• run with the bulls

    get your first month

    of hedgeye free


People lie, and so do Governments: Contemplating Greece's Deficit

Portfolio: Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)


Conclusion: citing a senior government source, Eurostat is expected to revise Greece’s budget deficit and debt in 2009 significantly upward. This announcement puts further question into the validity of Eurostat data and by extension the data from member countries. Greece’s likely upward revision ties into our forecast for continued sovereign debt risk in Europe, and underlines our call for a divergence, especially among Europe’s fiscally weaker countries.  Today we sold Germany (via the etf EWG), our one bullish position in Europe. We caution on slower growth across the region into year-end. 


The Eurozone’s sore thumb, Greece, could look a lot more black and blue if in fact Greece’s budget deficit and debt for 2009 are revised higher. Sources suggest the country’s deficit could be revised to 15.1% of GDP from 13.8% and the debt could be revised to 127% of GDP versus a previous calculation of 115.1%.


Clearly, a revision of this magnitude is not inconceivable given the country’s years of fiscal mismanagement, including improper book keeping.  If substantiated, the revision further erodes Greek PM’s George Papandreou’s credibility and his targeted debt and deficit reduction plan over the next three years. 


Our view is that Greece (and debt and deficit-laden countries like it) will remain the EU’s baby in the sense that European commissioners and heads of state will do everything in their power to prevent the immediate term failure (default) of member states for fear of the associated volatility (contagion).


Euro-crats had a good taste of contagion fears and currency destruction in the first half of the year, which led to the decision on May 9th to issue a €750 Billion package of medicine to contain it. Politics are generally local, but recently the EU’s political scene has gone global. Surely politicians in Brussels can ill afford talk of the destruction of the Eurozone!


While we don’t see an outright default by member countries over the intermediate term, what is clear is that capital markets are signaling the distressed outlook for fiscally weaker nations.  For instance, Greece’s Athex Composite is the worst performing equity market in the world YTD, down -29.3%. And as the charts below display, 5YR Sovereign CDS spreads have not abated significantly over recent weeks, with Portugal and Ireland holding above the 400 bps level, a critical break-out level (Shark Line) based on our analysis.  Also, as the final chart shows, sovereign bond yields also remain elevated particularly for Portugal and Spain, a reflection of the risk premium investors demand to hold the country’s debt (see charts below).


Certainly there are a number of headwinds for investors to be aware of in Europe.  We’re currently short Italy in the Hedgeye Portfolio and very cautious on the region as a whole. Please see our post on 9/28 titled “Why We’re Short Italy” for our fundamental view on Italy.


Matthew Hedrick



People lie, and so do Governments: Contemplating Greece's Deficit - t1


People lie, and so do Governments: Contemplating Greece's Deficit - t2


People lie, and so do Governments: Contemplating Greece's Deficit - t3

Dollar Stores & Food Stamps

Is it me, or does Family Dollar have stellar timing in hosting their analyst meeting on the day that government reports that a record number of Americans are receiving food stamps? The longer this trend continues to climb, the better it is for the dollar stores.  This comes in the form of increasing penetration of EBT as a % of sales as well as overall growth in the demographic that NEEDS to shop at deep-value discounters.  Keep in mind that this is through July, but nonetheless anecdotal evidence suggests the overall trend is still positive from the dollar store perspective.


Eric Levine


Hedgeye Retail




“With all of the talk about record highs (Gold) and record lows (Japanese interest rates), it’s important to focus on another record-high number that Americans on Main Street really understand. 


Whether the NBER says so or not, the recession persists for many Americans.  A record 41.8 million participants received food stamps in July as part of the Supplemental Nutrition Assistance Program, according to government data.  Furthermore, the White House estimates that an average of 43.3 million people will get food stamps each month in the twelve months that began October 1st, 2010.  The rising costs of food and energy (dare I say it, “inflation”), and the lack of job creation, continues to hurt the consumer – especially those at the low end of the spectrum.” 


Howard Penney

Managing Director

Hedgeye Macro



Dollar Stores & Food Stamps - FoodStamps 10 6 10



Sports Apparel: Negative Turn – Except NKE

Yes, we’d been prepping for a very tough comp. But even looking at the true underlying trend (2-year on a smoothed 3 week run rate) it still rolled. Still sitting at about +2-3% -- so it’s not the end of the world. But it marks the second week in a row that we saw this magnitude of erosion. 1 week is relatively meaningless to us. 2 weeks makes us raise an eyebrow. 3 weeks is a trend. Nike is the only brand to post a positive growth number for the week.


Sports Apparel: Negative Turn – Except NKE - FW App Ind Total Table 10 6 10


Sports Apparel: Negative Turn – Except NKE - FW App AppChan 1yr 10 6 10


Sports Apparel: Negative Turn – Except NKE - FW App AppChan 2yr 10 6 10


Sports Apparel: Negative Turn – Except NKE - FW App Reg 10 6 10


Sports Apparel: Negative Turn – Except NKE - NKE Apparel T3W 10 6 10


Sports Apparel: Negative Turn – Except NKE - UA Apparel T3W 10 6 10



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Eye On Latin America: Callouts from Brazil and Argentine

Conclusion: Depending on the result of the Brazilian Presidential election, the Brazilian economy may see an incremental boost in private sector investment, as a Serra victory is bearish for Brazilian interest rates. Also, Argentine CDS are at two year lows – this could potentially be a contrarian indicator.


Brazilian Presidential Election


As anticipated, Lula successor Dilma Rousseff won the initial election on October 3rd, though she failed to garner the 50% necessary to immediately emerge as Brazil’s new political leader.  That leaves her and her main rival Jose Serra, who lost to Lula in the 2002 presidential election, to go head-to-head in a runoff election scheduled for October 31st.  As it stands now, Rousseff has 46.9% of the popular vote and Serra has 32.6%; the wild card will be what happens with now-eliminated third place candidate Marina Silva’s 19.3% of voter support.


Assuming that a large percentage of Silva’s 19.6 million supporters show up at the ballot box in the runoff election, her followers will have a large voice in determining Brazil’s next president. Her supporters are typically university-educated young professionals, environmentalists, and a group of Evangelical Christians who oppose Rousseff because of her stance on legalizing abortion. Because of these qualities, many expect a large portion of her following to favor Serra over Rousseff, which could potentially push Serra over the top in the next round. Of course, this would assume that Rousseff’s fails to garner incremental votes from any potential non-participants during the first election.


As we called out back in July, a Serra victory is more bullish on the margin for Brazil’s private sector, as he is in direct contention with Brazil’s high interest rates and wasteful government spending. Rousseff, on the other hand, is essentially a Lula pawn and is expected to continue the social programs and heavy government spending that has made Lula such a popular president among the masses (~75-80% approval rating).


 Considering the dichotomy between their fiscal positioning, a Serra victory may be incrementally bullish for the real, which the government has had trouble containing of late (up 12% vs. the U.S. Dollar since late May). While it may seem at first glance that Serra’s desire to lower the Selic rate would be negative for the real, his reputation for fiscal austerity and his support for Brazilian private sector growth may prove to be the deciding factors in the real’s pace of appreciation, should he become elected.


Elsewhere in the Brazilian economy, in the latest attempt to stem the real’s gains the Brazilian government will double to 4% the tax it levies on foreigner’s investment in the nation’s bonds. The tax was first introduced a year ago in October and was greeted with near-term success (the real declined 3.5% from mid-October through the start of November). It, however, resumed appreciation back to its original high one week later, only declining substantially after the U.S. Dollar bottomed out early December. Considering the intermediate and long term outlook for the fiscal health, economic growth, and interest rates in the U.S. and Brazil, we don’t see the real’s bullish fundamentals eroding anytime soon.


Eye On Latin America: Callouts from Brazil and Argentine - 1


Eye On Latin America: Callouts from Brazil and Argentine - 2


Argentine CDS Head Fake?


By now, it’s no secret that Argentine is doing well economically as evidenced by the government’s 9.5% GDP growth projection for 2010 and the S&P’s Sept. 13th upgrade of Argentina’s debt rating one notch to B (five levels below investment grade). What does come as a slight surprise to us is the market’s positive reaction to the Argentinean government’s decision to use FX reserves to pay down debt – an action that is typically frowned upon because of its propensity to stoke inflation.


Currently, Argentine President Fernandez de Kirchner is avoiding selling bonds internationally to service debt despite the lowest yields in two years (~8%). Rather, she and central bank President Mercedes Marco del Pont have elected to finance debt service with FX reserves, which have grown to a record $51.2 billion as a result of dollar purchases and strong export growth. YTD, Argentine has spent $5 billion of reserves this year and plans to use an additional $7.5 billion next year to service debt (TRANSLATION: Piggy getting hooked on the trough). Never mind that the former central bank president Martin Redrado was fired for refusing to back the plan because of its inflationary potential.


On the inflation front, many Argentinean economists have gone on record to publicly contest the government’s reported 11.1% inflation rate, suggesting that consumer prices may be growing at more than twice the rate. Moreover, a September 15 survey by Buenos Aires-based Torcuato Di Tella University showed that consumer prices are expected to rise 25% over the next 12 months, further supporting inflation skeptics’ views on the economy. To sterilize recent sales of the peso, the government is issuing short term local debt that pays about 12 to 14% interest. So effectively, the government is taking a loss on the dollars it is buying which yield ~40bps on 2-year U.S. Treasuries. The total supply of central bank debt maturing in one month to three years has grown 77.1% since June ’09 to 60.4 billion pesos. We interpret that as Argentina’s liquidity risk just increased by some fraction/multiple of 77.1% in the last 15 months.


Also, we’d be reckless to not callout the potential for Argentine’s export tailwinds to deteriorate, creating directional headwinds in the process. The Argentinean economy has benefitted YTD from record export tax revenue (+92% YoY in September) fueled by a record 55 million ton soybeans harvest.  Soybeans (prices up +21.1% YoY) have an inverse correlation of 0.80 to the U.S. Dollar on a three-month basis, which has lost 12% of its value since its high on June 7th. Similar to company analysis, we callout peak revenue and peak margins on the country level as potential inflection points that are not to be streamlined into the future estimates of valuation.


To some extent, the Argentinean CDS market may be pricing in such peak revenues, as evidenced by Argentinean CDS hitting lows not seen since August 2008. Of course, two months later, the spread widened to over 4,000bps in the heart of the financial crisis. While we’re not suggesting a repeat performance, we are keen to highlight asymmetry of the current risk setup, considering the overwhelming positive investor sentiment regarding the Argentinean economy.


Darius Dale



Eye On Latin America: Callouts from Brazil and Argentine - 3


With all of the talk about record highs (Gold) and record lows (Japanese interest rates), it’s important to focus on another record-high number that Americans on Main Street really understand. 


Whether the NBER says so or not, the recession persists for many Americans.  A record 41.8 million participants received food stamps in July as part of the Supplemental Nutrition Assistance Program, according to government data.  Furthermore, the White House estimates that an average of 43.3 million people will get food stamps each month in the twelve months that began October 1st, 2010.  The rising costs of food and energy (dare I say it, “inflation”), and the lack of job creation, continues to hurt the consumer – especially those at the low end of the spectrum. 


Howard Penney

Managing Director




A primer on the proposed casino legislation in Japan



Japan is probably as close to legalizing casinos as it ever has.  While difficult to handicap the probability, - we will take flier and say 50% - what is clear is that if it happens it would be a big opportunity for the gaming operators awarded licenses.  In our universe, LVS and WYNN should be considered the front-runners.  The Japanese like to play slots so IGT, WMS, and BYI would certainly benefit from full-scale legalized gambling. 


A casino advisory group, comprised of legislators, will try to submit a Casino Act to the Diet when session resumes in February. If the bill has enough support, something could be passed as quickly as 6 months.  The chatter is that at least 100 legislators are in favor. At least 241 votes in the House of Representatives and 122 votes in the House of Councillors are needed for the bill to pass.


Japan Casino Act


What’s Been Proposed:


Drafted by representative Koga, chairman of The General Assembly of International Sightseeing Industry Development Diet Member Association, and Mihara, the advisor of the Assembly, the preliminary Casino Act consists of 68 articles.  Under the Act, there will be two licensed casino sites and based on the performance of the first two sites, 8 more sites could be considered.  The national government will handle the selection procedure for the casino sites while the local governments will choose the operators, who would need to be licensed by the Casino Administration Organization—a division under the Cabinet.


Currently, the bill does not address the repeal of Articles 185 and 186 of the Penal Code which prohibits most forms of gambling. The only legal forms of gambling are horse, speedboat, bicycle racing, and lotteries.


Who’s Interested:


In the past six months, prefectures from Tokyo, Okinawa, Nagasaki, Osaka, Wakayama, Kanagawa, Chiba, Miyagi, Akita and Hokkaido have expressed interest in establishing a casino.  LVS, who has expressed the most interest in Japan among the overseas operators, believes the two IRs will reside in Tokyo and Osaka, with a bunch of smaller casinos in places such as Okinawa and other suburban areas around Japan. LVS thinks if a bill is successful, a tender will be offered in 2012 and a casino could open by 2015. WYNN could also be in the mix since its largest shareholder and President of Japanese pachinko machine maker Universal Entertainment and also of Azure Gaming, Kazuo Okada, had stated that he along with WYNN would submit a joint bid to operate casinos in Japan once it is possible.  Another Japanese company that would bid is Maruhan Corporation, the nation's largest operator of pachinko parlors and a partner in the Ponte 16 casino.


What’s the Opportunity:


In a White Paper released by the Japan Productivity Center, as of FY-end March 2010, there were 17.2 million pachinko players in Japan. Annual gross wagers hit $245.4 billion, marking the 6th consecutive year of declines after Regulation 5 was implemented which effectively decreased the volatility of the pachislot machines to make them less "slot" like. Estimated gaming revenues reached close to $30 billion in FY 2010.  According to economist Takashi Kadokura, the Tokyo Metropolitan Government may place a 20% gaming tax on the casino's gross sales, a 5% consumption tax on gross sales, and a 30% corporate tax on net profit.


A $30 billion slot revenue market and $200 win per day per slot would imply a market of over 400k slot machines.  Of course, pachislot machines are not casino slot machines so it isn't a perfect comparison.  However, there is clearly a demand for gaming machines.  A roll out of casinos would be controlled and the initial legislation only contemplates a maximum of 10 casinos so 30k-40k slot machines would be appropriate to model.  However, longer-term, the potential is huge.


What’s Standing in the Way:


Not surprisingly, political division and public distrust are the biggest hurdles. One of the reasons the previous casino bill failed was that it proposed an unpopular article stating a state agency to be the collector of casino taxes. Addressing this concern, there is now talk of casino public revenue being directed to a national pension-fund system. There would also be protests from The Japanese Communist Party, the New Komeito party, and pachinko operators who would get squeezed by the proposed casinos.  


History of casino legislation in Japan this past decade:

What happened to the previous casino bill? Below is a timeline of a bill that suggested an IR-type casino, modeled after Singapore’s casinos.

  • 2003: The idea of a casino in Japan started to circulate.
  • 2006: LDP (Liberal Democratic Party) formulated a casino proposal.
  • April 15, 2007: Almost half of the House of Representatives—including some opposition lawmakers— supported the idea of legalizing casinos.
  • July 29, 2007: Passage of bill became shaky as the LDP lost control of the House of Councillors in the election, creating political uncertainty. Vote on legislation was pushed back back from July 2008 to the end of 2008.
  • August 7, 2007: Reports confirmed government considering casino legislation could be approved within 12 months.
  • Early 2008: Discussion between the LDP and Diet began speculating that there may be casinos in Tokyo and Okinawa by 2012.
  • June 2008: Sources said cross-party consensus on a casino law could be as close as two weeks away.
  • July 18, 2008: A cross party study group was set up to examine casino legalization right before end of Diet session.
  • Feb 24, 2009: The casino plan was put on indefinite hold because of political disorganization and economic troubles, despite Prime Minister Taro Aso approving such a plan. In addition, gambling continued to have a negative image in Japan and the new laws was not transparent and trustworthy enough to secure public support. Nevada-based operators also suspended their lobbying activities in Japan.  

What’s Next:

It is hoped that final draft legislation will be ready for submission to the National Diet when sessions resume in February 2011. A coalition of the ruling Democratic Party of Japan (DPJ) and the former ruling party, the Liberal Democratic Party (LDP) is needed to pass this bill. Gambling lobbyists believe if the bill is passed, it would take five years to train enough croupiers and other staff to be fully prepared for a casino opening.


Legislative Procedure:

  1. Bill submission to Diet
  2. Preliminary deliberation in plenary session
  3. Deliberation in a Committee
  4. Final deliberation in plenary session
  5. Passage in House of Representatives
  6. Passage in the House of Councillors
  7. Submission to Emperor for promulgation



Appendix: Pachinko Market (from Sega-Sammy 2009 Annual Report)





investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.