“Whatever we are, it’s we who move the world, and it’s we who’ll pull it through.”
-Hank Rearden (Atlas Shrugged)
If that isn’t the quote of a self-made man, I don’t know what is. In Atlas Shrugged, Rearden Metal personified capitalism. Sometimes it’s harsh. Sometimes you win. Sometimes you lose. But you are always going to be held accountable to your own decision making.
Le Bernank showed that he stands for none of that last night in Atlanta. Since he’s never run a company, hired/fired employees, or assumed the responsibility of putting his own capital at risk – this should not surprise you. He is a Keynesian Central Planner.
Whether you are an Ayn Rand, Ben Bernanke, or Jaime Dimon fan is of no particular concern to me when I wake up to write this note to you every morning. I am concerned with making money so that I can confidently and gainfully employ a team of professionals that helps you manage risk.
If there are more than a few lines in Ayn Rand’s 1168 pages of Atlas Shrugged that resonate with me, that doesn’t mean I am an Ayn Rand lover inasmuch as I don’t have to love anything in this good life more than my wife and family. I like to read things that I disagree with. I like things that make me think.
I am a Risk Manager – and, unlike Le Bernank, that means I am tasked with considering multiple ideas across multiple risk management scenarios. Accepting anyone’s dogma in full, including the Holy Bible’s, lacks the intellectual honesty to question. I am tasked with not losing you money. That includes accepting when I am wrong. The goal is to be right.
What’s been right about cutting interest rates to ZERO percent and scaring the living daylights out of Americans in order to market the fear-mongering message? Has socializing losses made the capitalists in this country less or more confident in hiring? What’s the difference between jacking up short-term liquidity and eroding long-term demand?
These are critical questions that the Chairman of America’s Unaccountable Central Planning Board does not have an answer to. Last night he called GROWTH “frustratingly slow” and INFLATION “transitory.” In response, JP Morgan’s respected CEO, Jaime Dimon, asked Le Bernank, “do you have fear like I do?”
The context of Dimon’s question was also critical. He prefaced the question about fear by asking Bernanke if he thinks in “10 years someone will be writing a book about” how all of this Big Government Intervention was what perpetuated the slowdown itself. Atlas Shrugged is a 54 year-old fictional book. Jaime, get the paperback.
Back to the Global Macro Grind…
Yesterday, when the US stock market was up intraday, I cut my US Equity exposure in the Hedgeye Asset Allocation Model in half, selling down our long (and wrong) position in US Healthcare (XLV) from 6% to 3%.
If the US stock market closes down again today, it will be down for 6 consecutive days and 6 consecutive weeks. If that’s Le Bernank’s definition of success, using a massive amount of financial and societal leverage, I’d hate to see what losing looks like.
Why do I continue to sell strength in equity and commodity market exposures?
- The Market – real-time prices don’t lie; Keynesians do.
- The Data – I have yet to see sequential improvement in any of the high frequency data that we track
- The Fed – and Indefinitely Dovish Fed that can’t hike (or cut) has been a life preserver for Gold and UST Bonds
Away from the US, here’s The Market’s message:
- China (the world’s 2nd largest economy) remains bearish TRADE and TREND with the Shanghai Composite down -2.1% YTD
- Japan (the world’s 3rd largest economy) remains bearish TRADE and TREND with the Nikkei down -7.6% YTD
- Germany (the world’s 4th largest economy) just moved to bearish TRADE and TREND this morning with the DAX down a full -1%
In terms of The Data:
- South Korean GDP Growth slowed sequentially to +4.2% in Q1 (better than US, Japanese, or W. European Growth, but slowing)
- Brazilian Inflation (CPI) rose sequentially to +6.6% year-over-year in May vs +6.5% in April
- Philippines Inflation (CPI) rose sequentially to +4.5% year-over-year in May – a new YTD high
But The Fed (and I couldn’t make this up if I tried):
- Expects US employment to improve in the coming months
- Expects US Growth to re-accelerate
- Expects US Inflation to remain “transitory”
PROBLEM: The Market and The Data completely disagree with The Fed (as they have for the last 3-6 months).
That’s why Ben Bernanke having a smirk on his face when a Market/Data centric Risk Manager like Jaime Dimon was asking him THE question (what if your Keynesian Dogma is wrong?), made every red-white-and-blue capitalist in this country want to puke.
This is the beggar/bailout central planning that we ordered up folks. “Whatever we are”, it’s only we who can stop doing what we are doing to this country – so that we can start to pull it through.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $98.40-100.79, $1, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on June 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The century of megacities has already begun.”
-Lawrence C. Smith (“The World In 2050”)
I’m writing the Early Look from Los Angeles, California this morning. According to Lawrence Smith’s research in an excellent book I just finished reading, “The World In 2050”, Los Angeles-Long Beach-Santa Ana is the world’s 11th largest Mega City (a city with more than 10M people). Next to New York-Newark, which I’ll be on a plane to later this afternoon, that makes LA the only US city in the global top 19.
Most of you probably knew that.
What I didn’t know (from Lawrence’s data compilation in his chapter titled “A Tale of Teeming Cities”):
- The world had 2 megacities in 1950
- The world has 19 megacities now
- The world will have at least 27 megacities by 2025
“Of the eight new megacities anticipated over the next fifteen years, six are in Asia, two in Africa, and just one in Europe. Zero new megacities are anticipated for the Americas. Instead this massive urbanization is happening in some of our most populous countries: Bangladesh, China, India, Indonesia, Nigeria, and Pakistan.” (Smith, page 34)
Now there are obviously plenty long-term investment implications associated with a world that continues to move East. And I assume most of you probably know that too – but what we don’t know is what this balance of population-power is going to do to our Western Dogma of ZERO percent interest rates - and the associated pillaging of our savings (Asians and Muckers like to save).
Being on the road, I get into a lot of fascinating debates with some of the world’s sharpest investing minds. This has been the most intellectually fulfilling aspects of building Hedgeye. Meeting with people who run the buy-side is infinitely more interesting than having a sell-sider beg me for a bonus, bailout, or an II vote.
One of the current debates I have been getting into with buy-siders centers on how long America can sustain Japanese and Western European monetary policies?
Good question - with answers that continue to be tattooed with partisan politics (yes, being a Keynesian is partisan):
- US Monetary Policy – we have two views; what Le Bernank should have done (raised rates 6 months ago) and what he will do (nothing – he hasn’t raised rates since 2006 and he won’t start now). Our Q2 Macro Theme remains that the Fed will remain “Indefinitely Dovish” (no QG3 and no rate hikes), which is why we are long a UST Flattener (FLAT) and the long-bond (TLT).
- Western European Monetary Policy – we have one view; Les Eurocrats will remain socialist in their leanings even though they are pretending to be chicken hawks post their most recent rate hike (ECB raised rates before the Fed for the 1st time ever). Le Trichet will be gone by year-end and replaced by a left-leaning Italian (Mario Draghi). We think he could cut rates within his first 3-6 months.
- Eastern European and Asian Monetary Policy – they have one view; fight inflation with the weaponry allocated to the Fiat Fools. Russia shocked me early this week with another interest rate hike and obviously the Chinese and Australians have raised interest rates 6 times respectively since this short-cycle global “recovery” began.
More objective policy makers who use the blunt fiat instrument of interest rate decisions both ways (like yesteryear’s Bundesbank or today’s Reserve Bank of Australia), have learned over the years that there is one unique advantage to having the stones to raise interest rates – THEN YOU CAN CUT THEM!
Le Bernank et Les Japanonais… not so much. They have chosen to put their countries in de penalty box for many, many, time – deh will ultimately sit dere now… and feel shame…
Or maybe they won’t feel shame. Your run of the mill central planning groupthinker from the Keynesian Kingdom tends to think they’ve saved us from all of the problems that they’ve created with ZIRPS (ZERO interest rate policies). Have you ever seen an academic “economist” win his or her Nobel prize and have a change of heart?
Not so much…
“We are now on a trajectory to add nearly 40% more population by the year 2050, raising our number to around 9.2 billion. Who will we be in 2050? In that year, for every one hundred of our future children and grandchildren born, fifty-seven will open their eyes in Asia and twenty-two in Africa, and mostly in cities.” (Smith, page 35)
A few important words in Smith’s depiction of the Global Macro Markets in which interconnected factors will continue to collide: “our number”, “our future”, and “open their eyes”…
Do we really think that conflicted, compromised, and constrained monetary policies that serve 5-10% of Western populations’ compensation desires (never mind 1% of our world’s) are going to hold their dogmatic line?
That’s a mega question that I’d love to see Le Bernank host a Global Presser Conference on and answer in Chinese and Rusky, with a straight face. Particularly after this morning’s Jobless Stagflation report, which will continue to remind the world that the Greenspan-Bernanke era of cutting savers account returns to ZERO percent has equated to a decade of ZERO net jobs created in America.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1527-1546, $98.11-102.29, and 1303-1324, respectively.
Best of luck out there today and enjoy the weekend,
Keith R. McCullough
Chief Executive Officer
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But that doesn't mean we can't speculate, estimate, and pontificate.
With the preliminary data we have, our best guess is that Galaxy Macau is on track for approximately $400-450MM of EBITDA in its first full year of operations. Given the cost, that level of EBITDA translates into a 20-23% ROI. Our calculation takes into account current revenue run rates adjusted for the “honeymoon” effect, high initial hold %, and market type margins on the property’s Mass and VIP revenues.
Galaxy Macau total gaming revenues for the first 16 days were around US$116MM ($112MM of which was table revenue).
- Mass table revenue of $19MM
- VIP table revenue of $93MM with RC volume of $2.3 BN
- Assuming no direct play, hold at Galaxy Macau was a high 4.0%
- Roughly $4-5MM of slot revenue
We estimate that a full month in May would have generated between $163-170MM, assuming normal hold for the entire month. We assume a full month of May would have generated:
- $35MM of Mass win
- $8-10MM of slot win
- Approximately $4.4BN of RC volume and $125MM of Gross VIP win
As a point of reference, we thought it would be helpful to compare Galaxy’s opening with some recent openings (City of Dreams, Venetian, and MGM Macau). The Galaxy opening was considerably stronger than CoD or MGM and even matches up to the Venetian.
- CoD opened on June 1st 2009 and produced a paltry $28MM of gross gaming revenues for their entire first month. Granted hold was very low, but Junket Rolling Chip was only $1.6BN. In July 2009 (its 2nd month), CoD did approximately $130MM of revenues on Junket RC volume of $2.36BN. For its first full 4 quarters of operations, CoD generated $183MM of EBITDA. All-in cost for the property was $2.1 BN (1st year ROI of 9%).
- Venetian opened in late August 2007. In September 2007, the property did about $145MM of gross gaming revenues on junket RC volume of $3.9BN. Venetian generated $500MM of EBITDA in its first twelve months of operations for a 1st year ROI of 20%.
- MGM Macau opened on December 18, 2007. We estimate that the first partial month of operations produced just $17MM of GGR. MGM’s first full month of operations wasn’t very inspiring either, with GGR of just $93MM on junket RC of $1.8BN. MGM Macau generated less than $120MM of EBITDA in their first full twelve months of operations for a ROI of just 10%.
TODAY’S S&P 500 SET-UP - June 8, 2011
If you don’t have, as Jaime Dimon said yesterday in Atlanta, “fear like I do”, about the final output of Le Bernank’s Keynesian monetary policies – you’re going to be on the wrong side of this global equity market selloff. When prices are falling, fear sells.
Yes, that’s a pathetic and sad statement – but this is the beggar’s bailout bed our profession asked for – and now we’re going to sleep in it. The good news is that consensus is starting to price in Growth Slowing and an Indefinitely Dovish Fed (our Macro Themes). US Stocks are down for 6 consecutive days and 6 consecutive weeks. UST Bonds (TLT) and Gold (GLD) continue to win the fear-mongering game.
As we look at today’s set up for the S&P 500, the range is 38 points or -0.77% downside to 1275 and 2.18% upside to 1313.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 386 (+2184)
- VOLUME: NYSE 934.66 (-2.56%)
- VIX: 18.07 -2.27% YTD PERFORMANCE: +1.80%
- SPX PUT/CALL RATIO: 1.40 from 1.46 (-4.10%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 21.11
- 3-MONTH T-BILL YIELD: 0.05%
- 10-Year: 3.01 from 3.01
- YIELD CURVE: 2.62 from 2.58
MACRO DATA POINTS:
- 7 a.m.: MBA Mortgage: Prior, (-4.0%)
- 10:30 a.m.: DoE Inventories
- 11:30 a.m.: Fed to sell $15b 6-day cash-management bills
- 1 p.m.: U.S. to sell $21b 10-yr notes reopening
- 2 p.m.: Fed Beige Book
- 2:20 p.m.: Fed’s Hoenig speaks in Steamboat Springs, Colo.
WHAT TO WATCH:
- Bullish sentiment decreases to 40.9% from 45.2% in the latest US Investor's Intelligence poll
- Banks may cut thousands of Wall Street jobs within weeks - NY Post
- Morgan Stanley to focus on cost cutting - WSJ
COMMODITY HEADLINES FROM BLOOMBERG:
- U.S. Corn-Crop Delays Signal Tightest World Supply Since 1974, Price Gains
- Copper Falls on Concern Demand May Wane as Economies Struggle; Tin Drops
- Oil Drops on Concern OPEC to Raise Quotas as U.S. Gasoline Demand Falters
- Gold Falls as Some Investors Sell Following Advance to Near Record Price
- Sugar Rises as Brazil’s Production May Miss Estimates; Coffee Prices Drop
- Aluminum Costs to Japan Said to Gain to One-Year High on Post-Quake Demand
- Copper Imports by China Set to Rebound on Consumption, Investment Demand
- Australia Suspends Cattle Exports to Indonesia on Animal-Welfare Concern
- Palm Oil Drops to Three-Week Low as Recovery Concerns Cut Commodity Appeal
- Global Rubber Shortage to Narrow, Capping Costs for Tiremakers, Group Says
- BHP Coal Mine Workers in Queensland Plan Strikes Next Week, Union Says
- Cocoa Arrivals From Brazil’s Bahia Region Climb 19%, Analyst Hartmann Says
- Oil at $100 Hurting Economy May Spur OPEC to Boost Targets: Energy Markets
- EUROPE: what a mess; Germany/Sweden/Denmark (pseudo stable countries) all down 1-1.5%
- ASIA: trying to find its bottom and can't; Japan and China up for day 2, barely, as rest of Asia swoons; Hong Kong -0.9%, India -0.64% and Thailand -2.0%
Conclusion: Our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future.
Position: Short Indian Equities (INP)
By now, it’s pretty clear that the global economy is cooling. Be it a “transitory soft patch" or the turning of the global economic cycle, the net result is the same – earnings estimates need to come down. How deep in magnitude and far out in duration negative revisions must take place is a topic that will be ferociously debated, largely due to the levered long nature of this current “bull” market.
Shifting to India specifically, our call that Growth Slows as Inflation Accelerates continues to play out in spades and we see more Stagflation in India’s intermediate-term future. Currently, all three of India’s major liquid asset classes confirm this thesis:
Equity Market: India’s SENSEX Index is down -9.2% YTD and remains broken from a TRADE & TREND perspective in our quant models:
Currency Market: India’s Rupee is flat YTD vs. the USD (astonishing for a country that’s raised rates three times YTD in the face of the Fed’s Indefinitely Dovish policy) and it is also down -1.4% vs. the USD since peaking on April 8th:
Bond Market: While still up +36bps YTD on upwardly-revised inflation and rate hike expectations, India’s 10Y sovereign bond yields have plummeted -18bps since peaking on May 30th. India’s yield curve (10Y-2Y spread), which had been falling YTD mostly due to the advance in short-term rates, is now at 2bps wide from 14bps prior to the recent move in long-term rates. From a corporate perspective, India’s 10Y AAA-rated credit spreads have widened +32bps since May 30th:
Alongside India’s Manufacturing PMI falling in May to 57.5 from a “toppy” 58 reading, we think these markets are leading indicators for further slowing of the Indian economy. Recently, C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, cut his estimate for India’s FY12 GDP by -50bps to +8.5% YoY. We think that’s still too high.
Additionally, accelerating inflation remains a risk over at least the next 3-6 months as the recent +8.5% increase in gasoline prices, a potential diesel price hike, and an expected +20-30% increase in food prices in 2H (according to India’s Commission for Agricultural Costs and Prices) all combine to give India’s WPI enough momentum to “comp the comps” in the coming months.
From a policy perspective, we continue to affirm our once-contrarian view that India is very likely to miss its deficit reduction target in FY12 (4.6% of GDP) due to lower-than-expected tax receipts and flat-out ridiculous assumptions baked into the projections (+9.25% YoY GDP growth; a -38% reduction in energy subsidies).
Net-net, all three of the big Macro drivers (GROWTH, INFLATION, and POLICY) are going the wrong way for India. As such, we continue to see alpha on the short side of India’s equity market, bond market (particularly corporate), and her currency (INR). At a bare minimum, long-term investors should continue to remain underweight of Indian assets for the intermediate-term TREND.
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