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MACAU SLOWS AS EXPECTED

No change to HK$22.5-23.5 billion December projection

 

 

Average daily table revenues for the past 8 days in Macau were HK$678 million, off the HK$732 million pace of the rest of the month.  However, this is a typical seasonal pattern.  We are maintaining our HK$22.5-23.5 projection for the full month of December which represents YoY growth of 23-28%.  The set up for January looks favorable as win generated on 12/31 will count in 2012 and Chinese New Year falls in January of 2012 versus February of 2011.  Remember that the DICJ is always one day behind so December actually includes November 30th to December 30th, January includes December 31st to January 30th, etc.

 

Week over week, WYNN gained the most share, coming from LVS and MPEL, and is now above recent trend.  Despite the sequential drop, MPEL remains at trend.  While LVS is above trend, December should be viewed as a disappointment given the junket push the last couple of months.  We would have expected 200-300bps of market share gains by now for LVS although hold may have played a role.

 

MACAU SLOWS AS EXPECTED  - m


THE HBM: MCD, WEN

THE HEDGEYE BREAKFAST MENU

 

Notable MACRO data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

CatteNetwork – “Retail beef prices rose in November for the fourth consecutive month and set a new record for the third consecutive month. The average price of choice beef in grocery store meat cases in November was $5.001 per pound. That was up 6.8 cents from the October record and up 51.7 cents from November 2010. The average retail price of all fresh beef also was record high at $4.504 per pound in November. Since the per capita beef supply is expected to be 4-5% lower in 2012, many more months of record retail beef prices are likely in the coming year.”

 

SUB-SECTOR PERFORMANCE

 

THE HBM: MCD, WEN - hfbrd

 

QUICK SERVICE

 

MCD - With the Year's Trading Nearly Complete, McDonald's Tops All Dow Jones Industrial Average Component Stocks With 2011 Gain of 30.47%

WEN - re-entered the Japanese market after pulling out of the country in 2009, with plans to open 100 restaurants in the next five years.

 

FULL SERVICE

 

EAT – Up last Friday on accelerating volume

 

 

 

THE HBM: MCD, WEN - qsr

THE HBM: MCD, WEN - fsr

 

 

Howard Penney

Managing Director

            

 

Rory Green

Analyst


TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK

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* The TED spread made a new YTD high at 58.1 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system.  According to the TED spread, none of European leaders' actions over the last weeks and months has made a difference to banking system stability.

 

* The ECB Liquidity Recourse to the Deposit Facility hit a new all-time high just days after its last cycle low.  This suggests that levels will climb even higher before the next cycle peak.  The level currently stands at 411 billion euros.  

 

*Credit default swaps for Eurozone countries tightened on Monday. Italian swaps tightened by 7%.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Neutral / 4 of 11 improved / 4 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 5 of 11 improved / 6 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 9 of 11 worsened / 1 of 11 unchanged

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Summary

 

1. US Financials CDS Monitor – Swaps tightened slightly for all 27 major domestic financial company reference entities last week.        

Tightened the most vs last week: RDN, XL, MMC

Tightened the least vs last week: GS, SLM, HIG

Tightened the most vs last month: SLM, RDN, UNM

Tightened the least vs last month: ACE, ALL, XL

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - cds  US

 

2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 37 of the 40 reference entities. The median tightening was 6.33%. The three exceptions were the Greek banks. 

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - cds  Euro

 

3. European Sovereign CDS – European sovereign swaps tightened last week. German sovereign swaps tightened by 3% (-3 bps to 103) and Italian tightened by 7% (-38 bps to 500).

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Sovereign CDS 1

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, ending the week at 8.92 versus 9.01 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5 points last week, ending at 1578.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - LLI

 

6. TED Spread Monitor – The TED spread rose 1.3 points last week, ending the week at 58.1 this week versus last week’s print of 56.8.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose less than 1 point, ending the week at -23.6 versus -24.5 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - JOC

 

 8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread widened by 4 bps to 98 bps versus last week’s print of 94 bps.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Euribor  OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  The Liquidity Recourse hit a new all-time high on Friday, signaling growing systemic risk to the European banking system. 

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - ECB liquidity facility2

 

10.  Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads tightened, ending the week at 182 bps versus 190 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - MCDX

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index fell -150 points, ending the week at 1738 versus 1888 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Baltic

 

12. 2-10 Spread  – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 174 bps, 12 bps wider than a week ago.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - 2 10

 

Margin Debt in November

We publish NYSE Margin Debt every month when it’s released. 

 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October and November’s print of +0.78 and +0.55 standard deviations.  But overall, this setup represents a material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through November.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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Boxed In

“If you ever dream of beating me you’d better wake up and apologize.”

- Muhammad Ali

 

In the United Kingdom, Boxing Day, historically, was the day after Christmas on which the wealthy gave their servants gifts in a box to show them appreciation for their service. It is a holiday that it still recognized in much of the Commonwealth, though the concept of the holiday has changed rather dramatically over time. Yesterday, I celebrated Boxing Day in my hometown of Bassano, Alberta with family and friends and a traditional town pond hockey game in the mid-afternoon.

 

In Canada, Boxing Day has morphed from a charitable day to a day which is generally known to have the best shopping deals of the year. With the commercialization of Boxing Day, the goodwill aspect of it has been all but lost. On some level, though, the massive sales that occur on Boxing Day do provide some respite to the middle and lower class consumer who continue to get Boxed In by the North American economy.

 

In the United States, one of the key issues facing the middle and lower class consumer clearly remains the employment situation. The most recent monthly employment report from the Bureau of Labor Statistics in the United States, reported in early December and including November data, showed that the national unemployment rate in the United States had declined from 9.8% in November 2010 to 8.6% in November 2011. This was good news, right? Well, as usual, the devil is in the details.

 

From November 2010 to November 2011, the totally number of employed in the United States increased from 138.9 million to 140.6 million for a total increase of 1.68 million, or 1.2%. Conversely, the total number of civilian and non-institutional population not in the workforce increased from 84.8 million to 86.6 million for a total increase of 1.79 million, or 2.1%. So on a net-net basis, the number of people out of the workforce has increased more than the people in the workforce over the last twelve months, despite the illusion of a decreasing unemployment rate.

 

As it relates to prospects for hiring, the outlook is muddled. According to the Business Roundtable survey released last week, about 1/3 of CEOs expect to add employees in 2012, about 40% expect to keep their employees flat, and almost 25% expect to trim headcount. This survey is basically unchanged from its results three months before. A recent survey from Manpower echoed similar uncertainty in the job market, with the following key conclusion:

 

“Seven percent of employers report they are unsure of their hiring intentions going into the new year. The rise from three to seven percent is the most significant quarterly increase since 1977 and represents the highest percentage of uncertain employers surveyed since 2005.”

 

Despite the more ominous long-term employment picture, recent weekly unemployment claims have shown some improvement in the U.S. In fact, last week’s headline initial claims fell 2,000 to 364,000. In terms of context, our financials team wrote the following regarding the recent claims data point:

 

“It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.

 

We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.”

 

Given the employer surveys highlighted above, it seems likely that typical trend of employment worsening in the first couple of months of the year will again come to the fruition this year.

 

In the Chart of the Day, we’ve highlighted the growth of the population not in the workforce in the United States going back three years. This chart illustrates that as unemployment has grown over that period, so too has the population that has left the workforce.

 

The background of the chart is a picture from the “Thrilla in Manilla,” which was the third and final fight between Muhammad Ali and Joe Frazier. At the start of the seventh round, Ali purportedly whispered in Frazier's ear, "Joe, they told me you was all washed up."  Frazier growled back, "They told you wrong, pretty boy." Unfortunately for Frazier he eventually lost in the 14th round by TKO when his trainer threw in the towel.

 

We are not certain when the U.S. consumer will officially throw in the towel, but there is certainly a scenario in which a strengthening U.S. dollar will help to buoy consumer spending by increasing purchasing power and deflating key input costs. On the other hand, we are much more certain that if Italian yields continue to trend above 7%, as they are this morning, global investors will be increasingly likely to throw in the towel on the Euro.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $106.02-109.11, $1.28-1.30, and 1, respectively.

  

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

 

Boxed In - DJ EL chart

 

Boxed In - HVP


Multiplier Effect

This note was originally published at 8am on December 22, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“… every job created by the government would add a further job to supply that new worker with goods.”

-Nicholas Wapshott (Keynes Hayek, pg 58)

 

John Maynard Keynes had more personal and P&L issues over the course of his career than Time Magazine. His biggest losses (both in terms of academic credibility and in his personal account) came in the late 1920s when “corporate profits were good” and debauching the British Pound came to an end.

 

Sound familiar? It’s a good thing they don’t let Bernanke trade his p.a.

 

The aforementioned quote comes from a passage in Keynes Hayek where Nicholas Wapshott does a nice job reminding us of the context of Keynes’ big marketing idea for Lloyd George going into the 1929 British Election. The idea, much like the central planning ideas of Big Government Liberals today, was to “stimulate” economic growth via government spending.

 

The Liberals lost that 1929 election (the Conservative Party’s Ramsay MacDonald formed a minority government), and like most politicized people who can’t get paid putting their own capital at risk, John Maynard Keynes, “ever the pragmatist...” (Wapshott), pulled a Bernank and shifted his central planning ideas to the other party line.

 

“This marked the end of Keynes’ long dalliance with the Liberals.” He “… now directed his energies toward persuading the new government to accept his prescriptions.” (Keynes Hayek, pg 58)

 

*Note: Since 1929, while tested and tried by Charles de Gaulle (France in the 1950s), and Jimmy Carter (USA late 1970s), the Keynesian concept of the Multiplier Effect has not worked.

 

Back to the Global Macro Grind

 

There was one big thing that changed yesterday that had me thinking about the 1928-1929 narrative of “but corporate profits are good and stocks are cheap” consensus – Oracle trading down -14% on the open.

 

Oracle isn’t exactly a small company ($130B in market cap – only about 20% of the size of yesterday’s LTRO leverage slapped onto insolvent European bank balance sheets). It’s also a company whose revenues are highly correlated to the corporate profit cycle.

 

Yes, a blind intellectual squirrel can tell you what corporate profits are, after they’ve occurred. But how many of the gargantuan intellects in our profession can tell you when the Global Growth and Profit Cycle is about to slow?

 

Not a trick question.

 

The answer, last I checked, on who nailed both the 2008 and 2011 Global Growth Slowdowns, is, not many.

 

How do we translate this thought about investing at the Top Of A Corporate Profit and Margin Cycle to our daily risk management positioning?

 

Well, the market has already started to do that for you. Look at the S&P Sector Returns for the YTD:

  1. Utilities (XLU) = +13.4% YTD (lead the market higher yesterday, closing +1.6%)
  2. Technology (XLK) = -0.7% (lead the market lower yesterday, closing down -1.7%)
  3. Financials (XLF), Basic Materials (XLB), and Industrials (XLI) = -19.8%, -13.4%, and -4.1% YTD, respectively.

In fact, the market has been telling you what we’ve been telling you on Global Growth Slowing since February – so this is not new. Neither is Utilities (dividends) moving into a raging bull market if we are on the cusp of what ISI’s Ed Hyman called for earlier this week (a Q4 surge in US GDP to 4%?).

 

Fortunately, the bond market has figured this out. Hyman actually taught me that, so I don’t get why he’s not following his own leading indicator process. Long-term US Treasuries (which we’ll be buying more of today and tomorrow, and really until the math tells us not to) remain in a bull market of their own.

 

Across all 3 of our risk management durations, both 10 and 30-year UST Bonds are in what we call a Bullish Formation (yields are in a Bearish Formation) with TRADE, TREND, and TAIL lines of resistance for the 10yr at 2.05%, 2.09%, and 2.82%, respectively.

 

Now before my Ivy League classmates who are endowed with the high powers of determining “valuation” better than I start yelling at me this morning that “stocks are cheap relative to bonds,” I’ll just take a moment to whisper, softly, in their 2011 ears… the market doesn’t care about what you think is “cheap”… it’s getting cheaper…

 

The corollary, of course, to where US Government Bonds can go in a Growth Slowing environment that is perpetuated by the piling of debt-upon-debt is Japanese Government Bonds (or JGBs).

 

Looking at last night’s reported non-resident holdings of JGBs as a proxy for TLT demand (long-term US Treasury ETF), they hit a new all-time record of 76 TRILLION Yen. That’s a lot of yens. And 15 years after Paul Krugman told them to “PRINT LOTS OF MONEY and stimulate”, Japan is still waiting for the Multiplier Effect to reach “escape velocity”…

 

My immediate-term support and resistance ranges for Gold (shorted it yesterday), Oil (Brent), German DAX, French CAC, Shanghai Composite (down every day this week), and the SP500 are now $1568-1623, $106.03-109.16, 5803-5901, 3059-3118, 2152-2341, and 1228-1259, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Multiplier Effect - EL Heut

 

Multiplier Effect - VP 12 22


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