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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 8, 2013


As we look at today's setup for the S&P 500, the range is 24 points or 1.15% downside to 1492 and 0.44% upside to 1516. 

                                                                                                                              

SECTOR AND GLOBAL PERFORMANCE


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EQUITY SENTIMENT:


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CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.69 from 1.71
  • VIX  closed at 13.5 1 day percent change of 0.67%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6am: ECB announces 3-yr LTRO repayment
  • 8:30am: Trade Balance, Dec., est. -$46b (prior -$48.7b)
  • 10am: Wholesale Inventories, Dec., est. 0.4%  (prior 0.6%)
  • 11am: Fed to purchase $1b-$1.5b debt in 2017-2042 sector
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Defense Dept. has ordered Army, Navy, Air Force, Marines to submit specific spending cuts they’ll make if across-the-board reductions take effect on March 1 under sequestration
    • CFTC holds closed meeting on surveillance matters. 10am
    • House Fin Svc Cmte holds hearing on FHA actuarial report, w/ Commissioner Carol Galante, 10am
    • Oral arguments at U.S. Court of Appeals for the Federal Circuit in Washington in CLS Bank Intl case that may clarify rules for when software is eligible for patent protection, 10am

WHAT TO WATCH

  • Trade deficit in U.S. probably narrowed as exports climbed
  • EU leaders prepare for budget cuts in bow to Cameron’s demand for thrift
  • China’s exports and imports rose more than estiamted in Jan.
  • German exports climbed in Dec. to propel year to record $1.5t
  • Charter to buy Cablevision’s Optimum West for $1.63b
  • S&P may face lawsuits by more states, Connecticut’s Jepsen says
  • Peugeot takes $5.5b writedown as sagging auto market saps assets
  • Boeing seen forced to alter 787 battery after U.S. NTSB findings
  • McDonald’s Jan. global comp sales may fall 1.1%
  • Warner Music agrees to buy Coldplay label for $764m
  • N.Y,, New England prepare for blizzard; 2,000 flights canceled
  • State of the Union, G-20, Cisco, Grammys: Wk Ahead Feb. 9-16

EARNINGS:

    • Soufun (SFUN) 5:45am, $0.56
    • Carlisle (CSL) 6am, $0.78
    • Corporate Office Properties Trust (OFC) 6am, $0.48
    • Sirona Dental Systems (SIRO) 6:30am, $0.84
    • Laboratory of America Holdings (LH) 6:45am, $1.62
    • AOL (AOL) 7am, $0.53
    • Apollo Global Management (APO) 7am, $0.93
    • Buckeye Partners (BPL) 7am, $0.82
    • Entergy (ETR) 7am, $1.71
    • Moody’s (MCO) 7am, $0.71
    • CBOE Holdings (CBOE) 7:30am, $0.42
    • Louisiana-Pacific (LPX) 8am, $0.21
    • American Axle (AXL) 8am, $0.06
    • Beacon Roofing (BECN) 8am, $0.40
    • Brookfield Infrastructure (BIP) 8am, $0.32
    • TC Pipelines (TCP) 8am, $0.63
    • IGM Financial (IGM CN) 9:39am, C$0.73
    • Emera (EMA CN) 10:20am, C$0.41
    • Cameco (CCO CN) Post-Mkt, C$0.41

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Arabica Coffee Premium Over Robusta Falls to Lowest Since 2009
  • Wheat Slump Seen Extending on Growth in Stockpiles: Commodities
  • Diesel Slumps in Europe as Output Capacity Soars: Energy Markets
  • Platinum Trades Near 16-Month High as Rally May Spur Selling
  • Brent Crude Advances to Nine-Month High, Boosts Premium to WTI
  • Copper Rises as Chinese Trade Tops Estimates and Car Sales Jump
  • Robusta Coffee Climbs to Four-Month High on Vietnam; Sugar Gains
  • Soybeans Head for Fifth Weekly Gain as U.S. Exports Cut Supplies
  • Brazil Prepares to Surprise Drillers This Time With Gas: Energy
  • TransCanada Says East Route Eases Oil Discount: Corporate Canada
  • Deutsche Bank Said to Fire 10 Traders as Banks Retrench
  • Chocolatier Petra Seen Targeted in Asia’s Deal Spree: Real M&A
  • Rebar Rises for Fourth Week as China’s Exports Beat Forecasts
  • Oil May Fall as Technical Tools Signal Pullback, Survey Shows

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CURRENCIES

 

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EUROPEAN MARKETS

 

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ASIAN MARKETS

 

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MIDDLE EAST


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The Hedgeye Macro Team

 

 

 

 



THE M3: CNY BOOKINGS; MGM: JUNKET REGULATION; SANDS CHINA PAY RAISE; MGM/BORGATA; SOLAIRE MANILA

The Macau Metro Monitor, February 8, 2013

 

 

MACAU FULLY-BOOKED Macau Daily Times, Macau Business

Gamblers booked into Macau resorts over the Lunar New Year can already count themselves lucky as accommodations are sold out, boosting revenue for operators.  Seventeen major casino hotels in the world’s biggest gambling hub were fully-booked for Feb. 12-14 for the weeklong Chinese holiday that begins on Feb. 10.  "Demand for hotel rooms is exceptionally strong with 100% occupancy," said Yoko Ku, a spokeswoman at Galaxy Entertainment. 

 

Total visitor arrivals from February 5 to February 7 reached over 316,000, up by 6.2% compared with the same period last year, according to the Tourist Office. Close to 246,000 of those visitors came from the mainland, an increase of 13%.

 

Last year during the Lunar New Year holidays, a five-star hotel room cost, on average, MOP2,400 (US$300) per night. This year, data submitted by the industry to the Tourist Office shows that the average room rate from February 11 to February 14 will stand at above MOP2,700.

 

STRICTER JUNKET RULES BRING NO HARM TO CASINOS: MGM CEO Macau Business

MGM China CEO Grant Bowie says that stricter regulation on junket operators, as announced by the government earlier this week, would not have any impact on VIP gaming revenue.  On the contrary, Bowie says it will ensure gamblers’ safety.

 

Commenting on the report by The Times that Beijing planned to crack down on triad-linked junket operators in the mainland, Bowie said he believed that Macau’s gaming industry would continue to get all the necessary support from the central and local governments.

 

SANDS CHINA ANNOUNCES PAY RISE Macau Business

Sands China announced it would increase the salaries of its employees by 5% starting next month. Additionally, the company said it is paying a bonus on February 14 to its staff, as a result of the company’s strong financial performance in 2012.  The gaming operator has over 25,000 employees.

 

NEW JERSEY AGENCY TO REVIEW FINDING AGAINST MGM WSJ

New Jersey regulators are set to reconsider a decision that had forced MGM to put its stake in an Atlantic City casino up for sale.  MGM planned Thursday to make a formal application for regulators to reconsider the Borgata investment.  The company planned to argue that the arrangement with Ms. Ho should be less troubling to regulators now because her influence and the size of her stake in the Macau business has decreased since the earlier investigation.


MGM is applying for licenses to build casinos in Maryland and Massachusetts and would like to remove a stain from its record ahead of those proceedings.  It also would like to retain its stake in the Borgata.

 

FIRST MANILA BAY CASINO TO OPEN NEXT MONTH Macau Business

Boasting 500 hotel rooms, the US$1.2-billion (MOP9.6 billion) Solaire Manila Resorts will open its doors on March 16.  Solaire plans to add 300 more hotel rooms after two years, said Bloomberry, a listed firm controlled by Philippine port tycoon Enrique Razon.


 



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6-Handle

This note was originally published at 8am on January 25, 2013 for Hedgeye subscribers.

"Most of the time ‘I don’t know’ is the right answer.”

-Wesleyan University Professor, 2008

 

It was nearing midnight and towards the end of a ten hour stint in a 4’ x 8’ freezer on a winter night in early 2008 that I realized I wasn’t going to be a career research doctor.   

 

At the time, I was a PhD candidate performing an RNA isolation as part of some larger work on DNA enzyme kinetics.  What that means exactly isn’t really important, but it takes a long time and the work flow requires that most of that time be spent inside a walk-in ice box. 

 

Tired, bored, and numb, I was thinking more about the puts I bought in NLY (REIT/Mortgage Investor) earlier in the day than on the final mix components for the experiment.  I ended up aliquoting (fancy science term for “added in”) way too much of the wrong substrate into the mix.  No take-backs or mulligans in experimental biochemistry - Game over, reset clock, 10 more hours of overnight freezer duty.  A short-time later I joined Hedgeye. 

 

Similar to probing the populous on their view of functional Enzyme Kinetics, I imagine that asking the average person how the U.S. calculates inflation conjures images of Good Will Hunting scenes, blackboard equations and chalk dust mathematical revelation.  

 

Reality, however, more often resembles a bearded, middle-aged Robin Williams than it does a svelte, young Matt Damon.   Consider the following question: 

 

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

 

That gem of a perfectly subjective question, asked as part of BLS’s monthly price survey process, drives the calculation of “owner’s equivalent rent” and singularly represents approximately one quarter of the index used to calculate CPI inflation in the United States.   

 

China reports official GDP numbers 5 minutes after the quarter ends, we have owner’s equivalent rent.  Next. 

 

Parsing the reality from the illusory in reported domestic labor market data and understanding the subtleties of the seasonal and other statistical adjustments presents its own unique challenges.   

 

 

‘Tis the Season(ality)

 

As we’ve highlighted previously, strong and quantifiable seasonal adjustments have had a meaningful impact on the temporal trend in reported economic and employment data over the last four years.  In short, the shock in the employment series in late 2008 – early 2009 which occurred alongside the peak acceleration in job loss during the Great Recession has been captured, not as a bona fide shock, but as a seasonal factor.   

 

The net effect of this statistical distortion is that seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period.  From a positive seasonal adjustment factor perspective, we’ve got about one month left. 

 

6-Handle - Wkly Claims

 

 

Sell in May & Go Away (Until September)

 

From a strategy perspective, the temporal pattern in market dynamics, despite being rather obvious to any market observer, hasn’t been insignificant. 

 

The annual déjà vu pattern in market prices, reported economic data and monetary policy announcements observable over the last 4 years isn’t particularly surprising when considering the reflexive interaction between the associated dynamics: 

 

reported economic data begins to inflect, market prices move higher, confidence and optimism measures begin to improve alongside stock prices and reported econ growth, the marginal bid moves from treasuries to equities as improving conditions pull expectations around a Fed exit timeline forward, equities benefit further while the reported data continues to confirm - until it doesn’t - and then the dynamics reverse, culminating with a new QE announcement in late Q3 just as the data and seasonal adjustments impacts hit trough. 

 

Compressed economic cycles and amplified market volatility at its statistically distorted and centrally planned best. 

 

6-Handle - SPX Deja Vu

 

 

6-Handle?

 

As the domestic employment and housing data has continued to confirm our 1Q13 Macro Theme of #growthstabilizing, a risk management question we’ve been considering is the possibility of seeing a 6-handle in the unemployment rate in 2013.  With Bernanke offering an explicit employment target of 6.5% for a cessation in QE initiatives, a significant decline in unemployment over the NTM may augur higher yields as the bond market attempts to front-run a prospective Fed exit.  

 

A material, mean-reversion back-up in yields is of obvious import for asset allocation decisions and remains the principal candidate catalyst for a driving a large-scale rotation to equities.

 

Further, in so much as an end to money printing is dollar bullish, we could see a perpetuation of the USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher dynamic we think needs to persist for sustainable real consumption growth.  A step function move lower in commodity prices would also be equity supportive from a rotation perspective.

 

In a recent analysis we framed up the variable dynamics and put some quant around the magnitude of change in the relevant unemployment rate drivers necessary to take unemployment below 7.0% over the NTM (email us if you’d like a copy of the note). 

 

In short, while we wouldn’t necessarily view a 6-handle on the unemployment rate by 2013 year-end as our baseline case, the reality of the math suggests that it wouldn’t take extraordinary improvement in the factors that drive the unemployment rate to take it below 7% over the NTM.

 

In terms of how we model unemployment, we effectively need to see 2 of the 3 input variables to trend favorably with respect to their impact on the unemployment rate.

 

For example, scenarios in which Employment Growth accelerates a reasonable 20bps (2Y basis) on average in 2013 and growth in the Civilian Non-institutional Population (CNP) declines linearly to the historical average over the NTM or the Labor Force Participation Rate (LFPR) continues to decline at the 3Y CAGR both result in a move to/below the 7% unemployment level in 4Q13. 

 

In the chart below we provide a timeline view of the 2013 Unemployment Rate under a selection of progressively favorable scenarios. If you’d like to observe the impact of your own growth and participation rate assumptions on the unemployment rate timeline you can link to the associated model here >> Unemployment Rate Variable Analysis_HEDGEYE

 

6-Handle - U.S. Unemployment Rate

 

 

Yesterday on CNBC Ray Dalio remarked that the question for investors now, as always, is how events will transpire relative to what the market has discounted.    

 

We continue to like our 1Q13 Macro themes of #growthstabilizing and #housingshammer.   Ultimately, however, Investment perspective remains wedded to last price. Now a hundred SPX points higher from where we first penned the #growstabilizing hashtag back in early December, the relevant risk management question is whether growth can organically and sustainably accelerate from here.

 

On my first day in the freezer in grad school, my professor offered the following piece of memorable advice with respect to evaluating one’s place within the program’s intellectual pecking order:   

 

“Regardless of what they say, nobody really knows anything.  Most of the time ‘I don’t know’ is the right answer”

 

Stay Tuned. 

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1654-1679, $111.51-113.95, $3.65-3.71, $79.41-80.14, 1.32-1.34, 1.84-1.91%, and 1481-1502, respectively.

 

Christian B. Drake

Senior Analyst

 

6-Handle - vpp

 


MCD SALES PREVIEW

McDonald’ is set to release January sales tomorrow before the market open and, while management already guided to negative global comparable sales, we will be watching for any indication of how respective markets and menu items are performing in the respective geographies. 

 

Since the company reported FY12 results recently, we will keep this note brief.  McDonald’s shares have been performing strongly of late but lag the S&P 500 over the past week as we move close to January sales being announced.  We remain convinced that the Street’s projected acceleration in earnings in 2013 is overly optimistic and would avoid buying the stock at these levels. 

 

The charts below illustrate what we believe the investment community will perceive as good, bad and neutral results for the US, Europe, and APMEA January sales. 

 

MCD SALES PREVIEW - mcd us preview

 

MCD SALES PREVIEW - mcd europe preview

 

MCD SALES PREVIEW - mcd apmea preview

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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