“Everything in war is simple, but the simplest thing is difficult.”
-Carl von Clausewitz
In hindsight, the perma Bull/Bear War in markets gets scored that way too. After the big moves, reasons for victory and defeat become simpler to understand.
Being a market strategist isn’t simple. You need to get to simple conclusions before the market does. And the deep simplicity of it all is born out of the complex. That’s why process matters. I’ve been highlighting the thought process of American Foreign Policy strategist George F. Kennan for the past few weeks. On #process, Chapter 11 (“A Grand Strategic Education”) of Gaddis’ Kennan biography, is a beauty.
“Kennan was struck by Clausewitz’s emphasis on psychologically disarming and adversary; finding the point at which the enemy realizes that victory is either too unlikely or too costly… the assailant weakens himself as he advances.” (George F. Kennan, pg 235)
Back to the Global Macro Grind…
Relative to our current strategy on the US stock market, the enemy is the bear. Having been bearish plenty of times myself, I respect the physiological disarming process, big time. There is nothing worse than being squeezed.
With the SP500 tacking on another +2% last week to a fresh all-time daily (and weekly) closing high of 1614, the enemy is starting to give up on some core positions. You can see that by analyzing the Top 3 performing Style Factors on a 1-month duration:
- High Short Interest Stocks – 1-month price performance = +6.2%
- Consumer Discretionary Stocks (XLY) – the top performing Sector Style on a 1-month basis = +5.6%
- Technology Stocks (XLK) – 2nd best to Consumer on a 1-month duration = +5.0%
In other words, with employment, housing, and consumption #GrowthAccelerating in April (versus the 1-month head-fake of data slowing in March), what’s leading this market’s bullish charge are the simplest things associated with a growth. Gold doesn’t like growth.
Looking back at late March and early April, what was fascinating to us was how quickly consensus bulls got bearish. Since we consider ourselves Non-Consensus Bulls, this is a self-serving (and convenient) way to look at the market, in hindsight!
One way to look at consensus is via the net long positioning in non-commercial futures and options contracts. Going into last week’s melt-up in US Stocks, here’s how consensus was positioned:
- Uber long Treasuries at greater than +196,000 net long contracts (one of the highest positions of 2013)
- Way low in SP500 net exposure at less than +2,000 net long contracts (lowest position of 2013)
Consensus positioning wasn’t new – it was trending that way as Treasuries trended (higher) and SP500 (lower) throughout the middle of April. Many got sucked into the “March data is weak” narrative. Makes sense. Consensus sprints toward the last data point, whereas macro context wins the race.
Now what? The April economic data is undeniably better vs March – and that’s more in line with the intermediate-term TREND of the data that we have been signaling since late November, early December:
- NSA Jobless Claims hit a 5yr low last week at 324,000
- Commodities (CRB Index) and Oil (Brent) prices are -4% and -6% year-over-year, respectively
- Bloomberg’s Weekly Consumer Confidence Reading hit a 5yr high at 28.9
Confidence? Who in God’s good name in this country is actually confident? Aren’t we all supposed to be calling for the next crisis that most missed calling in early 2008? If people were as confident as I am right now, they wouldn’t be buying Treasuries as they make another lower-high versus their all-time bubble peak (November 2012).
What drives confidence? Does employment, housing, and consumption growth matter? How about the price of your home and stock market portfolio going up double digit year-over-year for the 1st time since 2006? If you want to broaden market trends beyond 3-6 months to year-over-year (y/y):
- SP500 = +16.1% y/y
- US Home Prices (Core Logic) = +10.3% y/y
- Gold = -10.9% y/y
How are end of the world ads for Cyprus, BitCoin, etc. doing this morning? That’s a confidence factor too. Some market it as “social mood.” Others sell fear in more ways than one. As George Kennan wrote in the late 1940s (when people in America were right petrified of anything they couldn’t see):
“We are in a peculiar position of having to defend ourselves against mortal attack, but yet not wishing to inflict mortal defeat on our attacker… We must be like the porcupine who only gradually convinces the carnivorous beast of prey that he is not a fit object of attack.” (George F. Kennan, pg 235)
So be the porcupine. Eventually these beastly bears will stop trying to scare the hell out of you; the perma bid for Treasuries will recede; and fear (VIX) might be priced at 10, 11, or 12 by then too. Then, the simplest of things will be to sell high, smile, and go away.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX and the SP500 are now $1, $98.81-105.24, $81.74-83.12, 97.59-100.13, 1.71-1.82%, 12.36-14.39, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
SJM 1Q CONF CALL NOTES
CONF CALL NOTES
- 40 of their Mass tables were reclassified as VIP tables during the quarter due to the high payout. If not for the reclassification, then both Mass and VIP win would have grown about 10% YoY
- Grand Lisboa: also has 25 premium mass tables reclassified as VIP. Without the reclassification, VIP would have grown 23.8% and Mass would have grown ~11%.
- Working at full speed on the design of their Cotai project. Expect the gazetting of the project to come soon. Also expect that later this year they will be able to make an announcement for most of the details of their project.
- Working on the redesign of the mezzanine floor to accommodate more mass tables at Grand Lisboa
- Hold adjusted EBITDA: The 3.3% hold rate was due to the reclassification of tables by the government. If they consider the tables as normal VIP tables, their hold would have been 3.08%.
- Reclassification: When they report their operating tables to the DICJ, if the max payout is equal to or more than HK$300,000, then they treat it as a VIP table vs. a mass tabls. Can't really comment on why this has or hasn't impacted their competitors.
- This likely explains why certain properties have much higher reported VIP hold rates,although we don't know for sure.
- Thinks that Galaxy's acquisition of Grand Waldo was quite logical. They aren't considering a similar move
- Operating margin on both the Old Lisboa and Oceanus improved their margins due to a greater mix of mass margins
- # of tables at Grand Lisbao: 203 VIP tables (189 by their classification) and 219 Mass tables (28 premium mass considered VIP)
- 1714 total non-vip revenues; 6489 total VIP revenues, 300xx of VIP revenue is being reclassified as VIP. The reclassification only happened 50% through the Q, so the impact will be larger going forward but they will break it out.
- Why not convert more of their satellite to owned casinos? The casinos aren't structurally up to par. Think it's better to focus their energies on making their existing casino structures better.
- The reclassification happened last year but it only impacted 3 tables, but mass has gotten more material.
- Mgmt accounting hold was 3.12% last Q.
- They have had a recent impact because they have recently increased their premium mass table base.
- VIP margin is only 7.7% and premium mass margins are over 40%.
- VIP hold rate from other self-promoted casino: (Just old Lisboa since they don't have VIP at Oceanus) Don't have it at their finger-tips but it did go up
HIGHLIGHTS FROM THE RELEASE
- Group Adjusted EBITDA: HK$2,129 million with margins of 9.7% (US GAAP: 17.2%)
- If the Group’s revenue is further adjusted to include the net revenue of self-promoted casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s Satellite Casinos, the Group’s Adjusted EBITDA Margin would be 28.8%.
- Group Gaming revenue: HK$21,734 million
- VIP gaming revenue: HK$15,137 million, an increase of 13.4%
- Total VIP chips sales: HK$459.2 billion and the VIP gaming hold percentage 3.30%
- Mass market gaming revenue: HK$6,220 million an increase of 4.7%
- Slot machine (and Tombola) revenue: HK$377 million, a decrease of 4.2%
- The Group’s total revenue of HK$21,892 million included hotel, catering and related services revenue of HK$158 million
- During Q1 2013 the Group operated an average of 653 VIP gaming tables (Q1 2012: 603),
1,118 mass market gaming tables (Q1 2012: 1,165) and 3,531 slot machines (Q1 2012: 3,877)
(average of three month-end counts).
- Casino Grand Lisboa gaming revenue: HK$8,327 million and Adjusted EBITDA: HK$1,217 million
- Hotel occupancy: 93.9% and ADR: HK$2,236
- Other Self Promoted casinos gaming revenue of HK$3,340 million and Adjusted EBITDA of HK$386MM
- Satellite Casino revenue of HK$10,067 million and Adjusted EBITDA of HK$420 million
- On 28 February 2013 gaming operations at Casino Jai Alai, which consisted of 14 mass market
gaming tables and 84 slot machines, were suspended due to the renovation of the Jai Alai Palace.
- Cash: HK$27,661 million and debt: HK$1,672 million
- Capital expenditure of the Group during Q1 2013 was HK$131 million, which was primarily for
furniture, fixtures and equipment, and leasehold improvements
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The Macau Metro Monitor, May 6, 2013
MORE LOCALS, FOREIGNERS BANNED FROM MBS, GENTING CASINOS Strait Times
More than 15,600 were issued third-party exclusion orders for the 10 months leading to March, taking the total to 43,519, about 1.5x the 27,882 at the end of May last year.
The increase came largely as a result of some 15,000 people being banned by the Government because they were receiving financial aid from the Ministry of Social and Family Development's (MSF) ComCare, or had defaulted on the Housing Board's rental payments.
GALAXY TO TIGHTEN MACAU HOLD WITH GRAND WALDO BUY The Standard, Macau Business
Galaxy Entertainment will buy the Grand Waldo hotel complex in Macau for HK$3.25 billion. Selling the Cotai Strip hotel complex to Galaxy will be units of Get Nice Holdings. Grand Waldo hotel has 316 guest rooms, 23 gaming tables and 15 VIP gaming tables.
Get Nice has agreed to stop hotel and casino operations in Macau in order to avoid competition. The firm said it will use HK$890 million of the net proceeds for development of new investment opportunities and the remainder will be used for expanding existing financial businesses.
Galaxy Entertainment said the acquisition “is a strategic investment and is expected to have synergistic effect” on the group’s development in Cotai. Grand Waldo is located across the road from Galaxy Macau, in Cotai.
PACQUIAO TO FIGHT AT VENETIAN Macau Business
The date and the venue for the ring return of Philippine boxing hero Manny Pacquiao have been confirmed. Pacquiao’s adviser Michael Koncz told the Manila Standard that the fight would be at The Venetian Macao, on November 24.
TODAY’S S&P 500 SET-UP – May 6, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 1.51% downside to 1590 and 0.59% upside to 1624.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.52 from 1.52
- VIX closed at 12.85 1 day percent change of -5.45%
MACRO DATA POINTS (Bloomberg Estimates):
- Vornado Realty Trust (VNO) 5:17pm, $1.71
- Otter Tail (OTTR) 6pm, $0.34
- 9am: ECB’s Draghi speaks at university ceremony in Rome
- 11am: Fed to purchase $2.75b-$3.5b debt in 2020-2023 sector
- 11:30am: U.S. to sell $29b 3M bills, $24b 6M bills
- Rates Weekly Agenda
- House, Senate in session
- Senate votes on bill that would let states impose sales taxes on out-of-state sellers, including online and catalog retailers
- Washington Week Ahead
WHAT TO WATCH
- JPMorgan investors urged to split chairman, oust directors
- Alibaba seen avoiding Facebook flop with IPO below $100b
- BMC said close to being taken private by Bain, Golden Gate
- Goldman Sachs hire accused of secrets theft by Credit Suisse
- TPG, Warburg said to consider both sale, IPO for Neiman
- N.Y. plans new claims after JPMorgan mortgage suit template
- GM plans to invest ~$16b in U.S. factories, facilities by 2016
- Euro-area services, manufacturing shrink less than estimated
- Intel to buy Finland’s Stonesoft for $389m in cash
- Senate expected to vote on onlne sales-tax collection bill
- Berkshire plans for life after Buffett at annual mtg
- HP accused in lawsuit of ignoring Autonomy accounting warnings
- Cameron said to speed up patent process to boost U.K. economy
- “Iron Man 3” is 2nd-best opener w/ $175.3m in sales
- U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
- North American M&A Agenda
- Canada Weekly Agendas: Energy, Mining
- Bernanke, G-7, Pakistan Vote, News Corp.: Wk Ahead May 6-11
- National Health Investors (NHI) 6am, $0.80
- Westlake Chemical (WLK) 6am, $1.28
- Gran Tierra Energy (GTE) 6am, $0.16
- American Realty Capital (ARCP) 6:25am, $0.17
- Apollo Global Management (APO) 7am, $1.23
- Tyson Foods (TSN) 7:30am, $0.45
- Mobile Mini (MINI) 7:30am, $0.22
- E.W. Scripps (SSP) 7:30am, ($0.06)
- Sysco (SYY) 8am, $0.43
- PNM Resources (PNM) 8:30am, $0.20
- NIC (EGOV) 4pm, $0.10
- Vantiv (VNTV) 4pm, $0.30
- WMS Industries (WMS) 4pm, $0.26
- Martin Midstream Partners (MMLP) 4pm, $0.50
- Alnylam Pharmaceuticals (ALNY) 4pm, $(0.28)
- Frontier Communications (FTR) 4:01pm, $0.06
- Hologic (HOLX) 4:01pm, $0.34
- ProAssurance (PRA) 4:01pm, $0.76
- Norwegian Cruise Line Holdings (NCLH) 4:01pm, $0.03
- Retail Properties of America (RPAI) 4:01pm, $0.22
- DCP Midstream Partners (DPM) 4:01pm, $0.64
- Hudson Pacific Properties (HPP) 4:01pm, $0.22
- STAG Industrial (STAG) 4:01pm, $0.32
- Protective Life (PL) 4:01pm, $0.93
- First Solar (FSLR) 4:02pm, $0.75 - Preview
- Colony Financial (CLNY) 4:02pm, $0.33
- Prospect Capital (PSEC) 4:03pm, $0.31
- Parkway Properties (PKY) 4:04pm, $0.27
- Anadarko Petroleum (APC) 4:05pm, $0.95
- Plains All American (PAA) 4:05pm, $0.96
- Santarus (SNTS) 4:05pm, $0.14
- Interval Leisure Group (IILG) 4:05pm, $0.40
- Insulet (PODD) 4:05pm, $(0.21)
- Ruckus Wireless (RKUS) 4:05pm, $0.04
- Forest Oil (FST) 4:05pm, $0.02
- Energy XXI Bermuda (EXXI) 4:05pm, $0.48
- PAA Natural Gas Storage (PNG) 4:07pm, $0.23
- Sunstone Hotel Investors (SHO) 4:15pm, $0.09
- Legacy Reserves (LGCY) 4:30pm, $0.30
- Scotts Miracle-Gro (SMG) 4:35pm, $2.00
- First Quantum Minerals (FM CN) 5pm, $0.28 - Preview
- Tesoro Logistics (TLLP) 5pm, $0.48
- EOG Resources (EOG) 5:01pm, $1.19
- PS Business Parks (PSB) 5:03pm, $1.22
- Liberty Global (LBTYA) 5:07pm, $0.24
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Rises to One-Month High as Syria Says Attacked by Israel
- Gold Bulls Split With Buffett as Traders Say Sell: Commodities
- Palm Stockpiles Dropping to Nine-Month Low Seen Boost for Prices
- Gold Advances for Third day Toward Highest Price Since Rout
- Vietnam’s Central Bank Imports Gold to Bolster Official Reserves
- U.S. Winter-Wheat Crop to Fall to Two-Year Low, Survey Says
- Palm Oil Ends Near Three-Year Low as Ringgit Gains on Elections
- Copper Drops on Comex After Jumping Most Since ’11; Shanghai Up
- Gold ETF Tumbling as Agriculture Fund Rallies: Chart of the Day
- Saudi Aramco Raises June Light Crude Premium for Asian Buyers
- EU Pollution Push in Disarray as Crisis Focus Sharpens: Energy
- Golden Agri Seen Cheap LBO Target After Palm Oil Drop: Real M&A
- Dollar Seen Rising 9% by Dealers Citing U.S. Growth: Currencies
- Gold Seen Tumbling Toward Support at $1,227: Technical Analysis
The Hedgeye Macro Team
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