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To Growth

“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

-Ronald Reagan


Former Hedgeye Intern Brennan Turner recently started a company called FarmLead.  He has an ambitious goal which is to create the largest online grain trading platform in the recently deregulated Canadian wheat market.  Every day Turner sends out a morning recap of the action in the global grain markets from his office in the north Canadian outpost of Saskatoon.  Like a true entrepreneur he is focused on growth, and so ends each morning commentary with the salutation: “To growth”.


In recent weeks, we’ve had some government economic data reported in the United States that has suggested growth may be on its way back.  I’m not a conspiracy theorist, but under closer examination the data is probably more suspect than reliable.  The specific examples I’m thinking of include:

  • Advanced monthly retail sales – According to preliminary estimates, retail sales were up +5.4% for the month.  This is meaningfully above the 20-year average and an acceleration over the prior month.  The caveat is that this is a seasonally adjusted number.  In fact, the seasonal adjustment was $22 billion.  For comparison, the seasonal adjustment in 2012 was $12 billion.  So the biggest growth component of retail sales was the Commerce Department’s seasonal adjustment which was up a staggering 83% year-over-year.
  • Jobless claims – Last week jobless claims appeared to show meaningful improvement and fell 28,000 to 339,000.  At face value, this is a meaningful week-over-week improvement.  The caveat of this number was of course that one “large” state was excluded, which diminishes the improvement.
  • Jobs report – Jack Welch probably made the most noise around the jobs report two weeks ago when he tweeted, “Unbelievable jobs numbers … these Chicago guys will do anything … can’t debate so change numbers.”  The reality of the jobs report is that the headline number of 7.8% was a misleading statistic, although it likely wasn’t conjured up in the Obama campaign office.  The key reason that the unemployment rate is dropping is because labor force participation is literally at 20-year low of 64%.

Not surprisingly there was some furor over Welch’s tweet and as a result he wrote an op-ed in the Wall Street Journal the next day clarifying his statement.  A point that is worth highlighting from his op-ed is the following:


“Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.”


Similar to the retail sales numbers, the seasonality reported in the jobs numbers this year appears to be seeing an accelerated adjustment.  Once again, this isn’t a conspiracy theory statement, but rather a red flag as it relates to reading too much into some of the recently reported U.S. economic data.  Unlike one of our competitors who took up their Q3 GDP estimate yesterday on the back of growth in seasonality adjustments, we are not there yet.


Tonight we are likely to get a lot of discussion about future economic growth in the United States as President Obama meets Governor Romney tonight for the second Presidential debate.   The lead in quote from Ronald Reagan was not an attempt at a political statement, but rather an allusion to tonight in which it is likely both candidates refer to predecessors that they hope to emulate to stimulate growth.


According to the average of the most recent six major national polls, this race is basically a dead heat at 47.3 to 47.3.  Some of the polls, like the most recent Washington Post Poll that has Obama up three points, still appear to have some Democratic skew (Democratic ID of 35% versus Republican ID of 26%), but in general this race is definitely in the category of too close to call.  Tonight, Obama has a chance to re-establish himself, but even so the damage is likely done from the first debate and we will likely stay tight into election-day.


As is typical for modern Presidential politics, this race is once again going to come down to the battleground states.  On this front, we will be joined next week on October 24th by Professor Ken Bickers from the University of Colorado, who has done a historical analysis of state-by-state economic indicators as a method of predicting Electoral College results.  His work has predicted every Presidential election accurately since 1980.  The dial-in will be circulated to our Macro clients in advance, but if you aren’t a macro client and are interested in gaining access to this call please email .


Flipping to Europe briefly, Spain has obviously been in the news over the last couple days.  It appears that the Spaniards will be requesting some form of aid, which is increasingly likely to be a credit line as opposed to a full blown bailout.  The Spanish 10-year, while still below 6.0%, did accelerate over night from 5.72% to 5.83%.  As always, though, the root of Europe’s issues are in expectations as much as anything and as it relates to potential Spanish intervention an unnamed Spanish Finance Ministry official said the following:


“He suggested that the day following a request, interest rates on Spanish debt could fall by 150 bps, while the Spanish stock market could surge 15%.”


We’d probably take the other side of that.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.67-116.29, $79.24-80.06, $1.28-1.30, 1.64-1.72%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


To Growth - Chart of the Day


To Growth - Virtual Portfolio


Takeaway: LVS could generate significantly more revenues if it could match the market average VIP revenue per table

  • Despite the big VIP push starting last year, LVS trails the market average in table productivity by a wide margin
  • Mass revenue per table is also below the market average but only by a small margin
  • Assuming market average revenue per table, LVS could be generating approximately $200 million more in EBITDA annually.  We expect the company to continue to improve its productivity in Mass and especially VIP throughout 2013.



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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,



Keith R. McCullough
Chief Executive Officer


Selling Cycle Peaks - Chart of the Day


Selling Cycle Peaks - Virtual Portfolio


The Macau Metro Monitor, October 16, 2012



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. 



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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