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THE M3: 2013 GGR SHARE; TAIWAN GAMING DRAFT; SJM PAY INCREASE; 2014 VISITATION

THE MACAU METRO MONITOR, JANUARY 3, 2014

 

 

SJM HAS BIGGEST SLICE OF CASINO MARKET IN 2013 Macau Business

2013 GGR share:  SJM (25%), Sands China (21.5%), Galaxy (19%), MPEL (14%), WYNN (11%), and MGM (10%).  The market share pecking order was the same last year as the year before.

 

DRAFT GAMING BILL FAILS TO PASS LEGISLATIVE REVIEW Focus Taiwan News Channel 

The Legislature's Transportation Committee approved a measure Thursday to restrict casinos to Taiwan's offshore islands, though a lack of consensus along lawmakers struck down nearly three-fourths of the items on the same bill.  The committee conducted an article-by-article review of the Tourist Casino Management Act draft bill, in which 83 of the 114 articles failed to pass.  Among the 31 approved articles were regulations for licensing and, notably, a measure that restricts the establishment of casinos only to offshore islands, provided they have the approval of local residents.

The Transportation Committee also passed a proposal to block government investment in casino operations in accordance with related regulations.

 

SJM RAISES PAY, ANNOUNCES LIVING ALLOWANCES Macau Business

Effective 2014, SJM has raised the pay of all its employees by 5%.  It also announced that it would pay all its employees a living allowance this year.  Those paid MOP17,000 (US$2,129) a month or less will get an allowance of 175% of a month’s salary and the rest will get 125% of a month’s salary or at least MOP29,750.

 

NEW YEAR BRINGS FEWER VISITORS TO MACAU THIS YEAR Macau Business

Macau had 114,250 visitors on New Year’s Day, -1.89% YoY.  Gongbei was the busiest point of entry with 138,428 people having entered the city through the Border Gate.


Avoid, Deny, or Hide

This note was originally published at 8am on December 20, 2013 for Hedgeye subscribers.

“During the past five difficult years, we’ve attempted to make the decisions and take the actions that would keep Caterpillar competitive in a global economy, no matter how difficult those decisions might be.  Early in the 1980s, we recognized that our industry was faced with substantial overcapacity and that there would be tremendous price pressure on our products.”

-1986 Caterpillar Letter to Shareholders

 

On a list of the Worst CEOs of 2013 yesterday, CAT’s Oberhelman and UAL’s Smisek joined John Chambers and Michael Jeffries on the, let’s say, “laggard” list*.  Both UAL and CAT have been Hedgeye Industrials ‘shorts’ since we launched in mid-2012, paired against ‘longs’ PCAR (later TEX) and lower cost airlines, respectively.  While we are not surprised to see CAT and UAL on the list, is it fair to blame the CEOs?  Was it really management?

 

As a long-time buysider, I worry about having my views immortalized in print. Intellectual flexibility is central to survival in markets; published opinions serve as an anchor.  In October of 2012, we penned our previous Early Look "Steady-As-She-Goes?" outlining the short case for CAT.  Luckily, there is little to change 14 months later.   A differentiator in our Industrials work is a keen focus on industry specific cycles.  I often hear cyclicals discussed in the context of the business cycle – particularly in reference to early/mid/late cycle.  We take a different and, we think, more robust approach. 

 

Back to the Global Macro Grind...

 

Most capital equipment cycles are simply driven by the fact that “stuff” gets old.   Typically, regulation, tax changes or the like drive a period of abnormal demand, such as a pre-buy ahead of costly new emissions regulations.  Clumps of capital equipment purchased at the same time tend to wear out at the same time, creating ups and downs in demand, capacity utilization and margins independent of trend growth.  Central planners tend not to consider these long-tailed distortions when slamming policies into place, but our P&L is grateful for their neglect.

 

The cycles in airlines and mining equipment are a bit different, however. 

 

In airlines, the cycle has historically been driven by a dance we call the ‘bankruptcy shuffle’.  When the least competitive airline lowers costs in bankruptcy, it pushes the next airline down the cost curve into the top cost spot.  As we see it, AMR’s bankruptcy last year thrust UAL into that uncomfortable seat, conceptually in the back near the bathroom.  Given heavily unionized labor and little control over other costs, it has been very difficult for airlines to address uncompetitive costs outside of Chapter 11.  While the airline industry appears to be benefiting from an accelerated replacement cycle in commercial aircraft driven by significant fuel cost increases, and probably consolidation and other factors, we do not think the industry has improved enough to allow the high cost player to make a reasonable profit.   After all, AMR went bankrupt fairly recently.  As we see it, this dynamic will continue to plague UAL.

 

In resources-related capital equipment, rising commodity prices drive growth in commodity capital spending.   In mining, for example, higher metals prices allow profitable development of new mining projects.  The staggering increase in metals prices in the past decade drove a ‘bubble’ in mining capital investment.  Unfortunately, once metals prices stopped increasing, the stream of new projects started to run dry.  And dry is normal.  Assuming commodities remain flat to down, we suspect that CAT, JOY, Komatsu and friends will enter a period much like the early 1980s described in the quote above.


But what about management? 

 

Hindsight is 20/20 and we usually prefer to give people – yes, management teams are made of people – the benefit of the doubt.  But in the case of CAT and UAL, management actions should shake investors.  For example, UAL’s 2011 non-GAAP income metrics include $600 million in profit from an accounting change (adoption of ASU 2009-13).  Usually, the whole point of a non-GAAP presentation is to remove non-operating items.  UAL stopped providing estimates for this benefit in 2012, despite some dicey S.E.C. correspondences on the issue.  UAL also laid out a brand new cost cutting plan at its recent analyst day, while having failed to deliver on its current profit improvement plan.  And don’t get us started on UAL’s special items.  At CAT, management made spectacularly poor acquisition choices in Bucyrus and ERA, paying far too much and buying into a bubble, as we see it.  Worse, CAT management seems to be in denial about the severity of the resources-related capital equipment downturn, with industry overcapacity a serious looming problem, by our estimates.

 

Management teams at cyclical companies often get too much credit or grief for factors well beyond their control.  But when management teams make efforts to avoid, deny or hide what is really going on, a challenging period can quickly spiral into a disastrous one.  CAT suffered mightily in the early 1980s, but that existential threat forced a clear-eyed appraisal of what was needed to survive and, many years later, thrive.  In our view, these two management teams have yet to “make the decisions and take the actions” necessary, possibly out of a desire to avoid potentially humiliating accountability.  They are people.  Fortunately for shorts, we expect these management teams to focus on investor perception instead of business reality for a while longer.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST10yr 2.86-2.95%

SPX 1792-1821

VIX 12.91-14.91 

USD 80.15-81.14  

Gold 1191-1232 

 

Good Luck Out There Today.

 

Jay Van Sciver, CFA

Managing Director

 

Avoid, Deny, or Hide - jvs

 

Avoid, Deny, or Hide - yup7

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

3 FOR 3 TO START 2014: Claims, Confidence & ISM

Summary:  A second week of “clean” initial claims data confirms a return to the Trend rate of improvement, ISM New Orders and Employment both continued their respective advances to multi-year highs and, while Bloomberg’s weekly confidence data deteriorated marginally WoW, the positive reversal for consumer sentiment in December was unanimous across all the primary survey’s.   

 

INITIAL CLAIMS:  The YoY rate of change in non-seasonally adjusted claims improved 170bps WoW to -9.5% while headline claims fell 1K vs the prior weeks revised 338K. 

 

Josh Steiner, head of Hedgeye Financials, offered some summary context for this morning’s data with respect to the broader trend:  

  • The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims while the week prior showed an 8.2% y/y improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong. 

 

(source: Hedgeye Financials)

3 FOR 3 TO START 2014:  Claims, Confidence & ISM - JS 1

 

3 FOR 3 TO START 2014:  Claims, Confidence & ISM - JS 2

 

  

ISM MANUFACTURING:  The headline ISM index declined -0.3 to 57 in December but the New Orders and Employment sub-indices, the better lead indicators in the index, both advanced sequentially, posting their best readings since April 2010 and June 2011, respectively.  

 

The TREND in the manufacturing data remains one of strength with the trailing 3M/6M/TTM figures still improving across the headline, New Orders, and Employment indices to close the year.    

 

Notably, the Supplier Deliveries sub-index (i.e. how long purchase managers are waiting to receive orders/supplies) is getting interesting here as it moves into the high 50’s as higher waiting times are generally indicative of rising demand. 

 

Elsewhere, despite the inventory build juicing third quarter GDP, inventory angst appears relatively muted across the manufacturing base according to ISM with the Business inventory and Customer Inventory readings both running sub-50.

 

Separately this morning, the final Markit PMI reading for December showed commensurate strength, improving +0.3 MoM to a new 11-month high.  

 

3 FOR 3 TO START 2014:  Claims, Confidence & ISM - ISM  Dec  orders  Employment  Exports  Production

 

3 FOR 3 TO START 2014:  Claims, Confidence & ISM - ISM table  Dec  

 

CONFIDENCE:  Bloomberg’s weekly read on consumer comfort deteriorated -1.3 to -28.7 week-over-week, but the index remains north of the -30 Mendoza line and the positive reversal in confidence in December has been discrete. 

 

Indeed, with the +6.1 point jump in the conference board’s consumer confidence survey reported on Tuesday, the positive, post-gov’t shutdown, reversal across the major survey’s in December has been unanimous.  

 

Confidence, of course, is coincident-to-leading for a bevy of economic activity indicators and with seasonality building as a positive support in the reported domestic macro data through 1Q14 and without a discrete negative catalyst imminent on the calendar, the path of least resistance is probably higher.

 

3 FOR 3 TO START 2014:  Claims, Confidence & ISM - Confidence table dec

 

 

Christian B. Drake

 

Joshua Steiner, CFA

 

 

 


Initial Claims: Strength

Takeaway: The trend of "clean" labor data rises to two weeks with this morning's print, and the conclusion remains bullish for Financials.

Editor's note: This is an unlocked excerpt from Hedgeye's Financials team.

Two Clean Weeks

The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims, while the week prior showed an 8.2% year-over-year (y/y) improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong. 

 

As we've been arguing for some time now, the strengthening labor data is exerting upward pressure at the long end of the yield curve. Based on this, we continue to expect banks to have a macro tailwind into 1Q14 and builders to have a headwind. 

 

Initial Claims: Strength - daddaught

The Data 

Prior to revision, initial jobless claims fell 1k to 339k from 338k week-over-week (WoW), as the prior week's number was revised up by 3k to 341k.

 

The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 9.75k WoW to 357.25k.

 

The 4-week rolling average of NSA claims, which we generally consider a more accurate representation of the underlying labor market trend, was -2.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.0%. However, as mentioned above, the distortions that have been present in the data up until just recently have rendered this 4-week rolling average slightly less valuable. We expect that in a few weeks it will again become the most important data point we track on the strength of the labor market.

 

Initial Claims: Strength - bo1

 

Initial Claims: Strength - bo2

 

Join the Hedgeye Revolution.

 


Mo Mo?: SP500, Levels Refreshed

Takeaway: With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else.

POSITIONS: 7 LONGS, 5 SHORTS @Hedgeye

 

Do you do the mo mo?

 

After shorting the market too early in Q3 of 2007 (and getting fired for it), I had to teach myself how to not mess up missing the next melt-up to all-time highs. Risk managing bullish immediate-term TRADE momentum within a bullish intermediate-term TREND is a process.

 

With flows (out of bonds into stocks) this bullish, it’s more about time/price right now than anything else. So my levels are really important to me. Across our core risk management durations here are the levels that matter to me most:

 

  1. Immediate-term TRADE resistance = 1858
  2. Immediate-term TRADE support = 1833
  3. Intermediate-term TREND support = 1758

 

In other words, over the intermediate-term (now through June) you have a 100 point SP500 range of risk to consider (1).

 

In the immediate-term, it’s more a question as to whether or not Mr. Macro Market’s signal is right that we are going to continue to see a series of higher-lows (1833 support) and higher-highs (1858 resistance).

 

That is all. We held 1833 TRADE support this morning, so I bought Tesla (TSLA) instead of SPY (more mo mo in TSLA!).

KM

 

Keith McCullough

Chief Executive Officer

 

Mo Mo?: SP500, Levels Refreshed - SPX


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