Takeaway: We are bullish on Taiwanese equities with respect to the intermediate-term TREND duration.



  • While we continue to anticipate that economic growth will continue to slow broadly across the globe over the intermediate term, there is likely to be a handful of countries that have led the slowdown and are poised to lead any potential broad-based economic recovery.
  • Taiwan is one of those economies and we are now inclined to trade Taiwanese equities with a bullish bias with respect to the intermediate-term TREND duration. 


Yesterday, Taiwanese Primer Sean Chen announced a series of measures designed to boost real GDP growth by +100bps over the long-term TAIL, relative to prior expectations. Those measures include:


  • Attracting private investments of at least NT$1 trillion ($34B) annually through relaxing restrictions on Chinese investment(s) and easing curbs on domestic companies investing in mainland China;
  • Opening industries such as chipmakers and LCD panel makers to increased Chinese investment; and
  • Promoting increased tourism and hospitality-related revenues (the government now expects to grow annual visitors from an expected 7 million in 2012 to 10 million in 2016).


The measures, which carry a notable pro-China theme, come in the wake of the recently-signed yuan clearing agreement that should promote the use of the Chinese currency in Taiwanese financial markets – mimicking what we are seeing today in Hong Kong’s Dim Sum and yuan-denominated deposits markets.


While we continue to express long-term concerns with the Chinese yuan and Dim Sum markets (introduced in a 4/16 note titled: “FLAGGING ASYMMETRIC RISK IN THE CHINESE YUAN AND DIM SUM BOND MARKET”), we do think Taiwan’s relatively small economy ($887.3B) and its financial markets could serve to benefit from an influx of Chinese capital over the intermediate term – at least in the sense that the Chinese have established a penchant for acquiring international assets in strategic industries (energy and materials specifically… is tech next?).


Per Chen, a specific action plan is due out by the end of this month; from a fundamental perspective, this GROWTH-positive catalyst times up quite nicely with the Taiwanese economy’s likely move into Quad #1 on our proprietary G/I/P analysis. Our models currently have Taiwanese INFLATION slowing post the 3Q time frame (the AUG CPI reading came in at +3.4% YoY, which is the fastest rate since AUG ’08), though that forecast is certainly in jeopardy pending further action out of the Federal Reserve.




From a POLICY perspective, the OIS market is pricing in -100bps of cuts over the NTM, while the NDF market is pricing in +1.3% of FX strength vs. the USD over that same duration, indicating a mixed/status quo outlook for Taiwanese monetary policy among market participants – a view we’d agree with at the current juncture. If, however, our forecasts prove correct on Taiwanese GROWTH, we could see the interest rate swaps market price in less monetary easing on the margin, and that could prove positive for continued gains in the Taiwanese dollar (up +2.4% YTD vs. the USD).


On the equity market front, Taiwan’s benchmark Taiwan Stock Exchange Weighted Index (TAIEX) closed today down -7% from its MAR 2nd YTD peak. Moreover, the TAIEX has underperformed the regional median gain across Asian equity markets on both a six-month (-4.5% vs. +2.2%) and LTM (-0.5% vs. +7.1%) basis, so we like the potential for Taiwanese stocks to play “catch-up” relative to the region over the intermediate term from  mean reversion perspective.




We also like that the Taiwanese government has recently cut its 2012 real GDP growth forecast by -20% to +1.66%, confirming the YTD plunge in consensus 2012 growth expectations (from +4.1% in JAN to +1.8% currently) and creating ample space for upside surprise risk in the reporting of Taiwanese economic data.


Why We Wouldn’t Own Taiwan

Two fundamental factors that are not in support of our bullish bias are 1) exposure to Chinese/global growth slowing and 2) a meaningful lack of economic headroom to apply fiscal stimulus to boost growth over the intermediate term.


To the first point, it should be noted that exports account for roughly 60% Taiwan’s real GDP, leaving the country somewhat exposed to global growth trends – trends we expect to continue deteriorating over the intermediate term. Its largest export market is China (28.1% of total shipments per CIA Factbook) – a country where economic growth has slowed significantly and looks to base at/near current historically-depressed rates over the intermediate term.


To the latter point, Taiwan scores quite poorly on our propriety Stimulus Space Index; in fact, it posts the third-lowest reading of our 17-country sample of Asian and Latin American economies. For more details, including our methodology, refer to the following note: WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? (8/23).




All told, while we continue to anticipate that economic growth will continue to slow broadly across the globe over the intermediate term, there is likely to be a handful of countries that have led the slowdown and are poised to lead any potential broad-based economic recovery. Taiwan is one of those economies and we are now inclined to trade Taiwanese equities with a bullish bias with respect to the intermediate-term TREND duration. 


Darius Dale

Senior Analyst

Mining: The Cycle Turns

Takeaway: Names like $RIO and $MCP are under pressure as the mining cycle turns.

The last decade has undergone an extraordinary mining boom that has been a positive for companies that have some kind of involvement in it. Everyone from Caterpillar (CAT) to BHP Billiton (BHP) to Rio Tinto (RIO) have reaped the benefits of the rush for resources and owe China a “Thank You” card or two for boosting the mining rush. But all good things must come to an end and it appears the cycle is turning in the mining industry.


As China’s economic growth begins to slow and people realize they don’t need 500 high rise condo buildings in a one square mile radius, demand for materials and resources has tapered off. Seeing as how mining is a cyclical industry, the price of certain commodities like copper are beginning to fall regardless of Bernanke’s quantitative easing methods. Companies that manufacture mining equipment are also due to see a slowdown in sales and revenue as demand weakens. 



Mining: The Cycle Turns  - Mining

Up On a Rope: SP500 Levels, Refreshed

Takeaway: Everything is fine until it isn’t.

POSITIONS: Long Consumer Staples (XLP), Short SPY


The SPY is up on a rope as the US Dollar is getting burned at the stake. Correlation Risk, all the while, is moving right back to where it has multiple times in the last 5 years (0.9). Correlation Risk between Gold/USD is even higher than that.


But, bullish is as bullish does, until the music stops – and the musician himself has quite the set of expectations to deliver on tomorrow, so I’ll stay with the defensive position (Long Staples, Short SPY) into that.


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1445 (+0.55% upside)
  2. Immediate-term TRADE support = 1433 (-0.27% downside)
  3. Intermediate-term TREND support = 1419


In other words, everything is fine until it isn’t, so it’s worth waiting on Bernanke’s Weimar river card. I can handle a few 100bps of pain if it means we get a blow off top. It’s the price you pay for insurance against buying tops pre the next 10% draw-down.


If he prints to infinity, Oil probably rips to $125-130 again (like it did in February post his 0% rate push to 2014 on January 25th). Then #GrowthSlowing picks up its pace on the downside again too.





Keith R. McCullough
Chief Executive Officer


Up On a Rope: SP500 Levels, Refreshed - SPX

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20 Proprietary Risk Ranges

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GPS: Waxing and Man-scaping?

Takeaway: We think $GPS hiring Michael Francis, recently fired CMO at JCP, as a strategic advisor is yet another building block to a developing short.


We think that GPS hiring Michael Francis, recently fired CMO and confidant of Ron Johnson at JC Penney, as a strategic advisor is extremely telling. Think about it like this…

Make no mistake, this has been a financial engineering story over the past 8-years. Basically, buying back stock. $11bn in repo has taken down the share count by 47%. As recently as 3-years ago, GPS was sitting on a net cash position of $2.3bn. Now it is down to $400mm. In other words, this did not need to be an operational improvement story to grow earnings. Now the share repo angle is largely over. GPS absolutely NEEDS to show consistent comp and/or margin improvement.


GPS: Waxing and Man-scaping? - 9 12 2012 11 44 42 AM


At the precise time that they needed to perform, two things happened.

1)    The company ‘hit a fashion trend’ with its colors. I’m still not sure what that means. Hitting a fashion trend is pretty much useless. Having a process to sustain driving fashion trends (Ralph Lauren, Nike) is a completely different issue. GPS hit fashion because it was lucky, not because it was good.  

2)      JC Penney imploded at that exact same moment. When one of the largest apparel retailers in the country comps down by 20%+ and hands off $3bn in sales to the lowest bidder, it is absolutely positive for GPS. Some people think that Gap’s biggest competitors are specialty apparel retailers – even the teen and adolescent retailers. Not true. GPS is basically a department store. The company competes head to head with JCP. In fact, when JCP started comping down, its top competitor, Kohl’s, ALSO comped down. Virtually all of the share was picked up by Macy’s, GPS, TJX, and ROST.


Though we think that JCP is terminally ill, the reality is that its business will ebb and flow along the way. The second that it stops ebbing, then these companies -- particularly GPS and M will stop gaining share on the margin – which is all that this P&L needs to start choking on itself.


So this takes us back to the Michael Francis hire. What does this tell us? Well, on one hand, it tells us that GPS is being proactive in getting as smart as possible as to how JCP will be going to market with its new strategies. That way, GPS can pre-empt, or even just cope appropriately when certain initiatives come to fruition.


But on the flip side, it shows just how vulnerable it is and how much it is downplaying the JCP threat. Check the last conference call transcript. Search for the name ‘JC Penney’. You’re not going to come up with much. They’re completely playing down to the street how much this has been helping them.


Are they flat-out lying? Probably not. We’re not crying conspiracy theory here. But the reality is that they simply don’t know. Do retailers know why people buy their goods? Why they walk past the door and go to the next retailer? They really don’t. The only one that likely can is Wal Mart. Amazon is a close second. Costco and Target round out the top. It falls precipitously from there. GPS simply does not know (and JCP does not know either). That’s why this industry has always been plagued by companies having to compete away what is near-universal previously-held optimism around sales and margins.


Ron Johnson announced this week that the company had logged in 1.6mm free haircuts at JC Penney stores this Back-to-School. Now that the former head of marketing is advising GPS, maybe we’ll see free waxing at Athleta, and Man-scaping at Banana. They’re gonna need it…no joke.


The consensus has GPS earning $2.40 next year. Then $2.72 the year after. We’re about 10% below next year, and 20% below the year after. We’d argue that barring a disproportionately large capital investment (which would drive returns lower) GPS will never see $2.50 again – ever. And as we say at Hedgeye, ‘ever’ is a long time.


That did not matter with the stock trading at $15 a year ago. But it certainly matters today at $35.  Let’s say we’re dead wrong, and the Street is spot-on. Then you’re paying 12.9x earnings for a number that GPS will earn in FY 2014. That’s right up there with AAPL, NKE and RL. Which would you rather own?


Takeaway: There are other ways for LVS to skin the table cap cat

Helping casinos cope with the Macau table cap



There has been a lot of chatter recently on how Macau casinos will overcome the table cap of 5,500, which is in effect until the end of March 2013.  First off, it's not a law, it's government stipulation that can be changed at any time.  One way casinos are helping to overcome this stipulation is through the placement of "super tables' each of which seats 12 people with two dealers, compared to 6-8 positions on a traditional Macau table with one dealer.


Here is our count of Macau super tables:







At the end of Q2, there were 5,498 tables reported by the Macau government.  The cap has been a concern for LVS investors in particular with the opening of Phase 2 on September 20th.  Sands China is already the most aggressive with the new product to free up room for the additional 200 tables expected at Sands Cotai Central in late 2012/early 2013. 


SCC isn’t likely to get their new table allocations until December or January 2013.  In the meantime, they can increase the table count above the cap during Golden Week.  The good news is that the number of tables that SCC originally opened with was too high so they moved a lot of those tables back to Venetian where they are more productive.  When Ph2 opens next week they will move some of those back and take some from Sands.  What that means is that on weekends and peak times, Sands’ properties will be running at overcapacity, however, most of the time, the table shortage will not impact them as there are plenty of under-utilized tables.




SUPER SIZE ME - IMG 20120912 00857


Takeaway: Casual dining traffic continued to decelerate through August $DRI $DIN $BLMN $EAT $CAKE $BWLD $TXRH

The estimated Knapp Track numbers for August suggest a slight sequential improvement in casual dining trends from July. Traffic, however, continues to decelerate.


Knapp Results


Estimated Knapp Track casual dining comparable restaurant sales grew 0.8% in August versus an estimated 0.6% in July.  The sequential change, in terms of the two-year average trend, was -45 basis points. 


Estimated Knapp Track casual dining guest counts declined -1.7% in August versus an estimated -1.8% in July.  The sequential change from July to August, in terms of the two-year average trend, was -70 basis points.



Black Box Intelligence


Black Box Intelligence released its casual dining index comparable restaurant sales growth for August earlier this month.  Comparable sales grew 1% last month while traffic declined -1.1% and price grew 2.2%.  The Knapp-Black Box spread was at -0.2% in August, which could imply that Darden underperformed since Darden is included in Knapp but not in the Black Box data.  To be clear, there are several differences between the Knapp Track and Blackbox data sets so the spread is not a sure-fire indicator of a slowdown in Darden comps but, given the size of the Darden system, we believe that the spread between Knapp Track and Blackbox is likely relevant for Darden’s top line trends.  The spread was +0.8% in February, which was a strong month for Darden (Red Lobster, in particular).  Since then, however, the spread has been negative through August.



Pricing Power Pressure


The restaurant industry’s pricing power is under pressure, currently, as Food at Home CPI is now well below Food Away from Home CPI on a year-over-year basis.   


AUGUST CASUAL DINING SALES TRENDS - food at home vs food away from home cpi



Howard Penney

Managing Director


Rory Green



Early Look

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