“If I had a mind to rent pigs, I’d be mighty upset. A man that likes to rent pigs won’t be stopped.”
-Larry McMurtry, Lonesome Dove
Lately I’ve been watching the famed late 1980s mini-series, “Lonesome Dove”, on Netflix. It is based off of the Pulitzer Prize winning novel by Larry McMurtry of the same name. The novel tells the story of two former Texas Rangers, Captain Augustus “Gus” McCrae and Captain Woodrow F. Call, who run a livery called the Hat Creek Cattle Company in the desolate Texas border town of Lonesome Dove.
The bulk of the plot involves the decision by McCrae and Call to leave the relative complacency of Lonesome Dove and drive a massive herd of cattle north to the Montana Territory. On the way north, they encounter a plethora of adventures, including proverbial dust ups with the army, bandits, and Indians.
By far, the savvy plains Indians (Native Americans) are the most formidable challenge McCrae and Call face on their journey. In reality, this is no surprise since the Natives occupied the land for thousands of years before the European settlers arrived and developed many proprietary ways of surviving off the land without the benefit of modern technology.
One such proprietary method of hunting was the Buffalo Jump.
It was a simple, but very effective method of collecting a massive amount of buffalo meat. On horses or foot, the Natives would chase buffalo herds towards, and eventually over, a sharp cliff. Tribesmen waiting below would finish off the buffalo and butcher the meat. The key of course was that buffalo had no idea they were running towards, and eventually over, a cliff.
Back to the global macro grind . . .
While it is an apt analogy, we are not yet ready to say that the global economy is going over the cliff, but the fact remains that much of the data we’ve been collecting and watching is getting incrementally more negative. Yesterday in our morning meeting, Hedgeye’s Asian Analyst Darius Dale emphasized that he is getting a little more cautious on China.
They key reason for his shift is that money market rates continue to back up. This is a point that is emphasized in the Chart of the Day. Further, while the government could choose to intervene, the People’s Bank of China is instead opting to let the markets settle on their own. According to a February 8th PBOC report:
“When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that. The market needs to tolerate reasonable rate changes so that rates can be effective in allocating resources and modifying the behavior of market players.”
In the long run, this is likely a positive for the Chinese economy. In the short run, of course, higher money-market interest rate volatility is likely a headwind.
The caveat on getting aggressively negative on China is that GDP comps are relative easy for China and seasonality should also be a positive in the reported numbers this quarter and next. In part, this is likely why the Shanghai Composite is up +0.85% this morning and +3.5% this month – a move that may have some legs if the PBOC decides to cut the Reserve Rate Ratio (RRR) as is rumored this morning.
The novel Lonesome Dove is also somewhat apropos as newly minted Federal Reserve Chair Janet Yellen is scheduled for her debut in front of the House Financial Services Committee this morning, which will include Q&A. Interestingly, there will be a second panel of witnesses that will react to Dr. Yellen’s testimony and will include:
- Dr. John Taylor, Professor of Economics, Stanford University;
- Dr. Mark Calabria, Cato Institute;
- Abby McCloskey, American Enterprise Institute; and
- Dr. Donald Kohn, Brookings Institution.
So, we will see soon enough if Dr. Yellen is a Lonesome Dove or as my colleague Keith McCullough called her in this video the "Mother of All Doves." Either way, her commentary this morning is likely to have some impact on a stock and bond market that continues to be myopically focused on interest rates and Federal Reserve policy.
Speaking of headwinds, one of our Best Idea short positions Boardwalk Pipeline Partners (BWP) faced a few of them yesterday as the stock closed down -46%. We obviously don’t get them all right, but our Energy Sector Head Kevin Kaiser nailed this one. Interestingly, BWP didn’t miss its EBITDA estimate by all that much, but did cut its distribution by more than 80%.
A key tenet of our short call on MLPs in general is that their distributions are quite often an illusion as MLPs borrow money, issue equity and buy companies to maintain the distribution. Investment bankers then “value” MLPs based on the yield, rather than the actual intrinsic value of the assets, and sell these financial products to unsuspecting retails investors. This whole scheme works fine until the proverbial company goes over the Buffalo Jump and distributions get cut.
If you are invested in MLPs and / or looking for good shorts, I’d highlight recommend you subscribe to our Energy Sector research. Anyone on our sales desk, , can help get you signed up. The best risk management is to avoid blow ups like BWP and we seem more MLPs on the horizon that are headed for the cliff.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.60-2.76%
Keep your head up and stock on the ice,
Daryl G. Jones
Director of Research
THE MACAU METRO MONITOR, FEBRUARY 11, 2014
SO 'NOT WORRIED' ABOUT 7% JAN GROWTH Macau News
“There were a lot of people but business is not as good,” So said of SJM's revenue in January. So said that the slowed-down growth was “nothing to worry about” as there was no drop in the amount of gaming chips bought by customers, pointing out that casinos look at the win percentage to determine their revenue. Last month's slowed-down growth rate, So said, was nothing to worry about as he believed it won’t be a trend.
JOCKEY CLUB AWAITS APPROVAL TO REOPEN CASINO Macau Daily Times
Macau Jockey Club (MJC) is planning to reopen its casino following a ten-year absence. Jockey Club CEO Thomas Li Chu Kwan confirmed that the casino is now being redecorated and will be reopened as soon as government approval arrives. There is currently no timetable for the casino’s reopening, and neither are there specific numbers on gambling tables and slot machines to be set up.
BLOOMBERRY RAISES US$253 MLN TO EXPAND SOLAIRE Macau Business
Bloomberry Resorts Corp has raised privately US$253.4 million (MOP2.03 billion) to expand its Solaire Resort and Casino in Manila’s Entertainment City. The casino-resort operator had sold corporate notes to BDO Unibank Inc, China Banking Corp, Robinsons Bank Corp and United Coconut Planters Bank, among others. The Phase 1-A expansion of Solaire will include 200 more slot machines and 65 gaming tables, a 300-room hotel, mixed-use space, a 1,800-seat theatre and a nightclub.
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TODAY’S S&P 500 SET-UP – February 11, 2014
As we look at today's setup for the S&P 500, the range is 80 points or 3.66% downside to 1734 and 0.79% upside to 1814.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.37 from 2.36
- VIX closed at 15.26 1 day percent change of -0.20%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:30am: NFIB Sm. Biz Optimism, Jan., est. 93.5 (prior 93.9)
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 9am: Fed’s Plosser speaks in Del.
- 10am: JOLTs Job Openings, Dec. (prior 4.001m)
- 10am: Wholesale Inventories m/m, Dec., est. 0.5% (pr 0.5%)
- 10am: Fed’s Yellen testifies to House Fin. Services Cmte
- 4:30pm: API weekly oil inventories
- 8pm: Fed’s Lacker speaks at Stanford University
- 8pm: Fed’s Fisher speaks in Dallas
- 9am: Obama and Hollande hold state arrival ceremony, 9am; State dinner begins 8:30pm
- 10:15am House Ways and Means Committee marks up H.R. 3865 which would delay IRS rules on 501(c)(4) organizations
- 10:30am Senate Budget Cmte hears from CBO Director Douglas Elmendorf on economic outlook through 2024
- House Republicans plan Feb. 12 vote to boost debt limit until March 2015, restore cost-of-living raises for military retirees
WHAT TO WATCH:
- Fed’s Yellen testifies to House Financial Services Cmte
- KKR to close two funds targeting individual investors
- Obamacare delayed until 2016 for businesses w/ <100 workers
- Ackman sells General Growth shrs to exit holding in mall owner
- Barclays to cut up to 12,000 jobs as 4Q profit falls
- L’Oreal to pay $8.2b to buy back 8% of its stock from Nestle
- Blankfein says EMs in better position than during 1998 crisis
- SEC majority wants to review exchanges’ oversight status
- GM’s China sales rise 12% to record in January on Buick demand
- General Motors to invest 1.5b Zloty in Polish plant: Dziennik
- Porsche to exceed 200,000 in deliveries in 2015 on Macan
- Wall St. vets may be removed from arbitration panels: Reuters
- North Carolina agency may delay own deal with Duke Energy: AP
- Virgin America said to pick Barclays, Deutsche for IPO: FT
- Glencore Xstrata’s 4Q copper output increases 32%
- China auditors plan to file appeal of 6-month U.S. ban
- CAE (CAE CN) 8:22am, C$0.18
- CVS Caremark (CVS) 7am, $1.11 - Preview
- Dean Foods Co (DF) 7:01am, $0.18
- Entergy (ETR) 7am, $0.83
- HCP (HCP) 8am, $0.56
- Health Net/CA (HNT) 8:15am, $0.29
- Henry Schein (HSIC) 7am, $1.40
- Huntsman (HUN) 6am, $0.37
- Ingersoll-Rand PLC (IR) 7am, $0.61
- IntercontinentalExchange Group (ICE) 7:30am, $1.95
- LPL Financial Holdings (LPLA) 6:05am, $0.59
- Marsh & McLennan Cos (MMC) 7am, $0.56
- Mosaic (MOS) 7am, $0.43
- National Retail Properties (NNN) 8:30am, $0.28
- Omnicom Group (OMC) 7am, $1.14 -
- PG&E (PCG) 9:02am, $0.42
- Regeneron Pharmaceuticals (REGN) 6:30am, $2.09 - Preview
- Reynolds American (RAI) 6:58am, $0.80 - Preview
- Sprint (S) 7am, ($0.36)
- Zoetis (ZTS) 7am, $0.34
- Arch Capital Group (ACGL) 4:01pm, $0.96
- Brookfield Residential Properties (BRP CN) 4:09am, C$0.84
- CNO Financial Group (CNO) 4:03pm, $0.29
- Conversant (CNVR) 4:02pm, $0.57
- Covanta Holding (CVA) 4:01pm, $0.22
- DaVita HealthCare Partners (DVA) 4:01pm, $0.98
- Energen (EGN) 4:30pm, $0.82
- FireEye (FEYE) 4:05pm, ($0.37)
- Fossil Group (FOSL) 4:01pm, $2.43
- Packaging of America (PKG) 5pm, $0.89
- PHH (PHH) 4:03pm, $0.08
- Sangamo Biosciences (SGMO) 4pm, ($0.11)
- Seattle Genetics (SGEN) 4:05pm, ($0.24) - Preview
- Service International (SCI) 4:05pm, $0.24
- Trimble Navigation (TRMB) 4:05pm, $0.37
- TripAdvisor (TRIP) 4pm, $0.21
- Western Union Co (WU) 4:01pm, $0.32
- Willis Group Holdings PLC (WSH) 4:41pm, $0.49
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Natural Gas Rebounds From Three-Week Low on U.S. Winter Storm
- Gold Advances to Highest Price Since November as Dollar Weakens
- Rhodium Bust Ending as Car Sales Fuel Mine Deficit: Commodities
- Sugar Traders Split as Brazil Dryness Weighed Against Surpluses
- Aluminum Trades Near a One-Week High Before Yellen Testimony
- Rebar Touches 17-Month Low as Inventory Gains After Holiday
- Soybeans Extend Losses After USDA Raises Global Supply Outlook
- China Eyes Poultry Consolidation as Bird Flu Cuts Consumption
- Wheat Crop Seen Third-Biggest by Australia on Western Supply
- California Wildfires Erupt Early in Risk to Homes and Vineyards
- Transnet Fights BHP to Win Coal Port Access for Black Miners
- Strong Chinese Steel Demand May Fail to Absorb Iron Ore Glut
- Chinese Coal Firms’ Debt Concerns Sink Shares: Chart of the Day
- WTI Trades Near Six-Week High as U.S. Fuel Supplies Seen Falling
The Hedgeye Macro Team
Chinese New Year (CNY) is off to a great start for the Macau casinos following a softer than expected January (hold issues in Jan?). Daily table revenues averaged $1.464 billion, up 78% over comparable period last year. The more appropriate comp is 3rd week of February last year when table revs averaged HK$1.107 billion – so peak CNY is up about 32%. We should see one more week of fairly strong revenues related to the CNY celebration before the seasonal slowdown. All in, we continue to project February YoY growth of around 20%, which could prove conservative.
For market shares, LVS is crushing it this month with MTD market share well ahead of trend as is Galaxy. Those market share gains are coming at the expense of SJM, MGM, and MPEL. While variances from normal hold are no doubt causing most of the share volatility this early in the month, we expect LVS primarily and Wynn secondarily, to be volume share gainers, with LVS showing the longer tail. Indeed, the anecdotal feedback from the ground suggests terrific volumes at the LVS Cotai properties.
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