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Selling Cycle Peaks

This note was originally published at 8am on October 02, 2012 for Hedgeye subscribers.

“The peak in resource investment is likely to occur next year.”

-Glenn Stevens

 

Not all central bankers are like Ben Bernanke. Some of them, like the Reserve Bank of Australia’s Glenn Stevens, go both ways.

 

Last night Stevens and the RBA cut rates by 25 basis points to 3.25%. Unlike Bernanke, who hasn’t raised rates since taking over the Fed in 2006, Stevens hiked when he should have. And baby boomer retirees living Down Under on fixed incomes liked it.

 

I realize going both ways isn’t for everyone. If you get that dirty little thought out of your mind for a minute and think like hockey players – we have this little saying about grinding at both ends of the ice: ‘Backcheck, Forecheck, Paycheck.’ And we like that too.

 

Back to the Global Macro Grind

 

When Cycles Peak, you want to be selling into them; not buying them because they look “cheap.” When Cycles Peak, cheap gets cheaper. A stock like Caterpillar (CAT) is our Pamela Anderson poster for that on the short side right now.

 

Hardcore Japanese Keynesians have been trying to “smooth” economic cycles since their local Pawn Star Economist, Paul Krugman, told them to “PRINT LOTS OF MONEY” in 1997. With Japan’s Nikkei having made lower-highs for 20 years (down again last night, -14.3% since #GrowthSlowing started in March, globally), it’s a worldwide wonder how they last.

 

While stamina matters, what we’ve learned from some of these economists is that their weathered old dogmas can hang around political life for longer than we can stand them. At the same time, their population growth goes negative, and their economic incentives go dark.

 

There’s a common sense (behavioral economics) explanation for this. As Michael Cox, Director of the Center for Global Markets and Freedom at Southern Methodist University, writes in The 4% Solution:

 

“Economies grow faster when investors choose to put their money into productive assets rather than government bonds or gold… businesses won’t get started, workers won’t get hired, and the economy won’t grow.”

 

Sound familiar?

 

Of course it does. So let’s buy the S&P Futures on a rumor that Spain does more of that, requesting another bailout, based on growth, inflation, and employment results that their politicians continue to make up on the fly. Then, let’s do that in the USA, kick the can to the edge of The Cliff, then have Nancy Pelosi save us from it in the nick of election time.

 

Perfect. Now back to that money printing, metal, and mining cycle peaking…

  1. The world’s largest miners are already cutting project capex
  2. The world’s largest mining equipment companies are already guiding down from peak capex investment numbers
  3. The world’s most credible central banker, Glenn Stevens, is cutting rates because Australia is right levered to #1 and #2

It’s not just the mining cycle that’s peaking (ask sales@Hedgeye.com for Jay Van Sciver’s long-cycle notes on CAT’s issues), it’s the SP500’s Earnings Cycle that’s peaking.

 

While sell-side consensus bulls have only been wrong by 45-72% on US GDP Growth in 2012, the guys who are always bullish still say they nailed it. So let’s look at what they’re forecasting on growth and earnings from here:

  1. After cutting their numbers, the slowest revenue growth for the SP500 since 2008
  2. A magical acceleration in revenue growth for the next 12 months from here
  3. NTM earnings as far as the eye can see, with operating margins expanding 100bps, per quarter!

If corporate earnings go flat to negative for the next 2-3 quarters, the “stocks are cheap” crowd better beg Bernanke for “multiple expansion” on lower earnings, because that’s the only way stocks are going up from here.

 

I wrote an intraday risk management note titled “Buyem!” around 1430 SPX on Wednesday of last week. On this morning’s rally, do yourself a favor and sellem’ on green before Earnings Season starts next week.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, CAT, and the SP500 are now $1770-1784, $108.21-112.98, $79.46-80.35, $1.27-1.29, 1.59-1.70%, $82.13-88.05, and 1430-1451, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling Cycle Peaks - Chart of the Day

 

Selling Cycle Peaks - Virtual Portfolio


THE M3: MGM LOAN; TPI

The Macau Metro Monitor, October 16, 2012


 

MGM PLANS LOAN INCREASE: REPORT Macau Business

According to the International Finance Review Asia, MGM China is trying to increase a five-year syndicated loan for MGM Macau to US$2 billion (MOP16 billion) from US$1.5 billion.  MGM is hoping to finalize the deal later in October. 

 

TOURIST PRICE INDEX FOR THE 3RD QUARTER 2012 DSEC

Macau Tourist Price Index (TPI) for the third quarter of 2012 increased by 3.36% YoY to 120.54, attributable to rising charges for restaurant services and rising prices of clothing.  The Price Index of Accommodation decreased by 3.52% YoY.

 


Retail Sales . . . The Headline and the Reality

Takeaway: Retail sales numbers was goosed by a massive seasonal adjustment. On a sector basis, autos, home furnishings and online sales remain strong.

This morning the Department of Commerce reported that advanced monthly U.S. retail sales for September were $413 billion.  According to the release, retail sales rose +1.1% in September month-over-month and August was revised upwards to +1.2%.   On a year-over-year basis, retail sales were up +5.4% for the month and +4.8% for the quarter.  At face value, this is a strong report and the quarterly growth rate is slightly above the 20-year average of +4.6%.

 

In the year-to-date, there have been some interesting leaders and laggards in terms of retail sales.   The top three on a year-over-year basis for the first nine months of the year were: autos up +8.7%, furniture and home furnishing up +8.8%, and shopping online up +11.5%.  Meanwhile, the laggards for the first nine months of the year are department stores -0.4%, electronics and appliance stores up +0.1%, and pharmacies up +1.5%.  A clear take-away from the line items is that autos and home furnishings continue to outperform based on easier comps and online sales continue to take share from old line department store retailers.

 

A broader question is whether this retail number, which admittedly is a lagging indicator, tells us much about the trajectory of GDP growth in the U.S.  In the chart below we’ve compared real GDP versus retail sales going back more than twenty years.  The obvious takeaway, not surprisingly, is that they follow the same general trajectory.  

 

Retail Sales . . . The Headline and the Reality - retailsales.gdp

 

The caveat is that retail sales tends to be more volatile on the upside and downside.  Even at the +5.4% level for the quarter, retail sales won’t necessarily translate into an above average GDP growth rate.  As an example, retail sales were up 6.3% in Q1 2012 and real GDP was only up +2.0%.  In Q2 2012, retail sales fell off a cliff to +3.5% year-over-year growth rate and GDP only decelerated to +1.3%.

 

Further, even as there are likely some worthwhile takeaways from the line items highlighted in bold above, we would caution from reading too much into the “better than expected” headline figure.  Not dissimilar to the distortion we have noted in our work in non-farm payrolls, there also appears to be a distortion in the retail sales number when adjusted for seasonality. 

 

On a non-seasonally adjusted basis, September was actually down -$31.6 billion sequentially from August.  Now obviously there is seasonality, and we understand that.  The larger issue is that in last year’s delta between August and September on the non-seasonally adjusted numbers, September 2011 was only $19.0 billion less than August 2011.

 

We’ve summarized the differences between seasonal and non-seasonal numbers in the table below.   The key takeaway is that while the headline retail sales number was strong for September, it was the beneficiary of a very meaningful seasonal adjustment, so we would caution reading further into the number.  This, sadly, is consistent with much of the government data that has been released as of late.  

 

Retail Sales . . . The Headline and the Reality - retailsales

 

Daryl G. Jones

Director of Research

 


Early Look

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TRADE OF THE DAY: TCB

We sold TCF Financial Corporation (TCB) today at $11.20 at 10:00 AM EDT in our Real Time Alerts. For the original trade, we bought TCB at $11.10 on October 12 at 3:23 PM EDT. 

 

TRADE OF THE DAY: TCB  - image001

 

In today’s no volume market, we remained cautious holding onto long positions. On red tape, we’ll look to buy back into TCB by following the wisdom of Financials Sector Head Josh Steiner. Steiner originally wrote about TCB as a long idea on September 25:

 

“One name that should be a quiet beneficiary of this trend is TCF Financial (Ticker: TCB), which has 40% of its residential mortgage exposure in Minnesota and another 14% in Michigan. Minneapolis and Detroit are actually the second and third strongest markets in the country, respectively, on a YoY HPI basis. Moreover, the bottom tier (bottom third) of Minneapolis is up 23% YoY, which is a better proxy for TCF's exposure.“

 

Trade Of the Day is a note we put out each weekday highlighting a trade that occurs in our Real Time Alerts product. Every trade is timestamped for accuracy and full transparency. If you’re interested in getting the whole picture behind the trade and our real time ideas and alerts, check out the sign up page


WYNN: MACAU TO DRIVE A DECENT Q3

Similar to LVS, we are expecting an EBITDA and EPS beat.

 

 

We estimate that Wynn Resorts will report $1,306MM of net revenue and $376MM of EBITDA, in-line and 2% ahead of the Street, respectively.  We think the catalysts are lining up generally positive for the Macau operators although we would caution that Wynn’s share is very low month- to-date in October and while that is mostly due to hold, we would expect continued pressure on volume share both in Mass and VIP.

 

 

Q2 Detail:

 

We estimate that Wynn Macau will produce $927MM of net revenue and $291MM of EBITDA (2% above consensus)

  • Net casino revenue of $869MM
    • $606MM of net VIP win
      • Assuming 10% direct play, RC volume of $27BN
        • Down 14% YoY—the 2nd YoY decline since 2Q09; and
        • Down 11% QoQ—the 2nd consecutive QoQ decline since opening
      • 3.2% hold
      • Rebate rate of 96bps or 30% on a rev share basis
      • The property's historical hold rate since opening has been 2.94%.  If Wynn held at its historical hold rate in 3Q, net revenues and EBITDA would be $49MM and $12MM lower, respectively.
    • Mass win of $208MM, +7% YoY increase
    • Slot win of $54MM, down 15% YoY and 14% QoQ
  • $59MM of net non-gaming revenue
    • Room revenue:  $29MM
    • F&B:  $24MM
    • Retail & other:  $50MM
    • Promotional allowances:  $45MM
  • $516MM of variable expenses
    • $443MM of taxes
    • $65MM of gaming promoter expense assuming a blended commission rate 42.7%
    • Recorded non-gaming expenses of $19MM
  • Fixed expenses of $102MM, flat QoQ and down 3% YoY

 

We’re projecting $379MM of net revenue and $108MM of EBITDA for Wynn Las Vegas (8% above consensus)

  • Net casino revenue of $152MM and operating margin of $67MM
    • Table win of $146MM
      • 10% increase in table drop to $634MM
      • 23% hold rate
    • $40MM of slot win
      • 1% drop in handle to $667MM
      • 6.0% win rate
    • $33MM discounts & rebates or 18% of gross casino win
    • Casino expenses of $73MM, up 3% YoY
  • $273MM of non-gaming revenue
    • Room revenue of $91MM
      • RevPAR:  $206 (ADR: $245/ Occ: 85%)
      • CostPAR:  $85.33
    • F&B:  $123MM revenues at a 41% operating margin
    • Entertainment, retail, & other:  $59MM at a 38% operating margin
    • $46MM of promotional spending or 30% of casino revenue
  • SG&A:  $52MM, up 3% YoY

 

Other assumptions:

  • Corporate expense:  $23MM
  • D&A:  $94MM
  • Stock comp:  $6MM
  • Net interest expense:  $74MM

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH?

Takeaway: Chinese policymakers have increasing scope to stimulate, but we think they are also increasingly less likely to pursue anything meaningful.

SUMMARY BULLETS:

 

  • Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon.
  • Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.
  • Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

 

The note below expands upon a topic we discussed late last week – specifically whether or not the global economy was headed for an outright contraction over the intermediate term. Please refer to the following notes for more details:

 

 

Over the weekend, China reported a handful of key SEP economic data; we use our proprietary GROWTH/INFLATION/POLICY lens to analyze the data for you in the prose and charts below.

 

GROWTH

  • Export growth came in at +9.9% YoY, accelerating from +2.7% YoY in AUG. Shipments to the US and EU accelerated to +5.5% YoY and -10.7% YoY from +3% YoY and -12.7% YoY in AUG, respectively.
  • Import growth accelerated to +2.4% YoY from -2.6% YoY prior; anecdotally, copper imports climbed to a 4MO high and the volume of iron ore imports was the largest since JAN ’11.
  • The Trade Balance widened to $27.6B from $26.6B, pushing up FX Reserves to $3.29 trillion from $3.24 trillion.
  • M2 Money Supply growth accelerated to +14.8% YoY from +13.5% YoY in AUG – good for the fastest pace of growth since JUN ’11.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 1

 

INFLATION

  • Headline CPI slowed -10bps to +1.9% YoY. Food CPI slowed to +2.5% YoY from +3.4% YoY in AUG. Non-Food CPI accelerated to +1.7% YoY from +1.4% YoY in AUG.
  • Headline PPI slowed to -3.6% YoY from -3.5% YoY in AUG. Manufacturing PPI slowed to -4.2% YoY from -3.9% YoY in AUG.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 2

 

POLICY

On the heels of the SEP GROWTH and INFLATION data, several key Chinese policymakers were out with some interesting quotes, which, on balance, were largely intended to temper market expectations for meaningful stimulus:

 

  • PBOC Vice Governor Yi Gang: “That the most important job for the central bank is to control inflation… While this year's inflation rate is fine and may be +2.7% for the full year, longer-term threats are from agricultural costs and prices for imported raw materials, commodities and energy, which can be driven by global monetary easing… China's fiscal and monetary stimulus will be appropriate to counter the country's economic slowdown and avoid any negative fallout. The stimulus package, I think, this time will be appropriate in terms of size. When I say appropriate in terms of size, that is large enough to stabilize growth, but not too large to cause some further negative impact, or negative problems in the future."
  • PBOC Governor Zhou Xiaochuan: “Quantitative easing policies worldwide could cause inflationary risks… Central banks should consider draining excessive liquidity injected into the market and eliminate inflationary pressure in the long-term."
  • PBOC Secretary of Discipline Wang Huaqing: “The central bank is putting more emphasis on price-based tools to manage monetary policy and strengthening macro prudential rules to shield the country's financial sector from systemic risk. [The PBOC] was putting greater stress on price-based tools and stepping back from direct control on liquidity.” (i.e. reverse repos)

 

Taken in conjunction with the trend of rhetorical leanings from other bodies of Chinese government (State Council, NDRC and MOHURD), we are inclined to interpret this latest batch of commentary from the Chinese central bank as: “inflation is under control now, but key short-term and long-term risks remain; don’t expect too much from us on the stimulus front”.

 

Recently we’ve been flagging the developing trend of CNY strength (at a ~19YR high) and its divergence from the PBOC’s policy exchange rate (at least until late last week) as a sign that international investors were speculating on the PBOC having to defend the country from the inflationary impact of QE3-inspored commodity speculation, as well as poignant China-bashing on the US presidential campaign trail. Chinese interest rate markets, which have traded quite hawkishly in recent months and are no longer pricing in substantial monetary easing over the NTM, are in confirmation of this view.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 3

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 4

 

Interestingly, the NDF market continues to anticipate a fair degree of CNY and CNH weakness over the NTM, suggesting intermediate-term GROWTH concerns have not fully dissipated.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 5

 

KEY CONCLUSIONS

The aforementioned divergence between China’s rates and FX markets makes total sense to us, given the POLICY headwinds still facing China’s property market (Fixed Capital Formation = 46.2% of GDP). To the extent the September PRICE and DEMAND data comes in hot, we could be looking at another round of incremental tightening in this sector over the coming months. For our latest deep dive on China’ property market, refer to our 10/4 note titled, “HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET”.

 

Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon. Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.

 

It appears Chinese policymakers – the very architects of their current economic slowdown – are content with a growth rate trending in the range of ~7.5%, which is exactly what their current 5YR plan calls for. The days of China consistently beating GDP targets by 200-400bps are likely long gone as Chinese policymakers appear committed to truly transforming their economic growth model.

 

Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 6

 

Darius Dale

Senior Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%
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