Market Hangovers

“You come home, and you party. But after that, you get a hangover. Everything about that is negative.”
-Mike Tyson


Yesterday Keith, myself, and our head of consulting, Michael Lintell, had a meeting with one of our long term subscribers in our New Haven office.  Not only does this client have a great long term track record in their respective market (which happens to be Europe), but they are massively outperforming this year as well.  I won’t get into the intricacies of our discussion, but at the end of the meeting we all collectively agreed that this is not the type of market that you want to trade with a hangover.


For those that have never had a hangover before, Wikipedia defines a hangover as follows:


“A hangover is the experience of various unpleasant physiological effects following heavy consumption of alcoholic beverages. The most commonly reported characteristics of a hangover include headache, nausea, sensitivity to light and noise, lethargy, dysphoria, diarrhea, and thirst, typically after the intoxicating effect of the alcohol begins to wear off. While a hangover can be experienced at any time, generally speaking a hangover is experienced the morning after a night of heavy drinking. In addition to the physical symptoms, a hangover may also induce psychological symptoms including heightened feelings of depression and anxiety." 


Arguably the way the market is trading currently, with the SP500 down 5.7% for month to date, it is creating feelings of depression and anxiety in many stock market operators.  In effect, a market hangover over that is akin to taking down too many Jägerbombs the night before (for you old timers a Jägerbomb involves dropping a shot of Jägermeister into a glass of Red Bull and then chugging it).


The last five days of trading are prime examples as to why you need all of your wits about you.  Yes, some investors with true long term duration don’t have to adjust exposures and worry about monthly or quarterly performance, but the reality is that most of us do have to worry about short term performance.  In a market like this, the only way to really capture marginal performance, especially when correlations are heightened, is to “buy ‘em” when other people are selling and “sell ‘em” when other people are buying.


In the Chart of the Day, we emphasize the volatility of the last week.  The SP500 started the period at 1,328 then traded down to 1,295 then ripped up to 1,331 and then dropped back to 1,300.  Much like a hangover, that kind of short term volatility can be nauseating.  We actually look at it in a positive light and use it as an opportunity to adjust exposures accordingly, and gain performance edge.  While everyone’s strategy is unique, email our head of consulting at if you want some help developing a more proactive risk management strategy for your portfolio.


Obviously the key driver of recent volatility in equities is Europe.  This morning we are getting more of the same.  On one hand European equities are at the highs of the day and respecting yesterday’s late day rip in U.S. equities.  On the other hand, there remains little chance of resolution to the sovereign debt mess in Europe, especially given the shifting politics.


Currently, the positive sentiment is centered on increased chances of Euro-area deposit insurances and the growing likelihood of Eurobonds that were supposedly discussed at yesterday’s summit.  In reality, though, no new progress was made and the next summit is not until June 28th.  Frankly, European Central Bank President Mario Draghi probably summarized it best yesterday when he said:


“Euro bonds make sense when you have a fiscal union, otherwise they don't make sense. They are the first step towards a fiscal union.”


We have said it many times, a monetary union is no union at all without a strong political and fiscal union.  Until that occurs, the Euro is doomed to fail.


The one global macro market that is slowly shifting from being in hangover mode to recovery mode is natural gas.  In our best ideas call yesterday, we emphasized our shift from being long term natural gas bears to getting more constructive on natty. Some of the key reasons are as follows:


1.   Bottoms are processes, not points. And after a 3.5 year bear market in gas that saw the front-month NYMEX contract fall 80%, we think that bottoming process is in motion; front-month gas has bounced convincingly off the $2/Mcf level, gaining 30% in a month to trade over $2.60/Mcf, and has regained its TRADE and TREND lines on our quantitative model.


2.   Production growth is slowing, and will continue to slow. Gas production is already slowing on the margin: +4% YoY in early May versus +9% in 4Q11. We see that decline accelerating as oil prices move lower. Our research indicates that the average full-cycle cost to produce 1 Mcf of gas in North America is ~$5.50/Mcf ($2 cash cost and $3.50 PD FD&A cost), which suggests that producers in aggregate are well below breakeven.


3.   Demand from the power sector is surging and won’t stop. The U.S. power sector has responded to the low gas price by increasing consumption 44%, or 7.5 Bcf/d, YoY in the first week of May, taking market share away from coal, nuclear, and hydro in a short amount of time.


4.   The 2012 storage issue is priced-in. We will hit storage capacity this fall. That is probably the most consensus opinion on natural gas there is in the market right now. In fact, in an April 2012 survey of investors and industry professionals, 78% said that we will hit storage capacity this year.


5.   From a long-term perspective, sentiment is still bearish on natural gas. From 1995 – 2006, non-commercial traders (hedge funds, mutual funds, etc.) were net neutral on natural gas. Only since 2007 have non-commercial traders been heavily, consistently, and correctly short the commodity.


Just like real hangovers, most hung over markets will eventually recover.  We believe natural gas is one of those markets.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Market Hangovers - CotDay


Market Hangovers - VPP

American Pilots

This note was originally published at 8am on May 10, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“American and British pilots were forced to learn about this lethal athlete the hard way.”

-Ian Toll


Don’t blame the pilots. Blame the politicians. They were willfully blind to obvious risks and put our bravest in the sky anyway. That’s one of the key risk management and leadership lessons I learned from Ian Toll’s excellent new book about WWII, Pacific Crucible.


“The Mitsubishi A6M Zero was a dog-fighting champion, and aerial acrobat that out-turned, out-climbed, and out-maneuvered any fighter plane the Allies could send against it… The Zero had been placed in service in the summer of 1940, almost 18 months before Pearl Harbor… it was yet another example of the fatal hubris of the West in the face of plentiful evidence..” (pages 52-53)


I read about war because it educates me on winning and losing. Every decision counts. Decision processes matter. There has been “plentiful evidence” that the US Dollar has been driving The Correlation Risk in Global Macro markets since 2007-2008. There has also been an outright obfuscation of facts by Western Academics who have chosen to ignore it. It’s un-objective and un-American.


Back to the Global Macro Grind


The US Dollar is up for the 7thconsecutive day and US Stock Futures are indicated down for the 7thconsecutive day. There is absolutely zero irony in this causal relationship. Policy expectations drive currency prices.


In the absence of immediate-term expectations for an iQe4 upgrade of Gold and Oil price inflation from Ben Bernanke, the US Dollar has arrested its decline – and stocks and commodities have arrested their ascent.


Here’s a real-time update on the surreal Correlation Risk (inverse correlations between the USD and asset prices) developing:

  1. SP500 = -0.90
  2. Euro Stoxx = -0.92
  3. CRB Commodities Index = -0.94
  4. WTIC Oil = -0.89
  5. Gold = -0.89
  6. US Equity Volatility (VIX) = +0.93

Yes, you’ll notice that in the Romper Room that has become Keynesian Economic Policy outcomes, one of these things is not like the other – one of these things just doesn’t belong. It’s called volatility.


The US Federal Reserve has a 2-stroke mandate:

  1. Price “stability”
  2. Full Employment

We have neither. We have price volatility like the world has never seen. And we have forced American Pilots of other people’s hard earned moneys to chase their own tails of performance going after short-term and short-sighted Policies To Inflate.


As US Dollar Debauchery has only proven to Slow Global Economic Growth via accelerating short-term food and energy price inflations, now world markets have to deal with the other short-term side of the trade:

  1. Growth Slowing (until it slows at a slower rate)
  2. Deflating The Inflation (Bernanke’s Bubbles in Oil, Gold, etc. are popping)

When these 2 things are happening at the same time, you just cannot ignore the capital losses. They happen real fast.


That said, what’s been fascinating about this -4.6% draw-down in the SP500 from its April 2nd, 2012 top (capital loss from the Russell2000 March 26th, 2012 top = -6.9%) isn’t the absolute performance impact, but the Storytelling.


The Most Read (Bloomberg) headline this morning epitomizes the storytelling of the Old Wall: “Dow Falls For 6th Day In Longest Losing Streak Since August On Greece.


On Greece? C’mon. Americans in this profession are better than that.


You can look at real-time market signals (leading indicators) in 2-ways at this stage of the Fed Fight:

  1. What’s happened on the margin (draw-downs) from the YTD tops in February-April
  2. What’s happened YTD

The YTD thing is all about the Storytelling. Just don’t do it with my money. Last I checked, the SP500 is still down -13.5% from its willfully blind 2007 high and needs to be up almost +16% (from here) just to get The People and their 301ks back to break-even.


Everything that happens on the margin in markets matters most to the American and Global Macro Pilots who are trying to manage your money’s real-time risks. What happens on the margin is what drives fear and greed. It’s also what builds or destroys confidence.


If you don’t have planes or markets that the pilots can trust, you’re one step closer to losing whatever is left of the money they are willing to flow back to the politicized decision making process that’s driving markets.


Bottoms are processes, not points. We humbly suggest you fly these risky skies of Federal Reserve sponsored Price Volatility with the credible analytical sources out there who have actually landed the planes for the last 5 years.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1585-1640, $110.23-113.89, $79.42-80.28, $1.29-1.31, and 1346-1367, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


American Pilots - Chart of the Day


American Pilots - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 24, 2012

As we look at today’s set up for the S&P 500, the range is 33 points or -2.26% downside to 1289 and 0.24% upside to 1322. 












    • Up from the prior day’s trading of 104
  • VOLUME: on 5/23 NYSE 863.01
    • Increase versus prior day’s trading of 1.93%
  • VIX:  as of 5/23 was at 22.33
    • Decrease versus most recent day’s trading of -0.67%
    • Year-to-date decrease of -4.57%
  • SPX PUT/CALL RATIO: as of 05/23 closed at 1.83
    • Unchanged from the day prior 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.75
    • Increase from prior day’s trading at 1.73
  • YIELD CURVE: as of this morning 1.46
    • Up from prior day’s trading at 1.44 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Durable Goods Orders, Apr., est. 0.2% (prior -3.9% revised)
  • 8:30am: Cap Goods Orders Nondef Ex/Air, Apr., est. 0.8% (prior -0.8%)
  • 8:30am: Initial Jobless Claims, week of May 19, est. 370k (prior 370k)
  • 8:58am: Markit US PMI prelim., May
  • 9:45am: Bloomberg Consumer Comfort, week of May 20
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 10:30am: Fed’s Dudley to speak on regional economy in New York at Federal Reserve building
  • 11am: Kansas City Fed Manf. Activity, May, est. 5 (prior 3)
  • 11am: Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range
  • 1pm: Fed’s Dudley to speak at Council on Foreign Relations in New York
  • 1pm: U.S. to sell $29b 7-yr notes 


    • EPA holds all-day meetings in D.C., Chicago on proposed rule governing greenhouse gas emissions from power generation, 8am
    • Federal Deposit Insurance Corp. releases quarterly report on bank industry earnings, 10am
    • NOAA issues seasonal hurricane forecast, 11am
    • Senate in session, House not in session
    • Senate Banking holds hearing on legislation to help homeowners refinance mortgages, 10am
    • SEC holds closed meeting on enforcement matters, 2pm 


  • Hewlett-Packard rose after announced plans to cut 27k jobs, had 2Q profit, sales that beat ests.
  • Facebook IPO debacle triggers legal debate over disclosure
  • Morgan Stanley’s Gorman said to join Facebook call on price
  • J&J-Bayer’s Xarelto rejected by U.S. panel for broader heart use
  • Deutsche Telekom CEO says complete sale of T-Mobile USA unlikely
  • European services, manufacturing contracted more than forecast in May
  • China manufacturing shrank for a 7th month
  • U.K. economy shrinks more than est. on building slump
  • April durable goods orders may have gained 0.2% after falling 3.9% in March
  • International Grains Council issues global wheat, corn, rice production est., 9am
  • U.S. Climate Prediction Center issues its preseason Atlantic hurricane forecast
  • Europe chiefs clash on Euro bonds as crisis summit bogs down
  • German May business confidence fell more than forecast
  • AIG can’t pursue some Countrywide claims in $10b lawsuit
  • Goldman Sachs’s Trott tells jury Buffett deal was kept secret
  • Goldman Sachs AGM
  • Bank of America, MERS lose bid to dismiss Texas filing fee suit
  • Jury found Google didn’t infringe Oracle’s patents in developing Android software 


    • Royal Bank of Canada (RY CN) 6am, C$1.18
    • Flowers Foods (FLO) 6:30am, $0.28
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.77
    • Ship Finance International Ltd (SFL), $0.42
    • Tiffany & Co (TIF) 7am, $0.69
    • HJ Heinz Co (HNZ) 7am, $0.79
    • Patterson (PDCO) 7am, $0.57
    • Signet Jewelers Ltd (SIG) 7:30am, $0.91
    • Monro Muffler Brake (MNRO) 7:30am, $0.35
    • Toro Co (TTC) 8:30am, $2.13
    • VeriFone Systems (PAY) 4pm, $0.61 



COMMODITIES – interesting that the ISI’s of the world still aren’t talking about things like Commodities crashing as a bearish leading indicator for demand (CRB down -13.8% from Feb top, oversold here, but remains broken).











GERMANY – Germany’s PMI print for May was awful (45 vs 46.2 in April, which was also awful); the DAX would need to close above and hold 6383 to re-capture its 1st line of resistance; not happening despite the fresh wave of rumoring about whatever.





CHINA – China’s growth data is not yet slowing at a slower rate, and we think that’s why the Shanghai Comp snapped its TREND line of 2372 again in the last week (sold our long position on that); PMIs are made up, to a degree, but 48.7 for May is what it is, lower than April.










The Hedgeye Macro Team

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


CONCLUSION: The central bank’s upcoming monetary policy meeting is a major catalyst that will either serve to put a floor in the BRL in the near-term, or set the currency on a sustainable [and continued] path lower vs. the USD – an outcome that would likely continue to drag Brazilian equities down with it over the intermediate term.


VIRTUAL PORTFOLIO: We sold our long position in Brazilian equities on MAY 22.


In this business, which demands positive P&L on an increasingly high frequency basis, being early = being wrong. Regarding Brazil specifically, our Global Macro risk management task from here [as always] is making a call on what we see coming down the pike vs. expectations. Bearish TREND and now bearish TRADE, Brazil’s benchmark Bovespa Index is signaling to us that fundamentals for Brazilian asset prices (both domestic and international) are likely to deteriorate in the immediate-to-intermediate term.




As Keith highlighted in today’s Early Look, our proprietary three-factor (PRICE/VOLUME/VOLATILITY) quantitative model has proven to be far superior than traditional sell-side channel checks at signaling critical inflection points, as well as confirmation of many major trends across the global macro universe consisting of both single securities and broader asset classes. Currently, our model is confirming the “falling knife formation” in Brazilian equities, which forces us back to the drawing board on our once-bullish bottom-up view.


From an immediate-term perspective, the next major catalyst out of Brazil (aside from waking up to daily headlines from Finance Minster Guido Mantega), is the central bank’s upcoming monetary policy meeting (MAY 29-30). In short, we think there is a very, very dramatic need for them to put their foot down and stake their claim to sovereignty with regards to setting Brazilian monetary policy.


Regardless of whether or not there’s truth to the claim, many market participants are increasingly of the view that the central bank has become a mere extension of the central government and its drive to improve competitiveness via currency debasement and structurally lower the cost of capital throughout the Brazilian economy, which may require the central bank being significantly less vigilant in fighting inflation as it has been over the past ~10yrs or so. Up until recent weeks, such an outcome was being modeled into local economists’ NTM inflation expectations – which remain ~100bps above the median of the central bank’s +4.5 +/- 200bps target that continues to be guided to by Tombini as an EOY event.




One key reason we think both analysts and market participants are worried about the central bank’s sovereignty is the recent change to disclosure regulation – specifically in that each board member’s vote on monetary policy will be made public going forward. The risk here is that members who are increasingly likely to succumb to the political pressure to lower interest rates for career risk management purposes (central bank board members can be fired at the will of the President in Brazil). That makes the upcoming action, accompanying commentary and guidance out of the central bank very important as it relates to reeling in market expectations for decreased central bank autonomy and, along with it, accelerating inflation expectations.


Per Banco Central do Brasil’s latest minutes: “… even considering that the activity recovery has occurred more slowly than anticipated, the Committee believes that, given the cumulative and lagged effects of policy actions implemented so far [i.e. 350bps of rate cuts], any movement of additional monetary easing should be conducted with parsimony.” We’ll see if they meet and extend their guidance – an outcome which our proprietary G/I/P model identifies as the most rational.




Doing both would go a long way towards putting in a floor in the BRL/USD cross, which has dropped -6.1% from when we initially forecasted that we’d see limited downside relative to peer currencies over the intermediate term in our MAY 3 note titled, “WHAT THE HECK IS GOING ON IN BRAZIL?”. That decline is second only to the decline in the MXN/USD cross over that same duration within the region.


While we were clearly wrong here, three weeks does not a TREND make and we continue see asymmetric risk in what the Brazilian interest rate swaps and currency forwards markets are pricing in over the NTM relative to Brazil’s GROWTH/INFLATION dynamics – provided the central bank pushes back on the central government’s potentially inflationary policies. Alas, POLICY remains the lone holdout here and that can get investors right run over when central planners don’t behave according to expectations. For more on our view here, as well as a deep dive into the recent policy initiatives coming out of the central government, refer to our MAY 11 piece titled, “DON’T FIGHT THE FED… IN BRAZIL?”.




All told, we can’t stress this enough: we expect both Brazil’s equity market and currency to experience continued downside over the intermediate term post the MAY 29-30 central bank meeting if their actions are perceived to be in line with the broader central plan of Brazilian policymakers. The strongest TREND-duration short thesis for Brazilian equities (i.e. the opposite of our long thesis) is quite consensus at this juncture, given that the Bovespa Index has indeed crashed from its MAR 13 YTD high (-20.1%).


Shorting Brazil from here requires true guts, but if the USD continues to make higher-highs over the intermediate-term – dragging cross-asset volatility up alongside it (the two are +94% correlated on an immediate-term duration) – Brazilian equities and the Brazilian real will likely continue to get tattooed if policymakers don’t commit to providing international investors with higher rates of expected return(s) via doing what they must to stem the tide/reverse the trend in the exchange rate (i.e. selling dollars, lowering cross-border IOF taxes, introducing a rhetorical floor for the BRL, hiking rates [not likely], etc.).


To this tune, the BRL is up over +2.8% vs. the USD on the day after being down earlier in the morning – a sign that the central bank might be buying dollars here and coming to the currency’s rescue. We’ll see if that this [potential] drive to support the currency becomes a trend.


As an aside, when cross-asset volatility breaks out, as it is doing currently, capital inflows to emerging markets slow markedly and those countries with current account deficits such as Brazil (2% of GDP) are at increasing risk of seeing their growth rates decelerate as investment and/or consumption growth slows.




Lastly, given the recent acceleration in the pace of policy adjustments in Brazil, we thought it’d be helpful to compile the most recent headlines below in addition to Moshe Silver’s notes (our Portuguese-speaking CCO who mines the Brazilian press daily for incremental research nuggets): 

  • Latest Policy Maneuvers:
    • Brazil’s central government is considering cleaning up the balance sheets of certain state-owned banks through a transfer of “bad credits” to EMGEA, which is the government asset management company originally created to administer housing contracts held by Caixa Economica Federal under government housing programs.
    • Brazil will reduce a transaction tax charged on consumer loans; the said IOF tax on consumer credit will fall to 1.5% – the level it was at the start of 2011 – from the current 2.5%.
    • Brazil’s central bank will relax bank reserve requirements to specifically stimulate auto financing… should free up as much as 18 billion reais ($8.8 billion).
  • Moshe’s Notes:
    • Brazil central bank sees more rate cuts – speaking to O Globo, central banker Tombini says inflation should slow, from a current level of 5.1%, towards the 4.5% midpoint of the target range towards the end of 2012.  He rejected concerns over the recent decline in the real and fears of inflation.  “We recently laid in a course.  This course continues to be valid regarding future monetary policy,” he said.  “In the future, this process must be undertaken with frugality and care.” 
    • COPOM votes to be made public – starting with the upcoming meeting of COPOM – central bank monetary policy committee – the votes on monetary policy decisions will be published.  This goes against the traditional opacity that has been intended to shield the COPOM from political pressure.  In the past, the COPOM decision was presented as unified.  The decision has provoked heated debate, with many observers believing this will place pressure on individual bank directors to cave in to government pressure.  Partisans of the move claim it will provide transparency and shield dissenters with the “disinfectant of sunlight.”  This underscores what may be a new trend at the central bank – or perhaps what government officials hope will become a trend.  Over its history, the COPOM meetings have been marked by a high degree of unanimity.  Of the 153 COPOM meetings, only 25 have reported dissenting votes.
    • Treasury adds BNDES support – Brazil’s treasury is set to free up an additional R$ 10 billion to shore up BNDES lines of credit, as part of a program to add liquidity to the credit markets and stimulate economic expansion, after a weak Q1.  Government sources report that finance minister Mantega met with BNDES president last week and boosted the government’s lines of support for the bank from R$ 30 billion to R$ 45 billion, to show that the government will not skimp on resources to stimulate productivity.  Treasury lines of credit to BNDES are at subsidized below-market interest rates.  BDES says they will probably not draw down the entire amount this year, and will likely leave some over for 2013.  

Darius Dale

Senior Analyst


CONCLUSION: While Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.


VIRTUAL PORTFOLIO: Sold our long positions in Chinese equities (CAF) on MAY 21.


***This is an adjunct to our MAY 16 note titled, “CHINA: LESS BORING; MORE CONFUSING”. If you haven’t yet seen it, we encourage you to check that out in conjunction with our update below.***


The incremental growth slowdown in China has been confirmed. Per the State council: “We must proactively take policies and measures to expand demand and to create a favorable policy environment for stable and relatively fast economic growth.”


We can’t stress this enough: this is a dramatic rhetorical shift from guiding down growth expectations to trying to support falling growth expectations. Easing to support growth is a far superior driver of improvements in investor sentiment than easing to save growth, with the latter potentially being a bearish catalyst.


As outlined in the previous note, we anticipate that Chinese GDP bottoms here in 2Q – function of our Deflating the Inflation theme and the accompanying policy maneuvers giving us the scope to roll with our proprietary median forecasts for Chinese growth. That led us to the following conclusion (from last week’s research note): “… while we don’t view a material acceleration in Chinese economic growth in 2H as a probable event absent a removal of the property market curbs, we do think further RRR reductions and actual interest rate cuts will start to filter through the economy and provide an eventual boost to Chinese economic growth.” If we start accepting our predictive tracking algorithm’s downside guidance as the highest probability scenario, the range of Chinese GDP expectations is unlikely to bottom over the intermediate term.




Mixed signals make it too soon to tell which is the correct interpretation, however. Chinese rate sensitive sectors (Financials; Industrials) are not outperforming in the face of accelerating easing expectations in the interest rate swaps and currency forwards markets, while property developers have accelerated their outperformance over the last 6-8 weeks.








As an aside, we continue to wrestle with the thought that accelerating FX deprecation speculation is a sign of accelerating capital outflows – which would coincide with an acceleration to the downside in Chinese property prices and a potential Chinese banking crisis. That’s far from our baseline TREND-duration expectations currently, but we’ll adjust our outlook according with real-time data (i.e. market prices). Chinese banks sold a net CNY60.6B of foreign currency in APR (-0.2% MoM) and, while modest, this marks the first sign of a sequential capital outflow since DEC.




Regarding our market price indicators, the broader Chinese equity market is in the process of confirming a TREND breakdown on our proprietary quantitative models – a clear signal to us that investors should get to the sidelines here and wait for further confirmation. Sometimes the hardest thing to do in a business that demands positive P&L on an increasingly high frequency basis is “doing nothing”. In spite of such institutionalized pressures to act, our new call on China is just that for now.


Jumping back to the point regarding Chinese property developers’ recent outperformance, there are a handful of potential catalysts that can shift both sentiment and operating metrics in a positive direction over the near term that warrant keeping an eye on as it relates to the Chinese demand curve (Gross Fixed Capital Formation = 46.4% of GDP): 

  • Per today’s statement out of the State Council: “China will start a series of key infrastructure projects that are vital to the overall economy and can facilitate growth and speed up construction of existing railway, environmental protection and rural projects.”
  • Per Chen Guoqiang, Vice Chairman of the China Real Estate Society: “China is unlikely to expand a property tax trial to more cities in the near term and the government will continue home purchase restrictions.”
  • Per the Ministry of Land Resources, China will boost land supply for housing by 21 percent from last year to 172,600 hectares... Regardless of the unsustainable nature of adding incremental supply of unoccupied apartment buildings and shopping malls, stepping up construction here is bullish for Chinese growth from a TREND-duration perspective; bearish for property prices over the long-term TAIL, however.
  • Per the Ministry of Housing and Urban-Rural Development, China’s municipal governments were recently asked to submit by end-May a report on the progress of social housing construction over the past 2yrs and plans for 2013-2015. The reports are designed to help decide if adjustments are needed to social home construction targets in the 5yrs through 2015 (i.e. likely an acceleration in construction if anything). 

All told, while Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.


Darius Dale

Senior Analyst


The Macau Metro Monitor, May 23, 2012




Wynn Macau Ltd launched a US$1.5 billion two-tranche syndicated financing for a new project on Macau's Cotai Strip. According to sources, the deal consists of a US$1 billion five-year revolving credit and a US$500 million six-year term loan. Deutsche Bank AG and JP Morgan had joined with US$200 million each prior to syndication.  Sources said Wynn Macau will be issuing a bond and the two banks could be involved.


Sources said the margin on both tranches opens at 250bp over LIBOR for the first two quarters after which they will be based on a leverage ratio grid.  The margin will be 250bp for 4.5 times or more, 225bp for 4-4.5 times, 200bp for 3-4 times, or 175bp for less than 3 times.  Banks are invited to join at a top-level upfront fee of 200bp for commitments of US$200 million and the global coordinating lead arranger title; a 150bp fee for US$150 million and the lead arranger title; a 100bp fee for US$100 million and the arranger title; and a 75bp fee for US$50 million and the lead manager title.


Banks that join before June 8 or 9 will get an additional 12.5bp early bird fee.  The revolver comes with a 75bp commitment fee. The term loan tranche repays in 16 unequal instalments after a two-year grace period.  Banks can choose to join in US$ or HK$. Responses are due end of June.



China's biggest four banks issued only CNY34BN ($5.4BN) in new yuan loans in the first three weeks of May, and their deposits declined by CNY270BN over the same period, the 21st Century Business Herald reported on Tuesday, citing unidentified banking sources.


The four banks--Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd., and Agricultural Bank of China Ltd.--were previously reported by local media to have barely issued any new yuan loans in the first two weeks of May.  These banks usually account for 30% of new yuan loans issued by China's whole banking system.


New loans issued by Chinese financial institutions fell to CNY681BN in April, down from CNY1.010 trillion in March and posting the lowest monthly level so far this year.  China loans in May 2011 reached CNY 551.6BN.



Russia's state-owned Nash Dom Primorye said it is seeking private investors and/or companies to build casino resorts in a six square kilometre area near Vladivostok.  The masterplan includes luxury hotels, a yacht club, shopping malls as well as outdoor sports such as golf. As it stands now, the zone is 2.6 square kilometers, but can be extended to six square kilometers.  Known as the Integrated Entertainment Zone, the project has space for roughly five large resorts.


Marina Lomakina, general director of Nash Dom, said she hoped the zone would be fully completed within five years.  "We want companies who are well known and will help create amenities that are more than just casino gaming," she said, adding that the zone would require a total minimum investment of $2BN from private investors looking to develop properties.

Vladivostok is one of four official Russian government zones where casino gambling is legal but is the only one that has formally initiated plans to lure foreign investors.


Nash Dom Primorye has appointed Las Vegas-based Galaviz & Co as lead strategic adviser for the tender.  The tender will be initiated in June, giving potential international operators 60 days to send in a pitch and budget estimates.  The Russian government will then enter into discussions with potential investors by the end of October.



Visitor arrivals totaled 2,382,156 in April 2012, up 1.9% YoY.  The average length of stay of visitors increased by 0.1 day YoY to 1.1 days.  Visitors from Mainland China increased by 9.5% YoY to 1,391,119, with those traveling under the Individual Visit Scheme rising by 9.3% to 541,551.





Singapore's inflation rate accelerated in April to 5.4% YoY, from March's 5.2% rise.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.