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DELAYING THE DAY OF RECKONING

Yesterday the Ministry of Finance announced that it would extend its support for Cinda Asset Management, one of the four primary AMCs set up to absorb bad loans from commercial bank books over the past decade, for 10 additional years. Cinda currently holds more than $36 billion in bad loans purchased from China Construction Bank, an amount equal to more than half CCB’s net assets.  CCB officially has a non-performing loan ratio of 2% excluding “special mention” assets. 

 

Although no one was surprised that the AMCs life will be extended rather than see massive mark downs hit the balance sheet of the financials they sprang from, the expectation of many observers has been that Beijing would rather see the companies take on new business as agencies which could ultimately allow the debt to be supported without direct government support.  Instead the government appears to be signaling a willingness to allow these pools of zombie assets stagger on without any new plan for recouping losses on these troubled debt portfolios.

 

As the extension of credit between financial instructions continues to grow rapidly (see chart below) the expectation that the system will be able to support liquidity hinges heavily on government backing for the AMCs . As the Chinese become more acclimated to capitalism, they will have come to recognize that denial can have catastrophic consequences  -with the policy makers and bankers in both the US and Japan providing cautionary examples.

 

Andrew Barber

Director

 

DELAYING THE DAY OF RECKONING - barchina

 


THE MACAU METRO MONITOR

WYNN PLAYS CHINESE CARD ON EVE OF IPO LAUNCH scmp.com

Speaking at the launch of Wynn Macau’s initial public offering in Hong Kong, Steve Wynn said, “With this IPO, we’re a Chinese company with Chinese ownership.”  The IPO seeks to raise up to HK$12.6 billion by selling a 25% stake in the Macau business.  Wynn’s Macau business significantly outperformed its Wynn’s Las Vegas resorts during the second quarter, bringing in 32% more revenue and 56% more pre-tax earnings than the US operations.

 

Local tycoons and a fund have already committed to buy US$250 million worth of the Wynn Macau shares. These cornerstone investors include former Sun Hung Kai Properties chairman Walter Kwok Ping-sheung, Sogo department store owner Thomas Lau Luen-hung, Malaysian billionaire Quek Leng Chan and mainland-focused local fund management company Keywise Capital Management.

 

 


WYNN MACAU TO START A NEW PROJECT IN THE SPRING OF 2010 macaunews.com.mo

Steve Wynn has indicated that Wynn Macau had spent seven months planning a new project to be completed on the Cotai strip and could “take the next step” as early as the spring of 2010.  In April, the company will open an expansion of its flagship project, known as Encore at Wynn Macau.  However, Wynn sees Cotai as an “extraordinary” opportunity and believes that, in their plans for a new project there, Wynn Resorts has a “completely unique idea that’s never been done before”.

 

 

 

MACAU VISITOR ARRIVALS RISE IN AUGUST rttnews.com

Visitor arrivals into Macau rose 6.4% in August from a year earlier to 2.62 million, according to figures released by the Statistics and Census Service today.  50.9% of arrivals were from mainland China, an 8.9% year-over-year increase.  Visitation from Hong Kong rose by 2.9%, from Taiwan by 12.6%, and from Japan by 27.1%.  Arrivals from South Korea and Malaysia slowed by 15.4% and 13.9%, respectively.  For the first eight months of the year, visitor arrivals decreased by 9.6% from the previous year to 14.2 million.



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KSWS: Positive Top Line Datapoint

K-Swiss top line trends in the US continue to improve on the margin, due in part to the launch of its new ‘Tubes’ running product.  Key callouts are…

1)      Dollar sales and market share both continue to trend higher on a fairly consistent basis.

2)      Before the launch of this product, KSWS’ share of the running category was 0.02%. Now it sits at about 0.11%. That might not seem like a big number, but for a category that measures about $4bn at retail, these bps add up pretty quickly.

3)      The new launch nearly doubled the average selling price of K Swiss’ existing running offering.

 

 

Is this a game changer for KSWS? No… But for a company that has been decimated by fashion trends, over reliance on one category, poor brand management, excess cuts from Foot Locker, supply chain pressure, and a money-losing subsidiary, we need to keep in mind that ANY stabilization has meaningful margin implications. Keith recently removed this one from his virtual book due almost entirely to liquidity (or lack thereof), which is a factor he places increased emphasis on today as we head into a stagflationary environment in 4Q. Over longer durations. I still really like both the trajectory of the P&L, balance sheet, and ultimately risk/reward.

 

 

KSWS: Positive Top Line Datapoint - KSS1

 

KSWS: Positive Top Line Datapoint - 2

 

 


Playing Chicken: Is It Time to Get Long Natural Gas?

We have thankfully stayed on the sidelines of the natural gas market this year and used our commodity wherewithal to successfully trade the oil and gold markets.  Broadly, commodities have been “ripping” this year on the back of U.S. dollar weakness and the perception of future inflation.   As many of you know, natural gas has much different price drivers than its commodity peers.  It is both a local commodity and very seasonal in nature. 

 

I grew up in the heart of the Western Canadian Sedimentary Basis (“WCSB”) in a little prairie outpost called Bassano, which is in the Canadian province of Alberta.  Only three things come out of Bassano – farmers, oil field workers, and hockey players. I was the latter.  Despite the luck, or perhaps misfortune in inflationary times, of being better at playing hockey versus growing wheat or drilling for oil / natural gas, I still know a thing or two about those commodities.   As it relates to natural gas, I can definitely tell you, supply matters.

 

Our Lead Desk Analyst Andrew Barber put together a chart below that outlines the supply of natural gas going back ten years.  As we can see, inventories for natural gas have been building steadily since September 2008, which has led to the dramatic and steady decline we have seen in the price of natural gas.

 

Portfolio managers at commodity funds across the continent are chasing performance and natural gas is the most washed out commodity. Naturally, they are asking their analysts, “Should we buy? Should we buy? Should we buy?”.  Everyone wants to call the bottom and natural gas does look washed out on many metrics.  That said, the supply data is bearish and likely to get worse. So we have a classic game of chicken going on.  The analysts know that fundamentals are bad, but the portfolio managers know that from a price perspective there is massive potential upside in “Natty”.  So, who will budge first, the price or the fundamentals?

 

Admittedly, we’ve had the same scenario internally.  Keith has hit me with his levels on the natural gas, and noted breakouts from a trade perspective, but I’ve had a hard time telling him I think he should pull the trigger.  Currently, as of the month of September, natural gas inventories in the United States are 17.7% above their 10-year average (the September bar on the bottom chart). 

 

Natural gas collapsed in August because storage levels were butting up against 80%, which is the max they can be prior to September, so excess natural gas was sold into the market, which depressed prices.  Storage can now be filled to 100% of capacity, so excess natural gas has been going into storage in September versus sold into the market, which has been a key driver of the price of natural gas this month.   Obviously, the commodity was also dramatically oversold and the economic outlook has improved, which have helped the rally.

 

Last week storage hit 88.9%, which is its highest level since 2006.  This is noteworthy in that we are only halfway through the month and storage will likely be at 100%, or close to it, by the end of the September.  The implication of this is that we may revisit the price dynamics of August in which no more gas could go into storage, so it was sold to the market which pushed prices down again.  This is obviously a short term dynamic, but I have to be honest, high inventories and the potential reality of storage being filled by late September are making me a little  . . . ummm . . . chicken.

 

Daryl G. Jones
Managing Director

 

Playing Chicken: Is It Time to Get Long Natural Gas? - ng2

 

Playing Chicken: Is It Time to Get Long Natural Gas? - a1

 


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