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THE M3: TAIWAN; SUEN PAYMENT; GUANGDONG VISA

THE MACAU METRO MONITOR, MAY 30, 2013

 

 

MAINLANDERS WILL FORBID VISITING MATSU IF GAMING IS LEGALIZED Macau Daily News

The spokesperson of the Mainland-based Cross-Strait Tourism Exchange Association reiterated that Mainland China will forbid Mainland visitors from gambling in Taiwan.  He added that if the bill is passed, it will definitely affect the normal exchanges and cooperation in the tourism sector across the Strait, and the Association will have to take measures to restrict Mainlanders from visiting places where gambling is lawful.

 

LAS VEGAS SANDS TO PAY SUEN US$102 MILLION Macau Business

LVS has been ordered to pay US$101.6 million (MOP813 million) to Hong Kong businessman Richard Suen.  Nevada District Court Judge Rob Bare in Las Vegas yesterday issued a judgment that added US$31.6 million in interest to the US$70 million in damages the jury awarded Suen on May 14.

 

Suen won a trial over his claims that he helped the casino operator obtain a gaming license in Macau.

 

NEW VISA POLICY SUGGESTS BEIJING'S FAVOURABLE VIEW: UNION GAMING Macau Business

The Guangdong government has announced that starting Saturday, Guangdong citizens can apply for Individual Visit Scheme visas for both Macau and Hong Kong at the same time again, says Union Gaming Research Macau. 

 

This is under the condition that their last Macau visa is more than two months old - as a Guangdong resident can only apply every two months.  The application for both visas at the same time was possible before 2008, but this policy was canceled in that year, and all mainland residents have had to apply for the visas separately since.


CHART DU JOUR: IGT WIDENS SHIP SHARE LEAD

Small players make a push but IGT creeps back to 2008 levels

 

  • On a trailing 4 quarter basis, IGT’s share jumped to over 35%, its highest share in 5 years.  Share bottomed in mid-2010 in the mid-20s.
  • WMS continues to deteriorate, falling to 13% in ship share TTM in Q1
  • Spielo’s huge Canadian contracts in Q4 2012 and Q1 2013 drove most of the increase in Other

CHART DU JOUR:  IGT WIDENS SHIP SHARE LEAD - SSS


JGB Rates + Global Duration Risk Rising

Takeaway: Our fundamental research & quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate.

This note was originally published May 22, 2013 at 13:11 in Macro

SUMMARY BULLETS:

 

  • In recent weeks, both our fundamental research and quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate. Sure, it could be a massive head fake, but we certainly won’t be the ones holding the bag if we’re sitting here at EOY ’14 with G-7 bond yields +150-200bps higher than they are now. At a bare minimum, this is an increasingly probable scenario worth looking into.
  • As we’ve shown in previous research notes (HERE, HERE and HERE), a demonstrable backup in JGB rates could serve to apply selling pressure upon global sovereign debt securities, dragging up rates across various markets. Per the most recent Bank of America Merrill Lynch data, the spread between the nominal yields on G-7 notes and JGB yields narrowed to 61 basis points last week, the lowest since 1990!
  • While it’s not new news that investors have been increasingly shunning duration risk, we think it’s important to understand all of the moving pieces, rather than just relying on consensus expectations for what the Fed is going to do next. 

To recap those moving pieces:

  1. Domestic labor market improvement driven by a housing market recovery that itself is driven by a timely and marked acceleration in US births and household formation and a domestic consumption acceleration that is fueled by a commodity tax cut that is perpetuated by #StrongDollar are all reasons why we think Fed policy is poised for a major inflection over the intermediate term.
  2. A weakening yen that facilitates rising JGB yields that are more attractive on a relative basis should serve as an incremental drag on demand for US Treasuries stemming from Japan, which, as a country, currently represents 19.2% of total foreign demand for US Treasuries.
  3. Lastly, in a global currency war, manipulators simply need to buy less dollars to remain competitive if the USD continues to rally on trade-weighted basis (the Trade-Weighted US Dollar Index is already up +6% YTD). That ultimately equates to the central banks of commodity producing nations (many of which are EMEs) buying less US Treasuries, at the margins, in order to hold down their nominal exchange rates. The very recent blood-bath we’ve seen across the commodity currency spectrum is supportive of this view.

 

In today’s monetary policy announcement, the BOJ kept its “quantitative and qualitative monetary easing” program unchanged today, citing its view that previous measures would spur growth and lift consumer prices. The move (or lack thereof) was expected by consensus and came amid what policymakers termed "positive movements" in the Japanese economy. Central bank governor Haruhiko Kuroda downplayed the suggestions that the BOJ had lost control of the JGB market and said they would tweak the terms of its bond-buying program "as needed" to keep prices in check.

 

Net-net-net, the BOJ meeting was total non-event. In our opinion, the only important takeaway was that the BOJ plans to hold a meeting with financial institutions and institutional investors on MAY 29 to discuss recent market movements. Headlines are likely to follow – especially as it relates to the specter of rising interest rates and how the BOJ plans to facilitate that event. We’re guessing Japanese banks and pension funds – which have anywhere from 25% to 65% of their total assets parked in JGBs, depending on institution – would like an “orderly decline” of the JGB market as the Abenomics agenda progresses.

 

JGB Rates + Global Duration Risk Rising - 1

 

JGB Rates + Global Duration Risk Rising - 2

 

Perhaps the most important news of the day was the releasing of Japan’s APR trade data, which was very disappointing and highlighted some of Japan’s key macroeconomic issues that we’ve been detailing to investors for the past 12-18 months.

 

 

Export growth accelerated to +3.8% YoY from +1.1% prior vs. a Bloomberg consensus estimate of +5.4%. Import growth accelerated even more to  +9.4% YoY from +5.5% prior vs. a Bloomberg consensus estimate of +6.7%.

 

JGB Rates + Global Duration Risk Rising - 3

 

Thus far, the weakening yen has yet to prompt any structural shift in Japan’s BOP dynamics (these things take time), and that’s keeping Japan squarely in deficit territory with respect to its seasonally-adjusted trade balance, which narrowed slightly to -¥767.4B from -¥919.8B prior vs. a Bloomberg consensus estimate of -¥602.9B.

 

JGB Rates + Global Duration Risk Rising - 4

 

If the Japanese economy fails to make an import substitution adjustment prior to achieving any assumed structural increase in export competitiveness and fiscal retrenchment, we’re going to see more realized volatility in the JGB market as the current account dips squarely into deficit territory – which means Japan will be at the hostage of international creditors who’ll ultimately demand higher yields to compensate for the currency risk and Japan’s now-hawkish inflation outlook.

 

JGB Rates + Global Duration Risk Rising - 5

 

A backup across the JGB yield curve as a function of the aforementioned macroeconomic risks is amplified with Japanese domestic investors allocating financial assets to equities (currently 6.8% of the total), at the margins, in lieu of cash and bank deposits (currently 55.2% of the total, which are traditionally then intermediated into JGBs).

 

JGB Rates + Global Duration Risk Rising - 10

 

As it relates to Japan’s deteriorating BOP dynamics, the only saving grace we can think of is for Japanese bureaucrats to defy popular consensus by restarting the country’s nuclear reactors in a major way – an event rumored to be in the political works post the Upper House elections in MAR. Recall that Japan’s imports of mineral fuels increased to 34.1% of total imports in 2012 from 28.6% in 2010, which was the last full-year prior to the earthquake/tsunami. Adjusting for the impact of turning off the nuclear reactors, which subsequently increased Japan’s need to import incremental energy products, the 2012 current account balance would have been a positive 2.2% of GDP – double the reported 1.1%.

 

JGB Rates + Global Duration Risk Rising - 6

 

As we’ve shown in previous research notes (HERE, HERE and HERE), a demonstrable backup in JGB rates could serve to apply selling pressure upon global sovereign debt securities, dragging up rates across various markets. Per the most recent Bank of America Merrill Lynch data, the spread between the nominal yields on G-7 notes and JGB yields narrowed to 61 basis points last week, the lowest since 1990!

 

Even assuming that spread stays flat or that there is room for further compression given Japan’s bearish outlook for real interest rates, a material back-up in JGB yields over the next 12-18 months (akin to the 1994 and 2003 episodes) could be very hazardous indeed for bond investors around the world.

 

While it’s not new news that investors have been increasingly shunning duration risk, we think it’s important to understand all of the moving pieces, rather than just relying on consensus expectations for what the Fed is going to do next. To recap:

 

  1. Domestic labor market improvement driven by a housing market recovery that itself is driven by a timely and marked acceleration in US births and household formation and a domestic consumption acceleration that is fueled by a commodity tax cut that is perpetuated by #StrongDollar are all reasons why we think Fed policy is poised for a major inflection over the intermediate term.
  2. A weakening yen that facilitates rising JGB yields that are more attractive on a relative basis should serve as an incremental drag on demand for US Treasuries stemming from Japan, which, as a country, currently represents 19.2% of total foreign demand for US Treasuries.
  3. Lastly, in a global currency war, manipulators simply need to buy less dollars to remain competitive if the USD continues to rally on trade-weighted basis (the Trade-Weighted US Dollar Index is already up +6% YTD). That ultimately equates to the central banks of commodity producing nations (many of which are EMEs) buying less US Treasuries, at the margins, in order to hold down their nominal exchange rates. The very recent blood-bath we’ve seen across the commodity currency spectrum is supportive of this view. 

JGB Rates + Global Duration Risk Rising - 7

 

All told, the writing’s on the walls here, folks. In recent weeks, both our fundamental research and quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate. Sure, it could be a massive head fake, but we certainly won’t be the ones holding the bag if we’re sitting here at EOY ’14 with G-7 bond yields +150-200bps higher than they are now. At a bare minimum, this is an increasingly probable scenario worth looking into.

 

Darius Dale

Senior Analyst

 

JGB Rates + Global Duration Risk Rising - 8

 

JGB Rates + Global Duration Risk Rising - 9


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Trade of the Day: LEN

Takeaway: We bought back Lennar (LEN) at 11:57am this morning at $40.99.

We’re buying back our #HousingsHammer view with this high short interest home-builder. LEN is signaling immediate-term TRADE oversold, within a bullish intermediate-term TREND.

 

Trade of the Day: LEN - LEN


The Case Against Consumer Staples

Takeaway: It’s been a tough Q1 (and then some) for many staples investors that have to make a living generating alpha on the short side.

This note was originally published May 23, 2013 at 12:24 in Consumer Staples

It’s been a tough Q1 (and then some) for many staples investors that have to make a living generating alpha on the short side, or at least have to try and have their shorts go up less than their longs.  As with most market moves, there are multiple factors to which we can point as contributing causes to the run up in consumer staples:

  1. Investors chasing yield
  2. Inflows into low volatility ETFs
  3. M&A speculation in the wake of the HNZ acquisition
  4. Declining commodity prices and the associated expectation for improvement in gross margins
  5. Investors skeptical of the broader market rally and playing staples as a “safe” way to be long

Conspicuous by its absence is any case for the valuation of the consumer staples sector, broadly.  Valuation is always a tough one – it doesn’t matter until it matters, then when a stock heads lower (or higher, as the case may be), people point to valuation.



The Case Against Consumer Staples - Sector PE 5.23.13

 

Generally speaking, we like to see stocks heading higher as estimates head higher - that has not been the case.  Through Q1 earnings season, the "average" staples company missed revenue expectations by 0.4% and beat EPS by a meager 3.3%.

 

The Case Against Consumer Staples - Q1 EPS Summary

 

We have long made the case that investors have been using the staples sector (and utilities) as bond proxies.

 

The Case Against Consumer Staples - Yield Spread 5.23.13

 

The Case Against Consumer Staples - XLP vs. 10 yr. 5.23.13

 

With interest rates starting to creep higher, we may start to see money flow out of the consumer staples sector that was chasing yield and not invested for (or with, quite frankly) any fundamental view of the sector or the companies.

 

We also believe that certain stocks have benefitted from the inclusion in low volatility ETFs and associated money flows into those ETFs. 

 

The Case Against Consumer Staples - CPB and CLX 5.23.13

 

The Case Against Consumer Staples - GIS and KMB 5.23.13

 

In recent weeks, inflows into these ETFs have become decidedly less one directional.

 

The Case Against Consumer Staples - Low Vol Inflows

 

M&A speculation is more difficult to argue against.  We think some names continue to make sense over longer durations as potential targets of either activists (MDLZ - known) or strategic investors (BEAM, HSH, POST, DF).  We have always viewed the possibility of some sort of transaction as another reason to own a stock, but not the primary reason (unless you happen to work on a special situations desk, then have at it).  Therefore, names such as CPB or even TAP, that have benefitted in part from low-quality speculation remain squarely on our least preferred list.

 

As to commodity prices, we believe that the companies in our universe will see a benefit, but on a lag (3-12 months, depending on the hedging programs).  However, current multiples appear to be baking in a whole lot of good margin news, that may be fleeting in terms of duration given the competitive environment.  Most staples companies can't stand prosperity, and are likely, in our view, to deal back margin in an effort to support top line momentum, which is still faltering.

 

Where does this leave us?

 

Quite frankly, it leaves us with a long list of names where we have a hard time seeing how the marginal investing dollar makes money at current levels.  Our least preferred list is long and not so distinguished:

 

  1. KMB
  2. TAP
  3. CPB
  4. PM (more of an issue with the strength of the dollar)
  5. CLX
  6. CL
  7. GIS
  8. MKC

What we like remains largely unchanged:

 

  1. ADM
  2. CAG
  3. NWL
  4. BUD
  5. DF
  6. SPB

Call with questions,

 

Rob



 

Robert Campagnino

 

Managing Director

 

HEDGEYE RISK MANAGEMENT, LLC

 

E: rcampo@hedgeye.com

 

P: 203.562.6500

 

 

 

Matt Hedrick

 

Senior Analyst



SBUX – MCD DIVERGENCE CLEAR

Listening to each of these companies’ respective presentations today at the Sanford Bernstein conference, it was not difficult to understand why we like SBUX and are bearish on MCD.

 

Takeaways from the presentations:

 

MCD

 

We remain bearish on MCD as the stock has underperformed the S&P 500 by 550 basis points since we added it to our Best Ideas list on 4/25. On an absolute basis, the stock has declined -1.09%. We believe the Street’s expectations are still too aggressive, from a sales and earnings growth perspective, and the company needs to make structural changes to its U.S. business as the store has become too complex. Please click here for the materials for our presentation on McDonald’s from 4/25.

  • MCD CEO Don Thompson was cautious in his tone, citing soft economic environment and stagnant IEO industry
  • Comps have outperformed QSR sandwich operators in 16 of 19 weeks this year (we are wary of this statistic as sandwich concepts compete against everyone in food service)
  • Overall tone seemed to convey a message of near-term struggle with bright long-term ahead
  • Mgmt stating, first, that guest counts are important for franchisees was interesting – franchisees want higher margin items on the menu, there is a conflict between corporate and franchisees here in terms of priority
  • Unconvincing response as to what mgmt will do to revive U.S. business in ’13 – the menu is back and marketing is stronger and “more direct” – does not inspire confidence
  • Europe remains a significant problem for McDonald’s

 

SBUX – MCD DIVERGENCE CLEAR - best ideas mcd

 

 

SBUX

 

Starbucks’ presentation represented a stark contrast to McDonald’s as the company offered a clear, positive and energized outlook for shareholders. The company’s data-anchored strategy is tailored for specific regions of the world, unlike the more general and now-outdated MCD strategy (three global growth priorities). We continue to view Starbucks as one of the best ways to play the strengthening U.S. economy and consumer.

  • Goals of the company remain as lofty as ever – no constraints being placed on Schultz’ ambition
  • SBUX foundation for growth is solid, primed for accelerated growth over the next 5, 10 years
  • Challenges in Europe are persisting and will persist for “quite some time”
  • Growth being supported by Via, K-Cups, home brewer systems, tea and other categories such as juice
  • Expanding the loyalty card into the grocery aisle and following the rise of mobile internet closely

 

Conclusion

 

If you wanted to own a global company with strong growth prospects, sound fundamentals, high exposure to the U.S. recovery and low exposure to Europe’s travails, you would own SBUX and not MCD. We remain positive on SBUX and negative on MCD.

 

SBUX – MCD DIVERGENCE CLEAR - mcd operating income

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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