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The Big Slowdown

Client Talking Points

The Big Slowdown

The global slowdown of growth and earnings is entering its next phase after last week’s selloff in the the US (down -2.5%), China (down -2.3%) and elsewhere. As corporations continue to miss and guide lower on earnings, we’re beginning to realize that it’s looking a lot like 2007 all over again and that’s not very pleasant for the mind. We went through the tech bubble in 2001, the housing/credit bubble in 2007 and now we’re experiencing the commodity bubble caused by our friends at the Federal Reserve. This is something that can’t be avoided no matter what is laid out in the monstrosity known as the Dodd-Frank Act. Keep your eyes focused on the US dollar in particular because if you get the dollar right, you get a lot of other things right.

Asset Allocation

CASH 58% US EQUITIES 9%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

“The next Presidential election will materially be held inside the Democrat primary. Time for Rubio and others to become Democrats.” -@daytrend

QUOTE OF THE DAY

“People that are really very weird can get into sensitive positions and have a tremendous impact on history.” -Dan Quayle

STAT OF THE DAY

Leucadia buying Jefferies for $17.60 a share in stock deal worth roughly $3.7 billion.


MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY

Takeaway: The election, fiscal cliff and renewed EU concerns triggered sharp selloffs in Financials. Credit markets were dragged lower as well.

Key Takeaways

 

* U.S and EU bank swaps were wider last week, on the heels of the American presidential elections, mounting fears about the looming fiscal cliff in the United States, and renewed concerns regarding Greek austerity. In the United States the money center banks and the large brokers saw that most widening. In Europe, bank swaps were wider, led by Italy, Spain, and France.

 

* At the sovereign level, Spain, Italy, Portugal, and France saw their swaps widen notably last week. Meanwhile, U.S. and German swaps both widened by 2 bps. Swaps in Ireland and Japan tightened, dropping by 5 bps and 7 bps, respectively.

 

* Rates on high yield corporate debt rose 11 bps week-over-week. For reference, this is the third consecutive week that high yield rates have been up or flat.

 

* The Euribor-OIS widened by 1 bp. This is the second consecutive week of WoW widening.

 

* The 2-10 spread tightened last week, its third consecutive week of tightening. 

 

XLF Macro Quantitative Setup – Our Macro team’s quantitative setup on the XLF shows 2.3% upside to TRADE resistance and 0.1% downside to TREND support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Neutral / 2 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged

 • Long-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Summary

 

1. American Financial CDS –  Big banks all saw their default probabilities increase following last week's election. Morgan Stanley widened by the most (23 bps), reflecting not just the election outcome but also renewed EU fears. Following Greece's budget vote last night, we'd expect MS swaps to cool off a bit. Overall, wwaps widened for 24 out of 27 domestic financial institutions.

Widened the most WoW: MTG, MS, WFC

Tightened the most WoW: GNW, PRU, MET

Widened the most MoM: CB, AIG, COF

Tightened the most WoW: GNW, PRU, JPM

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - American

 

2. European Financial CDS – European financials followed Euro sovereigns, widening wee-over-week. Swiss banks were wider by 6 bps, while Spanish and Italian banks widened by 10-32 bps. French banks widened noticeably, while German banks widened slightly.

 

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Europe

 

3. Asian Financial CDS –  Default swaps in Asia were uneventful last week. There were small increases in Chinese banks (1-3 bps), and 3-4 bps increases at Indian banks. Japanese financials were mixed with Nomura the largest mover at +14 bps. 

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Asia

 

4. Sovereign CDS – European sovereign swaps were wider again last week on renewed Greece concerns. The largest movers were Spain and Portugal, widening 32 bps and 67 bps, respectively. With the passing of the Greek budget last night, we would expect to see some cooling off in the short-term.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Sov Table2

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Sov 1

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 10.7 bps last week, ending the week at 6.77% versus 6.67% the prior week.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.3 points last week, ending at 1734.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - LLI

 

7. TED Spread Monitor – The TED spread fell less than 1 bp last week, ending at 21.6 bps versus 21.9 bps last week.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - TED2

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.3 points, ending the week at -3.59 versus -4.9 the prior week.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - JOC

 

9. Euribor-OIS spread –  The Euribor-OIS spread widened by 1 bp to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – No change in the trajectory here - overnight deposits continue to shrink. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - ECb

 

11. Markit MCDX Index Monitor –  Last week spreads widened 3 bps, ending at 135 bps versus 132 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - MCDX

 

12. Chinese Steel – Steel prices in China fell 0.3% last week, or 12 yuan/ton, to 3738 yuan/ton. Since their lows on Sep 7, Chinese construction steel prices have rebounded ~10.3%. But the downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese construction market.. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - CHIS2

 

13. 2-10 Spread – Last week the 2-10 spread tightened 9 bps to 135 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - 2 10 Spread

 

14. XLF Macro Quantitative Setup – More upside than downside in the XLF in the short-term. Our Macro team’s quantitative setup in the XLF shows 2.3% upside to TRADE resistance and 0.1% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - XLF

 

Margin Debt - September: +1.12 standard deviations 

NYSE Margin debt rose to $315 billion in September from $287 billion in August. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through September. 

 

MONDAY MORNING RISK MONITOR: THE ELECTION, THE CLIFF AND THE AUSTERITY - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky


HEDGEYE RETAIL: Restoration Hardware IPO (RH) Call

Takeaway: We will be hosting a call today on Restoration Hardware (RH) at 11am EST highlighting our view on the recent IPO.

The Hedgeye Retail Team led by Brian McGough and Casey Flavin, will be releasing a black book on Restoration Hardware (RH) and hosting a Conference Call at 11:00am EST on Monday, November 12th. The team will dissect this recent IPO, outlining both the highlights and low lights objectively. This presentation will provide great company specific insight and on how the IPO could impact the rest of the sector.    


Key Topics Will Include: 

  • Is this a story worth doing the work on today? Short answer is 'Yes'
  • Detailed critique of drivers of demand (demographics, mix shift, square footage, E-commerce, catalogue) and cost levers
  • Competitive landscape
  • Expense leverage

Please contact if you would like to trial our research or obtain access to this conference call and receive a copy of the presentation. Current subscribers of our Retail vertical will receive the dial-in information automatically.    

 

 

HEDGEYE RETAIL: Restoration Hardware IPO (RH) Call  - RH Post Cover

 

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Finish Strong

“It wasn’t where he started, but where he’d finished, that mattered.”

-Arthur Herman, Freedom’s Forge

 

To be clear, in building the vision for My Business, I’m not finished – I’m just getting started. No matter what your political and/or economic view this morning, trust in yourself, family, and firm is what is going to help you build something that lasts.

 

Especially in this profession, where many are hyper-focused on what they get paid today, we can all learn a lot from the aforementioned quote in Freedom’s Forge about Bill Knudsen. That’s how he thought about the opportunity to compete with Ford. That’s how I think about competing with the Old Wall.

 

“What were you getting paid at Ford?” “Fifty thousand dollars a year,” came the answer. So Sloan started him on February 23, 1922 at six thousand dollars a year. Knudsen didn’t care.” (page 28) In 1922, Bill Knudsen took over “GM’s lowest-priced, but also least profitable, division.” It was called Chevrolet.

 

Back to the Global Macro Grind

 

With Global Equity markets down hard last week (USA -2.5%, China -2.3%, Europe -1.7%), all of a sudden November of 2007 doesn’t seem so far away. Remember, that’s when the global corporate revenue and #EarningsSlowing cycle started last time. In November of 2007, the SP500 was down -4.4%. It wasn’t all about “the cliff” then – it isn’t now, either.

 

I’m not suggesting the Fiscal Cliff doesn’t matter this time – I’m simply reminding you that:

 

A)     It’s not new and should have been proactively prepared for (it wasn’t)  

B)      It’s the outcome of a much larger causal factor that the country is begging for more of (Keynesian Policy)

C)      It’s not happening in a vacuum; both Japan and Europe are going off #KeynesianCliffs of their own

 

This is why we warned our clients of the #KeynesianCliff (Hedgeye Macro Theme #3) before it became the perma-bull marketers latest crutch. This is also why we’ll remind you that Japan reporting a -3.5% QoQ SAAR GDP for Q3 of 2012 (Nikkei down -15.4% since #GrowthSlowing started, globally, in March) is how it ends. Japanese stocks have been making lower-highs for 20 years.

 

Deficit spending and money printing has a very causal relationship with long-term #GrowthSlowing. Kicking this can down the road for the sake of a “market pop” is the dumbest thing Americans can hope for right now. We need to start anew by taking the pain, so that we our kids and theirs can finish strong. That’s what matters.

 

What doesn’t matter to the 97% of people who don’t get paid by them is creating asset bubbles that inflate, then pop. To review, there have been 3 Major Policy Bubbles perpetuated by Greenspan/Bernanke in the last 15 years:

  1. Tech
  2. Housing
  3. Commodities

Bubble#3 (our 2nd Hedgeye Macro Theme for Q412) remains Commodities. Looking at last week’s CFTC (Commodities and Futures Exchange) data, here’s what that looks like in real-time:

  1. CFTC net long contracts down -11% wk-over-wk (biggest weekly drop since June) to 931,048 futures/options contracts
  2. CFTC net long contracts down -31% from The Bernanke Top we’ve been focused since mid-September 2012
  3. Copper contracts down -70% last week to 2,077!

Now the Doctor (Copper) has been signaling #GrowthSlowing in our multi-factor, multi-duration, risk management model since February of 2012 (see Chart of The Day). Seeing copper implode since then is not new – but it doesn’t mean it has stopped.

 

On that score, last week’s commodity price moves highlight what I think summarizes the overall Q412 beta environment for stocks and commodities in particular:

  1. Copper = down another -1.1% wk-over-wk to $3.44/lb (bearish on all 3 of our core durations: TRADE/TREND/TAIL)
  2. Gold = up +3.4% wk-over-wk to $1730/oz (recapturing intermediate-term TREND support of $1702/oz)

To me, that’s demand slowing (Copper falling) versus long-term growth fear (Gold rising). Don’t forget that people choosing to invest in Gold are explicitly making a decision to invest in a relatively unproductive asset instead of high-growth companies like Hedgeye.

 

These people who are running around like chickens with their heads cut off saying the stock market falling is all about “the cliff” should also be reminded that Gold was down for 4 consecutive weeks into the US Election.  

 

Is Obama’s win bullish for Gold? Is it bearish for growth? Ask the bond market. If there’s so much “credit risk” now associated with “the cliff”, why are US Treasury Yields falling (and not rising like they did in Europe)?

 

If you know the answers to all these questions, good – because I don’t. All I know is that after blaming Bush for where he started, President Obama has a wide open opportunity to change growth expectations in this country. Where he finishes matters too.

 

My immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1, $105.22-109.72, $80.39-81.28, $1.26-1.28, 1.60-1.71%, $3.41-3.50, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Finish Strong - Chart of the Day

 

Finish Strong - Virtual Portfolio


SOUTH KOREA: THE NEXT ASIAN EXPANSION OPPORTUNITY

Takeaway: LVS, WYNN, and Genting would be leading contenders to invest in a potentially high IRR market

A summary of our expert call on the prospects of expanded gaming in South Korea

 

 

Last week, we hosted a call with Steve Park, Senior consultant at Gaming Asia-Pacific, to discuss the prospects for gaming expansion in South Korea.  Mr. Park is heavily involved in the process of drafting the gaming expansion platform for the government.  His bio is below. 

 

According to Mr. Park, South Korea has a 50/50 probability of passing gaming expansion legislation.  At this point, the platform is likely to be modeled after Singapore only with more licenses.  Investment returns would be very high in our opinion.  We think LVS, WYNN, and GENTING would be leading candidates to capitalize on this gaming expansion.  In particular, LVS seems well-situated since it is a premier IR operator with a major focus on the MICE business in Korea.  MGM, MPEL, and GALAXY would also be interested parties but they are lower-tiered operators.  On the gaming equipment side, we think Aristocrat, IGT, and SHFL stand to benefit from expanded gaming in South Korea.

 

 

Here is a summary of Mr. Park's comments on South Korea:

 

Background

  • Korea Tourism Organization (KTO) is in charge of tourism policy and reports to the Ministry of Sports and Tourism.
  • Back in 2009-2010, KTO looked at ways to increase inbound tourism, particularly the MICE business.  They studied the Macau and Singapore models and reached out to international gaming operators regarding interest in new Korean casinos that would allow local play.  The feedback was positive from LVS, WYNN, and MGM.  
  • Currently, there are 16 casinos with only one casino (Kangwon) that allows locals to gamble.

Gaming bill/Timeline

  • Bill details
    • Minimum investment of $2 billion (similar to S’pore standards).
    • $500 million needed for a foreigner’s casino license.  Recently, the Ministry made an ordinance change to allow for more flexibility.  The investment requirement to apply for a license has been reduced from $500 million to $250 million—provided the candidate meet a B investment grade rating and submit a plan for something other than a casino or hotel (e.g. auditorium, retail).
    • VIP and mass gaming taxes will be similar.  Currently, GGR tax is 10% in South Korea.
    • Prevention/treatment standards would be similar to Nevada standards.
    • IR job creation:  10,000 gaming employees (30,000-35,000 indirect jobs) per IR project.
    • South Korea/Singapore model differences:  will not limit the number of licenses; will not need to have 50% of investment before granting of license.
    • South Korea/Singapore model similarities:  US$ 70-80 (daily entrance fee), US$ 800-900 (annual entrance fee).
    • An IR could be located in the midpoint between Incheon airport and Seoul Metropolitan area.  Another IR could be located near the Busan area.
    • 24 legislative members comprise of the IR committee.  There are about 300 legislative members in total.
  • Current timeline 
    • Hope to submit legislation in April/May and have Congress review it by the end of 2013.
    • Selection/licensing process will take six months.
    • Earliest bill passage date:  Oct/Nov 2013—IR construction could start in summer 2014.
    • Presidential election:  Dec 19; new President will be in power Feb 2013.
      • Presidential candidates: will not support gambling publicly but will say they want to expand MICE industry via IR.
      • However, Mr. Park believes all candidates would be in favor of expanded gaming.
  •   Keep an eye on the agenda that comes out in February from the transition committee for any mention of IRs.

Obstacles

  • Negative public opinion on gambling
    • This is the biggest hurdle.
    • 70-80% of public has not been inside the casino.
    • Public needs to be informed about gaming.
  • Kangwon, who has a monopoly on local gaming, will oppose 
    • Foreign casino opposition:  7-luck (owned by Grand Korea Leisure Co)— also a government company, owned by KTO

Other

  • Kangwon regulation
    • Political schedule dictates how Kangwon is regulated.  Every year, Korea has a regular congressional oversight period some time between end of September to end of October.  Any consideration on additional gaming supply or other changes to the facility would happen after the oversight period.  Hence, the additional tables may be approved in February or early Spring 2013.
  • 8 City proposal:  not optimistic on this project; too many logistical complications
  • Okada:  has hurt its image in South Korea with the WYNN debacle; furthermore, it is applying for two projects simultaneously - 1) Incheon City and 2) Incheon Free Economic Zone (IFEZ) Authority—two different jurisdictions.
  • CZR:  looking at Midan City - northeast part of Yeongjong Island which is 10 minutes away from the Incheon International Airport.  City infrastructure has been completed but Midan City is trying to find an operator for a foreigners-only casino license.  CZR is interested in the project in that they wouldn’t have to contribute to the construction costs.
  • Other Asia opportunities:  Taiwan expected to submit a bill in 2013.  It’s still uncertain in Japan.  Vietnam has said no to local gaming. 

 

Steve Park Bio

Steve Park is a partner and senior consultant at Gaming Asia-Pacific, a firm providing business and regulatory consulting for international clients wishing to enter the South Korean and Japanese markets. Serving as a consultant to the Korea Tourism Organization Advisory Board, Park advises the integrated resorts committee on political and media affairs. He also provides advice and assistance to the New Frontier Party to develop the government party’s legislative agenda and strategies. Previously as a policy advisor in the National Assembly, Park served in the Public Administration & Security Committee reviewing tourism development projects and spending by all 16 regional governments such as Incheon’s Yeongjeong Sky City and Jeju’s tourist-only domestic casino resort. He also served as a campaign consultant and reporter in the U.S for the Republican Party and the Washington Times. Park holds a bachelor's degree in international studies and a graduate degree in government from Johns Hopkins University.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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