Shorting Italy: Trade Update

Positions in Europe: Short Italy (EWI); Short France (EWQ); Long German Bonds (BUNL)

This afternoon Keith shorted Italy in the Hedgeye Virtual Portfolio with the etf EWI broken on its immediate term TRADE and intermediate term TREND levels (see chart below). Our thesis on Italy remains intact: the country’s public debt overhang will continue to compromise growth and reduce tax receipts. PM Mario Monti has followed through on a sizable austerity package and recently has been a strong voice for the camp that suggests Europe needs a Growth Pact (beyond fiscal consolidation) as it attempts to alleviate its sovereign debt and banking imbalances.


Shorting Italy: Trade Update - 11. italia


To date there’s been no mention of a public works projects, but we wouldn’t rule one out over the next months given the likelihood of politicians to cave in the face of riots and strikes against austerity. To this end, just this weekend European Economic and Monetary Affairs Commissioner Olli Rehn called for additional government spending on large-scale infrastructure projects, arguing there was insufficient demand in the private sector to create jobs.


Italian fundamentals continue to look extremely challenged: PMI Services declined substantially month-over-month to 42.3 in APR vs 44.3 in MAR and Manufacturing rolled heavily to 43.8 in APR vs 47.9 in MAR, and both have been under the 50 line (representing contraction) since JUN 2011. And we’ve seen similar downward trends across consumer and business confidence surveys. Less current but important indicators like the unemployment rate and inflation rate have remained sticky and high over recent months, currently at 9.8% and 3.8%, respectively.


We see Italy, much like Spain (EWP) and France (EWQ), as a potential short on equity market strength as there exists underlying imbalances (like high debt, deficits, and unemployment rates; banking leverage to housing and property prices that have further room to fall; and potential for further credit ratings downgrades and the inability to raise debt at manageable yields) that are not all priced in and may drag growth lower than forecast.


Matthew Hedrick

Senior Analyst

A Refreshed Look Upon Our Best Ideas Across Asia & Latin America

Open Virtual Portfolio Positions in the Regions: Long Chinese equities (CAF); Long Brazilian equities (EWZ).


Sometimes lost in our daily Global Macro research grind is a clear and comprehensive view of our highest-conviction longer-term (i.e. TREND and TAIL duration) ideas across a particular region or space. This is both intentional and unintentional to some degree. The former because we believe in keeping our content as topical as possible (i.e. not spamming you with stuff you may already be aware of); the latter because we prefer to focus on new idea generation, rather than cheerleading or dwelling on calls. Every position we’ve ever taken – fundamental or risk managed (there’s a huge difference) – is #TimeStamped on our website for all to see.


With that context, we thought we’d take a moment to briefly update you on our best fundamental ideas out of Asia and Latin America. For the sake of brevity, we are purposefully being succinct here – please feel free to reply with any follow-up questions and/or requests for any of the research notes listed below.



Chinese equities (CAF) – While admittedly boring, we continue view China as the safest place to be in the EM space over the intermediate term. Contrary to consensus storytelling about supply and demand for raw materials, we view incremental Deflating of the Inflation as supportive of the Chinese economy, as it will allow the PBOC, State Council and China Securities Regulatory Commission to continue to implement “fine tuning”, which are pro-growth (i.e. pro-liquidity; pro-investment) measures designed to buoy, but not dramatically stimulate, Chinese economic growth – which our models point to a critical inflection point here in 2Q12. 

  • History – With a few tweaks here and there as price and expectations have changed, this is essentially the same thesis we’ve had since initially being bullish (and wrong) on Chinese stocks in APR ’11. We were then off of that train by the end of SEP ’11 and subsequently back on again at the end of DEC ’11.
  • Recent Relevant Research – 9/28/11: Goodbye China; 12/30/11: Sneaking One Past the Goalie – CAF Trade Update; 1/17/12: China, 2/21/12: China Lowers RRRs – Now What?; With Context; 3/9/12: Triangulating Asia – Divergence In Monetary Policy: Decidedly Dovish Camp; 4/10/12: China Is Boring


Brazilian equities (EWZ) – In short, we view Brazil as the country in the EM space with the most probable upside from an economic growth perspective over the intermediate term. That, in conjunction with the potential erosion of what has been a dramatic idiosyncratic headwind on the FX front with a marginally-hawkish shift to neutral out of the central bank, mean reversion upside risk and increasingly bearish sentiment (“Unfortunately the future looks less bright [in Brazil] than before.” – European Trade Commissioner Karel De Gucht on MAY 7), make Brazil a contrarian way to play the other side of our Deflating the Inflation thesis – Reflating the Growth. Still, the Bovepsa is a market that is exposed to energy and basic materials names, so timing will be ultra-critical here. Thankfully, Brazil has developed a tendency to cyclically trough well ahead of other global equity markets (OCT ’08, MAY ’10 and early AUG ’11). While we anticipate that the worst is in the rear view mirror, an accelerated resolve out of Brazilian policymakers to weaken the BRL and/or deter foreign investment will promptly get us to change our positioning here. 

  • History –  After leading the bear debate on Brazil from NOV ’10 through AUG ’11, we’ve been fundamentally in support of Brazilian equities on the long side since SEP ’11.
  • Recent Relevant Research – 9/1/11: Eye On Brazilian Policy – “Oh No You Didn’t”; 12/2/11: Weekly Latin America Risk Monitor – All Eyes On Brazil; 1/23/12: Weekly Latin America Risk Monitor – All Eyes On Brazil Part II + A King Dollar Update; 2/23/12: Triangulating Latin America – Does the Rally In Brazilian Equities Have Legs?; 3/26/12: Hedging the Inflation Trade – EWZ & EWA Combo Trade Update; 5/3/12: What the Heck Is Going On In Brazil?


Filipino equities (EPHE) – The Philippines continues to be this boring little country in SE Asia just humming along from an economic perspective (both growth and inflation are trending in the right direction). Additionally, monetary and fiscal policy have been and look to remain supportive of economic growth, but not so much so that its currency – the Philippine peso – has or should materially suffer (vs. the USD, relative to other EM currencies) over the intermediate term. “Sober” and “well-managed” are two phrases that immediately come to mind regarding the Philippines. 

  • History –  We’ve been bullish on Filipino equities since AUG ’11, with no deviation from this view.
  • Recent Relevant Research – We don’t publish frequently on the Philippines, as it is too small for many of our clients to care on. That said, however, for those of you looking to get up to speed on the fundamental background behind our thesis, refer tour 8/31/11 not titled, “Philippines – One of the Better Stories in Global Macro”.



Japanese yen (FXY) – In the context of what we view as heightened sovereign debt event risk (VAT hike discussions; potential ratings downgrades), we think the Bank of Japan will grow increasingly resolute in pursuing its 1% inflation target over the long term – especially as key monetary policy board seats are turned over. While an increasingly politicized expansion of the BOJ balance sheet is highly likely over the long-term TAIL, we are cognizant of the near-term risks to being short the yen vs. the USD – a cross that has historically been driven by S/T interest rate spreads that look to continue narrowing (in the yen’s favor) over the intermediate term

  • History – We were fundamentally bullish on the Japanese yen in MAY ’11 through the end of SEP ’11 (though occasionally shorting it in our VP to get ahead of proactively predictable interventions). Since then, we've been fundamental yen-bears – a thesis best highlighted by our MAR ’12 seminal piece: Japan’s Debt, Deficit and Demographic Reckoning.
  • Recent Relevant Research – 5/16/11: Time To Press? – Revisiting Japan From a Secular Perspective; 8/24/11: Change A’Cometh In Japan; 8/30/11: Noda Wins! Bullish On Japan?; 3/2/12: Japan’s Debt, Deficit and Demographic Reckoning; 3/6/12: Shorting the Pursuit of Inflation – FXY Trade Update; 4/3/12: Digging Deeper Into Japanese Sovereign Debt Risk; 4/11/12: Will Pressure Bust Pipes In Japan?; 4/26/12: Ichiro’s Coming Out Of Left Field


Aussie dollar (FXA) – The Australian dollar continues to be a currency with an awful lot of mean reversion risk to the downside over the long-term TAIL, as it remains the poster child for Bernanke’s Bubbles in the FX space (up over +35% vs. the USD since Bernanke took office as the Federal Reserve Chairman and up nearly +70% from its 2008 low). Continued Deflating of the Inflation and a secular shift in the Chinese growth model will likely erode Australia’s already-poor current account dynamics and domestic employment situation. This and an increasingly subdued outlook for the Australian property market should force Aussie interest rates lower over the long term. One very key positive here is Australia’s pristine fiscal position and the country’s parliamentary resolve to return the country to a budget surplus in the next fiscal year. 

  • History –  We’ve been fundamentally bearish on the Aussie dollar and trading it with a bearish bias since APR ’11, with a brief inflection from JAN 25, 2012 through mid-MAR in an attempt to take advantage of the Bernank’s Policy To Inflate on the long side of this commodity currency.
  • Recent Relevant Research – 4/6/11: Aussie Dollar – Getting Long in the Tooth?; 5/19/11: Aussie Dollar – Dancing ‘til the Music Stops; 10/11/11: Shorting the Aussie Dollar; 12/13/11: Shorting the Aussie Dollar – Trade Update; 3/9/12: Triangulating Asia – Divergence In Monetary Policy: Decidedly Dovish Camp


Indian equities/rupee/rupee-denominated debt (IFN, INP, ICN) – India remains a country that can’t seem to get out of its own way from a monetary, fiscal and regulatory policy standpoint. An increasingly questionable long-term growth outlook and persistently elevated rates of inflation form a colorful backdrop for consistent “misses” relative to the country’s budget deficit, growth and inflation targets. India remains dramatically short of both capital and crude oil – having to import both in size at steep costs to the economy. As detailed in our recent work, India’s latest budget fiasco has set the country up for a repeat of our 2010-11 Nasty Trifecta thesis. 

  • History – We’ve been bearish on Indian equities since early NOV ’10 and the country’s L/C bond and currency markets since MAY ’11.
  • Recent Relevant Research – 11/9/10: India’s Two Big Problems; 1/6/11: India’s Two-Factor Squeeze; 1/26/11: Top Emerging Market Short Ideas – Indian Equities; 2/28/11: India – Missing Where It Matters Most; 5/3/11: India’s Nasty Trifecta; 10/21/11: Weekly Asia Risk Monitor – Global Bankruptcy Cycle?; 11/28/11: Weekly Asia Risk Monitor – The Many Faces Of King Dollar; 1/20/12: Weekly Asia Risk Monitor – Stress-Testing Asian Risk; 1/9/12: Awful Fundamentals – Out Updated Thoughts On India and Shorting INP Trade Update; 2/17/12: Triangulating Asia – Is It Time for India To Take a Breather?; 3/5/12: Triangulating Asia – Policy Ping Pong Sets Indian Equities Up For a Sustainable Breakout or Breakdown; 3/30/12: India Strikes Out Again; 4/17/11: Is India Out of Bullets?


Argentinean equities/peso (ARGT) – Argentina remains one of the few countries in the reasonably investable universe of emerging markets that has been consistently mismanaged to a greater degree than India. A breakneck trend of oft-maligned schemes of financial repression have temporarily disguised the underlying current of capital flight out of the Argentinean economy. Heighted default risk has been appropriately priced into both the CDS and cash markets for Argentine sovereign debt, as a continued unwind of Bernanke’s Bubbles will threaten the country’s solvency over the long-term TAIL. 

  • History –  We’ve been bearish on Argentine equities and the peso since early NOV ’10, with no deviation from this view.
  • Recent Relevant Research – 11/4/10: Is Argentina Signaling a Cyclical Peak In Emerging Market Asset Values?; 8/22/11: Weekly Latin America Risk Monitor; 8/29/11: Weekly Latin America Risk Monitor; 9/26/11: Weekly Latin America Risk Monitor; 11/3/11: Weekly Latin America Risk Monitor; 11/14/11: Weekly Latin America Risk Monitor – Credit Markets Get It/Equity Markets Do Not; 1/10/12: Weekly Latin America Risk Monitor – Argentina’s Making Noise; 3/7/12: Triangulating Latin America – Default Or Hyperinflation: Argentina’s Tough Choice; 4/18/12: Argentina, Imploding


Have a great week,


Darius Dale

Senior Analyst


In a reversal of recent disappointments, we’re expecting a big beat from Genting Singapore this quarter.  Unfortunately, high hold may have lent a helping hand this quarter.



Our call for a big quarter is largely predicted on our proprietary analysis of Singapore betting tax data.  According to the January and February data, 1Q12 GGR should contribute to an all-record number, with QoQ growth of at least 10% or S$2.1BN.  MBS reported GGR of S$1.1BN, implying that RWS produced about S$1.0BN compared to S$903MM in 4Q11.   RWS’s 4Q benefited from a huge hold rate as did MBS’s 1Q12.  We think Genting’s 1Q12 numbers were also the beneficiary of lady luck.


We estimate that Genting Singapore’s RWS will report property level net revenue and EBITDA of S$843MM and adjusted EBITDA of S$445MM, 9% and 21% ahead of consensus, respectively.  




RWS did S$406MM of EBITDA last quarter on S$782MM of revenues which benefited from a huge hold rate.  If our GGR estimate is in the ballpark, we believe that the incremental S$100MM of GGR should easily produce an extra S$39MM of EBITDA, even if fixed expenses creep up QoQ.

  • Gaming revenue, net of commissions of S$698M
    • Gross VIP revenue of S$541MM and net revenue of $313MM
      • We expect RC volume to increase sequentially to S$15.5BN, but still be 18% below a record number produced in 1Q11
      • Hold of 3.5%
      • Rebate of 1.33%
    • Gross Mass table of S$286MM and S$236MM net of gaming points
      • Gaming points equal to 3.75% of drop or S$50MM
    • S$178MM of slot and EGT win
      • The incremental slots/EGT expansion was installed the second week of January so the quarter should have benefited from healthy growth
  • Non-gaming revenue of S$145MM
    • Hotel room revenue of S$38MM
      • Hotel revenues should see a sequential lift with the added capacity of the Equarius rooms
    • S$25MM of F&B and other revenue
    • USS revenue of S$82MM
  • Gaming taxes of S$91MM
  • Implied fixed costs of S$195MM compared to S$185MM/Q in 2H11

Early Look

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European Banking Monitor: France CDS Rise On Election Results

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* French Bank Swaps tightened slightly WoW going into Sunday's French presidential election, which saw Francois Hollande, the socialist party candidate, win the presidency. French sovereign swaps widened by 3% this morning compared to last Friday, highlighting an increased risk of default stemming from Hollande's likely rejection of certain austerity policies. 


* Spanish Bank CDS tightened over the week while Spanish sovereign CDS widened.


If you’d like to discuss the implications of election results across Europe please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 29 of the 39 reference entities. The average tightening was 3.9% while the median tightening was 3.3%. 


European Banking Monitor: France CDS Rise On Election Results - 1. banks


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps this morning over last Monday to 38 bps.  We have noted previously that the correlation between Euribor-OIS and other risk measures (such as bank CDS or even bank stock prices) was very tight in the fall, but has disintegrated since mid-March.  Thus, at the moment, we are not focused on Euribor-OIS as a key risk indicator. 


European Banking Monitor: France CDS Rise On Election Results - 11. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  The latest overnight reading is €801.49B.


European Banking Monitor: France CDS Rise On Election Results - 111. ecb


Security Market Program – For an eighth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/4, to take the total program to €214 Billion.


European Banking Monitor: France CDS Rise On Election Results - 11. smp


Our May forecast is HK$27-29 billion, +14-23% YoY growth



No big surprise out of Macau for the first week of May.  On the surface, HK$975m in average daily table revenue (ADTR) would appear strong when compared to April’s HK$775m.  However, Sands Cotai Central was not open for a third of April and Golden Week was the first week of May.  Our forecast for May GGR (including slots) is HK$27-29 billion which would represent YoY growth of 14-23%.  May could end up being the slowest growth month of the year thus far.




Not surprisingly, hold has impacted the first week.  We are hearing that MGM and especially WYNN held low in the first week.  Sands China market share still looks weak to us after a hold impacted April.  While share is up to 19.0% from the 3 month trend of 17.3%, SCC did add over 4% to Macau table supply.  Galaxy continues to defy expectations with another week of strong share while MPEL looks like they are holding their own.  One potential trend we will be watching is the migration of play from the peninsula to Cotai.  Even though that appears to be happening since the opening of SCC, it is too early to make that definitive claim.




The Macau Metro Monitor, May 7, 2012





According to preliminary Singapore Tourism Board (STB) statistics, the six-day Singapore Airshow in February helped to push hotel room rates to $302.90 in Singapore, a four-year high.  This is the highest since September 2008's $302.90 when the inaugural Singapore Grand Prix Formula One race was held.  The average occupancy rate was 89%.