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The Macau Metro Monitor, February 5, 2013




Local authorities are forecasting the number of border crossings during the Lunar New Year holiday period to increase by 5 to 8%.  Fuelling the increase is the opening in late December of the Gongbei railway station, the last stop of the high-speed railway link connecting Zhuhai to Guangzhou.


Last year, the police recorded a total of around 2.5 million border crossings during the Lunar New Year holiday period, including tourists, residents, non-resident workers and others.  To handle the peak in border crossings, the Public Security Police has suspended the holidays of all frontline officers and deployed extra staff at the checkpoints, TDM reported.



The Director of the Chinese Liaison Office in Macau Bai Zhijian said the central government would help Macau to determine how many visitors it can accommodate, which he believed should be done as soon as possible and denied Beijing is playing its visa restriction cards by loosening or tightening the border control targeting the gaming industry. 


Asked if that means visa restriction is looming on the horizon, he said “it all depends on Macau.  If they think there’re too many people, then we can make it fewer, but that doesn’t mean we’re targeting the gaming industry, or testing the water by relaxing the restrictions at one time and tightening it at another.


TODAY’S S&P 500 SET-UP – February 5, 2013

As we look at today's setup for the S&P 500, the range is 24 points or 0.45% downside to 1489 and 1.16% upside to 1513.             














  • YIELD CURVE: 1.74 from 1.71
  • VIX  closed at 14.67 1 day percent change of 13.72%

MACRO DATA POINTS (Bloomberg Estimates):


  • 6:30am: ESM to sell as much as EUR2b 91D bills
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Fed’s Duke speaks on community banks in Duluth, Ga.
  • 10am: ISM Non-Manf. Composite, Jan., est. 55.0 (prior 55.7)
  • 10am: IBD/TIPP Economic Optimism, Feb. est. 47 (prior 46.5)
  • 11am: Fed to purchase $1.25b-$1.75b debt in 2036-2042 sector
  • 11:30am: U.S. Treasury to sell 4W bills, $25b in 1Y bills


    • CBO releases federal budget projections, economic outlook
    • Yahoo’s Mayer, Goldman’s Blankfein in Obama immigration session
    • CFTC holds public roundtable to discuss agency’s proposed rulemaking, “Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations,” 9:30am
    • SEC holds a roundtable discussion on decimal-based trading, tick sizes for small, medium sized companies, 10am
    • CFPB Director Richard Cordray, National Credit Union Administration Board Chairman Debbie Matz hold “town hall webinar” on “Ability-to-Repay” rule, 3pm
    • HHS, FDA discuss creation of alternative pathway for expediting approval of drugs needed for unmet medical needs, 9am
    • FCC Chairman Julius Genachowski holds field hearings on Hurricane Sandy to consider how nation’s communications networks work during crises, 9am, 2pm.
    • FCC Commissioner Robert McDowell and David Gross, former U.S. ambassador for international communications and information policy, testify at hearing on Internet freedom before 3 House subcmtes, 10:30am


  • Dell board said to meet to vote on $24b leveraged buyout
  • Virgin Media in talks with Liberty Global on possible transaction
  • Hartford announces buyback, debt repayment plan after Sandy
  • Goldman hired by Russia as corporate broker to boost image
  • U.K. economy faces risk of a prolonged stagnation, NIESR says
  • German push to speed bank bondholder-loss plan gains momentum
  • Wells Fargo to target sovereign wealth funds in Dubai expansion
  • Buffett gets $1.8b in investment assets from Cigna deal
  • Fidelity said to press Endo Health to consider selling itself
  • Facebook said to develop location-tracker app for smartphones
  • Homes sell in 2 weeks as U.S. spring buyers face low inventory
  • MF Global customer funds rules will get another hearing at CFTC
  • UBS 4Q loss narrower than est. after Libor fine, job cuts
  • Hemispherx fails to win U.S. approval for chronic fatigue drug
  • IBM adds cheaper power servers to expand in emerging markets
  • Boeing asks U.S. FAA to permit test flights with Dreamliner
  • J.C. Penney asks judge to bar claim retailer defaulted on bonds
  • Consumer Reports says Ford, GM turbo engine benefits overstated
  • Shirakawa plans to exit as Bank of Japan governor on March 19


  • Becton Dickinson (BDX) 6am, $1.23
  • Diamond Offshore Drilling (DO) 6am, $1.09
  • Centene (CNC) 6am, $0.36
  • Emerson Electric (EMR) 6:30am, $0.62
  • Spectra Energy (SE) 6:30am, $0.31
  • Eaton (ETN) 6:30am, $0.93
  • Littelfuse (LFUS) 6:30am, $0.84
  • Church & Dwight (CHD) 7am, $0.57
  • Cardinal Health (CAH) 7am, $0.86
  • Sirius XM Radio (SIRI) 7am, $0.02
  • Archer-Daniels-Midland (ADM) 7am, $0.59
  • Delphi Automotive (DLPH) 7am, $0.87
  • OneBeacon Insurance Group (OB) 7am, $0.12
  • Techne (TECH) 7am, $0.77
  • Aecom Technology (ACM) 7am, $0.30
  • HCA Holdings (HCA) 7:03am, $0.83
  • Alliant Techsystems (ATK) 7:30am, $1.71
  • Teco Energy (TE) 7:30am, $0.21
  • Estee Lauder (EL) 7:30am, $1.05
  • Automatic Data Processing (ADP) 7:30am, $0.71
  • Vishay (VSH) 7:30am, $0.08
  • Arch Coal (ACI) 7:45am, $(0.15)
  • Inergy Midstream (NRGM) 7:45am, $0.16
  • Inergy (NRGY) 7:46am, $0.08
  • SunCoke Energy (SXC) 7:59am, $0.34
  • Magellan Midstream (MMP) 8am, $0.65
  • Spectra Energy (SEP) 8am, $0.37
  • Computer Sciences (CSC) 8am, $0.65
  • Kellogg Co (K) 8am, $0.66 - Preview
  • UDR (UDR) 8am, $0.34
  • Agco (AGCO) 8am, $0.98
  • Liberty Property Trust (LRY) 8am, $0.63
  • Lennox International (LII) 8am, $0.55
  • Allergan (AGN) 9am, $1.18 - Preview
  • Bell Aliant (BA CN) Pre-Mkt, C$0.41
  • Unum Group (UNM) 4pm, $0.77
  • Chipotle Mexican Grill (CMG) 4pm, $1.95
  • Expedia (EXPE) 4pm, $0.65
  • Ultimate Software (ULTI) 4pm, $0.39
  • Universal (UVV) 4pm, NA
  • Panera Bread Co (PNRA) 4pm, $1.74
  • CBL & Associates Properties (CBL) 4pm, $0.57
  • Kimco Realty (KIM) 4:01pm, $0.31
  • Cerner (CERN) 4:01pm, $0.64
  • Fiserv (FISV) 4:01pm, $1.40
  • CME Group (CME) 4:01pm, $0.64
  • NeuStar (NSR) 4:01pm, $0.72
  • Hanesbrands (HBI) 4:01pm, $1.04
  • Team Health (TMH) 4:01pm, $0.35
  • Shutterfly (SFLY) 4:02pm, $1.39
  • Thoratec (THOR) 4:02pm, $0.37
  • Take-Two Interactive (TTWO) 4:05pm, $0.55
  • Zynga (ZNGA) 4:05pm, $(0.03)
  • Jack Henry & Associates (JKHY) 4:05pm, $0.50
  • Myriad Genetics (MYGN) 4:05pm, $0.38
  • Alterra Capital Holdings (ALTE) 4:05pm, $(0.44)
  • Trimble Navigation (TRMB) 4:05pm, $0.55
  • Aflac (AFL) 4:07pm, $1.48
  • Hain Celestial Group (HAIN) 4:10pm, $0.69
  • Genworth Financial (GNW) 4:10pm, $0.27
  • KKR Financial Holdings (KFN) 4:12pm, $0.39
  • Walt Disney (DIS) 4:15pm, $0.77
  • CH Robinson Worldwide (CHRW) 4:15pm, $0.70
  • Equity Residential (EQR) 4:25pm, $0.76
  • Genworth MI Canada (MIC CN) 4:30pm, C$0.78
  • Acadia Realty Trust (AKR) 5pm, $0.28
  • HNI (HNI) 5:30pm, $0.43
  • Suncor Energy (SU CN) 10pm, C$0.74
  • BioMed Realty Trust (BMR) Post-Mkt, $0.34
  • MDU Resources Group (MDU) Post-Mkt, $0.39




CRB Index – Commodities failing at our long-term TAIL risk line for the CRB Index (306) was a big reason why we got longer of Asian/US stocks into yesterday’s close; CRB Index (peaked in 2011) = long-term bubble that is popping as the US Dollar continues to make a series of long-term higher lows; Oil is overbought up here, but we need to see that drop back below $113 (Brent).


  • Iron Ore Seen Poised for Bear Market by Smirk as Supply Expands
  • Platinum Supply Falls to 13-Year Low as Mines Close: Commodities
  • Oil Rises From One-Week Low as Recovery Signs Counter Supplies
  • Platinum Trades Near 17-Week High on Concern Supplies Will Fall
  • Nickel Drops Most in Three Weeks as Investors Seek to Curb Risk
  • Soybeans Rise for Third Session as Brazil Rain May Slow Harvest
  • Coffee Gains as Vietnam Growers Hold Supplies; Sugar Advances
  • Oil Supplies Rise in Survey on Seaway Disruption: Energy Markets
  • Gasoline at U.S. Pumps Jumps Most in Two Years on Crude Rally
  • Mongolia Should Get More Control of Rio Mine, President Says
  • ADM Profit Beats Estimates After Soybean-Processing Margins Gain
  • Niger in Talks With Areva for Uranium Mines to Give More Funds
  • Record China Flour Cost Spurring Wheat Imports: Chart of the Day
  • Anglo American CEO Carroll Says Platinum Industry Is ‘in Crisis’








EUROPE – didn’t take much to freak people out in European Equities – Socialist Quote of The Day “the Euro shouldn’t fluctuate as the market sees fit” (Hollande), as France reports a bomb of a Services PMI print for JAN at 43.6 (vs 45.2 last month); UK and Germany both had very solid PMI reports – both equity markets look very bullish compared to France, Italy, and Spain.





KOSPI – continues to be a stealth leading indicator (broke TRADE and TREND supports in the last 3 weeks) and confirmed that bearish TREND overnight, down another -0.8% to 1938 (TREND resistance = 1959); China, Singapore, and Hong Kong look nothing like the KOSPI (so buy those); Shanghai Comp closed up +0.2% last night, despite the European freak-out.








The Hedgeye Macro Team





Let's Do This

This note was originally published at 8am on January 22, 2013 for Hedgeye subscribers.

“C’mon! Let’s do this.”

-Ray Lewis


If Japanese policy makers really want to get nuts, they should sign Ray Lewis for the 2014 Money-Printing season. After taking down the Patriots this weekend, the 13x Pro Bowler is going back to the Super Bowl. It’ll be his last game. If Baltimore wins, it will be epic.


“You’ve got to go out and show them that I’m a different creature now than I was 5 minutes ago, cause I’m pissed off for greatness. Cause if you ain’t pissed off for greatness, that just means you’re okay with being mediocre.”


Yep. That’s what I am talking about Japan – some ole school Raven rants in those BOJ pressers.


Back to the Global Macro Grind


Evidently, the global currency market didn’t get the BOJ’s marketing message overnight. The Japanese Yen rallied a full +1% on the “news”, and Japanese stocks snapped immediate-term TRADE support for the first time in months. Isn’t a #QuadrillYen fun?


PM Shinzo Abe called the BOJ’s “2% inflation” targeting and asset purchase plan both “bold” and “epoch making.” That might sound like some serious stuff, but the new asset purchases don’t start until January of 2014 – so there’s this little thing called timing that people short the Yen today are getting Taro Aso’d by in the meantime.


If you didn’t know the Global Currency War is on, now you know. The Russians and South Koreans talked about it last week, and the President of the Bundesbank (Germany) is calling it out, explicitly, in the FT (Financial Times) this morning. If you want to show the world you are a “different creature”, you’re going to have to one-up The Bernank’s 2012 performance.


That’s no easy task – neither is seeing the US Dollar stabilize alongside weekly US economic growth data:

  1. US Dollar Index closed up another +0.6% last week and continues to make a series of higher long-term lows
  2. US Housing Demand (MBA weekly mortgage applications) ripped a +12.9% move, taking the MBA series to 205
  3. US Weekly Jobless Claims dropped to fresh new intermediate-term lows at 335,000

If what’s bad for a country’s currency is eventually really bad for that country’s real (inflation adjusted) economic growth, the opposite should hold true when a country’s currency stabilizes.


What if a stabilizing US Dollar became a strengthening one? How about strengthening the US Dollar +15% (from here) and hammering energy/food inflation next? Didn’t the President of the United States say “we, the people, are all in this together” now?


Can you think of a more galvanizing, progressive, and uniquely American marketing message than Strong Dollar = Strong America? I bounced it off the Keynesians in the Romney camp, and they didn’t get it either. But you, The People can get this – Yes You Can!


In other major global #GrowthStabilizing news:

  1. Chinese monthly data for December (Industrial Production and Retail Sales) accelerated versus November
  2. Chinese Exports for December ramped by +14.1% (versus +2.9% NOV)
  3. Germany’s ZEW Index (reported this morning) just hit a 2.5 year high (31.5 DEC vs 6.9 in NOV)

It’s been a while here, folks – but, setting aside the economic disaster that is Japan for a minute, we have the other 3 major global engines no longer stalling/slowing (USA, China, and Germany). That’s better than bad. And so is sentiment.


The problem with sentiment, of course, is that it tends to turn after markets move. And right now that’s precisely what many of my key sentiment indicators are starting to flag:

  1. US Equity Volatility (VIX) = immediate-term TRADE oversold at a 5-year low of 12.46
  2. II Bull/Bear Spread (Bulls minus Bears) = 3,090 basis points wide (53.2% Bulls, 22.3% Bears)
  3. Fund Flows (to US Equities, ex-ETFs) = +3.8B last week (versus +7.5B in the week prior)

In addition to last week’s -6.7% drop in the VIX, we’re seeing aggregate short interest in US Equities fall fast from their late November highs (that was a bullish signal) at the same time that NYSE Margin Debt rips to the high-end of its 5-year range (perma bulls lever themselves up on the long side at the end of a move trying to chase performance).


So, it’s all out there – the economic data; the price action; the sentiment indicators – and, no, they don’t always signal that you should be doing the same thing at the same time. But that doesn’t mean you don’t have to get out there every morning and get it. As Japan’s new ‘let’s get nuts’ prospect, Ray Lewis, might add: “Effort, is between you, and you, and nobody else.”


Our immediate-term Risk Ranges for Gold, Oil, US Dollar Index, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $110.75-112.35 (Oil is back above TAIL support, bearish for Consumption), $1654-1692, $79.75-80.17, 88.58-90.61, 1.84-1.91% (Bonds continue to signal #GrowthStabilizing), $482-561 (into Earnings tomorrow), and 1471-1489, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Let's Do This - Chart of the Day


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JCP: Our Take On The Liquidity Debate

Takeaway: We're weighing in on JCP liquidity -- an issue that's quickly racing to the forefront of key risks, and opportunities.

JCP issued a release this evening vehemently defending against a letter it received suggesting that JCP is in violation of terms on 11% of the company’s debt. The letter came from a firm claiming representation of over 50% of holders of the 7.4% debenture due 2037 (one of 11 tranches of debt).  JCP argues that this is ‘completely without merit and intended to create self-interested trading opportunities in the market’. It’s impossible for us to know one way or another. But right or wrong there’s only one thing that’s certain – liquidity will be talked about more as a key issue with JCP. With that being a near certainty, we thought we’d stress-test our model to see where the risks are to this story.


Before going into the model, here's a few thoughts...

  1. First off, the letter was dated on 1/29/13. Based on today’s close, JCP is down 8.0% since the letter was written. That compares to -0.7% for the S&P, and -1.3% for the broader Retail group (RTH). Clearly, this is news to people reading the general tape – but the market has been acting on the event since last Wednesday.
  2. The claim is that JCP violated the agreement when it entered into its current inventory-backed $1.5bn revolver (which is expandable to $2.0bn) in Jan 2012 without providing for equal security for the debenture holders.   Why this would come out 13 months after the issuance is questionable – perhaps because liquidity was not a concern back then and now the bond holders are doing whatever is feasible (or unfeasible) to secure their capital if JCP faces a liquidity crunch in 2013.
  3. From a risk management perspective, the best we can do is assume that the claim is valid.
    1. In that case, a worst case scenario would be that the other 10 consortiums of JCP’s debt attempt to step forward and stake claim on inventories. But that, quite frankly, seems ridiculous. It would be a first for any retailer we have ever seen. Maybe we’re missing something, but we don’t see how unsecured lenders could think that they could stake claim over a secured asset.
    2. Perhaps a slightly more realistic scenario equity holders should keep in mind would be that the holders of $1.1bn in Senior Notes put the debt back to JCP, which could happen in the event of change in control combined with not meeting certain minimum rating standards. That certainly would not be possible based on what we’ve seen transpire thus far. Not even close.


We think that the key is to do a simple assessment of JCP’s cash, and cash flow needs under a bear-case scenario, and then do a simple check as to the company’s liquidity. Consider the following as it relates to sources of cash.

  • SOURCES: JCP ended 3Q with $525mm in cash, and the company stands behind its guidance that it will have $1bn in cash by the end of the year. We don’t buy it.
  • Traditionally, 4Q has the biggest cash flow build of the year. There has historically been 12%-17% incremental cash build as a percent of 3Q revenue.
  • That mold was broken last year, when JCP only generated 7.8% -- or $422mm in cash.
  • We assume that 4Q cash build comes in at only 3%, or just $100mm. That leaves JCP with $625mm in cash.
  • JCP has no debt maturities due until 2015 – and even then we’re just looking at $200mm.
  • JCP has $1.5bn in its revolver, and that is expandable to $2.0bn
  • All-in, JCP has between $2.1 and $2.6bn in sources of cash per our estimate.
  • If they miraculously hit their YE estimate of $1bn, then it bolsters the strength in JCP's liquidity materially.


USES: Assumptions for uses of cash gets a bit more dicey, but let’s start with our P&L and Cash Flow modeling assumptions…

  • Let’s assume JCP does not earn one red cent until FY16. We’re modeling that it loses $1.0bn in EBIT through 2015. As noted many times, our more constructive view on the stock has been predicated based on the direction of the top line as opposed to profitability, as we think that revenue will pick up on the margin as JCP anniversaries an abysmal 2012 and changes over a third of its store base to a more productive mix by the end of FY13.
  • We assume that sales are down 35% in the upcoming quarter, and remain negative until the back half of 3Q14.
  • We’re modeling Gross Margins just under 35% by the end of 2015 – which is a full 500bp below where JCP is planning its business ‘longer term’.
  • Our SG&A estimate is bottoming out at $4.2bn. Quite frankly, this gives credit for the $900mm in net savings – and if there’s any area where we’re stretching it, this is probably it. JCP needs to invest in its stores.
  • Our EBIT decline estimate is almost evenly offset by $500mm+ in D&A per year.
  • We’re assuming that working capital – both inventories and payables move with the business. On one hand, JCP can’t be a pig and expect vendors to bolster its balance sheet. That jeopardizes its partnerships. On the flip side it’s sitting there with 98 days of inventory on hand – which is a level that can be chopped down. Every day is equal to about $25mm in capital.
  • We tack on about $800mm in cash needed to fund capex and new shops annually. That suggests that JCP will need to use somewhere around $1bn of its revolver ($800mm x 2) = $1.6bn - $625mm in cash on hand.
  • A key consideration is that the company has the option to slow down the cadence of the new store rollout.  Don’t get us wrong…That’s bad. But it is a way to help ward off a liquidity event to the extent that one approaches.
  • When all is said and done, we get to an extra $500mm-$1.0bn in cash available to draw under what we think is a beared-up model.


The punchline is that we can absolutely see why there’s all the concern about JCP’s liquidity – a $500mm-$1bn pad is not as much as we’d like to see for a retailer this size. But we don’t think that the concern should be the result of this evening's announced claim.


We think we’d need to see a cash balance at year-end below $600-$700mm to get concerned about JCP’s cadence of shop in shop rollouts for 2013. That would lead to either a) a slowdown in the rate of shop-in-shop additions, or b) the need to sell equity to keep the storytelling alive. We’d prefer the former, but due to management’s ego regarding growing the business, we can’t rule out the latter. For now we’re sticking with our modeling assumptions that shouldn’t require either. 


As the facts change so will we. For now, we're comfortable with the facts.


Yum! Brands announced FY12 EPS and gave game-changing guidance on FY13 that is leading us to capitulate on our long YUM idea. 


Stepping Back From YUM


In advance of tomorrow’s earnings call, we are stepping back from our long YUM thesis.  While our initial analysis, released in November 2013 as a Black Book, was sound, the chicken supplier issue was clearly unforeseeable.  With hindsight, our mistake was defending the stock at that point, rather than taking a more prudent approach.  The reasoning behind our decision was that the government’s investigation had ceased, the stock price had declined quite dramatically, and sentiment seemed to be setting up for a strong contrarian position on the long side over the long-term TAIL duration.



Growth Story Intact, Comp Sales the Big Issue in 2013


The important component of the YUM press release was the commentary from David Novak, the Chairman and CEO.  Important points regarding China:

  • Due to continued negative same-restaurant sales, mgmt not expecting EPS growth in FY13
  • Growth strategies unchanged, globally.  Still aiming for 700 new units in China this year
  • Same-restaurant sales declined 37%, including 41% at KFC and 15% at Pizza Hut

That the company is not revising its growth targets could mean that management’s confidence in the long-term prospects of its China business is high but, given the data in the press release, we think that the bottoming process could take several quarters. 


Our Black Book, which was published the week before YUM’s analyst day, included a sum-of-the-parts-analysis suggested a value of $88 per share.  On December 6th, during the analyst day presentation, management suggested a value of between $80-90.  As of now, it is much more difficult to value this stock.  Following the call tomorrow, we expect to have a better idea of how the business should fare over the coming quarters and years.



Howard Penney

Managing Director


Rory Green

Senior Analyst