Keith’s covering of CAKE this morning was executed at a critical risk management level in his model.  The fundamental case, however, is unchanged.


As we described in our post yesterday outlining the SIGMA positions in the restaurant space, CAKE faces increasingly difficult restaurant-level margin comparisons going forward.  The second half of this year will be especially difficult in this respect.  CAKE’s management team, along with several peer management teams, has stated that food costs are going to be a headwind in 2H10.  For CAKE, with higher restaurant margin hurdles to comp down the track, this anticipated cost pressure could prove meaningful.   Also evident in the chart is the degree to which top line trends will be harder to lap as the year unfolds.


We also are monitoring the considerable downside risk that exists in the macro-consumer sphere; today’s University of Michigan Consumer Sentiment release is yet another bearish consumer macro data point.  In light of this, and the SIGMA analysis summarized above, we believe estimates will be moving lower in 2H10. Our EPS estimate for 2010 is currently $1.31 versus the street at $1.36.


CAKE – THESIS HOLDS - cake sigma est


Howard Penney

Managing Director




Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries

Conclusion: The Chinese say U.S. Treasuries are important and a long term holding, but they are consistent net sellers.  This will be negative for the price of Treasuries if the trend is sustained.


In May, total foreign holding of U.S. Treasury debt increased slightly by $5.8 billion to $3.96 trillion.  The most noteworthy change was in Chinese holdings of Treasury debt.  In May, China’s holdings fell by $32.5 billion to $867.7 billion, which was a 3.6% drop month-over-month.  Japan, the second largest holders of U.S. treasuries, also dropped their exposure month-over-month.


Interestingly, since August 2009, foreign holdings of U.S. Treasuries have increased from $3.5 trillion to $3.9 trillion, which is growth of 11.4%.  In the same period, Chinese holdings of U.S. Treasuries have declined from $936.5 billion to $867.7 billion, or 7.7%.


It is always interesting what the Chinese say.


On March 13, 2009, Chinese Premier Wen Jiabao said: “We lent such a huge fund (sic) to the United States and of course we’re concerned about the security of our assets and, to speak truthfully, I am a little bit worried.”


And more recently the Chinese statement on the State Administration of Foreign Exchange website stated: “US bonds constitute “a very important market for China” and “any increase or decrease in our holdings of US Treasuries is a normal investment operation”.


So, recently the Chinese have been both defending Treasuries, and selling them. 


As Keith noted in the Early Look today:


“This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.


Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.”


The fact is, short term Treasuries are priced to perfection.  As such, any incremental change in demand, will have a meaningful impact on price and yield.


So, as you think about the next move in Treasuries and what the largest holder is doing, watch what China does and not what they say.  The chart below outlines what they’ve been doing.  And the trend is negative for the price of Treasuries.


Daryl G. Jones

Managing Director


Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries - 1


I said this yesterday, and I will say it again today, until the consensus view begins to catch up with the weakening reality, reporting risk continues to be to the downside of expectations. 


I understand why the market is selling off on this news, but who is actually surprised that confidence is declining? 

  1. The economy and public deficits dominate as the nation's most important problems and there is little confidence in Washington’s ability to rectify either issue.
  2. We estimate discretionary spending to be down 2.8% in 2Q10 and 6.4% in 2H10.
  3. Initial jobless numbers improved of late, but the improvements are not significant enough to bring down the unemployment rate.
  4. Consumer demand has not bottomed - we are seeing this in a number of industries we cover at Hedgeye.


Today’s decline in confidence is a clearly not a one-time event.  Two of our key themes in 3Q10 (Bear Market Macro and Housing headwinds) have only just begun to play out.  Unfortunately, if our themes are right, the consumer will face a difficult time in 2H10.


Howard Penney 

Managing Director







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Jefferies initiated coverage on LVS with a buy rating.  Fair enough.  Using the correct share count drops the price target by 20%. Still a buy?



As we pointed out in our 09/14/09 post, “Check Your Models”, many analysts continue to use the wrong share count in calculating earnings and price targets.  This isn’t a minor error.  In Q1, LVS reported a loss, so ordinary shares of 660 million were used as the share count.  However, going forward, we expect LVS to be continually profitable so fully diluted shares must be used.  Since LVS has a convertible outstanding and significant common stock warrants, the share count will be much higher – 815 million per our math.


Jefferies price target is $30 based on 660 million shares, implying an equity target value of $19.8 billion.  If the analyst was using an appropriate fully diluted share count close to our estimate, the price target would only be $24.  Since the stock closed yesterday over $24, this stock can hardly be rated a Buy with that price target.


Will Jefferies downgrade the stock upon recognition of their error?  Unlikely.  Look for a subtle model and valuation revision magically resulting in the same $30 price target.


Position: Long Chinese Yuan via the etf CYB.


Conclusion: Slowing economic data supports sequentially slowing growth in China, and policy actions suggest more slowing is to come. Despite this, China's organic growth story is right on track. Eventually, investors will pay a premium for it again.


Like we’ve been saying since our January 15th  Chinese Ox in the Box theme, China’s 6-9 month economic outlook looks bearish. As bearish as that may be, the long term economic outlook for China is equally bullish and at a point, investors will again pay a premium for that growth. The whole concept of premium is hinged upon relative economic health and that will begin to matter a great deal more than it did in 1H10, as investors begin to rightfully get long those nations with strong balance sheets.


China has been tightening its economy to cool its white hot growth and inflationary pressures. Those methods have included: targeting a reduction in loan growth, raising lender’s reserve requirements, selling bills to soak up excess liquidly, and tightening controls on the expansion of businesses that are heavy energy users (i.e. manufacturing). As a result of these actions, we have seen Chinese economic growth slow as verified by the following data points: 

  • GDP slowed sequentially: 10.3% y/y in 2Q vs. 11.9% y/y in 1Q;
  • Money supply growth (M2) continues to slow: 18.5% y/y in June vs. 21% y/y in May – June marks the slowest growth since Dec. 2008 and has slowed each month since November;
  • Loan growth continues to slow: 603B Yuan ($89B) in June vs. 639.4B Yuan ($94B) in May vs. 774B Yuan in April;
  • Property Prices continue to slow: 11.4% y/y in June vs. 12.4% y/y in May vs. 12.8% y/y in April;
  • CPI slowed sequentially: 2.9% y/y in June vs. 3.3% y/y in May
  • Commercial Real Estate sales growth slowing – Floor Space sold declining: 15.4% y/y Jan-June vs. 22.5% y/y Jan-May; Sales Volume slowing: 25.4% y/y Jan-June vs. 38.4% y/y Jan-May;
  • Fixed Assets Investment continuing to slow: 25.5% y/y Jan-June vs. 25.9% y/y Jan-May;
  • Funds In Place for Investment continuing to slow: 29.2% y/y Jan-June vs. 33.8% y/y Jan-May;
  • Investment in Construction Projects slowing: 27% y/y Jan-June vs. 28.7% y/y Jan-May. 





As suggested by the data above, China’s tightening measures are producing the desired results and China has no plans to loosen the reins anytime soon. On Tuesday, The Ministry of Housing and Urban-Rural Development reiterated that it will maintain curbs on speculative purchases and increase market supply. Furthermore, China’s banking regulator said it has made no changes to policies on home loans, calling on commercial banks to strictly enforce home loan rules.


The momentum associated with these declining statistics and the government’s resolve to maintain tightening policies towards the Chinese property market suggest that the easy money in China has likely moderated for now. As a result, the Chinese equity markets have suffered (the Shanghai Composite is down 27% YTD and is underperformed by only Greece since the start of the year). Chinese entrepreneur confidence followed suit, down 2.5% Q/Q in 2Q, alongside slowing imports, slowing PMI, and slowing industrial production. Furthermore, weakening commodity prices in the face of a dollar decline are all sings that the Chinese demand side of the REFLATION trade is diminishing.






CHINA: SETTING UP TO OUTPERFORM - China Growth Commodites Index


All is not cause for alarm, however. As I pointed out in a note last Tuesday, the Chinese government has been busy making moves to position itself to better weather a slowdown in international trade. Those measures include increasing minimum wages by as much as a third in more than 21  provinces and municipalities this year, and, of course, relaxing the Yuan peg. Those measures, combined with further appreciation of the Yuan from here, will help stimulate domestic consumption, which has fallen from 46.4% of GDP in 2000 to 35.6% of GDP in 2009. Domestic consumption in China, much like Singapore, has a very bullish long term outlook and recent developments are further enhancing those prospects.




Those prospects are exactly the reason the international community is pouring capital into the country. Foreign Direct Investment in China just hit its second-highest reading on record in June. Investment sequentially accelerated to 39.6% Y/Y in June to $12.5 billion, the Ministry of Commerce said in Beijing yesterday – the most since December 2007. For the first six months of the year, Foreign Direct Investment rose 19.6% Y/Y to $51.4 billion, after a 14.3% Y/Y increase in the first five months. Foreign Direct Investment in China has shifted on the margin towards investing in China’s growing urbanization. Tesco, the U.K’s biggest retailer, said in April it will spend 2.5 billion pounds ($3.7 billion) over five years to open shopping malls and hypermarkets in China. For China this is a step in the right direction vs. last year when nearly 52 percent of foreign investment went to manufacturing and another 19 percent to real estate (National Bureau of Statistics). Furthermore, China could see even higher foreign investment if it opened up more industries, including telecommunications, transport, and resources to overseas companies. Any policy shifts in that direction will only accelerate the amount of capital flowing into the economy.


Rising incomes and the likely urbanization of hundreds of millions of people has also attracted private equity funds flows into the economy. At only 40%, China’s urbanization has a great deal of headway to grow, which is one of the reasons China attracted $10.5 billion (275% Y/Y) of private-equity capital in the first half of this year, accounting for 68 percent of the $15.4 billion raised in Asia in the period (Centre for Asia Private Equity Research). Following in the footsteps of Blackstone Group LP and Carlyle Group, KKR is seeking to raise $800 million to invest in China.


All told, China’s organic growth story will matter more when consensus finally comprehends the downside risk associated with the U.S.’s 12-18 month forward economic outlook. As easy money brought on by REFLATION, accelerating trade, and industrial production slows globally, organic growth stories will move to the forefront of investment opportunities. Governments worldwide will have to think twice about levering up and implementing further stimulus, so those economies that have proactively prepared themselves to grow organically will see their equity markets and currencies strengthen in 2H10 and 2011, and beyond.


Darius Dale



The Macau Metro Monitor, July 16th, 2010


SANDS, GALAXY TO HIRE 22,000 Macau Daily Times

According to MSS Recruitment’s Macau Job Market 2010 overview, Galaxy Macau and Sands' sites 5 & 6 need 7k and 15k more workers, respectively.  Sands China's senior vice president of human resources, António Ramirez, stressed, “Even though these projects offer more job openings to the local population, it does not necessarily mean that everyone will be suitable... Non-residents will play a crucial role in transferring their expertise and knowledge to local talents."  Trevor Martin, Galaxy’s senior vice president for human resources and administration, mentioned that the vast majority of the Galaxy Macau personnel would be locals, found through local initiatives and educational sources.


When it comes to local human resources, casinos are “the main competitors” of SME, the Macau Small and Medium Enterprises Association said.  According to the association, most of the 9,600 unemployed have “low education and skills, and some are out of work construction workers.”



IM believes Frank McFadden, Ian Coughlan, and Grant Bowie are the top candidates for the CoD CEO position.  McFadden, SJM’s President of Joint Ventures and Business Developments and the Grand Lisboa boss, has had experience in developing and redeveloping new and struggling properties and played a critical role in SJM's IPO but buying out his SJM stock options might be expensive. Even though Coughlan, president of Wynn Macau, runs the best and most profitable property in Macau and would be highly qualified for the position, it would be difficult to get Coughlan given his relationship with Steve Wynn and he may have golden handcuffs.  The most likely candidate is Grant Bowie, president of MGM Grand Paradise.  Bowie's contract is up for renewal soon and IM believes he would fit in well with the Anglo-Aussie-American-Chinese management team at CoD.  Other candidates include younger guys such as Ciaran Carruthers and Pete Wu.

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