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Boom. Asian Contagion

(Editor's note: What follows below is a complimentary excerpt from Hedgeye CEO Keith McCullough's "Morning Newsletter." We send these market notes out every weekday morning before 9am ET, along with our immediate-term risk ranges on select asset classes. To learn more about this excellent Hedgeye research product and how you can become a subscriber, please click here.)

 

Boom. Asian Contagion - guy56

MACRO GRIND

Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.

 

Reviewing the risks of #AsianContagion:

  1. Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
  2. Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
  3. When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad

From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:

  • Indonesia -5.6% DoD vs. a regional median delta of -0.2%
  • Thailand -3.3% DoD vs. a regional median delta of -0.2%
  • India -9.1% MoM vs. a regional median delta of -1.2%

Then, on Indonesia in particular, he called out yesterday’s key economic data point:

  • 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP

And finally, we get this morning’s Bloomberg headlines (under Economy):

 

A)     “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”

B)      “Rupee Drops To Record on Fed Tapering Concern”

 

These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.

 

Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).

 

Again, to review in the most simplest of complexity’s terms:

  1. Currency Burns, then local  
  2. Inflation Accelerates and Growth Slows; and finally          
  3. Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)

If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.

 


DKS: Still Bearish; ROIC Going Lower

Takeaway: DKS’ 2Q print validated our bear case that it is trading greater investments from lower cash margin, and ultimately, a lower multiple.

DKS’ 2Q print validated our bear case that the company is putting up a greater proportion of incremental capital on both the P&L and the balance sheet for disproportionately less cash flow in return.  Our view is that this trend (which also applies to Macy’s and Gap) will mitigate any kind of valuation support, as multiples have no business being near their tops when returns are rolling over like we see today.

 

Like many retailers quarter-to-date, sales trends were soft, and the company did not have a firm grasp as to why. It comped down for the second quarter in a row, and though gross margins held steady, inventories were up 12.4% on 6.6% sales growth. That’s not a good setup by any stretch for gross margins heading into the back half.

 

If there’s any bullish angle, it’s that earnings expectations might finally be down to more doable levels. But the reality is that this stock is still trading at over 18x current year earnings, which is downright expensive.  Based on our model, it will never have over a 9% operating margin again (see our assumptions below). We’d need to see consensus estimates come down by about 25% in the outer years for us to back off of our bearish stance on DKS. That’s unlikely to happen.

 

Avoid the temptation to support it here. Let it cook.

 

DKS: Still Bearish; ROIC Going Lower - 8 20 2013 12 14 32 PM

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

Rupiah Forwards Plunge to Lowest Since 2009 as Bond Risk Surges (via Bloomberg)

Asia stocks hit by fears about emerging markets (via MarketWatch)

Fukushima Plant Has 300-Ton Water Leak (via New York Times)

 

Morning Reads on Our Radar Screen - duut

 

Brian McGough – Retail

J.C. Penney Posts Slower Sales Decline on Ullman Plan (via Bloomberg)

Retailer Dick's Sporting Goods misses estimates, shares fall (via Reuters)

 

Jonathan CasteleynFinancials

Capital Flows Back to U.S. as Markets Slump Across Asia (via Bloomberg)

1997 Asian financial crisis (JC note: If someone blows up in China this is your analog. via Wikipedia)

 

Kevin Kaiser – Energy

E&P Investors Fear the Oil Party Hangover (via Wall Street Journal)

BHP delays $14 billion Canada potash push as profit drops (via Reuters)

Go Your Own Way – Offloading Heavy Canadian Crude On The Gulf Coast (via RBN Energy)


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GALAXY 2Q 2013 CONFERENCE CALL NOTES

Galaxy beat our 2Q EBITDA estimate and we were high on the Street.  High mass hold and controlled corporate costs were the driving factors. 

 

 

"We are very pleased to report improving financial results across the business and that Phase 2 of Galaxy Macau remains on schedule. The Group also expanded its existing Cotai landbank with the strategic purchase of the Grand Waldo Complex.  We also strengthened our balance sheet by prepaying a significant portion of our bank borrowings. I am particularly delighted that the half year culminated in the Group being included as a constituent of the Hang Seng Index. Looking into the future, Macau's prospects for the remainder of 2013 and beyond continue to be bright. We believe that our development pipeline for Phases 2, 3 and 4 plus the Grand Waldo Complex on Cotai position us well for continued growth." 

 

- Dr. Lui Che-woo, Chairman of GEG 

 

CONF CALL 

  • Galaxy Macau:  opened new premium mass Pavilion club, will open new VIP room in late Q3
  • Starworld:  all-time record in mass; opened new premium mass room, made some shifting in VIP rooms 

 

Q & A

  • Sands Cotai Central competition:  all operators have benefited from SCC opening, including Galaxy Macau
  • Galaxy Macau revenue growth:  visitation has grown especially in mass segment
  • Galaxy Macau Phase 2 capex:  YTD over a billion dollars; have spent $2.8 BN of $19.6BN budget; significant ramp-up in capital outflow at the end of this year and 2014.
  • Henquin Island:  Galaxy looking at it
  • 2Q Hold adjusted EBITDA:  refused to give it given 'no standardized definition'; wants analysts to focus on the volume growth
  • GM Phase 3/4:  combined capex HK$60-80BN -start the project out with the arena and construction could start at end of year/ early 2014.
  • Net cash $5 billion before Waldo acquisition
  • Took Waldo tables and employed them at other properties
  • Table mix:  1/3 VIP, 2/3 MASS; 3Q 2013 will have a little more VIP tables
  • GM Phase 2 table count:  working closely with govt 
  • GM Phase 3/4: some gaming
  • Starworld:  VIP RC - tables yielding better, redesigned new VIP room, more rewards, 16 VIP operators down from 17; Q3TD is very positive
  • Non-gaming revenue decline:  accounting adjustment - reclassification of travel-related revenue; Starworld disruption at L16
  • No fees with prepayment of loan


Macro Tricks

“We were forever inventing new tricks.”

-Hans Bethe

 

From a strategy and teamwork perspective, one of the most fascinating aspects of reading American Prometheus (The Triumph and Tragedy of Robert Oppenheimer) has been how well these to-be-famous scientists collaborated with one another.

 

Hans Bethe, who eventually won the Nobel Prize in Physics in 1967, said “the intellectual experience was unforgettable.” (page 182). Since he was working alongside Oppenheimer, Feynman, and Bohr, I don’t doubt that for one second!

 

I’m not making a political statement on nuclear. I’m simply pointing out how a culture of trust and collaboration can incubate innovation. While the powers that be will likely never acknowledge the Global Macro models we are building here @Hedgeye, we are getting more and more respect from you, the practitioners, every day. On behalf of my team, thank you for this experience.

 

Back to the Global Macro Grind

 

One of the most interesting realities embedded in our independent research process is that we don’t know where we are going to end up next. Our Global Macro Themes are born out of intermediate-term market signals and then contextualized by long-cycle research. If it feels like we’re forever inventing new themes, that’s because the market’s ecosystem is forever reinventing itself.

 

Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.

 

Reviewing the risks of #AsianContagion:

  1. Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
  2. Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
  3. When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad

From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:

  • Indonesia -5.6% DoD vs. a regional median delta of -0.2%
  • Thailand -3.3% DoD vs. a regional median delta of -0.2%
  • India -9.1% MoM vs. a regional median delta of -1.2%

Then, on Indonesia in particular, he called out yesterday’s key economic data point:

  • 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP

And finally, we get this morning’s Bloomberg headlines (under Economy):

 

A)     “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”

B)      “Rupee Drops To Record on Fed Tapering Concern”

 

These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.

 

Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).

 

Again, to review in the most simplest of complexity’s terms:

  1. Currency Burns, then local  
  2. Inflation Accelerates and Growth Slows; and finally          
  3. Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)

If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.70-2.91%

SPX 1

VIX 13.51-15.36

USD 80.91-81.96

Yen 97.11-98.26

Copper 3.25-3.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Tricks - Chart of the Day

 

Macro Tricks - Virtual Portfolio


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