prev

China: The Retail Version Of QE

Takeaway: China's VAT tax refund will double profitability for manufacturers who normally rely on a smaller refund for profits.

China is underway with what can effectively be dubbed an “export equivalent of quantitative easing.” Essentially, China is refunding its 17% value-added-tax (VAT) on exports of key products. Take a look in your closet and dresser and check out how much clothing is made in China. We’d say clothing fits into that “key product” range. China does this to keep its otherwise unprofitable manufacturing base afloat. Companies making apparel are essentially operating at a loss and generating profit on the tax rebate.

 

So the deal is that most manufacturers run at about a 3-5% margin – which includes a 13-14% VAT rebate. If you have a 17% rebate, that effectively doubles profitability for the apparel manufacturers and also translates to higher wages at some factories. Higher-end manufacturers like Foxconn, the company that assembles all of those fancy Apple products we know and love, will also benefit from the tax rebate. This is China playing hardball in order to prevent its profit stream of its existing factory base from being destroyed and it’s quite crafty to say the least.

 

The question is whether these benefits find their way down the value-add scale from iPads to things toys and underwear. 

 


Masking Economic Growth

MASKING ECONOMIC GROWTH

 

 

CLIENT TALKING POINTS

 

A WHOLE LOT OF NOTHING

Last week’s Jackson Hole non-event came and went. The Bernanke statement was released and the market popped a little (7 handles in the S&P 500). That was about it. That doesn’t seem like a vote of confidence for us. With Mario Draghi failing to show up and Bernanke giving the spiel about how the Fed is prepared to take additional measures to boost the economy if need be (i.e. more QE), it’s clear we’re going to continue to slowly move higher in the market, making lower highs while oil continues to climb towards $150 a barrel.

 

 

CHANGING MARKETS

As we head into September, it’s time to examine the sea change that’s occurred in the markets. Let’s examine what’s going on here: volatility is up +30% since its year-to-date closing low two weeks ago, commodities are up 1.9% and US Treasury yields are down 14% this morning. Meanwhile, stocks are falling, bonds are up. Trading this market takes a hell of a good eye and diligence in risk management. Meanwhile, the US dollar continues to take hits to the stomach and is falling further still. Despite last week’s “whole lot of nothing” at Jackson Hole, it appears that people aren’t ready to give up hope in Bernanke just yet.

 

 

MASKING ECONOMIC GROWTH

We’ve said it before and are certainly ready to say it again: inflation of market prices does not equate to economic growth. Gold buyers who initiated positions right before Bernanke at Jackson Hole are now enjoying their short-lived gains, but look what you get in return: higher energy prices, no hiring, no economic growth and a lower US dollar. Growth continues to slow and it’s clear that Ben Bernanke has no intention of fixing the economy; he’d much rather placate market participants in the short-term.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:   UP

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Facebook Has Lost More than $50 BILLION in Value. The Man to Hold Responsible: nyti.ms/OSHqpd--jjc” -@andrewrsorkin

 

 

QUOTE OF THE DAY

“The United States is a nation of laws: badly written and randomly enforced.” –Frank Zappa

                       

 

STAT OF THE DAY

$6 billion. The amount of capital Spain’s Treasury will inject into a rescue fund to help recapitalize failing financial institutions.

 

 

 

 

 


THE M3: VISITORS; SCC; CHINA HOME PRICES

The Macau Metro Monitor, September 4, 2012

 

NEW RULES MAKE IT EASIER FOR MILLIONS TO ENTER MACAU: HEAD OF TOURIST OFFICE COUNTERS CONCERNS OVER MORE VISITORS Macau Daily Times

Director of the Macau Government Tourist Office (MGTO) João Manuel Costa Antunes was asked by the media about the mainland’s decision to allow non-local residents in the six cities of Beijing, Tianjin, Shanghai, Chongqing, Guangzhou and Shenzhen, to apply for Macau entry-permits in the cities they are residing instead of returning to their native hometowns for the application.  The new policy is likely to see many more mainland visitors to Macau.  Antunes was not worried about the increase in capacity for Macau’s tourism industry. 

 

As to the possibility of the mainland’s further relaxing of entry-permit applications and the extension of coverage of the Individual Visit Scheme, the official stressed that the decision is in the hands of the central government, but Macau has been taking measures to smoothly prepare for receiving additional visitors.  The Scheme has increased its coverage from 6 to 49 cities, and the relevant arrangements have been implemented smoothly step-by-step, so the new expected increase would not cause any problems. He said the government has been improving its carrying capacity by building new facilities to attract and accommodate more visitors and offer them a more enjoyable stay in the city.

 

SANDS COTAI CENTRAL SECOND PHASE ADDS 38 NEW RETAILERS Macau Daily Times

Sands Cotai Central’s 2nd phase opening, scheduled for September 20, will add 38 new retailers to the resort. With the new store openings, Shoppes Cotai Central will offer a total of 70 retailers, with plans to expand to over 90 by early 2014.  

 

CHINA HOME PRICES RISE FOR 3RD MONTH IN AUGUST-SURVEY Reuters

According to the China Real Estate Index System (CREIS), China's average home prices rose 0.2% to 8,738 yuan ($1,400) per square metre in August, moderating from July's MoM increase of 0.3%.  On a YoY basis, home prices in the 100 cities were down 1.6% in August, the fifth month of YoY declines since June 2011.  In China's top 10 cities, including Beijing and Shanghai, average home price rose 0.5% MoM, but were down 1.5% YoY.  

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS

Takeaway: $XLF-While Europe continues to move modestly higher on talk without action, oil prices, Chinese steel prices and yield spreads flash danger.

Key Takeaways

 

Overall, there is more bad news than good in our risk monitor this morning. On a short-term basis, four of twelve measures deteriorated (Muni default probabilities, Chinese steel prices, yield spread, and Asia financial CDS), while just two measures improved (High yield, Euribor-OIS). On an intermediate and long-term basis, the trends remain net positive, for now. While the momentum of the market, and in Financials in particular, has clearly been higher since early June, we see storm clouds on the horizon in the form of higher commodity costs (fuel & food), lower Chinese steel prices, and tighter yield spreads.  

 

*  European bank swaps were mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher. 

 

* The high yield and leveraged loan markets both pushed higher last week.

 

* Municipal default risk rose again last week, as measured by the MCDX, continuing the trend that started a few weeks back when news broke that Warren Buffett cut his exposure to the muni market.  

 

* Chinese steel in a major bear market - steel prices in China fell another 1.2% last week, or 43 yuan/ton, to 3506 yuan/ton, bringing the decline over the last four months to roughly 20%. 

 

* The yield spread (2-10) resumes its downtrend, compressing by another 8 bps this past week to 133 bps. This barometer of bank margin pressure continues to make lower lows and lower highs. 

 

* Our Macro team’s quantitative setup in the XLF is now Bullish TRADE and TREND, with 0.7% upside to TRADE resistance of $15.26 and 0.9% downside to TRADE support of $15.02. 

 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 2 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged  

• Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged  

• Long-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 3 of 12 unchanged

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Summary

 

1.  American Financial CDS   Swaps were broadly tighter last week for all major U.S. financial reference entities. Interestingly, this was a divergence from their equity performance, which was modestly negative.  

Tightened the most WoW: GS, C, BAC

Widened the most WoW: MTG, AON, PRU

Tightened the most WoW: RDN, LNC, C

Widened the most/ tightened the least MoM: MTG, COF, GNW

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - American 2

 

2. European Financial CDS  European bank swaps were mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - European

 

3. Asian Financial CDS   Chinese and Indian bank swaps widened while Japanese bank swaps were mixed. 

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Asia 2

 

4. Sovereign CDS – Spanish and Italian credit default swaps showed notable degradation last week, rising 20 and 10 bps respectively. In contrast, Portuguese swaps tightened 20 bps. The other markets we track were largely flat, though Japan widened by 4 bps (5%) to 85 bps. 

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Sov Table

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Sov 1

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 7.06% versus 7.14% the prior week.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.5 points last week, ending at 1709.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - LLI

 

7. TED Spread Monitor – The TED spread rose 1 bp last week, ending the week at 34 bps versus the prior week’s print of 33 bps.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 0.6 points to a new 52-week high, ending the week at -1.96 versus -2.5 the prior week. The relentless ascent of both fuel and food prices will not end well for the consumer. 

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Joc

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 21 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - ECB

 

11. Markit MCDX Monitor – Last week spreads widened 4 bps, ending the week at 154 bps versus 150 bps the prior week. The index, which measures municipal bond default probabilities, has been trending generally higher since the news two weeks ago that Warren Buffett was reducing his exposure to the market's default risk. While the index is only making lower highs thus far, we're keeping an eye on it to see if it takes out the mid-July highs of 167 bps. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - MCDX

 

12. Chinese Steel - Steel prices in China fell another 1.2% last week, or 43 yuan/ton, to 3506 yuan/ton, bringing the decline over the last four months to roughly 20%. This index continues to reflect significant weakness in China's construction market. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - CHIS 2

 

13. 2-10 Spread – The yield spread resumes its downtrend - last week the 2-10 spread tightened 8 bps to 133 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF is now Bullish TRADE and TREND, with 0.7% upside to TRADE resistance of $15.26 and 0.9% downside to TRADE support of $15.02. 

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - XLF macro setup

  

Margin Debt - July: +0.61 standard deviations 

NYSE Margin debt fell  to $278 billion in July from $285 billion in June. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through July. 

 

TUESDAY MORNING RISK MONITOR: YIELD SPREAD, COMMODITY PRICES AND CHINA ALL FLASH WARNING SIGNS - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.


Fore!

This note was originally published at 8am on August 21, 2012 for Hedgeye subscribers.

“Golf is a game in which one endeavors to control a ball with implements ill adapted for the purpose.”

                -Woodrow Wilson

 

Yesterday I took a few of my colleagues out to play in a charity golf tournament at The Course at Yale.   For those of you who haven’t played it, the Yale course is not for the faint of heart.  It has some incredibly challenging holes replete with hazards in the most untoward places.  The more we became engrossed in golf yesterday, and marginally removed from stock market operating, the more I actually began to see the parallels between the two.

 

Now as anyone will tell you, I am far from a great golfer.  But just as a broken clock tells time twice a day, every round I pull a few shots out of thin air that make me look like a veritable Arnold Palmer, albeit a younger and more Canadian version.  In between my great shots, of course, were many less than spectacular shots.  The bad shots, though, made me think more strategically about the game and I realized that if I could stay out of trouble – avoid the sand traps, out of bounds, and water hazards – I could still score reasonably well.

 

In short, the key parallel between golf and investment management: avoid the looming hazards and you will remain competitive.  The caveat to this point is that in golf there are hazards that are not so obvious to the casual observer.  The wild card hazard yesterday on the course was my colleague, and Hedgeye’s Asia Analyst, Darius Dale.

 

Darius is a novice golfer but was a lineman in college and still has the strength of a few normal men.   Needless to say, when he winds up on the tee, it’s best to hide behind your cart if you are within a few fairways.  Being the risk manager he is, Darius is not afraid to yell - fore!  Collectively, we appreciated this risk management aspect of his golf game.

 

Speaking of avoiding hazards, the rumors coming out of Europe this morning imply that the Europeans hope to avoid any future sovereign debt sand traps.  This morning the Telegraph is reporting that Jorg Asmussen, Germany’s director at the ECB, is supporting unlimited purchases of peripheral debt.  This plan is in line with Draghi’s plan, though is in conflict with the German Bundesbank.  This article also re-stated the report from Der Spiegel on the weekend that suggested the ECB was studying plans to cap Spanish and Italian yields.  (It seems both Greece and Portugal have been all but forgotten!)

 

Purportedly, the key criteria to trigger this plan is a formal request from Spain for a bailout from the EFSF/ESM and agreeing to the fiscal terms therein.  On a positive note, the market appears to be of the view that Spain will get onside as the Spanish bond auction yesterday was seemingly successful.  Specifically, Spain sold its maximum target of €4.51 billion of 12-18 month bills this morning. The 12-month average yield was 3.070% versus 3.918% on July 17th, 18-month average yield 3.335% versus 4.242% on July 17th.  Further, the bid-to-cover was a veritably euphoric 2.4x.

 

In the Chart of the Day today we show Spanish 10-year yields going back one year.  The Spanish 10-year has backed off of its highs, so it seems that the rumors the ECB may change the lay of the course and bring out some bigger clubs (The Bazooka Driver?), which have had at least a marginally positive impact on Europe’s debt woes.  The history of the last couple of years has indicated that any proposed solution in Europe has typically been short term in nature and never quite as good as the rumors in Der Spiegel.  Of course, perhaps this time is truly different . . .

 

Switching clubs briefly, our Energy Analyst Kevin Kaiser recently did an update on the key factors he sees as supporting the price of oil and wrote the following:

 

“The fundamentals (read: supply and demand) warrant lower oil prices, but expectations for easier monetary policy and fears of supply disruptions (geopolitical risk) have lifted prices recently.  Note that the oil market has shrugged off actual data in favor of events that may or may not occur – the Fed has not gone to QE3, Europe has yet to implement a comprehensive solution to its debt crisis (if there is one), and there has been little aside from increased rhetoric out of Iran and Israel – yet oil continues to trade higher in expectation of some or all of those events.” 

 

On the last point, it seems the rhetoric is at the very least heightening, especially according to reports from The Times of Israel this morning.   Well it is quite possible this is saber rattling by the Israeli government, the report was very specific and as such we wanted to highlight it below (emphasis ours):

 

“Israel’s Prime Minister Benjamin Netanyahu “is determined to attack Iran before the US elections,” Israel’s Channel 10 News claimed on Monday night, and Israel is now “closer than ever” to a strike designed to thwart Iran’s nuclear drive.

 

The TV station’s military reporter Alon Ben-David, who earlier this year was given extensive access to the Israel Air Force as it trained for a possible attack, reported that, since upgraded sanctions against Iran have failed to force a suspension of the Iranian nuclear program in the past two months, “from the prime minister’s point of view, the time for action is getting ever closer.”

 

Asked by the news anchor in the Hebrew-language TV report how close Israel now was to “a decision and perhaps an attack,” Ben-David said: “It appears that we are closer than ever.”

 

Obviously, the Israel government makes statements to the media for strategic reasons and much of this could well be rhetorical.  That said, one thing I’m pretty sure of is that at a VIX of 14.02, the tail risk of an Israeli strike on Iran is not even remotely priced into the U.S. equity markets.  To some, my emphasis on the article above may be construed as fear-mongering, but in reality it is just like golf – you need to be aware of the hazards on the course.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1614-1628, $113.21-115.49, $82.21-82.81, $1.22-1.24, 1.74-1.88%, and 1408-1419, respectively.

 

 

 

Keep your eye on the ball,

 

Daryl G. Jones

Director of Research 

 

Fore! - Chart of the Day

 

Fore! - Virtual Portfolio


LV STRIP: JULY DECEPTION

Gaming revenues were likely up solidly in July but should anyone get excited?

 

 

The answer is no.  Our opinion likely won’t stop the initial euphoria that Vegas is back, baby.  When Nevada releases July statistics in the middle of next week, gaming revenues will look strong.  However, we think even a cursory review of the underlying metrics will reveal yet another soft month.  July faces a very easy hold comparison on both slots and tables.  We continue to believe that slot volume is the most important barometer of Strip health, and this metric will likely show another YoY decline.

 

We are projecting gross gaming revenues to increase 14-18% assuming normal slot and table hold percentages.  However, we expect slot and table volume (ex baccarat) to fall YoY.  Slots held at only 6.5% last year versus a normal 7.0% - mainly due to the accounting quirk of month end falling on a weekend.  July 2012 will benefit from a June accounting catch up where the month ended again on a weekend.  Meanwhile, table hold was only 10.3% against a normal 12.0%. 

 

Despite the lower gaming volumes, July wasn’t a disaster.  July 2012 is down a Friday and a Saturday.  However, we do think investors may overreact positively to the initial revenue print and the Vegas stocks, particularly MGM, will trade off following the initial euphoria.

 

We were positive on MGM late last year and at the beginning of 2012 on improving slot volumes.  However, the slot business turned negative in April and so did we.  July should represent the 4th straight month of declining slot volumes in a period where the Strip should be in recovery mode.  Not good.

 

LV STRIP: JULY DECEPTION - FF


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next