"Whoever fights monsters should see to that in the process he does not become a monster. And if you gaze long enough into the abyss, the abyss will gaze back at you."
Yesterday I was flying out to San Francisco and the United Flight I was on lacked two key things: access to the Internet and/or a choice in movies. As a result, I was stuck watching Monsters, Inc.
For those of you that have progeny perhaps you've seen it already? I'm still in the bachelor camp, so don't regularly watch Pixar cartoons. I also have to sadly report, it wasn't all that scary, though it was cute and funny.
The movie did, however, make me think about a few things that currently scare me about the U.S. economy. In no particular order, my biggest fears are:
1) The Federal Reserve - We certainly harp on the Federal Reserve and rightfully so as an un-elected and largely unaccountable body with the power to influence the global economy is very scary. Our biggest concern is the excesses that are being built into the system because of elongated, extreme monetary policy.
The economy is growing and the unemployment rate is in decline, but we remain at the zero bound in interest rates. Admittedly the policy has helped to inflate some asset classes, such as housing, that were a major anchor on the banking system. Unfortunately, this extreme monetary policy has created an economy and set of markets that are highly sensitive to central bank actions.
In the chart of the day, we highlight this point by looking at the volatility that is occurring in the interest rate market. As an example, rates on the 10Y spiked ~37% in 3Q13. This is as substantial a move we've seen on a percentage basis in fifty years. Further, in the wake of Bernanke’s confused policy communication on Sept 18th, we’ve seen a marked reversal in 10Y treasury yields with rates declining -17% off peak levels.
2) Macro Data - Admittedly it's odd for a macro analyst to be scared of macro data, but I am and here's why - it is often grossly inaccurate.
An example from our research earlier this week was a note I wrote on gold (somewhat of a meaningful asset class). The note took a deeper look at a letter gold bug Eric Sprott wrote to the World Gold Council on supply and demand in the global gold market.
Sprott's thesis is that the global supply and demand numbers for gold grossly overstate the excess supply of gold in the world. In fact, Sprott thinks that in the year-to-date we are running at a supply deficit of some 503 tonnes.
Meanwhile the World Gold Council's projections for the year-to-date suggest the world is over supplied by a tune of 217 tonnes. If we annualize both sets of projections, the difference between them is a notational value of some $50 billion dollars. Not exactly chump change !
If you are one of those people that like to invest based on concrete date, like me, you must be scared of some macro data at times as well. If you believe Sprott, then you should be buying gold hand over fist, and if you believe the World Gold Council, you should be selling.
While we do like it when we get concrete data that informs us, as it relates to gold we'll stick with our sneaky correlation models, which show a very tight correlation to the Federal Reserve balance sheet and prevailing, forward policy expectations. Interestingly, for the first time in a year, gold is actually looking like a buy in our quant model. Scary indeed!
3) U.S. Economy - Coming out of the Great Recession, the U.S. outperformed many of its western peers in both labor market and broader economic improvement. From here, though, there a few reasons to be scared.
The equity markets domestically have been on a tear and are literally registering new all-time highs – but, of course, with highs in equities and expanding multiples come high expectations for forward fundamentals. A few things that might not be so rosy on the U.S. over the next few months include:
1) Debt and debt ceiling - The uncertainty on the recent debt ceiling debacle led to a meaningful decline in consumer confidence and a slowing in economic activity. There is now a series of dates from December to February, that investors will be watching to see if there will be another debt ceiling scare or government shutdown. In markets, confusion breeds contempt.
- 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.
2) Corporate earnings – The results from U.S. corporate this quarter haven’t been terrible, but they certainly haven’t been gangbusters either. As of yesterday, 52% of companies are seeing sales accelerate, 51% are seeing earnings accelerate, and 47% are seeing operating margins expand. That sounds good, but the translation is that over half of corporate America is seeing earnings, revenue and margins decelerate.
3) Financials – We’ve already become more cautious on the financial sector over the last couple of days as we’ve taken Franklin Templeton off our Best Ideas as we see the outflow from bond funds slowing. More broadly, as the yield curve narrows, this is negative for banks generally. Borrowing short and lending long doesn’t pay in a narrow yield curve environment. In the year-to-date, financials has been a market leader up 26%, the second best sector after consumer discretionary. If this reverses, it will be hard for the SP500 to march higher.
Halloween is only six days away, so I don’t want to scare you too much . . . Boo! Or do I?
Our immediate-term Global Macro Risk Ranges are now as follows:
Enjoy the weekend.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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TODAY’S S&P 500 SET-UP – October 25, 2013
As we look at today's setup for the S&P 500, the range is 21 points or 1.09% downside to 1733 and 0.11% upside to 1754.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.21 from 2.22
- VIX closed at 13.2 1 day percent change of -1.64%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Durable Goods Orders, Sept., est. 2.2% (prior 0.1%)
- 9:55am: U Mich Consumer Sentiment, Oct. final, est. 75.0 (prior 75.2)
- 10am: Wholesale Inventories, Aug., est. 0.3% (prior 0.1%)
- 1pm: Baker Hughes rig count
- President Obama speaks in N.Y. on importance of education, entrepreneurship, middle class competitiveness
- Senate, House out of session
- U.S. Customs and Border Protection holds final day of East Coast Trade Symposium on “Increasing Economic Competitiveness through Global Partnerships and Innovation”
WHAT TO WATCH:
- Twitter seeks $1.4b in biggest Web IPO since Facebook
- Twitter insiders hold on to shrs in IPO amid growth prospects
- JPMorgan said to see possible U.S. accord on Madoff scheme role
- Microsoft 1Q sales, profit top analyst ests.
- Amazon reports jump in 3Q rev. ahead of holiday shopping season
- DuPont says it will spin off performance chemicals subsidiary
- Fed said to issue warning about lax loan underwriting practices
- U.K. eco. grew in 3Q at strongest pace since 2010 on services
- German business confidence unexpectedly decreased in Oct.
- Samsung’s record earnings fueled by demand for handsets to chips
- Toyota loses $3m verdict in Oklahoma fatal crash lawsuit
- Ares Capital Management planning IPO, hires JPM: N.Y. Post
- Boeing gets China commitment for $20.7b of 737s: Reuters
- Europe clocks go back 1 hour as daylight savings time ends
- Fed Meeting, BOJ, Iran Talks, Apple: Week Ahead Oct. 26-Nov. 2
- AbbVie (ABBV) 7:51am, $0.78 - Preview
- Aon (AON) 6:30am, $1.04
- Avery Dennison (AVY) 8:30am, $0.64
- Brookfield Office Properties (BPO CN) 7:20am, $0.25
- DTE Energy (DTE) 7:10am, $1.22
- Eaton (ETN) 6:30am, $1.12
- ImmunoGen (IMGN) 6:30am, $(0.22)
- Lear (LEA) 7am, $1.33
- Legg Mason (LM) 6:59am, $0.62
- Moody’s (MCO) 7am, $0.81
- National Oilwell Varco (NOV) 7am, $1.32 - Preview
- Newell Rubbermaid (NWL) 6:30am, $0.49 - Preview
- Procter & Gamble (PG) 6:58am, $1.05 - Preview
- Rockwell Collins (COL) 7:25am, $1.31
- Sherwin-Williams (SHW) 8am, $2.64
- Simon Property (SPG) 7am, $2.16 - Preview
- TCF Financial (TCB) 8am, $0.23
- United Parcel Service (UPS) 7:45am, $1.15 - Preview
- Ventas (VTR) 7:03am, $1.02
- WisdomTree Investments (WETF) 7am, $0.09
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Abe’s Farmers Fight Fat as Trade Talks Mean Tariff Cuts in Japan
- Gold Bulls Persist on Dollar Drop as Stimulus Kept: Commodities
- Gold Trades Below Three-Week High as Demand May Slow After Rally
- Copper Heads for Weekly Drop on Concern China May Tighten Credit
- Wheat Gains as Australia Dry Weather Adds to Crop Damage Concern
- WTI Oil Fluctuates on the Way to Biggest Weekly Loss Since June
- Cocoa Butter Falls as Chocolate Makers End Christmas Buying
- Crude May Decline Next Week as Weak Demand Boosts U.S. Supplies
- Palm Oil Declines Most in Four Weeks as Malaysian Exports Slow
- Rubber in Tokyo Has First Weekly Loss in Three as Yen Climbs
- Aluminum Shipments by Japan Expand as Auto Demand Improves
- Anglo American CEO Cools on Minas-Rio Stake Sale as Prices Climb
- European Coal Rallying From Record Low on Growth: Energy Markets
- Copper Set for Weekly Drop on China Credit Concern: LME Preview
The Hedgeye Macro Team
I’d like to have some of what Steve Wynn was eating during the conference call last night.
WYNN served up a tasty quarter and whet our appetites with hints of an impactful upcoming Board meeting. A smorgasbord of issues will likely be discussed at the meeting including a special dividend, whether to pull out of the MA and PA bidding, and potentially moving corporate headquarters to Asia (just our guess).
WYNN’s long-term prospects in Asia are delicious: Potential new menus in Japan, Taiwan, and South Korea, and the Cotai project that could open before Chinese New Year in 2016. Moreover, WYNN also announced a Phase II in Cotai. Over the near-term, Wynn Macau is finally hungry for potential market share gains in the Mass market. While the overall continued strength of Macau was discussed, management’s recent aggressive push into the Mass business was not.
We think Wynn Macau will be more aggressive promoting its Mass business, something it really hasn’t done. Macau management was enhanced recently with some Mass focused personnel. Consistent market share losses have been a key tenant of the WYNN bear thesis. Any reversal will likely be rewarded by investors. As can be seen in the following chart, September produced a Mass revival for Wynn Macau. Our sources indicate that the property should show further gains in October and likely for the rest of the year.
Strong quarter and outlook
CONF CALL / Q&A
- On their way to having their best year
- Wynn Palace on schedule for CNY 2016 but by 1H 2016 at the latest
- Planning for phase 2 for Wynn Palace - will introduce a revolutionary product
- $1 BN cash at parent company; after tender at Wynn LV, they'll have $250MM
- Macau: >$1.8BN cash and $1.55BN revolver - plenty of capital
- Las Vegas: positive trends in 4Q as well as 2014; continuing with same momentum as they've had in previous Q
- Conventions trending very well
- WYNN board meeting: Nov 4/5- will discuss special dividend possibility
- Encouraged about MA but very challenging, complex situation there; timelines change frequently
- Like idea of hotels with casinos
- Adding 2 major junket areas at Wynn Macau (southwest corner); they will be done by CNY 2014
- Wynn Diamond will include the Wynn Diamond coliseum of 15,000 seats, it will include an all suite Wynn Diamond hotel that will be directly related 1,300-square foot feet at the premium mass market and above.
- Will consider social/virtual gaming opportunity
- High hold (direct business) impacted Macau by $10-15MM
- Vegas: F&B revenues may have been hurt by new competition from Hakkasan but Wynn emphasized the need to protect the bottom line, not top line
- No comment on Japan
- Macau: usual rooms out of service in 3Q; remodel will be done in few weeks-remodel is more about retaining existing customers than attracting new customers
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