“By definition, a government has no conscience. Sometimes it has a policy, but nothing more.”
With the debt ceiling and government shutdown behind us (at least for a few months), we can now all go back to focusing on doing investment research. Well, not so fast, now we actually have to focus on the Federal Reserve. The key question there is, of course, will they taper or not taper.
Yesterday, we wrote in the Early Look about an interesting study from the San Francisco Fed, which showed that the Fed’s program of quantitative easing had a de minimis impact on the real economy. We would actually take it a step further and suggest that with the inflation of commodities due to printing more dollars, QE may have even eaten into the real economy.
In that regard, we were trying to think of an analogy from the animal kingdom that best represented the impact of QE on the real economy and very naturally the tape(r) worm came to mind. For those that didn’t know the following is a description of a tape worm (emphasis mine):
“Tapeworms, or cestodes, are intestinal parasites; they are worms that are flattened like a tape measure. A tapeworm cannot live freely on its own - it survives within the gut (intestine) of an animal, including a human.”
To be fair, my assessment that QE effectively eats into its host, the real economy, has led to some push back. As my colleague Christian Drake rightfully pointed out to me earlier this week, while QE may not have an impact on the real economy, it does have an impact on asset prices. As an example, in the Chart of the Day we show the S&P 500 index with and without the twenty-four hour pre-FOMC returns.
The implication of this chart is quite astoundingly that the Fed may be responsible for almost all returns of the SP500 since 1994. Further, if QE truly does inflate asset prices, as the correlations suggest, then there is likely a wealth impact that ultimately does impact the economy by the way of increased consumption.
As we stand here today though, it seems much easier to argue that some easing of stimulus is likely to strengthen the U.S. dollar and deflate oil, which is probably the most important consumer stimulus the Fed could implement over the coming quarters and years. Hopefully, Mrs. Yellen gets the memo on this point. Let’s face it, if oil were at $50, we’d all be buying jelly doughnuts for the office.
Back to the global macro grind . . .
As noted, the government is back to work and the debt ceiling is averted, so now the global equity markets should be rallying hard. Well, that’s not quite how it is working out this morning. U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small. So much for the party!
As we, and people much smarter than us have often said, markets don’t like uncertainty and our fine elected officials have now created more uncertainty with a number of looming deadlines, specifically:
- December 13th – the date when a House-Senate committee will report back on negotiations on a longer term budget deal;
- January 15th – the date on which the government is now open until subject to another budget agreement being reached; and
- February 7th – the next debt ceiling.
Now of course, Washington is changing this morning. Former Newark Mayor (although we understand he didn’t actually live there) Cory Booker is the newly minted Senator from New Jersey. We knew Cory when we were undergrads at Yale and he was in law school and he can be persuasive, but we aren’t sure even he can resolve this mess of catalysts that Congress will be dealing with in the next three months.
So, speaking of the real economy, what impact does this massive amount of uncertainty have? According to Gallup, the economic confidence index has fallen off a cliff in the last month from -15 (a range it had been in for awhile) to -40. With such short term and potentially negative catalysts on the horizon, it is unlikely this confidence improves meaningfully.
Luckily, as global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar.
Increasingly, the recent data from Europe is also supportive of being a #EuroBull. Some examples include:
- Greek 10-year yield down 206 basis points month-over-month to 8.4%;
- Eurozone September CPI benign at 1.1%;
- European new passenger car registrations up the most in two years at +5.4% year-over-year in September;
- European ZEW economic expectations at 59.1 in October, a sequential improvement from September; and
- U.K. ONS house price index +3.8% in August which beat expectations and increased sequentially.
To be fair, all is not great in Europe. But, in global macro markets, change happens on the margin, and on the margin the European economy is improving.
Our immediate-term Risk Ranges are now:
UST 10yr yield 2.66-2.73%
Good luck out there today.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on October 03, 2013 for Hedgeye subscribers.
“If making money is a slow process, losing it is quickly done.”
That’s a mint quote at the start of chapter 13 (“Wild Money And The Stealth Tax”) in one of my favorite economic history books, Jack Weatherford’s The History of Money (pg 193). I’d love to hear Bernanke and Obama’s version of this history. Devaluing the purchasing power of The People for political gain is as old as politics itself. It’s called inflation – and it’s a stealth tax.
Ex the anti-dog-eat-dog-class-warfare-storytelling, you’ve probably noticed that US politicians are currently burning the credibility of your hard earned currency at the stake (see Chart of The Day). No US President and/or Federal Reserve Chief has overseen A) a lower US Dollar value and/or B) a higher Oil price than Obama and Bernanke. Nice job boys.
No US President has been forced to “shut-down” the government in 17 years either. In order to explain the mechanics of it all, we’ll be hosting a call with the last man to force Big Government’s hand on this, Newt Gingrich, at 11AM EST @Hedgeye today (email Sales@Hedgeye.com if you’d like access – we’ll have a full access client Q&A for Newt too).
Back to the Global Macro Grind…
Simple question: When it comes to the purchasing power (currency) of who Obama labels “ordinary, middle class folks”, doesn’t the buck stop with the President of The United States?
As Obama pointed out yesterday in an interview with raging Republican, John Harwood, the appointment of Bernanke was as important as any he’s made. So, doesn’t that make The President accountable to empowering a Burning Buck policy?
Silly questions, I’m sure. That’s why CNBC didn’t get me to do the interview.
In other news, the US stock market is now down for 9 of 11 days since Ben Bernanke arbitrarily decided to do precisely the opposite of what he was “communicating” to the marketplace (taper).
Counter to consensus thinking, the better part of this recent correction in stocks has come on days when:
- US Dollar is DOWN, and
- US Interest Rates are DOWN
The causal factor in driving Down Dollar has been a two track (monetary and fiscal) political strategy that is starting to look like an idea that came out of a Roman bath club circa 52 BC. Plunder the people for political gain. They won’t understand. #stealth
With the US Dollar having given back all of its YTD gains (it’s down -2.7% in the last month):
- The US Dollar Index now has a 6-week POSITIVE correlation of +0.95 to the 10yr US Treasury Yield
- And the USD has a 6-week POSITIVE correlation of +0.82 to the US Treasury 10Y-2Y Yield Spread
Just because you won’t get things like leading indicators from your President or the US Federal Reserve doesn’t mean they cease to exist:
- Down Dollar and Down Interest Rates are starting to = Down Stock Market
- Down Dollar and Down Interest Rates = a leading indicator for #GrowthSlowing
If this sounds familiar to you, it should – this is basically the inverse of our call for the last 10 months. We were bullish on US GDP #GrowthAccelerating because two of the most obvious leading indicators for growth (#StrongDollar + #RatesRising) had both #OldWall Street and Washington consensus chasing the rising growth expectations.
From a S&P Sector perspective, the easiest way to summarize growth expectations slowing is via the Financials (XLF). The reason why the 10Y minus 2Y Yield Spread matters is because this is how a bank makes money. As the long-end of the curve (interest rates) falls, banks make less of a margin and can then lend less. How’s that for “ordinary folks”?
While almost every said “economics” guru advising Obama will tell him that a “weak Dollar is good for manufacturing and exports”, that’s the biggest crock since Nero started devaluing The People’s currency in the first place. Let’s look at what just happened in a country whose currency was lit on fire earlier this year (and whose stock market was crashing, in kind) – Brazil:
- Brazil finally said enough is enough, and RAISED rates to defend its currency (the Real)
- Brazilian Real is now +7.8% in the last month versus USD; Brazilian Stocks (Bovespa)= +17.9% in the last 3 months
- Brazil’s SEP economic data (both manufacturing PMI and Exports) accelerated as its currency did (Exports +5% y/y SEP)
Yep. Them be the facts, “folks.” And if you want to re-gain the trust of The People, you better start talking #truth. Politically preying on the ignorance of “ordinary” people is un-American. Losing respect like the US Dollar has happens slowly, then all at once.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.58-2.73%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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.
TODAY’S S&P 500 SET-UP – October 17, 2013
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.32 from 2.33
- VIX closed at 14.71 1 day percent change of -21.17%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: Fed’s Fisher speaks to Economic Club of New York
- 8:30am: Init. Jobless Claims, Oct. 11, est. 335k (prior 374k)
- 9:45am: Bloomberg Economic Expectations, Oct. (prior -9)
- 9:45am: Bloomberg Consumer Comfort, Oct. (prior -29.7)
- 10am: Philly Fed Business Outlook, Oct., est. 15 (pr 22.3)
- 10am: Freddie Mac mortgage rates
- 10:30am: DOE Energy Inventories
- 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
- 11am: U.S. announces offering size for auction of 30Y TIPS
- 12:45pm: Fed’s Evans speaks on economy in Wisconsin
- 12:45pm: Fed’s George speaks on economy in Oklahoma City
- 2:45pm: Fed’s Kocherlakota speaks on monetary policy in Mont.
- Parts of the federal govt may reopen as soon as today following 16-day shutdown
- FTC Commissioner Julie Brill delivers remarks on “Removing the Roadblocks to Affordability” at America’s Health Insurance Plans’ State Issues Conference, 4pm
- Booker beats Lonegan for New Jersey U.S. Senate seat
- Kentucky’s $1.2b public works pork included in debt deal
WHAT TO WATCH:
- Congress vote ends fiscal impasse; Obama signed measure
- S&P cuts U.S. 4Q GDP growth outlook on fiscal impasse
- Restarting government seen harder than shutting down
- IBM 3Q EPS beats, rev. misses; reiterates yr EPS view
- EBay holiday-quarter forecast misses analyst ests.
- American Express 3Q EPS, rev. beat ests. on member spending
- Facebook loosening rules to let teens share content publicly
- J.C. Penney, Home Depot defeat $250m gift-card patent case
- Barington Capital calls for breakup of Darden Restaurants: NYT
- Twitter hires Google ad exec. Hirschle ahead of IPO
- Ford to expand 2014 F-150 line to widen lead in pickup market
- Jos. A. Bank won’t rule out hostile bid for Men’s Wearhouse
- Tesla led Calif. zero-emission vehicle credit sales last yr
- CEO funding Chevron lawsuit says he regrets supporting case
- Beechcraft said to revive possible $1.5b sale
- Alliance Data Systems (ADS) 7am, $2.66
- Amphenol (APH) 8am, $0.97
- B&G Foods (BGS) 7:35am, $0.40
- Baxter Intl (BAX) 7am, $1.19 - Preview
- BB&T (BBT) 5:45am, $0.70
- Blackstone Group (BX) 8am, $0.56
- Cypress Semiconductor (CY) 7:41am, $0.12
- Danaher (DHR) 6am, $0.83
- Dover (DOV) 7am, $1.50
- Fairchild Semiconductor (FCS) 7:25am, $0.12
- Fifth Third Bancorp (FITB) 6:30am, $0.42
- Goldman Sachs Group (GS) 7:30am, $2.47 - Preview
- Hubbell (HUB/B) 7:20am, $1.60
- Huntington Bancshares (HBAN) 5:55am, $0.17
- M&T Bank (MTB) 8:03am, $2.09
- Nucor (NUE) 9am, $0.39 - Preview
- Peabody Energy (BTU) 8am, $(0.04) - Preview
- Penn National Gaming (PENN) 7am, $0.46
- Philip Morris Intl (PM) 6:59am, $1.43 - Preview
- PPG Industries (PPG) 8:11am, $2.34
- Quest Diagnostics (DGX) 7am, $1.02
- Snap-on (SNA) 7am, $1.42
- Sonoco Products (SON) 7:30am, $0.61
- Supervalu (SVU) 8am, $0.11 - Preview
- Union Pacific (UNP) 8am, $2.47 - Preview
- UnitedHealth Group (UNH) 6am, $1.53
- Verizon Communications (VZ) 7:30am, $0.74 - Preview
- Advanced Micro Devices (AMD) 4:15pm, $0.02 - Preview
- Align Technology (ALGN) 4pm, $0.30
- Associated Banc (ASBC) 4:05pm, $0.26
- Athenahealth (ATHN) 4:01pm, $0.31 - Preview
- Capital One Financial (COF) 4:05pm, $1.81
- Chipotle Mexican Grill (CMG) 4:01pm, $2.78 - Preview
- Cytec Industries (CYT) 4:06pm, $1.31
- Google (GOOG) 4pm, $10.36 - Preview
- Intuitive Surgical (ISRG) 4:05pm, $3.40 - Preview
- Las Vegas Sands (LVS) 4:01pm, $0.76 - Preview
- People’s United Financial (PBCT) 4:02pm, $0.21
- Rambus (RMBS) 4:05pm, $0.11
- Stryker (SYK) 4pm, $0.99 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Cocoa Nears 25-Month High in New York on Dollar; Sugar Retreats
- Gold Slumping to Four-Year Low for Best Forecasters: Commodities
- WTI Crude Slips After Biggest Gain in a Week as Stockpiles Rise
- Gold Jumps Most in Four Weeks on Dollar, Dagong U.S. Downgrade
- Copper Falls as Investors Shift Focus to Prospects for Surplus
- Wheat Gains on Concerns Argentina Needs More Rain to Boost Crops
- Record Copper Output in China Seen by Antaike on Smelter Fees
- Shanghai Rebar Falls as Inventory Gain Stokes Supply Concern
- Gold-Silver Ratio May Rise to Two-Month High: Technical Analysis
- Gasoline Refiners Lose in Europe as U.S. Exports: Energy Markets
- Chocolate Prices Fueled by Cocoa Butter’s Gain: Chart of the Day
- China Railways Trailing 1880 U.S. Show Spending Scope: Economy
- Alcoa Doesn’t Know Impact of Saudi Outage on Aluminum Production
- China Steel Production Outlook Raised as Supercycle Continues
The Hedgeye Macro Team
In preparation for LVS FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
- "The original idea for The Parisian would be a three-star to four-star property, that would have mass market appeal, that's what the government wants there. We want to be middle market in The Parisian, we're positioned just below the Venetian."
- "Based on our current construction schedule, and subject to timely government approvals, we are targeting the opening of the Parisian Macao for late 2015."
FOUR SEASONS CO-OP
- "We are also advancing our plans to sell shares in a co-op venture to prospective buyers of Four Seasons branded properties in the Apart Hotel on the Cotai Strip."
- "We're lining up the project management and the sales team. And we don't need any further approval."
- "The macro view about China is not affecting the visitation to Macao. If anything, the visitation is increasing."
- "SCL mass table games has grown 60% in the last year to $920 million from $577 million a year ago in this segment and the margin is still mid-40s, 45%, 46%, 47%."
- "Upside in this segment comes from the organic growth in the Macau market, specifically in Cotai, our ability to leverage our hotel and retail asset base in Macau and in Cotai, in particular, to drive much higher win per unit, we're just in a unique position to improve dramatically and see SCL's mass table growth grow to $4 billion to $5 billion, $6 billion years ahead."
- "If they work on time, their goal is to get the integrated resorts opened, a couple of them open by 2020 for the Olympics which is in the summer of 2020. To do that, they'll have to make decisions in by the end of 2014 or very early 2015. There'll be a lot of competition for those particular facilities at the high-end, the integrated resort, they definitely will pick integrated resorts probably for Osaka and Tokyo, that's our feeling, two major ones. What else they do, we really don't know, there's talk about Okinawa as well as an integrated resort."
- "We prefer the Singapore model to any of the other models of integrated resorts."
- "We submitted the feasibility study. We're waiting for the government. There are actually four governments involved, there is the local government, the regional government, the national government and the EU, all of which."
SINGAPORE RC VOLUME
- "We've been pretty consistent in the range of $12 billion to $16 million roll per quarter. I think that will remain intact for the foreseeable future."
- "We publicized last year that our dividends would increase by a minimum of 10% per year, most of the market expectations are that we'll do actually more than that. But there is a dividend bias in the company to continue to increase the yield on our stock, the stock has gone up, so that means we have to increase our dividends to keep the yield at where it should be. We have announced a $2 billion buyback of stock. We are progressing with that buyback and we'll continue to do that until the $2 billion is taken care of."
- [Special dividend] "The specials are generally unlikely. We need to save some of the cash for development opportunities that are coming up, although our balance sheet and the cash for our free cash flow as most everybody knows about is pretty significant."
- On the gaming side, we are very dependent on high-end premium Asian players who come here. And although we've participated, we've done very well in that segment, we're happy to be in it, the entire town doesn't share equally in that. Slot and mass tables continue to be mediocre. I wouldn't call it a head fake as much as it's just a challenging market that will slowly get better, but I wouldn't look for rapid improvement in the next few quarters."
- "The word you hear on groups and conventions is it has improved and it certainly has, there's no question about it, our advanced sales on conventions are amongst the highest we've had ever."
- "The problem we have in Las Vegas is more rate than it is people...so the prices are going up but they're not coming up to 2006, 2007 levels."
- "I think Vegas gets better on the mass side slowly, slots, ETG slowly getting better, but not rapidly. And on the table game side, very tough sledding on new mass tables and better on the high-end Asian."
- "Win per unit per day on the pure mass in Las Vegas is very challenging. The premium mass, the better customer who comes in for special events, fights, high frequent, out of Southern California, that is getting better."
FOUR SEASONS PREMIUM MASS
- "As we move more into this premium mass business there, I think the numbers will get better and the hold percentage will be what it's going to be. We know with that kind of volume, the hold percentage pretty much stays flattish when it's all said and done."
- "When we sell out the 300 apartments at the Four Seasons, that'll bring us in a lot of premium direct at the high end because anybody spending several million dollars is going to play at the Four Seasons. There'll be direct play or there'll be premium mass. So that's one element that's going to contribute to an increased gross and increased EBITDA number."
This note was originally published October 16, 2013 at 14:36 in Energy
Kinder Morgan (KMI, KMP / KMR, and EPB) is scheduled to release 3Q13 distributable cash flow at 4pm EST today, closely followed by its quarterly conference call at 4:30pm EST.
In advance of the call, we've compiled a list of questions that we'd like management to answer. As Kinder Morgan will not respond to our questions, perhaps someone else will ask them for us...
1. Does PricewaterhouseCoopers audit, or deliver an opinion on, KM's sustaining capital expenditures?
2. How does KM define "capacity" in its E&P business?
3. Why does KM feel that relying upon a partnership agreement written in 1992 is relevant 21 years later, especially considering that E&P assets were not in the partnership at that time, and the industry defines maintenance CapEx for E&P assets completely differently?
4. Why doesn't KM acquire a large E&P company or asset given how accretive such a deal would be to KMP's DCF/unit with $0 sustaining CapEx?
5. Or, if KM wants to de-emphasize its E&P business, why not sell those assets today? What does KM believe fair / market value is for its E&P assets?
6. How is the St. John's Dome project (CO2) going? How much capital has been put into the project to date? Discuss the well results?
7. Please discuss KM’s intentions with respect to investing in “coal / other natural resources.” How much capital will be dedicated to this effort? What has been done so far?
8. Is KM considering a corporate acquisition to kick off this new “coal / other natural resources” business?
9. More importantly, how will KM define sustaining CapEx for this business? Will there be a replacement reserve to reflect the fact that these will be depleting assets? Or will it be similar to how KM currently defines E&P sustaining CapEx (i.e. $0)?
10. Over the last several years, KM has spent an enormous amount of expansion CapEx in both its refined products and bulk terminals businesses, yet unit volumes, at each, has not increased. This cannot be explained by a single project gone wrong or a bad economy; what, exactly, is this expansion CapEx going towards?
11. Within KMP’s Natural Gas Pipelines segment, there is a large gathering & processing (G&P) business, made more significant with the CPNO acquisition. For 2013, what is G&P sustaining CapEx vs. expansion CapEx (including JVs)? What is G&P organic volume growth expected for 2013 and 2014, respectively?
12. Over the long-term, how much capital would KMP need to spend on an annual basis to keep gathering throughput and NGL production flat (including CPNO)?
13. Does KMP include new well connections needed to keep gathering throughput flat in sustaining CapEx? Does KMP include or reserve for processing capacity refurbishment / replacement in sustaining CapEx?
14. If KMP were to retire a 300 MMcf/d processing plant and build a new 300 MMcf/d processing plant next to it, would the CapEx incurred be sustaining CapEx or expansion CapEx?
15. On the 9/18/13 conference call, management noted that, “Everything that you do eventually gets into the rates you charge for your transportation services.” How will the significant spending cuts at the former El Paso subsidiaries affect rates going forward?
16. On the 9/18/13 conference call, management cited a Goldman Sachs report that listed KMP’s 2012 maintenance CapEx as a % of EBITDA as 11.1%. But in KMP’s 1/30/2013 IR presentation, it states that sustaining CapEx was $285MM and EBITDA (ex. items) was $4,144MM, for a ratio of 6.9%. Which number is accurate? Why did management cite the Goldman figure?
17. In the FERC financials, which expense line includes “anomaly repairs” for the former El Paso subsidiaries?
18. In the FERC financials, where can we find the increase in O&M expenses to make up for the significant decline in maintenance CapEx on the former El Paso subsidiaries?
19. What does KM have for natural gas transmission contract roll-offs over the next few years? Can KM quantify it in terms of EBITDA impact?
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