CONCLUSION: Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market.


On AUG 31, 2011, we published a note titled: “PHILIPPINES: ONE OF THE BETTER STORIES IN GLOBAL MACRO”; the conclusion of the note was as follows:


“The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.”


Since that date, the country’s benchmark PSEi Index is up +14.2%, which roughly double the comparable return of the S&P 500 and, over that duration, +14.2% good for sixth place atop the performance leader board of the 84 global equity indices and SPX sector ETFs we track. Moreover, of the 48 international currencies we track, the Philippine peso’s (PHP) -2.2% decline vs. the USD since AUG 31 is good for 9thplace atop that performance leader board – meaning the dollar-based returns of US investors would have been far more protected relative to the vast majority of other international equity investments during this latest intermediate-term King Dollar breakout.


Additionally, Philippine President Benigno Aquino has stated in recent weeks that while he “prefers to let market forces decide [the peso exchange rate]”, he’s comfortable with a 5%-plus appreciation from current prices to the 41 per USD level and will seek to protect it in the event it depreciates towards the 45 per USD level (-4% from current prices). Relative stability on the currency front can’t be discounted as a positive factor in today’s environment of rising FX volatility – a phenomenon that has repeatedly eroded the earnings growth of developing-nation corporations in recent years (see: India, Brazil, Turkey, etc.).




From a forward-looking perspective, Philippine’s TREND-duration GROWTH/INFLATION/POLICY outlook remains quite supportive of further equity market gains over that timeframe and sober and proactive fiscal and monetary policy means the country has quite a few levers to pull in the event the situation in Europe takes a dramatic turn for the worse.










In addition to his team’s victories on the policy front since his inauguration in JUN ’10 (six-year term), President Aquino has won over investors with his reform agenda, a core tenet of which is tackling the perception of corruption that has casted a dark shadow over the Philippine economy over the years. The recent conviction of foyer Chief Justice Renato Corona for illegally concealing his wealth sends a powerful message that neither corruption nor tax evasion will continue unabated under Aquino’s watch. That’s a positive for international investment flows into the Philippine economy – particularly from investors who are rightfully becoming less enamored with the TAIL-duration fundamental outlooks in some of the more notable developing nations like China, India and Brazil.


In the current investing environment where inflows continue to be hampered by the economic and financial market volatility stemming from excessive gov’t intervention, taking share is the best outcome any country can ask for. No doubt, Philippines has been taking share; as recently as today, Aquino and his team won an additional $650-$750M of foreign direct investment into his $200-plus billion economy from UK corporations. The next stop on his international road show is the US, where Aquino and his trade, finance, energy, defense, tourism, transport and foreign affairs secretaries will meet with President Obama on JUN 8. We expect additional “wins” as US corporations/investors may find the Philippines to be an increasingly attractive destination for diversifying their EM exposure.


All told, Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market. Furthermore, we believe fiscal and monetary policy levers as well as the country’s reliance on domestic (i.e. not external) demand for economic growth should keep the PSEi Index outperforming in an environment of continued Global Macro headwinds.


Darius Dale

Senior Analyst



FNP/LIZ: Driving Kate Spade Int’l


In an 8K released this morning, FNP announced that it will be offering $150mm in 10.5% secured notes due 2019 with the intent to:

  1. Pay for all or portion of expected exercise of the buyout option for a 51% interest in Japanese JV partner Sanei International
  2. Repurchase $37.1mm of 5% Euro Notes (€28.6mm)   
  3. Effect the redemption of the remaining €52.9mm aggregate principal amount of Euro Notes outstanding (not due until July 2013)

The bottom-line here is that we’ve never seen a higher-end brand take back control of its content and distribution and it not be a positive event.

Here’s what this means for FNP:

  • It’s further reducing the remaining Euro Note position and the related volatility embedded in the Other Income line on the P&L at a time when the USD is strengthening = Positive.
  • It’s taking over majority control of Kate Spade’s Japanese business similar to what the company did in China last summer, increasing FNP’s control over international brand growth (~15%-20% of brand sales) in the process = Positive.
  • Less volatile, but more expensive debt. This comes as a bit of a surprise in the current interest rate environment. However, the company is effectively pushing out the duration of its debt exchanging debt due in 2013 for debt now due in 2019 so it’s about a wash.
  • As for the EPS impact, there is a fair amount of variability here primarily as it relates the profit contribution of the JV. We will have a more detailed analysis on this to follow.  In looking at the initial net impact on interest expense alone, it results in $11-$12mm of incremental expense when accounting for the increased rate, change in cash balance, etc., which equates to ~$0.06 in EPS dilution. Assuming a similar structure to Kate’s China JV in which wholesale sales are still realized as such, but now FNP realizes incremental profits in the Other Income line, and depending on the number and productivity of doors in Japan as an offset, this may end up being an accretive deal from Day 1.

We expect the company to continue to reduce and eliminate the remaining Euro Note exposure over the next few quarters in light of USD strength – patience here has proven prudent. With the balance sheet greatly improved, we don’t think $40-$50mm in incremental debt is a concern relative to this time last year.

That said, while we would have liked to see it at lower rates, this move gives FNP greater control over Kate Spade’s international growth trajectory. With Kate accounting for over 50% of EBIT, we like this move in aggregate. We’re at $0.66 and $1.00 in EPS in F13 and F14 respectively (pre filing). FNP remains a top long idea.

Casey Flavin



FNP/LIZ: Driving Kate Spade Int’l - LIZ SOTP




  • Number of 1st time visitors and proportion of visitors that gambled at all-time low
  • Unless new visitors are attracted, growth will be challenged
  • Vegas as a gambling destination becoming less attractive – could be bad for margins



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June ECB Presser YouTubed

--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-aways include that President Mario Draghi remains hands off in issuing another “bazooka” to the market, noting the effects of the 2nd LTRO have not been fully realized; he didn’t rule out another LTRO or the re-engagement of the SMP down the road. But more than anything, he reaffirmed the need of individual governments to stay the course of fiscal consolidation, the fruits of which he indicated may not be born out tomorrow, but could take 10 years. He kept his cards tight and was optimistic that much work can be accomplished by Eurocrats in the upcoming Summits and meetings to limit tensions, but noted that there is no “silver bullet” to solve the Eurozone crisis. On the ESM getting a banking license he did not provide an explicit answer, but argued the merits of an amendment or not.


Our take-away is the ECB is now marginally closer to cutting rates, reengaging the SMP, or providing additional non-standard measures at its next meeting in July, however, for now the ECB wants to see the outcome, if any, of the 28-29. June EU Summit. The work of individual governments to consolidate fiscally and solve for this "crisis" remains Draghi's unrealistic crutch.



At the Governing Council of the ECB meeting today the ECB kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 1.00%, 1.75% and 0.25%, respectively.


ECB President Mario Draghi announced that the council decided to continue conducting its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 12th maintenance period of 2012 on 15 January 2013.


Draghi did not drift far last month’s statement. On the growth outlook he said that the Eurozone economy should recover gradually, however he quickly followed that on-going tensions continue to dampen underlying growth momentum.


The June 2012 Eurosystem staff macroeconomic GDP projections are -0.5% and 0.3% for 2012 (UNCH vs previous projections) and between 0.0% and 2.0% for 2013 (vs 0.0% to 2.2%).


The ECB’s inflation forecast was in-line, namely that it would stay above 2% in 2012 and should fall below 2% in early 2013.


The June 2012 Eurosystem staff macroeconomic projections for the Eurozone foresee annual HICP inflation in a range between 2.3% and 2.5% for 2012 (vs 2.1% to 2.7%) and between 1.0% and 2.2% for 2013. 


On the money supply he reiterated that the underlying pace is subdued, with the M3 annual growth rate at 2.5% in April, down from 3.1% in March. Draghi noted that the annual growth rate of loans to the private sector declined to 0.8% in April (from 1.2% in March), owing to negative loan flows to non-monetary financial intermediaries. At the same time, monthly flows of loans to non-financial corporations and households were moderately positive in April and the annual rates of growth stood at 0.7% and 1.5% respectively in April, broadly unchanged from March.


You can find Mario Draghi’s Introductory Statement to the press conference here:




Highlights from the Q&A:


-Was the decision to keep rates unchanged unanimous?   MD: a few members would have preferred to have a rate cut today. I’d say not many.


-How does the ESM get a banking license?   MD: the present structure forbids direct recapitalization of banks. There two opposing ways to view this. One is that banks could recapitalize without the debt of the country going up by using the ESM. However, if the ESM is used to recapitalize banks, then the ESM will take on bank shares and become a shareholder? The question is that the ESM was not born to be a shareholder. The answer is still not clear. 


-Will we see further extensions of collateral and lower requirements?   MD: we have to assess funding conditions of banks. We do not think all of the effects of the 2nd LTRO have been exhausted.


-Is the efficacy of rate cut limited?   MD: we think the rate is appropriate but have to keep in mind liquidity constrains and tension in financial markets.


-What is the state of fiscal consolidation across Europe?   MD: Great strides have been made. The full benefits of fiscal consolidation may take 10 years time.


-What is the ECB’s position around cutting to the zero bound?    MD: as you know we never pre-commit.


-How effective have the LTROs been?   MD: there’s plenty of liquidity in some areas, shortages in other areas. Some issues throughout Eurozone have nothing to do with monetary policy, which we will continue to evaluate.


-Is the market over reacting to the developments in Europe? What’s your comment to George Soros’ three month deadline for Europe to find a solution?   MD: I don’t see how one/he can put a deadline on the complexity of Eurozone issues. Certainly there is a sense of concern. There is fragmentation across markets. The fears are not incorrect. What observers however underestimate is the strength of the political commitment of the governments of the Eurozone states. We’ve had many years of price stability and strong growth. We must figure out how to deal with this long term goal [of stability and growth] with the near and intermediate tensions. We just need to clarify this decision.


-You’ve left the window open for another LTRO, what about a reactivation of the SMP?   MD: the instrument is there, it is temporary and not infinite. This applies to both facilities.


-Can Spanish banks receive help without going through the Spanish government?   MD: the question revolves around if the banks want access to the EFSF or not. Very soon, probably Friday, the first assessment by the IMF on the recapitalization needs of Spanish banks will be available. But we will have to also wait for the assessments of firms hired by the government to review the banks. Any decision on EFSF should be based on realistic assumptions and needs to recapitalize the banks.


-If ECB brings interest rate below 1%, it would be at level last seen in response to the Lehman Brothers collapse. Is the environment this time around comparable to the Lehman period?  MD: the answer is no. To a great extent we know what the problems are today, which wasn’t the case for Lehman.


-There are many concerns that the debt crisis in Europe is spreading to the rest of the world, what message would you send them?  MD: it is true that there is a capacity of Euro crisis to effect rest of world. But if you carry this reasoning too far, then we are really saying that the USA is a small, closed economy. I don’t find this to be the case. Europe may have its problems, but many other countries also have their own problems they must deal with. This may be the message at the G20 summit in Mexico. All countries must work together, to address their own problems, and then worry about spillovers of policy, or lack thereof, in other economies.



Matthew Hedrick

Senior Analyst


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



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 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,



Keith R. McCullough
Chief Executive Officer


Long Time Leaving - Chart of the Day


Long Time Leaving - Virtual Portfolio