prev

Rattling Sabers

Client Talking Points

Down With The KOSPI

Korea's KOSPI index dropped the most in five months as the Bank of Japan stimulus resonates throughout the country. 41% of the KOSPI is tech/industrial that competes head to head w/ Japanese Manufacturers and as the Yen continues to be debauched, the KOSPI continues to slip lower, down another -1.6% overnight.

Bear Oil

When crude oil drops in price, that's bullish for the economy. Americans hate high gas prices and an increase in consumption is a bullish catalyst for growth. Brent Crude oil is down -4.3% year-to-date and it's starting to look a lot like gold did three months ago as the US dollar continues to roar higher. Oil can still come down further from these current prices. Get the dollar right, you'll get oil right.

Asset Allocation

CASH 18% US EQUITIES 30%
INTL EQUITIES 25% COMMODITIES 0%
FIXED INCOME 3% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. The company's net income declined on its recent earnings report but beat the Street's expectations

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"@moorehn Well if recent history teaches us anything, basically no one in America gets how money works." -@KatherineMiller

QUOTE OF THE DAY

"The cure for boredom is curiosity. There is no cure for curiosity." -Dorothy Parker

STAT OF THE DAY

U.S. creates just 88,000 jobs in March; unemployment rate down to 7.6%.


REGIONALS: TAX REBATES

Takeaway: We would fade the optimism

Tax rebates a positive for the regionals in March but revs will struggle to move into the black

 

 

Uncle Sam's late refunds may have jolted a very weak regional gaming environment – temporarily.  Sadly, same store revenues will still likely fall.  Our first peak into March involves Missouri, which we think declined only 2% on a same-store basis in March, much improved from the 9% average decline seen in the past 3 months.  

 

Overall, we expect SS riverboat revenues to decline 2-3% in March, much improved, but still down.  Down revenues with a favorable calendar and the tax refund catalyst is not cause for celebration, in our view.  Our projection model accounts for changes in seasonality factors, calendar differences and the tax refund. 

 

REGIONALS: TAX REBATES - riverboat

 

Before people get too pumped up about the sequential improvement in gaming revenues, we would note that SSS revenues may continue to post YoY declines until July, with July benefiting from an a easy comp from July 2012 (-7%).  With lower visitation and an older, smaller number of core gamers, we remain bearish on the regional fundamentals. 


Persistent Illusions

This note was originally published at 8am on March 22, 2013 for Hedgeye subscribers.

“Reality is merely an illusion, albeit a very persistent one.”

-Albert Einstein

 

This has been an entertaining week at Hedgeye.  For those that have been reading the Early Look or following us on Twitter, you have noticed that we have been having some fun with a few of the old guard of Wall Street research.  One friend of Hedgeye actually wrote in and called Keith and myself: grumpy young men.

 

Candidly, that is probably more truth than illusion.  To be fair, though, getting up early and grinding hard throughout the week probably does rightfully make a guy or gal grumpy.   There is no doubt many of our subscribers can relate to this as well.  While we have the pressure of running a profitable business and making 50+ employees happy, the pressure that many of you have associated with the fiduciary responsibility of managing money is also no illusion.

 

Speaking of illusions, our Energy Analyst Kevin Kaiser actually identified a great one this week in the cash flow statement of a company called Linn Energy (LINE).  LINE is an upstream MLP, so in effect they use the tax advantage of a MLP structure to pay out large distributions.  This is fine for predictable and mature businesses.  Unfortunately, neither of those traits fit LINE.

 

In fact, LINE is an oil and natural gas producer.  So not only is it not a mature to slightly growing business, it is actually a business with natural decline rates that requires meaningful capital expenditures to maintain the cash flow stream.  In the Chart of the Day, we’ve included a slide from the presentation that looks at distributions paid from 2006 to 2012.

 

In that time period, LINE paid $2.2 billion in distributions.  Strangely, in the same period the company only generated $1.7 billion in cash flow from operations.  Moreover, if we look at free cash flow, which we define as cash flow from operations less capital expenditures, LINE generated a negative -$1.0 billion in cash flow.  Despite these cash flow deltas, LINE management has done a decent job pulling rabbits out of the proverbial cash flow hat and paying distributions, largely from financing cash flow.

 

So, as Kaiser summed up about the company at the end of his presentation:

 

The illusions:

  • LINN’s assets are mature oil and gas fields with low decline rates;
  • LINN’s cash flows are stable because of its hedging strategy;
  • LINN generates sufficient cash flow to pay and grow its distribution;
  • With an 8% yield, LINN is an attractive fixed-income alternative; and
  • LINN is creative and innovative.

The reality:

  • LINN’s base decline is 20 - 25% per year;
  • LINN’s cash flows are overstated because of its hedging strategy;
  • LINN does not generate any FCF, and must raise additional capital to pay its distribution;
  • LINN equity is more than 50% overvalued today; and
  • LINN is financially creative and innovative.

If Houdini were a hedge fund manager, he would likely be all over this company!

 

In the global macro world this week, the primary illusion has been in regards to the cash in Cypriot bank accounts.  Is it there? Will it stay? How much will the government take?  Coming in to the week, many pundits predicted that the arbitrary decision to “tax” money in bank accounts in Cyprus would lead to a run on the banks across the peripheral countries in Europe.  Much to the chagrin of alarmists, this hasn’t happened.

 

Of course, this is not to say that the EU decision to try and force a bank levy on Cyprus makes any sense.  The larger risk is not that the EU will do try to this in Greece, Portugal, or Spain next, but rather that the illusion is created that they will.  A run on banks across the peripheries is literally a worst case scenario for the EU.  Unfortunately, investor and depositor confidence erodes very quickly with seemingly arbitrary decisions.

 

The latest news flow suggests that the Cyprus situation will continue into next week.   Russians have a large amount of capital in the Cypriot banking system, but Cypriot Finance Minister Michael Sarris spent all week in Russia and returned with his hat in hand and no bailout monies.  The European Central bank has also said that effective this coming Monday they will cut off liquidity lines unless Cyprus gets a deal in place.  So yes, the illusion that ECB officials have the situation under control is alive and well.

 

As for the Cypriots, well as of this morning the statement the government was supposed to issue is now more than 60 minutes late, but according to Twitter they are working on it.  As for the average Cypriot, their bank withdrawals from ATMs are limited to literally a couple hundred Euros.  Talk about dysfunction!

 

The slow and steady recovery of U.S. economic activity continues to be solidly in the category of non-illusions.   The key data point we received this week was in the way of non-seasonally adjusted jobless claims, which declined by -7.5% year-over-year for the week.   In aggregate, the improvement in jobless claims is starting to mirror 2012. 

 

Our Financials Sector Head Josh Steiner has noted many times, improving jobless claims are one of the best leading indicators for housing trends, credit quality, and loan growth.  Even as the dysfunction in Europe percolates, the U.S. economy stabilizing is no illusion. This is a key reason U.S. equities remain one of our favorite global asset classes.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1594-1620, $107.01-108.99, $3.39-3.49, $82.23-83.39, 94.12-97.08, 1.89-1.98%; 10.73-14.74, and 1542-1565, respectively.

 

Enjoy your weekends.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Persistent Illusions - Chart of the Day

 

Persistent Illusions - Virtual Portfolio


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE M3: BIRD FLU; TAIWAN GAMING TAX

The Macau Metro Monitor, April 5, 2013

 

 

BIRD 'FLU ON MAINLAND NOT AFFECTING MACAU: GOVT  Macau Business

Macau need not be worried about four confirmed human deaths on the mainland linked to a strain of bird influenza known as H7N9, said the government. And the outbreak has no impact on the decision to open the Gongbei border for two hours longer during the three days of the Ching Ming holiday, added Alexis Tam Chong Weng, head of the Chief Executive’s office.  “For the [H7N9] ‘flu this time, there is still not any case recorded in Macau,” Mr Tam told a press conference on Wednesday. “The cases are currently limited to the northern region of China so I think there will be no problem for us to open longer hours in the border in these three days.”

 

CHINA CULLS POULTRY AS BIRD FLU DEATH TOLL REACHES SIX BBC News

China has begun a mass slaughter of poultry at a market in Shanghai, after a new bird flu virus was detected there.  The H7N9 virus, a form of avian flu not before seen in humans, was discovered in pigeons being sold in the market.  Six people have now died from the virus, Chinese officials say.

 

It is not yet known how people are catching the disease, although the WHO says there is currently no evidence of human-to-human transmission.  The virus was discovered in pigeon samples in Huhuai market in western Shanghai, Chinese media said.  There have been 14 confirmed infections so far in eastern China, including in Shanghai and Zhejiang province.

 

TAIWAN PROPOSES 13% GAMING TAX Macau Business

The Taiwanese government is proposing a 13% tax on gross gaming revenue for potential casinos built on its outlying islands.  In Macau, casinos pay a 39% effective tax on gross gaming revenue.

 

 





In #StrongDollar, We Trust

“Kennedy Pledges He Will Maintain Value of Dollar”

-New York Times, 1960

 

As William Silber points out in Volcker – The Triumph of Persistence, that’s what JFK was rolling with 2 weeks before the 1960 US Presidential Election. It was a pro-growth campaign about American progress. A #StrongDollar has always symbolized that.

 

After LBJ, Nixon, and Carter spent 15 years devaluing the Dollar, this progressive conservative American mantra lost its place in the vernacular of what Hayek called the Political Economy. Why? Currencies and the central bankers that manipulate them get politicized.

 

After watching Bernanke devalue the Dollar as aggressively as any Fed Chairman since Arthur Burns (1970s), now you are watching the Japanese take a page out of his un-American playbook. That’s not a partisan comment either. Long-time Democrats will recall Kennedy’s thoughts about the US Dollar and monetary policy were crystal clear:

 

Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything.” (Volcker, pg 53)

 

The world no longer trusts the Japanese.

 

Back to the Global Macro Grind

 

But do Americans trust President Obama and Ben Bernanke? Does Wall Street? Do we trust that if the US unemployment rate continues to surprise on the downside in 2013 that these politicians will get out of our hard earned currency’s way?

 

Today is a big day on that score. While it’s tough to get comfortable with a number that the US government effectively makes up, we’re confident that the market is confident that Bernanke is somehow confident betting the entire bond bubble farm on one made-up number.

 

To be balanced, if there’s one thing we are overly confident in, it’s that Bernanke’s growth forecasts will continue to be wrong. We think both US employment and consumption growth surprises to the upside during #StrongDollar periods like the one you are seeing now.

 

Does the market like this? Which market? First, let’s look at what USD Correlation Risk is telling us on a 1-month duration: 

  1. US Dollar vs SP500 = +0.84
  2. US Dollar vs Brent Oil = -0.71 

Hooowah! Al Pacino couldn’t have said it better. Like taking a flyer in a Ferrari for free, American Consumers absolutely love #StrongDollar, Down Oil. Basic Materials and Energy stocks, not so much.

 

Commodity-linked country stocks markets don’t like it either:

  1. Russia – RTSI down again this morning and down -13.3% since January 28th 2013
  2. Brazil – Bovespa is a big commodity index, and continues to be just nasty YTD (-10.3%) 

For Commodities overall, the last 2 months have been flat out nasty:

  1. Rubber -21.1%
  2. Silver -15.2%
  3. Corn -14.2%
  4. Copper -10.9%
  5. Platinum -10.7%
  6. Wheat -9.0%
  7. Brent Oil -7.9%
  8. Soybeans -7.8%
  9. Lean Hogs -7.4%
  10. Gold -7.4%

So, I guess if you are really long commodities, being long Gold right now would be your outperformer!

 

Long-time market history fans know that Gold has been annihilated, multiple times, during #StrongDollar periods. Until Nixon and Connolly (his politically compromised Treasury Secretary – the guy who rode in the car with JFK during the assassination) figured out how to Burn The Buck for political victory (1971), US Dollar strength (particularly in the 2nd half of 1969) crushed the Gold bugs.

 

But this is much larger than #AngryBugs at this point. This is really the first opportunity since Q1 of 2009 where #StrongDollar Commodity Deflation has provided a real-time Tax Cut to American Consumers of food and oil.

 

The Fed’s Bill Dudley would disagree with me on this, but I don’t think you can eat platinum or rubber. That said, producers who need such things to make what we consume will pay less for their inputs, if pervasive Dollar strength continues.

 

So, again – I call on the great market minds in Washington D.C. to do what’s right and:

  1. End the most dovish Fed policy in US history
  2. Continue with the shift toward conservatism in fiscal policy
  3. Spread the love about #StrongDollar’s benefits (Obama, Yes You Can!)

Especially at the pump and at our dinner tables, we can trust that a lot more than we’ve trusted the #PoliticalClass under any of the Nixon, Carter, Bush II, or Obama regimes. “And trust is everything.”

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $105.68-108.93, $82.52-83.41, 94.04-96.35, 1.76-1.92%, 12.31-14.61, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

In #StrongDollar, We Trust - Chart of the Day

 

In #StrongDollar, We Trust - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next