TODAY’S S&P 500 SET-UP – September 26, 2013
As we look at today's setup for the S&P 500, the range is 21 points or 0.58% downside to 1683 and 0.66% upside to 1704.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, SEPTEMBER 26, 2013
SANDS EXEC FLAGS RETHINK ON LOCAL-ONLY DEALER RULE Macau Business
Macau’s casinos face “some limit on the availability of people” unless the government changes a rule that only residents can be employed as croupiers, says LVS President and COO Mike Leven. Leven told an investor forum in Las Vegas the Macau government would have to think about the bottleneck the rule has created.
Business Daily says the casinos would need up to 10,000 more dealers in Cotai by 2018 if the government approves all of the 3,366 new gaming tables the operators want to put in the eight new casino-resorts there.
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Following four months of down Baccarat drop, August was a winner.
We estimate Las Vegas Strip revenues increased 2-5% YoY in August, assuming normal table hold. Since the month ended on a Saturday, slot hold will be below normal due to State accounting and that is factored into our estimates. Assuming consistent slot hold in both periods, we estimate YoY gaming revenues increased 5-8%. We still expect down slot and non-Baccarat table volume, but our research indicates that Baccarat volume was strong. Remember that Baccarat volumes have fallen 4 straight months – fueling fears of the end of the 5 year Baccarat bull market. Our Baccarat revenue projection of 30% YoY growth could actually prove conservative if our suspicions of high hold prove true.
State gaming figures should be released early next week. Here are our full projections.
Takeaway: The real economic impact of sequestration in 2014 will likely be equivocal. Positive growth will resume for the balance of the decade.
This note was originally published September 24, 2013 at 15:49 in Macro
“Knowing Is Half The Battle” - G.I. Joe
It’s been more than two years since the Budget Control Act (BCA 2011) was passed as a first step towards reigning in federal fiscal profligacy. Subsequent legislation, principally the American Tax Payer Relief Act (ATRA 2012), modified the original provisions and adjusted the caps on discretionary budget authority.
With the new fiscal year here and congressional cantankery again in crescendo, we thought it worthwhile to provide a cliff note review of the 2014 budget setup, with a focus on the projected impacts of sequestration specifically. Unless you’ve followed the legislation closely, the details are probably fuzzy at this point and a superficial read of the headlines can be misleading in regards to both the magnitude and real economic impact of the legislated cuts.
Garnering a clean read on what a fiscal policy actually proposes, how it’s being measured and scored and the mechanics of its implementation is probably more than half the battle in analyzing fiscal policy measures. Below we offer a summary refresh on the details of sequestration and some clarity on the main points of confusion.
TWO SETS OF CAPS: There are currently two discrete sets of caps on discretionary spending in place that are independent of one another. The Budget Control Act of 2011 placed a first set of caps on discretionary budgetary authority (see top set of numbers in table below). Cuts legislated under sequestration are incremental to the BCA caps and work to further lower the total discretionary budget authority in each year through 2021 (middle set of numbers in CBO table below).
THE BUDGET CONTROL ACT: The Budget Control Act (BCA), enacted in August 2011, put a cap on total federal discretionary spending with separate sub-caps on Defense and Non-Defense discretionary programs. The caps were put in place for the fiscal years 2013-2021 with the goal of reducing projected deficit spending by $1.5T over that period (more on that in “Scoring Sequestration” below).
SEQUESTRATION: The BCA created and charged the Joint Select Committee on Deficit Reduction (i.e. the “Supercommittee”) with finding deficit savings incremental to those achieved under the discretionary caps set forth in the BCA. Specifically, it called for $984B in additional budget cuts, divided equally over the nine years spanning 2013-2021 ($109.4B per year, divided equally between Defense and Non-defense Discretionary). Sequestration was the fall-back provision that automatically cut funding should the Supercommittee fail to reach agreement on an alternative source of deficit reduction. The committee failed to reach an accord, thus triggering the Sequestration provision.
BUDGET AUTHORITY vs. OUTLAYS: The statutory caps on discretionary spending target Budget Authority. Budget Authority represents the allocation of funds in a given year that an agency can use to make financial commitments. Budget Authority, however, does not necessarily equal spending. If an agency has excess funds or appropriations from prior years it can still spend those dollars – the effect being that total outlays could exceed total budget authority in a given year.
SCORING THE SEQUESTRATION CUTS: This point is simple but a key one to remember when evaluating the real economic impact of the “cuts”. The often cited “Cuts” for a given year do not refer to incremental, year-over-year reductions in spending. The cuts, as they are quantified and quoted, are relative to total projected spending under the 2010 funding path.
To clarify, when congress was debating the Budget Control Act and the Simpson-Bowles deficit reduction committee was actively evaluating deficit reduction options, the latest available data was the official discretionary funding level for 2010 and the CBO’s forecast for discretionary spending over the 2012-2022 period. In their baseline scenario, the CBO’s took the 2010 funding level for discretionary spending and inflation adjusted it to arrive at projected spending over the subsequent decade.
To illustrate using 2014 as an example - the scheduled cut (as scored by the CBO/OMB and quoted in the press) for fiscal year 2014 is $109B. This does not mean that discretionay outlays will be $109B less than last year – it means budget authority for 2014 will be $109B less than the CBO projected it would be back in 2010 based on the 2010 inflation adjusted spending path.
EXTRA APPROPRIATIONS: Overseas Contingency Operations (i.e. war funding), Disaster relief, Emergency Designations and Program Integrity Funding all, despite being discretionary in nature, fall outside of the purview of the caps legislated under BCA. Spending for these programs totaled $152.6B in fiscal 2013 according to the CBO (Here). Total spending on these ‘adjustment’ items represents the chief means by which total spending could deviate from that legislated under the tight controls in place under the discretionary spending caps. In fact, adjustments in 2013 increased total discretionary budget authority over the 2012 level.
SEQUESTRATION MODIFICATIONS: The American Tax Payer Relief Act (ATRA 2012), which served as the resolution to the fiscal cliff issue, modified the sequestration cuts for fiscal 2013 and 2014 legislated by BCA. Specifically, it lowered the legislated cut for 2013 by $24B from $109B to $85B. As an offset, ATRA lowered the 2014 cap by $8B (split evenly between defense and nondefense).
It's worth noting that while the total cut was reduced for 2013, the final decision came in March, 5 months into the fiscal year - which, on an annualized basis, equates to ~$140B in cuts. For any agency that hadn't already adjusted budget expectations, any adjustments had to be concentrated in order to stay below sequestration defined levels over the balance of the year.
ABSOLUTE FUNDING WILL DECLINE IN 2014 BUT RISE THEREAFTER: Total Discretionary Budget Authority is scheduled to decline $76B to $967B in fiscal 2014 from $1043B in FY2014. From FY2015 to 2021, funding is scheduled to grow approx +2.5% per year.
So, unless congress reaches an accord on an alternate path to deficit reduction, total discretionary budget authority will decline by ~$76B in absolute term in 2014. However, depending on the level of extra appropriations and the difference between actual outlays vs authorized funding, that negative difference could narrow or even turn positive.
All-in, the real economic impact of sequestration in 2014 will probably be equivocal. For the second half of the decade, discretionary budget authority (and presumably actual spending by extension) will resume positive growth.
Christian B. Drake
OMB Sequestration Preview Report for FY 2014 >> HERE
CBO Sequestration update Report (Aug 2013) >> HERE
CBPP – Sequestration, Clearing Up misunderstandings >> HERE
(BCA 2011) Budget Control Act of 2011 >> HERE
(ATRA 2012) America Taxpayer Relief Act of 2012 >> HERE
Takeaway: Chinese policymakers appear to be embarking on a clever strategy to offset internal headwinds to growth with foreign capital.
PLEASE NOTE: The discussion below is a direct continuation of an analysis we presented in our SEP 12 research note titled, “DEBATING THE BULL CASE FOR CHINA”. To the extent you have not reviewed that piece, we encourage you to do so prior to examining the analysis below, as it will help elucidate the conclusions we continue to make. In the event you may have missed it come through, please email us for a copy of that note or to set up a call to discuss China more broadly.
This morning we received what we interpreted as positive news with respect to China’s TAIL-duration economic outlook.
Specifically, interest rates will be fully liberalized within the Shanghai Free Trade Zone and there’ll be no restrictions on raising capital – either from domestic or foreign banks – for companies operating inside the zone.
While still very much in the realm of conjecture, this piece of information is positive, on the margin, for the following two reasons:
On that last point, we think the powers that be up in Beijing are no dummies when it comes to making China an increasingly attractive destination for foreign capital.
Not unlike the migration of foreign capital from the imperiled South America to the then-attractive Asian Tigers in the early-to-mid 90s, China appears to be inclined to promote itself as a bastion of economic and financial stability amid rising risk of EM crises in places India, Indonesia, Turkey and Brazil.
Perhaps that’s why the PBoC has been inclined to mark up the CNY over the LTM (+3% YoY and +1.8% YTD).
Amid that process, the CNY has hit an all-time high on a REER basis, imposing systemic risk to China’s export economy and its razor-thin margins. Moreover, they have done so in the face of some fairly obvious international headwinds to export growth.
No doubt, Chinese officials appear keen to sacrifice what little liquidity they are likely to receive from the current account over the long term for what may turn out to be a far deeper and more sustainable source of liquidity in the form of foreign portfolio and direct investment flows.
Furthermore, they appear willing to entice said capital flows with the allure of FX appreciation and higher real interest rates within the Shanghai FTZ (in addition to favorable corporate tax policies). Importantly, their strategy appears to be increasingly effective at improving foreign investor sentiment towards China, on the margin.
All told, if Chinese policymakers are, in fact, pursuing the growth strategy we have outlined above, then it would behoove us to have a bullish bias on the Chinese economy, its currency and under-owned stock market (less than 20% of Chinese households’ financial assets are allocated to equities vs. 33.7%% in the US).
In the face of the bear case getting “less bad” at the margins, easy comps and GDP seasonality support a sanguine 1H14 outlook for Chinese economic growth.
We can’t forget that China’s most recent real GDP growth rate of +7.5% was over a full standard deviation (-1.1x) below the trailing 3Y mean. The balance of risks imply some degree of mean reversion born out of a combination of marginal retracement and continued pressure on the average itself. Net-net, the likelihood of a downside economic surprise(s) in China is declining, at the margins, and should be rather muted on an absolute basis in 2014.
On the bearish front, the two most probable catalysts that would increase the likelihood of a downside economic surprise(s) over the intermediate term are:
Of course, one of, neither of or both of the aforementioned risks may materialize. We have no edge beyond stating that both are likely more probable than consensus may realize. This is the primary reason we are not outright bullish on China at the current juncture in spite of the developing intermediate-to-long-term bull case we have expanded upon in this note.
One of the things we’ll monitor to determine whether or not it’s an appropriate time to A) buy China outright or B) trade it with a bullish bias is whether or not the insider-driven Shanghai Composite Index closes above its late-MAY highs. That lower-high came just before the JUN liquidity crunch and subsequent consensus debate about China’s financial sector risks (i.e. the same risks we called out in our Hedgeye Macro Emerging Market Crisis Risk Index back on APR 23).
Specifically, a close above that level would be akin to receiving a second quantitative “thumbs-up” (i.e. no more lower-highs) in our playbook (the first being the recent TREND line breakout).
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