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CHART OF THE DAY: The Enemy of Growth



CHART OF THE DAY: The Enemy of Growth -  Chart of the day


PWC raised some eyebrows with their growth projections.  At least for next year, they may be low, and it’s hardly supply driven.



The main goal in our trip to Macau last week was to gauge the long-term growth potential of the Macau market.  We already get weekly data and with our contacts, we think we have a good read on the near-term developments.  We came away not only positive about current fundamentals but that the market may grow faster than currently anticipated.  Our trip coincided with the PWC release of its Macau forecast which certainly raised a few eyebrows.  PWC thinks the Macau market will grow at a CAGR of 24.7% over the next five years from the 2009 base.  Of course, that includes roughly 50% growth for 2010 which is pretty much in the bag.  Still, their 2011 estimate of 26% growth is pretty compelling.  We think it will be closer to 30%.


Are we being too aggressive?  We don’t think so.  Even if the market doesn’t grow from the Q4 run rate (adjusted for seasonality), 2011 will still be over 13% higher than 2010.  Our 30% projection assumes 2% monthly sequential growth, adjusted for seasonality, throughout 2011. 


What about same store growth?  Well, Galaxy Cotai will open in the spring and boost table supply by 12%, a substantial increase but well below demand growth.  As can be seen in the following chart, our monthly revenue growth projection remains higher than supply growth in every month of 2011.  To be conservative, we are not assuming any increase in visitation as a result of the opening of Galaxy which is probably unrealistic.




We remain most bullish on Wynn Macau due to recent market share gains, a clean operation, and a differentiated product.  MGM also looks like a winner as its recent market share gains are sustainable and likely higher margin than the Street expects.  MPEL’s City of Dreams (CoD) is probably most at risk when Galaxy Cotai opens.

The Enemy of Growth

“Conformity is the jailer of freedom and the enemy of growth.”

-John F. Kennedy

I’ve heard a lot about “growth” in recent weeks. After a March 2009 trough to December 2010 peak rally in the SP500 of +83%, the US centric stock market bulls say “growth is back.” As a result, conforming to an institutionalized consensus weeks before our profession receives its year-end bonus check is a mounting pressure in my inbox. I’ve seen this movie before.


The Enemy of Growth isn’t going away. It’s called debt. Sovereign debt. And, no matter where you go in the new year, there will be more and more of it…


You don’t have to take my word for it on this. The longest of long-term data series we can find on sovereign debt default cycles and their correlations to fiat currency issued debts and structural inflation can be found in Reinhart & Rogoff’s “This Time Is Different.”


No, this is not a new thesis this morning. It’s a critical reminder. Because US stock market consensus is choosing to ignore it for a few more weeks doesn’t mean it ceases to exist.


The Enemy of Growth isn’t a Thunder Bay bear. It’s marked-to-market on your globally interconnected macro screens every day. While it’s convenient to assume that a +10% YTD return in the SP500 is a leading indicator for growth, one can easily argue that US style Jobless Stagflation won’t lead America to sustainable economic growth in 2011.


Remember, “inflation is a policy.” Or at least that’s what an ole school Austrian economist by the name of Ludwig von Mises said. Before your big Keynesian cheerleader of a global liquidity trap leads you to believe otherwise, don’t forget that it was von Mises who already called out Bernanke’s strategy to inflate 50 years ago when he said:


“The fact is that, in the not very long run, inflation doesn’t cure unemployment.” (Economic Policy, 4th Lecture, “Inflation”, page 53).


The Enemy of Growth is inflation. We know that, much like Jimmy Carter and then Fed Head, Arthur Burns, once tried to argue in the 1970s, some people think inflation is cool for some people. Some of those people aren’t the poor or middle-class however.


Currently, there is no more obvious threat to Global Growth Slowing than what you are seeing in emerging markets. Heck, some of these markets (like Hong Kong) might not even be considered “emerging” anymore. That’s not the point – what’s happening on the global macro scoreboard to emerging market stocks and bonds in the last 6 weeks is…


Since the beginning of November, here’s the score:

  1. Hong Kong’s Hang Seng Index has dropped -8.1% since November the 8th.
  2. India’s BSE Sensex Index has dropped -8.3% since November the 5th.
  3. Brazil’s Bovespa Index has dropped -7.1% since November the 4th.

Now, the first thing you’ll hear coming out of US-centric stock market bulls right now has nothing to do with:

  1. Spiking Sovereign Debt Yields in Spain, Italy, Portugal, Argentina, America, etc…
  2. US Treasury and Global Commodity markets flashing clean cut inflation signals.
  3. The BRIC’s (Brazil, Russia, India, and China) falling, well, like bricks.

No, no, no. It’s all about a short-term year-end bonus “pop” in US growth associated with cutting taxes so that the world worries more and more about America’s long-term sovereign debt risk. Short term political resolve perpetuating long term systemic risk. Nice trade.


Markets “pop” then “drop”… most emerging stock and bond markets are already dropping…


Like the broken European promises of reducing their deficit/GDP ratios when European bond yields started breaking out in December of last year (when Hedgeye introduced our “Sovereign Debt Dichotomy” Macro Theme), now professional US politicians are promising you this time is different. This time it’s all about “growth”…


This time, The Enemy of Growth is a government inflation policy itself.


My immediate term support and resistance levels for the SP500 are now 1232 and 1246, respectively. I continue to be a seller of bonds, reducing my asset allocation to bonds from 6% to 3% as of yesterday’s close. Inflation is bad for bonds.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Enemy of Growth - 1

Early Look

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The Macau Metro Monitor, December 16th, 2010




Secretary Tam said Sands' application for sites 7 & 8 was submitted after the Macau Government announced in 2008 that it would not accept any new land requests for the development of gaming projects.  Tam also revealed that since Wynn Macau, MGM Macau, and SJM submitted their Cotai applications before that policy was stated, it’s likely their requests will be approved.


When asked about the approval of 2,000 imported workers for Galaxy Macau, he explained that it was needed to make sure the property has sufficient workers for the property opening early next year.  He added that Galaxy must hire at least 4,000 locals in order to receive the 2,000 foreign laborers quota.  Galaxy has said that it needs 8,000 workers to open its new resort. 


As for why Sands' plots 5 & 6 have not received the green light to hire foreign construction workers, Tam responded, "The Government has to ensure the growth of the gaming industry is happening in an orderly fashion."


Muni Bonds Are On Sale: Time To Buy Now?

“A bargain is not a bargain if it remains a bargain.”

-Martin J. Whitman


Conclusion: Muni bonds are cheap again. They’re likely to get a lot cheaper. Don’t buy the dip or the storytelling that this is a “great buying opportunity because 2011 will be a great year for muni bonds”.


Position: We remain bearish on muni bonds and have traded the etf MUB in the Hedgeye Virtual Portfolio.


The quick answer is a resounding “NO”. Just ask anyone who bought U.S. equities during late-2007 if they got a great deal.


We have been quite vocal YTD regarding our bearish stance on Municipal Bonds and we foresee the proverbial “X” hitting the fan in 2011. This note is more of a strategy update, however. For a complete listing of relevant reports regarding the 2011 outlook for muni bond fundamentals, please refer to the bottom of this note (email us if you’d like to see a copy of any/all of the reports).


This view is in stark contrast to the recommendations of a quite a few large sell-side firms, who think now is great time to buy muni bonds, as they are on sale. Inconsequently, they also happen to be some of the largest underwriters of muni bond issuance, whose motivations for making recommendations are questionable at best.


Moving back to the meat of this report, I can’t help but find similarities to the current state of the muni bond market to the S&P 500 in late 2007. Muni bonds have been routed since early November and yields and credit risk have backed up materially:


Muni Bonds Are On Sale: Time To Buy Now? - 1


Muni Bonds Are On Sale: Time To Buy Now? - 2


Muni Bonds Are On Sale: Time To Buy Now? - 3


Credit risk, as measured by the Markit MCDX Spread (a measure of muni bond CDS) backed up 35bps week-over-week, closing at 208bps.


Muni Bonds Are On Sale: Time To Buy Now? - 4


The recent rout in the $2.9 trillion muni bond market is the direct result of a confluence of three factors: 

  1. Inflation, inflation expectations and bond yields (all on a global basis) dragging U.S. Treasury yields higher (we have no one to blame other than The Ber-nank);
  2. Oversupply from a glut of year-end issuance ahead of the potential Build America Bond Program expiration (scheduled for 12/31); and
  3. Accelerating muni bond fund redemptions as retail investors who have been stuffed with bond allocations in their 201(k)’s rush to avoid more red ink on their monthly statements. 

The latest moves in the muni bond market have many nervous investors and underwriters coming out of the woodwork touting things like, “Muni bonds are an excellent source of yield in a low-yield environment”, and my personal favorite: “The current weakness in muni bonds presents an excellent buying opportunity as the year-end supply glut will shrink heading into 2011.”


Below we tackle each of the aforementioned factors for muni bond weakness individually:


Bond Risk (inflation, sovereign debt, etc.) and Yields:


We see that U.S. Treasury yields have indeed been dragged up alongside global bond yields and yields across the entire curve are in a Bullish Formation (i.e. U.S. Treasury prices are in a Bearish Formation):


Muni Bonds Are On Sale: Time To Buy Now? - 5


Apparently bond market risk doesn’t occur in a U.S.-centric vacuum filled with conflicted and compromised U.S. CPI reports.


Year-end Oversupply:


In trying to get ahead of a potential expiration of the BAB program, States and municipalities borrowed roughly $55.6 billion in November – the most since at least 2003 – and another $53.7 billion in October – the second most on record. While 30-Day visible supply has backed off its five-year high reached on November 16th of $26.3B, the average 30-day visible supply for 4Q10-to-date remains well above historic averages for the fourth quarter:


Muni Bonds Are On Sale: Time To Buy Now? - 6


Currently, it appears unlikely that the Federally-subsidized BAB program will be extended, as it has not been included in the recent comprise President Obama struck with Republicans over extending the Bush Tax Cuts in exchange for spending concessions for the hardest-hit American families. Amendments may be added to the bill in a vote today, but it grows increasingly unlikely that any amendments will receive support from the two-thirds supermajority needed to be passed.


The outlook for extending the BAB program grows even dimmer if the debate carries on into 2011, as the new Republican leadership is expected to continue party’s opposition towards extending the program. Since their April ’09 inception, BABs have accounted for ~23% of municipal bond issuance ($181 billion), so the removal of this program (beloved by issuers, investors and underwriters alike) will likely force an acceleration tax-exempt bond supply in 2011.


Investor Redemptions:


Lastly, muni bond fund redemptions have created a self-perpetuating cycle of price declines, as investors withdraw funds and fund managers are forced to sell assets to cover redemptions. In November, Municipal Bond funds suffered their first net outflow in 22 months – a whopping $7.6B!


By comparison, November’s $7.6B withdrawal is 7.2% of the $105B of net inflows added from January 2009 through October 2008. Moreover, the $7.6B redemption is roughly 4x the amount retail investors withdrew from stock funds and 5x the amount withdrawn from bond funds during the month.


Even Bill Gross saw his Total Return Fund suffer its first withdrawals in two years (-$1.9B) in November. By the looks of it, his plea for investors to load up on “Big Apple” debt won’t be enough to stop redemptions from leaking through the crack in the bond fund reservoir. On Monday, muni bond holders sought buyers for $1.1 billion in debt – the second highest single day total since December 9, 2008.


If mean reversion has its way, there’s a potential $97.4B of withdrawals waiting to be reported over the next couple of years. The timing of which is particularly important to note, as the likely extension of the Bush Tax Cuts over that duration does indeed reduce some near-to-intermediate term demand for tax-exempt muni bonds.


Conclusion & Recommendation:


When it comes to muni bonds, institutional investors are the “Odd Lot” with respect to behavioral finance. Retail investors own 70% of the total amount of muni bonds in circulation through direct and indirect holdings (mutual funds, etc.). Keep that in mind the next time you hear a sell-side recommendation to buy muni bonds right here and now. Perhaps we institutions should follow them into cash (retail investors added a net $24.7B into money funds in November – the most since January 2009).


 All told, we are making an explicit recommendation with regard to muni bonds: don’t buy the dip; don’t buy the hype; don’t buy the storytelling around how cheap bonds suddenly are. They are likely to get a lot cheaper before we find real value – a lesson well-taught by Marty Whitman. That, however, doesn’t mean there will be an absence of head-faking rallies along the way.


Darius Dale



Getting Up To Speed


With the struggles of State & local governments making more and more news of late, we’ll continue to remain diligent in keeping you appraised on this topic. We’ve written extensively on State & local government fiscal headwinds YTD; email us if you’d like to receive copies of any/all of the following reports:


February 24: DOMESTIC PIGS – A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them. While we are not calling for the U.S. to default on its sovereign debt, the likelihood of a State and/or local government defaults may potentially lead to a downgrade in the U.S.’s credit rating.


April 20: GOVERNMENT’S MARKING TO MODEL – Property tax rates and property tax receipts continue to rise in the face of a weak domestic housing market, showing just how much the government marks their “assets” to model. We break down the convoluted municipal property value appraisal system and highlight the oncoming headwinds to local government property tax collections in the coming years.


July 21: IN A SORRY STATE INDEED - Waning federal funding, slowing tax receipts, and declining home prices will put additional strain on State and local government budgets, which have an incremental negative effect on the U.S. economy at large.


September 13: BREAKING DOWN MUNI BONDS – We firmly disagree with the relative “safety” of muni bonds, as current yields are at a disconnect with the underlying negative fundamentals that will begin to reveal themselves over the next 2-4 quarters.


October 13: CONTRACT FOR AMERICA: EVEN SLOWER GROWTH AHEAD? - Careful analysis of State & Local Government fiscal headwinds suggests that a Republican takeover of Congress may lead to decisive spending cuts, which could negatively impact U.S. economic growth in the intermediate term. Furthermore, State and Local Government’s FY11 revenue projections are very out of line with economic reality, which suggests further cuts are on the way. In this report, we analyze this divergence in great depth.


November 16: REPUBLICAN HEADWINDS FOR STATE & LOCAL GOVERNMENTS - The Republican landslide in the recent election all but guarantees State & local government fiscal headwinds will continue to materialize in 2011. These headwinds will likely result in material spending cuts and tax hikes going forward, which will create a drag on the economy going forward and increased risk for State and local bond defaults.

The Ber-nank's Pig

This note was originally published at 8am on December 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“For many people the “long run” quickly becomes the short run.”

-Ludwig von Mises


It’s both amazing and frightening that some US-centric investors can call rising European bond yields “pigs” and, at the same time, call the current breakout in US sovereign bond yields bullish because it’s all about US “growth.” If you are being forced to chase your “long run” stock ideas here into the short run of year-end, be forewarned – feeding The Ber-nank’s Pig comes with globally interconnected risk.


In hedge fund speak, we call a position that goes straight down a pig. Although I have never managed risk on a long only desk, I’m hearing that they call charts that look like Spanish Equities (EWP) and short-term Treasury Bonds (SHY) iggy little piggies too.


Obviously there is a confirmation bias embedded in US markets to lean bullish. As a result, not being wrong 82.6% of the time on the short side (Hedgeye’s batting average on shorts since 2008) isn’t easy to do. Sometimes however, the perma-bulls start to trip all over themselves painting every bearish and bullish data point as, well, bullish. This little piggy has a funny way of making its way to the market AFTER stocks have moved.


This morning’s Institutional Investor Bullish to Bearish Survey marked a new cycle-high in terms of the spread between de Bulls and da Bears:

  1. Bullish sentiment ramped to 56.8%
  2. Bearish sentiment dropped to 20.5%
  3. The spread (bulls minus bears) = +36.3%

In the short-run, we have finally bumped up against the widest bullish bias the US stock market has seen since April 2010. This may or may not matter to the “buy stocks for the long run” bulls, but we think the April peak to July trough drop of -15% left a mark.


In the long-run, the Bullish/Bearish Spread has never sustained a level north of 40. Historically speaking, never is a long time. The last time we saw the +40 handle raid the bears to the upside was at the beginning of 2008. Not exactly the best buy-and-hope signal that was…


Last night on Kudlow, I attempted to remind one of the 2008 bulls (Don Luskin) what the confluence of a pending slowdown in global growth and rising global inflation means for stocks in the intermediate term. He didn’t like that reminder.


This morning, in hopes of not being labeled one of the “world is awash with liquidity” 2008 dudes, I’m going to make sure that I am crystal clear on this – the rise in sovereign bond yields from Portugal (who printed 3 MONTH bills this morning at 3.4% versus 1.81% in the last auction!) to California is NOT a bullish leading indicator for 2011 “growth.”


No, that doesn’t mean I’m suggesting that last month’s US Retail Sales number wasn’t good. Neither am I saying that last month’s breakdown in domestic and emerging bond markets was either. We, as risk managers, aren’t tasked with trumpeting the +83.6% US stock market move that’s already behind us. We need to play the risk management game that’s in front of us.


So let’s strap on the multi-factor, multi-duration, global macro pants and take a walk down the path of what’s new out there this morning other than Portuguese pigs getting plugged:

  1. China and Hong Kong equities closed down another -0.54% and -1.95% overnight, respectively. Both remain broken on our immediate term TRADE duration. Growth in Asia will slow, sequentially, until Q2 of 2011.
  2. Indian equities closed down another -0.76% and remain bearish on both our immediate and intermediate-term TRADE and TREND durations.  The trajectory of India’s 2011 growth could slow materially against very tough 2010 compares.
  3. Spanish and Italian stocks markets are getting crushed again after rallying to lower intermediate-term highs as European bond yields continue to rise in the face of sovereign debt and inflation risks.
  4. Sweden’s Riksbank raised interest rates on its 7-day repo rate to 1.25% in order to proactively protect against inflation.
  5. Turkish equities (a hot spot in the buy everything emerging markets land of nod) continue to underperform and are down another -1.3% this morning as local inflation pushes towards the double digit zone (yes, inflation is bad for emerging markets – it starves their people).
  6. Brazil was down another -0.55% yesterday and traded back below its intermediate-term TREND line of support for the Bovespa = 69,005. Brazil’s GDP growth slowed to 6.7% in Q3 vs. +9.2% in Q2 and inflation just ticked up again, sequentially, to +5.6% in November.

Notwithstanding that everything that I just wrote equates to a real-time read through on Global Growth Slowing in the in the next 3-6 months, what’s most interesting here is that every US centric stock market news service hasn’t mentioned any of them!


US tax cuts are good for short-run spending and political popularity (unless you are long Best Buy), but what have they done to the world’s long run expectations of American fiscal resolve? Have we learned nothing about the short-termism associated with begging for “shock and awe” easing in early 2008? Or are we, sadly, just feeding the pig until we get to year-end and collect our high/low society bonuses?


My immediate term lines of support and resistance for the SP500 are now 1230 and 1246, respectively. I’m early in being short the US stock market here – I get that. I was in late 2007, too. But don’t forget that I was also early buying the US Dollar (UUP) in November and shorting US Treasuries (SHY) and Munis (MUB). This globally interconnected game of risk is no longer all about buying US stocks for the “long run.”


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Ber-nank's Pig - 1

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