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What Keith's Reading


Our Struggle

This note was originally published at 8am on January 02, 2013 for Hedgeye subscribers.

“Our support goes to those who struggle to gain those rights or keep them.”

-Franklin D. Roosevelt

 

Our struggle in 2013 will be no different than the struggle we’ve endured for the last 5 years. Our struggle for economic freedom is intensely personal. Both parties have violated us. That’s why it feels as real as gaining or keeping our natural rights has ever felt.

 

In his State of the Union Address of 1941, Franklin D. Roosevelt united America and those fighting socialism/fascism in his “Four Freedoms” speech. On page 258 of The Last Lion, Paul Reid reminded me of this epic moment in American leadership:

 

“We Americans are vitally concerned in your defense of freedom… This is our purpose and our pledge… We look forward to a world founded upon essential human freedoms:

 

  1. “The first is our freedom of speech and expression…”
  2. “The second is freedom of every person to worship God in his own way…”
  3. “The third is the freedom from want…”
  4. “The fourth is freedom from fear…”

 

Obviously this is not WWII. But it isn’t the time to abandon our struggle for our freedoms and liberties either. Living in fear of a cliff that politicians create and perpetuate is no way to live. With America’s balance sheet under ideological attack, I submit these principles to you for your deliberation and debate. On this #KeynesianCliff of deficits and debt, you are the last line of defense.

 

Back to the Global Macro Grind

 

To kick-off 2013, I need to do a better job communicating our process. For those of you new to it, there are two big parts: fundamental RESEARCH and quantitative RISK MANAGEMENT. Over the years, I’ve made enough mistakes to learn that I need to respect both. They aren’t always signaling the same thing. When they are, I have more conviction.

 

Quantitatively speaking, our read-through on the US stock market is bullish provided that the SP500 is trading above our intermediate-term TREND line of 1419. Our call on bonds (provided that 1.70% TREND support on the 10yr holds), is now bearish. That’s why I am starting 2013 with a 0% asset allocation to Fixed Income.

 

From a fundamental research perspective, for over a month now our Globally Interconnected Macro Model has been signaling an important shift from global growth slowing to #GrowthStabilizing. On the margin, that matters.

 

So does rising volatility associated with the US government being the market’s daily catalyst. The VIX went from up +22.4% last week to down -20.7% in a day (Monday)! If you nailed both sides of those moves, congrats. No one said our daily struggle was easy.

 

As a reminder, our long-term thesis on Big Government Intervention is that:

 

  1. It amplifies market volatility
  2. It shortens economic cycles

 

Point #1 is trivial. Point #2 less so. On that score, I think I confuse some people when I say growth, globally, has gone from slowing to stabilizing. The point in and of itself isn’t confusing as much as how I risk manage the market on that is.

 

Remember, the economy is not the stock market. So you can easily see a market rip as growth slows inasmuch as you can see it collapse as growth stabilizes. There’s no rule in markets that states they have to make sense. So keep moving out there.

 

#GrowthStabilizing RESEARCH and RISK MANAGEMENT signals of the day:

 

  1. British Manufacturing PMI for DEC shot back above the expansion line (50) to 51.4 vs 49.1 in NOV
  2. India’s Manufacturing PMI hit a 6-month high of 54.7 in DEC vs 53.7 NOV
  3. Italy’s PMI finally stopped collapsing, sequentially, registering an uptick to 46.7 DEC vs 45.1 NOV
  4. Indonesian inflation (CPI) joined that of South Korea’s, slowing in DEC to 4.3%
  5. South Korea’s KOSPI shot to higher-highs overnight (vs SEP highs), +1.7% to 2031 (bullish TREND)
  6. Hong Kong’s Hang Seng Index ripped another higher-high (vs SEP), up +2.9%
  7. Germany’s DAX is taking out its recent highs, +1.7% this morning (bullish TREND)
  8. Both Brazilian and Canadian stocks markets closed at bullish TRADE and TREND levels at yr end
  9. CRB Commodities Index remains bearish TAIL (306 resistance) – good for consumption growth
  10. UST 10yr Treasury Yields are flying higher this morn to 1.82% after holding 1.70% TREND support

 

Of course, there’s always bearish growth data somewhere (German Manufacturing PMI slowed sequentially to 46.0 DEC vs 46.8 in NOV and Brent Oil is inflating back above its TAIL resistance of $111.58/barrel). But that’s not enough to knock me off this #GrowthStabilizing puck.

 

From these implied multiple expectations, the most bearish fundamental research factor affecting US Equity and Bond markets (on both a relative and absolute basis) compared to China and Germany is crystal clear: Congress.

 

And unless Our Struggle ends in victory versus these Keynesian quacks who get paid to lever your country up with debt and deficit spending, this short-term economic growth pop will be as short-lived as every one that’s come before it since 2008.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1637-1689, $109.99-111.89, $79.21-79.98, $1.31-1.33, 1.73-1.85%, and 1419-1453, respectively.

 

Best of luck out there in 2013,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our Struggle - Chart of the Day

 

Our Struggle - Virtual Portfolio



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STRIP CHANNEL CHECKS

The December print should be a big headline but underlying metrics remain soft.

 

 

November Strip revenues as reported last week were ugly, due in part to a difficult slot hold comparison but also soft volumes.  For December, the hold comparison is very easy – 5.8% in December 2011 versus a normal 7.4%.  Table hold was also a little low last year.  If hold was normal in December 2012, total GGR could be up double digits easily which could spark a favorable reaction from the investment community.  However, we’re not sure the underlying volume metrics are improving much.

 

So that’s the math.  Anecdotally, we’re hearing gaming demand levels remain sluggish in Las Vegas.  When Vegas is busy due to conferences or events, it’s the lower margin, non-gaming elements that are benefitting.

 

One bright spot might be a transaction.  The scuttlebutt in Vegas is that The Mirage might be back on the block and Phil Ruffin may again be interested.  But that might not be the only transaction involving MGM MIRAGE.  We continue to think MGM should outbid PNK for ASCA.  They could easily pay more than $30 and make it very accretive, value added, and de-leveraging.  Time will tell.


BUYING SINGAPORE ON WEAKNESS

Takeaway: Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing.

SUMMARY CONCLUSIONS:

 

  • Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing.
  • From a bottom-up country level, investing in Singapore here is not without its risks. Far and away the most notable risk at the current juncture is the recent round of macroprudential measures levied upon the Singaporean property market.
  • That being said, however, we expect the ever-prudent Singapore economy to eventually overcome any near-term GROWTH headwinds associated with this latest round of measures and continue its cyclical recovery throughout the intermediate term.
  • While it’s rarely ever the right call to be contrarian solely for contrarian’s sake, we are comfortable standing on the other side of consensus here and are comfortable buying Singapore on a pullback(s), provided our TREND line holds. 
  • A breakdown there would  be an explicit signal that the aforementioned measures are indeed a bit more cyclically punitive than we are currently anticipating in the construct of Singapore benefiting from a broader global economic recovery over the intermediate term.

 

Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing. To the extent you weren’t able to join today’s conference call, please click HERE to gain access to the replay materials and podcast. Also, please refer to our 1/9 note titled: “GLOBAL GROWTH STABILIZES SOME MORE” for our latest number-crunching of global GROWTH trends.

 

In line with our previous work on the country, we typically start off our analysis of Singapore (and Hong Kong) from a top-down perspective at the international level. That’s because:

 

  • At 209% and 226% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy Asian economies (China: 31.4%; South Korea: 56.2%; Japan: 15.2%; Thailand: 76.9%; and Taiwan: 66.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 6.5x and 7.1x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by a full 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities.

 

BUYING SINGAPORE ON WEAKNESS - 1

 

From a bottom-up country level, investing in Singapore here is not without its risks. Far and away the most notable risk at the current juncture is the recent round of macroprudential measures levied upon the Singaporean property market. To recap, the following measures were announced on Friday:

 

  • A +500-700bps increase in the stamp duty for all homebuyers (first home for permanent residents and second home for native Singaporeans), which is to be layered on top of previous levies;
  • Tighter loan-to-value standards for buyers seeking a second mortgage, in which the cash down payment will rise +1,500bps to 25%;
  • A cap on bank loan repayments for public housing to 30% of the buyer’s monthly income;
  • Restrictions barring permanent residents from subletting their entire units if purchased from the government;
  • Income limits and various other restrictions, such as limiting the size of executive condominiums to 160 square meters; and
  • A new 15% stamp duty for sellers of industrial properties if the transaction takes place within a year of the purchase date.

 

It should be noted that this is the third round of macroprudential measures aimed at Singapore's property market. Prior to last week’s measures, Singaporean policymakers barred interest-only loans for some housing projects, stopped allowing developers to absorb interest payments, imposed an additional tax of 10% on foreigners and companies buying properties and imposed limitations on further development of “shoebox” apartments. This past OCT, they also restricted mortgage maturities to 35 years and required lower LTV ratios for loans exceeding 30 years in duration.

 

While prices are indeed up +59% off the 2Q09 lows, we are not of the view that the Singaporean property market is in bubble territory. Fueled by record low domestic interest rates and an extremely tight labor market, the Singaporean housing market, at least, is underpinned by real demand that is unlikely to be structurally eroded by the recent tightening measures. To this end, home sales in Singapore climbed to an annual record of 22,699 units in 2012 according to Urban Redevelopment Authority data.

 

BUYING SINGAPORE ON WEAKNESS - 2

 

We cannot, however, reach the same conclusion with regards to Singapore’s industrial property market, where prices have doubled over the past three years. The aforementioned 15% stamp duty on all sales within one year will most likely limit further speculation within this segment of Singaporean property development.

 

On the announcement of the latest measures, Singapore’s Deputy Prime Minister Tharman Shanmugaratnam issued the following statement:

 

“The reality we face is that interest rates are extraordinarily low, globally and in Singapore and continue to add fuel to our property market. We have to take this further round of measures now to check recent market trends and avoid a more serious correction in prices further down the road.”

 

My, do we love POLICY sobriety @Hedgeye. While certainly not as exciting as investing in German equities during the Weimar Republic hyperinflation saga, we like to invest in countries where capital has a history of being both respected and returned to investors (i.e. we don’t like allocating capital to pending blow-ups and/or currency debauchers).

 

Accordingly, expect the ever-prudent Singapore economy to eventually overcome any near-term GROWTH headwinds associated with this latest round of measures and continue its cyclical recovery throughout the intermediate term.

 

BUYING SINGAPORE ON WEAKNESS - SINGAPORE

 

Moreover, any economic resilience and/or outright strength will likely come in the face of growing bearish sentiment among sell-side consensus (our paraphrased notes from Bloomberg, following Friday’s announcement):

 

  • Singapore bank earnings to be off 3-5% – JPM
  • A potential 10-20% decline in mortgage origination – DBS
  • Sales volumes may drop 30% - Barclays
  • Mass market property prices to fall 10% in 2013 – Kim Eng

 

The Merrill Lynch Singapore Property Equities has plunged -6% in a straight line since these measures were announced. At a point, the bad news becomes priced in. While that point may be a bit further in the future for select Singaporean financials (the MSCI Singapore Financials Index is down -2.1% over the past month vs. a +0.8% gain for the broader MSCI Singapore Index), we think the Singaporean equity market overall is poised to outperform when those headwinds do in fact get fully priced into the associated stocks.

 

While it’s rarely ever the right call to be contrarian solely for contrarian’s sake, we are comfortable standing on the other side of consensus here and are comfortable buying Singapore on a pullback(s), provided our TREND line holds. A breakdown there would  be an explicit signal that the aforementioned measures are indeed a bit more cyclically punitive than we are currently anticipating in the construct of Singapore benefiting from a broader global economic recovery over the intermediate term.

 

BUYING SINGAPORE ON WEAKNESS - 4

 

Moreover, INFLATION should continue to slow from a 25-month low here in 1H13 on the strength of previously hawkish POLICY (via SGD appreciation) out of the MAS and subdued inflation expectations should help underpin broader market multiples in the near term (via a reduced threat of monetary POLICY tightening).

 

BUYING SINGAPORE ON WEAKNESS - 5

 

Darius Dale

Senior Analyst



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