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CHART DU JOUR: CORE LV METRICS IMPROVING

Slot volume is the metric we watch closely - and growth is accelerating 

 

  • Nevada numbers are out and slot handle gained 1% YoY in April, with the 3-month rolling trend on track to break out to the upside this summer
  • We believe May will start off a string of growth months for Vegas slot volume
  • Due to unfavorable demographics, we still believe the long-term trend is negative. However, better near-term results should boost sentiment.
  • MGM is the obvious trade on the long side on the data.  MGM's strong Macau ramp should also contribute to higher near-term estimates.

CHART DU JOUR: CORE LV METRICS IMPROVING - vegas  1


IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK?

Takeaway: Recent policy developments call attention to the systemic risks facing China’s banking system. Additionally, MAY growth data came in soft.

SUMMARY BULLETS:

 

  • The pending introduction of a nationwide deposit insurance scheme and proactive regulations for dealing with commercial bank failures calls attention to the systemic risks facing China’s banking system. When taken in context with the outlook for interest rate liberalization and a bubbly property market, we are left continuing to hold a far-less-than-sanguine view of Chinese financials.
  • As a reminder, we’ll be hosting a flash conference call this Wednesday at 11AM EST to discuss Chinese financial system risks in greater detail, having added CHIX (Global X China Financials ETF) to our Best Ideas list on the short side. We look forward to your participation and questions then.
  • The sluggish MAY growth figures are in line with what we saw out of China’s recent PMI readings on both the manufacturing and non-manufacturing fronts and we continue to warn of A) incremental tightening (macroprudential or blunt instrument, if necessary) to stem rampant property price appreciation and B) a 2H13 slowdown in Chinese growth as conditions for credit growth deteriorate.
  • While certainly hard to know for sure, it is our view that much of the equity market upside stemming from positive sentiment surrounding the various avenues for reform (economic, financial, fiscal and social) was priced in during the recent rally.
  • For our latest thoughts on the Chinese economy and its banking system, please refer to the research notes hyperlinked at the bottom of this note.

 

PBOC, CBRC RAISING EYEBROWS (OURS AT LEAST)

This morning, we learned that the PBOC was out confirming that a deposit insurance system is ready to be launched after gathering much-needed political consensus. According to the central bank, the insurance system will help "increase the flexibility of commercial banks in terms of financial business innovation and risk control". Moreover, China’s regulation on the standardization of commercial bank bankruptcy – which has been deliberated on for five years – is expected to be submitted to the State Council in 2H13.

 

So let’s get this straight: Chinese authorities are A) implementing a deposit insurance scheme and B) finalizing regulations to facilitate commercial bank bankruptcies. Are we missing something or is Beijing preparing for some meaningful banking system headwinds over the intermediate-to-long-term?

 

In the context of the PBOC likely scrapping the deposit rate ceiling over the intermediate term, there have been concerns that smaller banks would be uncompetitive in a competing cost-of-funds environment. They would ultimately lose deposits and creditor faith as their ability to generate earnings growth declined amid slower or potentially negative financing growth.

 

The commensurate tightening of interbank liquidity is something we’ve been keeping an eye on; last week there was a rumor of a mid-sized bank failing to repay an interbank loan. Expect more to come on that front as we inch closer to the implementation of interest rate liberalization in China. Consensus has been celebrating/bidding up headlines on that front in the YTD, but we continue to hold a far less sanguine view:

 

  • On scrapping the lending rate floor (current minimum = 70% of the benchmark): Consensus expects this to increase the supply of credit to SMEs by lowering the cost of funds for SOEs and allowing risk-based credit allocation to flourish. We think there is risk that SOEs just demand cheaper financing from the banks and that SMEs continue to get crowded out in the absence of regulatory quotas.
  • On scrapping the deposit rate ceiling (current maximum = 110% of the benchmark): Consensus expects this to increase the return on household savings deposits (as do we), but fails to see the dangers of crowding out small-to-mid-sized lenders out of the market for deposits. Moreover, this would be an enormous blow to the systemic financial repression that underpins China’s investment economy (~46-47% of GDP) and higher real rates of return in safer, traditional savings deposits would slow the supply of yield-chasing funds to Trusts and WMPs – potentially exacerbating any liquidity constraints in those credit markets.
  • On doing both at the same time: We’re not sure what consensus thinks here, but it’s obvious to us that lowering lending rates and increasing deposit rates at the same time will inevitably result in NIM compression – something that can only be offset from an earnings perspective by accelerating credit growth. In the context of subdued GDP targets, the Party’s economic rebalancing agenda, a bubbly housing market and an inevitable and potentially dramatic rise in NPLs over the long-term, a meaningful, sustained increase in credit growth appears unlikely.

 

IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK? - 1

 

As a reminder, we’ll be hosting a flash conference call this Wednesday at 11AM EST to discuss Chinese financial system risks in greater detail, having added CHIX (Global X China Financials ETF) to our Best Ideas list on the short side. We look forward to your participation and questions then.

 

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 663556#
  • Materials: CLICK HERE (slides will download one hour prior to the call)

 

RATTY MAY DATA

This weekend brought us some pretty ratty growth data out of China for the month of MAY. Perhaps the largest callout would be export growth slowing from +14.7% YoY in APR to +1% YoY in MAY, which is what we were calling for post the regulatory crackdown on fake invoicing. Back in line with reality, the MAY export growth figures may arouse global growth fears (exports to the US slowed to -1.6% YoY; exports to the EU slowed to -9.7% YoY).

 

IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK? - 2

 

In the context of slower capital flows stemming from a reduction in “fexports” (i.e. fake exports) and tighter interbank liquidity, the MAY credit growth data was also pretty subdued: total social financing growth slowed to +CNY1.19 trillion MoM from +CNY1.75 trillion prior as new loans ticked down to +CNY667.4 billion MoM from +CNY792.9 billion prior. That is unsupportive for fixed assets investment and industrial production growth, the both of which ticked down marginally.

 

IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK? - 3

 

IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK? - 4

 

IS CHINA PREPARING FOR SYSTEMIC FINANCIAL RISK? - 5

 

All told, the sluggish MAY growth figures are in line with what we saw out of China’s recent PMI readings on both the manufacturing and non-manufacturing fronts and we continue to warn of A) incremental tightening (macroprudential or blunt instrument, if necessary) to stem rampant property price appreciation and B) a 2H13 slowdown in Chinese growth as conditions for credit growth deteriorate.

 

While certainly hard to know for sure, it is our view that much of the equity market upside stemming from positive sentiment surrounding the various avenues for reform (economic, financial, fiscal and social) was priced in during the recent rally.

 

For our latest thoughts on the Chinese economy and its banking system, please refer to the research notes hyperlinked at the bottom of this note.

 

Darius Dale

Senior Analyst

 

  • IS THE RECENT RALLY IN CHINESE EQUITIES SUSTAINABLE? (5/17): We do not think the recent strength in the Chinese equity market is sustainable, as China’s 2H13 growth outlook appears dicey at best.
  • WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? (5/8): Chinese firms are goosing exports to drive incremental liquidity into the banking system – a phenomenon that appears set to slow from here.
  • TWO CHINAS? (5/1): Financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy.
  • REPLAY: Will China Break? (4/30): The Party’s use of state owned banks to drive economic growth through fixed asset investment has left the financial system loaded with bad assets.  The bad assets mirror bad investments in the real economy.  They also can limit the ability of Chinese banks to make new loans.  Following the financial crisis, the Chinese government pushed too hard on the FAI growth lever, building infrastructure projects “for the next 10 years.” It has also left the banking sector choked with bad debts that may limit future lending.  Those factors should slow Chinese FAI growth and slower Chinese FAI growth should be negative for commodity prices and resource-related profits, all else equal.
  • CAN CHINA AVOID FINANCIAL CRISIS? (4/26): The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.
  • REPLAY: EMERGING MARKET CRISES (4/23): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. China is particularly vulnerable to experiencing a financial crisis.
  • IS CHINA CAREENING TOWARDS FINANCIAL CRISIS? (3/28): Systemic risks are present across China’s financial sector – as is the political will and fiscal firepower needed to avert a crisis.

ARE YOU SHORT CHINA YET?

Takeaway: The case for shorting Chinese financials stocks, frontier markets and EM LC and USD debt is becoming stronger by the minute.

This note was originally published June 07, 2013 at 11:44 in Macro

SUMMARY BULLETS:

 

  • Next week we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call: Short CHIX, Short FRN, Short EMLC and Short EMB.
  • In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.
  • While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

Normally, we aim to provide more lead time to get our Black Books and conference calls into your respective calendars, but the recent volatility across Global Macro markets has provided us with a strategic opportunity to expand upon our #EmergingOutflows theme. To that tune, the $5.5B in EM equity fund outflows per the most recent week of data was the largest weekly withdrawal since AUG ’11!

 

Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call:

 

 

As an aside, we like to use ETFs in order to #TimeStamp our positions, but for those of you whose funds are larger in size and require additional liquidity, we encourage you to express these views at the asset class level as well.

 

In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.

 

ARE YOU SHORT CHINA YET? - 1 large

 

While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

Lastly, if you're getting bear'd up here, don't lazily join the consensus crowd that has been getting squeezed trying to short US equities throughout the YTD. Short stuff like Emerging Markets that A) have a legitimate bear case and B) will actually decline in value for more than 1-3 days.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


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MAY SALES SURPRISE – BUT!

Strong headline numbers belie the fact that promotional activity around new product introductions and trading day benefits masked the real issues at McDonald's in May. We continue to believe it will not be until July that we see what MCD normalized trends look like. Adjusted for the calendar/trading day impact, global comps actually registered a sequential deceleration in the two-year average trend.


MCD reported May global same-store sales growth of 2.6% versus 3.3% last year.

 

All the regional results showed positive same-store sales growth with the U.S. up 2.4% versus 4.4%; Europe up 2% versus 2.9%; and APMEA up 0.9% versus 1.7%.

 

The results benefitted from positive trade day variances of approximately 1% for the global business and between 0.6% and 1.4% for the balance of the regions.

 

The positive takeaway for the month is Europe, which reversed a string of 5 consecutive months of declining same-store sales.   The strength in the U.K., and to a lesser degree Russia, continues to offset weakness in France and Germany as the comps become very difficult in June for many European markets.  

 

U.S. same-store sales were better than our estimate, helped by the significant promotions following the introduction of the new Egg White Delight and, to a lesser degree, the McWrap.

 

APMEA posted slightly positive comps of 0.5%.  Positive same-store sales were achieved on the back of better sales in Japan, offsetting declining sales in China, where Avian flu issues persist, and Australia.

 

MAY SALES SURPRISE – BUT! - MCD US SSS

 

MAY SALES SURPRISE – BUT! - MCD Europe SSS

 

MAY SALES SURPRISE – BUT! - MCD APMEA SSS

 

<chart5>

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


EMPLOYMENT DATA MIXED FOR RESTAURANTS

The indication of strong employment growth in April, in the quick service and casual dining industries, was positive news for the restaurant industry. However, mixed employment by age demographics warrant attention going forward as the United States saw sequential deceleration in the 20-24 YOA cohort's employment growth.

 

Generally, Friday’s jobs data were positive for the U.S. economy as the important macro metrics (Labor, Housing, Confidence, Credit) remain attractive on an absolute and relative, versus the rest of the world, basis. We like SBUX and EAT as ways to play this theme.

 

Below, we discuss employment by age and restaurant industry employment. These serve as proxies for demand and operator confidence, respectively, in our models.

 

 

Employment by Age (demand)

 

Employment growth by age was mixed in May as the 20-24 YOA cohort saw growth decelerate to +4 bps from +170 bps in April, the 25-34 YOA cohort saw growth accelerate to +200 bps from +140 bps in April, the 35-44 YOA cohort saw growth accelerate to +50 bps from +30 bps in April, the 45-54 YOA cohort saw growth decelerate to -80 bps from -70 bps in April, and the 55-64 YOA cohort saw growth decelerate to +280 bps from +320 bps in April.

 

This is an important metric for the restaurant industry. Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth. Within QSR, also, the majority of management teams that we track have highlighted employment growth as being crucial to the ongoing success of their businesses. The sequential deceleration in 20-24 YOA employment could, if it continues into May and June, be a cause for concern for some QSR shareholders.

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - employment by age 610

 

 

Restaurant Industry Employment (confidence)

 

The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggest that employment growth in the food service industry ticked up in May. The more narrow restaurant-focused data sets also suggest an increase in operator confidence in April versus March (narrow data released on a lag). On a sequential basis, Leisure & Hospitality employment data registered a month-over-month gain of 43k (second chart below), an acceleration from the prior month’s 38k month-over-month gain.

 

We would caution that Knapp Track comps and traffic have implied two successive quarters of two-year average trend decelerations in the casual dining industry, for April and May, and that industry hiring has generally been reactive, not proactive, in the past.

 

 

Sequential Moves:

 

Leisure & Hospitality: Employment growth at +3% in May, up 28 bps versus April

 

Limited Service: Employment growth at +4.4% in April, up 20 bps versus March

 

Full Service: Employment growth at +1.7% in April, up 8 bps versus March

 

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - restaurant employment

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - knapp comps vs L H

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - leisure   hospitality

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


Sell Some: SP500 Levels, Refreshed

Takeaway: Every time this US stock market corrects we get a whole new bear case and each bear case is different than the one prior.

POSITIONS: 6 LONGS, 5 SHORTS @Hedgeye

 

Ok, I sold more than some. I actually sold ½ my long positions this morning. But not because I am all beared up or anything like that – it’s just process. We bought the oversold signal well last week < 1601, and now the SP500 is 50 handles higher!

 

I usually don’t use exclamation marks but, this year deserves one. Every time this US stock market corrects we get a whole new bear case. Each bear case is different than the one prior, but it feels equally as tough to buck up and buyem when you should.

 

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

 

  1. Immediate-term TRADE overbought = 1662
  2. Immediate-term TRADE support = 1624
  3. Intermediate-term TREND support = 1583

 

In other words, now we’re just trying to manage the risk of the intermediate-term TREND range (1). If you want to think about where I’d be as a % of a full intermediate-term TREND position in US Stocks, I went to 97% of my max allocation last week.

 

If we test 1583 again this summer, I’ll probably do that again.

 

Keep moving out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sell Some: SP500 Levels, Refreshed - SPX


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