Takeaway: The PBoC’s surprise rate cut confirms our bearish thesis on the Chinese economy, but may portend brighter days ahead.

Chartreuse and Spoos: The Global Central Planning Spree Continues

As you can probably tell by the overnight action in the spoos, a central bank in Asia eased monetary policy. This time, it was China – i.e. the economy responsible for 16% of global GDP and 30% of global GDP growth (on a PPP basis). Yes, the same China where 2014 Real GDP growth is tracking at the slowest pace since 1990!


From a forward-looking perspective, this is a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now. Recall that amid incessant cries for Western-style monetary easing, the PBoC has refrained from cutting interest rates since July of 2012 (excluding the removal of the lending rate floor). It has not [broadly] lowered RRRs since May of 2012.




In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.


Chinese growth is effectively crashing at this point. Our model points to a continued slowdown of Real GDP to +7.1% YoY in 4Q – and that’s being polite (i.e. conceding their made-up numbers). The reality is that Chinese growth is far shy of that number, making the 2nd derivative impact much more severe for economies and businesses that rely on Chinese demand. Pull up a 2Y chart of Standard Chartered (STAN) if you want the real story on Chinese growth. 


So Why Cut Now?

There are two primary reasons why the PBoC surprised everyone by cutting rates today (-25bps on the benchmark household deposit rate; -40bps on the benchmark lending rate):


  • Economic growth – which had already been slowing precipitously, as evidenced by the sea of red in the table below – fell off a cliff in October. This is most easily confirmed by the rate of change in Total Social Financing growth and Macau’s mass business, which was down -8% YoY (from +15% in September). That was the first annual decline in mass revenues in over five years!
  • Amid increasingly large capital outflows (see: declining FX reserves and negative “hot money” flows) and trending disinflation, the real cost of 1Y capital in the Chinese banking system has actually risen to fairly high level of late, rising to roughly 1.4% from ~0% at the start of the year.




CHINA: WHY DID THE PBOC CUT? WILL IT EVEN MATTER? - China Iron Ore  Rebar and Coal YoY vs. GDP




Again, the PBoC’s decision to cut rates today makes a ton of sense to us, given China’s sustained #Quad4 setup, which calls for a dovish response from fiscal and monetary policymakers. We just didn’t see it coming given their official guidance; it's worth noting that Beijing is notorious for sticking to the script.




Cyclical Outlook: Still Very Negative, But Potentially Positive

You’ll note that in that our GIP Model has China going into #Quad1 for the first quarter. That’s primarily because of seasonality (fiscal expenditures and credit growth tend to be front-end loaded) and, obviously, very easy comps. That being said, China had these things working in its favor at the start of this year, but obviously the tightening we saw in the early part of 2014 trumped that setup (to the downside).




A continued “recovery” in the Chinese property market – which had been truly crashing – is also supportive of any positive 2nd derivative delta for the Chinese economy in 1H15.




It’ll be interesting to see if the rebound in property development (read: fixed asset investment) is actually sustainable amid home price deflation accelerating to the downside on a trending basis. For now, it’s too early to tell; what we do know is that Chinese policymakers are very concerned about this segment of the economy and have ratcheted up support for the sector in recent months.


Investment Conclusions

All told, the PBoC’s surprise rate cut confirms our bearish thesis on the Chinese economy, but may portend brighter days ahead from a cyclical perspective.


That being said, long-term investors should NOT get involved with any “China recovery” trade that may percolate from this. China’s structural economic imbalances and official rebalancing agenda imply continued slowing over the long-term TAIL.


Feel free to ping us w/ any follow-up questions. Have a great weekend,




Darius Dale

Associate: Macro Team

Cartoon of the Day: Central Planning Gone Wrong

Cartoon of the Day: Central Planning Gone Wrong - Draghi cartoon 11.21.2014


As Hedgeye CEO Keith McCullough tweeted earlier, “You are watching the climax of a centrally planned market experiment gone bad.”  In the last 24 hours, ECB President Mario Draghi made yet another dovish speech that opened up the possibility of yet more QE. 

Please Join Hedgeye For Holiday Cocktails & Appetizers

'Tis the Season…. We hope you can join us at Cellar Bar (40 W. 40th Street – in the Bryant Park Hotel) on Tuesday December 9th from 5-9pm for some holiday cheer!


Please RSVP to this email if you can join.


We look forward to seeing you!


-Your Hedgeye Macro Team


Please Join Hedgeye For Holiday Cocktails & Appetizers - z. invite

Please Join Hedgeye For Holiday Cocktails & Appetizers - z. Cellar Bar Map

EVENT: BABA Call Today at 11:00am EST

Takeaway: We're hosting a call today at 11:00am EST discussing our bearish long-term view on BABA, and timing the short opportunity.

We will be hosting a call outlining our long-term BEARISH view on Alibaba Group Holdings.  BABA is too large to control its own destiny, leaving it hostage to the China growth story and creating a set of challenges for its business model.


Moderated by Hedgeye's CEO Keith McCullough, we'll integrate a PMs perspective on risk and timing.  


Join us for our call Friday, November 21st at 11:00am EST.




  • China Can't Grow Fast Enough: Top-down analysis of the key factors driving E-Commerce in China.
  • Growth Will Come at a Price: How the China growth story will pressure BABA's Business Model.
  • Timing the Short: Model Projections and the Key Metrics we're tracking to monitor our thesis.



Toll Free Number:

Direct Dial Number:

Conference Code: 373216#

Materials: CLICK HERE

McDonald's: An Activist's Dream? Not So Fast.

Takeaway: Here's our take on recent news of a large activist investor buying into McDonald's.

This note was originally published November 18, 2014 at 07:19 in Restaurants

With the news of a large activist buying into MCD, we find it prudent to ask, “Will shareholders be saved?” 


We think it’s going to be a long road.  The last activist that was involved in MCD was successful, but not because they had an impact on management thought process. 


What did Pershing see in late 2005?

  • A concept squarely in the midst of a significant turnaround that resulted in over 110 months of positive global same-store sales growth
  • MCD had a market cap of $42 billion and $20 billion in system-wide sales
  • A real estate portfolio that was undervalued by $16 billion ($30 billion versus Pershing Square’s $46 billion estimate)
  • A stock that was unnecessarily trading at a discount to its peers
  • Three different businesses: franchise operations, company-owned operations and real estate


What did Pershing propose?

  • Spin 65% of the McOpCo stores
  • Spin out the real estate
  • Use the proceeds and increase leverage to repurchase stock


What was McDonald’s response?

  • They called it a mere exercise in financial engineering
  • Claimed they had a unique business model
  • Suggested it would disrupt the relationships it had with customers, franchisees and suppliers
  • Management said friction costs would make a REIT cost prohibitive
  • Pointed to potential unintended consequences
  • Feared it would lose its “A” credit rating


In the end, the company never implemented any of Pershing's bold plans.  Pershing's investment in MCD was successful, not because of the their ideas, but because the business was going in the right direction. 


Here we are, ten years later, with another activist prepared to potentially knock on the door of MCD.  In some ways, it’s a very different McDonald’s this time around.  In others, it’s the same old story. 


Last week, Jana Partners took a stake in MCD by accumulating 1.042 million shares, inclusive of calls.  According to the investment manager’s website, “Jana typically applies a fundamental value discipline to identify undervalued companies that have one or more specific catalysts to unlock value.  Jana can be the instrument for value creation by becoming an actively engaged shareholder.”


We understand why an activist would be attracted to MCD today:

  • McDonald’s needs to undergo a significant restructuring
  • McDonald's has approximately 6,500 company-operated restaurants that could be re-franchised
  • Global same-store sales are declining and have been for quite some time
  • The stock has under-performed the SPX by 14.5% over the past year
  • Chipotle has grown from approximately 440 restaurants in 2005 to approximately 1,785 restaurants today and is leading a significant shift in consumer eating patterns. 
  • McDonald's must be pushed to aggressively adapt to the changes in the market place 


The activist playbook in the restaurant space is generally confined to a couple of key moves.  Get control of the board and do one, or all, of the following:

  • Sell real-estate
  • Cut SG&A
  • Sell company-owned stores
  • Sell other non-core assets
  • Increase leverage and repurchase stock


In the case of MCD, we believe it will be very difficult to achieve any of these moves. 


First, we don’t think the board is ready to give up on CEO Don Thompson (for now, at least). Second, selling real-estate will never happen at MCD; there is a chance, however, that the company sells some McOpCo stores.  All told, we believe the latter is too small of a change and would not move the needle on profitability.  Third, McDonald’s doesn’t have any non-core assets.  And, fourth, we believe it is unlikely management will increase leverage because they like their credit rating where it is.  This would likely be a unwise move, to be frank, because increasing leverage in a declining sales and margin environment is unlikely to create shareholder value.


Now, either Jana’s investment is just the beginning of a bigger position or they are making the call on a short-term improvement in the operating performance of the company. 


We’re not sure what the play is here. 


What we are sure of is that McDonald’s is unlikely to see a notable, short-term improvement in trends and that Jana’s position is too small to agitate for change.  The truth is, none of the typical moves in the activist playbook will generate much value in this environment. 


The biggest upside in MCD will come from fixing the core operations.  With no disrespect to Jana, there is likely little they can do in this regard.  If they did come up with a silver bullet it would take 12-18 months for it to be approved and executed.  Lastly, we doubt the franchisee base will look kindly upon a hedge fund telling them how to run their business.    


For this reason, we still think there is risk to the numbers in 2015 and remain bearish on MCD.  We normally side with activists in the restaurant space, but we don’t see how one can make money in MCD right now. 


LEISURE LETTER (11/21/2014)



  • Nov 23: Pacquiao-Algieri bout at Venetian Cotai Arena


BYI – SGMS announced that the Nevada Gaming Commission unanimously approved the company's pending acquisition of Bally Technologies, Inc. The Commission's approval was the final regulatory approval required to complete the merger. The company expects to complete the Bally merger today.  


BYD – Kansas Star Casino on Wednesday unveiled a $20 million expansion project that includes an 11,000-square-foot meeting center and a 183-stall equestrian center that will enable the casino to host large horse shows. Both facilities are scheduled to open in mid- to late December. The projects will complete the casino’s original master plan and bring the total investment in the property by Boyd Gaming and previous operator Peninsula Gaming to $330 million.

Article HERE

Takeaway: The Kansas Star expansion is ahead of schedule. The budget of $20m remains unchanged.


MGM – announced it priced a public offering of $1.15 billion in aggregate principal amount of 6% senior unsecured notes due 2023 at par.  The transaction is expected to close on November 25, 2014. Use of proceeds include general corporate purposes, including repaying certain debt maturing in 2015 and funding a portion of the development costs related to its Maryland and Massachusetts resort projects.

Article HERE

Takeaway: Probably not the last debt offering to fully fund the Baltimore and Springfield developments 


WYNN – announced a new credit agreement including a US$375 million senior secured revolving credit facility that will mature on November 20, 2019, and a US$875 million delay draw senior secured term loan facility that will mature on November 20, 2020 and will require quarterly principal payments, scheduled to begin on June 30, 2018. Use of proceeds are primarily for capital expenditures for the construction of a US$1.6-billion casino resort in Everett, Massachusetts.

Article HERE


WYNN – Prosecutors from the Manhattan and Las Vegas U.S. Attorney’s offices and investigators from the Internal Revenue Service and Drug Enforcement Administration are investigating whether casino operator Wynn Resorts Ltd. violated money-laundering laws, according to people familiar with the matter. Allegedly, the U.S. Government asked Wynn for a list of its biggest customers from 2011 through 2013, along with their dates of birth, Social Security numbers and details from their identification documents. The IRS specified it wants information about the company’s safeguards against money laundering and requested a list of Wynn’s top 100 patrons from North America as well as its top 50 in each of three other regions: Asia, Europe and Latin America, according to the letter.

Article HERE

Takeaway: The company has indicated it is not aware of any investigation.  Regardless, we won't want to be one of the patron names who could be listed as a stop gambler.


577.HK – The holding company of boutique Macau casino hotel project Louis XIII (pictured in a rendering) is seeking to raise up to HKD3.03 billion (US$390.7 million) in additional funds through the placing of shares and convertible bonds. The initial fundraising target is HKD1.56 billion through the placing of shares and convertible bonds, with an upsize option of up to HKD780million. The placing price range is HKD3.00 to HKD4.00 per placing share, while the conversion price of the placing convertible bonds will be the same as the placing price.

Article HERE


GENS.SP – Genting Singapore today repurchased 9.6 million shares for S$10.757 million. Cumulative shares repurchased year-to-date = 46,284,000.    Following today's share repurchase, the total shares outstanding = 12,201,752,480.

Article HERE

Takeaway: While Genting has quietly repurchased 0.38% of its outstanding shares this week, the price of GENS stock traded up 7.7% over the past week and up 11.9% from the intraday low of S$1.005 on November 12.


HOT – today announced it sold Sheraton on the Park in Sydney, Australia to Sunshine Insurance Group Corporation for AUS$463.0 million or US$399.0 million. 

Takeaway: We noted in our November 14, Leisure Letter the expected sale of this hotel.  The AUS$463 million sale price was higher than the rumored AUS$450 million price we heard last week. We expect Starwood to use the transaction proceeds to repurchase shares. 


PEB – announced that it acquired the 264-room, upper-upscale, Hotel Palomar Los Angeles – Westwood for $78.7 million. The company will own a leasehold interest in the property through a ground lease which will expire in 2107, assuming all extension options are exercised. For the trailing twelve months ended September 2014, the Hotel Palomar operated at 87% occupancy, with an ADR of $207 and RevPAR of $180.  For 2015, the Company currently forecasts the hotel will generate EBITDA of $5.2 to $5.7 million and NOI after capital reserves of $4.2 to $4.7 million.

Takeaway: The average price per key of $298,100 is very reasonable for the location, but the ~14.4x forward EBITDA is pricey.  With proforma cash of approximately $255 million, the company has sufficient cash to fund both the Westin and Hotel Palomar acquisitions.  We expect PEB to seek long-term mortgages on both assets, thus providing additional cash proceeds and low-cost long-term debt financing.


CCL – After a drydocking to turn her from the Grand Celebration to the Costa Celebration, the ship’s winter season has been cancelled, according to the Italian company. Costa said in a released statement to Cruise Industry News that the Celebration will no longer be part of the fleet starting on November 22. 2015 deployment will be taken over by the neoClassica.

Article HERE

 Takeaway:  This sale has been rumored but who was the buyer?


CCL – Carnival announced it has signed a memorandum of understanding with Fincantieri S.p.A., the world's largest cruise ship building company, to explore the possibility of a shipbuilding joint venture aimed at accelerating development and growth of the cruise industry in China. The MOU between Carnival Corporation and Italy-based Fincantieri outlines the framework for evaluating and exploring a potential shipbuilding joint venture for constructing cruise ships for the Chinese market. The MOU with Fincantieri follows the news that Carnival Corporation and the China State Shipbuilding Corporation (CSSC), China's largest shipyard, had signed an MOU in mid-October to work together on a potential collaborative joint venture focused on shipbuilding in China.

Takeaway:  Serious ship-building interest in China from Carnival. 


RCL – announced that Majesty of the Seas will transfer from its Royal Caribbean International cruise brand to its Pullmantur brand in 2016 in an attempt to help build out Pullmantur's Latin American growth strategy.  Majesty of the Seas' last 3-night sailing for Royal Caribbean International will depart on April 29, 2016.

Article HERE

Takeaway:  Pullmantur is transitioning away from the Spanish market just when trends are getting better there in 2014. Latin America, while exciting, is an uncertain opportunity.


Macau / Zhuhai Border Gate Open Longer – The long-awaited 24-hour border crossing between Macau and Zhuhai will become reality in the early hours of December 18, the government spokesperson Alexis Tam announced yesterday.
From Dec 18, the Lotus Bridge Cotai Frontier Post (connected to Hengqin) will be operating around the clock. Meanwhile, the operation hours of the Border Gate (connected to Gongbei) will be extended by an hour before and after. The border checkpoint will open at 6 am and close at 1 am.

Article HERE

Takeaway:  As suggested in previous media reports


South Korea - New Casino (Part 1) – Chow Tai Fook Enterprises Ltd signed a letter of intent to invest US$1.6 billion to create a new South Korean casino resort at Incheon, near the country’s capital Seoul, on November 16. The agreement was with Incheon City Mayor Yoo Jeong-bok for a property at Yeongjong Island in the Incheon Free Economic Zone. Chow Tai Fook Enterprises is a privately held firm founded by Cheng Yu Tung, for many years an investor in Sociedade de Turismo e Diversões de Macau SA, the parent of Macau casino operator SJM Holdings Ltd.

Article HERE

Takeaway: At present there are no less than four new major casino developments in the works - including: Chow Tai Fook, Caesars, Paradise, and Genting. Gaming operators rush to build a bigger, brighter, shinier casino as they compete for the nearly 6 million Chinese tourists to South Korea.  By comparison Macau received 18.6 million Chinese visitors in 2013.


South Korea - New Casino (Part 2) – South Korean casino operator Paradise Co Ltd broke ground on its planned US$1.7 billion Paradise City casino resort at Incheon, near the country’s capital Seoul, according to a report in the Korea Herald newspaper. The development is scheduled to open in 2017. Paradise is a partner with Japan’s Sega Sammy Holdings Inc for the scheme at Yeongjong Island in the Incheon Free Economic Zone. Paradise holds a 55% stake in the joint venture according to previous statements by the company. The project includes hotels, restaurants, and – as local law currently stands – a foreigners-only casino. The casino resort will have 160 gaming tables and 340 slot machines and 750 hotel rooms.

Article HERE


China Lowers Interest Rates – In an unexpected shift in monetary policy, the PBoC cut the one-year deposit rate by 25 bp to 2.75%. It also cut the one-year lending rate by 40 bp to 5.6%. 

Takeaway: We have run a regression analysis that shows the highest correlation between Chinese rate cuts and Macau VIP volume on a 9 month lag. 


China PBoC Said to Inject Cash –  The PBoC was said to have added money to the banking system today as a cash shortage stemming from new share sales drove the benchmark money-market rate up by the most since July. The monetary authority supplied funds on a short-term basis, according to two people with direct knowledge of the matter who asked not to be identified. Some 50 billion yuan ($8.2 billion) was offered using Short-term Liquidity Operations. Eleven companies are due to sell shares for the first time next week. 

Article HERE


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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