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What's In The Dollar?

Client Talking Points

Dollars and Commodities

The US dollar is driver of many economic events, hence why it’s important to keep an eye on it at all times. If you get the dollar right, you’ll get a lot of other things right. The US dollar is now up for 8 of the last 9 weeks. If this continues, along with the S&P 500 recapturing our TAIL line of support at 1364, we’ll see food inflation come down and the commodity bubble exploding. Institutional bets on commodities cannot withstand these strong dollar gains and they will be forced to fold their hand eventually. 

 

Wheat, Soybeans and Coffee have been big losers on a week-over-week basis. Eventually you’ll see some products coming down in price at the supermarket but it will take time. This is also a positive for stocks like Starbucks (SBUX), Walmart (WMT) and others who are reliant on the price of commodities. Net long contracts at the CFTC continue to drop; it’s easy to see what’s happening in commodity-world right now and it ain’t pretty.

 

Asset Allocation

CASH 61% US EQUITIES 6%
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

“Haldane: ‘As UK banks increased leverage, they managed to maintain constant capital ratios by seeking out assets with lower risk weights’” -@edwardnh

QUOTE OF THE DAY

“It is by the goodness of God that in our country we have those three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.” -Mark Twain

STAT OF THE DAY

Bad debt at Spanish banks hit new highs as debts that are mostly related to home buyers and property developers reached 182 billion euros or 10.7% of bank assets.


MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET

Takeaway: We're watching Euribor-OIS, the TED Spread, and high yield. Bank and sovereign CDS remains generally benign, for now.

Key Takeaways

 

*European Bank CDS: The Eurozone officially moved into recession last week. Preliminary Q3 GDP contracted by 0.1% QoQ following a 0.2% contraction in Q2. In response, EU bank swaps widened WoW on concern around deteriorating fundamentals in Europe. Despite Draghi's pledge to do "Whatever It Takes", it seems that risk is creeping back into the markets. Along with swaps widening at the bank and sovereign levels, both Euribor-OIS and the TED spread have stopped their march downward and are now slowly pushing higher. For reference, This is the third consecutive week that the Euribor-OIS has risen WoW.   

 

* Sovereign CDS: Sovereign swaps followed (or led?) bank swaps wider in Europe last week for 4 out of the 6 EU sovereign reference entities. The notable exceptions were Germany and Ireland, where swaps tightened nominally. French sovereign (and bank) swaps were noticeably wider WoW. 

 

* Rates on High Yield corporate debt in the U.S. rose 26 bps week-over-week to 7.03% vs 6.77% in the prior week. This is the fourth consecutive week that rates have moved higher. Rates are now 50 bps higher than where they stood a month ago.

 

* Our Macro team’s Quantitative Setup in the XLF shows that it is broken from an intermediate term TREND duration. On a short-term TRADE basis there is 3.5% upside to TRADE resistance and 3.1% downside to TRADE support.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 7 of 12 unchanged  

• Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 5 of 12 unchanged  

• Long-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Summary

 

1. U.S. Financial CDS – U.S. large cap financials were more or less flat WoW, but remain significantly wider MoM. MS, GS and BAC are wider by 32 bps, 28 bps and 22 bps, respectively. Overall, default swaps widened for 21 out of 27 U.S. financials. MBIA widened by 415 bps WoW on the news that BofA was buying MBIA debt in an effort to block the separation of the the muni business from the structured finance business.  

  

Widened the most WoW: MBI, AIG, LNC

Tightened the most WoW: BAC, C, MTG

Widened the most MoM: MBI, AIG, CB

Widened the least/ tightened the most WoW: GNW, UNM, MTG

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - American

 

2. European Financial CDS – French banks continue to widen on the news that Europe is officially back in recession. BNP and Credit Agricole were wider WoW, bringing their MoM changes to +44 and +35 bps.  Soc Gen was flat WoW, but is up a similar +42 bps MoM. Italian banks are also notably wider MoM.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Europe

 

3. Asian Financial CDS Japanese brokers continue to tighten. Daiwa, Matsui and Nomura tightened by 14, 10 and 6 bps, respectively bringing their MoM change to -32 bps, -47 bps and -63 bps. The Japanese banks have been stable over the same time period. Chinese banks were slightly wider WoW, but are more or less flat MoM. Indian banks also widened this past week. 

 

Chinese and Indian banks continued to widen across the board week-over-week.  In contrast, Japanese banks were mostly tighter with swaps falling for 4 out of 6 Japanese reference entities.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Asia

 

4. Sovereign CDS –  Portuguese sovereign default swaps widened by 46 bps WoW to 641 bps, an increase of 8%. However, outside of Portugal it was a fairly benign week for sovereign swaps. Italy was flat. Spain widened by 8 bps. France widened by 7 bps. Ireland, Japan, the U.S. and Germany all moved by 3 bps or less.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Sov Table

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Sov1

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 26.1 bps last week, ending the week at 7.03% versus 6.77% the prior week.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 11.6 points to 1722 points last week. Leveraged loans are off ~1% in the past month.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - LLI

 

7. TED Spread Monitor – The TED spread rose 1.7 bps points last week, ending the week at 23.3 bps this week versus last week’s print of 21.6 bps. This gauge of U.S. interbank risk has risen roughly 3 bps in the last month.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.5 points, ending the week at -2.08 versus -3.6 the prior week.  

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by less than a basis point to 12 bps. This series has been moving essentially sideways for the last month. 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: MIXED SIGNALS FROM THE CREDIT MARKET - Euibor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – In a positive sign for the stability of the EU Banking System, the ECB Liquidity Deposits continued to decline in the latest week. 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: MIXED SIGNALS FROM THE CREDIT MARKET - ecb

 

11. Markit MCDX Index Monitor – Last week spreads tightened by 1.4 bps, ending the week at 133 bps versus 134 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: MIXED SIGNALS FROM THE CREDIT MARKET - MCDX

 

12. Chinese Steel Steel prices in China fell 0.5% last week, or 18 yuan/ton, to 3720 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~3%. The broader 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: MIXED SIGNALS FROM THE CREDIT MARKET - CHIS

 

13. 2-10 Spread The 2-10 spread tightened 1 bp to 134 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows that it is broken from an intermediate term TREND duration. On a short-term TRADE basis there is 3.5% upside to TRADE resistance and 3.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS FROM THE CREDIT MARKET - 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: MIXED SIGNALS FROM THE CREDIT MARKET - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 


THE M3: S'PORE HOTELS; JAI ALAI; SJM COTAI; OKADA

The Macau Metro Monitor, November 19, 2012

 

 

SINGAPORE HOTELS FEEL THE SQUEEZE AS CORPORATE BUDGETS TIGHTEN Reuters 

The best may be over for Singapore's booming hotel market as tightening corporate budgets and bank job cuts leave more luxury rooms empty.  "We will see a slight drop in occupancy rate (in Singapore) mainly due to new supply that is about to come on board in 2013," said Jonas Ogren, Asia director at hotel data provider STR Global, based in Singapore.  According to CBRE, the supply of four- and five-star hotel rooms in Singapore is expected to increase by 17.4% from 2011 to 2014. 

 

The city-state's high-end hotels have been hit harder than moderately priced rooms, which suggests that weaker corporate travel rather than tourism is weighing on demand. 

 

JAI ALAI TO UNDERGO REVAMP Macau Business

SJM said it has reached an agreement to continue leasing the Jai Alai Palace complex, where it operates a self-promoted casino, owned by Angela Leong On Kei.  The gaming operator now plans to revamp the run-down property.  

 

The new contract, which has a duration of three years, starts on January 2014.  SJM Holdings will pay monthly rental of MOP10.3 million (US$.1.3 million) for the property.  CEO Ambrose So said that the redevelopment project would cost up to MOP700 million.  He added the project would start “soon” and be completed in 2013.

 

SJM EXPECTS COTAI PROJECT TO COST OVER MOP20B Macau Daily Times

SJM Cotai is set to have as high as 70% non-gaming business.  SJM said it’s planning to have 700 gaming tables in Cotai but CEO Ambrose So stressed that the number is what the company initially applied for, but the government is yet to give an answer on the precise figure. 

 

US INVESTIGATING OKADA'S PHILIPPINES PAYMENT Macau Business

U.S. gaming regulators are looking at a payment made by a subsidiary of Kazuo Okada’s Universal Entertainment Corp to a former consultant for the Philippine gaming authority, the Philippine Amusement and Gaming Corporation (Pagcor).  An investigative report from Reuters says a Universal subsidiary made a US$5 million (MOP40 million) payment in May 2010 to a firm wholly-owned by Rodolfo Soriano, a close associate of Efraim Genuino, who headed Pagcor at the time of the events.


Universal has already filed a suit against an ex-employee saying he acted without proper authorization in channelling the US$5 million to Mr Soriano. The payment is part of US$40 million in transfers by Universal that are being looked at by the U.S. regulators.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


We Build

“Together we build.”

-Henry Kaiser

 

In 1941, “the experts predicted it would take Bedford, McCoon, and their teams six months to build up enough solid ground before they could begin work in the shipyard. It took Kaiser’s men exactly 3 weeks.”

 

“There was a race … between the Kaiser draftsmen and the field people as to whether we could build it first or the engineers and architects could draw it first.” (Freedom’s Forge, page 131)

 

That was during WWII. We are in a very different kind of war now – a globally interconnected economic one that is dominated by compromised politicians and theoretical Keynesian draftsmen – but it is a war we free-market libertarians can still win. We, the field people, need to lock arms and build a new foundation for global growth. There’s only 1 big one that we have not tried.

 

Back to the Global Macro Grind

 

The difference between us and them is that we believe in a Strong Dollar providing the foundation for a Strong America (1 and 1) and a stronger global consumption economy at large.

 

They have always believed that a weak US currency would drive “strong exports.” We believe that a weak currency drives global food, energy, and cost of goods inflation – that, in turn, slows real (inflation adjusted) global economic growth.

 

With the US Dollar up for 8 of the last 9 weeks, if the SP500 can re-capture my long-term TAIL line of 1364, together, we can build upon 2 very bullish economic developments:

 

1.       Food Inflation is deflating

2.       Institutional Commodity gambling is imploding

 

With the US Dollar up +0.2% last week to $81.26, the Euro continued to weaken and the Japanese Yen got slammed for a -2.2% wk-over-wk decline. Japan is channeling its inner-Krugman (1997 “Print Lots of Money) by attempting to do what the USA did at the Bernanke Top (print money, juice stocks, and eventually fizzle out at another 20yr lower-high in the Nikkei).

 

Back to Food Deflation last week (and from Bernanke’s Top, 2 months ago):

  1. Wheat = down another -5.5% week-over-week (-7% in the last 2 months)
  2. Soy = down another -4.7% week-over-week (-20% in the last 2 months)
  3. Coffee = down another -1.7% week-over-week (-19% in the last 2 months)

If you eat carbs and drink coffee every morning, that’s good. And it’s really good for the likes of our Top 2 Global Consumption long ideas right now (Starbucks, SBUX and Walmart, WMT) too.

 

Forget about the USA’s politicized class warfare thing. When you deflate food prices, you save money for at least 99% of the world’s 7,053,206,438 people. With taxes going up on the some-of-us, I like tax cuts like that for the all-of-us.

 

If you’ve been living large long Oil futures contracts since 2009, you may not like how this story ends. If you’ve been shorting food and energy since September, you are smiling.

 

Here’s a look at how Institutional Commodity Gambling (CFTC futures/options contracts) is imploding:

  1. Net long contracts (bets on commodity inflation) = down another -17% last wk to 772,512 contracts
  2. Bullish Commodity bets are now crashing, down -42% from the Bernanke Top (SEP14, 2012)
  3. Crude Oil contracts = down another -18% last week (despite Israel/Gaza) to 100,021
  4. Farm Goods = down -22% last week to 415,498 contracts
  5. Corn (biggest component of the Farm Goods basket) = down -14% wk-over-wk to 202,853 contracts
  6. Copper joined Cotton as the 2nd major commodity to move into a net SHORT position

Since I won large in Vegas last week ($736 bucks!), I’ll bet my whole lot that at least 1/2 of institutional investors reading this note will call what I just outlined as a bullish contrarian indicator. On the margin (immediate-term TRADE duration) that’s probably right.

 

But, as you move out from intermediate (3 months or more) to longer term durations (TREND and TAIL), averaging down into a wildly volatile asset class like commodities can put perma-commodity bulls out of business, fast. So be careful.

 

From an asset allocation perspective, the most asymmetric long-term risk to all of Global Macro continues to be Strong Dollar. If it manifests itself into the mid-to-high $80 levels (US Dollar Index), you haven’t seen anything in terms of commodity deflation yet.

 

While it may sound perverse to call deflation bullish, it’s not. Letting free-market prices clear without fiscal and/or monetary price supports is the only big idea we have not tried for the last decade.

 

I think it’s the only way We Build sustainable consumption growth in both the US (71% of GDP) and global economy. Get the Dollar right, you’ll get long-term growth right. If you want to know how I get bullish on the economy, look no further than that.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, 106.12-109.98, $80.87-81.45, $1.26-1.28, 1.49-1.64%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

We Build - Chart of the Day

 

We Build - Virtual Portfolio


CASINOS SEEN THROUGH THE REAL ESTATE LENS

Takeaway: ASCA is the most undervalued casino operator under the new valuation paradigm

How the PENN deal could impact other casino companies

 

 

Our view here is that the industry has and should receive a step up in valuation.  Maybe valuation does matter.  Our company specific commentary is below:

  • ASCA – Slam dunk in our opinion.  If there is one stock that should see a permanent valuation bump, it’s ASCA.  See our note from Friday. “RE-VALUING ASCA”.  Even after the big move, the stock is still trading at a whopping 18% FCF yield. 
  • BYD – If there was ever a stock that could use a valuation bump, it’s BYD.  A perennial underperformer, BYD is actually a very cheap stock if you factor in the significant unused real estate.  PENN’s deal should shed light on BYD’s 87 Strip acres that are non-producing.  However, it seems unlikely BYD could complete a PENN type transaction due mainly to prohibitively high leverage of over 6x.  Moreover, BYD has deferred CapEX and continues to spend well below normal on maintenance CapEX.  That is unsustainable. 
  • ISLE – At 6x leverage, it is unlikely ISLE could pull something off similar to PENN anytime soon.  However, they are in harvest mode, so debt pay down will occur fairly quickly.  We estimate that by the end of 2014, leverage will fall to about 4.5x and at that time they could consider a REIT spin-off.
  • LVS – Highly unlikely to pursue a PENN type transaction for a few reasons.  First, LVS maintains a deep backlog of potential developments that just doesn’t make sense within a REIT format.  In addition to Lot 3 in Macau, other Asian countries are likely to expand or open up to casinos and LVS is probably the most desirous operator because of its MICE focus.  Second, LVS generates most of its profits in international jurisdictions with significantly lower tax rates than in the US.  In fact, LVS pays almost nothing in corporate taxes in Macau.  The international exposure bites into the tax efficiency benefit of the REIT structure.  Finally, we don’t believe Sheldon would want to give up any control which he would have to do in a property company. 
    • However, the new focus on real estate should be a positive for LVS’s valuation.  LVS owns malls in Macau and Singapore that are worth a lot more to a separate real estate focused entity than the market is valuing them within LVS.  We would expect investors to begin to re-value LVS (again) using current cap rates on the Mall portfolio.  More on this later.
  • MGM – Just too much darn leverage.  The REIT structure probably cannot be pursued by this company.  However, with its low cost of capital, the new PENN PropCo should become a more aggressive buyer of casino assets.  We know MGM is a willing seller and PENN has been interested in The Mirage in the past.  So MGM could benefit from the PENN transaction.
  • PNK – We think PNK is a great candidate for a REIT split.  While leverage is a little high at over 5x, they should be able to pay down debt fairly quickly with the opening of Baton Rouge behind them.  In fact, the PNK situation is very similar to ASCA’s with one potentially major difference.  We wonder if this management team still views the company as a development company.  They’ve made a push in Vietnam and may be pursuing other growth opportunities.  We would rate the likelihood of PNK converting to the PENN structure to be lower than ASCA's.
  • WYNN – While leverage is low, we think the WYNN is an unlikely candidate for many of the same reasons as LVS.
  • CZR - Similar to MGM, CZR is way too leveraged in its current form for this to really move the needle for them (as an equity holder at least).  They can sell a few assets at higher multiples but their leverage is over 10x

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 80.64%
  • SHORT SIGNALS 78.61%
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