Another week, another update... Macau growth slows this week


Macau slowed a bit in the third week of September.  The daily table GGR for the last 6 days slowed to HK$429MM from a daily average GGR of $485MM for the first 14 days of the month.  Based on the table revenues through the 20th as shown below, we are now projecting total September revenues at HK$14.5-14.7 billion, or 36-38% growth over September of 2009.  Directionally, market shares were similar to our last update, although Wynn’s share loss and MPEL’s share gain have grown.  Wynn's share plummeted to just 6.15% over the last 6 days, while MPEL's market share soared to 19%.  Our understanding is that low hold (~2%) is largely to blame for Wynn's share losses.  If Wynn's hold was really just 2%, normalizing hold while holding the other concessionaires constant implies that their market share would have been around 13.3% through Sept 20th - which is still below the 13.9% share Wynn had in August, and its lowest share since opening Encore. MPEL is up 80 bps since our update last week.  Despite apparently low VIP hold percentage, MGM’s share continues to climb in response to the company’s aggressive commission efforts.



European Fundamental Bears and Currency Bulls

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD


Today, Eurozone Industrial Orders disappointed forecasts on a month-over-month and year-over-year basis. The data is in line with our call for a slow-down in fundamental performance across most of Europe—a call we’re making over the intermediate term TREND and longer term TAIL as austerity measures drag down growth prospects across the region.


We’re however not bearish on Europe outright. As we noted in our post yesterday titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.


Comparison Boost?


Even off “easy” year-over-year compares of -24.7% in July 2009, Industrial Orders rose only +11.2% in July 2010, and undercut a forecast of +16.2% (see chart below). As a compare, June 2010 saw a rise of +22.7% year-over-year off a compare of -25.8%. Certainly as compares get harder into year-end and demand wanes, we’d expect Industrial Orders to slow further.


Over the immediate term TRADE to intermediate term TREND we expect European bond yields to continue to push to the upside as investors demand a yield premium to own the sovereign debt threats imbedded in European countries that are struggling to contain bloated sovereign debt and deficit levels.  As an example, today, Portugal successfully issued €450 Million in debt due 2014 that commanded a yield of 4.695% versus a similar maturing bond issued on July 28th that commanded a yield a full 1% less.


While we see further downward pressure across European markets over the immediate term TRADE and intermediate term TREND, we’re comforted over the longer term TAIL that the EU community will effectively backstop the region to prevent another Greek default scare, a fact that should help to put in a moderate floor on the downside from here. 


Matthew Hedrick



European Fundamental Bears and Currency Bulls - e.orders

EARLY LOOK: Embracing Change



EARLY LOOK: Embracing Change - CHART2



Who would have thought Tim Geithner would be the last man standing on the Obama economic team?
First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).
So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue.
There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start.
Keith said it best last night:

EARLY LOOK: Embracing Change - CHART4


The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future.
The other one-liners that made the highlight reel on the Hedgeye Twitter feed:


EARLY LOOK: Embracing Change - CHART3



Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.
So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:


  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.


It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!
The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   


  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.


The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt.
The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery.
In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.



EARLY LOOK: Embracing Change - chart1

One last thought:

The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.
-Abraham Lincoln


Function in disaster; finish in style
Howard Penney



This note was originally published at 8am this morning, September 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK and PORTFOLIO IDEAS in real-time.

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Japanese Pensions: Risks to the Global Economy

Conclusion: Japanese demographics and pension obligations pose one of the biggest risks to the global economy.


Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)


At Hedgeye, we try to resist hyperbole as much as humanly possible in today’s manic, never-ending stream of real-time information. But after spending some time researching Japanese demographics and pension obligations, we feel they are one of the most dangerous TAIL risks to global investing over the next 10-20 years.


For background, let us attempt to quantify Japan’s demographic headwinds that are often bandied about (for good reason) without much supporting data. For starters, with 22.7% of its population above the age of 65 as of 2009, Japan has the world’s oldest population. That figure will continue to grow, as Japanese government projections have modeled that ratio to 29.2% by 2020 and 39.6% thirty years after that.


Japanese Pensions: Risks to the Global Economy - 1


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%. In just ten years time, that ratio will be equal to 48%. In a society notorious for luxurious pension packages, going from a 3-to-1 base in potential contributors to a near 2-to1 base in a matter of just ten years is frightening to say the least. And it doesn’t get any better – by 2050, the ratio of retirees to working-age population will reach 76.4%, according to projections from Japan’s Ministry of Health, Labour and Welfare.


Japanese Pensions: Risks to the Global Economy - 2


The obvious conclusion here is that more and more people will be in line for pension payouts with less and less people to fund them. To that tune, the funding outlook looks incrementally more bearish when one considers that 56% of Japanese workers rely on financial support from their parents or other sources to cover their living expenses (Japanese Labor Ministry). As it seems, the people who are going to be counted on the most to fund ever-increasing pension liabilities are actually being supported by those very payouts they are needed to cover. This is not good.


This year, we’re already starting to see the ill-effects of funding gaps, with Japan’s public pension fund (the world’s largest at $1.433 trillion) increasing its asset sales by a factor of 5x year-over-year to bridge the gap between insurance premiums and payouts. According to Takahiro Mitani, president of the fund, the now 4 trillion yen ($48 billion) figure can be raised by selling any combination of assets (67.5% JGBs, 12% Japanese equities, 10.8% international equities and 8.3% in foreign bonds, including U.S. Treasuries), according to “market conditions”. We expect the asset sales by Japan’s public pension fund to continue accelerating as the first of Japan’s baby boomers turn 65 in 2012.


Expect the heavy hand of Japanese selling to weigh on global markets in the coming years. Despite this, Mr. Mitani remains convinced that the interest rates on Japanese government bonds will not increase from the potential glut of new supply on the market. We beg to differ. We all know what happens when marginal supply outweighs marginal demand – prices decline.


On the demand front, Japanese government debt (which is north of 200% of GDP) has largely been financed by domestic investors (94%; IMF). Japan’s savers, however, are shifting on the margin to consumers as they age rapidly: Japan’s household savings rate (as a % of disposable personal income) has declined 1,170 bps over the past 20 years to 2.2% (IMF; OECD).


Japanese Pensions: Risks to the Global Economy - 3


Much has been made about the fact that direct holdings of JGBs by the household sector are only ~5% of the total outstanding amount. When indirect channels are taken into account, however, Japanese households finance 61.5% of JGB issuance through banks and pensions funds, after factoring in an incremental 10% of JGBs held by the basic public pension fund that will be paid out as future liabilities (BoJ Flow of Funds Statistics; IMF).


Japanese Pensions: Risks to the Global Economy - 4


To compound the decline in domestic demand, a recent report from Mizuho Trust & Banking Co. (Japan’s second largest bank) suggests that demand for 20 and 30-year JGBs will start to wane in the next few years as purchasing from major Japanese life insurers peaks out.


With regards to supply, Japan’s budget deficit as a % of GDP is currently 8.7% (IMF) and more spending initiatives, such as current Prime Minister Naoto Kan’s recently announced 915 billion yen ($11 billion) stimulus plan, don’t suggest that figure will come in meaningfully over the next few years. In fact, baseline IMF projections (taken for whatever they’re worth) have Japan’s budget deficit as a % of GDP at 7.2% in 2015. This means that they will need to continue to issue large sums of government debt to finance deficit spending.


Japanese Pensions: Risks to the Global Economy - 5


Combined, the outlook for future demand for and supply of Japanese government bonds is one of gross disequilibrium to the supply side, which should, in theory, push down prices substantially and send yields soaring. Currently, about 10.6% of Japan’s federal budget goes to interest payments, which is much higher than the 7.8% we see in America (Japan Ministry of Finance; BEA). Further, all-in National Debt Service, which includes interest payments, bond redemption and administrative costs, stands at roughly 22.4% of Japanese government expenditures.


Japanese Pensions: Risks to the Global Economy - 6


This figure is one to keep any eye on, as bond redemption costs are arguably a growing canary in the coal mine as it relates to the Japanese fiscal situation. Known as the “60-year Redemption Rule”, Japan’s current debt servicing system requires JGBs to be completely redeemed in cash over a 60-year period irrespective of bond duration – using sources of income other than refinancing. Simply put, Japan can’t just pile more debt upon debt to meet all its refinancing costs. This will continue to be headwind for the Japanese government budget, likely forcing them to meaningfully raise taxes and implement substantial austerity measures over the next decade.


That will be tough, considering that Japan’s dependency ratio (ratio of elderly and children to the working-age population) will grow 1,017 bps to 66.7% in that time span, according to the Japanese Ministry of Health, Labour and Welfare. Plainly stated, the Japanese citizenry will likely need spending to increase over this time period while the government will need to cut its budget meaningfully and raise taxes. We saw what happened in the streets of Greece this summer after the government implemented tough austerity measures. Japan is much, much larger than Greece (population: ~127.5 million vs. ~11 million in Greece).


Circling back to my previous comments regarding the possibility of Japanese interest rates backing up significantly, history tells us that this could happen over a span of decades or, as we saw this summer, in a matter of months once the global investment community (who will be increasingly responsible for funding JGB issuance as Japanese domestic demand wanes) loses confidence in Japan’s fiscal sustainability.


Of course, there’s always the Paul “PRINT LOTS OF MONEY” Krugman factor to consider, whereby Japan could in fact “PRINT LOTS OF MONEY” to buy more of its own government debt. Currently, the Bank of Japan holds about 8% of total JGBs as a result of its monthly purchases designed to stabilize market conditions (IMF). How much more JGB financing could the BoJ undertake without major unintended consequences (i.e. global asset inflation, yen debasement, etc.) is beyond us.


What is not beyond us, however, is where this ship is likely headed over the next 5-10 years. As a result of growing underfunding, Japan’s pension fund may have to invest in riskier assets to meet its long-term payout needs. An entity as large as Japanese pension funds collectively joining the global search for yield will provide a substantial amount of incremental demand for emerging market stocks and bonds over the next decade and beyond. Mr. Mitani, who recently said his mandate is to invest in “safe” assets with a long-term view, may need to step outside his comfort zone pretty soon if the Japanese pension system isn’t to implode upon itself (and the global financial system).


We understand this note sounds alarmist, as it probably should. Similar to Bob Shiller warning everyone about housing in the mid-2000’s, we think the growing liabilities of the Japanese pension system pose a major threat to the global economy. Of course, a crisis isn’t likely to ensue tomorrow or next year, though the probability of a major crisis happening in our lifetime is a lot higher than not, in our opinion.  We would be remiss, however, not to send a golf clap in Japan’s direction for at least addressing the problem: the number of Japanese workers in defined-contribution plans (which reduce future pension liabilities on the margin) has grown 40x since 2001 to 3.5 million in 2009 (WSJ). Unfortunately, that’s only 2.7% of the working-age population, so there’s more work to be done to say the least.


God speed, Japan. God speed.


Darius Dale


R3: Plus Sizes, Forever 21, NKE, and Leather


September 22, 2010


Investors and retailers alike continue to place bets on the growing plus size market, this time with a purchase out of bankruptcy.  Despite obesity rates being at all time highs, retailers until now have struggled with profitably reaching this demographic 





-According to the Luxury Institute, 57% percent of high-end consumers identify quality customer service as a defining characteristic of luxury goods.  However, expense cuts over the past year or so have left 50% of luxury consumers noticing a drop off in the quality of the luxury consumer experience. Additionally, 76% of respondents believe high quality of the goods themselves is a defining characteristic of a luxury product, while at the same time 51% of consumers believe quality has declined.


-According to CoStar, investment in retail real estate has been steadily improving throughout 2010.  Through the first 8 months of the year, $22 billion has been invested in retail related properties.  This marks a substantial pick up from 2009, which saw total investment of $12 billion for the entire year.  There are also signs that this trend may continue, with signs beginning to show that lenders are beginning to feel comfortable disposing their distressed assets in an effort to clean up their books.


-For the first time, more computer games were purchased via online downloads than in retail stores, according to NPD. So far in 2010, PC game sales sold in brick and mortar stores still have a dominant 57% share, but if higher ASPs in physical stores continues, online  downloads will take over which will have implications for retailers from GME to BBY.


-Fashion ads may soon have to label photos that have been retouched curbing the latest trend from too thin to impossibly skinny. With brands and designers becoming increasingly liberal in their use of photoshopping subjects (recall RL’s ad controversy in Japan involving Flippa Hamilton), the British government is convening next month to evaluate the effects of these fallacious representations on their female audience. While the soda industry adopted labeling for caffeine, we suspect the outcome here is likely to require more than a simple label.





Urban Brands Bought Out of Bankruptcy - Urban Brands Inc., parent company of the Ashley Stewart plus-size specialty apparel chain, inked a deal with an affiliate of Gordon Brothers to buy the business out of bankruptcy proceedings. The Secaucus, N.J.-based Urban, along with 54 affiliated debtors, filed Chapter 11 petitions for bankruptcy court protection Tuesday in a Delaware bankruptcy court. Urban Brands operates 210 stores in 26 states and has 2,100 employees. <>

Hedgeye Retail’s Take:  Looks like the start of another attempt to capitalize on the plus-size trend.   Unfortunately, the holy grail of retailing targeting this demographic has yet to be found (profitably).  Despite this, obesity in the U.S remains at record levels, leaving the potential for getting the business fixed very high. 


Canadian Sporting Goods Company Forzani Sees Sales Lift in BTS - The Forzani Group Ltd. reported same-store sales climbed 5.8% in seven weeks ended Sept. 19. Comps at its corporate stores jumped 8.9% while comps at its franchised locations dipped 0.2%. In the two weeks ended Sept 19, comps grew 8.1%. A 12.1% gain in corporate comps offset a decline of 0.1% at franchised locations. In the five weeks ended Sept 5, comps advanced 4.8% with corporate comps up 7.4% and franchise comps sliding 0.4%. <>

Hedgeye Retail’s Take:  No surprise here as the Canadian market is mirroring the same product and inventory trends we see here in the U.S.  Less competition in that market also helps. 


Forever 21 in India - Fashion brand Forever 21 has made a foray into the Indian retail market, opening a 10,000 square feet flagship store in New Delhi. The store was inaugurated by Bollywood's sultry actress Bipasha Basu and Forever 21's president, Alex Ok. Don Chang, owner and founder of Forever 21 said, "The Indian women truly understand and appreciate fashion and opening of Forever 21 will encourage fashionistas to give into their style desires and will provide them a much needed “Fashion Stimulus." <>

Hedgeye Retail’s Take:  Nothing really surprises us anymore when it comes to Forever 21.  The brand continues to persue unabated growth across multiple store formats, varied real estate profiles, and now multiple geographies.   


Plus Sized Retailer Avenue Launches Mobile Shopping App - Avenue, a premier plus size brand in the portfolio of Redcats USA, launched its iPhone application. This new application enables fashion enthusiasts to now experience and shop a streamlined version of Avenue's website at the click of a button. They can also browse new arrivals, search for specific items, take advantage of Avenue's great promotions and deals, make purchases with just a few clicks, and find the closest Avenue retail store within a matter of seconds.  <>

Hedgeye Retail’s Take:  More plus size in the news, this time mixed with m-commerce.  We continue to believe mobile shopping is nothing more than e-commerce on a smaller screen.  The better the technology, the more likely transactions will begin to take place. 


Japanese Athletic Company Mizuno Launches New Global Golf Brand JPX - Mizuno, the leader in golf technology and innovation, is set to launch a new global brand, "JPX", to deliver the highest performing game improvement equipment in the world. Superceding the award winning MX line of equipment, the JPX brand will bring Mizuno's very latest game improvement technologies to the United States. JPX will complement Mizuno's legendary MP Series, which is world renowned amongst professionals and better amateurs. Heading the JPX launch are the JPX-800™ and JPX-800 Pro™ irons. <>

Hedgeye Retail’s Take:  Based on the description, JPX hardly seems like a new brand.  Instead, it appears to be a line extension or sub-brand under the Mizuno umbrella.  Either way, golf’s anemic growth probably puts a lid on the idea of creating an entirely new brand for a market that has been stagnant for a while.


China: Fujian Province Toughens Control Over Tanners - China’ Fujian province has recently launched a new pollution prevention program for the Quanzhou leather industry to step up pollution prevention and treatment in the region. <>

Hedgeye Retail’s Take:  As we’ve mentioned over the past few months, the Chinese government is focused on cleaning up the tanning industry.  Both regulation and massive tannery closures are expected to take place over the next year or two.  Leather looking more and more like a commodity that could see pricing increases soon.


Local Advertising Sees Slow Rebound Overall but a 30% Increase Online - Local advertising spending is holding up better in 2010 than previously expected, according to estimates from BIA/Kelsey. The firm, which initially predicted a nearly 1% drop in overall local ad spending this year, forecast growth of 2.1% to $133.3 billion by year-end. Drilling down into where that spending will occur, online is the source of all growth in the space. Traditional local spending, after a dramatic plunge in 2009, will continue a downward trajectory through 2011 and will not recover to earlier spending levels. But rising spending on the web will fuel overall increases in the local space from 2010 through 2014. The growth of online local ad spending, along with the stagnation of traditional efforts, will mean online takes an ever greater slice of the local advertising pie in coming years. Online has already increased its share by 50%, from 10% in 2008 to 15% this year. <>

Hedgeye Retail’s Take:  With location based services embedded in smartphones, it certainly feels like the tipping point has been reached for the decline of traditional local advertising.  Penny Shoppers and billboards take note.

R3: Plus Sizes, Forever 21, NKE, and Leather - 1


BBBY: Facing Reality

So here’s the setup on BBBY.  I’m at $0.67 for the quarter, Street is at $0.63 (high-end of guidance).  I’m modeling a 5% comp and modest gross margin expansion.  This represents the first quarter that the company comes up against gross margin gains on y/y basis.  Importantly, I believe they can achieve margin expansion given ’07 and ’08 saw massive margin erosion in the wake of the housing blow up and substantially heightened promotional activity. 


The environment over the past few months has been very much status quo from a promotional standpoint (we’re not talking denim or logo tees here) as well as a demand perspective.  WSM, PIR, KSS, TGT, COST, and TJX all continued to highlight home/soft home as a leading category (i.e actually comping positive), which is consistent with the commentary we’ve been accustomed to hearing over the past 6 months.  Overall there remains substantially less couponing by BBBY a key factor in maintaining margin expansion.


With the fundamentals sound, the sentiment is a bit different heading into the quarter this time vs. last.  Recall,  there was much speculation last quarter surrounding a same store sales miss heading into the print.  BBBY ultimately came through with the top line, although there was substantial volatility into the reporting of results and the shares sold off even with confirmation that sales didn’t tank. 


This time the set-up is more benign, as we haven’t heard many whispers going into tomorrow evening.  The flip side here is the stock is at $42 (almost parity with June 23rd, the date of the last quarterly release) but the environment is slightly more positive towards the space (we can’t ignore the S&P’s 8.8% increase month to date as one of the more positive backdrops).  All in, this quarter largely hinges on guidance for the next quarter and the year.  The Street is currently at the upper end of this quarter’s guidance, but ahead for the remainder of the year.  Like most of retail, the rest of the year that presents the greatest challenge on both top and bottom line comparisons.  We’re concerned that the 19% growth represented by the consensus is very unlikely to be blessed by management.  Yes there is still upside here on the margin line, but you won’t know it come tomorrow’s recorded conference call.  Headlines will run with a “guide down”  spin even if we all know that this management team is one of the most conservative in all of retail. 


Yes, we’d all like to believe all of this conservatism and tough comparison rhetoric is “in the stock”.  However, this is easier said than done and we wouldn’t be surprised to see a sell off even if the underlying prospects remain solid for BBBY.  For the longer term, we’re still comfortable that margins can continue to expand and that cash will either continue to build or eventually be deployed. 


The wildcard remains share repurchase, which management has been very conservative with despite sitting on $1.6 billion in cash and no debt.  This can only mean upside, but we put less than a 50% chance that they stepped it up in a meaningful way.  BBBY is still one of the better retailers out there, with a decidedly favorable competitive position.  We’re just not confident that the stock is well positioned from the long side (come tonight’s results).


BBBY: Facing Reality - bbby2q


Eric Levine


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