Client Talking Points
No, India is definitely not the USA. India’s stock market got tagged for another -1.8% loss overnight. It is moving back to down -2.3% year-to-date as the other side of #StrongDollar this year is Red Rupee. A weak currency imports inflation to local economies. We have a name for this. We are calling this the #AsianContagion (one of Hedgeye's three Q3 Macro Themes). Our advice? Buy US stocks instead.
Well, there you have it. Another week, another up move in Treasury yields following a bullish ISM non-manufacturing print for July. Economic growth ostriches beware. The 10-year is yielding 2.65% and continues to make a series of higher-lows and higher-highs. Yield Spread (10s minus 2s) is +235 basis points this morning. That’s now +84 basis points year-to-date. That is very good signal for the Financials.
The precious metal does not like this whole #RatesRising thing. Yes, Gold is breaking down yet again this morning. It's down -0.9% to $1291 and is still crashing year-to-date at -22.9%. Boom. Stop for a moment and imagine what Gold would do if people actually believed the Fed was objective and data dependent. Stay out of the way of this total train wreck.
|FIXED INCOME||0%||INTL CURRENCIES||24%|
Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout. An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona. The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater. Longer term, the objective is for BCN World to have six resorts. The first property is scheduled to open for business in 2016.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Three for the Road
QUOTE OF THE DAY
"I think gold is a great thing to sew in to your garments if you're a Jewish family in Vienna in 1939, but I think civilized people don't buy gold. - Berkshire's Charlie Munger
STAT OF THE DAY
$148,587: The amount of money Yankees slugger Alex Rodriguez will forfeit per game of his MLB suspension for violating league rules prohibiting performance-enhancing drugs. (Wall Street Journal)
This note was originally published at 8am on July 23, 2013 for Hedgeye subscribers.
“The greatest barrier to success is the fear of failure.”
-Sven Goran Eriksson
I was in Kansas City, Missouri then Denver, Colorado yesterday before flying into Aspen last night for the 2013 Fortune Brainstorm Tech Conference (ping me if you are here!). Cabs, planes, and bad coffee - just another busy day in the life of building a business.
But what is it that gives us the confidence in building our own businesses? With all of the politics, fear-mongering, and central planning, why do we care to carry on? In moments of weakness, I admit to asking myself these questions every once in a while. Then something inspires me to rise above all of that. It’s either in your gut, or it is not.
There’s a great passage in a novel I just finished (Out Stealing Horses, by Per Peterson) that reminded me of who taught me to be this way (my Dad): “he had so much self-confidence he could take on almost anything and believe he would succeed” (pg 51). But don’t kid yourself; having role models in your life isn’t enough – you have to be the change, and break confidence barriers yourself.
Back to the Global Macro Grind…
How many people have been confident enough to be invested in US growth stocks in 2013? Of the non-consensus bulls you know, how many of them are bullish because of #RatesRising?
I won’t hear it at this innovator’s conference in Colorado today, but I hear it a ton in institutional investor meetings - lots of doubt, fear, and concern. The lack of self-confidence out there is born out of a lot of 2008 baggage. I don’t get bogged down by that.
Both the SP500 and Russell2000 clocked fresh all-time highs again yesterday of +18.9% and +24%, respectively for 2013 YTD. #StrongDollar and #RatesRising isn’t something to be feared; it’s a pro-growth signal that needs to be understood.
By our risk management process scorecard, this morning is almost perfect for US stocks. Here’s the big 3 things to have confidence in:
1. #StrongDollar – after correcting -0.5% last week (Bernanke wasn’t giving anyone anything but things to fear, which is just a shame at this point) and falling again yesterday, today the US Dollar Index holds both our immediate-term TRADE ($82.07) and intermediate-term TREND ($81.53) lines of support
2. #RatesRising – after falling 10 basis points last week to 2.48% (Bernanke policy to have you fear failure), the 10yr yield held our immediate-term TRADE line of 2.45% support yesterday (TREND support underpins that at 2.21%) and is backing up again this morning to 2.51%; higher-lows and higher-highs for bond yields is a bullish growth signal supported by employment gains
3. #CommodityDeflation – with the USD -0.5% last week, Commodities were +1.5% (CRB Index) – that’s not new; the intermediate-term correlation between USD and Commodities = -0.71. Why? That’s simple – the entire base of futures/options buyers in Gold, Oil, Food, etc. is still trying to front-run Bernanke’s “tone” on tapering
Like they were in the summer of 2008 (when Bernanke was whispering to the #OldWall that he was going to cut to 0%, too early), Oil prices are once again the biggest threat to US Consumption.
If you want fear, I’ll give you something to fear – it’s called Dollar Devaluation. Just reverse all of the aforementioned 3 things and the USD will weaken, interest rates will fall, and commodity reflation will slow growth.
Who wants that? And, moreover, if 95-99% of Americans don’t want that, who stands in the way of tapping Bernanke on the shoulder and telling him to taper?
If Reagan or Clinton were in office, they’d be perfectly fine with that. Bush and Obama have been so scared of their own economic shadow that it’s their fears that have manifested into the conflicted power of Bernanke’s Bubbles (Commodities, Gold, Treasuries, etc.).
I don’t fear the politicized not liking my advice. I fear that a lot of Americans are going to get blown up by this bond bubble. I also fear that the only fear left, is a fear-mongering anti-growth government policy itself.
The greatest barrier to #StrongDollar and #RatesRising is self-evident. It’s time to get this old-boy, crony-whispering, and un-elected policy out of our way. It’s time to let free-market prices clear. The inability to evolve is as very credible threat. Confidence is the answer.
Our immediate-term Risk Ranges are now:
UST 10yr 2.45-2.70%
Brent Oil 107.11-109.08
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
“The notion that I was travelling down a clear track would be wrong.”
Today in 1945, the US dropped the bomb on Hiroshima. At least 130,000 were killed and 90% of the city was eviscerated. To say that this weighed heavily on the conscience of the “father” of the atomic bomb would be the understatement of my writing career.
The aforementioned quote comes from Chapter 2 (“His Separate Prison”, page 29) of a book I have long waited to crack open: American Prometheus - The Triumph and Tragedy of Robert Oppenheimer.
When it comes to both markets and my life, the notion that I know where things are going isn’t the truth. The reality is that people and circumstances change inasmuch as markets do. Sometimes it happens fast; sometimes it’s slow. Yes, there are patterns of behavior that provide probabilities of direction. But there is no clear path. I’m learning to embrace that uncertainty.
Back to the Global Macro Grind…
Einstein said that “the only reason for time is so that everything doesn’t happen at once.” And I like that. For the past 8 months we’ve seen a very simple US market pattern develop:
- US economic #GrowthAccelerates
- US interest #RatesRising challenge the Fed to taper
- Gold Bonds fall, Growth Stocks rise
Now that 1st bullet is the one that provokes the most bitterness from bears. I still don’t think they can believe that A) it’s August and B) both the employment and economic data (NSA rolling jobless claims hit another YTD low last wk) continue to improve.
On top of last Thursday’s #GrowthAccelerating July ISM print of 55.4 (vs 51.9 in June), here’s what the bitterness of it all looked like in the only economic data point that mattered yesterday:
- ISM non-Manufacturing (i.e. the highest % of the US economy) = 56.0 in JUL vs 52.2 in JUN
- New Orders (within the ISM report) = 57.7 JUL vs 50.8 JUN
- “Business Activity” (within the same report) = 60.4! JUL vs 51.7 JUN
Sorry #GrowthSlowing fans, that wasn’t what you were looking for.
It wasn’t what I was looking for either! I thought there was a developing probability that the higher-frequency (weekly and monthly) US economic data points could slow sequentially here in Q313 vs Q213. Evidently, I thought wrong.
It’s ok to say you are wrong. It’s ok to say you made a mistake. Heck, it’s even ok to say you are sorry once in a while too (this morning’s marriage tips are brought to you by your Broda).
The bottom line is that in literally every “Style Factor” we score, #GrowthAccelerating is winning, big time, YTD:
- Top25% EPS Growth Stocks (in the SP500) = +7.3% m/m and +26.8% YTD
- Low Dividend Yield (growth) Stocks = +6.7% m/m and +28.8% YTD
- High Short Interest Stocks (high multiple, high beta too) = +6.9% m/m and +25.4% YTD
Yes, despite the Russell 2000 (another US growth investor proxy) pinning yet another closing all-time high yesterday at 1063 (+25.2% YTD), all 3 of those Style Factors are still beating the Russell!
But what is awesome? “inspiring an overwhelming feeling of” (Dictionary.com):
- Or Fear?
It’s a great word because, whether we want to admit it or not, we are all human and there are a lot of feelings that start to overwhelm us during phase changes in both markets and our lives.
From a macro market perspective, fear itself is now re-testing its YTD low (Gold and VIX are down -23% and -35%). Growth investors admire that. But they shouldn’t straight-line this as the new normal. Nothing is normal. Everything is always changing.
Our immediate-term Risk Ranges are now as follows:
UST 10yr 2.56-2.72%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
In preparation for MPEL's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
- "Studio City, our cinematically-themed mass market focused integrated casino resort, remains on track to open in mid 2015. The project remains on time and on budget with expected design and construction costs remaining at $2.04 billion...total spending for 2013 is between $800 million to $1 billion."
- "We continue to improve the two major signature club area on improving their service. So you'll note that in the next two quarters some improvement in this premium mass area with nice improvement as well as well as the service level that we are bringing to the property."
COD GAMING MARGINS
- "I think the primary driver, and I think there is room, is what's happening on the gaming floor and what's happening with the mix of business. Given our success in the mass market business and that, the strength in that segment overall, we do see a potential for favorable mix shift over time, which will drive blended margin higher."
- "First, I think, gaming floor, we continue to see a positive trend in terms of hold percentage on the floor as well as absolute revenue."
- "I think our retail area, although it's relatively small compared to the neighbor, it's already up to a level which is quite comparable with the neighbors. So I think with this kind of improvement in our positioning in the last few quarters, it has started to pay off in terms of this non-gaming higher margin EBITDA contribution. So we hope that that trend continue and you'll see some more improvement in the next few quarters."
COD NON-GAMING MARGINS
- "While not a major contributor to the overall results, that's sustainable going forward."
COD PHASE 3
- “We are optimistic that we'll break ground before the end of the year.
- "As your modeling should anticipate, as of April, it increased fairly market wide of a 5% wage rate increase in your model and that's not inconsistent with what we experienced last year as well despite incremental supply in the market, incremental staffing needs across the market. So this year, we think 5% is very manageable and one that we expect to be consistent throughout the year. But I would encourage you to flag that in your models going into the next quarter."
- "Will open in mid-2014."
- "In this quarter, our pre-opening expense of about $1.9 million. About two-thirds of that was Philippines. As that project ramps up over the course of the year into the mid single digits and then subsequent from that into 2014, but that will increase over the course of this year."
- "Our view is that the tax situation will be resolved favorably. So no change in our expectation of ROIC."
- "But if we exclude Phase 3, we'll have CapEx in the next quarter of something in the $225 million range and wrapping up by about $25 million in the subsequent quarter and then closer to $400 million in the fourth quarter. So that includes Studio City as well obviously."
3Q NON-OPERATING GUIDANCE
- "Total depreciation and amortization expense is expected to be approximately $90 million to $95 million, corporate expense is expected to come in at $20 million to $22 million, and consolidated net interest expense attributable to MCE is expected to be approximately $40 million to $42 million, which includes finance leased interest of $10.8 million relating to the Philippines development and approximately $11.8 million of interest associated with Studio City. This reflects approximately $6 million of capitalized interest related primarily to Studio City."
- [Interest expense] "The gross amount should be a good number going forward as a run rate, approximate run rate. I anticipate that our – the amount of capitalized interest that we have would go up over the course of the year, but the number we provided for Q2, I think, is a solid number and then perhaps declining a bit over the remainder of the year."
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