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“It's just a job. Grass grows, birds fly, waves pound the sand. I beat people up.”
- Muhammad Ali
As a youngster growing up in southern Alberta, I was an enthusiast of Stampede Wrestling. Back in those days, before World Wrestling Entertainment began to dominate, professional wrestling was split into territories and Calgary-based promoter Stu Hart was recognized as one of the top promoters in the field. He had many colorful wrestlers in his stable, but one of the more interesting was Joe “Tweet Tweet” Tomasso.
Tomasso was a scrappy Italian from Hamilton, Ontario. He earned his nickname “Tweet Tweet” for talking about his imaginary pet bird (incidentally, he also spoke with a pirate’s accent). Tomasso had decent success in the ring and shortly before his retirement, the famed Stu Hart said, “He was an indestructible little bastard.” High compliments from the Canadian godfather of wrestling to a small undercard wrestler like Tomasso.
Speaking of imaginary tweets, Twitter (TWTR) reported earnings last night after the close. While the $250 million in quarterly revenue suggests the business model isn’t a total façade, the fundamental sell call we’ve been making on Twitter is playing out in spades with the stock down over -11% this morning to a new 52-week low.
(Our internet analyst Hesham Shabaan reiterated his thesis in this video.)
A few key takeaways from the quarter:
The best way to describe the Twitter quarter is Shakespeare’s oft used expression, “expectation is the root of all heartache.” At more than 20x this year’s market cap to revenue, Twitter’s expectations were high, indeed.
Back to the Global Macro Grind...
Staying on the stock specific side our wily veteran and head of Retail research Brian McGough is adding Target (TGT) to our Best Ideas list as a sell in a conference call today at 11 a.m. EST. According to McGough:
“The crux of our argument? Wall Street's perception of Target's financial trajectory is more upbeat than Main Street. When the stock glossed over the company's weak 4Q earnings report, it was because Steinhafel (CEO) issued guidance that he hoped the company would grow into if the Company repaired its reputation after the data breach - not guidance that he knew TGT could meet or beat. We don't think that the Street is giving TGT credit for a) a miss this year, and b) another one in 2015. The reality is that when a customer has a great experience in retail, they tell a friend. When a customer has a bad experience, they tell 20. Just ask JC Penney or Lululemon. Some of these 'fire your customer' events are worse than others, but there's one commonality - they take a very long time to recover.”
Keith was off seeing clients in the Midwest the last couple of days and, despite getting in late last night, hit us and subscribers on the “Direct From KM” list with some key thoughts this morning...
Buy in May, and pray? Not on the US consumer, social bubbles, or housing stuff – no thank you!
On the last point of housing, D.R. Horton, one of the nation’s largest homebuilders, recently announced they will build homes in the price range of $120,000 to $150,000. This appears to be a reaction to the obvious, which is that housing demand is tepid at best, and more aptly anemic for first time buyers. In fact, in February first time home buyers account for a mere 28% of purchases, which is the lowest level since October 2008 (the veritable apex of the financial crisis).
Not that we need more confirmatory data points, but U.S. MBA mortgage applications index came out this morning and showed applications down -4.4% for the most recent week and the total market index down -5.9%. This compares to -2.6% and -3.3% respectively in the prior week and is obviously a deceleration.
As mortgage applications go so goes housing demand and ultimately home prices. As home prices continue to stagnant or decline, it will be increasingly likely that the almighty Federal Reserve continues to be one of the more globally accommodating central banks, which will be negative for the dollar but continue to drive commodity prices higher. Reflexivity anyone?
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.63-2.73%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TICKERS: BYD, WYNN
Wednesday, April 30
Thursday, May 1
Friday, May 2
Tuesday, May 6
Wednesday, May 7
BYD – COO Paul Chakmak featured in a Executive Profile Q&A article in the Las Vegas Review-Journal.
Takeaway: Would BYD allow an article to run this week if the company were going to "miss" earnings expectations tonight?
WYNN – announced it has reached "surrounding community" agreements with Cambridge and Medford and "neighboring community" agreements with Lynn and Melrose. The communities join Malden, which entered into a "surrounding community" agreement with Wynn in 2013. The announcement comes as the gaming commission is set to hold a public hearing May 1 on Boston's bid to be designated a "host community" for Wynn's proposed Everett casino and Mohegan Sun's proposed casino in Revere
Takeaway: Additional steps in the development process.
Suffolk OTB -will attempt to sell $90 million in bonds to finance their land acquisition and construction of a 1,000 slot casino and $65 million facility.
Takeway: widely discussed, but timing and subsequent opening seems faster than anticipated.
California Internet Poker - we've read an increasing amount of commentary that while internet poker is a low probability event this year, 2015 is looking significantly more likely as 2015 is a non-election year.
Takeaway: Given the strains on tax revenue, California needs to be creative in generating additional revenues - away from personal income taxes. This is obviously an important market given the population. Operators that can secure the players here will have a leg up as internet poker goes interstate.
Philippines Gaming - Travellers International Hotel Group Inc. said it received approval from PAGCOR to expand its gaming area within the 11.5-hectare leisure and resort complex Resorts World Manila in Pasay City. The expansion of the gaming capacity would increase the number of gaming tables to 420 from 287 as of end-2013 and also double the number of gaming machines at Resorts World to 4,148 from 2,030 as of end-2013. Phase 2 is expected to be completed by September 2015.
Takeaway: The buildout of the Philippines continues.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
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This note was originally published at 8am on April 16, 2014 for Hedgeye subscribers.
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!
Nothing besides remains. Round the decay
Of that colossal wreck, boundless and bare
The long and level lands stretch far away.”
The excerpt above is from one of my favorite poems, “Ozymandias”, written by Percy Shelley. As you might have been able to decipher, the poem (well sonnet really) is about the inevitable decline of all leaders and the empires they build based on personal pretensions to greatness.
The economic and military history of the world is replete with examples of great empires that have been built and then suffered decline. The most notable to us in the west is likely the British Empire, and rightfully so. At its peak the British Empire covered more than 13,000,000 square miles, or ¼ of the earth’s surface.
The second largest empire in the history of the world was the Mongol Empire. The origins of the Mongol empire were admittedly modest and started when a young boy named Temujin vowed in his youth to bring the world to its feet. Genghis Khan, as he would later be known, did that and more. The Mongol empire, although almost impossible to manage, stretched from Vietnam to Hungary and was the largest contiguous empire in history.
In modern days, empires are more commonly measured by economic output. Currently, the top three economic empires in the world are the United States with a $16.8 trillion GDP, China with a $9.2 trillion GDP, and Japan with a $4.9 trillion GDP. Collectively, these behemoths make up almost 40% of the global economy.
If history tells us anything, to the point of Shelly’s sonnet, emperors will decline. Or as a quant might say, revert to the mean. The challenge for us as stock market operators is to find opportunities in this tectonic economic shift and to be on the right side of global economic empire building and subsequent declines.
Back to the global macro grind . . .
The mighty empire of China reported some critical economic numbers last night. My colleague Darius provided a quick summary of the results below:
As you can see from his short hand notation, “G -1” (growth decelerating), broadly speaking the data was incrementally bearish for growth.
In the Chart of the Day, we take a look at year-over-year Chinese growth by quarter going back ten years. As the chart highlights, it is really no secret that Chinese growth has been declining and also no surprise that the Chinese stock market is basically shrugging off the data this morning.
Most pundits are now vocal on the fact that Chinese growth has slowed and is slowing. Meanwhile, Chinese policy makers are of the view that this is the bottom in China’s economy (in as much as an economy growing 7%+ can be considered bottomed). Given that policy makers have the ability to stimulate and an early, inside look at the data, at a minimum, we’d probably not short China here.
Or as Genghis Khan said:
“If you’re afraid – don’t do it, if you’re doing it don’t be afraid.”
Speaking of being afraid, what scares me and should scare most stock market operators are the mysterious projections that many strategists of the Old Wall come up with. As an example, yesterday we took a look at the projections for real GDP growth in the U.S. From Q2 2014 to Q2 2015 the real GDP quarterly growth rate is projected as follows:
Clearly, Herding 101 was a well attended class by most of these sell side economists in PH.D. school . . .
We are not ready to call for the decline in the United States economic empire just yet, but we are wise to note that the Emperor, namely the U.S. dollar, continues to weaken and, in our view, is likely front running a more dovish tone by the Fed. In that vein, the U.S. 10-year yield is down again this morning (albeit small) as well after failing to participate in the late day, low volume exuberance in equities yesterday.
For those of you that do watch the Fed closely, Grandma Yellen, I mean Chairperson Yellen will be speaking at 12:15pm this morning in beautiful New York. Our friends at Goldman Sachs are out this morning saying it will be pertinent to interest rates, and the market seems to be agreeing with (or maybe front running) that view.
Finally this morning on the inflation front, and this is a point we highlighted in our recent themes deck, we are starting to see some tightness in the labor market. According to an article from Bloomberg, businesses in some US cities are raising wages and adding benefits to attract employees as metropolitan jobless rates have fallen below the 5.2% to 5.6% level considered full employment. The article noted that 49 of the 372 metro areas reported rates below 5% in February, while four years ago just two cities were below that level. This has the potential to build what we call #StructuralInflation and it is prudent to keep your hedgeyes on this trend.
Our immediate-term Global Macro Risk Ranges are now:
Good luck empire building today!
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – April 30, 2014
As we look at today's setup for the S&P 500, the range is 27 points or 1.08% downside to 1858 and 0.36% upside to 1885.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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