TODAY’S S&P 500 SET-UP – August 10, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.06% downside to 1388 and 0.16% upside to 1405. 











    • Up versus the prior day’s trading of 62
  • VOLUME: on 08/09 NYSE 575.75
    • Decrease versus prior day’s trading of -9.56%
  • VIX:  as of 08/09 was at 15.28
    • Decrease versus most recent day’s trading of -0.26%
    • Year-to-date decrease of -34.70%
  • SPX PUT/CALL RATIO: as of 08/09 closed at 1.82
    • Up from the day prior at 1.52 


  • TED SPREAD: as of this morning 34
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.64%
    • Decrease from prior day’s trading of 1.69%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.42 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Import Price Index (M/m), July, est. 0.2% (prior -2.7%)
  • 8:30am: USDA crop forecast
  • 11am: U.S. Fed to sell $7b-$8b notes in 7/15/2013 to 1/31/2014 range
  • 1pm: Baker Hughes rig count
  • 2pm: Monthly Budget Statement, July, est. -$93b 


    • House, Senate not in session
    • CFTC holds closed meeting on enforcement matters, 10am
    • NOAA Acting Deputy Director Tracy Dunn, Greenpeace campaigner Phil Kline discuss U.S. ocean, coastal law enforcement at Environmental Law Institute, 12pm 


  • U.S. won’t prosecute Goldman Sachs, employees over CDO deals
  • Yahoo strategy review may result in changes to cash plans
  • RIM said to draw interest from IBM on enterprise-svcs unit
  • Corn near record as USDA to report on drought damage
  • Manchester United raises $233m as IPO prices below range
  • RBA highlights currency risk as 2012 growth forecast raised
  • Standard Chartered’s fitness is key grounds on shutdown decision in N.Y. law, not laundering
  • Knight says it may suffer more losses from trading error
  • Knight Investors face funding options with Hotspot, Direct Edge
  • WellPoint CEO faces ire of investor who says she must go
  • Citigroup offers to buy back bonds in plan to use “excess cash”
  • China export growth collapses as World recovery slows
  • Hong Kong economy grows at close to slowest pace in 3 years
  • Gold bulls strengthen on outlook for more stimulus    


    • Calfrac Well Services (CFW CN) 6am, C$(0.046)
    • Enerplus (ERF CN) 6am, C$(0.02)
    • J.C. Penney (JCP) 6am
    • ioCan REIT (REI-U CN) 7am, C$0.37
    • Rentech Nitrogen Partners (RNF) 7am, $0.98
    • Brookfield Asset Management (BAM/A CN) 7:06am
    • Harman International (HAR) 7:30am, $0.64
    • Celtic Exploration (CLT CN) 8am, C$(0.14)
    • Emera (EMA CN) 12:30pm, C$0.27
    • Pengrowth Energy (PGF CN) Post-Mkt, C$(0.04) 



COPPER – the Doctor sees this Chinese slowdown for what it is – too big to bail. Copper fails fast at 3.43 TRADE resistance, down -1.2% this morning; CRB Index fails at my TAIL risk line of 307. 

  • Rig Shortage Means Record $4.5 Billion Blowout Binge: Energy
  • Sugar Poised for Two-Year Low After Rains Ease: Chart of the Day
  • Cocoa Poised for Rally as Investor Bets Climb: Chart of the Day
  • Gold Bulls Strengthen on Outlook for More Stimulus: Commodities
  • Corn Advances to Record as USDA Set to Report on Drought Damage
  • Oil Pares Weekly Gain on China, IEA Sees Demand Growth Slowing
  • Gold Declines With Stocks, Euro as China Data Tempers Risk Mood
  • Copper Drops as China Export Collapse Adds to Slowdown Signs
  • Sugar Rises as India’s Set to Import From Brazil; Cocoa Advances
  • Oil May Rise on Refinery Runs, Middle East Tension, Survey Shows
  • Sugar Output in India Set to Fall on Dry Weather, Kingsman Says
  • China Soybean Imports Gain for Fifth Month Even as Prices Soar
  • China’s Iron Ore Imports Drop to 3-Month Low on Falling Prices
  • India’s Green-Energy Providers May Struggle After Power Blackout
  • Rises to Record on U.S. Drought Damage
  • Oil-Equities Link Nears Record as Stimulus Looms: Energy Markets
  • India to Import Sugar From Brazil on Dryness, White Premium 





EURO – snapping my 1.23 TRADE line again; that puts a boat load of correlation risk back in play, at lower-highs, for a lot of big beta trades (stocks and commodities).










CHINA – exports falling like hot knife through butter, but do not worry – bailouts coming, allegedly. No stimuli announced overnight; both Chinese and Japanese stocks fail at big TRADE and TREND lines of resistance, respectively.











The Hedgeye Macro Team






Management cautious regarding near-term growth


The Group adopted a cautious approach in its business dealings towards the end of 2011, when an uncertain global economic environment began to present challenges to the Asian economies. Notwithstanding this, the Group continues to deliver a set of sustainable financial results that demonstrates healthy return on capital employed



  • Gained market share QoQ, which is commendable given their disadvantageous location
  • Will continue to see similar EBITDA margins this past Q


  • GGR market share 49%
  • Casino Control Act Amendment: Draft went public where you can find a lot of details. They don't think that there will be any significant impact on their business. They believe that the financially vulnerable that gamble is a small minority.
  • 3.1% hold rate for VIP this quarter
  • Collections: receivables have come down.  In 4Q, they spoke about slowing down the granting of credit and they did what they said. The have been more careful in who they credit to.  Incentives to collect are given to less than 1% of people that they need to collect from.
  • The higher commission has almost a negligible impact; i.e. there were no material changes in commission rate
  • RC volume QoQ change: it has come down by slightly more than 10% but less than 15%
  • Mass revenue was marginally down QoQ
  • Split between VIP/MASS 
    • 49% at the gross gaming revenue
    • 35% of the net revenue gaming revenue
  • Receivables: Casino receviable is all in current receivables S$734MM (Group level).  $269MM is the bad debt provision. 
  • Continue to maintain that the Echo investment is a portfolio investment
  • Labor expense inflation was basically flat YoY.  However, they added 1,300 employees to the West Zone.  With the Singapore government tightening up foreign labor they will be squeezed in two ways: difficulty in finding talent and wage inflation. They are focused on acheiving productivity gains.
  • Have 13,600 total employees now
  • There is no dividend policy for the company. They plan on continuing pay something similar in absolute terms as last year if things continue to go well.  Growth is primary and dividend is secondary for them.  Don't expect big dividends from them.
  • There was no material change in their bad debt expense this quarter.  They were impacted by Marine Life Park -which had very high electricity expenses and new employee expenses without any new revenue.  Over the next 2 quarters, they will have similar issues. The 45% margin should be the worst that they see and then see significant margin improvement next year when the Marine Life Park opens in earnest in 2Q13.  So the margin will be in the 45-50%. 
  • High impairment level (bad debt expense) is a prudent approach to provisioning given the state of the world economy at this time.  They would rather provision conservatively then see a big charge offs.
  • Net gaming revenue share was marginally lower QoQ
  • Not all the expenses for the Marine Life Park are in pre-opening: electricity, security, and other expenses difficult to breakout. The expenses in pre-opening relate to Marine Life Park specific personnel.
  • The slowdown from Chinese patrons was not huge but significant.  Chinese patrons are usually in their top 5 contributors.
  • RC volume market share: 48%
  • Mass market share: 47% (GENT didn't specify whether it was win or drop)
  • Junkets are called IMA's - they have two and their contribution to revenue is negligible at this point.  They are deliberating managing this on a low basis to take it slowly.  Both of the IMAs are Malaysians. Don't see a material contribution from IMAs for at least 2012.
  • Continues to be optimistic that something will get passed in the next 12-18 months in Japan.  The first legislation will allow casino legislation to get formed (i.e. legalize casinos). Then the second draft will decide locations of the casinos. There has been some talk about putting a Casino in the area of where the nuclear disaster happened.   
  • YoY trend in VIP RC:  close to sequential trend
  • 562 tables; Slots: 1017; ETGs: 710
  • How are the perpetual securities accounted for?  See on page 2. It's treated as equity and not a bond and is therefore entitled to a % of NI of the company. So it's a balance sheet item and not a P&L item.
  • EBITDA margins:
    • Gaming has the best margin
    • Non-gaming margins are not that great but that's part of the deal
    • West Zone- will not have great margins but it will have positive cash flow at steady state. Will not be a margin margin contributor for first 12-18 months.
  • Their new show will open in November but won't be as big as the previous one - Magic Illusion Show. They have learned in terms of what works and doesn't in terms of genre and pricing. Think it will be a lot more profitable than last one.
  • Were opportunistic about raising cash. They are confident that they will announce something in the next 12-18 months. Will not rush into anything but if the opportunity presents itself, they will be able to pounce on it. They are obviously looking at Japan and several other greenfield projects. In the worst case, they make enough to just pay interest on the securities and hopefully they will make a big ROI investment.
  • Their investment hurdle rate is 15%.  They have just rejected a greenfield project where the ROI didn't meet their expectation. They will only look at investments of S$500MM or greater. 
  • What is happening on the Mass side? It is difficult because the local population is small. The Singapore market will either be stagnant or deteriorate. They are not hopeful about getting growth from the local market. They are working with the government to be responsible. They need to work a lot harder in bringing overseas players. They are also working to add a few potential partners to bring in mid-segment patrons from overseas.
  • They need more hotel rooms to grow the Mass business. They are looking for more land in the vicinity to add hotel rooms. Would cost north of S$350MM.
  • The per cap at USS is down a little YoY. People aren't spending as much in the park as they used to. However, their non-gaming revenue is trending up. In a steady state, expect non-gaming revenue to comprise almost 30% of their total revenue.
  • Has the Singapore gaming market reached maturity or is it just an economic issue? 
    • Doesn't think that they have reached maturity. They still have a ways to go into growing their overseas market but it requires a lot of work and it will take time: 12-24 months
    • The local market is not likely to grow
  • 50% are gaming customers in the Beach Villas and Equarius. So they can improve how well they yield those rooms.



  • Genting Singapore net revenues of S$702.2MM and Adjusted EBITDA of S$311MM
  • RWS revenue of S$696.3MM and adjusted EBITDA S$313MM
  • Equarius Hotel and Beach Villas in the beginning of 2012, and overall room inventory increased by 8%
  • Hotel occupancy: 92%; ADR: $432
  • USS average daily visitation: 9,560 and S$86 spend per day
  • 2Q was impacted by "an increase in expenses for the Marine Life Park. The Park is under various stages of completion and incurring pre-opening operating costs without corresponding revenue generation."
  • "The high-end Equarius Hotel and Beach Villas are seeing good occupancy ever since opening just 6 months ago. The newly opened luxury spa ESPA and two exclusive treetop lofts are our latest luxury products. The Marine Life Park will soft open by the end of the year."
  • "RWS Invites, the non-casino loyalty programme was launched in April to drive loyalty and repeat visitation to our non-gaming products, offering the best the Resort has to offer. The card and its usage has been gaining momentum since"
  • "With the anticipated completion of the West Zone, we will be gearing up for our Grand Opening celebrations in the last quarter of this year."
  • "The Singapore government is set to make amendments to the Casino Control Act and we fully support its aim of protecting financially vulnerable persons. We will continue to work closely with the authorities on implementing responsible gambling measures."
  • "The global economy looks increasingly unfavourable. As we move into the pre-operations phase of the Marine Life Park over the next few months, we will continue to see similar narrower EBITDA margins as in the current quarter."
  • "The Group’s cash position today is healthy. In an economic challenging environment, such a good cash standing presents significant advantage for the Group to capitalise on any suitable investment opportunities."
  • "On 12 March 2012 and 18 April 2012, the Company issued S$1,800 million 5.125% perpetual subordinated capital securities (“Institutional Securities”) and S$500 million 5.125% perpetual subordinated capital securities (“Retail Securities”) respectively at an issue price of 100 per cent. The perpetual subordinated capital securities were issued for the Group’s general corporate purposes as well as to finance capital expenditure and expansion of its business."
  • "During the financial period ended 30 June 2012, the Group invested in a portfolio of quoted securities, unquoted equity investment and compounded financial instruments amounting to S$1,148.9 million. The Group also spent a total of S$315.1 million for construction work-in-progress and other property, plant and equipment during the financial period."


The Macau Metro Monitor, August 10, 2012





A planned Adelson Center for U.S.-China Enterprise in Beijing is now under scrutiny by the Justice Department, the Securities and Exchange Commission, and the company's audit committee for possible violations of antibribery laws, according to company documents and people familiar with the inquiries.  The probes go beyond the allegations in the FCPA suit, which is pending.


The Adelson Center was an attempt to network with influential business groups and included agreements to cooperate and promote trade with organizations such as the Chinese government's trade body, chaired by Wan Jifei, the son of China's former vice premier.  The Adelson Center was part of a plan announced in 2005 for LVS to invest more than $1 billion in an ambitious new non-gambling convention center, hotel, and retail complex near Macau on the southern Chinese island of Hengqin.


The Chinese government and company investigations are looking into at least three transactions in mainland China unrelated to the company's Macau casino properties.  Those transactions involve: a $50 million payment for real estate for the Adelson Center, Sands's sponsorship of a Chinese basketball team, and a contract for ferry service between Macau and Hong Kong.


A former Macau controller for Sands is assisting the FBI in its probe of the deals.  Preliminary results of the board's audit committee probe, led by an outside law firm, were presented last week to Nevada gambling regulators, who are conducting their own inquiry.



According to Business Daily, Sands China is proposing to build an Eiffel Tower replica in its parcel three site, in Cotai; it will be the centerpiece of the project, to be located besides the Four Seasons hotel.



SJM Holdings will relocate 40 live gaming tables from its satellite casino Greek Mythology to other properties under the group’s portfolio.  SJM's CEO Ambrose So Shu Fai said the recent row between the New Century hotel shareholders, where Greek Mythology is located, is “an internal issue”, but he admitted it has affected business volumes in the casino.  “So they will now give us back 40 [gaming] tables, as well as 200 employees,” Mr So said, quoted by Business Daily.    The table relocation is to be completed by September.



Singapore's economy contracted by 0.7% QoQ in 2Q 2012, a reversal from Q1's growth of 9.5%.  That compares with a July preliminary estimate of a 1.1% contraction in a Bloomberg News survey of 11 economists.  On a year-on-year basis, the economy expanded by 2.0%, compared to 1.5% in the preceding quarter.  The Ministry of Trade and Industry says it will narrow the GDP growth forecast for 2012 from 1-3% to 1.5% to 2.5%.  Singapore's growth outlook remains cautious in 2H 2012.  MTI says it expects global economic conditions to remain subdued, as consumer spending in advanced countries will be dampened by weak labour market conditions.




Chinese banks extended 540.1 billion yuan of new local-currency loans in July, well below market expectations for 690 billion yuan.

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In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • SLIGHTLY BETTER:  Although EPS was in-line, the BYI release was more positive than expected, particularly after the WMS and IGT debacles.  BYI placed more new participation games than expected.  Buying back as much stock as the did was also a plus.



  • IN-LINE:  Reported FQ4 of $0.78 and FY 2012 EPS of $2.45 (although better than the whisper)
  • PREVIOUSLY:  FY 2012 EPS: $2.37-$2.45 ($0.72-$0.80 in F4Q)



  • IN-LINE:  F4Q R&D was 10% of revenues (vs 11% of revenues YoY), while SG&A was 26% of revenues, (vs 28% of revenues YoY). A relief after the cost inflation seen at IGT & WMS
  • PREVIOUSLY:  "Our R&D and SG&A to grow at a somewhat lower percent of revenues, although we continue to invest aggressively in R&D."


  • BETTER:  purchased $73 million (1.6 million shares) of common stock in F4Q and purchased an additional $33 million (745k shares) of stock post June 30.  The company has ~$58MM available under its board-authorized share repurchase plan.
  • PREVIOUSLY:  "We still have approximately $57 million remaining under our board authorized share repurchase plan and would expect to increase this amount in the coming months if necessary."





  • SAME:  BYI reiterated shipping their Atlantic lottery units in F2Q13
  • PREVIOUSLY:  "We were awarded a little over 1,500 games…We would expect to start selling those units in the second quarter of our fiscal 2013, probably take about three to five quarters to fill that order out. Within the class three machines in Canada, there's probably a good 60,000 to 65,000, we routinely replace those games. We're about a 20% player in class three there, but VLT is definitely a new initiative for us."


  • SAME:  F4Q game equipment margins was in-line QoQ.  Guidance commentary on game equipment margins reaching 48-49% within the next 2-3 quarters remain unchanged.
  • PREVIOUSLY:  "Based on anticipated mix for our fourth quarter, which we expect will include multiple Ohio properties, we anticipate our Game Sales gross margin will decline slightly over the third quarter. However, we still expect our Game Equipment margins will approach 48% to 49% within the next few quarters, due to continued reductions in material costs on each of the Pro Series cabinets."


  • SAME:  BYI expects to begin shipments to the Illinois VLT market in FQ2 2013, pending final approval of locations
  • PREVIOUSLY:  "We've had good discussions with customers there, have signed several contracts and feel our products are well positioned for the market, which should result in us winning a fair share. We expect to begin initial VLT shipments in Illinois during the second half of calendar 2012, with the mix of sale versus lease to be determined by the contract terms, which are in various stages of negotiations now."





  • SAME:  F4Q systems margins came in at 74%
  • PREVIOUSLY:  "We currently anticipate that fourth quarter Systems margin will return to the higher end of our historical range of 70% to 75% based on mix.”





  • SAME:  Strong performance by both Grease and Michael Jackson.  BYI continues to believe they will do well.  Cannibalization remains low due to low WAP exposure and unique product offering. 
  • PREVIOUSLY: "We just released Grease in March, and it's doing very well in the marketplace better than our expectations.  We've seen very little cannibalization. Michael Jackson is in beta test performing very well mechanically, and we think it's going to perform well when we launch it here in the next week."


  • BETTER:   WAP increased base increased by 500 units (+31% QoQ and +72% YoY) including Grease & MJ placements; this exceeded mgmt expectations.  BYI continues to think that 750 placements for each of these games is acheivable.  They have a couple of follow on games and changes to extend the life of the games.
  • PREVIOUSLY: "Our guesstimate is that it would be reasonable to get in the neighborhood of 750 each of these two games [Michael Jackson/Grease] placed over the first six to nine months from launch; and we would expect very low cannibalization of our existing WAP games because we have so few WAP games."


Finally a solid quarter and guidance in a sea of disappointments



“Our fourth quarter and fiscal 2012 results validate our leadership position in gaming technology innovation. This innovation leadership and visibility into further growth opportunities for all of our businesses for fiscal 2013 and beyond is tremendously encouraging.”


- Richard M. Haddrill, the Company’s Chief Executive Officer



  • 19% NA ship-share
  • iVIEW DM went live in 8 additional locations this quarter. Now have a solid base of 1,050 games running across all major manufacturers and pipeline continues to grow.
  • Anticipate an improvement in their FY13 operating margin as gaming sale margins should increase
  • Recorded a $10MM charge recorded to settle certain outstanding legal matters
  • 4,143 units to NA (1,323 new and expansion units and 2,820 replacements)
  • Still expect to get to 48-49% game sales margins due to continuous cost reductions 
  • Repurchased 1.6MM shares of stock in the quarter
  • In July several of their Elite Bonusing Suite of products went live across iVIEW and iView DMs at South Point in LV.  Since the launch, South Point saw an improvement in food traffic, carded play and player card enrollment.
  • They were the first company to get an interactive gaming supply license in the US
  • BYI's cloud-based mobile product continues to move forward at good speed.  Have 58 gaming and non-gaming sites currently using their mobile products with ~60 applications running.  Expect their content generating revenue on various portals in regulated international markets some time in the near future.
  • First U.S. based play for free poker site at Golden Nugget using their backend B2B i-gaming platform went live this quarter. 
  • They completed testing in Italy and are currently operating in several locations.  Expect to have 1,000 VLTs in Italy by the end of FY13.
  • Making progress in their shipments to Australia and completed their first systems installation there 
  • Expect to begin initial shipments to IL in F2Q pending approval of more locations
  • Making good progress on international systems implementations 


  • Legal $10MM accrual:  For several matters (more than 1, less than 6)
  • Michael Jackson/ Grease:  Think that the games have the potential to have 750 units each. Cannabalization is still low because they don't have much in terms of WAP. They also don't see any impact from consumer weakness yet.  Their gaming operations margin this quarter was impacted by a bit by higher jackpot expense.
    • Average win per day is meeting their expectations.  In each of the quarters this year, they have been above $100/day on WAP and were below that last year.
  • Range for FY2013 depends on success of future WAP releases, ability to hit their margins and meet sales expectations with Pro-Series. There are a lot of new markets opening as well. 
    • How much and how fast of IL will roll out; how much will be for sale vs. participation
    • Italy rollout and win per day performance
  • WAP:  there hasn't been any new competitor pressure 
  • 745,000 shares were repurchased for $33MM post June 30th
  • Grease:  Out since March.  They have a couple of follow on games and changes to extend the life of the games.
  • Their WAP strategy doesn't stop with just MJ & Grease
  • Their iDeck is considered a value proposition; don't need to switch out the button panel.  Same thing with the Curve- customers don't need to change out the reels.
  • They are focused on the categories of gaming operations. They are not focusing on WAP at the expense of Premium.
  • Very comfortable with their leverage ratio given their 50% recurring revenue base.  They have been very focused on execution of their strategies. So a lot of the execution risk is behind them now, and therefore some accretive / strategic acquisitions in addition to using their FCF on making buybacks.  They usually buy back $15-20/MM per quarter. They assume that they will buy back between $60-80MM of stock in FY13.
  • Their DM sales were up several times what they were last year.  Expect that DM sales will keep increasing YoY.
  • In Italy, their prospects are modest given their product delays
  • Their first system went live in Australia and just went live in New Zealand a few months ago.  South Africa is moving along.
  • Canada VLTs do come at a lower ASP- but the margin is good.  IL will also come at a lower ASP.
  • Their i-gaming strategy is to go in with their customers.  They launched their free play poker site for Golden Nugget.
  • They have 58 mobile sites up and running.  They believe that mobile can be more profitable than i-gaming in the near term. 



  • FY2013 guidance for Diluted EPS of $2.95 to $3.30. 
    • "This guidance anticipates continued year-over-year growth in each of game sales, gaming operations, and system revenues. The Company currently anticipates an increase in the placement of its premium games, particularly WAP, an increase in the number of gaming devices sold with continued margin improvements on game sales, and continued growth in its systems business. This guidance assumes an effective tax rate between 38 percent and 39 percent"
  • BYI reported $246MM of revenue and EPS $0.78, a little ahead of consensus estimates
  • In 4Q BYI purchased $73MM of stock and another $33MM since June 30, 2012. In FY 2012. BYI repurchased $155MM of stock at an average price of $40.06.  $58MM is available under their buyback plan as of today
  • Gaming Equipment: 
    • New gaming devices: 5,322; ASP: $17,182 (increase due to higher mix of Pro Series cabinets sold)
    • International shipments: 1,170
    • Gross margin increased to 46%.... primarily due to mix and cost reductions on certain models of the Pro Series line of cabinets
  • Gaming operations:
    • “Increased the Cash Connection wide-area progressive (“WAP”) installed base by almost 500 units in the fourth quarter including additional installations of Grease and the recently launched Michael Jackson"
    • 72% gross margin
  • Systems: 
    • $20MM of maintenance revenue
    • 74% gross margin, due to change in mix.  "Hardware sales were 29%  of systems revenues, and software and service sales were 35%, as compared to 42% for hardware and 29% for software and services" in 4Q11
  • "SG&A increased $2 million primarily due to an increase in payroll to support key new markets."


CONCLUSION: Inclusive of China’s July GROWTH and INFLATION DATA, we reiterate our intermediate-term view of the Chinese economy, which remains: A) we do not expect a meaningful inflection point in Chinese economic growth and B) we do not anticipate a meaningful acceleration in fiscal stimulus, state-directed lending or deregulation in the property market. If anything, we could potentially see increased tightening in the latter if speculative activity is detected in the July/August property price data and/or the State Council’s regional surveys. Lastly, we reiterate our bearish long-term thesis on the Chinese yuan and Dim Sum bond market – a position supported by the latest data points.


Overnight China reported incrementally-dovish July GROWTH and INFLATION data – which, of course, paved the way for aggressive media coverage demanding that the PBOC cut interest rates or RRRs. Those speculative demands were no doubt emboldened by the Chinese stocks’ intraday rally from trading flat-to-down to close up +61bps on the day. The close of 2,174.1 on the Shanghai Composite Index puts it at 5 ten-thousandths of a percent higher than our immediate-term TRADE of resistance.


While we don’t expect to see a sustained follow-through, we are waiting and watching for confirmation; our fundamental case on China (as laid out above) will not change absent a meaningful shift in the data or a quantitative breakout above our TREND line as indicated in the chart below:




Below, we neatly parse the July data into the following three buckets for you:



  • JUL Industrial Production: +9.2% YoY from +9.5%
  • JUL Retail Sales: +13.1% YoY from +13.7%
  • JUL YTD Urban Fixed Assets Investment: flat at +20.4% YoY
    • YTD FAI – Real Estate Development: +15.4% YoY from +16.6%
    • YTD FAI – Construction: +19.6% YoY from +20.6%
  • JUL YTD Source of Funds for Fixed Assets Investment – Foreign Direct Investment: flat at -11.1% YoY
  • Key Takeaways: Chinese economic growth continues to slow across sectors and the continued weakness in retail sales indicates that the government isn’t “rebalancing” the Chinese economy (w/ respect to their current 5yr plan) as quickly as some might have hoped. Beyond that, we flag the -11.1% YoY rate of decline in foreign CapEx as a sign that international corporations remain particularly sour on the Chinese growth story and we continue to see longer-term negative implications here for China’s currency and cross-border capital flows. The recent occurrence of China’s sovereign Dim Sum bond yields normalizing with mainland rates is in support of our thesis, which we outline at the conclusion of this note. 



Spot prices for Rebar and Hot Rolled Sheet steel continue in free-fall, as economic growth expectations remain muted in what is arguably China’s most important domestic commodity market from a economic growth perspective (Fixed Capital Formation = 46.2% of GDP).





  • JUL CPI: +1.8% YoY from +2.2%; slowest rate since JAN ‘10
    • While falling pig prices shaved -71bps off of the YoY headline figure, the food category overall contributed +78bps to the headline figure on a net basis.
  • JUL PPI: -2.9% YoY from -2.1%;s lowest rate since OCT ‘09
  • Key Takeaways: Despite rates of headline inflation falling to new multi-year lows, Chinese interest rate markets continue to price in incrementally less easing out of the PBOC, as indicated in the chart below. We interpret this as a sign that those closest to the source are taking the PBOC’s recent hawkish warning on 2H inflation at face value. 




  • JUL YTD Source of Funds for Fixed Assets Investment – State Budget: +30.5% YoY from +26.7%
  • JUL YTD Source of Funds for Fixed Assets Investment – Domestic Loans: +6.7% YoY from 5.8%
  • Key Takeaways: Consistent with the recent pledged increases in railroad investment and low-income housing development, the State Council continues to “fine tune” its economic policy with respect to “stabilizing growth” by increasing sovereign expenditures on investment. It’s important to note, however, that stabilizing ≠ stimulating. As it relates to a state-directed lending spree, growth in domestic loans earmarked for Fixed Assets Investment accelerated to +6.7% on a YTD, which remains far, far below the +20-40% YoY clips recorded during the 2009-10 lending spree. Mid-single digit growth rates is hardly stimulatory in comparison and is consistent with Chinese policymakers’ decreased willingness to stimulate. In fact, recent statements suggest that they appear keen to avoid the recent mistakes of overinvestment and capital misallocation – both of which contributed to the current property bubble – during this growth slowdown. 




If you haven’t yet had the chance, we encourage you to check out our recent work on China – particularly our thoughts on the outlook for Chinese policy over the intermediate term. Importantly, we are increasingly of the view that aggressive expectations for Chinese stimulus and the associated rebound in Chinese economic growth are being priced into “risk assets” broadly and that Chinese policymakers are likely to disappoint those expectations. For more details please review the following notes: 

  • FLAGGING ASYMMETRIC RISK IN THE CHINESE YUAN AND DIM SUM BOND MARKETS (APR 16): Given the asymmetry of both the pricing setup and fundamental outlook, secular yuan weakness and a bearish re-pricing of the Dim Sum bond market are two long-term TAIL risks we are flagging to you at the current juncture.
  • CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED (MAY 23): 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.
    • As an aside, China’s Shanghai Composite Index remains in a Bearish Formation and is down -8% since we put out this initial bearish piece on the Chinese economy in this latest cycle. That is far and away the largest decline throughout the region over that duration and is vastly underperforming the regional median gain of +6.7% (same duration).
  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (JUN 7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (JUL 13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (JUL 17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being.  

Best of luck out there,


Darius Dale

Senior Analyst

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