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Q4 Macro Themes Conference Call on Monday, October 8th

Takeaway: Please join us for our Q4 Macro Themes Conference Call.

Next Monday, October 8th at 1:30pm EST, the Hedgeye Macro Team, led by CEO Keith McCullough, and DOR Daryl Jones, will be hosting our Q4 2012 Macro Themes Call.

 

Topics will include:

 

1.       #EarningsSlowing – Corporate margins are stretched on numerous metrics. Even with financial engineering we suggest there’s limited upside in the results from here.  We expect the gravity of global growth slowing and inflation accelerating to impact consumer and corporate P&Ls alike.

 

2.       Bubble #3 – Following the tech and housing bubbles, the charts of Bernanke’s Commodity Bubble could not be more crystal clear. So when does this bubble pop?  We’ll continue to take our cues from the US Dollar and weigh the influence of policy and fundamentals across the complex.

 

3.       Keynesian Cliff – We wrap together an analysis of the U.S. Presidential  race with the nearing US fiscal  cliff.  We discuss the impact of investors potentially shifting their attention away from  Europe and back to the U.S.’s ugly imbalances.

 

As always, valued mid & top tier clients of our MACRO vertical will automatically receive the materials and dial-in number prior to the call. If you have any questions please contact . 

 

 

ABOUT HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.

 

ABOUT KEITH MCCULLOUGH 

Prior to founding Hedgeye Risk Management, Keith built a track record as a successful hedge fund manager at the Carlyle-Blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He got his start as an institutional equity sales analyst at Credit Suisse First Boston after earning his Bachelor of Arts in Economics from Yale University, where he captained the Yale Varsity Hockey Team to a Division I Ivy League Championship. Keith is also a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010). 

 

ABOUT DARYL JONES

Prior to joining Hedgeye Risk Management, Daryl was the Sector Head for Basic Materials at HIG Capital's hedge fund, Brightpoint Capital. Earlier, Daryl founded the public investment effort at Onex Corporation, a leading private equity firm. At Hedgeye, Daryl covers commodities, geo-politics and major asset classes outside of equities. 


ASIA’S NOT HELPING THE GROWTH BULLS

Takeaway: While the consensus bull case has been far removed from anything fundamental, Asian GROWTH data does imply incremental deterioration.

SUMMARY BULLETS:

 

  • The trends across Asian export, import and industrial production statistics continue to come in weak, portending negatively for global growth over intermediate term.
  • US economic growth is particularly at risk, given the relationship between Asian economic activity and that of our own.
  • The list of potential negative TREND-duration economic catalysts is long and their respective probabilities are all rising, not falling. To recap:
    • Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
    • An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
    • Outright tightening of Chinese monetary policy or incremental tightening in its property market;
    • A resurgence of European sovereign debt and banking risk (that crisis is far from over);
    • A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
    • An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
    • A potential Japanese sovereign debt scare; and
    • A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).

 

With the inclusion of this morning’s large swatch of SEP PMI data from a number of key countries and economic blocs globally, our call for global growth to continue to slow remains firmly intact. If anything, calls for an outright economic contraction – both domestically and globally are now in play. While we haven’t been calling for this scenario explicitly in our Macro Team’s research notes, we have been debating the subject internally at an accelerating rate of late. Jay Van Sciver, Hedgeye’s managing director of Industrials, hosted a similar debate in print via his 9/28 research report titled, “THOUGHTS ON A RECESSION STRATEGY FOR INDUSTRIALS” (email if you’d like access to Jay and his team’s thought-provoking research).

 

Covering the Industrials space lends Jay a real-time, direct gaze upon the economic cycle – both domestically and globally; in covering Asia, I am afforded a similar boon. Asian economies – particularly the trade and production-heavy countries like Hong Kong and Singapore – tend to possess a leading-to-concurrent relationship with US economic statistics, which is both trivial and intuitive, given their place in the global production cycle. Other key stats worth noting:

 

  • Exports account for roughly 33% of Asia’s GDP in aggregate;
  • The US and EU combine for roughly a third of Asia’s export destinations;
  • 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region, increasing the combined US and EU share of Asian exports to somewhere closer to two-thirds;
  • The Asia-Pacific region is home to the world’s eight-busiest container ports and 17 of the top 25; and
  • Asian exports account for far and away the largest share of US imports (32.7%).

 

With this backdrop, we find it alarming that our amalgamated Asian Export, Import and Industrial Production series (weighted by exports, imports and GDP, respectively) continued to trend negatively in AUG.

 

On the Export front, Asian shipments declined -2.9% YoY in AUG (vs. -3.2% in JUL); on a three-month moving average basis, our indicator slowed to -1.1% YoY from +2.5% prior.  

 

ASIA’S NOT HELPING THE GROWTH BULLS - 1

 

On the Import front, Asian demand slowed to -4% YoY in AUG (vs. +1.9% in JUL) – nearly a 3yr-low. On a three-month moving average basis, Asian Imports slowed to -0.6% from +2.9% prior.

 

ASIA’S NOT HELPING THE GROWTH BULLS - 2

 

On the Production front, Asian Manufacturing Activity slowed to +2.1% YoY (vs. +3.5% in JUL) – also near a 3yr low. On a three-month moving average basis, Asian Industrial Production slowed to +3% YoY from +4%.

 

ASIA’S NOT HELPING THE GROWTH BULLS - 3

 

Looking to the slowdown in Asian Exports more closely, the following two charts highlight the aforementioned relationship between Asian and US GROWTH data. Specifically, since JAN ’07 Asian Exports YoY have registered a +0.93 concurrent correlation with US Imports YoY and a +0.86 leading (1MO) correlation with US Durable Goods New Orders YoY. The latter would imply continued weakness in US Durable Goods New Orders growth here in SEP (i.e. the AUG stink-bomb wasn’t a one-off).

 

ASIA’S NOT HELPING THE GROWTH BULLS - 4

 

ASIA’S NOT HELPING THE GROWTH BULLS - 5

 

On the domestic import front, we have shown empirically how crucial that statistic is to US Real GDP growth – especially given that PCE accounts for ~70% of the US economy (and the production of the goods component is largely outsourced to Asia) . While this is likely to be counterintuitive to traditional macroeconomic modeling (imports are a drag in standard GDP calculus), one cannot argue with the relationship detailed in the following charts:

 

ASIA’S NOT HELPING THE GROWTH BULLS - 6

 

ASIA’S NOT HELPING THE GROWTH BULLS - 7

 

For more details on this relationship and why today’s ISM Manufacturing Index beat hardly matters in the grand scheme of things, refer to the following two notes:

 

  • CHART(S) OF THE DAY – NOT ENOUGH PURCHASING POWER TO BOOST GROWTH (4/12): In the charts below, we highlight the fairly symbiotic relationship between U.S. import demand and headline economic growth, as well as what that means for the 1Q12 GDP report.
  • WE DON’T MAKE WIDGETS – TLT TRADE UPDATE (5/1): The math would suggest it is prudent to fade bullish manufacturing and export data at these prices, given their low predictive value for economic growth. Growth Slowing remains our fundamental outlook for the U.S. economy over the intermediate term.

 

Looking to Asia’s SEP Manufacturing PMI data (i.e. data that actually does matter to domestic and global GROWTH), the few series we’ve received to-date suggest continued weakness:

 

China:

  • SEP Manufacturing PMI: 49.8 from 49.2
    • Input Prices: 51 from 46.1
    • New Orders: 49.8 from 48.7
    • New Export Orders: 48.8 from 46.6
    • Employment: 48.9 from 49.1
    • Output: 49.8 from 50.9
    • Backlogs: 46.5 from 45.1
    • Imports: 47.7 from 47
  • SEP HSBC Manufacturing PMI: 47.9 from 47.6; 11th straight month of “contraction” (signified by a reading < 50)

India:

  • SEP Manufacturing PMI: flat at 52.8; a 9MO-low

Australia:

  • SEP Manufacturing PMI: 44.1 from 45.3

Taiwan:

  • SEP Manufacturing PMI: 45.6 from 46.1

Vietnam:

  • SEP Manufacturing PMI: 49.2 from 47.9

 

Keep an eye out for Singapore and Hong Kong’s Manufacturing PMI releases (OCT 2 and OCT 7, respectively) as we tend to anchor on those two countries as a barometer of global growth over all others in Asia (ex China). All told, Asia is warning us that global GROWTH continues to slow and is signaling to us incremental risks that it surprises our already-bearish expectations the downside over the intermediate term. Key TREND-duration catalysts on the negative front include:

 

  • Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
  • An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
  • Outright tightening of Chinese monetary policy or incremental tightening in its property market;
  • A resurgence of European sovereign debt and banking risk (that crisis is far from over);
  • A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
  • An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
  • A potential Japanese sovereign debt scare; and
  • A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).

 

The list is long and their respective probabilities are all rising, not falling. The interconnected nature of the expectations game and macroeconomic reflexivity are the key behavioral components to watch – particularly with regards to the latter point. But don’t just take our word for it; CAT, SPLS, FDX and IHS have all had a thing or two to say about the deteriorating global growth outlook in recent weeks.

 

Perhaps those companies are one-offs. What if they’re not? What if US corporations start to aggressively manage earnings by meaningfully slowing the pace of SG&A, R&D and CapEx spending – all at [roughly] the same time? These are the key questions we think you and your respective teams should be focused on at the current juncture, especially in the context of incessant Policies To Inflate out of the Federal Reserve.

 

For a refresher on our TREND and TAIL thoughts on global growth, please refer to the following notes:

 

    • With the inclusion of this morning’s swath of global PMI data, we continue to receive confirmation that our call for global growth to slow is proving accurate.
    • Looking ahead, we see the confluence of downside risks to growth as being both more probable and more impactful over the intermediate term.
    • Those risks include, but are not limited to: Fed policy-sponsored commodity price inflation; a renewed debt ceiling debacle in the US and a potential government shutdown in Japan – the world’s third largest single-nation economy; inadequate Fiscal Cliff resolution; and a continued deceleration in global industrial production as Chinese policymakers surprise consensus expectations for economic stimulus to the downside. Further austerity measures and/or financial market contagion is likely to continue weighing on the slope of European growth as well.
    • From our purview, the key question to debate from here is not whether policymakers are poised to deliver more [failed] stimulus policies, but rather if the reflexive and interconnected nature of the global economy starts to perpetuate an acceleration to the downside with respect to real GDP growth over the intermediate term.  
  • DEBUNKING THE STRUCTURAL BULL CASE (8/15): We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.
  • THINKING OUT LOUD RE: GLOBAL GROWTH (8/10): New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.
  • ARE US EQUITIES SUFFERING FROM COGNITIVE DISSONANCE? (8/8): We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).
  • GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD (8/3): Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.
  • CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY (7/25): We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.
  • HAVE US CORPORATE EARNINGS GONE TOO FAR? (7/20): When analyzed outside the vacuum of short-termism associated with quarterly reporting, US corporate profit margins appear particularly overstretched – from both an operational and a social perspective. This has potentially dire implications for corporate earnings growth over the long term.

 

Darius Dale

Senior Analyst


CHART DU JOUR: LV REVPAR PROJECTIONS

Now with RevPAR underperforming, Baccarat looks like the only reliable Vegas metric

 

  • The chart below shows monthly RevPAR change as reported by the Las Vegas Convention and Visitors Authority for all of Las Vegas.  We’ve also added our trend-based projections adjusted for seasonality out to June of 2013.
  • Although not shown on the chart, Q3 Strip RevPAR is likely to decline YoY and could fall Vegas-wide as well.
  • MGM management previously had indicated that Q3 was a blip but we think Q4 could be flattish and even negative.  Management seemed less constructive on the outlook last week.  RevPAR and Baccarat were the last important metrics that were reliably positive.  Looks like Baccarat will hold down the fort solo.

 

CHART DU JOUR: LV REVPAR PROJECTIONS - LVCVA


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Building Homes and Momentum

Homebuilder stocks have been on a tear over the last year, with Toll Brothers (TOL) and D.R. Horton (DHI) up +130.9% and +128.9%, respectively. It's been our contention that the group is way over its ski tips, but now there's a growing body of evidence, in the form of builder CEOs dumping stock, that seems to concur. Multiple insider sales of stock are definitely worth keeping an eye on going forward.

 

 

Building Homes and Momentum  - Bob Toll

 

Building Homes and Momentum  - Donald Tomnitz


IGT: IMPROVING 2013 EARNINGS VISIBILITY

Takeaway: IGT could be a 20%+ EPS CAGR the next few years yet it trades at only 11x

We were out in Las Vegas last week and back for some more at G2E

 

 

Like BYI, IGT looks good heading into G2E but not necessarily for the same reasons.  We’re not sure IGT is going to deliver the same content wow factor as BYI will.  It’s not that IGT management wasn’t positive on its content for the show but who isn’t?  Our takeaways deal more with earnings visibility and growth, capital allocation, and a few upcoming catalysts.

  • Earnings – Obviously, management is not going to provide their earnings expectations but a line by line review of their business yielded good commentary about unit shipments, margins, and improving yields.  With Italy, Canada, and Ohio, unit shipments should be strong in FY2013.  Operating margin will be better sequentially in the September Q.  For 2013, there are some tailwinds.  Higher volumes will help product margins.  For gaming operations, margins will be aided by the depreciation schedule and conversions.  Obviously, the significantly lower share count will be very accretive.  The leveraging of the built out international infrastructure should benefit the margins of both segments.  Finally, gaming ops yields remain a concern.  However, management thinks they will cease to decline YoY in FQ3 of 2013 and while the September and December Q’s will likely be slightly negative YoY, they should look better than the YoY in the June Q.  We remain cautious on yields and are not sold on the content yet.  Obviously, management cannot control the economy or any caps put on the WAPs, but the fact is IGT’s content has lagged.  However, investor expectations for yields are pretty low and the other business levers are leaning positive.   
  • Capital Allocation – It’s very simple.  Current leverage of around 2.5x is the minimum that they will accept.  IGT generates strong free cash flow and there really isn’t anywhere else for them to put their cash (we hope!) other than buy back shares.  I suspect that they find the current price attractive for repurchase.
  • Catalysts – We are expecting a 10k unit order from Western Canada that has been awarded but not announced for political reasons.  IGT should get a good share of this and it will impact fiscal 2013 earnings.  Potentially more near-term, we think Goldman may be done with the accelerated share repurchase program soon.  Following completion, IGT will announce the results and, as we’ve been writing about, the number of shares repurchased will be more than expected.  IGT may also announce additional shares repurchased.  Overall, we would expect that announcement to be received positively.

 

Here are some details from our notes of the meeting:

  • No ASP issue but investors still concerned about that.  ASPs should be up in FQ4.
  • Game performance has been a yield issue for IGT – economy and competition as well
  • Product margins:  sequential improvement in September Q.  Same with Gaming Ops
  • 5 out of 6 yield buckets are up YoY
  • WAPs is the one category that is down
  • Pricing competition is fierce – cap on WAP is the most common
    • IGT is doing some of that but only in defense
  • Will be a positive announcement when Goldman finishes up the repurchase
  • International performance has been “good”.  Claim international share is growing and growing faster than the US.  Europe has been a drag.  
  • Projected low double digit growth for international in fiscal 2012 and it will be high single digits
  • Pretty much done with international infrastructure so should be able to leverage that
  • Should see flow from Atlantic Lottery Corp in September Q
  • Western Canada impact mostly in June and September 2013
  • IL: probably 50/50 for sale.  30k in shipments and IGT should get 45-55% share.
  • No boxes in Italy; games on Lottomatica boxes in early calendar 2013
  • Columbus – don’t know when it will be recognized
  • Canadian orders should help margins in 2013
  • FQ2 should be the first Q to have higher yields. There is a chance it happens in FQ1
  • 2.5x leverage right now.  This is probably the minimum and “wouldn’t go below that."
  • D&A and conversions are working in favor of IGT’s game ops margins for F2013.  Play levels will be a big driver.
  • F2013 should be a very good volume year
  • December NY Analyst meeting – we view this as management’s outlook is improving 
  • Will get 2013 guidance on November 8th

Financials And The S&P 500

Year-to-date, the Financials SPDR (XLF) is outperforming the S&P 500 (SPY) quite a bit with the XLF up 21.7% compared with SPY, which is only up 15.9% during the same time period. The XLF’s success can be attributed to QE3 and Mario Draghi’s “whatever it takes” comments coming out of the ECB in Europe. 

 

Financials And The S&P 500  - xlfspy


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