“It means no worries,
For the rest of your days,
It's our problem-free philosophy,
-The Lion King
Hakuna matata is a Swahilli phrase that means, literally, there are no worries. The term was first popularized by 1980s rock band, Boney M, but gained most of its popularity in the 1994 Disney animated hit, Lion King. Yesterday, the U.S. equity markets closed solidly to the positive with the benchmark SP500 closing at 1,345 near the highs for the day. Hakuna matata! Right?
Certainly, yesterday’s stock market action reflected a care free / hakuna matata type of attitude, especially given the backdrop of the economic news of the day. There were actually three data points out that caused your grumpy old risk managers at Hedgeye a little concern. They were as follows:
1) Chicago PMI - The ISM’s Chicago business barometer dropped from 67.6 in April to 56.6 in May, which was its lowest reading since November 2009. This was the largest one-month deceleration since October 2008. Clearly ominous, although perhaps somewhat attributable to the region’s exposure to the auto industry and shortage of auto components from Japan (at least, that’s the spin). The comments from the recipients of the survey were fascinating and can be found here: https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CMay2011.pdf
The common themes were price inflation and slowing growth.
2) Case-Shiller Index – According to the Case-Shiller Index, U.S. home prices fell for the 8th straight month and were down 4.2% for Q1 2011 versus Q4 2010. This is an accelerated decline versus Q4 2010, a quarter in which home prices fell 3.6% quarter-over-quarter. Declining home prices are negative for the financial sector, as banks have to adjust residential mortgage loan books accordingly, and negative for the outlook for consumer spending, especially on the low end. According to the Case-Shiller report, home prices have now fallen as much as they did during the Great Depression. In that period, it took 19 years for the prior peak to be revisited.
3) Consumer Confidence Index – The Conference Board’s index of consumer confidence dropped 5.2 points in May and is now at its lowest level since November. The Hedgeye Optimism Spread continues to contract, as the expectations component led the decline falling to 75.2 from 83.2 (previously 82.6). The present situation component dipped to 39.3 from 40.2 (previously 39.6). Overall, the assessments of future business and labor market conditions fell in May.
As we noted at the outset of the note, the equity markets completely shrugged off the economic data points above and closed at, or near, the Hakuna Matata Highs of the Day. Now to be balanced, these data points are mostly backward looking, except for perhaps the consumer confidence reading, so it is, maybe, understandable that the market looked through the news.
That said, speculating on the meaning of market price moves is just that - speculation. To reduce speculation, we incorporate a quantitative process around looking at market prices. As Keith and I learned in our early days in the hedge fund industry, markets or stocks going up on bad news is an important signal, but it does need to be confirmed. That is, one day a trend does not make. As well, short term price action needs to be placed into the greater context of market sentiment and psychology.
To the last point, we have posted in the chart below a look at NYSE margin debt versus the SP500 going back to January 1997. The takeaway from this analysis is that when margin debt has reached an extreme of 1.5 standard deviations above the mean, the SP500 has seen a 50% correction in the ensuing 18 months. We are certainly not calling for a crash or correction to that degree, but wanted to highlight this context, which is simply that stock market operators are leaning levered long - in a large way.
Over the course of the past couple of quarters, there is no doubt most stock market operators have experienced some level of cognitive dissonance. Yesterday’s action likely accelerated those experiences. On the positive side of the ledger yesterday, a Greek default seems to have been punted, which is positive on some level for some time frame, and the economic data suggested, to our Q2 Theme, that The Bernank has continued clearance to stay Indefinitely Dovish. Therefore, if fixed income earns you little, or at least historically low rates of return, then perhaps equities are marginally more appealing? Thus the equity markets reacted accordingly yesterday . . .
We certainly understand this line of reasoning, but remain concerned that the “valuation” case for the U.S. stock market may not be what it is cut out to be. As inflation accelerates and growth slows, corporate margins contract, and earnings growth becomes challenging. Recall that at the end of 2007, the SP500 was trading at 17.3x forward earnings of $84.67 per share, except for the fact that the real earnings number was actually $60.57, or 28% lower than expected. There was little cognitive dissonance by the end of 2008.
Keep your head up and stick on the ice,
Daryl G. Jones
The Macau Metro Monitor, June 1, 2011
MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ
For May, Macau GGR was 24.31 BN MOP (23.60 BN HK$, 3.04 BN US$), up 42.4% YoY.
GOVT EXPENDITURE RISES 115% IN JAN-APRIL Macau News
Macau govt’s expenditure in the January-April period stood at 10.4 BN patacas, up 115.6% YoY. Direct gaming taxes accounted for 84% of the total revenue, compared with 83.8% in the first four months of 2010.
CHINA'S HOME PRICES ROSE IN MAY FOR NINTH MONTH AS SMALLER CITIES CLIMB Bloomberg
According to SouFun Holdings, the nation’s biggest real-estate website owner, China home prices rose 0.5% MoM in May. Residential prices increased in 76 out of 100 cities tracked by SouFun, with average home values nationwide climbing to 8,819 yuan ($1,361) a square meter (10.76 square feet).
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This note was originally published at 8am on May 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.”
-Henry Hazlitt (Economics In One Lesson, page 208)
I suppose it’s only fitting that Henry Hazlitt revised his million-plus copies sold of “Economics In One Lesson” in June of 1978 (originally penned in 1946). That’s when the Western world was swallowing stagflation whole. That was shortly after the French introduced the G-Fluff.
G-Fluff, formerly known as the G-6 Central Planning Board (created by France in 1975), is now affectionately referred to by professional politicians as the G-8.
The G stands for Groupthink. The G-8 currently consists of Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and the United States. Not to be outdone, The EU also sends their commissioners for 3 hour lunches that serve up piping hot bs, with broccoli.
This year’s G-Fluff conference is being held in a hoity-toity town on the northwestern coastline de la belle Provence. Les Obamas et les Sarkozys (hearing there may be more than a few of them – with adjoining rooms)… La rencontre… et la culture… sans le DSK.
BREAKING HEADLINE (out of the G-8 conference this morning):
“THE GLOBAL RECOVERY IS GAINING STRENGTH… HOWEVER, DOWNSIDE RISKS REMAIN”
Mais, qu’est-ce que c’est Le Recovery? Que’est-ce qui se passe avec Le Downside?
(Before someone goes all French socialist on me – for the record, my Mom’s side of the family is French-Canadian, and I went to French school until the 5th grade, learning how to read, write, and count in French before the English pig stuff.)
Back to Le Recovery et Le Downside…
In Spain the socialists are running a 21.3% unemployment rate, so let’s not talk about that outcome of le debt financing les deficits – Spain isn’t allowed at the G-Fluff conference anyway.
Let’s talk about le USA.
- Yesterdays US jobless claims report rose 15,000 week-over-week to 424,000
- Ze rolling claim (the 4-week moving average) held at 439,000 – a new YTD high!
When considered on 1 of the 2 key measures of le success of Le Bernank (1. Full Employment, 2. Price stability), this is not good. Actually, it’s really bad – because our math suggests that for the unemployment rate in this country to recover, we’ll need to see weekly jobless claims consistently below 385,000.
Le Bernank et L’Obama get this. That’s why Le Bernank’s key statement less than a month ago at his Presser was:
“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”
-Ben Bernanke, April 27, 2011
In other words, without Le Quantitative Guessing (and ze Inflation born out of it) – we do not know what to do.
May I suggest two eggs, side by each, pour ton fluffy dejeuner Madame Obama?
This entire Keynesian experiment and my mockery of it is a much more serious joke than I can muster this morning. For the last 6 months Hedgeye has been warning that a policy to inflate will structurally impair (slow) economic growth.
I’m actually getting tired of hammering my hockey knuckles into my keyboard every morning – as de French-Canadian goalie from “Slapshot”, Dennis Lemieux, might say – SLOW-z… SLOW-zzz – de Inflation slow-ZZZ de growth!
Back to the Global Macro Grind…
The US Treasury Bond market is busting a move to the upside again this morning. US Treasury Bond yields are getting crushed. The 2-year is trading at 0.48% and 10’s are testing a breakdown of the 3% line. The Yield Spread (2-year yields minus 10’s) continues to compress (+258 basis points wide, down another 6 basis points week-over-week).
What does this mean?
- Growth expectations are slowing
- Inflation expectations are slowing
We call this Deflating The Inflation (Hedgeye Q2 Macro Theme), and we can send you the 50 page slide deck on how it works. The two long positions we have on to reflect this view are bullish on the long-end of the bond market (TLT) and long a US Treasury Flattener (FLAT).
Yes, we are aware that Le Bernank has to end le QG2 in 6 weeks. We are also aware that when this unprecedented Keynesian experiment ends, jobless claims in America could go a lot higher. I don’t have to wonder what Henry Hazlitt would say about that in June 2011.
My immediate-term ranges of support and resistance for Gold, Oil, and the SP500 are now $1511-1538, $96.89-101.57, and 1310-1328, respectively.
Have a great Memorial Day weekend. God Bless America. And best of luck out there today,
Keith R. McCullough
Chief Executive Officer
A stock in need of a catalyst.
While most regional gaming operator stocks are sitting close to their 3 year highs, ISLE is not. In fact, ISLE is 23% off its 2011 peak. With concerns about flooding and gas prices, this is a stock in need of a catalyst. A solid earnings report might just do the trick.
We’ve been a big fan of regional gaming operators for a couple of months now but have emphasized the higher quality names such as ASCA and PNK. However, a rising tide (pun intended) lifts all boats, and ISLE should benefit from better regional gaming trends as well. Trading at 7x forward EV/EBITDA, the ISLE boat needs a jump start.
We are projecting FQ4 (April) EPS and EBITDA of $0.29 and $63.3 million, 19% and 6% above consensus, respectively. Q1 FY2012 will likely be messy due to flooding related property closings and business interruption insurance but underlying May fundamentals were decent. We expect management to make that clear on the conference call.
Notable news items and price action from the restaurant space including our fundamental view on select names.
- RRGB is to test a smaller restaurant prototype. RRGB’s regular store size is approximately 5,600 square feet; the area of the smaller prototype will be between 2,000 and 4,000 square feet. d CHUX gained on accelerating volume.
- DIN has entered into an asset purchase agreement with Apple American Group LLC for the sale of 66 Applebee’s company restaurants located in Massachusetts, New Hampshire, Rhode Island, Vermont, and New York. The transaction is expected to result in proceeds of $49 after taxes.
- PFCB has signed an agreement with Alsea to develop 17 restaurants in Argentina, Chile and Colombia in the next 10 years.
- The tender offer to acquire MSSR has been extended by Tilman Fertitta until July 29, 2011.
- RT cut to “Neutral” at SunTrust Robinson.
- TXRH raised to “Buy” at SunTrust Robinson.
- JACK raised to “Buy” at SunTrust Robinson.
- AFCE gained 3.9% on accelerating volume. WEN, JACK, RUTH, BJRI, and TXRH also gained on accelerating volume.
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