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Energy Capex Growth

Compared to other industries that are part of the S&P 500, energy takes the lead for the amount of dollars spent in terms of capital expenditures. In 2012, energy companies in the S&P500 will spend 38% of all S&P500 capex; this compares to just 12% in 1999 and 2000.  Oilfield service and equipment companies are the least capital intensive and include names like Dril-Quip (DRQ), National Oilwell Varco (NOV) and Core Laboratories (CLB). 

 

While we expect a slight tick down in capex for the energy sector in 2013, between 1996 and 2012, nominal capex for the S&P500 increased 108%; nominal capex for the energy sector increased 472% over the same time period.  Energy accounted for 61% of total S&P500 capex growth from ’96 – ‘12, while utilities was second at 20% of the growth.

 

Energy Capex Growth - 1


Cheat 'Em

Client Talking Points

Three-Card Monte

The market can sometimes feel like  a guy with a cardboard table, hidden in an alleyway with some playing cards and the odds stacked against you. Yesterday, the US equity market rallied on “Greek” news and then promptly did an about-face and proceeded to sink lower along with European and Chinese equity markets. A lot of investors probably feel cheated, especially those who though that China had “totally bottomed.” Remember: cheap can always get cheaper. Stocks can always go lower. #GrowthSlowing continues in full force.

Asset Allocation

CASH 58% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 18%

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

“‘China has bottomed’ bulls, very quiet” -@KeithMcCullough

QUOTE OF THE DAY

“Bore, n.: A person who talks when you wish him to listen.” -Ambrose Bierce

STAT OF THE DAY

ConAgra to Buy Ralcorp Holdings for $5 billion.



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Looking Backward

"The farther backward you can look, the farther forward you are likely to see."

-Churchill

 

If you think it’s more progressive to look forward than backward, we should take a walk in the bush together on Northern Ontario right before the black bears go into hibernation. My Dad and I recommend keeping your head on a swivel.

 

Looking back at sovereign debt cycles (Reinhart & Rogoff go back to the year 1500) helps us look forward at how ridiculous expectations are that Greece is going to be fixed.

 

I couldn’t make this up if I tried this morning, but this is what Greece Prime Minister, Antonis Samaras, had to say about the latest Greek debt deal: “A new day begins for all Greeks!”

 

Back to the Global Macro Grind

 

A new day in storytelling it is. World Equity markets initially rallied on the Greek “news”, then reversed, and quickly. Chinese stocks closed down -1.3% making fresh new lows, Greek stocks went from +1% to -1.5%, and US Equity Futures went from green to red.

 

If you’ve never played a shell game, this is how it works: now you see it, now you don’t. Here’s an abbreviated version of the Greek debt deal: €40B in debt is evaporated, then they get a fresh €44B in bailout debt within the next few months (€34.4 billion paid out in Dec and €9.3 billion in Q1 linked to MoU milestones agreed by Troika).

 

Great. Right? Yeah, just great. For those of you still looking backwards as you attempt to proactively risk manage forward, you can see what all this Greek noise has added up to over the years in Josefine Allain’s Chart of The Day:

  1. Greek stocks -1.5% on the news to 831 on the Athens Stock Exchange Index
  2. Greek stocks -7% from their lower long-term highs in October (894 on the Athex)
  3. Greek stocks -49% from the lower highs they established 2 years ago (November 2011)

To be fair, 2 years ago requires a decent look back. And, admittedly, I forget what the bailout rumors on Greece were 3 years ago. All I know is that whatever the rumors were, they were lies.

 

Martin Luther King, Jr. said “a lie cannot live.” And, if you have the risk management mandate to look forward far enough, that’s generally an accurate mean reversion assumption to make.

 

But, if you have an investment mandate to chase weekly and monthly performance bogeys, you’re probably ok to suspend disbelief and pretend the lies are realities. I read my kids fairy tales at bedtime too.

 

Reality: if you bought Greece (Athex Index) or Apple (AAPL) in November 2011 or September of 2012, you need to be up +96% and 19%, respectively, to get back to break-even. That’s just math.

 

Ultimately, betting on more of what has not worked (more debt financed government spending) is destroying the world’s long-term equity capital. That’s why I am wedded to looking back at LOWER-HIGHS in long-term prices. While this is a relatively new phenomenon to those who got plugged buying American or Greek stocks in 2007-2008, it’s been happening in Japan for 20 years.

 

Back to China (and Global #GrowthSlowing)…

 

Evidently those who were suggesting “China has bottomed” a few months ago were a little off on the timing. Last night’s -1.3% smack-down in the Shanghai Composite puts China 90 basis points away from going back into crash mode.

 

A crash, by our risk managed definition, is a price that’s made lower-highs on the order of 20% or more. Try it at home with your own money. I can promise you it will feel like what I just called it.

 

The Shanghai Composite is down -19.1% since #GrowthSlowing started, globally, in March of 2012. While it’s fun for passive Captain Stock Picker to talk about what the Dow is “up year-to-date”, real money that’s managed from a global macro perspective has been seeing lower-highs in prices in pretty much everything that matters since the March-April 2012 highs.

 

Here’s one really simple 3-factor Hedgeye Global Macro Growth Model to beam up onto your globally interconnected screens:

  1. CHINA (Shanghai Composite in a Bearish Formation = bearish TRADE, TREND, and TAIL)
  2. COPPER (Bearish Formation as well, down -11% from its Q112 lower-high)
  3. BONDS (US Treasuries in a Bullish Formation as Bond Yields are in a Bearish Formation)

Now, if my #OldWall competition wants to tell me that China, Copper, and Bond Yields are flashing a “back to growth” global economy, I’m happy to debate them live anywhere, anytime. Looking Backward, they’ll be forewarned that the Thunder Bay Bear will hold them accountable for missing the 2012 US and Global Growth slowdown just like they did in 2008.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.91-111.48, $3.43-3.56, $80.05-80.61, $1.28-1.30, 1.54-1.68%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Looking Backward - Athens2

 

Looking Backward - vp


THE M3: AFFECTED SLOT PARLOURS; UNEMPLOYMENT

The Macau Metro Monitor, November 27, 2012

 

 

FIVE SLOT PARLOURS TO BE RELOCATED Macau Business

Five slot parlours must either relocate or shut down under the new slot machine rules that took effect today.  Among the slot parlours affected, are the Yat Yuen Canidrome Slot Lounge and the Treasure Hunt Slot Lounge, both operated by SJM. The Mocha Lan Kwai Fong, Mocha Marina Plaza and Mocha Hotel Taipa Best Western clubs, operated by Mocha Clubs (MPEL), are the other three slot parlours impacted by the new rules.

 

The new rules stipulate that slot parlours can only be located inside five-star hotels, in non-residential buildings located within a 500-metre range of a casino or within a resort “not integrated in a densely populated area”.  The non-compliant slot parlours have one year to make the needed changes.  Angela Leong On Kei, executive director of SJM said that the gaming operator is studying new locations for its affected slot parlours.

 

EMPLOYMENT SURVEY FOR AUGUST-OCTOBER 2012 DSEC

The unemployment rate for August-October 2012 declined further to 1.9%, down by 0.1% point from the previous period (July-September).  In August-October 2012, total labor force was 353,300 and the labor force participation rate stood at 72.3%. Total employment reached 346,600, an increase of 2,400 over the previous period. 


KEYNESIAN CLIFF-HANGING

This note was originally published at 8am on November 13, 2012 for Hedgeye subscribers.

“When you get to the end of your rope, tie a knot and hang on.”

-Franklin D. Roosevelt

 

Much ado has been made about the Fiscal Cliff in recent weeks and rightfully so. As we outlined in the Keynesian Cliff section of our 4Q12 Macro Themes presentation, it’s only the biggest fiscal retrenchment in US history; the latest report from the CBO suggests a complete plunge over the cliff would have an estimated impact of $503 billion and $684 billion in FY13 and FY14, respectively.

 

Moving along, the aforementioned “plunge” comes at a time where underlying real GDP growth has crept to a near stall speed, slowing to an adjusted +0.9-1.3% QoQ SAAR rate in 3Q12, as we detailed in our 10/26 note titled: “BREAKING DOWN THE US GDP REPORT: THE ODDS OF A RECESSION JUST INCREASED”.

 

Needless to say, going over the cliff – proverbial or actual – could actually tilt the US economy into recession into and through the event, joining what are highly likely to be confirmed recessions in the European Union (confirmation pending the 3Q GROWTH data) and Japan (confirmation pending the 4Q GROWTH data).

 

While it may be trivial to suggest that having three of the world’s four largest economies mired in recession at the same time is not a bullish catalyst, we’ll gladly do so at this time. Someone has to take ownership of flagging Global Macro risks before they happen.

 

This we know: corporate management teams and sell-side analysts will almost-universally blame any negative guidance and/or estimate revisions on the Fiscal Cliff in the coming weeks. Even if we don’t actually traverse the cliff in the US, the sell-side will simply find some other “exogenous” catalyst for everyone to attribute further bottom-up weakness to. They’ll have to; the latest survey data suggests hedge funds are still very exposed to the long side of equities.

 

For now at least, few beyond the Hedgeye Macro client base will point to mean reversion within asymmetrically stretched corporate profit margins, broad-based corporate cost cutting and/or the continued popping of Bubble #3 (commodities and mining CapEx) as the likely culprits.

 

Keynesian Cliff Update

It’s worth stressing that the US, Japan and China are each dealing with some version of their own Keynesian Cliff, as each country’s government debt-fueled GROWTH model faces political headwinds to varying degrees.

 

Below, we summarize where each country is in its respective process (email us if you’d like to engage in a deeper discussion regarding anything you see below):

  • US: This has morphed into nothing short of a Manic Media gong show despite the event just getting kicked off post last Tuesday’s election. The news flow in recent days has centered on the willingness to compromise on tax reform emanating from both President Obama and House Speaker John Boehner. Specifically, there seems to be a newfound willingness to extend the Bush-era tax cuts for the wealthy in exchange for “broadening the base” by tightening up loopholes and deductions. Outspoken fringe parties within both camps continue to be polarized on possible solutions, with unions largely in support of Obama playing “hardball” and not caving in to Republican demands and Senate Budget Committee chairwoman Patty Murray saying that the Democrats would agree to go over the cliff before agreeing on an unfair deal. Senate Minority Leader Mitch McConnell was recently out reaffirming the GOP mandate to “not raise taxes” and his lack of trust in the Obama administration, while some 60-80 Republican representatives have allegedly told Boehner that they would not support him on any backdoor deal struck with the White House without their consent.
  • Japan: In recent weeks, Japan’s Finance Minister Koriki Jojima has repeatedly reminded investors that the Japanese sovereign will run out of money in late NOV, rendering it unable to pay its bills without the ability to issue more debt – an ability that had been previously delayed by partisan protest of the FY12 deficit financing bill. This morning, we received some directionally positive news on this front as Japan’s two main political opposition parties (the LDP and New Komeito Party) agreed to approve the deficit financing legislation in exchange for the ruling DPJ agreeing to call snap elections by late DEC or early JAN – after the previous impasse slowed public expenditures enough to begin causing increasing disruptions in funding at the regional and local levels. It’s worth noting that Japan’s Real GDP GROWTH slowed in 3Q to -3.5% QoQ SAAR from 0.3% in 2Qwithout public consumption being a net drag on the economy in the quarter! Any further delays to ratifying the legislation would surely have equated to Japan reporting its second recession in the last two years when the 4Q12 GROWTH figures are published. It still might.
  • China: We continue to think the Chinese economy is in the later stages of a bottoming process, with GROWTH slowing for the better part of the last three years to levels more consistent with the revised political objectives of those atop the Chinese Communist Party leadership. Over the past ten years, China’s investment-fueled GROWTH model – a model perpetuated by GDP targets at the State, provincial and municipal levels – has accounted for 23.6% of global real GDP growth vs. only 9.8% in the ten years preceding the Hu-Wen administration. Heightening concerns about macroeconomic sustainability and general asset quality throughout the purposefully-repressed Chinese financial system amid broad-based vertical and horizontal malinvestment have compelled Chinese officials to focus intently on heading off excesses and rebalancing their economy – gradually scaling down the Keynesian Cliff in the process. That process appears to be nearing completion from a GROWTH rate perspective, but we continue to warn that it’s too early to put capital to work largely on the premise the Chinese economy has bottomed. In fact, since a large swath of pundits and analysts decided to lock arms and agree to agree that China bottomed on OCT 18, the Shanghai Composite has fallen another -3.9% and remains in a Bearish Formation on our quantitative factoring.

All told, we will continue to let the market tell us how to risk manage the confluence of the aforementioned POLICY scenarios.

 

Domestically speaking, a confirmed break out above the S&P 500’s 1,419 TREND line would be a signal to us that the “can” is likely to be sufficiently kicked down the road in a way that will not upset the bond market from a sovereign credit risk perspective.

 

A confirmed break down below the S&P 500’s TAIL line of 1,364 suggests Obama and Boehner are likely unable to lead their respective Parties to a grand compromise and/or they were able to and the bond market does not like the solution.

 

It’s worth noting that a domestic sovereign credit risk scare is not at all out of the band of probable outcomes – especially given the likely JAN ‘13 timing of the debt ceiling breach. That would put a summer of 2011-type scenario in play in our opinion. Per the latest commentary from credit ratings agency Fitch:

 

“Washington needs to put in place a credible deficit-reduction plan to underpin the economic recovery and confidence in the full faith and credit of the US… As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner, as well as securing agreement on credible deficit reduction, would likely result in a rating downgrade in 2013.”

 

Best of luck out there handicapping the world’s increasingly compromised political event risk.

 

Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper and the SP500 are now, 1712-1714, 105.32-109.69, 80.56-80.44, 1.26-1.28, 1.58-1.71%, 3.41-3.49 and 1364-1403,  respectively.

 

Darius Dale

Senior Analyst

 

KEYNESIAN CLIFF-HANGING - Chart of the Day

 

KEYNESIAN CLIFF-HANGING - Virtual Portfolio


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