“Take the shortest route to the puck, and arrive in ill humor.”
At my alma mater Yale, the under graduates hold a party every day in February. If you have ever been to New Haven, CT, you get the reason they do this - New Haven is a rainy and depressing place in February. Naturally, in the spirit of reliving their youth, a group of Yale graduates resurrected the tradition and started Yale Club Emeritus. In effect, Yale Club for old people.
Now I’m not sure if I’m officially old or not, but after stopping by the final Yale Club Emeritus last night at the infamous Dorrian’s Red Hand Bar in the Upper East Side of Manhattan, and perhaps staying a little too late, I feel old this morning. Or to refer to Fred Shero’s quote above, I’m at the very least in ill humor.
Yesterday I had the pleasure of joining Mario Bartiromo on CNBC’s closing bell. The topic of the discussion was what’s next for U.S. equities. The gentleman I was debating cited the fact that most Wall Street analysts had reduced their estimates for U.S. GDP growth recently and he was therefore negative on growth and the market. As I countered, I went to these funny critters called facts. The three most recent data points on the U.S. economy that I’d seen which were as follows:
- New home sales up 29% y-o-y and inventory is at the lowest level since 2005;
- Chicago PMI new orders reading coming in at 60.1, an 11-month high; and
- Jobless claims in the most recent week showing an 8% improvement year-over-year.
As they say, facts don’t lie, people do. Now those are only the facts that I happened to see as I was prepping for my interview yesterday and it is certainly not to say that all is well in the world, but those facts are supportive of our growth stabilizing thesis.
The caveat to my points above is the Chinese economic data that came out this morning was definitely slightly disappointing. Chinese PMI came in at 50.1 versus the estimate of 50.5 and was down from January’s reading of 50.4. Now this reading is still expansionary, but is indicative of a sequential slow down, although admittedly the February economic data from China is distorted by the Lunar New Year.
Even as we continue to express our bullish stance on U.S. equities, we are not bullish of all markets. In fact, a key global market we remain bearish on is the Japanese Yen. This morning we received more confirmatory data of that stance as Japanese CPI fell for the eighth time in the last nine months. Since the political leadership of Japan intents to manufacture inflation, they will obviously react to this by doubling down on their policy of debauching the Yen.
On that note, in the Chart of the Day (titled: Japanese Consumers Are Going to Get Bag Skated) we highlight how difficult it will actually be to create inflation in Japan via monetary easing. This chart goes back to 2004 and highlights that annual CPI has been consistently below 0%. The point being that if the Japanese leadership is really intent on taking CPI to a 2% level, it will take a massive amount of Japanese Yen printing, which begs the question: are we bearish enough on the Yen?
While we are doing the around the globe macro review this morning, it is probably prudent not to forget the currency experiment gone awry – the Euro-zone. This morning European manufacturing PMIs are out and the results are mediocre at best. The headline number for the Euro-zone is 47.9, which is slightly better than the 47.8 estimate but still suggesting of an economy in decline. As always though, Europe is bifurcated.
On the positive extreme, consistent with our research, is Germany with an expansionary PMI of 50.3. Meanwhile on the negative end of the spectrum is France with a dreadful PMI of 43.9. To the credit of the French politicians who implemented tax rates that have motivated capital to flee France, they actually don’t have the worst PMI in the Euro-zone. That title goes to Greece at 43.0.
Before you head off into the weekend, let’s talk stocks for a second. As many of you know, we are instituting a best ideas list that highlights our best ideas across our research team. On Wednesday we did the second part of that launch and our Financials Sector Head, Josh Steiner, presented the idea Nationstar Mortgage (NSM), a company that is in the business of servicing delinquent loans and originating agency mortgages for sale. The thesis is as follows:
- The company operates in a oligopoly with only two true competitors;
- We think the street is too low in 2013 and that the earnings power of the company is ultimately close to $10 per share;
- A spin-off of its Solution Star business could unlock $6 in incremental value; and
- NSM has a servicing acquisition pipeline of some $300BN in the foreseeable future.
So, here we have a company with a big market opportunity, operates in an oligopoly and is trading at less than 4x its ultimate earnings power. Stock ideas like NSM, are starting to put me in a much better mood this morning.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, UST10yr, and the SP500 are now $1, $110.04-112.85, $81.45-82.46, 1.83-1.95%, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
In preparation for BYD's F4Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary.
BOYD GAMING ANNOUNCES AGREEMENT TO SELL DANIA JAI-ALAI (2/28)
- Entered into a definitive agreement to sell the assets of Dania Jai-Alai in Dania Beach, Fla., to Dania Entertainment Center, LLC, for $65.5 million in cash. As part of the agreement, the $7 million deposit previously paid by Dania Entertainment to Boyd Gaming will be applied to the purchase price.
Subject to terms of the definitive agreement and satisfaction of closing conditions, the transaction is expected to close on or before May 24, 2013. The Company intends to use proceeds for general corporate purposes, including the repayment of debt.
BOYD GAMING COMPLETES ACQUISITION OF KANSAS STAR CASINO'S OPERATOR (11/20)
YOUTUBE FROM 4Q CONFERENCE CALL
- "We expect wholly-owned EBITDA after the deduction for corporate expense to be in the range of $70 million to $75 million."
- "Our Midwest and South region... is currently the healthiest region of the domestic gaming industry and the most robust part of our business."
- "We were especially pleased by the continued strong performance of the IP, which delivered its largest year-over-year EBITDA improvement since we acquired it a year ago."
- "Upon completion of the Peninsula transaction, we will have added six properties in just over a year, generating approximately $250 million in additional EBITDA annually."
- "Atlantic City.... the... environment remains competitive. Weakness was concentrated in our table games business, where both volume and hold fell year-over-year. This accounted for almost the entire EBITDA shortfall. Still, there were encouraging signs as our slot and non-gaming business showed growth. Borgata remains the undisputed market leader and we expect it will be Atlantic City's premier destination resort for years to come."
- "As expected, we saw growth resume in our Downtown business segment in the third quarter and we anticipate this positive trend will continue in the fourth."
- "The Las Vegas Locals business remains extremely competitive...we're continuing our efforts to grow business from casual players. Penny denomination games are popular with these guests and are one of the few segments of the Locals market to show growth in recent months. So we've recently taken steps to ensure we are well positioned in this area and are nearing completion of the rollout of some 1,500 new penny themes across our Southern Nevada properties. Starting today we have begun to aggressively promote these new games. While we believe this initiative will be attractive to slot players, video poker will remain an essential part of our business, especially among our core players. We will continue to offer our guests what we believe is the most competitive video poker product in Las Vegas."
- "Revel spent a lot of marketing dollars, they were very aggressive in buying business, in trying to gain trial and gain some traction. We increased our promotional dollars slightly. If you look at some of our slot promotional credits, they're up slightly year-over-year, but not substantially, and not compared to what the rest of the market is doing."
- "We know that in certain markets like Tunica, Mississippi and Shreveport, Louisiana, there is a significant amount of competition both within the specific geographic market as well as within neighboring states. But I've got to tell you, I feel awfully good as to where we perform in those markets relative to our competitors that post those results. And you can see it in the revenue numbers that are published especially in Louisiana as it relates to Sam's Town Shreveport."
- "Regarding CapEx, we're kind of spending at what is in today's world a fairly normal level, wouldn't expect anything – any abnormal capital spending. We have announced... that we'll be wrapping the Echelon property and sprucing up some landscaping. It's to the tune of a couple of million dollars, so it's nothing significant. That work will take place first... first couple of months of the year or so."
- "On the FTE side, we obviously took measures really at this point years ago in adjusting FTEs for the business levels. And at this point in time we really don't see any further opportunity of any significance to do that."
- "If I had to make a guess...it will continue to be fairly promotionally aggressive in... Atlantic City."
- "I wouldn't say that promotions have abated. I think they're at very much kind of the same state they were in through the summer. What we have seen is spend per visitor in the Las Vegas Locals segment flatten out."
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The Macau Metro Monitor, March 1, 2013
FEBRUARY GGR DICJ
Macau February Gross Gaming Revenues hit MOP 27.084 BN (HKD 26.294 BN, USD 3.39 BN) up 11.5% YoY.
MELCO PLACES HK$460 MILLION IN BONDS Macau Business
Hong Kong-listed Melco International Development Ltd, one of the two main shareholders of MPEL, is placing HK$460 million (US$59.3 million) in bonds. The five-year notes will pay 4.15% interest annually The bonds are being issued by Melco International Finance Ltd, a British Virgin Islands company, and fully guaranteed by Melco International Development. The cash will be used for general working capital and future investment purposes, according to the company.
This note was originally published at 8am on February 15, 2013 for Hedgeye subscribers.
“If it’s your job to eat a frog, it’s best to do it first thing in the morning. And if it’s your job to eat two frogs, it’s best to eat the biggest one first.”
My Hedgeye mates and I have been over in London for almost half a fortnight. Meeting with European investors and getting entrenched into the British culture has been an interesting experience for us. To be fair, we probably have spent a few more quid at the pub then we would in a normal week, but even that seems to be part of the culture over here.
Since being in the U.K., we have learned a few bits and bobs, and also some new phrases. The most interesting one to me is, “box of frogs.” It is actually used to describe a crazy state of mind, such as: that Keynesian economist is as mad as box of frogs. The point being that if frogs were placed into a box, it would drive someone crazy if they had to hold onto the box. The parallels to our frustration with global monetary policy are quite evident.
I’ve also taken up reading the Irish Times when I have had a break for coffee and biscuits during the day. While I can’t say I totally understand rugby, the hockey player in me obviously has some affinity for the sport. This morning in the Irish Times the Rugby Analyst Liam Toland wrote the following:
“Yes, I was enthralled by England’s application, their maturity, their discipline, and their ever growing belief in negotiating a tough fixture. That’s why I stayed. Remember not so long ago, these guys were throwing dwarfs around.”
I’ve heard, and frankly overused, many sports analogies in my days, but “throwing dwarfs around” is a new one even for me. I’ll have to ask one of the blokes on our restaurant team, Rory Green, about that one.
On a serious note, the trip to London was very fruitful in terms of gauging expectations. Over the course of the week, we probably met with well over 500 billion sterling in cumulative investor capital. From a philosophical perspective, many of the money managers in London describe themselves as thinkers, especially as compared to the traders in New York and Connecticut. And from our view, they are a very thoughtful and strategic group.
Interestingly enough, we may actually be entering an environment in which thinking is rewarded more than trading. This is certainly not to say thinking is a better risk management strategy per se, but rather that we are in a new environment of low volatility. In the Chart of the Day we actually look at the VIX over the past five years. The interesting point to note based on our models is that upside resistance is what was for the past three or more years the point where we recommended shorting and/or selling stocks (right around 14).
The implication is simply that based on the VIX, it looks to us we may actually be entering a new and lower phase in volatility. This supports our bullish case on U.S. equities, especially if the VIX breaks through its year-to-date lows. In that scenario, our models have the VIX going to 9. This would obviously be a very favorable tailwind for equities, and really risk assets generally. Not so favorable, though, for the end-of-the-world, such as long Treasuries and gold.
A key question many of the asset allocators in Europe are asking us is in regards to what regions of the world we are most favorably disposed to, or vice versa. For us this is less an exercise of whetting our fingers and sticking them up to see which way the wind is blowing, but rather just a function of what our models are telling us. As it relates to countries specifically, we focus on growth, inflation and policy. Our views on some of the key economies are as follows:
- The U.S. economy – The U.S. is currently in Quad 1, which means growth is accelerating, or poised to accelerate, and inflation is decelerating;
- The Chinese economy – China is currently in Quad 2, which means that growth is accelerating with inflation also accelerating.
In terms of being long equities, an investor wants to live in Quads 1 and 2.
Interestingly enough, Europe is actually also currently in Quad 1, albeit growth itself is stabilizing at very low rate in Europe and it is a continent, as usual, with very distinct potential by country. One of the most negative countries being flagged in our models currently is France, the regions second largest economy. (And no, Box of Frogs was not a reference to France!)
One of the lads on our Macro Team, Matt Hedrick, knows his onions as it relates to European economies and emphasized the key risks to France in a note yesterday. Some of the key negative trends include:
- Public debt – pushing 91% (as a % of GDP) - France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth;
- Credit Rating – Fitch is the only main agency to maintain its AAA status. S&P is at AA and Moody’s at Aa1. We expect all three to be lined up at AA in 2013 and for this reduction in credit standing to weigh on its public finances, and put upward pressure on yields;
- Competitiveness Drag – Hollande’s policy to tax the rich (75% on those making €1MM or more) is not only driving out his countrymen but sending negative investment signals to the business community. Hollande has moved the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain;
- Hamstrung Spending – we believe that Hollande will not be able to issue additional spending cuts due to push back on the street against austerity; and
- Bank Leverage – French banks remain an outside concern due to their leverage to the periphery.
The research in this instance also supports the price as the CAC is broken in our quant models. It is not totally surprising either, as some of the government policies in France seem a little dodgy.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1628-1661, $117.21-118.92, $80.04-80.77, 92.71-94.48, 1.96-2.05%, and 1513-1529, respectively.
Enjoy your weekends and if you want to talk Europe, feel free to give us a bell.
As always, keep your head up and eyes on the blindside of the pitch,
Daryl G. Jones
Director of Research
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