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STRONG FINISH TO NOVEMBER

Macau doesn’t disappoint with November YoY growth of 42%.

 

 

The month of November finished a touch stronger than expected and total gaming revenues slightly exceeded the top end of our HK$16.2-16.7 projection range.  The following table shows the HK$ total gaming revenue for November for BOTH tables and slots. The market share numbers are for tables only, but slots shouldn’t make a material difference to percentages.  We don’t yet have the breakdown between Mass, VIP, Rolling Chip, and Slots.

 

STRONG FINISH TO NOVEMBER - MACAU123

 

We believe that Wynn had an exceptionally high VIP win percentage - greater than 3.4%.  LVS probably held below 2.5%.  MPEL’s share rebounded in the last few days.


Squeezing Japan’s Jugular

Conclusion: Japan’s economy continues to underperform its regional counterparts and the factors driving our Japan’s Jugular thesis remain supportive. We welcome the Nikkei 225’s recent strength as a shorting opportunity within the context of this bearish fundamental backdrop.

 

Position: We are not currently invested, but remain bearish on Japanese equities and bearish on the Japanese yen for the intermediate-term TREND.

 

Strategy Update

 

Regarding the title, the pun is most definitely intended, as Japanese equities have experienced a monster short squeeze since the dollar bottomed on November 4th. The Nikkei 225 has outperformed nearly every other major world equity market since then (with the exception of Ukraine and Bangladesh) to the tune of +6.2%, aided by a positive 0.72 correlation with the U.S. dollar in that time period.

 

Squeezing Japan’s Jugular - 1

 

Given that persistent yen strength was outlined as one of the key drivers in our bearish Japan’s Jugular thesis (email us if you need a copy of our 4Q10 Macro Themes presentation), it comes as no surprise that Japanese equities have rebounded off their lows alongside weakness in the yen (JPYUSD down -3.8% in the above time period).

 

Squeezing Japan’s Jugular - 2

 

With the dollar trading comfortably above its TREND line of support of $79.71, it appears the Bullish Buck Breakout has some legs and is supported by a confluence of supporting factors – American Austerity, Sovereign Debt Dichotomy, and Quantitative Guessing backlash.  Given this setup, we anticipate further weakness in the yen from here over the intermediate-term TREND.

 

So that must equate to a bullish outlook on Japanese equities over the same duration, right?

 

Wrong.

 

In a report published on 10/26 titled: Japan’s Jugular Continues… Don’t Buy the Hope, we outline three reasons why Japanese equities will continue to look attractive on the short side once we sift through near-term strength associated with yen weakness. Those reasons are: 

  1. The Consumption Cannonball looks to conquer an ailing U.S. consumer in 4Q10 and 1H11 (the U.S. is Japan’s second largest export market at 16.4% of total exports);
  2. Tightening in China and elsewhere in Asia as inflationary headwinds brought on by QG force economies throughout the region to rein in speculative growth via rate hikes, tax hikes and price controls (China, Korea, Taiwan and Hong Kong combine for ~39% of Japan’s export demand); and
  3. Rising tensions with Asian rivals China and Russia (note: this looks to have taken a back seat, but the damage to Prime Minister Naoto Kan’s approval rating has been done – 35% in November vs. 53% in October). 

In addition to those factors, the bulk of global economic data continues to be supportive of the Hedgeye Global Macro outlook, which suggests: 

  1. Growth is slowing;
  2. Inflation is accelerating; and
  3. Interconnected risk is compounding. 

Under this setup, we remain extremely cautious on equities as an asset class, in general, over the intermediate-term TREND.

 

While we’d certainly like to see an additional 2-3% short squeeze in the Nikkei 225 before we re-short it, the reality is that it just broke its TREND line overnight. Should it fail to close above 10,001 in the immediate-term, last night’s (-1.9%) decline is an explicitly bearish quantitative signal.

 

Squeezing Japan’s Jugular - 3

 

Macroeconomic Update

 

Overnight, Japan released its October economic data and, by and large, the slowdown continues.

 

Export and Industrial Production growth slowed again in October, coming in at +7.8% YoY and +6.1% YoY, respectively. The comps only get tougher from here…

 

Squeezing Japan’s Jugular - 4

 

As we show in our Japan’s Jugular slide deck, Japan is an economy that is highly levered to manufacturing and exports for growth and employment. Considering, it’s not a conceptual leap to see Japan’s Unemployment Rate tick up for the first time since June, as the economy shed 180,000 jobs – the most since May.

 

Squeezing Japan’s Jugular - 5

 

A second-derivative effect we outline is that the pain felt by the manufacturing sector would eventually reverberate throughout the rest of the Japanese economy, causing consumer confidence and spending to decline. In October, both Consumer Confidence and Retail Sales growth continued to slow, coming in at 40.9 and (-0.2%) YoY, respectively.

 

Squeezing Japan’s Jugular - 6

 

Going forward, it’s important to keep in mind that stimulus measures and policy changes helped buoy the Japanese consumer in 3Q10, including a subsidy for energy-efficient cars and a tobacco tax hike scheduled for October 1st. Both programs pulled forward consumer demand to the tune of a 0.7 point contribution to 3Q10 GDP, after having no contribution from private consumption in 2Q10. In addition, Japan’s hottest summer in over a century fueled demand for cooling products.

 

These tailwinds helped boost 3Q10 GDP growth to +3.9% QoQ SAAR and their absence will create a drag on growth in 4Q10 and potentially into 1Q11 – just around the time bearish 4Q10 economic data is being reported in globally. Japanese equities have nowhere to turn but to the hopeful promise of additional stimulus. As we have shown, stimulus won’t matter when it’s all said and done; it merely helps the Nikkei rally to lower highs as it has done for much of the past two decades.

 

Squeezing Japan’s Jugular - 7

 

FYI, Japanese equities haven’t always gone up during periods of yen strength historically. Throughout the past twenty years, the inverse relationship has waxed and waned over various durations.

 

Squeezing Japan’s Jugular - 8

 

Needless to say, Japan’s chin is exposed.

 

Darius Dale

Analyst


Old Austerity

This note was originally published at 8am this morning, November 30, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You never see the old austerity. That was the essence of civility; young people hereabouts, unbridled, now just want.”

-Moliere

 

That’s an old quote from a famous French playwright who has long been dead. “Moliere” was Jean-Baptiste Poquelin’s stage name. His urban legend was born when he collapsed and died in the middle of a play in 1673. He was 51 years old.

 

I’ll take some editorial liberty this morning and evolve Moliere’s quote for the Age of American Millenials and Baby Boomers: ‘You’ve never seen austerity. That was the essence of our grandparents; Millenials and their parents, unbridled, now just want.’

 

This is obviously a generalization but, in principle, I can’t imagine that an analyst from outer-space wouldn’t see the hypocrisy in Americans door busting each other on Black Friday for i-Pads at the same time as their Congress fights to keep interest rates on my savings account at zero percent as a result of an alleged depression.

 

Want, want, want. What can I get out of this market? Pretended Patriotism be damned, what’s in this for me?

 

The good and the bad news on this front is that we have leaders in this country who can enforce change. Some of that change is going to be slow. Some of it is going to hurt. Some of it is needed or what you’re seeing in European stock and bond markets is going to be playing at an American “Lifestyle” Center near you in 2011.

 

In proposing a 2-year pay freeze for US Federal employees, President Obama did the right thing yesterday in implementing the first stage of what we have been calling for since July of 2010 (when we were short the US Dollar on reckless government spending). Our Q3 of 2010 Hedgeye Macro Theme was titled “American Austerity” and we think that fiscal conservatism is the only path to US Dollar driven prosperity.

 

The debauching and devaluation experiments of the Big Government Interventionists have been tested and tried. From Japan to Europe and back home again, they have not worked. We need to fix these deficit and debt to GDP ratios, or the global bond market is going to fix us.

 

This morning you are seeing Greece’s stock market test its lows from June 2010 when the European Fiats made a conflicted and compromised promise to the world that Piling more short-term Debt-Upon-Debt was the elixir of life. Apparently 8 centuries of Reinhart & Rogoff data has once again trumped political storytelling. This time isn’t different.

 

Why me? Why now? Shouldn’t this be someone else’s problem?

 

I get that line of thinking, but I also get what wearing a team jersey means  - and, as legend USA Hockey Coach Herb Brooks said:

 

“You're looking for players whose name on the front of the sweater is more important than the one on the back.” 

 

Back to the construct of our intermediate-term global macro forecast…

  1. Growth Slowing
  2. Inflation Accelerating
  3. Interconnected Risk Compounding

We don’t have a choice but to do this now. European and Emerging Bond markets are telling you this and so are American Bond yields:

  1. European Sovereign Debt Yields continue to make a series of higher-highs as concerns push rightly towards Spain and Italy.
  2. Emerging Market Debt just had its worst month in 2 years (NOV down -2.9% on the EMBI Index with Brazilian and Russian weakness).
  3. US Municipal Debt funds just flashed their 2nd consecutive week of outflows, taking the 2-week total to north of $5 BILLION.

Yes, we recognize that a BILLION or a TRILLION dollars isn’t what it was to our grandparents, but these are still big numbers to consider on the margin. Remember, everything in global macro that matters happens on the margin.

 

US Treasury yields are bullish on both our immediate and intermediate-term durations (TRADE and TREND) again this morning as well (yes, that’s a very bad leading indicator for bond funds in your 401k). Despite The Ber-nank’s JapanEuro style political promises, Mr. Global Macro Market is saying hey, dude, remember The Lehman Brother?

 

If you or your parents are baby boomers, you know what a double digit mortgage rate means to your family’s discretionary income. God knows you don’t need a Johnny Come Lately Wall Street “economist” to warn you about that. Maybe it’s time to dig into those Old Austerity boxes of our forefathers this Christmas to remind ourselves that as good as it gets may be gone if we don’t stop ourselves from just want.

 

My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I’ve maintained my ZERO percent asset allocation to US Equities. I’m still long the US Dollar (UUP) and short the SP500 (SPY) in the Hedgeye Portfolio.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Old Austerity - 1


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Still Bearish: SP500 Levels, Refreshed

POSITION: Short SPY

 

In the last 2 trading days the SP500 has sold off towards, but held, our immediate-term TRADE line of support (1173). That, not surprisingly, has my inbox ringing with questions as to why I’m not covering my short position in the SPY. Fair questions.

 

The answer relies heavily on 3 core-factors in my risk management model – PRICE, VOLATILITY, and VOLUME: 

  1. PRICE – both immediate and intermediate-term TRADE and TREND lines (TRADE = 1196, TREND = 1206) are stiff levels of new resistance.
  2. VOLATILITY – the VIX is up another +6% today and won’t calm down; it’s moved to bullish TRADE and TREND with no resistance to 23.89.
  3. VOLUME – on the intraday rallies, volume is almost laughably low; with month end (today), people haven’t capitulated selling, yet… 

Ultimately I think I’ll see my 1173 and that’s why I am patiently waiting and watching to see the river card.

 

Yours in risk management,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bearish: SP500 Levels, Refreshed - 1


MACAU: DIFFICULT COMPS? NO WORRIES

Strong year-over-year growth will continue for a number of months.

 

 

December is likely to be another strong month in Macau.  We are currently projecting about 50% growth which would exceed November’s YoY growth of approximately 40%.  Last year, November’s hold was unusually high and higher than December’s which created a more difficult comparison – 62% in Nov 2009 vs. 48% in Dec 2009.

 

Not only should December look strong, but Macau will likely generate 30%+ growth through March, even without any sequentially, seasonally adjusted growth.  That is, at current run rates of underlying demand, Macau will continue to defy expectations of moderation.

 

The following chart shows YoY growth for the next twelve months assuming no pick up in demand other than seasonality:

 

MACAU: DIFFICULT COMPS? NO WORRIES - macau111

 

Of course, demand could always fall.  It’s hard to imagine a scenario where Mass visitation doesn’t continue to grow.  VIP has historically been a roller coaster and recent inflation fighting tactics in China could restrict liquidity.  So far we haven’t seen any impact but that is somewhat of a risk.  As it looks right now, demand just needs to stay steady to continue the YoY momentum through mid-2011.


CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA

***The report below was written by our Financials Vertical - led by Josh Steiner. If you are an institutional client or prospective client and aren’t yet receiving Josh’s work on housing, credit, and the financials, please email to learn more about how we can get you setup.***


 

This note includes analyses of five home price series: Case-Shiller, FHFA, Corelogic, NAR Existing Home Sales, and Census Bureau New Home Sales.

 

All five home price series in this note show a notable worsening in the housing market in the most recent month.

 

Case-Shiller Continues to Fall: 20-City Down 0.7% MoM

The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 1

 

The chart of year-over-year price change below shows another deceleration in September.

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 2

 

Looking at the breadth of the data, 16 of 20 cities showed worsening MoM price changes and 19 out of 20 showed worsening YoY price changes.  Las Vegas was the only city to see a better YoY print (though still came in at -3.5% YoY).  It's interesting to note that the overall index figures seem to overstate how "good" things are when put in comparison with the charts below. In other words, the strongest markets are also the heaviest index components: NYC, LA, DC. This is also why the 20-city index looks much worse than the 10-city index. Consider Cleveland, where home prices dropped 3.0% last month (month-over-month) compared with a 30 bps drop sequentially the month before.

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 3

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 4

 

It's also interesting to note, as the following two charts show, that those cities with the highest prices are also those seeing the strongest price performance/resilience. Consider the regression line, which shows clearly that higher home price markets are trending better. This is a reflection of the growing divide between Washington and New York and the rest of the country.

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 5

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 6

 

It's evident from the charts above that an equal-weighted average of the 20 cities would yield a significantly more negative growth rate on both a MoM and YoY basis. Specifically, the 20-city equal-weighted month-over-month change was -1.1% compared with the volume weighted average of -0.7% and the 20-city equal-weighted year-over-year change was -1.1%, as compared with the volume weighted average of +0.5%.

 

Investors frequently look at affordability as a sign that demand is likely to improve.  We have analyzed this data and found that homebuyers usually don't buy low and sell high.  Instead, they buy when prices are going up and sell when they're going down.  There are two interpretations to this.  One is that homebuyers get sucked into momentum moves at the wrong time (much like retail investors in the stock market are generally taken as a contrary indicator).  The other interpretation is that potential homebuyers are not interested in levering up to buy a depreciating asset.  Either way, decreasing home prices aren't a catalyst for demand by themselves.  

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 7

 

It's critical to understand the timing associated with the Case-Shiller series.  The printed number is a 3-month rolling average released on a two-month delay, so the September release today is the average of July, August, and September.  Case-Shiller measures closing activity, which tends to lag signing activity by 1-2 months. To compare Case-Shiller to the MBA Mortgage Purchase Applications Index, we should look at applications from May/June/July.  Thus, today's Case-Shiller print is the first that does not capture a benefit from the April tax credit. With supply remaining at historical highs, we expect prices to increasingly come under pressure.  The chart below demonstrates.  

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 8

 

FHFA Home Price Index Shows No Signs of Life

 

The two greatest differences between Case-Shiller and FHFA home price indices are that Case-Shiller uses a value-weighted approach whereas FHFA uses an equal weighted approach, and Case-Shiller uses a 3-month rolling average whereas FHFA uses the most recent month. As such, sales of more expensive homes have a proportionately larger influence than sales of less expensive homes under the Case-Shiller methodology.

 

For those interested in how the the FHFA series differs from Case-Shiller, we include a brief description at the end of this note.

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 9

 

Corelogic Home Price Index Declines Year-over-Year

The Corelogic Home Price Index posted its second year-over-year decline in September.  September 2010 was down 3.5% versus September of 2009.  The only bright spots of improvement in the FHFA Index over the last year have lined up with the tax credits. The chart below shows the trend in home prices.  We include a description of Corelogic's methodology at the end of this note as well.  

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 10

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 11

 

Existing Home Sales Median Price Index

The National Association of Realtors publishes the median sale price of existing homes in conjunction with the Existing Homes series.  This series is not seasonally adjusted, so the year-over-year comparison is the right metric to consider, eliminating seasonal volatility.  The chart below shows that the median sale price for October fell -0.9% versus a year ago. Median price fell -0.7% versus the prior month, which is in line with the typical seasonal pattern.  

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 12

 

New Home Sales Median Price Index

The median price of new homes dropped sharply in October, according to Census Bureau data.  Median price fell 14% MoM to $194,000, the lowest price level since September of 2003.   On a year-over-year basis, median new home prices are down 9.4%. While the series is volatile, this is a significant move worth noting. 

 

CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA - 13

 

How FHFA differs from Case-Shiller

Both indices employ the same fundamental repeat-valuations approach, but there are a number of data and methodology differences:

a. The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions FHFA HPI also includes refinance appraisals.  

b. FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices. 

c. The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. FHFA’s index weights price trends equally for all properties.

d. The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHFA’s U.S. index is calculated using data from all states.

 

Methodology of the Corelogic HPI

Corelogic explains, "The CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic industry-leading property information and its securities and servicing databases. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all home sales. The CoreLogic HPI provides the most comprehensive set of monthly home price indices and median sales prices available covering 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."

 

Joshua Steiner, CFA

 

Allison Kaptur


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