prev

Steve Keen and Private Sector Debt

This note was originally published at 8am on February 21, 2013 for Hedgeye subscribers.

“The Great Recession was not an unpredictable ‘Black Swan’ event, but an almost blindingly obvious certainty.”

-Steve Keen

 

Yesterday was emblematic of the news flow that dominates today’s financial markets.  Speaker of the House, John Boehner, published a scathing op-ed in the Wall Street Journal that criticized President Obama over the looming sequester, calling it “a product of the president’s own failed leadership.”

 

Hours later, the Federal Reserve released the minutes from its January 29 – 30 Federal Open Market Committee (FOMC) meeting.  As soon as the robots read that “Many FOMC participants voiced concern about risks of more QE,” gold gapped down, the USD jumped, and stocks slid into the close.

 

These are the days of our centrally-planned lives.


Given the undeniable impact that both monetary and fiscal policies have on the disposable income in your pocket, the interest earned on your life’s savings, and the asset prices in your portfolios, it’s fair to ask some tough questions of those making the decisions:

  • What caused the financial crisis and subsequent “Great Recession” which we are still mired in (as a reminder, US real GDP was -0.1% in 4Q12)?
  • Why didn’t you see the crisis coming?
  • What are you doing to lift us out of the current recessionary-like environment, and why do you believe these policies will work?

At 2PM EST today, the Hedgeye Macro Team will host a conference call for institutional clients with economist Steve Keen to get his views on those questions and more.  Email team@hedgeye.com if you would like to participate in the call.

 

Professor Keen predicted the financial crisis as long ago as 2005, and was recognized by his peers for his work when he received the Revere Award from the Real-World Economics Review for “being the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises” (Keen 2011).  He collected twice as many votes as the runner-up, Nouriel Roubini.  His book Debunking Economics and other works are super-critical of mainstream economics (“neoclassical” economics – think Bernanke and Krugman), and succinctly describe his own theories on monetary macroeconomics, which are built on the foundations of money, banks, debt, instability, and complexity.

 

Professor Keen quips, “Bernanke’s Essays on the Great Depression is near the top of my stack of books that indicate how poorly neoclassical economists understand capitalism,” and that “Krugman himself is unlikely to stop walking on two hind legs – he enjoys standing out in the crowd of neoclassical quadrupeds” (Keen 2011).  Professor Keen likes to take shots at Bernanke and Krugman…  Sounds like a Hedgeye kind of guy!

 

One topic that Professor Keen is an expert on that is generally absent from macroeconomic discussion is the relationship between private sector debt and growth.  Debt of any kind – government, financial, mortgage, credit card – is often ignored in mainstream economics due to the argument that “one man’s liability is another man’s asset,” so that the total level of debt has no economic impact (which Keen refutes).  It was really only after Carmen Reinhart and Kenneth Rogoff published their New York Times Bestseller This Time is Different, and sovereign bond yields in Europe’s periphery started to spike, that economists and market participants began speaking to the aggregate level of debt more seriously, but it was often only government debt.

 

The now widely-held opinion is that excessive sovereign debt will eventually impede growth.  But Professor Keen has empirically demonstrated that this claim is too simplistic, and fails to explain why public debt increases in the first place.

 

Consider that in 2007 US public debt was less than 60% of GDP, while private sector debt was 300% of GDP, up from 110% in 1980.  A massive private sector debt bubble grew for nearly 30 years while public sector debt remained fairly constant (see our Chart of the Day below).  It was only after the private debt bubble burst in 2008 that public sector debt began to lever up.  Why?

 

The correlation (2000 – present) between private debt and unemployment is -0.94.  The correlation between government debt and unemployment is +0.82. 

 

In a recession tax payers lose jobs and go on some type of welfare – for a government that equates to tax receipts down and outlays up.  To fund the delta, the government borrows.  In 2007, US government revenues were 18.5% of GDP; that fell to 15.1% of GDP by 2009 and only recovered to 15.8% of GDP in 2012.  On the other side of the ledger, outlays were 19.7% of GDP in 2007 and jumped to 25.2% of GDP in 2009 – the majority of that increase was “mandatory” outlays.  In fact, only 36% of US government spending is deemed “discretionary,” and 17% is discretionary “non-defense.” 

 

The point is that public sector debt is reactionary.  While it’s popular to deride politicians about mounting debts and deficits (and indeed politicians do this to each other), they have less control than most know.  Increasing public sector debt is the symptom, not the disease.  The disease is a private sector debt bubble that bursts, and is slowly deflating from a still very high level (~240% of GDP today).

 

The blame lies with the economists that allowed, and in fact assisted, the private sector debt bubble to grow to a dangerous, unsustainable level (because debt doesn’t matter in their models) – the same economists that are today charged with cleaning up the mess.

 

In describing “The Great Moderation,” Bernanke said in 2004, “Improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation but to the reduced volatility of output as well.”

 

Does Bernanke and co. still believe their monetary policies to be a panacea?  Probably.  But how can they solve for the crisis if they continue to ignore its cause – a heavily-indebted, deleveraging private sector?

 

Professor Keen believes that we could be in for many years of a drawn out deflationary crisis, as private debt is still ignored in public policy.  We hope he’s wrong about that, but are looking forward to learning more from Professor Keen on our call with him today. 

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1558-1617 (bearish/oversold), $112.94-115.89, $80.29-80.99, 92.64-94.36, 1.97-2.05% and 1507-1530, respectively.

 

Kevin Kaiser

Senior Analyst

 

Steve Keen and Private Sector Debt - el chart

 

Steve Keen and Private Sector Debt - vp 2.21


When Can We Short Food Stocks Again?

Is this the start of something big?



The question we have received most in the wake of Heinz being acquired by 3G with financing provided by Berkshire Hathaway is “who is next?”  We attempted to answer that question specifically in a prior analysis that highlighted some of the characteristics of Heinz that might have made it attractive to a cost-minded acquirer such as 3G.  Here, we attempt to answer the question behind the question which is whether or not we are poised for a wave of acquisitions across staples, specifically packaged food.

 

We are of the opinion that merger waves are a consequence of industry “disruptions”.  These disruptions don’t have to be single events, but can be built up over a longer duration and comprised of multiple smaller events, rather than a single significant event.  There isn’t a great deal of academic research to fall back on with respect to this topic – Mitchell and Mulherin (1996) argued that industry-specific merger waves occur as a “common response to regulatory, technological and economic shock.”  The new competitive dynamic requires a reallocation of capital within in an industry.

 

Interestingly, most “waves” occur during strong, broader markets with varying theories for this – access to capital or perhaps  a desire on the part of managers to trade “expensive” paper for “real” assets - Maksimovic and Phillips (2001) and Jovanovic and Rousseau (2001).  Interestingly, research suggests (unsurprisingly) that engaging in merger activity in strong markets and subsequent to prior deals in the same industry may not necessarily be a recipe for creating shareholder value.



Looking back at the wave of consolidation in packaged food in 2000 (see below), it appears that it was in response to a shift in the balance of power between manufacturers and retailers brought about by a prior wave of consolidation within food retail.  From 1996 to 2000, assets representing nearly $75 billion of retail sales were consolidated in US food retail, including two of the biggest combinations in history (Albertson’s/American Stores and Kroger/Fred Meyer).



Packaged food manufacturers were faced with a sea change in terms of relative power versus retail counterparts (recall that Wal-Mart was becoming an increasingly more significant participant in food retail at this time as well).  Scale mattered again, and, in fact, became an imperative versus larger retail partners.  The packaged food industry responded in kind.



2000 Was a Huge Year for Packaged Food M&A

 

Unilever approached Best Foods in May of 2000, with the deal price ultimately agreed to in June (approximately 10% higher than the original offer, total consideration of $24.3 billion).    Later that same month (June), Philip Morris (at that point still the tobacco/food conglomerate) agreed to acquire Nabisco for $15.5 billion.  The bidding for Nabisco was robust, with Danone and Cadbury as other engaged parties.



Though not the purchase of a public company, General Mills agreed to purchase Pillsbury from Diageo at the end of July for $10.5 billion.



In a smaller transaction relative to the food deals in 2000, Kellogg acquired Keebler Foods for $3.9 billion in October.  The year wasn’t quite over, as Pepsi acquired Quaker Oats in December for $13.4 billion.



Does the same imperative exist now?

 

We would argue, no.  If anything, we believe that food retail’s relative position has only weakened over the last decade.  Channel blurring is a familiar term for most investors and we have seen data that suggests that fully ¾ of consumers shop more than 5 CPG channels regularly.  Fewer trips and smaller tickets per trip to each retail channel has “spread the wealth” among various retailers and retail concepts to the point where conventional grocers (the catalyst for the last wave of packaged food consolidation) continue to struggle.  Certainly Wal-Mart’s importance continues to grow, but we see an acquisition that could successfully balance a supplier against Wal-Mart as being highly unlikely, if at all possible.



Further, since 2000, an entirely new channel has emerged – the natural and organic store.   The trend toward health and wellness has certainly represented a “shock” in some sense of the word.  Capital has been reallocated by the packaged food manufacturers to address this competitive disruption, but the size of the channel doesn’t allow for “mega” deals, so we don’t see this trend, while certainly powerful and ongoing, as a catalyst for large scale M&A.



Is age a factor?

 

There is some work that suggests that the age of CEO’s within a particular industry might be a catalyst for merger activity.  We only mention this because, Bill Johnson of Heinz, at age 64, was the oldest of the CEO’s in large cap packaged food.  Denise Morrison at Campbell Soup and Irene Rosenfeld at Mondelez are “next in line” at age 59, with Ken Powell of General Mills close behind.

 

Where does this leave us?

 

It appears that some conditions have been met for a “wave” of merger activity – a strong market, access to liquidity and perhaps the age of the relevant CEOs.  However, we are simply not seeing the “shock” to the system that forces companies to pursue acquisitions in an environment where current valuations make the creation of shareholder value through mega deals an uncertain prospect at best.

 

If no more deals, what’s next?

 

We decided to take a look at the performance of the S&P Packaged Food Index into and subsequent to some recent, large transactions, as well as the performance of the indices in 2000.  No question, if we are at the start of a wave of consolidation within packaged food, there is room to run – trough to peak relative performance in 2000 for the index was +46%.  Wrigley in 2008 as a “one off” event represented far less compelling relative performance, but as everyone is well aware, ’08 is a difficult year to which one can (or should) draw analogies given market conditions.  Ralcorp (the first time around) is useful - +8% relative performance; 27 days later (call it a month).  Right now, with Heinz, the numbers stand at +6% relative performance, 14 trading days post-deal.  That suggests to us, using Ralcorp as an example, that we have some more time and price before it becomes “safe” to short packaged food stocks again.



 

When Can We Short Food Stocks Again? - Merger Wave

 

When Can We Short Food Stocks Again? - Wrigley

 

When Can We Short Food Stocks Again? - Cadbury

 

When Can We Short Food Stocks Again? - Ralcorp1

 

When Can We Short Food Stocks Again? - Ralcorp2

 

When Can We Short Food Stocks Again? - Heinz

 

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



TRADE OF THE DAY: STZ

Today we bought Constellation Brands (STZ) at $43.21 a share at 3:21 PM EDT in our Real-Time Alerts. Hedgeye Consumer Staples Sector Head Rob Campagnino wanted to sell it higher and wait for an oversold signal. Here it is. His fundamental thesis on STZ or the pending deal has not changed.

 

TRADE OF THE DAY: STZ - STZtotd


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

MACAU: FEBRUARY DETAIL

Here are some more details regarding the February gaming revenues in Macau

 

 

Y-O-Y TABLE OBSERVATIONS

 

Total table revenues grew 12% in February.  Mass revenue growth was strong at 31%, in-line with its 6-month trailing average.  VIP revenues grew 5%, a little better than its 6-month average.  Junket RC volume was the most disappointing, falling -0.4%, the 1st decline since October 2012.  

 

LVS

 

Table revenues grew 28% YoY, led by a 76% surge in mass revenues - the market growth leader for the past month.  We estimate that Sands China held at 2.80% vs 3.17% last year, adjusted for direct play of 16%.  

  • Sands fell 24% YoY, as VIP revenues tumbled 45% due to low hold (1.9% vs 4.1%).
    • Mass grew 15%
    • VIP was down 45%.  We estimate that Sands held at 1.9% compared to 4.1% in the same period last year.  We assume 10% direct play in February vs 11% in February 2012.
    • Junket RC increased 19%, the 2nd consecutive monthly gain
  • Venetian grew 30% YoY 
    • Mass increased 43%, matching its highest growth since November
    • VIP grew 20%
    • Junket VIP RC fell 16%, its 11th decline in the past 12 months
    • Assuming 28% direct play, hold was 3.93% compared to 2.76% in February 2012, assuming 27% direct play 
  • Four Seasons dropped 63% YoY as hold was only 1.6%
    • Mass revenues fell 19%
    • VIP tumbled 68% and Junket VIP RC fell 28%. 
    • If we assume direct play of 14%. hold in February was 1.56% vs. 3.22% in February 2012 when direct play was ~16%
  • Sands Cotai Central produced $221MM in February, a new record
    • Mass and VIP hit new monthly records, $75MM and $146MM respectively 
    • Junket RC volume of $4.077 BN, up 22% MoM and a new high
    • If we assume that direct play was 11%, hold would have been 3.18% 

WYNN

 

Wynn table revenues grew 6% in February. 

  • Mass was up 16% YoY 
  • VIP grew 4%, the 1st growth in 5 months  
  • Junket RC fell 8%.  Aside from a 1% gain in November, 9 of the last 10 consecutive months have been in the red.
  • Assuming 11% of total VIP play was direct, we estimate that hold was 3.12% compared to 2.79% last year (assuming 10% direct play).

MPEL

 

MPEL table revenue only grew 1%.  Hold was very low at 2.40% vs 3.00% last year. 

  • Altira revenues fell 10%, with a 25% increase in Mass and a 14% decline in VIP
    • VIP RC fell 12%
    •  We estimate that hold was 2.63%, compared to 2.72% in the prior year
  • CoD table revenues grew 6% YoY
    • Mass grew an impressive 45%, offset by a 10% drop in VIP
    • RC grew 24%
    • Assuming a 18% direct play level, hold was 2.30% in February compared to 3.17% last year (assuming 16% direct play)

SJM

 

Table revenue grew 2%

  • Mass revenue declined 3%, its 1st decline since December 2008 and the laggard in the market
  • VIP grew 5%
  • Junket RC declined 1%
  • Hold was 3.05%, compared with 2.89% last February

GALAXY

 

Galaxy table revenues grew 25%, aided by high hold.  Mass grew a robust 57%, while VIP grew 17%.  Across its two owned properties, Galaxy held at 3.60% vs. 2.50% in February 2012.

  • StarWorld table revenues rose 13%
    • Mass rocketed 35% higher
    • VIP grew 10%
    • Junket RC fell 26%, marking the 9th month of consecutive declines
    • Hold was normal at 3.34% vs. an easy comparison of 2.26% last February
  • Galaxy Macau's table revenues grew 38%
    • Mass grew 72%
    • VIP grew 29%, while RC fell 6%
    • Hold was high in February at 3.80% vs. 2.75% last  year

MGM

 

MGM table revenue grew 8% in February

  • Mass revenue grew 19%
  • VIP revenue grew 6%, on flat RC growth
  • If direct play was 9%, then February hold was 3.29% compared to 3.19% last year

 

SEQUENTIAL MARKET SHARE

 

LVS

 

LVS’s MoM share increased 1.0% to 21.4%, the biggest monthly share gainer.  February's share was better than its 6 month trailing market share of 20.0% and better than the 2012 average share of 19.0%.

  • Sands' share lost 60bps to 2.9%, a new low.  For comparison purposes, 2012 share was 3.9% and 6M trailing average share was 3.8%.
    • Mass share ticked down to 5.1%, a new low.
    • VIP rev share fell 80bps to 2.0%, a new low.
    • RC share was 2.8%, up 20bps MoM
  • Venetian’s share ticked up 80bps to 9.2%.  2012 share was 7.9% and 6 month trailing share was 8.0%.
    • Mass share rose 110bps to 15.2%, its highest level since April 2012
    • VIP share increased 100bps to 6.7%, its highest level since Jan 2012
    • Junket RC share was unchanged at 4.0%
  • FS lost 90bps to 2.1%.  This compares to 2012 share of 3.7% and 6M trailing average share of 3.1%.
    • VIP lost 140bps to 2.3%
    • Mass share was flat at 1.5%
    • Junket RC gained 80bps to 4.2%
  • Sands Cotai Central's table market share gained 160bps to 6.8%, a new high, and compares to the 6M trailing average share of 4.6%.
    • Mass share rose 1.2% to 7.9%.
    • VIP share jumped 1.9% to 6.4%
    • Junket RC share rose 1.0% to 5.8%

WYNN


Wynn's share gained 0.6% to 11.8% in February.  Wynn’s 2012 share averaged 11.9% and their 6-month trailing share averaged 11.5%.  

  • Mass share of 8.4%
  • VIP share of 13.2%, up 0.7%
  • Junket RC share increased 40bps to 12.3%

MPEL

 

MPEL’s lost 160bps of share, the biggest share donor in February, to 12.8%, below their 6 month trailing share of 13.8% and their 2012 share of 13.5%.  

  • Altira’s share fell 90bps to 3.3%, below its 6M trailing share of 4.0% and below its 12-month share of 3.9%
    • Mass share grew 0.5% to 1.4%
    • VIP tumbled 160bps to 4.1%, a new low
    • VIP RC share fell 60bps to 4.8%
  • CoD’s share fell 80bps to 9.3%.  February’s share was below the property’s 2012 and 6M trailing share of 9.4% and 9.7%, respectively.
    • Mass market share grew 2.2% to 12.2%, a new high
    • VIP share fell 2.0% to 8.1%
    • Junket share rose 30bps to 9.6%

SJM

 

SJM’s share fell 0.8% to 25.5%.  February's share compares to their 2012 average of 26.7% and its 6M trailing average of 26.5%.

  • Mass market share fell 3.3% to 27.1%, an all-time company low
  • VIP share rose 50bps to 25.8%
  • Junket RC share lost 0.6% to 27.7%

GALAXY


Galaxy lost 0.1% share to 18.4%, below its 2012 average share of 19.0% but in-line with its 6 month average

  • Galaxy Macau share increased 0.6% to 10.8%
    • Mass share declined 20bps to 9.5%
    • VIP share increased 1.0% to 11.3%
    • RC share lost 10bps to 9.8% 
  • Starworld share fell 50bps to 6.8%
    • Mass share fell 40bps to 3.0%
    • VIP share fell 70bps to 8.3%
    • RC share decreased 10bps to 9.8%

MGM

 

MGM gained 0.9% share to 10.1%, above their 6M average of 9.8% and above their 2012 share of 9.9%

  • Mass share decreased 0.8% to 6.1%
  • VIP share grew 1.5% to 11.2%
  • Junket RC fell 60bps to 10.2%

 

Slot Revenue

 

Slot revenue grew 17% YoY to $155MM in February.

  • LVS took the top prize for YoY growth of 60% to $47MM
  • Galaxy’s slot revenue grew 8% to $18MM
  • MPEL grew 9% YoY to $26MM
  • MGM slot revenues grew 46% to $28MM, a new high
  • WYNN had the worst performance, falling 24% to $19MM
  • SJM lost 6% to $16MM

MACAU: FEBRUARY DETAIL - table

 

MACAU: FEBRUARY DETAIL - mass

 

MACAU: FEBRUARY DETAIL - rc


Oil Prices Head Lower

Over the last month, the US dollar has strengthened considerably, which in turn has helped deflate the great commodity bubble brought on by the policies of the Federal Reserve. Over the last month, Brent Crude oil has fallen from $119 to nearly $110 a barrel. Lower oil prices are a tailwind to recovery in the economy and help increase consumption. More consumption is a boon for stocks as consumers spend more instead of worrying about the price at the pump.

 

Oil Prices Head Lower - usdoil


More Evidence of Housing Strength

Takeaway: The MBA Mortgage Application survey is yet another piece of data that confirms our strong housing thesis.

Here’s why Financial Sector head Josh Steiner is highlighting the MBA Mortgage Application Survey that came out earlier this morning. It’s showing year over year strength, up 20.2%, which he says is important because it was one of the few housing indicators that wasn’t signaling strength – at least before today’s report. Here’s a chart that shows the MBA Survey’s year-on-year growth.

 

More Evidence of Housing Strength - housing1


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next