“The quality of the imagination is to flow and not to freeze.”
-Ralph Waldo Emerson
For those of you who dial into the Hedgeye Morning Macro Call every morning at 830AM EST, you know that the title and topic of this Early Look note is dear to my Canadian heart – The Flows.
In institutional investor speak, The Flows are where the fees are. For bulls, they foster the imagination. For bears, they focus the mind. The Flows represent your moneys. In a world “awash with liquidity” and sovereign debt, we don’t think you should trust. Bernanke Bubbles beware.
Last year, they flowed you into US Treasury Bonds and Emerging Markets. This year, outflow-you-go into the “safe havens” of US and Japanese stocks. Like the promise of Bernanke “buying bonds” in 2010, the promise of not “fighting the Fed” bears US stock market fruits from the heavens. Do not freeze men and women of the risk management gridiron. The chase for the last Dollar Debauched drop of equity returns is on.
The problem, of course, arises when The Flows run into these little critters called The Fundamentals. Understanding full well that our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus (yes, sadly, they are now one and the same) is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.
Thankfully, not every institutional investor understood the repercussions of Quantitative Guessing II (QG2) on Global Inflation Accelerating back then. Now those who bought US Treasury Bonds and Emerging Markets are being reminded that what flows into a said haven, flows out…
From EPFR Global, here’s the latest on The Flows (per their February 18th report):
Now, as we like to say at Hedgeye, what happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”
How long can The Flows trump The Fundamentals? How much risk gets entrenched into an asset class when the storytelling starts to follow the natural confirmation bias of positive price momentum? How many times do we need to see this movie before we learn the lesson?
These are all questions that have a much clearer answer now versus then. Whether you look at the opportunities to short US and Emerging Market Equities into the peaks of fund flows of 2007 or shorting the mountain tops of a bond market bubble in 2010, history writes itself as of last price.
As a risk manager who is shorting things almost every day, I need to be really sharp on timing and price. While many institutional marketing messages preface their buy-and-hold strategy with “you can’t time markets”, we should all be very thankful for that – many of them can’t. What we’re doing is preserving capital and making probability-weighted decisions, daily, with a fundamental Global Macro research overlay.
On the scoring of Growth and Inflation, this morning’s Global Macro Grind has some positives, but more negatives:
But there is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold. For the last decade, that hasn’t worked inasmuch as buy-and-hold hasn’t . Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility… We have America’s sad State of political leadership to thank for that.
My immediate-term lines of support and resistance for the SP500 are now 1311 and 1343, respectively. The US stock market should make another lower-high today – one that you should outflow from, provided that US Dollar Debauchery continues to sponsor Global Inflation.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The receivable balance doesn't concern us. Mass slowdown does but we can't overlook the huge VIP volume growth and impressive operating cost control.
We think Genting's Resorts World Singapore (RWS) may be in a better spot relative to expectations and valuation than LVS's Marina Bay Sands (MBS). The valuation disparity is obvious but the higher VIP growth profile, particularly with junkets coming online, could allow RWS to continue to grow its market share. On the negative side, the market appears to be focused on the growth in receivables but we'll tell you why we don't think this is an issue.
The recent quarter was solid and the outlook is pretty favorable. We've got a lot of detail in this note because we think the company and financials are very misunderstood by the analysts. For instance, the Street seems to be assuming that all the tax revenue was accounted for in expenses. In fact, Genting Singapore actually deducts Goods and Services Tax (GST: 6.54%) from revenues which is the correct methodology according to IFRS. The incremental gaming tax (5% for VIP and 15% Mass) is accounted for in expenses. For this reason, on an apples-to-apples basis, RWS revenues will be lower than MBS's with EBITDA unaffected, thus resulting in higher margins for RWS.
Details & thoughts:
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TODAY’S S&P 500 SET-UP – March 1, 2011
Equity futures are trading above fair value as markets show plenty of resilience despite continuing turmoil in the Middle Eastern. Yesterday's momentum came on the back of renewed M&A excitement, better than expected Chicago PMI, a positive headline personal income report. As we look at today’s set up for the S&P 500, the range is 32 points or -1.22% downside to 1311 and 1.19% upside to 1343.
MACRO DATA POINTS:
EARNINGS/WHAT TO WATCH:
We have 6 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Foot Locker reports 4Q earnings on Wednesday 3/2 after the market close, followed by a conference call on Thursday morning. We continue to expect a solid 4Q result, with our model forecasting EPS of $0.43 well ahead of the Street at $0.37. The cornerstone of our forecast is a 6% same store sales increase coupled with gross margin expansion at the upper end of the guided range (+300 bps y/y). We note that promotional activity during the quarter was low, with very few promos occurring beyond the traditional holiday period. Recall that management suggested going into the quarter that they would strategically reduce promotional cadence if “sales were good”. We believe this was the case.
Beyond the quarter, which almost seems like old news at this point, we expect an update on the company’s strategic priorities for 2011 as well as some high level guidance. We remind investors that we do not expect Foot Locker (and specifically CEO Ken Hicks) to change its policy regarding conservatism. As such here’s a list of what we do and do not expect to hear on Thursday’s call. We also include several questions that we’d like to hear answered as current management anniversaries its first year on the job.
EXPECT TO HEAR:
DO NOT EXPECT:
WOULD LIKE TO KNOW:
Keith shorted MCD in the Hedgeye Virtual Portfolio.
We have been bearish on McDonalds for some time now and published a contrarian Black Book detailing our thesis in mid-January. MCD’s core business is in decline and the first chart, below, shows where January’s comparable restaurant sales came in versus expectations. Our estimates for the rest of the year are also detailed in the chart; clearly we have a pessimistic outlook for the U.S. business which represents approximately 46% of the company’s operating profit.
The second chart details the quantitative set up for MCD at its current level. The Hedgeye Risk Management quantitative set up shows the nearest intermediate-term support down at $74.12.
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