This note was originally published at 8am on June 07, 2013 for Hedgeye subscribers.
“And when it rains on your parade, look up rather than down. Without the rain, there would be no rainbow.”
-Gilbert K. Chesterton
It is a rainy day in the Northeast. And rain can be depressing if we let it get to us. The point that Chesterton makes above though is spot on. Without the disruption of rain, there would ultimately be no rainbow and subsequently the hope of a pot of gold.
The idea that we have to suffer through bad times to get to good times is of course a bit of a paradox. To Chesterton, who is often referred to as the “prince of paradox” this was fine. After all, he was an orthodox Christian who had friendly enemies. (He was also 6’4, wore a cape, and carried around a swordstick in his hand.)
In mathematical terms, we would probably characterize this concept of bad weather becoming good as reversion to the mean. Due to mathematical impossibilities, no price goes up forever and no price goes down forever. In the same vein, rain doesn’t last forever and when it stops the weather is typically very nice. Unfortunately for those hoping for good weather, the forecast is for showers through Tuesday of next week. But as Longfellow said:
“The best thing one can do when it’s raining is to let it rain.”
For the last week or so, the U.S. equity market has been raining on our growth is accelerating parade. So is this a temporary rainy spell and will the sunshine of a positive economic growth return shortly? Well, we certainly still believe this to be the case.
We had a good email discussion with one of our subscribers yesterday who asked us about an assertion Keith made that employment is continuing to improve. The distinction between our view and the view of much of consensus is that we believe that seasonally adjusting the employment number distorts the data series. Unfortunately for us, the market continues to cue off the seasonally adjusted number and those appear to be stagnating.
The impact over the last four years is that the seasonal adjustments have created a tailwind from September to February and a headwind from March through August. This is highlighted in the first chart below. This “seasonally adjusted” slowdown in employment has also been a headwind for the equity market for the last few years. Nonetheless, even on a seasonally adjusted basis, as highlighted by the purple line in the first chart, employment is decelerating at a slower pace than in the prior four years.
More instructive though is the second chart below, which highlights rolling initial unemployment claims that are non-seasonally adjusted. The trend here is clear, which is that employment is improving and somewhat decisively so. To the extent that the market continues to focus on the seasonally adjusted series, though, we are likely to have a few more months of employment rain. On that front, the May employment report is at 830am, so be wary as we are in the season of employment rain!
We would be remiss if we didn’t touch on Asia this morning where the storm clouds are creating a down pour on the global macro markets. For those that chased Japan into its Abenomic highs, they are now quite literally having a mother of a time. Specifically, the MOTHERS index closed down -11.5% over night and is now down -38% from its highs. (This index holds smaller companies so is naturally more volatile.)
The driver of this mother of a correction in Japan was the strength in the Yen versus the dollar. From our purview, the break through the 99 barrier seemingly triggered a massive stop loss program and, as they say, when it rains, it pours. As a result, the Yen / Dollar went from 99 to 96 in a straight line yesterday. (Some have speculated that one catalyst may have been a leaking of today’s jobs number, but who are we to distrust the government . . .!)
As it relates to the Yen, which remains one of our Best Ideas on the short side, we still think that relative monetary policy will inform the direction of the currency. As my colleague Darius Dale emphasized yesterday in a note to subscribers, the BOJ is already committed to monetizing ¥132 trillion through EOY ’14 (27.7% of 2012 nominal GDP) vs. the Fed’s $2.04 trillion (13% of 2012 nominal GDP) over the same time period – assuming the Fed continues at the current pace of $85 billion per month through EOY ’14 (an unlikely scenario in our opinion). So despite yesterday’s correction in the Yen, we think the structural bear case remains.
One important highlight in the recent action in U.S. equities is that our risk range on the SP500 has widened to 1,607 – 1,669. This isn’t terribly surprising given that volatility, as measured by the VIX, is up about 30% in the last month. For those that actively hedge or trade their portfolio, all this really means is that you need a bigger umbrella in the short term! Or as the popular band Blind Melon sings, “No Rain.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1361-1424, $100.58-104.73, $81.34-82.46, 95.66-103.34, 2.02-2.22%, 13.37-17.91, and 1607-1669, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
THE MACAU METRO MONITOR, JUNE 21 2013
SOUTH KOREA REJECTS PRELIMINARY CASINO LICENCE FOR CAESARS, UNIVERSAL Reuters
South Korea has rejected preliminary casino licences for two international bidders, a Caesars Entertainment and Lippo Limited consortium, and Kazuo Okada's Universal Entertainment. The surprise move could stall plans for casino development as a means to attract tourists.
MELCO CROWN SAYS ON TRACK TO OPEN $1 BLN PHILIPPINE CASINO BY MID-2014 Reuters
MPEL Philippines is on track to open its $1 billion gaming complex in Manila by mid-2014, targeting not just Chinese gamblers but Southeast Asian high-rollers as well its president, Clarence Chung said.
"We will open everything in one go in mid-2014. The project is already fully funded," said Chung. Chung added that Melco will take advantage of its Macau "connections and VIP database" in promoting its Manila operations. "The Chinese would definitely be one of the major targets and, obviously, we're targeting the Southeast Asians," he said.
MACAU LEGEND TO SLASH, DELAY IPO WSJ
Macau Legend development is considering cutting its fundraising size by more than half to up to US$358 million and delaying its listing, as deteriorating market conditions hurt demand for the casino operator's HK IPO.
Macau Legend had been due to price an IPO that was seeking to raise up to US$788 million Friday. It is now planning to announce a change in its listing plans next week, people with direct knowledge of the deal said. It now aims to relaunch the deal next week before an IPO listing in July, a person said, adding that Macau Legend is awaiting regulatory approval.
One of the people familiar with Macau Legend's deal said the company plans to offer just 934.8 million shares, down sharply from the originally planned 2.05 billion shares. Based on an indicative price range of 2.30 Hong Kong dollars to 2.98 Hong Kong dollars (29 U.S. cents to 38 U.S. cents) per share, Macau Legend could raise up to US$358 million.
CONSUMER PRICE INDEX FOR MAY 2013 DSEC
Macau CPI for May 2013 increased by 4.84% YoY and 0.28% MoM.
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“A government’s first job should be to protect its citizens. But that should be based on informed consent, not blind trust.”
I was flying back from California last night and those few sentences in The Economist article titled “Secrets, lies and America’s spies” got me thinking about the Fed. The article, of course, had nothing to do with Bernanke. But it had everything to do with trust.
How can you trust what you cannot see? I am Canadian, so hard core Americans will have to check my work on this – but didn’t the US Constitution provide a clause for this thing called free elections?
While I hardly doubt Franklin and Jefferson envisioned an America that was hostage to an un-elected and un-accountable central planner’s qualitative views of economic gravity, that doesn’t matter right now – because that’s what you have. The blind trust this country has put in Bernanke’s ability to “smooth” the Waterfall of interconnected risk was a mistake. Now we have to deal with his mess.
Back to the Global Macro Grind…
So how did you like yesterday anyway? Feeling good yet? Want to get Bernanke whispering to Hilsenrath around 320PM EST this afternoon that he didn’t really mean it? Wouldn’t that be cool – then we could do the whole over the Waterfall thing together again!
If you are going to tell me that markets trust how Bernanke is going to manage this going forward, I am going to tell you that you are probably already hammered. It’s always 5 o’clock on a Friday somewhere.
When markets don’t trust something, the forward curve of implied volatility starts to rise. When they really don’t trust something, that volatility rises at a faster rate. It’s called convexity.
In terms of implied volatility in everything that was already crashing (Gold, Treasuries, Emerging Markets, etc), that concept has been pretty straightforward for going on 6 months now. For US Equities, it’s relatively new.
Here are front-month US Equity Volatility’s (VIX) TRADEs and TRENDs:
In other words, as US consumption, employment, and housing #GrowthAccelerated in the last 3 months, US Equity market expectations went right squirrel. How screwed up is that?
It makes sense though. We have a US Federal Reserve that is A) horrendous in terms of forecasting and B) compromised and conflicted in terms of timing its “communications.” Bernanke made his legacy bed – now we all have to sleep in it.
Another way to think about US growth expectations is bond yields – they love growth:
In other words, 10yr Yields ripping yesterday wasn’t new – they’ve been making higher-lows and higher-highs since the November 2012 all-time low. In the last 6 months, 10yr US Treasury Yields are up +35%!
Captain Keynesian is going to say, whoa, whoa, on that Mucker – you are using % moves instead of absolutes. Ah yes, professors, and that’s the precisely the point. Right back at ya – you created an expectation of an absolute zero bound that was reckless and un-precedented.
What else has been front-running Bernanke’s Blind Trust of 0% rates to infinity-and-beyond? Gold:
Gold hates growth and gold loved Bernanke’s anti-consumption growth Policies To Inflate. Period.
Now, to be fair to the community who trades on Washington “consultant” whispers, if you do have a Hilsy rumor in your back pocket this morning, the first thing you’d probably do with that is buy Gold, lever yourself up with some Oil futures, and short Treasuries.
Isn’t that just great for America!
The sad reality is that Americans don’t trust Bernanke’s Fed as far as they can throw Cramer or his buddy’s gnome. The American zeitgeist of distrust in politically driven institutions reaches far beyond the IRS. It’s in your mind each and every market day.
The best thing President Obama can do is say goodbye to Ben S. Bernanke’s concepts of “innovation and communication.” Unless you are all interested in scaling back up the bond-buying Waterfall, ripping a VIX 30 handle, and doing yesterday over and over and over again, that is.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.80-103.96, $81.11-82.19, 96.18-97.92, 2.24-2.46%, 17.25-21.56, and 1, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
Takeaway: Don't read this mgmt chg as a precursor to an EPS miss. But as great as NKE is with backfilling talent, it has many roles in transition.
Conclusion: Some things surprised us about Nike's announced management changes, other things did not. Regardless, we don't think that it was timed such that there'd be a fall guy(s) for disappointing earnings to come next Thursday. We think that the company will do its best to keep guidance for FYMay14 earnings grounded -- but that has absolutely nothing to do with what we saw after the close today. The bottom line is that most of the job changes make sense and have long-term organizational benefits -- but for the next quarter or two half a dozen key roles will be in transition.
Plain and simple, Charlie Denson (COO) is retiring. We all knew back in 2006 that this day would come. Back then Bill Perez was fired from the corner office and Mark Parker got the nod to take the CEO role over Denson -- who was then his equal. Denson is 57 and Parker is 56 -- they're both still young, and Parker isn't going anywhere soon. Denson can't move any higher up the org chart. He's sticking around until January 2014 -- hardly a time frame for an executive who's running for the door (or being pushed out of it). The press release says Parker is sad to see him go, and we think it's genuine.
We're pleased to see that there are no changes to the Finance organization -- notably Don Blair or his team. With Denson transitioning out, we think that Don Blair's stock inside the company will rise given Don's ability to lend expertise to a new incoming COO. That said, it bugs us to see that Gary DeStefano is retiring. DeStefano is 54 years old, and has been at Nike for 31 years in too many roles to list. He's currently President of Global Operations, and will only be at the company for another five weeks. Last we checked, that's a pretty important role. The good news is that Denson will still be there to oversee the team while replacements are groomed. But out of the whole management change, if there was one part that we'd point to as being potentially disruptive, this would be it.
One thing that was put in place at Nike over the past few years is that all employees that have managerial responsibilities have several people identified in their HR file who could easily step into their role in the event that they move on. What this means is that if there is one higher-profile departure, then it sets off a domino-effect of other movement inside the organization. Look at past press releases. Try to find an example where only one person leaves or moves to a different role. You can't find it.
Another thing that works for Nike is that the company is not afraid to move its employees around the organization into and around different disciplines. Take for example Eric Sprunk (note: Wall Street universally loves the guy) who started his career at Price Waterhouse, and then after joining Nike in 1994 as Finance Director for the Americas, then Finance Director of Europe, Regional GM of Europe Footwear, GM Global Footwear, VP Global Product, EVP Merchandising and Product, and now COO. We could follow a similar track for almost all of the more successful Nike executives.
In the end, this is all consistent with how we expect Nike to run it's business long-term, and it's what makes it so successful at what it does. We'll keep a closer eye on a few of these areas that are in transition, but over our 15-years covering the company have never been given reason to doubt the company's ability to manage through similar leadership changes without coming out on top.
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