“Hello out there, we're on the air, it's 'Hockey Night' tonight.
Tension grows, the whistle blows, and the puck goes down the ice.
The goalie jumps, and the players bump, and the fans all go insane.
Someone roars, "Bobby Scores!" at the good old Hockey Game.”
-Stomping Tom Connors
It is a sad day back in my home country of Canada. Iconic Canadian singer Stomping Tom Connors passed away from natural causes. For those that were born south of the 49th parallel, his name is probably not all that familiar, but in Canada his songs are unofficial national anthems.
I know, I know only Canadians would idolize a singer that called himself Stomping and sang about hockey. To be fair, Connors also sang about more complex topics like potatoes (Bud the Spud) and Saturday evenings in small Canadian outposts (Sudbury Saturday Night). On some level this simplicity is the beauty of Canada, although one does have to wonder what would be worse – listening to Stomping Tom on repeat for 12 hours or a 12 hour Rand Paul filibuster.
As many of you know, one of Canada’s most significant industries is mining. Our Industrials Sector Head Jay Van Sciver will be presenting his in-depth view of the global mining and construction sector on March 27th in a black book presentation. We will circulate the information closer to the date. The most controversial name in this sector is Caterpillar Tractor (CAT).
A primary reason we are negative on the global mining sector, and CAT in particular, is simply reversion to the mean. Mining companies have dramatically over spent for the last decade, as highlighted in the Chart of the Day, and as much as some sell side bankers would have you believe otherwise - mining is not a growth industry. Margins will revert to the mean, spending will revert to the mean, and so too will capital investment. After all, cyclicals are cyclical.
Switching gears, between Keith and myself, we have been on the road for the better part of the last month from London to San Francisco, and most spots in between. If there is one consistent theme, it is that most large investors are still very cautious as it relates to equities. Now I realize this is anecdotal, but it has been a striking observation for us.
In that vein, as I was reviewing the New Tape (aka Twitter) this morning, I noticed this tweet from Ralph Acampora:
“This is still the “most hated” bull market I have ever seen in my close to 50 years in this business. This disbelief is very bullish.”
I don’t know enough about Ralph’s history to know whether he has a good record of forecasting stock market direction, but I do think that tweet was apropos and consistent with what we are seeing and hearing.
A key theme underscoring our relatively bullish call on the U.S. economy and U.S. equities has been what we call #HousingsHammer. In effect, this is the idea that home prices will improve not at a linear pace, but at a parabolic rate. This was a thesis developed by our Financials Sector Head Josh Steiner and we continued to see support in this week’s Core Logic numbers.
Corelogic released its January home price data Tuesday morning as well as its early look at February 2013. The data was very strong. January 2013 saw home prices rise +9.7% YoY, which was upwardly revised from the preliminary estimate for January one month prior of +7.9%. The preliminary estimate for February is that prices rose +9.7% YoY, unchanged vs. January.
Excluding the distressed segment of the market, the story is more bullish. January prices for the non-distressed market rose +9.0%, which was up materially from the +6.7% increase in December 2012. Interestingly, the early read on February prices shows the non-distressed market up +11.3%, a sequential acceleration of 230 bps. So in two months, the rate of appreciation on non-distressed homes has accelerated 460 bps. This is what we call a parabolic recovery.
In our models, housing is a critical variable to the U.S. economy because more than 70% of the U.S. economy is driven by consumption. In a paper last year, Charles Calomiris, Stanley Longhofer, and William Miles found that the wealth effects from housing “vary depending on whether the homeowner is old or young, poor or rich—but their overall estimate is that a dollar of extra housing wealth triggers five to eight cents in additional spending.”
On a high level, the math is compelling in terms of the housing benefit to GDP. If we assume there are 75 million owned homes in the U.S. and the average price is $175,000, then that is a total housing stock value of $13.1 trillion. That value of that housing stock would increase by $1.3 trillion if home prices are up 10% this year. Assuming the midpoint ($0.065) in the study above is accurate, the appreciation in home value at 10% this year will lead to an incremental $85 billion in consumer spending. On a GDP base of $15 trillion this is an incremental tailwind tail wind of 0.6% growth.
Clearly, these are all rough numbers and estimates, but we do feel very good about the fact that the home price appreciation will continue to accelerate and this will be additive to consumer spending. Given that Bloomberg consensus for 2013 U.S. GDP growth is 1.8%, an additional 0.6% could very well lead to an actual GDP number that “stomps” the consensus estimates.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $109.01-111.98, $81.88-82.66, 91.89-94.69, 1.91-1.97%, 11.91-15.18, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – March 7, 2013
As we look at today's setup for the S&P 500, the range is 32 points or 1.46% downside to 1519 and 0.62% upside to 1551.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.70 from 1.69
- VIX closed at 13.53 1 day percent change of 0.37%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: BoE interest rates, monetary policy cmte decision
- 7:30am: Challenger Job Cuts Y/y, Feb. (prior -24.4%)
- 7:30am: RBC Consumer Outlook Index, March (prior 49.5)
- 7:45am: ECB announces interest rates
- 8:30am: ECB’s Draghi holds news conference
- 8:30am: Trade Balance, Jan., est. -$42.6b (prior -$38.5b)
- 8:30am: Non-farm Productivity, 4Q F, est. -1.6% (prior -2.0%)
- 8:30am: Unit Labor Costs, 4Q F, est. 4.3% (prior 4.5%)
- 8:30am: Init Jobless Claims, March 2, est. 355k (prior 344k)
- 9:45am: Bloomberg Consumer Comfort, March 3 (prior -32.8)
- 10am: Fed’s Powell testifies to Congress on Bank Secrecy Act
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11am: Fed to buy $3.00b-$3.75b notes in 2018-2020 sector
- 12pm: Household Change in Net Worth, 4Q (prior $1.722t)
- 3pm: Consumer Credit, Jan., est. $14.7 (prior $14.595b)
- 4:30pm: Fed releases bank stress test results
- 9am: Energy Dept meeting of Natl Coal Council
- 9am: U.S.-China Economic and Security Review Commission hearing on access to China’s financial system
- 10am: REI CEO Sally Jewell’s confirmation hearing to be Interior secretary before Sen. Energy and Natural Resources Cmte
- 10am: Sen. Judiciary Cmte considers gun-control legislation including an assault-weapon ban
- 10am: Sen. Health, Education, Labor and Pensions Cmte hearing on safety in schools
- 10am: Sen. Banking Cmte hearing on Bank Secrecy Act
- 11am: National Transportation Safety Board opens public docket for Japan Airlines Boeing 787 lithium-ion battery fire probe
- 1:55pm: Obama signs Violence Against Women Act into law
WHAT TO WATCH
- Fed to release preliminary results of bank stress tests
- ECB, BOE to keep their benchmark interest rates unchanged
- BOJ rejects earlier asset purchases as Shirakawa exits
- Trade gap in U.S. probably widened on costlier energy imports
- Feb. retail sales hurt by tax concerns, cold weather
- Banks said to weigh disregarding Fed with payout-plan disclosure
- SEC to consider technology standards to avoid automated trading meltdowns
- Time Warner will split from magazine unit in 3rd major spinoff
- Apache said to weigh sale of deep-water assets in Gulf of Mexico
- Artisan Partners raises $332m pricing IPO above range
- NGP said to solicit buyers for pipeline operator Teak Midstream
- MGIC raises $1.1b as investors bet on mortgage insurance
- Facebook names UCSF Chancellor Desmond-Hellmann to board
- Keystone pipeline decision may influence oil-sands development
- Smithfield Foods (SFD) 6am, $0.50
- EPL Oil & Gas (EPL) 6am, $0.50
- Navistar International (NAV) 6am, $(1.76) - Preview
- Nationstar Mortgage (NSM) 6:30am, $0.69
- Ciena (CIEN) 7am, $(0.14)
- John Wiley & Sons (JW/A) 8am, $0.83
- Baytex Energy (BTE CN) 8am, C$0.34
- Canadian Western Bank (CWB CN) 8am, C$0.60
- Kroger (KR) 8:15am, $0.70 - Preview
- Cooper Cos. (COO) 4pm, $1.19
- Quiksilver (ZQK) 4pm, $(0.07)
- Finisar (FNSR) 4pm, $0.16
- H&R Block (HRB) 4:02pm, $(0.03)
- Pandora Media (P) 4:02pm, $(0.05)
- Westport Innovations (WPRT) 4:05pm, $(0.44)
- Main Street Capital (MAIN) 4:05pm, $0.50
- Workday (WDAY) 4:05pm, $(0.21)
- Paramount Resources (POU CN) After-mkt, C$(0.30)
- Boise Cascade (BCC) N/A, N/A
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- BHP Billiton Rebuffs China Claims of Iron-Ore Price Manipulation
- Oil Crop for McDonald’s Fries Rising Most Since ’08: Commodities
- WTI Crude Trades Near Lowest in 10 Weeks; Brent Pipeline Resumes
- Copper Rises as Portuguese Upgrade Eases Euro-Crisis Concern
- Putin Pipeline to Send 25% of Russia’s Oil East: Energy Markets
- Corn Advances on Speculation U.S. Will Lower Supply Estimate
- Paulson Gold Fund Plunges 18% as Metal’s Decline Foils Rebound
- Sugar Climbs for Fourth Day on Port Congestion; Coffee Advances
- Rebar Falls to Near Two-Month Low Amid Rising Inventory in China
- Lumber Futures Double Top Signals Price Chop: Technical Analysis
- World Wheat Output May Rise 4.3% on Europe, Russia, UN FAO Says
- Maersk Sees Tanker Slump Persisting Amid Biggest Glut Since 1996
- Sumitomo Sees Aluminum Surplus at Highest Level in Two Years
- Gold Swings Between Gains and Losses as Investors Weigh Outlook
The Hedgeye Macro Team
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The Macau Metro Monitor, March 7, 2013
ACDL SAYS MGM NO LONGER INVOLVED IN VIETNAM CASINO RESORT Reuters
Asian Coast Development (Canada) Ltd (ACDL), which is developing Vietnam's first large-scale integrated resort, said on Thursday its partner, MGM Hospitality, will no longer manage the project. MGM Hospitality gave its decision on March 4. "We thank MGM for its assistance in the hiring and training of our 2,000-strong team of Vietnamese hospitality professionals," Chief Executive Lloyd Nathan said in a statement. "We are delighted that we have completed the construction of the first phase of our first resort," he added.
Vancouver-based operator ACDL's principal shareholders, Harbinger Capital and PNK, said in the statement they remained committed to the project.
ACDL's Ho Tram development includes 541 five-star rooms and suites, nine restaurants, gaming facilities and luxury retail. The company said it is now constructing Tower 2 of the first resort, which will add 559 five-star rooms and is constructing an 18-hole Greg Norman-designed championship golf course.
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.”
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 email@example.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.
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.
Call with questions,
HEDGEYE RISK MANAGEMENT, LLC
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