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CHART DU JOUR: CONSUMERS FEELING GASSY BUT NOT BLOATED

Takeaway: QE = higher gas prices = lower casino revenues

  • Higher gas prices have a statistically significant negative impact on US gaming revenues
  • Both QEs contributed to higher gas prices and we expect QE3 to be no different
  • US gaming revenue growth has been stagnant even with flattish gas prices

 

CHART DU JOUR: CONSUMERS FEELING GASSY BUT NOT BLOATED   - cc


QE: The Unthinkable

QE: THE UNTHINKABLE

 

 

CLIENT TALKING POINTS

 

QE: THE UNTHINKABLE

It’s truly amazing what we witnessed yesterday. It’s clear the Federal Reserve can’t help the economy at this point. A cute short-term rally is what we’ll get from Ben Bernanke’s extension of 0% rates and MBS buybacks. After the rally? Higher fuel prices, higher food prices. No new jobs. Stagnant economy growth. Sounds great, doesn’t it? QE can save anything, anytime, right? 

 

 

GAS MONEY

Remember back when gas was $1 a gallon and you’d as your parents or friends for a couple bucks to fill up your tank so you could go out for the weekend? Those days are truly a relic of the past. We’re at an average of $4 a gallon gas right now and as if that weren’t bad enough, we’re going higher. As the S&P 500 climbs and as Ben Bernanke destroys the US dollar and juices commodity prices, we’ll no doubt see $5 gas, followed by $6 gas and so on. Aren’t central planner great?

 

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ASSET ALLOCATION

 

Cash:                Flat

 

U.S. Equities:   Up

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Down

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Insiders knew Bernanke was going to go all in; they'll live large this weekend while you take it in the pump” -@KeithMcCullough

 

 

QUOTE OF THE DAY

“There is no fate that cannot be surmounted by scorn.” –Albert Camus

                       

 

STAT OF THE DAY

US Retail Sales increase by 0.9% for August.

 

 

 


CAT CALL AT 11AM: REVIEW OF BEARISH THESIS

Takeaway: $CAT: Call at 11AM to discuss our view of $CAT. Don't be the investor who holds CAT through peak margins...

CAT CALL AT 11AM: REVIEW OF BEARISH THESIS

 

 

Please join us for a quick review of our bearish thesis on CAT at 11AM this morning.  

 

MATERIALS: Follow the link CAT's Deep Cycle

 

DIAL-IN: Toll Free Number:

               Direct Dial Number:

               Conference Code: 581552#

 

 

If you think that aftermarket parts will save CAT, so did these guys.  

 

CAT CALL AT 11AM: REVIEW OF BEARISH THESIS - parts

 (Picture from CAT's 1953 Annual Report)

 

Since then, CAT has cycled down a half dozen times.  



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To Infinity and Beyond

“Two things are infinite: the universe and human stupidity.  And I’m not sure about the universe.”

-Albert Einstein

 

As much as we and other market prognosticators (and even trained economists) have criticized Chairman Bernanke’s monetary policies, he went ahead yesterday and put on the big boy gloves of monetary policy.  In the Fed’s statement yesterday, quantitative easing was, as Buzz Light Year would say, extended to infinity and beyond.

 

In using the Einstein quote above I’m not suggesting anyone on the Federal Reserve board is stupid.  In fact, they are obviously all very intelligent.  While I would give myself the odds in a game of hockey, I’m pretty sure anyone on the Fed could beat me in a game of one-on-one Sudoku (if that even exists).  Of course, what they may be missing is the impact of their policies on the real economy. 

 

After Keith got off CNBC’s Fast Money last night, he and I had a long discussion about the quarter.  Let’s be honest, we’ve been leaning too bearishly this quarter.  Coming into the quarter, we actually believed that the Fed would be in a box because the data didn’t currently support incremental easing and that the Fed wouldn’t ease ahead of the election.  Obviously, we were wrong on both those points.

 

Conversely, we’ve been spot on in terms of our view on general economic growth this quarter and this year.  Ultimately, economic activity will drive both company fundamentals and the broader stock market.  In the shorter term, of course, other factors can override these fundamentals. 

 

So while we weren’t levered long in to this new market high (in fact, we are actually short the SP500), our risk management process has also enabled us to not have major blow ups.  Step #1 for us is always to minimize our losses.  Start by not losing money, and you will get your shot to generate returns.

 

A popular refrain yesterday in the media and around some areas of Wall Street was that Bernanke and the Fed are the only ones focused on doing anything about the abysmal jobs market.  I have to admit, I find this view a little nonsensical. From a practical sense, printing money does very little to encourage companies to hire.  Further, it has actually done very little to encourage banks to lend more broadly.

 

On the last point, and I will admit this is anecdotal, I ran into a friend who is one of the larger real estate developers and condo owners in a small New England city.  I assumed that extending the duration that rates will be held at 0% and further monetizing of MBS would be beneficial for those in real estate.  His response was that I was right, for those that can get a loan this is a very good thing.  But, according to him, for the large percentage of the population who doesn’t have a 20% down payment or stellar credit rating, it is far less relevant.  On some level, this likely explains why mortgage applications have not accelerated with rates at all-time lows.

 

The most critical economic issue with printing dollars to infinity and beyond is the inflationary impact.  Ironically, shortly before the Fed released its statement yesterday, PPI hit a three year high in terms of month-over-month growth.  But forget that spurious government data, what about the real economy you say?  Well, in the Chart of the Day today we actually looked more closely at the impact of commodity inflation on the real economy.

 

As the chart shows, going back to 2008 gasoline has exceeded $4 in mid-2008, in mid-2011, in early 2012, and now. The corresponding result, as the chart shows very vividly, is that economic growth slowed and we then saw a corresponding correction in equities, despite infinitely loose monetary policy.

 

Not to scare you this morning, but inflation from these levels shifts our growth slowing scenario squarely into potential recession territory. We don’t use the R word frivolously.  In fact, the last time we emphasized recession as a probable scenario was back in March of this year.

 

Whether we get aggressive on the recession call will be data dependent, but we are comfortable continuing with the idea that global growth is slowing. In this vein, later this morning we will be doing a 15-minute call on Caterpillar Inc. (CAT) outlining our long-term bearish thesis.  Our Industrials Sector Head Jay Van Sciver is relatively new to Hedgeye, but hasn’t been afraid to make a bold call. This one will be no different.  The key tenets of his thesis on CAT are as follows:

  • Resource company investment is near cyclical highs and set to decline.  Other end markets do not appear poised to replace this tailwind;
  • CAT has been adding capacity and building inventory into what we believe will be a peak in demand; and
  • Our cyclically adjusted valuation for CAT implies a stock price range of $50 – 70.

This is going to be a quick call with a lot of data, so grab a coffee and join us at 11am.  If you are an institutional subscriber and don’t have the dial in, please email and we will get it to you.

 

Before I let you head into this weekend, the other point related to extending QE to flag is that if equity markets continue to inflate, it will likely be positive for President Obama’s re-election chances.  To wit, our Hedgeye Election Indicator has his chances of re-election at an all-time high at 61.9% and this corresponds closely with InTrade at 64.5% odds.

 

Incidentally, if you are confused by the global economy, you are in good company.  In his most recent letter to investors, legendary investor Howard Mark writes that the “world seems more uncertain than any other time in my life.” 

 

Indeed.

 

Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $114.49-118.01, $79.04-80.67, $1.27-1.30, 1.70-1.80%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

To Infinity and Beyond - Chart of the Day

 

To Infinity and Beyond - Virtual Portfolio


THE M3: HOTEL PRICE WAR; PACKAGE DATA

The Macau Metro Monitor, September 14, 2012

 

 

HOTEL PRICE WAR MIGHT OCCUR AT LOW SEASON THIS MONTH Macau Daily Times

Chan Chi Kit, President of the Macau Hoteliers & Innkeepers Association, said the traditional low season of September this year coincides with the launch of over 1,800 rooms and suites by Sheraton in Sands Cotai Central with promotional prices very close to those of the 3 or 4 star hotels.  According to some operators, this could trigger a price war between hotels as visitor numbers fall and no major new attractions are launched during this low ebb to draw extra tourists.  Chan pointed out that in the first ten days of September, some hotels recorded occupancy rates as low as 50 –70%, and individual establishments even saw record 20 – 50% lows.  While a price war is possible in September, the hotel industry leader hoped the Golden Week holiday starting October 1 would bring some relief to the hospitality industry by bringing more mainland visitors, as it always has done in past years. 

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR JULY 2012 DSEC

Visitor arrivals in package tours increased by 19.5% YoY to 825,464 in July 2012.  Visitors from Mainland China (606,120) went up by 20.4%, with 256,537 coming from Guangdong Province; besides, those from Taiwan (75,261); Hong Kong (35,395) and Japan (24,717) increased by 54.2%, 14.4% and 66.1% respectively.  On the contrary, visitors from the Republic of Korea (25,491) decreased by 17.9%.  In the first seven months of 2012, visitors in package tours totaled 4,908,359, up by 24.8% YoY to account for 30.6% of the total visitor arrivals.  The average length of stay decreased by 0.18 night to 1.2 nights.

 



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