“We have become both spectators and actors in the great drama of existence.”
You can’t geek out on quantum mechanics without giving a big shout-out to the great Danish atomic physicist, Niels Bohr. He won the Nobel prize for Physics in 1922. He would have been a beauty running the Hedgeye Research Team. No offense, DJ.
I was on a plane to Kansas City from Denver yesterday and couldn’t stop thinking about the progress that our research team has made. I’m actually becoming quite humbled when I read the work of junior analysts who have matured into senior analysts at our firm. They are well ahead of where I was 5 years into being in the game. A collaborative culture provides them a convex learning curve.
Applying chaos theory, predictive tracking algos, and the principles of thermodynamics to our Global Macro research is what we are doing. Yes, we are early. And, no, we don’t need to call a management team for “edge” on what the Euro is going to do next. In order to execute on our process, we have to submit ourselves to being both attentive spectators of the game and proactive actors within it.
Back to the Global Macro Grind…
Not unlike playing team sports, you have to adapt to the game that you are in and play it accordingly. Because, no matter where you go this morning, here you are – at the all-time highs in the SP500 (+11.7% YTD). And the great drama of our existence within the game continues…
A few weeks ago I contrasted approaching markets from a Darwinian (evolutionary) rather than a Newtonian (time-independent) perspective. “Newton’s 17th century view stipulated the physical world as a closed system dominated by cause and effect” (Cosmic Evolution, pg 34). Whereas opening your mind and risk management process to non-linearity, uncertainty, and interconnectedness is the new frontier.
In both calling market tops on “valuation” and picking stocks irrespective of style factor risks, what we are learning here is that we all have a lot more to learn. “Gone is the deterministic and mechanistic paradigm” (Chaisson). Gone is the idea that central planners can smooth economic gravity and/or the unintended consequences associated with their trying to control the game.
Tomorrow and Thursday, central planners will once again attempt to do precisely the opposite of what I just wrote:
- Fed’s Open Market Committee will hopefully do nothing to our intermediate-term #StrongDollar TREND
- European Central Bank (ECB) will either cut rates or allude to cutting them soon
Rather than get upset about what we think these people who are paid to print political compensation should do, what we’ve done is build a model that front-runs their proactively predictable behavior (yes that’s sad). We call it our GIP Model (Growth, Inflation, Policy) where:
A) POLICY is causal to a currency’s price, volatility, and expectations (across risk management durations)
B) INFLATION is local (to currency moves) and will accelerate or decelerate based on POLICY (causal)
C) GROWTH reacts (on a currency adjusted basis) to real-time local inflation expectations
No one is going to give my team a Nobel Prize for this. We’d have to had racked up debt and toiled in academia to prove out our practitioner’s model (with no real-world experience) for decades – and by that time we would have been way late. But, our Growth and Inflation forecasts have been better than anyone in the marketplace for the last 5 years, and I’m not going to apologize for that. We’re proud of it.
So back to the why on an ECB rate cut:
- #CommodityDeflation is perpetuating “lower than expected inflation readings” across Europe
- Both European employment and real (inflation adjusted) consumption growth remain weak
- So, in their central planning box of thinking, this provides theoretical air-cover to devalue the Euro
In market speak, this won’t save what the Europeans have been desperately trying to solve for (GROWTH). To the contrary, this POLICY to INFLATE will devalue the Euro versus the US Dollar, rally European stock markets, and plug the people (again). #EuroCrats, Unite.
- United States of America’s monetary POLICY to inflate (2010-2012) = US Dollar hits 40yr lows
- Japan’s Weimar Republic POLICY to inflation (2012 to ?) = Burning Yen, to be continued
Perversely, this is a great opportunity for America. This provides both the President of the United States and his conflicted and compromised Fed and Treasury an opportunity to get out of the way (Treasury just announced they’ll pay down $35B in borrowings!) and let the US Dollar strengthen versus her socialized European and Japanese counterparts.
Politically driven causal factors driving entropy into an unstable and non-linear market ecosystem of colliding global currencies, commodities, and country factors … Yes, this is war - a Currency War (thank you Jim Rickards). We’re just spectators and actors trying to perform within it.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $97.13-104.38, $3.06-3.26, $81.93-83.31, $1.29-1.31, 97.11-100.94, 1.66-1.76%, 11.71-14.61, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
In preparation for PNK's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
YOUTUBE FROM Q1 CONFERENCE CALL
- "These trends continued into January, with similar patterns to what we saw in the fourth quarter, that being, overall visitation softness and declines largely seen in the Retail segment."
- [Baton Rouge] "Overall, we're very pleased with the visitation trends, and look to keep our focus on driving additional regional plays, continuing our brand awareness efforts and hosting high-profile events throughout 2013 remains a priority. It's important to remember that cultivating VIP business take time, and we're confident that we can reach our goals, based on the quality of the property, extremely favorable guest response and the infrastructure we have in place, with an experienced host team, branch offices and a network of independent agents."
- [River Downs] "Demolition of the grandstands and related facilities will be completed shortly, and we expect to begin construction of a new gaming entertainment center this quarter. We plan to open in the second quarter of 2014."
- [River City] "The next two phases are progressing rapidly, with a multipurpose event center expected to come online by the summer and the hotel is scheduled to open in the third quarter of 2013."
- [Baton Rouge room renovation] "We're trying to get this next phase done before the summer season hits and then we would not continue with rooms until after Labor Day, next September."
- "Now the other thing I'll just add is that we feel pretty good about the airlift that comes into Baton Rouge, the commercial airlift. And Baton Rouge is a vibrant and growing city. So from a longer-term point of view, we are very bullish on what we have in Baton Rouge."
- [Marketing plans] "We have forecasting tools, so we can anticipate the business volumes for those properties that have hotel demand. So there is trends that you can look out into the future and, therefore, adjust accordingly versus waiting for business volumes and then reacting. So I would just answer it more succinctly that we can react. And, really, plus react we can proactively adjust our marketing spend based on the business volumes that we're seeing with future demand, whether it be hotels, events, those kind of things, response rates. So we're pretty nimble when it comes to that."
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TODAY’S S&P 500 SET-UP – April 30, 2013
As we look at today's setup for the S&P 500, the range is 33 points or 1.48% downside to 1570 and 0.59% upside to 1603.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.45 from 1.46
- VIX closed at 13.71 1 day percent change of 0.73%
MACRO DATA POINTS (Bloomberg Estimates):
- FOMC opens two-day meeting
- 7:45am: ICSC weekly sales
- 8:30am: Employment Cost Index, 1Q, est. 0.5% (prior 0.5%)
- 8:55am: Johnson/Redbook weekly sales
- 9am: NAPM-Milwaukee, April (prior 50.98)
- 9am: S&P/CS 20 cities, M/m SA, Feb., est. 0.80%
- 9am:S&P/CS Composite 20 cities, Y/y, Feb., est. 8.90%
- 9am: S&P/CaseShiller Home Price Index, Feb. (prior 146.14)
- 9:45am: Chicago Purchasing Manager, April, est. 52.6
- 10am: Consumer Confidence, April, est. 60.0 (prior 59.7)
- 11am: Fed to purchase $4.25b-$5.25b notes in 2017 sector
- 11:30am: U.S. to sell 4W bills, $23b 52W bills
- 4:30pm: API energy inventories
- House meets in pro forma session, Senate not in session
- Federal Open Market Cmte meets on eco, interest rates, 9am
- Bloomberg LINK holds Washington Summit w/ CFTC Chairman Gary Gensler, FCC Chairman Julius Genachowski, Lazard Vice Chairman Gary Parr, White House CEA Alan Krueger, CAP Chairman John Podesta, Va. Gov. Bob McDonnell, 8am
WHAT TO WATCH
- KKR said to weigh bid for Rio Tinto Australia copper mine stake
- Best Buy exits Europe with sale of stake to Carphone Warehouse
- CBOE plans post mortem on response, procedures amid outage
- BofA urges dismissal of U.S.’s $1b faulty mortgages suit
- Time Warner Cable appoints AOL’s Minson CFO as Esteves departs
- MBIA bid for pretrial ruling in Countrywide lawsuit is rejected
- UBS 1Q profit beats ests. on investment bank
- BP 1Q profit beats analyst estimates on trading
- Deutsche Bank seeks $6.5b as co-CEO Jain reverses course
- AB InBev’s quarterly results miss estimates on Brazil, U.S.
- Heinz holders vote on acquisition by Berkshire, 3G Capital
- Heinz wins ruling tossing investor suits over Berkshire buyout
- Suncor Energy 1Q operating EPS beats est.
- US Airways-AMR in talks on credit cards w/Barclays, Citigroup
- German unemployment climbs in sign economic recovery delayed
- Japan-to-Korea output misses estimates as Taiwan cools
- Enterprise Products Partners (EPD) 6am, $0.65
- Aetna (AET) 6am, $1.38
- Starwood Hotels & Resorts Worldwide (HOT) 6am, $0.53
- Huntsman (HUN) 6am, $0.16
- Norbord (NBD CN) 6am, $1.36
- NiSource (NI) 6:30am, $0.71
- CGI Group (GIB/A CN) 6:30am, C$0.49
- Rockwood Holdings (ROC) 6:30am, $0.67
- Harris (HRS) 6:30am, $1.12
- Pitney Bowes (PBI) 6:30am, $0.44
- Cummins (CMI) 6:44am, $1.86
- Legg Mason (LM) 6:59am, $0.20
- Pfizer (PFE) 7am, $0.55
- Thomson Reuters (TRI CN) 7am, $0.32
- Sirius XM Radio (SIRI) 7am, $0.02
- Fidelity National Information Services (FIS) 7am, $0.61
- Cobalt International Energy (CIE) 7am, ($0.14)
- Wisconsin Energy (WEC) 7am, $0.71
- Avon Products (AVP) 7am, $0.14
- TRW Automotive Holdings (TRW) 7am, $1.43
- Xylem (XYL) 7am, $0.27
- Oshkosh (OSK) 7am, $0.86
- MGIC Investment (MTG) 7am, ($0.14)
- Office Depot (ODP) 7am, $0.04
- Marathon Petroleum (MPC) 7:03am, $2.17
- McGraw-Hill (MHP) 7:10am, $0.73
- MeadWestvaco (MWV) 7:15am, $0.24
- NextEra Energy (NEE) 7:30am, $1.02
- Public Service Enterprise Group (PEG) 7:30am, $0.74
- Invesco (IVZ) 7:30am, $0.47
- Tenet Healthcare (THC) 7:30am, $0.30
- Domino’s Pizza (DPZ) 7:30am, $0.55
- Vishay Intertechnology (VSH) 7:30am, $0.11
- Valero Energy (VLO) 7:42am, $0.99
- U.S. Steel (X) 7:45am, ($0.22)
- Affiliated Managers Group (AMG) 7:54am, $2.03
- HCP (HCP) 8am, $0.72
- UDR (UDR) 8am, $0.33
- AGL Resources (GAS) 8am, $1.34
- BOK Financial (BOKF) 8am, $1.18
- Hudson City Bancorp (HCBK) 8am, $0.11
- 3D Systems (DDD) 8am, $0.21
- Arcos Dorados Holdings (ARCO) 8am, $0.06
- Agco (AGCO) 8:15am, $0.88
- Martin Marietta Materials (MLM) 8:15am, ($0.35)
- Ecolab (ECL) 8:20am, $0.59
- Franklin Resources (BEN) 8:30am, $2.49
- Zoetis (ZTS) Pre-mkt, $0.33
- Arthur J Gallagher (AJG) Pre-mkt, $0.24
- Athabasca Oil (ATH CN) Pre-mkt, (C$0.03)
- Edison International (EIX) 4pm, $0.66
- Vertex Pharmaceuticals (VRTX) 4pm, ($0.21)
- Western Union (WU) 4pm, $0.32
- SolarWinds (SWI) 4pm, $0.37
- Regal Entertainment Group (RGC) 4pm, $0.13
- AvalonBay Communities (AVB) 4:01pm, ($0.63)
- Fiserv (FISV) 4:01pm, $1.34
- Canadian Oil Sands (COS CN) 4:01pm, C$0.42
- Amdocs (DOX) 4:01pm, $0.72
- Flextronics International (FLEX) 4:01pm, $0.13
- IAC/InterActiveCorp (IACI) 4:01pm, $0.68
- DreamWorks Animation (DWA) 4:01pm, ($0.03)
- EXCO Resources (XCO) 4:01pm, $0.08
- NCR (NCR) 4:02pm, $0.42
- Oneok Partners (OKS) 4:05pm, $0.58
- Oneok (OKE) 4:05pm, $0.59
- Trimble Navigation (TRMB) 4:05pm, $0.38
- QEP Resources (QEP) 4:05pm, $0.30
- Questar (STR) 4:05pm, $0.43
- Questcor Pharmaceuticals (QCOR) 4:06pm, $0.96
- Verisk Analytics (VRSK) 4:10pm, $0.53
- Genworth Financial (GNW) 4:10pm, $0.28
- Access Midstream Partners (ACMP) 4:15pm, $0.34
- Fortinet (FTNT) 4:15pm, $0.10
- Yamana Gold (YRI CN) 4:20pm, $0.18
- TECO Energy (TE) 4:24pm, $0.17
- FMC (FMC) 4:30pm, $1.07
- Willis Group Holdings PLC (WSH) 4:30pm, $1.31
- Jones Lang LaSalle (JLL) 4:30pm, $0.23
- Genworth MI Canada (MIC CN) 4:31pm, $0.81
- Equity Residential (EQR) 4:55pm, $0.65
- DDR (DDR) 5pm, $0.26
- Boston Properties (BXP) 5:09pm, $1.21
- SM Energy Co (SM) 5:30pm, $0.57
- UGI (UGI) Post-mkt, $1.44
- American Capital (ACAS) Post-mkt, $0.28
- Manitowoc (MTW) Post-mkt, $0.14
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump
- Lumber Mills Expand as Prices Rise Most Since 1993: Commodities
- WTI Crude Heads for Monthly Decline as Stockpiles Seen Rising
- Gold Swings Between Gains and Losses Before Policy Makers Meet
- Copper Heads for Biggest Decline Since May on Demand Concern
- Corn Extends Biggest Gain Since June as Rain Slows U.S. Planting
- Sugar Climbs With Grains Before May Futures Expiry; Cocoa Falls
- Perth Mint Works Through Weekend to Meet Most Demand Since 2008
- Noble Group Said to Hire Former Goldman Trader Evans for Metals
- India May Consider Cutting Wheat Export Price to Boost Shipments
- Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight
- Voestalpine Sees Steel Recovery Taking Until 2014 on Europe Glut
- Crude Stockpiles Gain in Survey as Output Climbs: Energy Markets
- Gold Exchange-Traded Products Poised for Record Monthly Decline
The Hedgeye Macro Team
The Macau Metro Monitor, April 30, 2013
SINGAPORE SAYS WAGE COSTS MAY QUICKEN AMID FOREIGN WORKER CURBS Bloomberg
Singapore’s wages will grow at a faster pace in 2013, contributing to higher labor costs and price pressures even as the economy expands at a “modest” pace, the Monetary Authority of Singapore said. Overall wage growth could average 3% in 2013, compared with 2.3% in 2012. The island’s job market will remain “tight” this year as demand for workers outpaces supply amid the continued tightening in foreign labor. A Manpower Ministry report today showed job creation in the three months through March 31 was the weakest in 10 quarters, and the unemployment rate rose from a five-year low.
Singapore tightened curbs on overseas workers for a fourth straight year in February and unveiled measures that will raise wage costs for companies through 2015, as the government steps up efforts to increase productivity. The central bank, which uses its exchange rate to manage inflation, stuck to a policy of allowing gradual gains in its currency even after the economy unexpectedly contracted last quarter.
The economy added 20,800 jobs last quarter, compared with 44,000 in the previous three months, said the Ministry of Manpower. The seasonally adjusted jobless rate rose to 1.9% from 1.8%, it said.
This morning we co-hosted a conference call with our Industrials Team, lead by Managing Director Jay Van Sciver, featuring Carl Walter, co-author of Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise (2012). On the call, Carl dove deeply into the complexion of and outlook for the Chinese financial system – specifically its key risks, most misunderstood features and the outlook for reform(s).
The replay podcast is about 50 minutes in its entirely (~25 mins of prepared remarks and ~25 mins of Q&A); if you care on China, it’s worth every minute of your time. If, however, you enjoy a more passing interest on the subject(s), please enjoy the following collection of what we thought were some of the more critical, candid and/or colorful quotes from our expert, Carl Walter:
- RE: provincial and municipal governments – “Really, you’re looking at a huge country that’s much like Europe… you have the Germanys, you have the Frances, you have the Greeces and you have the Portugals. You have places that work and places that don’t work.”
- RE: why banks are so integral to the Chinese financial system – “Banks are the pillar of the system because they have all of the deposits. The Big 5 Banks hold over 60% of all deposits.”
- RE: corporate bond market – “People seem to think the corporate bond market is being developed to take pressure off of the banks… I’ve never read such shallow and meaningless stuff in my life… The guys that own the bonds are the banks. They are the only ones that have the money to lend.”
- RE: bonds vs. loans tradeoff – “Banks have lent long and have run up to various liquidity measures. On a net-net basis, you can lend less than if you [underwrite] a bond.” … “You can see there is a [consistent] 3% or so differential between [yields on] loans and bonds.” … “Why are you creating a bond market where 75% of the issuers are the same as your borrowers?... What does a bond market really mean when there are no real third party interests?”
- RE: banks being the source of the problem – “Bank lending is no longer the solution for China, which is why you have all this discussion about changing business models.”
- RE: Too Big To Fail – “The banks really are just too big to fail and I truly doubt that any of them will be allowed to fail… When Lehman Bros. was allowed to fail here or, rather, was put into bankruptcy, the Chinese were completely taken aback because they couldn’t understand how the US gov’t would let one of its blue-chip banks go under unless it the gov’t really didn’t have the capacity to support it. In my point of view, [a major bank failure] would never happen in China because it would truly mean that the gov’t doesn’t have the capacity to support it.”
- RE: contextualizing shadow banking – “The huge bulk of [lending over the last 3-4yrs] has not been the shadow banking market. It’s been the banks.” … “WMPs have grown to be about 13% of deposits and pose a real risk to the credibility of the banks.”
- RE: NPL estimates – “[Chinese banks] certainly are hiding NPLs. The biggest way to hide them has been to extend maturities. But there are problem loans there and sooner or later they are going to have to come out or the banks are not going to be able to continue to lend… [For comparison] in 1997, 25% of total loans were bad… [Applying 20% to today’s post credit bubble loan portfolio yields about CNY6 trillion.]… CNY6 trillion is a conservative figure. You’re going to see a lot more capital raising on behalf of the banks.”
- RE: why China can’t use FX reserves as fiscal firepower – “Foreign reserves can’t really save China’s banks.” … “The capital [i.e. US Treasuries] is sitting in New York in a subaccount at the Fed under the PBOC. The capital is in New York. The bank is operating in China. It doesn’t really have any capital. So what happened was that they did five-year currency swaps and swapped them into RMB with the shareholder, Central Huijin… Those swaps were done over a period of three years and were done in such a way that they would not cause any kind of pip in inflation. If you’re going to use foreign exchange reserves – of which China has a load – you can’t really bring them back into the country to use them. You’ve already created RMB when you got them. If you bring them back into the country, you’re going to create a similar amount of RMB all over again and you’re going to create an inflationary situation.”
- RE: national debt – “If you add local government debt plus estimated NPLs [to a “narrow” calculation that includes the MOF, Policy Banks, Ministry of Railways and Bank Subordinated Debt] you get to 97% [sovereign debt/GDP].”
- RE: broad-based financial reform – “How do you reform interest rates – which are now fixed by the PBOC – when you have banks that are frozen in time with long-term loans with fixed interest rates and a big chunk of their corporate bond portfolio – which also long-term and has fixed interest rates? How are you going to reform your interest rates when it’s going to require a tremendous recapitalization of the banks? And you can’t hide it, because these banks are all listed in Hong Kong.” … “If you really want to reform this market, you’re going to dismantle everything that’s made it work so far. And you’re going to dismantle the levers of control the government and the Party has. I can’t imagine real serious reform.”
- RE: CNY and capital account liberalization – “How are you going to liberalize the RMB?... How are you going to reform [China’s financial system] by opening up the RMB markets? What would be the first thing that happened? People say that the RMB will appreciate. My comment is there’ll be a vast swooshing sound as people take their money out of the country.”
- RE: interest rate reform triggering a massive bank recapitalization requirement – “The real cost of capital is nowhere near 3% in China… As soon as you [liberalize deposit rates and] put on a more realistic cost of capital, you’re going to lose money on the banks’ bond portfolios – which are 25-30% of their balance sheets. And similarly, you’ll lose money on their loan portfolios as well.”
- RE: previous financial sector reforms – “Between the Asian Financial Crisis to 2005, there was a real serious effort to restructure the Chinese banks… My view of it is that the new leadership came in and didn’t have an appreciation for what was accomplished and stopped it. Serious people [in China] don’t want financial reform because they would not be the beneficiaries of reform – for example, the big SOEs.”
- RE: NPL evergreening – “Rolling this stuff forward so they can buy time to decide what to do is the typical bureaucratic way of dealing with this [NPL] problem. That will only make the problem worse.”
- RE: social unrest – “Unless GDP picks up in the next 3-5 years, there’s a possibility of some real social problems there [in China].”
- RE: sustained slowdown in fixed assets investment – “[Fixed assets investment] has to come down [as a percentage of GDP] because I don’t think the banks can continue to support this stuff. If you look at total social financing growth, we’re talking about [incremental] lending that’s over 30% of GDP the last four years… If a big chunk of [bank] assets are nonperforming and another big chunk of [bank] assets are long term and if [bank] deposits aren’t growing, then how are [Chinese banks] going to make new loans? You’ve got to have new liquidity. And the export sector, the WTO is what provided all this new liquidity. If you look at any of these charts – look at household savings – all of these things take off like rockets. [Look at] foreign reserves… [Look at] foreign direct investment. All of these things took off like rockets. The amount of liquidity injected into that system was unbelievable and that’s what allowed the banks to make all these loans. And now that liquidity is not being created.”
- RE: key players in the reform process – “I thought Hu Jintao and Wen Jiabao were the most useless people I’ve ever seen in my life. The new [President], Xi Jinping, impresses me. The new Premier [Li Keqiang] is not impressive. He’s a bureaucrat and if you’re a bureaucrat, you’re not going to achieve anything in that environment.”
Enjoy your evening,
ABOUT CARL WALTER
Carl Walter joined Stanford's Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC) during the winter and spring terms of the 2012-13 academic year after a career in banking spent largely in China. Walter has contributed articles to publications including Caijing, the Wall Street Journal and the China Quarterly. He is also the co-author of Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise (2012) and Privatizing China: Inside China's Stock Markets (2005).
Walter lived and worked in Beijing from 1991 to 2011, first as an investment banker involved in the earliest SOE restructurings and overseas public listings, then as chief operation officer of China's first joint venture investment bank, China International Capital Corporation. Over the last ten years he was JPMorgan's China chief operating officer as well as chief executive officer of its China banking subsidiary.
Walter holds a PhD in political science from Stanford University, a certificate of advanced study from Peking University and a BA in Russian Studies from Princeton University.