Currency Wars With Jim Rickards

This Wednesday (August 29th) at 11:00AM EST, we’ll be holding an expert call with Hedgeye CEO Keith McCullough and the one and only Jim Rickards, author of the book Currency Wars and a leading economist, lawyer and investment banker with over 35 years of experience on the Street.


Topics during the call will include the ongoing global currency wars at hand, correlation risk, examining the repercussions of abandoning the gold standard and monetary policy. The call will be made available for our Macro vertical subscribers in full but for those of you in the Twitterverse, we’ll also be live tweeting the call. If you’d like access to the call, please email for more information.


Please follow @Hedgeye on Twitter and tune in at 11:00AM sharp for a tweet-a-thon of Keith and Jim’s discussion.



Currency Wars With Jim Rickards  - dollarswithguns


Takeaway: Companies that are struggling from a top line perspective are unlikely to find much relief from commodity costs other than coffee.

During the most recent earnings season, as we wrote in our recent post titled, “BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE”, the top line is the key focus for investors in the restaurant space.  As we know, the commodity outlook and/or pricing power of restaurant companies are not unrelated.  The ability of restaurant companies to raise prices this year is limited given the relationship between CPI for food at home and food away from home. Companies like Darden that are posting decelerating traffic numbers are likely to struggle from a top line perspective and any commodity-related headwinds will only add to the bottom-line impact.


Summary View (charts below)


Coffee prices have been the outlier to the upside over the last week, largely due to gains posted yesterday as speculators wagered that Tropical Storm Isaac will “damage beans stored in warehouses in New Orleans”.  Robusta coffee is expected to become more expensive in 2012/2013 as demand for the cheaper cousin of Arabica is forecasted to rise roughly 6%, according to Volcafe.   All in all, we see the outlook as favorable for Starbucks and other coffee retailers from a coffee cost perspective. (SBUX, DNKN, GMCR, PEET, CBOU, THI)


Whole bird chicken prices gained modestly week-over-week.  Wing prices did decline somewhat but elevated corn prices spurring food processors (SAFM) to cut back egg production means that BWLD will remain in a difficult position for some time.  BWLD CEO Sally Smith said in late July, “This year highest wing prices we've ever seen at a sustained level. Now, there's nothing to indicate that wing prices are going to change.”


COMMODITY CHARTBOOK - egg sets wings


Dairy prices (milk and cheese) seem to be moving steadily higher as concerns mount over shrinking herd sizes in the United States.  This could be a potential headwind for CAKE which, during the first half of 2012, experienced better-than-anticipated favorability due in part to the price of non-contracted dairy ingredients.


Corn and wheat prices have declined over the past week as speculation mounted that Isaac will bring rains this week to the southern United States, helping to ease drought conditions. 


Beef prices have been moving lower recently as the drought has accelerated herd sell-off.  Longer-term, inventory numbers suggest continued elevated prices for beef.  TXRH, WEN, and JACK all have exposure to spot market beef prices.




Macro Callout


The drought is having an impact on commodity costs in many different ways. This article from Bloomberg describes the difficulty shippers are having moving petroleum, commodities, and goods around inland waterways in the U.S.


“More than 566 million tons of freight valued at $180 billion moved through inland waterways in 2010, including 60 percent of U.S. grain exports, 22 percent of domestic petroleum and 20 percent of the coal used to generate electricity, according to the Waterways Foundation in Arlington, Virginia.”






COMMODITY CHARTBOOK - correlation table




COMMODITY CHARTBOOK - crb foodstuffs












COMMODITY CHARTBOOK - chicken whole breast


COMMODITY CHARTBOOK - chicken broilers











Howard Penney

Managing Director


Rory Green



LVS: Wonderfully Bullish On Macau

Takeaway: Las Vegas Sands' Sands Cotai Central will help boost the company's Macau presence over time $LVS

We’ve been a proponent of being long Las Vegas Sands (LVS) for several weeks now as part of our RIA Daily Playbook and Alpha Sheets. The main catalyst behind the bullish stance is that the company has reached and maintained 20% gaming share in Macau, due in large part to the new Sands Cotai Central (SCC). With the SCC remaining the talk of the town, we see that level of gaming share holding steady if not improving a little.


Keith bought LVS for the Virtual Portfolio at $42.05 yesterday. The stock is well off its $60+ high that occurred back in April due to a halt in VIP growth in Macau and a rough start at the SCC. With the stock down 30%, we believe concerns have been adequately discounted in the stock. Now that VIP growth is picking back up significantly (see this post: Rebound: The Macau Trade), we believe there’s buying opportunity here. Take a look at the chart below: the stock is currently above TREND support of $39.69 and has room to go to $44.47 at the upper echelon of the TRADE range.



LVS: Wonderfully Bullish On Macau   - LVS quantsetup



There’s also some positive catalysts in the mix for LVS. Sheraton is opening 2500 rooms at SCC, which should be a big boost and is considered the de facto top hotel brand in China. This is big considering that the Ministry of Public Security of Macau has eased travel restrictions on Macau that now allows people living in six mainland cities – Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen or Tianjin– to get visas enabling them to visit and gamble in Macau.


The company also has significant free cash flow which could be used for a stock buyback or to fund another Cotai project. Simply put, our bullish case for LVS speaks for itself.

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In preparation for ISLE's F1Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary



Pennsylvania Supreme Court Affirms PGCB Selection of Isle of Capri & Nemacolin Woodlands (Aug 21)

  • Expect to open Lady Luck Nemacolin 9-12 months after construction begins.


  • We're currently renovating rooms in Lake Charles and Black Hawk, and adding a new Lone Wolf Bar in Waterloo.
  • Our Lady Luck rebrand at Vicksburg will be completed about the same time as the expected opening at Cape Girardeau, with upgrades that will enhance the customer experience, including a Lone Wolf bar and Otis and Henry's casual dining restaurant.  
  • We are currently finalizing plans for a major renovation of the pavilion in Lake Charles. We're working with the Kansas City Port Authority on the development of an RFP for a third-party hotel and other outburst of development opportunities at our Kansas City property, and we're evaluating a new concept for a land-based gaming facility in Bettendorf.
  • Vicksburg, we think we've turned the corner. We have made some improvements to the staff. 
  • Biloxi:  “Real softness in midweek hotel demand. Room rates are way down. We really haven't seen an impact from Boyd or New Palace. As you know, Margaritaville opened at the end of May, no real big impact there, but it's a very aggressive promotional war in Biloxi, probably more than anywhere.”
  • Kansas City Speedway opening promotional activity impact: “It hasn't got completely out of hand, but – and we don't necessarily expect anything long-term, but we have seen an uptick there.”


Takeaway: The political calendar poses a great deal of risk to the Japanese economy, JGBs and Japanese financial institutions over the next ~2 months.

Earlier today, Japan’s lower house of parliament (a.k.a. the Diet) passed a bill authorizing the sale of ¥38.3 trillion of JGBs to cover ~40% of already-approved FY12 expenditures, which began on APR 1st. While no set limit exists, this motion is akin to the US’s own statutory debt ceiling and, like our own debt ceiling, Japan’s deficit financing legislation allows for minority parties to have a say in the accumulation of sovereign debt.


Enter the LDP, Japan’s primary minority party in the more relevant lower house (House of Representatives – 120 of 480 seats) and a slight minority in  the upper house (House of Councillors – 87 of 242 seats) where no party has formed an outright majority. They have signaled as recently as last week that they will not approve the bill unless Prime Minster Yoshihiko Noda calls new elections, which would be roughly one year early, as they are officially due by AUG ’13. As it stands, neither party looks to dominate in the event of a snap election; both the DPJ and LDP have a paltry 13% approval rating per an Asahi poll released earlier this month.


This marks the latest political ploy for the LDP to regain political power in Japan, having recently backed off using the now-ratified VAT hike bill as collateral for Noda’s head. Members of the LDP remain broadly bitter about their party’s AUG ’09 defeat to the DPJ – which was architected by the now-defected Ichiro Ozawa – and they continue to look aggressively for opportunities to restore their long-time position atop Japan’s political hierarchy. Needless to say, we’d be remiss to dismiss these threats as mere political wrangling. Per Finance Minister Jun Azumi’s latest projections, the Japanese government will run out of cash sometime in October if this bill isn’t ratified in time.


The ramifications of a potential/actual Japanese government shutdown are three-fold:

  1. A potential sovereign default;
  2. A potential sovereign credit rating downgrade(s); and
  3. An associated $75-80 billion capital call across the Japanese banking system in the event JGBs are downgraded to single-A level by Moody’s and/or Standard and Poor’s, where the outlook is already “negative”.

To point #1, we do not see material risk of a JGB default over the intermediate term, despite debt service compromising roughly one-fourth of FY12 federal expenditures. Rather, we anticipate that Japanese lawmakers will either find a clause(s) within Japanese statue to completely circumvent a near-term default or they’ll cobble together some political compromise under the increasing scrutiny of global financial markets and ratings agencies. Either way, we don’t view a JGB default as a probable  risk over the next couple of months, as indicated by Japan’s sovereign CDS:




Unlike point #1, we do view point #2 as a heightened and increasingly-probable risk over the intermediate term. Per Takahira Ogawa, S&P’s director of sovereign ratings in Singapore, “political risk is the biggest negative for Japan’s rating”. In and of themselves, neither political risk nor an incremental downgrade of Japanese sovereign debt should do much to the historically-bulletproof JGB marketplace, which continues to have demand buoyed by surplus liquidity in the banking system that gets parked largely in JGBs for lack of better alternatives (second chart below). To this point, deposits at Japanese banks exceeded the aggregate size of their loan book by ¥173.2 trillion as of JUL; this spread, also known as the “Yotai Gap” is equivalent to 17.4% of the total amount of JGBs outstanding, creating a substantial amount of excess demand.






For additional drivers of JGB  market strength in the face of an overwhelmingly-consensus bearish thesis, refer to our MAR 2 presentation titled, “JAPAN’S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING” as well as in our MAR 30 note titled, “DIGGING DEEPER INTO JAPANESE SOVEREIGN DEBT” and our JUL 27 note titled, “ARE JAPANESE GOVERNMENT BONDS POISED TO MAKE SOME NOISE”. Staying on top of which levers are at the most risk of becoming unsupportive on the margin are the key to staying ahead of a JGB market crisis, should one materialize over the long-term TAIL.


Jumping back to ramifications of Japan’s looming government shutdown, we view point #3 as laid out above as among the key catalysts for a JGB market crisis over the intermediate term. Per our calculations according to Basel II standards, Japanese banks would be on the hook for a $79.1 billion capital call in the event JGBs become a single-A entity (at the current exchange rate), after previously having to hold no capital against these assets. It remains to be seen how Japanese banks plan to react to this event; they could merely slow demand for other assets or they could materially slow their rate of JGB accumulation. Time will certainly be more telling here than we ever could; at any rate, we maintain that this is not a risk that should be glossed over by investors.




In addition to a changing risk profile of Japanese bank exposures, we also view a structural shift in long-term inflation expectations as a key catalyst for a JGB crisis; our latest thoughts here were previously outlined in the latter of the aforementioned research notes. To this point, the amount of JGBs held on the BOJ balance sheet now exceeds the total supply of banknotes in the country (¥80.96 trillion vs. ¥80.78 trillion), raising concern that investors will lose confidence amid fears of runaway inflation perpetuated by sovereign debt monetization – an event which has already happened twice in Japan: during the Great Depression and during WWII.


The BOJ counters that it does not include JGBs bought as part of its “transitory” asset purchase program in its calculus, allowing it to exceed the self-imposed “banknotes rule”. The obvious risk here is that BOJ Governor Masaaki Shirakawa loses credibility with the market; we suspect he knows this and that this has been a contributing factor to the BOJ’s unwillingness to acquiesce to incessant political demands for incremental monetary easing. At the current pace of accumulation (¥3.9 trillion per month in 2012; ¥2.8 trillion per month in 2013), the BOJ will have increased its ownership of JGBS by ¥44 trillion in the current fiscal year – more than the ¥40 trillion to be issued per the aforementioned FY12 deficit financing bill!


All told, we see three ramifications of a potential/actual Japanese government shutdown over the near term: a potential sovereign default, a potential sovereign credit rating downgrade(s) and an associated $75-80 billion capital call across the Japanese banking system in the event JGBs are downgraded to single-A level by Moody’s and/or Standard and Poor’s. Moreover, the confluence of these risks has the potential to perpetuate a meaningful back-up in JGB yields over the intermediate term – though, admittedly, this remains an improbable risk for the time being.


Stay tuned,


Darius Dale

Senior Analyst

The Spanish Numbers Game

Takeaway: Spain's GDP numbers and unemployment data paint a colorful picture of the country's economic turmoil.

Spain is quickly becoming the new “China” in terms of the economic data its been putting out. China loves revising GDP and employment numbers all the time and now Spain is joining in on the fun. It revised its GDP numbers on Monday, indicating it had increased 0.4% in 2011 instead of 0.7%. It also noted that its economy shrank by 0.3% in 2010 instead of 0.1%. Whoops!



The Spanish Numbers Game - Vin   Spain



Spain’s unemployment rate has continued to climb since 2008 and picked up swiftly in 2011, in line with the revised GDP numbers. Nearly one-in-four people are unemployed in the country as the unemployment rate hovers around 22%. If this is a sign of the kind of games Eurozone members are going to play in order to save face, the outlook for the rest of 2012 is quite grim.


Hedgeye Senior Analyst Matthew Hedrick lists several reasons why Spain’s situation will continue to worsen:


•             As many peripheral European counties continue austerity programs, growth will slow.

•             This will show up in missed deficit targets, often because they’re unrealistic targets (Portugal and Spain in particular).

•             And in missed growth targets, as austerity has a greater drag on growth and confidence than previously assessed.

•             Spain is one example of a country trying to dig itself out of a huge hole, struggling with huge unemployment rate figures (over 50% for youths), further downside in the property market, and major bank recapitalization needs (current pending funds from the EFSF)

•             We expect confidence and growth to be muted by the developments outlined above, and therefore growth targets to under deliver. This could be a theme throughout not just the periphery but much of Europe over the next quarters as the region’s sovereign debt and banking “crisis” has a nasty tail.

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