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IS THE CORRECTION IN THAI EQUITIES OVER?

CONCLUSION: We think  the risk of political unrest is overblown/priced in the immediate term. Further, you’re likely to see a rapid dissipation of the negative sentiment currently surrounding Thai equities if the Pheu Thai opts to acquiesce to the demands of the Constitutional Court.

 

Answering the question in the title from a fundamental perspective, our answer is “quite likely”. This is a function of our analysis of the effects of recent bouts of political instability on Thailand’s benchmark SET Index, in that the current draw-down is roughly in line with previous sell-offs: 

  • APR/MAY ’10 protests of the ruling party (then Yellow Shirts): -11.2% peak-to-trough decline;
  • JAN/FEB ’11 protests of the’00 border negotiation agreement w/ Cambodia and demanding the Thai military force Cambodians to withdraw from disputed areas:  -9.7% peak-to-trough decline;
  • MAY/JUN ’11: the looming threat of political unrest ahead of the JUL 3 parliamentary election: -9% peak-to-trough decline; and
  • MAY/JUN ’12: the looming threat of political unrest ahead of a potential court-ordered dissolution of parliament [again]: -9.8% peak-to-trough decline. 

As it relates to what’s currently derailing performance in Thai equities (aside from global growth slowing), a rift has been created between the Thai Constitutional Court and the ruling Pheu Thai Party (which won a 265-seat majority in the aforementioned mid-’11 election). Their beef stems from pending Pheu Thai legislation that would establish a 99-member body tasked with rewriting the constitution, which was drafted by an army-appointed panel after the ’06 military coup which overthrew the government of Thaksin Shinawatra’s – current Thai Prime Minister Yingluck Shinawatra’s elder brother.

 

There are those (including us) who speculate that the Pheu Thai mostly wants to alter the rules in order to allow Thaksin a return to his homeland free from incarceration (he’s currently living overseas to avoid a 2yr jail sentence) with his personal wealth restored (upon the sentence, the courts seized 46B bhat ($1.5B) of his assets). The court fears any new governing document may violate or eradicate Article 68 of the current constitution, which restricts attempts “to overthrow the democratic regime of government with the King as Head of State”, allowing for judges to disband political parties found in violation of the clause:

 

“[We] judges want lawmakers to provide a promise to the public in clarifying whether plans to rewrite the constitution will change articles related to the monarchy… This will ensure that the constitutional amendments will not go too far… We need to investigate this to balance the power.”

-Constitutional Court President Wasan Soypisudh

 

All told, if the Pheu Thai comes out in the coming days and acquiesces to the Constitutional Court’s demands that any changes to the constitution protect the Thai monarchy as well as the court’s own sovereignty and independence as the supreme judiciary body, we think that would remove a great deal negative sentiment currently surrounding Thai equities – especially given the elevated threat of political unrest, which would likely take place in the event the court is forced to disband the very popular Pheu Thai party.

 

We are not of the view that this infringing upon the Constitutional Court and/or the Thai monarchy is the Pheu Thai’s goal anyway, so we would expect them to play ball, rather than risk severe political instability during the economy’s continued recovery from last year’s devastating floods. Speaking of “continued recovery” our proprietary G/I/P model continues to point to accelerating economic growth in Thailand from a TREND-duration perspective on the back of aggressive minimum wage increases, stimulus spending and other populist policies.

 

Darius Dale

Senior Analyst

 

IS THE CORRECTION IN THAI EQUITIES OVER? - THAILAND


Long Time Leaving

This note was originally published at 8am on May 23, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I been a long time leaving, but I’m going to be a long time gone.”

-Willie Nelson

 

I think we have been pretty clear on this – Global Growth is slowing and the USA is not going to “de-couple” from this globally interconnected world. This time is not different.

 

Last night on CNBC I asked Goldman’s chief of everything US economic forecasting, Jan Hatzius, when he was going to cut his US GDP forecasts again. He didn’t really answer the question.

 

That doesn’t mean that you don’t have to answer it for yourself and/or your clients out there today. Real-time risk waits for no one.

 

Back to the Global Macro Grind

 

Willie Nelson is also known as the Red Headed Stranger. He’s the kind of Red-White-and-Blue blooded American we Canadian folks from Northern Ontario grew up respecting. He was born during a legitimate Great Depression (1933). He was self-made. And he didn’t wake up every morning looking to point fingers at anyone but himself.

 

That’s who I am. That’s who many of you are. That’s why this entire political Gong Show that has become our policies and markets gets us so fired up. That’s also why we are going to lead from the front and change it. The day you stop blaming everyone but yourself, is the day you start to lead.

 

Morgan Stanley got a subpoena last night for doing what it is that the Old Wall does. So, they put out a press release admitting as much – but, in doing so, entirely missed the point – i.e. what it is that they do during the IPO process doesn’t make sense to The People. This is a huge political football going into the US Presidential Election.

 

Since Morgan Stanley was a recipient of socialized bailout policies, now that’s their problem to deal with. That’s the other side of the Hank Paulson trade. It’s now the US stock market’s problem too. The US Financial Sector ETF (XLF) is laden with the Too Big To PR names.

 

In the last 2 days I have basically yard-sale’d my Global Equity exposure. On Monday morning we had 27% US Equity and 12% International Equity exposures, respectively. I’ll go into the open with the following:

  1. US Equities 6% (Healthcare = XLV)
  2. International Equities = 0%
  3. US Dollar = 9%

I’m not going to apologize for playing this game fast. Sometimes you have to. I’ve been a Long Time Leaving this charlatanic parade of storytelling. There are only so many times you can assure people that growth “is back” or it just “feels like” an economic recovery.

 

Enough of the “feel” already.

 

Quantitatively, this doesn’t feel like anything other than what the score is telling you. Growth Slowing has been plainly obvious to any economist/strategist who has live quotes and real-time data since March.

 

Inclusive of this morning’s selloffs, here are the asset price draw-downs (ie real-time indicators) since February-March:

  1. Japanese stocks (Nikkei225) = -16.6%
  2. Hong Kong stocks (Hang Seng) = -13.3%
  3. Indian stocks (BSE Sensex) = -13.5%
  4. German stocks (DAX) = -11.8%
  5. Italian stocks (MIB) = -23.8%
  6. Russian stocks (RTSI) = -27.5%
  7. Commodities Index (CRB) = -12.3%
  8. Oil (WTIC) = -17.8%
  9. Gold = -13.0%
  10. Copper = -14.1%

If you bought into any of the cockamamy “surveys” that growth “feels” fine, you can tell me how that’s going to feel in your P&L today. We, as a profession, have been living through growth slowdowns for 5 years and we are better than some of the said sources on growth have repeatedly proven to be.

 

You’ll note that I didn’t include Spain or the US stock market in the draw-down table. But they are in our refreshed Chart of The Day. You’ll recall that you’ve had plenty of opportunity to sell US Equities in the last 3 months; plenty of opportunity to ask yourself ‘heh, why on God’s good earth would the US, China, and Japan “de-couple” from mean reversion risk?’

 

Even if you didn’t say it to yourself that way, you probably thought about it in terms of what we have coined as The Correlation Risk. Get the US Dollar right, and you’ll get pretty much everything else right. That’s not a perma-strategy. Nothing is. It’s just the one that’s not losing you money right here and now.

 

With the US Dollar up for the 4thconsecutive week to $81.80 this morning, here’s your refreshed immediate-term inverse correlations between the USD and everything else:

  1. SP500 = -0.95
  2. Euro Stoxx600 = -0.96
  3. MSCI Emerging Market Index = -0.97
  4. CRB Commodities Index = -0.93
  5. US Treasury 10-yr Yield = -0.93
  6. Copper = -0.97

How does that “feel”?

 

I’ve been a Long Time Leaving the broken forecasting processes of the Old Wall. Most of these outfits have missed every single Growth Slowing call since 2007. Unless they change what it is that they do, they might just be a long time gone soon too.

 

My 27 person research team and I will be grinding through our long/short positions on our Best Ideas Conference Call this morning at 11AM EST. Please ping Sales@Hedgeye.com if you’d like access to Risk Managed Buy-Side Research built by buy-siders.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, EUR/USD, and the SP500 are now $1533-1571, $90.13-93.28, $1.26-1.28, and 1286-1326, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Time Leaving - Chart of the Day

 

Long Time Leaving - Virtual Portfolio


THE M3: MSC FINANCING

The Macau Metro Monitor, June 6, 2012

 

 

EIGHT-BANK GROUP LIKELY FOR US$1.4BN MELCO CROWN FINANCING IFR ASIA

The financing is for Macau Studio City.



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Jelly Donuts

“A jelly donut is a yummy mid-afternoon energy boost.”

-David Einhorn

 

On a flight to Dallas, Texas yesterday, I was reviewing My Pile and re-read David Einhorn’s Op-Ed from May 3rd, 2012 in the Huffington Post titled “The Fed’s Jelly Donut Policy.” Loved it.

 

I love donuts, burgers, and beers too. What I don’t love is pretty clear – Ben Bernanke’s post 2009 Policies To Inflate rank right up there at the top of my no-love list alongside listening to Giraldo Rivera and watching figure skating.

 

What I also love is the debate. I love to argue; particularly with people that don’t. How else do we hold these charlatans accountable? How else are we going to challenge the perceived wisdoms of their economic policies? How else are we going to evolve and progress?

 

Alongside Ray Dalio (Bridgewater Associates) and Seth Klarman (Baupost Group), I consider David Einhorn (Greenlight Capital) one of the thought leaders of Wall St 2.0. Stylistically, while Einhorn is often compared to Warren Buffett (“value guys”), I think he’s currently  evolving his investment process at a much faster pace. Einhorn does macro – he shorts things too.

 

Einhorn isn’t politically polarized like Buffett has become. He is able to evaluate macro risks objectively (what the Fed should do and balance that with his opposing thoughts of what the Fed will do). He’s embraced Behavioral Finance, writing openly about fear and greed. He also understands that the stock market is not the economy, and that “valuation” is not a panacea.

 

On Bernanke’s failed policies, here’s my abbreviated version of Einhorn’s Op-Ed:

 

“The blame lies in his misunderstanding of human nature. The textbooks presume that easier money will always result in a stronger economy, but that’s a bad assumption… it is simply misguided thinking that persists among the Fed Chairman and other government ivory tower thinkers. They do not understand or relate to the prime component of capitalism and a free market: greed.”

 

“The Fed does not understand investor psychology: if you want to get people to sell bonds and buy stocks, the best way to do that is to show them that bond prices can, and do, fail… there is nothing that slows the economy faster than rising oil prices… In light of this, I cannot understand why we are even discussing let alone hoping, for Qe3.”

 

Agreed, Mr. Einhorn. Agreed. Hope is not a risk management process. Neither is doing more of what didn’t work. Enough of the yummy intraday stock market rallies on iQe4 upgrade rumors already. After 3 of these suckers, Americans have a “tummy ache.”

 

Back to the Global Macro Grind

 

Strong Dollar = Deflates The Inflation = Stronger Consumption. That remains our bull case for not only the US and Global Economy, but for their Equity market multiples.

 

Yesterday’s US Services ISM report (May) was one of the most constructive we have seen on the Prices Paid front since December:

  1. US Services ISM of 53.7 (May) vs 53.5 (April) stopped slowing – that’s better than bad
  2. Prices Paid (within the ISM Services report) dropped -7.1% month-over-month to 49.8 (vs 53.6)
  3. Employment dropped -6.2% month-over-month to 50.8 vs 54.2

So, employment is bad and getting worse. But A) you know that B) so does the bond market and C) employment is a lagging (as opposed to a leading), indicator. Real-time market prices are also leading indicators.

 

In other words, if you are begging for Bernanke’s iQe4 Upgrade this morning, you are begging for prices paid to go back up at the pump – and you are begging for the leading indicator on real (inflation adjusted) economic growth to continue to slow.

 

Begging isn’t leadership. It’s un-American.

 

Our process hasn’t changed in scoring how the real world works. Unfortunately, neither has the Washington and Old Wall Street consensus. These people don’t have a risk management process. This is what they do. So it will be very interesting to see how the political pressure for Bernanke to bailout everything from Europe to Morgan Stanley looks in the coming days and months.

 

Bailing out Europe through the Washington, DC based (and US tax payer backed) IMF? Yep, I’m thinking Einhorn will lead from the front and have a few things to say about that too.

 

In the meantime, the SP500 recapturing our long-term TAIL line of support (1283) yesterday should be as bullishly received as it was bearish when it snapped on the downside.

 

Yes, “risk” changes faster than you can bang back another Jelly Donut. That is the game we are in, so play it.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.21-103.11, $82.03-83.35, $1.22-1.25, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Jelly Donuts - Chart of the Day

 

Jelly Donuts - Virtual Portfolio


MCD SALES PREVIEW

McDonald’s will release May sales results on Friday before the market open.  The price action in the stock is indicating a degree of investor skepticism heading into the summer months.  With price running at 3%, it will be a tall order for the company to maintain the impressive traffic growth that the company has produced over the last year or so.

 

McDonald’s was one of our favorite names in the restaurant space in during 2011 (from April onward, before that we were bearish and wrong).  On April 24th, 2012, we wrote that “we see plenty to be concerned about” regarding the top line going forward and that our “conviction on the top-line continuing to meet consensus is tenuous at best”.  Following the April sales release, growing risks to the top line heightened our concern and we think that the May sales release will once again disappoint investors.  With price running at roughly 3% in the United States and 2-3% in Europe, the company will need to drive substantial gains in traffic to meet consensus estimates and we lack confidence that the pipeline of promotions for the summer months is sufficient.  Beverage promotions over the past two years have been instrumental in driving traffic yet management has been placing far less emphasis on beverages in their recent communications with Wall Street (earnings calls) than in years prior.

 

Below we go through our take on what comparable restaurant sales numbers will be received as good, bad, and neutral by investors.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to May 2011, May 2012 had one additional Wednesday, one additional Thursday, one less Monday, and one less Sunday.  As a result, we expect a slightly negative calendar shift to impact the headline number. 

 

 

U.S. - facing a relatively easy compare of 2.4%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:

 

GOOD: A print of higher than 4.5% would be received as a strong result by investors as it would imply a sequential acceleration in the calendar-adjusted two-year average trend as well as 1.5% of mix/traffic growth on top of the 3% of price that the U.S. business is running.  With growth slowing globally and economic uncertainty mounting in the U.S., we think that this would be a strong result given the current environment and lack of promotions that can replicate what frappes and smoothies achieved last year.  We are anticipating a print of 4% for U.S. comparable store sales growth in May.

 

NEUTRAL: A print of between 3.5% and 4.5% would be considered neutral by investors, in our view, as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis. 

 

BAD: A result of less than 3.5% would imply a significant slowdown in two-year average trends and would likely cause the stock to sell off further.  While we do believe that McDonald’s sales trends are slowing, we do not think a number as low as 3% is likely.

 

MCD SALES PREVIEW - mcd preview may

 

 

Europe - facing a relatively easy compare of 2.3%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:

 

GOOD: A print of more than 5% would be considered a strong result as it would imply two-year average trends level with those seen in April on a calendar-adjusted basis.  Given the weakness in MCD’s Europe business in recent months, and the ongoing crisis there, we are not holding Europe to a high standard.

 

NEUTRAL: A print of between 4% and 5% would be received as neutral by investors, in our view, as it would imply some stabilization in two-year average trends.

 

BAD: A number below 4% would imply a substantial deceleration in two-year average trends.

 

 

APMEA - facing a compare of 4.3%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:

 

GOOD: A result of 4% or higher would be received as positive by investors as it would imply a significant acceleration in two-year average trends.  Yum Brands has been trading poorly in recent days on fears of a slowdown in China sparked by a disappointing PMI number for May.  We are still holding APMEA to a high standard given that slowdowns in this metric do not necessarily correspond to a top line deceleration for McDonald’s.

 

NEUTRAL: A print between 3% and 4% would be received as neutral by investors as it would imply two-year average trends roughly in line or slightly better than those seen in April.

 

BAD: Comparable restaurant sales growth of less than 3% for the McDonald’s APMEA division would imply a continuation of sluggish two-year average trends. 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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