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Liberty's Flows

“We are sowing the seeds of Ignorance, Corruption, and Injustice, in the fairest field of Liberty.”

-John Adams

 

According to Joseph Ellis in Revolutionary Summer, that’s what John Adams wrote to Joseph Hawley on August 25, 1776. Adams could have said that about heavy-handed government in August of 2013 – and, in principle, he’d still be right. But betting against the prospects of American growth rising above compromised politicians has often been wrong.

 

Politics versus people - that’s not new. Americans generally dislike socialists and/or plutocratic pomp. On August 13, 1776, George Washington called the British out like most of us call out conflicted central planners today: “Their cause is bad; their men are conscious of it, and if opposed with firmness and coolness… victory is most assuredly ours.” (Revolutionary Summer, pg 86)

 

I like that, a lot.

 

Back to the Global Macro Grind

 

I also like seeing all of the growth factors in our multi-factor model rip to the upside. It’s especially fun to watch on days like yesterday when my contra-stream (I built one on Twitter of market pundits who are wrong at least 65% of the time) starts whining.

 

Winning versus whining – that’s not new either. There are a lot of losers out there who whine but, over time, Americans eventually put those people on mute and roll with winners who have principles they can associate with.

 

There’s been a lot of whining about US GDP “dropping to 1%” in Q213 – but that didn’t happen either. US GDP has by no means had a championship season, but it’s been a heck of a lot better than Q412’s 0.38% - and it’s what happens on the margin in macro that matters to us most. Here’s the Q213 breakdown:

  1. Consumption (C) = +1.8% quarter-over-quarter, contributed +1.22% to Q213 GDP
  2. Investment (I) = +9.0% quarter-over-quarter, contributed +1.32% to Q213 GDP
  3. Government (G) = -0.4% quarter-over-quarter, contributed -0.1% to Q213 GDP 

In other words, government spending fell as Consumption and Investment rose. Good, eh? It’s not a new story in America. It just hasn’t happened in a while – and that’s the point.

 

Since C + I + G + (EX-IM) is the GDP equation, whiners (particularly partisan ones) will add that:

  1. Net Exports (EX-IM) = +5.4% quarter-over-quarter, but contributed negatively to GDP by -0.81%
  2. Inventories contributed positively to GDP by +0.4%
  3. Inflation (PCE Deflator) was at its 2nd lowest level ever of +0.8%

But let’s get real here – who really cares about those line items when the big stuff (Consumption and Investment growth) is finally going the right way for once?

 

To give them some air-time, the Princeton/Yale/Harvard Keynesian Econ 101 textbooks will also whine about “net exports being down because the Dollar went up” and “disinflation is a threat to our academic dogma” – but again, who cares?

 

I went to Yale and, admittedly, was confused about this “inflation is good, deflation is bad” concept. My family doesn’t buy into the class warfare labeling thing, but we do buy (and invest) more when the purchasing power of our hard earned currency appreciates.

 

Is Bernanke’s fear-mongering about “deflation” really the hobgoblin?

 

We answer that on slide 36 of our current Global Macro Themes deck (ping if you’d like a copy) where we outline a recent study by Atkeson & Kehoe that spans a time period of 180 years (across 17 countries) that found no relationship between deflation and depressions.

 

The objective study actually found a greater number of episodes of depression with economies experiencing inflation than with deflation. Over the 180 year time period:

  1. 65 out of 73 deflation episodes had no depression
  2. 21 out of 29 depressions had no deflation

So what say you President Obama? Yes, we know. We know that you know that we know.

 

Bernanke’s cause is no longer saving us from the end of the world. That was so 3-5 years ago. Perversely, it’s to talk down growth in order to uphold un-precedented (and un-elected) central planning power on the order that this country hasn’t seen in 237 years.

 

But he’s conscious of it. So is the country.

 

Mr. Market gets it too. That’s why all of these end of the world (#EOW) trades that were driven by an explicit Policy To Inflate (Gold, Treasury Bonds, etc.) are coming unglued. That’s also why growth investors are getting paid.

 

Liberty flows. She still plays to the hands of the independent minds. We don’t have to be long Bernanke Bubbles in order to get paid. We have to be right on the slopes of the lines in our model.

 

Growth’s slope is up; Inflation’s is down – and unlike the government, I like that, a lot.

 

Our immediate-term Risk Ranges are now as follows (12 big macro risk ranges are in our new Daily Trading Range product):

 

UST 10yr 2.52-2.71%

SPX 1

Nikkei 135

VIX 11.96-13.85

Yen 97.12-101.01

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Liberty's Flows - Chart of the Day

 

Liberty's Flows - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 1, 2013


As we look at today's setup for the S&P 500, the range is 17 points or 0.22% downside to 1682 and 0.79% upside to 1699.                              

                                                                                                 

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2a

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.30 from 2.27
  • VIX closed at 13.45 1 day percent change of 0.45%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England rate decision; est. 0.5% (prior 0.5%)
  • 7:30am: Challenger Job Cuts Y/y, July (prior 4.8%)
  • 7:30am: RBC Consumer Outlook Index, Aug. (prior 50.7)
  • 7:45am: ECB announces interest rates; est. 0.5% (prior 0.5%)
  • 8:30am: ECB’s Draghi holds news conference
  • 8:30am: Init Jobless Claims, July 27, est. 345k (prior 343k)
  • 8:58am: Markit US PMI Final, July, est. 53.2
  • 9:45am: Bloomberg Consumer Comfort, July 28 (prior -27.3)
  • 10am: Construction Spend M/m, June, est. 0.4% (prior 0.5%)
  • 10am: ISM Manufacturing, July, est. 52 (prior 50.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 5pm: Total Vehicle Sales, July, est. 15.8m (prior 15.89m)

GOVERNMENT:

    • House Energy and Commerce Cmte hears from Medicare and Medicaid Services Administrator Marilyn Tavenner on Affordable Care Act implementation
    • 8:30am: Energy Dept’s Bioenergy Technologies Office, Advanced Biofuels USA hold conf on bioindustry role in American energy
    • 9am: SEC Commissioner Troy Paredes discusses finl regulation at Chamber of Commerce’s Center for Capital Markets Competitiveness event
    • 9:30am: Senate Energy and Natural Resources Cmte hearing on the political status of Puerto Rico
    • 10am: House Armed Services Cmte hearing on “Initial Conclusions Formed by the Defense Strategic Choices and Management Review”
    • 1:30pm: API briefing on oil, natgas industry jobs, economic analysis by PricewaterhouseCoopers

WHAT TO WATCH

  • U.S. trade agency issues ruling on Samsung import limit
  • Tenet, Health Management accused of paying kickbacks to clinic
  • Macy’s makes final bid to block Martha Stewart goods at rival
  • Walgreen investors sue CEO over $80m DEA painkiller fine
  • Lloyds prepares to resume dividends as Osborne weighs sale
  • Apple’s new iPad mini likely to have Samsung display, WSJ says
  • Citigroup ordered to pay $10.8m for soured RBS investment
  • Celltrion says reports of stake sale to AstraZeneca inaccurate
  • Tourre jurors end first day of deliberations without verdict
  • Dish customers blocked as Raycom Media accord expires
  • Congress votes to reverse rise in student-loan interest rates
  • China pledges to keep growth within “reasonable zone”
  • U.K. factory growth strengthens as recovery builds momentum
  • Australia to raise tobacco excise to narrow budget shortfall
  • July Auto Sales: July SAAR May Be 15.8m

EARNINGS

AM:

    • Alliant Techsystems (ATK) 7:01am, $1.92
    • AltaGas (ALA CN) 7:45am, C$0.21
    • Ameren (AEE) 7:48am, $0.46
    • Ansys (ANSS) 7:09am, $0.71
    • Apache (APA) 8am, $2.00 - Preview
    • Arena Pharmaceuticals (ARNA) 7am, $0.18
    • Automatic Data Processing (ADP) 7:30am, $0.57
    • Avon Products (AVP) 7:01am, $0.26
    • Barrick Gold (ABX CN) 6:31am, $0.56 - Preview
    • Becton Dickinson (BDX) 6am, $1.48
    • BGC Partners (BGCP) 8am, $0.13
    • Bombardier (BBD/B CN) 6am, $0.09
    • Cameco (CCO CN) 8:23am, C$0.18
    • Cardinal Health (CAH) 7am, $0.77
    • Catamaran (CCT CN) 6am, $0.44
    • CenterPoint Energy (CNP) 8:15am, $0.26
    • Chesapeake Energy (CHK) 7:01am, $0.41 - Preview
    • Cigna (CI) 6am, $1.60
    • Clorox (CLX) 8:30am, $1.34 - Preview
    • CME Group (CME) 7am, $0.90
    • Colonial Properties Trust (CLP) 7am, $0.33
    • ConocoPhillips (COP) 7am, $1.29 - Preview
    • Covidien (COV) 6am, $0.89
    • CVR Energy (CVI) 8am, $1.62
    • CVR Refining (CVRR) 8am, $1.66
    • Dentsply Intl (XRAY) 7am, $0.65
    • DirecTV (DTV) 7:30am, $1.34 - Preview
    • Dynegy (DYN) 7:30am, $(0.29)
    • Enbridge (ENB CN) 7am, C$0.39 - Preview
    • Enterprise Products (EPD) 6am, $0.69
    • Exxon Mobil (XOM) 8am, $1.89 - Preview
    • Fluor (FLR) 9am, $1.01
    • Fortis (FTS CN) 7am, C$0.32
    • Fortress Investment (FIG) 7am, $0.20
    • Genesee & Wyoming (GWR) 6am, $1.11
    • Gildan Activewear (GIL CN) 6:31am, $0.94
    • Halcon Resources (HK) 7:30am, $0.06
    • HCA Holdings (HCA) 7:03am, $0.91
    • IGM Financial (IGM CN) 10:30am, C$0.76
    • Imperial Oil (IMO CN) 7:55am, C$0.98
    • Incyte (INCY) 7am, $0.01
    • Iron Mountain (IRM) 6am, $0.31
    • ITT (ITT) 7am, $0.45
    • Kellogg (K) 8am, $0.98 - Preview
    • LKQ (LKQ) 7:30am, $0.25
    • Magellan Midstream (MMP) 8am, $0.54
    • Marathon Petroleum (MPC) 7:03am, $1.90
    • MSCI (MSCI) 7:30am, $0.53
    • Mylan (MYL) 7am, $0.67
    • New York Times (NYT) 8:30am, $0.13
    • NII Holdings (NIHD) 6:30am, $(1.16)
    • Nu Skin Enterprises (NUS) 7:30am, $1.20
    • Ocwen Financial (OCN) 7:30am, $1.02
    • PBF Energy (PBF) 8am, $0.79
    • PPL (PPL) 7am, $0.47
    • Procter & Gamble (PG) 6:58am, $0.77 - Preview
    • Quanta Services (PWR) 6:07am, $0.37
    • Quintiles Transnational (Q) Bef-mkt, $0.44 - Preview
    • Sally Beauty Holdings (SBH) 7:30am, $0.43
    • Scana (SCG) 7:30am, $0.54
    • Targa Resources (NGLS) 7am, $0.14
    • Teco Energy (TE) 7am, $0.27
    • Teradata (TDC) 6:45am, $0.71
    • Time Warner Cable (TWC) 6am, $1.65 - Preview
    • TMX Group (X CN) 6am, C$0.83
    • Vulcan Materials (VMC) 8am, $0.16
    • Western Refining (WNR) 6am, $1.20
    • WPX Energy (WPX) 7am, $(0.19)
    • Xcel Energy (XEL) 7am, $0.39

PM :

    • Activision Blizzard (ATVI) 4:05pm, $0.08
    • American International Group (AIG) 4pm, $0.86
    • Apartment Investment & Mgmt (AIV) 4:05pm, $0.48
    • Bill Barrett (BBG) 4:15pm, $(0.01)
    • Consolidated Edison (ED) 6:43pm, $0.57
    • DCT Industrial Trust (DCT) 4:10pm, $0.11
    • Edison International (EIX) 4pm, $0.66
    • Extra Space Storage (EXR) 4:05pm, $0.49
    • Fairfax Financial Holdings (FFH CN) 5:01pm, $(12.40)
    • Federal Realty Investment Trust (FRT) 4:30pm, $1.12
    • FleetCor Technologies (FLT) 4:01pm, $0.95
    • Home Properties (HME) 4:30pm, $1.09
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.13
    • Kraft Foods (KRFT) 4pm, $0.67 - Preview
    • Leap Wireless (LEAP) 4:05pm, $(1.02)
    • LeapFrog Enterprises (LF) 4:01pm, $(0.08)
    • LinkedIn (LNKD) 4:05pm, $0.31 - Preview
    • MercadoLibre (MELI) 4:01pm, $0.63
    • Mohawk Industries (MHK) 4:01pm, $1.66
    • MRC Global (MRC) 4:15pm, $0.38
    • ON Semiconductor (ONNN) 4:03pm, $0.13
    • OpenTable (OPEN) 4:31pm, $0.47
    • Osisko Mining (OSK CN) 4:05pm, C$0.05
    • PerkinElmer (PKI) 4:05pm, $0.48
    • Piedmont Office Realty Trust (PDM) 5:02pm, $0.34
    • Public Storage (PSA) 5:14pm, $1.77
    • ResMed (RMD) 4:05pm, $0.62
    • SBA Communications (SBAC) 4:01pm, $(0.10)
    • Southwestern Energy (SWN) 5:15pm, $0.52 - Preview
    • Synaptics (SYNA) 4:15pm, $1.30
    • Tesoro (TSO) 4:31pm, $1.43 - Preview
    • ValueClick (VCLK) 4:05pm, $0.39
    • Walter Energy (WLT) 4:01pm, $(0.75)

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Japan Purchases First Oregon Wheat Since Discovery of GMO Crop
  • p Commodities Market, Industry News »             
  • Burger Costs Rising With Beef Supply at 21-Year Low: Commodities
  • Pan Pacific Sees Copper Surplus at 5-Year High on Slowing China
  • Wheat Rises a Fifth Day on Speculation Chinese Demand to Gain
  • WTI Rises to One-Week High on Fed Stimulus, China Manufacturing
  • China Makes First Investment in South African Wine Industry
  • Gold Swings Expand as Jobs Help Gauge Stimulus: Chart of the Day
  • Palm Climbs to One-Week High as Malaysian Exports Signal Demand
  • Coffee Exports From Indonesia’s Sumatra Surge to Four-Year High
  • Barrick Takes $8.7 Billion Writedown, Cuts Dividend on Gold Drop
  • Rebar Extends Monthly Gain as China Manufacturing Strengthens
  • No Rebound for Uranium Seen as Japan Plants Idle: Energy Markets
  • Chile Copper Output Up for Second Month as Strikes Ebb: BI Chart
  • COMMODITIES DAYBOOK: U.S. Beef Production Plunges to 21-Year Low
  • ANZ Opens 50 Ton Gold Vault in Singapore as Asian Demand Climbs

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


THE M3: INCHEON CITY PROJECT CANCELLED; JULY GGR

THE MACAU METRO MONITOR, AUGUST 1, 2013

 

 

JULY GGR DICJ

JULY GGR 29.485BN MOP (28.626BN HKD, 3.691 BN USD), up 20% YoY

 

S KOREAN PLAN FOR MACAU GAMBLING RIVAL COLLAPSES Bloomberg

South Korea's Incheon city said a $290 billion plan to transform a fishing village into a rival to Macau has collapsed. Incheon Free Economic Zone official Jung Mi-hyun said luxury hotel operator Kempinski AG, a key member of the development consortium, failed to raise a promised $40MM by the end of July.  Kempinski's Korean unit KI Corp. is the largest shareholder in the consortium, Eightcity Co. Korean Air Lines Co. is the second-largest.

 

Park Seong-hyun, vice chairman of Eightcity, said the company is still trying to attract investment to the project and Incheon city is also responsible for the delay in raising the money on time.

 


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IS CHINA A “VALUE BUY” OR A “VALUE TRAP”?

Takeaway: Chinese equities might appear “cheap”, but cheap is likely to get sustainably cheaper in the absence of a positive catalysts.

SUMMARY BULLETS:

 

  • Recent statements out of Chinese policymakers lead us to reasonably conclude that Chinese officials are less concerned about the outlook for future [unabated] property price appreciation than they had been in recent months. While we continue to think Chinese monetary policy will remain relatively tight with respect to the intermediate-term, we must acknowledge the emergence of a more unfettered path towards PBoC easing – which, generally speaking, is being appropriately reflected in Chinese money markets.
  • Even if Chinese officials suddenly decided to implement another big stimulus package for reasons we can’t fathom (Xi and Li will be in office for 10 years; 2H13 growth pales in comparison to the task of maintaining economic stability over the long term), it remains to be seen how much incremental debt the system can take on over a relatively short period of time.
  • Where Chinese growth trends from here is anyone’s best guess; the most probable answer is “sideways” given the uniform guidance out of the Chinese policymaking spectrum of late.
  • Our GIP algorithm suggests a slight uptick in 3Q followed by a deceleration in 4Q; leading indicators for Chinese growth are starting to rhyme with this quantitative outlook. Interestingly, Chinese GDP seasonality trends concurs with the aforementioned “sideways” view. Lastly, the case for continued slowing is supported by diminished cross-border liquidity, at the margins, and a probable uptick in NPLs in the form of debt rollovers across the Chinese banking system.
  • In the absence of meaningful deposit growth, debt rollovers slow broader economic growth by diverting incremental credit away from productive enterprises, at the margins, to unproductive enterprises that are merely trying to stay afloat. This phenomenon remains a core tenet of our structurally negative outlook for Chinese economic growth. Contrary to the 2008-09 period, it’s almost impossible for us to model in another dramatic [positive] inflection in Chinese growth/growth expectations that is worthy of investors getting excited about on the long side of Chinese equities.
  • Economic gravity in China is – at best – trending sideways though 2H13. Moreover, structural growth headwinds for 2014 and beyond remain a clear and present danger for what we’d argue are increasingly consensus “value buyers” of Chinese equities. Chinese equities might appear “cheap” (a view that we wholeheartedly disagree with), but cheap is likely to get sustainably cheaper in this case in the absence of a positive catalyst or series of positive catalysts.

 

POLICY GAME-CHANGER?: SHORTING CHINA JUST GOT A LOT MORE DICEY

From our 6/26 Early Look titled, “Uncertain China”: “We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.”

 

Today, Chinese officials finally signaled that they are perhaps more willing to keep the game going for longer than us short-sellers of the heavily indebted Chinese financial system and associated fixed asset bubble might prefer. Today President Xi Jinping said the leadership will guarantee that the +7.5% growth target for this year will be met, despite a notably absent inflection in economic momentum. In addition to Xi’s statement, the official Xinhua News Agency also chimed in with an update from Beijing:

 

  1. “Authorities will maintain steady second-half expansion amid extremely complicated domestic and international conditions.”
  2. “China will keep a prudent monetary policy and a proactive fiscal stance.”
  3. “China will ensure major tasks in full-year economic and social development are completed.”
  4. “Authorities will coordinate the multiple tasks of stabilizing growth, restructuring the economy and promoting reforms.”
  5.  “China will promote reform of the fiscal, tax and financial systems and seek stable and healthy development in the property industry.”

 

Statements #1-4 do not reflect a meaningful shift in China’s fiscal and monetary policy guidance. Conversely, statement #5 does signal a slight change relative to previously implemented property curbs and an overt focus on combating speculation across China’s bubbly property markets.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Real Estate Climate Index

 

Taken in conjunction with a less-than-subtle statement today put forth by Sheng Songcheng, head of statistics with the PBoC, we can reasonably conclude that Chinese officials are less concerned about the outlook for future [unabated] property price appreciation than they had been in recent months:

 

“Unbalanced supply and demand caused rising home prices, not the country's ample money supply… One of the main targets of monetary policy is to maintain the stability of overall consumer prices and not to target prices of specific goods.” (emphasis our own)

 

The key takeaway from this statement is that the PBoC’s preexisting reservations about meaningfully easing monetary policy in the face of a buoyant property market are now likely mitigated, on the margin. In kind, the property sector outperformed the broader Shanghai Composite Index by +195bps on the day.

 

All told, while we continue to think Chinese monetary policy will remain relatively tight with respect to the intermediate-term (first chart), we must acknowledge the emergence of a more unfettered path towards PBoC easing – which, generally speaking, is being appropriately reflected in Chinese money markets (second chart).

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Interest Rate Markets

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Money Markets Monitor

 

WHERE TO FROM HERE?: CHINA’S 2H13 GROWTH OUTLOOK REMAINS SOFT

Where Chinese growth trends from here is anyone’s best guess; the most probable answer is “sideways” given the uniform guidance out of the Chinese policymaking spectrum of late. Our GIP algorithm suggests a slight uptick in 3Q followed by a deceleration in 4Q; leading indicators for Chinese growth are starting to rhyme with this quantitative outlook:

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - CHINA

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - Rebar YoY

 

Interestingly, Chinese GDP seasonality trends concurs with the aforementioned “sideways” view:

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China GDP Seasonality

 

Lastly, the case for continued slowing is supported by diminished cross-border liquidity, at the margins, and a probable uptick in NPLs in the form of debt rollovers across the Chinese banking system.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Cross Border Liqudity Flows

 

In the absence of meaningful deposit growth, debt rollovers slow broader economic growth by diverting incremental credit away from productive enterprises, at the margins, to unproductive enterprises that are merely trying to stay afloat. This phenomenon remains a core tenet of our structurally negative outlook for Chinese economic growth. Contrary to the 2008-09 period, it’s almost impossible for us to model in another dramatic [positive] inflection in Chinese growth/growth expectations that is worthy of investors getting excited about on the long side of Chinese equities.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China GDP Expectations

 

Even if Chinese officials suddenly decided to implement another big stimulus package for reasons we can’t fathom (Xi and Li will be in office for 10 years; 2H13 growth pales in comparison to the task of maintaining economic stability over the long term), it remains to be seen how much incremental debt the system can take on over a relatively short period of time.

 

The latest statistics from ChinaScope Financial indicate that total assets and liabilities of SOEs were respectively 45T yuan and 30T yuan, respectively, in 1H13. The debt ratio of 66.7% is fast approaching the regulatory ceiling of 70%; among the 294 listed SOEs, 26.9% exceeded the limit and will eventually have to become compliant either through asset growth or deleveraging…

 

Jumping back to the Chinese banking system for a minute, we’ll leave you with a few data points that suggest parts of 2H13 could rhyme with what we saw in JUN from an interbank liquidity perspective:

 

  • The China Banking Association said in an annual report that bad loans at Chinese banks could rise by between +70B yuan and +100B yuan ($11.4-16.3 billion) in 2013 due in part to delinquency risks from industries plagued by overcapacity – which, per recent mandate, must begin to pare back operations starting in SEP. For context, aggregate NPLs across the Chinese banking system are already up +33.6B yuan in the YTD (through 1Q, when liquidity was extremely plentiful). An upside surprise through the top end of the guidance range is more than likely.
  • Some 127B yuan ($20.7 billion) of LGFV notes expire in 2H13 according to Everbright Securities Co., the most in its data going back to 2000 and more than double the 62.7B yuan that matured in 1H13. As it stands currently, the 2014 LGFV debt maturity total of 208.8B yuan ($34.1 billion) is roughly +10% higher YoY. Note that PBoC Governor Zhou estimated in MAR that roughly 20% of local government debt was “risky”. All in, LGFVs may owe more than 20T yuan according to an APR statement from former Finance Minister Xiang Huaicheng, but we’ll soon learn the full extent of local gov’t indebtedness upon the results of the recently announced nationwide LGFV debt audit.
  • Aggregate industrial profit growth slowed in JUN to +6.3% YoY from +15.5% YoY in MAY. A recent report from the China Iron and Steel Association said the group's 86 members made a combined loss of 669M yuan ($109.2 million) in JUN, marking the first aggregate loss this year. The report said that there was unlikely to be any recovery in demand in 2H13 as China's economy slows.

 

CONCLUSION: CHINA REMAINS A VALUE TRAP

We’ll conclude this note with exactly how we concluded our 7/10 note titled, “CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS?”:

 

“In the immediate term, macro markets mean revert and we recommend having a tried and tested quantitative risk management process to properly interpret the price action. Over the intermediate-to-long term, however, macro markets tend to trend in the absence of a fundamental inflection(s) in economic gravity. With respect to Chinese stocks – specifically bank and property developer shares – we think that trend remains south [for the foreseeable future].”

 

Economic gravity in China is – at best – trending sideways though 2H13. Moreover, structural growth headwinds for 2014 and beyond remain a clear and present danger for what we’d argue are increasingly consensus “value buyers” of Chinese equities. Chinese equities might appear “cheap” (a view that we wholeheartedly disagree with), but cheap is likely to get sustainably cheaper in this case in the absence of a positive catalyst or series of positive catalysts.

 

Darius Dale

Senior Analyst


HYATT 2Q 2013 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:  BETTER

  • Even after adjusting for a lower tax rate and d&a, Q2 was very strong for Hyatt.  Adjusted EBITDA exceeded our estimate handily driven mainly by fees.  We were encouraged by the significant amount of stock repurchased during the quarter as the balance sheet remains underleveraged.   

REPURCHASE SHARES

  • BETTER:  Hyatt repurchased nearly $200 million of stock in the quarter (Hyatt had announced an additional $200MM increase in repurchase authorization in Q1).  Hyatt will continue to evaluate their capital allocation options.
  • PREVIOUSLY:  “So one think I would, just to note is that, our primary application of our capital base on our balance sheet is to support our growth, that's our number one priority. We have been, more formally over the last year, been in the market and repurchasing shares."

LONG-TERM GROUP BOOKINGS

  • WORSE:  2014 bookings are trending near flat, lower than previous guidance.  Hyatt remains optimistic about 2015-2016 growth.
  • PREVIOUSLY:  
    • “Bookings for 2014 have increased by 10%. So the short-term booking trend is still very volatile. It's still very sensitive on a month-to-month basis and we continue to see that long-term bookings 2014, 2015 and even into 2016 look very healthy, look very promising. We don't see any issues there yet. Although, when you go back to last year August, September, October and you looked at 2013 and the booking trends were and compare it to where we are now with 2013, there has been quite of a wash, cancellation and push out into future years, and we continue to see that trend.”
    • “Overall, we see our booking experience as an indication that the booking window is lengthening.”

GROUP PRODUCTION

  • SAME:  2Q in the quarter for the quarter growth was 1%.  In the quarter for the year, bookings increased 6.5%.
  • PREVIOUSLY:  “As we look to the future, we're encouraged by several data points. First, group pace. Even though realized revenue for group business was down in the first quarter, overall group revenue production was up over 3% in the quarter.”

TRANSIENT DEMAND

  • BETTER:  Strong transient demand was ahead of expectations.  Manufacturing, business serving the housing industry and technology segments continue to lead.
  • PREVIOUSLY:  “Second, transient demand, the overall business climate in the U.S. was strength in manufacturing, technology, housing and other sectors, is supporting robust transient demand levels. Therefore, while we expect group demand to improve relative to what we saw in the first quarter, we still expect transient business to be a stronger driver of improved results this year.”

CHINA

  • WORSE:  Continues to be a challenging market, impacted by austerity measures, renovations and increased supply.  The outlook remains weak for 2013.
  • PREVIOUSLY:  In China, the focus by the new leadership on austerity has and will continue to hurt F&B revenue, in particular in the short-term.”

INDIA

  • SAME:  REVPAR was stable in 2Q
  • PREVIOUSLY:  “In India, the economy is starting to stabilize, while the country enters a national political process leading up to general elections in 2014. Nonetheless, the positioning of our existing portfolio as well as the hotels expected to join our portfolio over the coming year in each of China and India is very encouraging.”

RENOVATIONS IMPACT

  • BETTER:  Impact from renovation of managed properties in 2Q was only $1MM
  • PREVIOUSLY:  
    • "We expect the impact to be towards the lower end of the previously mentioned $3 million to $6 million range per quarter for the next quarter or two. The impact is expected to decline as renovations of managed hotels are completed and year-over-year comparison issues recede.”
    • “I think the modeling disruption beyond the end of this year, we know now and we mentioned that the renovations in the key markets in Asia would continue into next year.”

M&A

  • SAME: Continues to be active.  They have four assets that are generating much interest in the transaction market.
  • PREVIOUSLY:  “Our intention is to continue to be active through the cycle on both the buy-side and the sell-side.”

CHART DU JOUR: PNK NON-RECURRING BUT RECURRING EXPENSES

PNK’s quarterly exclusions from adjusted EBITDA are material and consistent.

 

  • Consistent - Although not depicted entirely on this chart, over the past 8 years, PNK has excluded GAAP operating expenses from Adjusted EBITDA every quarter.
  • Material - “Non-recurring” operating charges have represented from 5% to 25% of company reported adjusted EBITDA.
  • Reducing EBITDA estimates by 5-10% to account for likely “non-recurring” items going forward would result in ½ to a full turn higher EV/EBITDA valuation
  • We will be looking at the other operators in upcoming posts.

 

CHART DU JOUR: PNK NON-RECURRING BUT RECURRING EXPENSES - pnk1


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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