan, S. Korea report larger-than-forecast industrial production
  • Standard Chartered profit climbs to record for eighth year 


  • Joy Global (JOY) 6:00am, $1.36
  • Staples (SPLS) 6:00am, $0.41
  • Carter’s (CRI) 6:30am, $0.44
  • Starwood Property Trust (STWD) 6:30am, $0.44
  • ITT (ITT) 7:00am, $0.35
  • Hospitality Properties Trust (HPT) 7:01am, $0.79
  • Liz Claiborne (LIZ) 7:27am, $0.14
  • Accretive Health (AH) 7:30am, $0.16
  • CenterPoint Energy (CNP) 8:02am, $0.19
  • Fannie Mae (FNMA) 8:30am, NA
  • Sotheby’s (BID) 4:00pm, $1.25
  • Edison International (EIX) 4:00pm, $0.46
  • Finisar (FNSR) 4:00pm, $0.23
  • MBIA (MBI) 4:00pm
  • PetSmart (PETM) 4:02pm, $0.90
  • Babcock & Wilcox (BWC) 4:05pm, $0.41
  • McDermott International (MDR) 4:06pm, $0.19
  • Greif (GEF) 4:07pm, $0.58
  • Darling International (DAR) 4:30pm, $0.33 


OIL – 2 down days does not even a hyper short-term TRADE make. Both Brent and WTI have corrected to their most immediate-term TRADE lines of support ($122.01 and $105.46, respectively) and bounced. Bernanke’s semi-annual USD Debauchery speech is today, so that should be interesting to watch in real time vs TIP, GLD, OIL, etc. Inflation from here is not growth. Déjà vu Q1 2011. 

  • Jewelers Want Platinum for Asians After Gold Vaults: Commodities
  • Americans Pay More as Sanctions Lift Iran Profit: Energy Markets
  • Oil Set for Best Month Since October on Recovery Signs, Iran
  • Soybeans Set for Best Monthly Gain in a Year on Parched Crops
  • Iran to Take Gold Payments From Trade Partners, Agency Says
  • Natural Gas Near Bottom, Avoid Short Bets, Morgan Stanley Says
  • Gold May Gain for a Second Day on ECB Lending; Platinum Climbs
  • Aluminum Fee to Japan Gains for First Time in Three Quarters
  • Asia Faces Sugar Deficit as Demand Increases, McNeill Says
  • Corn Shipments From India to Miss Forecast on Pests, Rupee
  • Oil Surge to Record Endangers Europe’s Growth Dash: Euro Credit
  • Lumber May Extend Rally as China, U.S. Demand Gain, Ekstrom Says
  • Robusta Coffee Rises as Traders Bet on Higher Price; Sugar Falls
  • Oil Surge Endangers Europe’s Growth Dash
  • Copper Rises, Heads for Back-to-Back Monthly Gains on Stockpiles
  • Iraq Plans to Cut Daily Kirkuk Crude Oil Exports by 5% in March
  • Palm Oil Has Best Monthly Gain Since 2010 as Supplies Decline 






















The Hedgeye Macro Team




  • SJM Cotai proposal: at "advanced stage"; expects govt decision soon



  • Recurring/special dividend:
    • 72% earnings paid out as dividends. Regular dividend will continue to be 50% of earnings and anything more will be classified as special dividend
  • Casino Lisboa/ Oceanus:
    • Increased return per table on Oceanus (target was 20%, actual return was 27% in 2011)
  • QoQ VIP table decline: from 613 tables to 595 tables
    • Nothing to worry about, may go up in Q1 2012
  • Grand Lisboa: 2.44% hold in Q4, compared with 2.53% hold in Q3
  • Old Lisboa margins are benefited from the move of certain VIP business to Grand Lisboa
  • Grand Lisboa Mass market
    • Expanding mass sq ft in 2012 at expense of slot machines; may also move mass tables from other properties
    • Still growing on par with market
  • SCC commission competition:
    • No pressure on commissions; will use credit rather than elevated commissions
  • Grand Lisboa Rolling Chip is very good in February
  • Grand Lisboa VIP renovation: may increase 40 VIP tables (August/September/October 2012);
  • Moving VIP tables from self-promoted casinos to Grand Lisboa?
    • No, right now different table revenue performance thresholds at different properties but performance is holding up
  • Grand Lisboa/Oceanus: VIP business very sticky; very comfortable with VIP at Grand Lisboa
  • Cotai Mass business impact on Grand Lisboa?
    • Does not affect revenue stream
  • 3rd party operations: sees no signs of risk of slowdown



  • The Board recommends final ordinary dividend of HK43 cents per share and special dividend of HK22 cents per share for 2011 year. It is subject to approval at the forthcoming annual general meeting of the Company to be held on Thursday, 10 May 2012.
  • 2011 Gaming revenue: HK$75.514 BN (+32% YoY)
  • 2011 Adjusted Company EBITDA: HK$6,923MM (+42.5% YoY)
    •  Casino Grand Lisboa property EBITDA: HK$3,756MM; property EBITDA margin: 27.2% (US GAAP)
  • 2011 SJM market share: 29%
  • Grand Lisboa occupancy rate increased 14.7% to 92.6%; ADR increased 5.3% to HK$2,055
  • Cash: HK$20.7BN
  • Besides growth of gaming revenue, other factors that contributed to higher Adjusted EBITDA in the
    year were improved operating results at Ponte 16 and Grand Lisboa Hotel.
  • VIP
    • As at 31 December 2011, SJM had 609 VIP gaming tables in operation with 32 VIP promoters, as compared with 507 VIP gaming tables and 33 VIP promoters as at 31 December 2010. As at 31 December 2011, SJM operated VIP gaming in 14 of its casinos.
    • The hold rate for SJM’s VIP operations decreased slightly in 2011 to 2.88% from 2.91% in 2010.
  • MASS
    • SJM had 1,166 mass market gaming tables in operation as at 31 December 2011, as compared with 1,183 mass market gaming tables as at 31 December 2010.
    • Increased mass market table gaming revenue of 24.1% resulted from increased visitation to Macau
      from the Mainland and the Asian region as well as increased spending per visitor.
    • SJM had 3,910 slot machines in service as at 31 December 2011 as compared with 4,147 slot machines as at 31 December 2010.
  • During 2011, Casino Grand Lisboa attracted a total of 12,238,494 visitors, an average of 33,530 visitors per day. To continue attracting gaming patrons, Casino Grand Lisboa frequently launches special promotions, such as “Spin2Win”, “Spot the Jackpot”, “Royal Cards” and “Heir to the Throne.” Jackpots are paid frequently, with the total exceeding $267 million for slot machines and over $84 million for table games (Caribbean Stud Poker) in 2011. During the year, the number of active members of the Casino Grand Lisboa loyalty card programme increased by over 83,000 to 394,393.
  • In October 2011 new VIP gaming capacity was added on the second floor of Grand Lisboa with 12 tables. In the fi rst half of 2012 additional capacity for VIP gaming will be added on the 31st floor of the building.
  • In October 2011 SJM completed enclosing and air-conditioning the walkway from the Macau Maritime Terminal to Casino Oceanus. Promotions such as “Scratch and Win” are held regularly and a number of special activities took place in November at the time of the Macau Grand Prix, of which SJM was the sole offi cial sponsor. In the second quarter of 2012 the Oceanus Club is scheduled to open on the third fl oor where Oceanus membership card holders can relax and enjoy various club facilities. Also in 2012 the casino plans to open its third dining facility, a deluxe Cantonese restaurant located on the second floor.

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