The Macau Metro Monitor, October 19, 2012
MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group
Passenger traffic at Singapore's Changi Airport rose 4.84% YoY in September to 4,002,344.
This note was originally published at 8am on October 05, 2012 for Hedgeye subscribers.
“Shocks create change.”
Ex the Nobel Prize thing, Mr. Scholes and I have a few things in common. We’re both Canadian-American economists. We’re both from Northern Ontario (he’s from the home of the Timmins’ Benjamin Bears). We’re both ex-hedge fund managers!
Admittedly, Scholes’ 1998 blow up of Long-Term Capital Management was more shocking than ours at Carlyle in 2007. His team got a bailout. Ours didn’t. But we’ve both had an opportunity to learn from our mistakes.
In one of the most timely chapters of The 4% Solution, “Not All Growth Is Good”, Scholes made some of the simplest but relevant risk management points I have read in a while: “We have to encourage success (and allow for failure), because that is how we grow… we need to remain flexible… adapt to changing circumstances… let’s not let a good shock go to waste.” (page 115)
Back to the Global Macro Grind…
I was on the road this week in both Denver, Colorado and Kansas City, Missouri. I love the road. It’s where I became both an athlete and an investor. As a risk manager, the road is where I get a non-groupthink pulse in this country.
Every cab I got into in Kansas City yesterday was blaring Rush Limbaugh. Every cabbie was all fired up about the debate. No matter what your politics, Mitt Romney shocked the country yesterday. That’s what this country (and market) needed.
Bobby Valentine got a little shock of his own last night too. I’m guessing Red Sox fans probably appreciate the accountability assigned to wins, losses, and leadership. That’s the America I immigrated to in the 1990s. I think it’s the one we all love too.
Shocks create change…
Or at least, in free-market economy, they should. Could a change in overall US Growth Expectations shock the country? You tell me. If my macro model gets as much as a whiff of a +3% US GDP Growth probability that’s greater than 33%, I may have to dress up as a bull for Halloween.
And so was the Old Wall’s March 2012 consensus that the USA would see +3-4% GDP growth with all this debt and uncertainty. While I have had no problem leaning longer in the last 3 weeks, I’ve had even less of a problem selling on green.
Why? Because #EarningsSlowing is going to continue to shock the bulls in certain stocks throughout earnings season. That starts next week. So, no matter where we go on a made-up and politically massaged government number today, there we will be.
What if Romney’s Rally wasn’t a one off?
What if Romney continues to build momentum, but Earnings Season is worse than I expect?
A 3% down day? Never. It’s different this time. Right?
Right. Right. Until it isn’t, I guess. India’s stock market (the Nifty) dropped -16% this morning on “erroneous orders” and they had to halt trading for 15 minutes. Imagine that happened here? It has. So you don’t have to imagine too hard.
This market is as laden with both risk and opportunity right now as I can remember. I like to be shocked the right way. But I fully expect to be shocked, at any given moment of my centrally planned day, the wrong way.
And that’s all I can say about that.
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1770-1794, $108.41-111.89, $79.29-80.13, $1.29-1.31, 1.59-1.73%, and 1446-1466, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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“What defined a good scout? Finding out information that other people can’t.”
I was eating a delicious lobster roll on a pier in Camden, Maine yesterday and all of a sudden my iPhone went batty. The market went from straight up, to straight down. Google was “halted.”
So, I jogged back up to my hotel room, fired up my machines, ran GOOG through my quantitative screens – and there it was – someone knew something! Someone always does. They don’t always get caught.
Most people in this business are honest, hard working and intelligent enough to not take on orange jump suit risk when they buy or sell securities. But some people are so “smart” they are stupid. This isn’t baseball. “Finding out information that other people can’t”, in many cases, is illegal. That’s why we have to continuously evolve our analytical processes so that we can win more than we lose.
Back to the Global Macro Grind…
The aforementioned quotes come from another excellent chapter in Nate Silver’s The Signal And The Noise, “All I Care About is W’s and L’s.” Silver has credibility because he built (and sold) a projection system for baseball called PECOTA. The chapter’s title is a quote from the “not physically gifted” Dustin Pedroia of the Boston Red Sox – a player that PECOTA screened as a stud when scouts disagreed.
That’s where you really win in this game – when you make a bet on a stock, commodity, bond, etc. that sits outside of consensus. This doesn’t just happen. Scouting for ideas requires a fast and flexible process. If you are doing it legally, it’s a grind. “Billy Beane, the protagonist of Moneyball, sees relentless information gathering as the secret to good scouting.” (page 99)
As you build your team, machines, and processes, it actually gets harder as you achieve success. People who cut corners and cheat don’t want you to win. They’ll do whatever it takes to take you down. So, you have to be resilient. As Silver reminds us, the real lesson of Moneyball is that Beane “was very threatening to people in the game; it seemed to imply that their jobs and livelihoods were at stake.”
Here’s what our multi-factor, multi-duration, research and risk management process is telling me this morning:
I’ll stop there. These are both quantitative signals and noise (they both matter). And stopping on lucky 13 on the anniversary of 1987’s Black Monday is just me being cute. So is the storytelling that “everyone is bearish and you have to buy stocks because they are up YTD.” After a -23% down day on October 19th of 1987, the market still “closed up YTD” too.
On the research side (very different than the quantitative side of what we do, but critically complimentary), here’s what’s new this morning:
Slapping all 16 of those pieces of Hedgeye Scouting Information onto my notebook this morning doesn’t make me particularly bullish on anything other than buying US Dollars and bonds. Why pretend to be smarter than the market when the market can tell me when not to swing at outside pitches?
One by one, they’re picking off the bad guys in this business. Using steroids to juice returns is no longer cool. As Nate Silver writes at the end of chapter 3, “in the most competitive industries, like sports, the best forecasters must constantly innovate…. The key is to develop tools and habits so that you are more often looking for ideas and information in the right places.” (page 106)
It’s October. The good news is it’s a cleaner game than it was 5 years ago and they don’t have Candy or replacement umps. Batter up!
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, GOOG, and the SP500 are now $1, $111.71-113.54, $79.02-79.82, $1.29-1.31, 1.74-1.82%, $687-731, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: CMG's decline is not finished. Investors will likely assign a lower multiple to a lower cash flow estimate before this stock bottoms
We believe that CMG is a broken stock not a broken company. The stock will likely trade much, much lower over the next six months from where it is trading after hours.
Chipotle reported very disappointing 3Q12 results and, most importantly, guided to flat-to-low-single-digit comparable restaurant sales growth for FY13 versus the Street at 5%, according to Consensus Metrix.
Earnings could grow at a mid-single-digit pace versus 21% consensus as margins, while difficult to say, could contract to 20-25% depending on how food costs trend over the year. The biggest impact to the share price, we believe, could come from multiple contraction as investors decide how much they will pay for flat-to-LSD comp growth and declining margins.
Revenue is set to miss current investor expectations in FY13 as comps are projected to grow between 0% and low-single-digit. 4Q12 comps are likely to decelerate from 3Q12 as unseasonably warm weather in December 2011 helped set up a difficult compare for this quarter. Unit growth is expected to accelerate to 165-180 from a projected 165 this year.
Margins are likely to come under pressure as food inflation is expected to ramp up in 2013. Additionally, margins will likely contract significantly due to sales deleverage alone. The implications of sales slowing to the degree that management is expecting are difficult to gauge but we believe that earnings growth could be in the mid-single-digit range for FY13 versus current expectations of 21%, per Bloomberg.
The company estimates that its FY13 tax rate will be 39% and announced an additional $100mm stock buyback authorization in conjunction with today’s earnings.
3Q12 earnings missed across the board but it was the outlook that was most impactful for the stock price.
Revenue came in light as same-restaurant sales growth was just shy of expectations. New unit volume growth was negative for the second successive quarter but remain in the $1.5-1.6mm range. Management said that it was happy with its transaction trends but fewer beverage orders, possibly due in part to fewer large online orders and an increase in to-go orders. Management did not directly name Taco Bell but addressed speculation that “a competitor” was taking share, stating that 2Q and 3Q traffic trends were sequentially level and that there interpretation is that none of the rumored market share shift had occurred.
Margins narrowly exceeded expectations as cost of sales benefited from favorable avocado prices which offset rising steak, chicken, and rice prices. Labor and other operating costs benefitted from higher restaurant sales; we expect these line items to turn unfavorable in 2013 as sales growth slows.
Takeaway: In our view, a much larger rally in steel, coal, iron ore and other key Asian commodities would be need to improve $CAT's 2013 outlook.
Chinese Construction Materials Prices Rally (Back To 2009 Lows)
Jay Van Sciver, CFA
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