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The Macau Metro Monitor, April 4, 2013


The Gongbei border gate on the Zhuhai side is running for longer from today until Saturday (April 6) as a temporary trial measure.  Under the approval, the Gongbei border will open at 6am and close at 1am for three successive days for the Ching Ming Festival, from today onwards.  “We hope to realize 24-hour operations for the border gates, but we have to discuss with other related parties, such as the central government and the Zhuhai side,” Alexis Tam said, a spokeman for the MSAR government.


Money For Nothing

Client Talking Points

Ease Into It

Keith mentioned that this was coming and it came like a bat out of hell: the Bank of Japan will inject $1.4 billion into the economy in less than two years. As a result, the Yen bit the dust, the Nikkei 225 continued its meteoric rise (+5.2% over the last two days) and US stocks applauded as the futures rose in anticipation of the announcement. This is what happens when you print more money and promise to throw a bunch of it at anything that moves; people get excited and it helps inflate stocks around the world.

Navigating Europe

Europe is looking quite bearish, but it's important to know which index to play if you're going to short it. Germany's DAX index and the UK's FTSE 100 have held above our TRADE and TREND lines of support since the beginning of April. We wouldn't short these indices but the EuroStoxx 50 is looking ripe for a short very soon, though. Since we stick to a process here at Hedgeye, we're going to wait for our signals to tell us when to short the index no matter how tempting it may be to hop right in. The economic data (particularly, some of the March PMI numbers) supports our bearish thesis and if we get another country like Cyprus that needs a bailout, the selling will come hard and fast.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. The company's net income declined on its recent earnings report but beat the Street's expectations.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"Yen down 2.54% against USD as BoJ intends to double size of its balance sheet. ow.ly/i/1OTde #EcoBrief" -@JoeBrusuelas


"History is indeed little more than the register of the crimes, follies and misfortunes of mankind." -Edward Gibbon


Bank of Japan to pump $1.4 trillion into economy as part of an unprecedented stimulus package.

Independent Minds

This note was originally published at 8am on March 21, 2013 for Hedgeye subscribers.

“Blows must decide whether they are to be subject to this country or independent.”

-King George III


And they did… the British lost and the Americans won their independence. “Jefferson threw himself into whatever came his way. He was hardheaded, not rhetorical. He believed the hour called for action, not rhetoric.” (John Meacham’s Thomas Jefferson, pg 79)


The founding principles of this country aren’t romantic. They are real. And it started with a fight. People used to stand up for something and really argue for it. Passion and pride wasn’t always politically correct.


As our enemies have found we can reason like men, so now let us show them we can fight like men also.” –Jefferson, 1775


Back to the Global Macro Grind


After 5 long years of war versus the #OldWall, independent minds are winning. This isn’t about being bullish or bearish. It’s about being transparent as opposed to opaque; it’s about being accountable as opposed to arcane.


As Patrick Henry said, “give me liberty, or give me death.” Economic freedom versus hereditary right is an old war. We’re just fighting it on a new front. Revolutions are rarely pretty. This one is no exception.


So upward and onward we go. Today isn’t unlike any other day where, God willing, we all put our feet on the floor at the top of the risk management morning - one shoe on a time - and decide where we think we can be less wrong than right.


This morning’s Global Macro Research and Risk Signals are decidedly mixed – let’s look at Asia first:


A)     China’s flash PMI for MAR accelerates to 51.7 (vs 50.4 FEB); Shanghai Comp holds bullish TRADE/TREND

B)      South Korea is (allegedly) cyber attacked by China, and the KOSPI closes -0.4% (bearish TRADE/TREND)


How about Europe?


A)     German Manufacturing PMI for MAR slows to 48.9 (vs 50.3 FEB); but German DAX holds TRADE/TREND support

B)      France’s Services PMI tanks to 41.9 in MAR (vs 43.7 FEB); French CAC snaps TRADE support (again) of 3864




A)     US Housing Starts ripped another +3% sequentially in FEB, but what will this morning’s Existing Homes print bring?

B)      Housing stocks (ITB) led gainers +2.9% yesterday, making a fresh YTD high as the SP500 closed -0.3% inside of hers


All the while, on the interconnected risk front:

  1. US Dollar Index is having its 6th up week in the last 7
  2. CRB Commodities Index is having its 6th down week in the last 7
  3. Correlation Risk between USD/CRB and USD/SPY continue to diverge, big time

Immediate-term TRADE (inverse correlations) between USD and CRB (Commodities):

  1. USD vs Brent Oil = -0.98
  2. USD vs Copper = -0.95
  3. USD vs Gold = -0.69

Immediate-term TRADE (positive correlations) between USD and Stocks:

  1. USD vs MSCI Asia = +0.71
  2. USD vs SP500 = +0.63
  3. USD vs EuroStoxx600 = -0.16

Oops. That last one wasn’t a positive correlation – a month ago European stocks had a barely positive correlation to the US Dollar; now that’s melting away. Other than how bad it is for a socialized economic zone having its currency debauched by money launderers in Cyprus (and Italian criminals holding other parts of the money bags), I can’t think of any fundamental reason why Europe sucks economically.


And why is the correlation between the US Dollar and Emerging Market (MSCI EM Index) not positive? It’s actually going really negative (-0.70 vs USD on a 60 day correlation basis). Does that make sense? Sure does. That’s why we aren’t long EM. If #StrongDollar continues to crush Commodities, guess who loses? “Emerging Markets” (like Brazil, whose stock market is basically a commodity-linked index).


What about Gold? On a 60-day basis, the inverse correlation to the USD was like it is for Copper and Oil right now (wacky high). But this morning it’s less so. Is that interesting? Sure. What do I do with that? Well, I’ll tell you what I won’t do today – and that’s short Gold. I’d much rather short Oil - not only from a correlation perspective, but because the net long position in Oil (CFTC data) remains much larger.


There are so many things to consider - so many signals and pieces of data to incorporate into our decision making process; so many new technologies and mathematical concepts to apply to our analysis. Embracing The Uncertainty of it all is what makes us different. It allows for freedom of thought – and the humility to change our minds. Long live the independent research revolution.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1593-1615, $107.23-109.26, $3.38-3.51, $82.61-83.31, 94.19-97.02, 1.89-1.97%, 10.73-14.51, and 1546-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Independent Minds - Chart of the Day


Independent Minds - Virtual Portfolio

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Chinese Chicken

“Chickity China the Chinese Chicken. You have a drumstick and your brain stops tickin’.”

-Barenaked Ladies (1998)


Thank goodness the A-Shares are closed today.


Ok, perhaps that is quite a bit dramatic, but we’re certainly not thrilled by the fact that the Shanghai Composite Index is down -3.8% since our Macro Team pitched Chinese equities on the long side in our 2/27 Best Ideas Presentation (underperforming the regional median equity market gain of +1.3% by 507bps).


The lesser analyst in me would’ve begun the note pointing to the SHCOMP’s +6.8% delta since 12/10 (when we originally introduced the idea), calling for the index to continue making higher-highs and higher-lows over the intermediate term.


While that remains our base case scenario – for now at least – we would be remiss to ignore what we have learned from Dr. Daniel Kahneman’s work in the then-groundbreaking field of prospect theory – specifically in that economic agents A) assign an asymmetrically greater absolute value of utility to losses then they do to gains and B) multiple gains and/or losses are accumulated to create an overall feeling about a series of transactions that extends from the most recent, not original, reference point.


Applying prospect theory to our bullish bias on China, the absolute value of the negative utility associated with the -3.8% delta since 2/27 is likely in excess of the positive utility associated with the +11% delta from 12/10 to 2/27. Loosely applying the above quote from our Canadian friends up north (which itself hardly makes sense even in the context of the song it is sourced from), it would be fair to say that the Chinese stock market has indeed indulged in a rather infamous “drumstick”.


Cutting to the chase, it was our view that Chinese authorities would delay any tightening of monetary policy and/or macroprudential regulation until well after the country’s economic recovery had been firmly entrenched – creating cover for at least 3-6 additional months of potential upside for a traditionally high-beta market. With the introduction of the early-MAR propriety curbs, the late-MAR clamp-down on wealth management products (WMPs) and the dramatic acceleration in official recognition of systemic risks in the financial sector, however, it has become quite clear to us that the aforementioned view was dead wrong.


No doubt these measures will have some negative impact on Chinese economic activity, which we still see as accelerating over the intermediate term. But as prospect theory would have, the negative delta from our original, fairly-subdued expectations for a Chinese economic rebound to our updated view of an even more muted acceleration likely registers the entire sequence as a negative utility event.


In broader terms, it’s bad when your bull case gets less bullish, at the margin. Moreover, to the extent that the bull case was consensus across the investment community, the initial delta from “positive” to “less-positive” in any fundamental thesis is often the first cue for experienced short-sellers to enter a particular market.


Is China a short?


While we don’t believe it is (at least not yet; as evidenced by Keith’s buy signal on the CAF yesterday afternoon), we would be downright slipshod to not thoroughly debate the merits of the bear case, which we did in our 3/28 note titled “IS CHINA CAREENING TOWARDS FINANCIAL CRISIS?”. To recap a few highlights:

  • Last week China Daily reported that the China's banking regulator has urged banks to pay close attention to the credit risks in key industries affected by the economic downturn and hit by overcapacity woes. Zhang Ping, Chairman of the National Development and Reform Commission recently said that the industrial sectors suffering most from overcapacity include steel, cement, electrolytic aluminum, plate glass and coal coke sectors, each of which is operating at 70-75% of total capacity. Analysts estimate the outstanding loan portfolio of those industries may amount to around 30T-40T yuan ($4.83T-$6.44T or 22.6-30.2% of total banking system assets at the end of JAN). Per the PBOC, outstanding loans to the property sector were 12.1T yuan at EOY ’12.
  • In addition to these on-balance sheet risks, China has roughly 15T yuan of off-balance sheet credit (28.8% of GDP) in the form of commercial bills, trust financing, entrusted loans, etc. that has increasingly been allocated to riskier borrowers in recent years (per various agencies, including the IMF) – many of whom which have outsized exposure to property prices, such as property developers and local gov’t financing vehicles (LGFVs). The latter entity has 636.8B yuan in bonds outstanding as of EOY ’12 (+148% YoY) and 9.3T yuan of loans outstanding (17.9% of GDP) – 20% of which are “funding projects which are largely not profitable and thus are vulnerable to [repayment] risk,” per PBOC Governor Zhou Xiaochuan.
  • The next round of interest rate liberalization should promote better real returns and improved access to credit for Chinese households and SMEs, respectively, and that may perpetuate an unwind of off-balance sheet lending activities, which, according to most sources, have been largely capitalized with the surplus savings of China’s private sector that are seeking higher real yields via Trust Products and WMPs, where average annualized yields are 37% higher than the PBOC’s benchmark 1Y household deposit rate of 3%. To the extent there are any weak hands in the WMP or trust financing sectors, a lack of new inflows, at the margins, would expose the “ponzi-scheme” nature of some products (per the words of the Xiao Gang, Chairman of the Bank of China) – specifically those that rely on short-term funds in order to invest in illiquid fixed assets and fund distributions largely with new net inflows.
  • Ultimately, the most recent WMP regulations should translate into slower (and potentially even negative) growth in the supply of credit within the shadow banking channel and to the extent any existing liabilities facing repayment risk aren’t able to be rolled over, we will start to see default rates accelerate across China’s shadow banking sector. Any spillover effects across key industries – particularly in the oversupplied construction and construction materials sectors – could adversely impact Chinese bank NPL ratios (currently at 0.95%) on a lag.

In spite of all this, we continue to hold a reasonably high degree of conviction in our bull case on China, as a core driver of the thesis (i.e. Strong Dollar) is, in fact, the same bull case for US equities we have held since late 2012 that consensus has largely ignored and/or fought all year. To sum it up in a few bullets:

  • As expected, early MAR growth data is supportive of the Chinese economy resuming its trend of broad economic acceleration (the official Manufacturing PMI accelerated to 50.9 from 50.1 and the official Non-Manufacturing PMI accelerated to 55.6 from 54.5).
  • A sequential slowing in China’s MAR CPI and PPI figures (due out 4/8) is highly probable from the Lunar New Year jump in FEB. Moreover, continued gains in the CNY (at a ~19yr high) should weigh on inflation expectations over the intermediate-to-long term as China reorients its economy, though rebalancing certainly won’t happen overnight. Amid rebalancing, the country’s import model should change (less commodities; more consumer goods), ultimately increasing the impact of currency fluctuations upon consumer prices.
  • Lastly, continued USD strength should continue weighing on the prices of internationally-traded commodities, which should ultimately allow the pace of economic activity to creep higher in China on a lag. China’s heavy industry benefits from energy and raw material deflation via margin expansion and potentially increased production, at the margins, in a backdrop of subdued credit expansion. Additionally, Chinese consumers benefit from food and energy deflation by freeing up share of wallet for more discretionary goods and services.

All told, being long of China is certainly a non-consensus position at the current juncture. In spite of fairly recent gains, the fundamental backdrop for the Chinese stock market is as convoluted as it has been in quite some time. As such, we are sticking to our process and deferring to the quant on this one.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/JPY, UST 10yr Yield, VIX and the SP500 are now 1, 106.26-109.11, 82.55-83.46, 93.07-96.11, 1.81-1.93%, 12.31-14.54 and 1, respectively.


Keep your head on a swivel,


Darius Dale

Senior Analyst


Chinese Chicken - Chart of the Day


Chinese Chicken - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 4, 2013

As we look at today's setup for the S&P 500, the range is 30 points or 0.49% downside to 1546 and 1.44% upside to 1576.       










  • YIELD CURVE: 1.58 from 1.58
  • VIX closed at 14.21 1 day percent change of 11.19%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BoE interest rate announcement
  • 7:30am: Challenger Job Cuts Y/y, March (prior 7.0%)
  • 7:30am: RBC Consumer Outlook Index, April (prior 47.1)
  • 7:45am: ECB interest rate announcement
  • 8:30am: ECB’s Draghi holds news conference on interest rates
  • 8:30am: Init Jobless Claims, Mar 30, est. 353k (prior 357k)
  • 9:45am: Bloomberg Consumer Comfort, March 31 (prior -34.4)
  • 10:30am: Fed’s Bernanke speaks on economy
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 12:30pm: Fed’s George speaks in El Reno, Okla.
  • 5pm: Fed’s Yellen speaks in Washington


    • Carlyle Group Managing Director David Rubenstein, Bloomberg CEO Dan Doctoroff, 32 Advisors CEO Robert Wolf, Asst. to the Pres. Michael Froman among panelists at Export-Import Bank annual conf., 8:45am
    • Fed Vice Chair Janet Yellen, AOL CEO Tim Armstrong speak at Society of American Business Editors and Writers conf.
    • CSIS hosts forum on financial reform in China, with Dep. Asst Treasury Sec Robert Dohner, IMF’s Markus Rodlauer, Institute of Intl Finance MD Timothy Adams, 2pm
    • SEC holds closed meeting on injunctive actions, administrative and enforcement proceedings, 3:45pm
    • Treasury, IRS discuss proposed regulations on implementation of additional Medicare tax, 10am
    • U.S.-China Economic and Security Review Commission holds hearing on political, and economic drivers of China’s maritime disputes in east, south China seas, 9am


  • Facebook said to plan Android phone push to boost ad sales
  • BOJ doubles monthly bond purchases to meet inflation target in 2 yrs
  • Lululemon chief product officer to leave; reaffirms 1Q view
  • Primary dealers are losing influence in U.S.
  • British Airways parent IAG to buy 18 extra Boeing 787 Dreamliners
  • Cerberus said to tap Goldman, JPMorgan, BofA for property IPO
  • GM board calls emergency meeting at Germany’s Opel: Bild
  • Deutsche Bank said to be probed over hidden losses in crisis
  • Vodafone restates results in change to accounting for ventures
  • Euro-area March services output shrinks more than estimated
  • ECB, BoE to leave benchmark rates unchanged today, according to est.
  • North Korea warns U.S. it approved ‘lighter’ nuclear attack
  • Chinese Army on ‘high alert’ over North Korea: DPA
  • New bird flu strain kills third person in China as cases spread


    • International Speedway (ISCA) 7am, $0.36
    • RPM International (RPM) 7:30am, $0.06
    • WD-40 (WDFC) 4pm, $0.56


  • Gold Slumps Toward Bear Market as Investors Reduce ETP Holdings
  • Iron Ore Bear Market Looms as Supply Swamps Demand: Commodities
  • Brent Rises After Closing at Four-Month Low; WTI Little Changed
  • Barclays Oil-Research Head Horsnell Said to Leave After 10 Years
  • Copper Reaches Eight-Month Low as Services Contraction Worsens
  • Sugar Climbs on Speculation of More Ethanol Demand; Coffee Gains
  • Soybeans Drop on Concern Bird Flu in China May Limit Feed Use
  • ETF Securities Says Investors Move from Gold to Cyclical Assets
  • Macquarie Says China Bonded Copper Stocks Fell 100,000t in Q1
  • Shenzhen Is First in China With June Start for Emissions Trading
  • Norway’s Oil Future Seen With Ice-Free Arctic’s Barrels: Energy
  • New Bird Flu Kills Third Person in China as Cases Rise to 10
  • Copper Heading Toward June Low of $7,219.50: Technical Analysis
  • Drought-Hit Coffee Area in Vietnam Forecast to Receive Rains






















The Hedgeye Macro Team











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