Takeaway: The dollar fell against the British pound today.
Smoking ban is real but likely to exclude VIP/Premium Mass and deadline delays likely
CALL TO ACTION
Today’s pronouncement regarding full smoking ban on mass floors beginning Monday, October 6, 2014 is not a positive. Unfortunately, the operators appear to have not taken the health issue as seriously as they could/should have given all the discussions, working groups and testing. However, given that the partial smoking ban had no discernible impact and we don’t believe the premium mass nor VIP smokers will be affected, the disruption could only be minor. Moreover, the deadline is likely to be pushed back.
Given the recent Labor Day protests in Macau and the smoking debate, this policy outcome seemed an inevitable conclusion. Based on our conversations with our contacts in Macau, we understand:
- VIP rooms and Premium Mass will be excluded
- Operators will build “smoking lounges” on the mass floors. We are told the lounges will be plentiful (probably located in the former watch, jewelry and pawn shops)
- This means most gamblers will slip in for a quick cigarette between shuffles or when they need a change of luck
- Possible impact on GGR in the short term from the business disruption as all the construction works are going on but these guys are pretty tolerant of that kind of distraction
- Basically, this is nothing more than a short term (probably 1 or 2 week) disruption retraining mass gamblers about smoking regulations
- We would not be surprised to see potential “red tape” delays in the implementation of the mass smoking ban
Since the opening of the casinos and gaming floors in Macau, the question of whether or not to allow smoking on gaming floors has been raised. We outline the smoking ban development in the timeline below.
June 17, 2010
SMOKING TO BE ALLOWED IN CASINOS FOR A THREE-YEAR PERIOD Macau Daily Times
The latest version of the tobacco ban bill draft declares that smoking will be allowed in "venues for adults"--i.e. casinos, bars, terraces and business open areas, massage lounges and dance halls--for a three-year period. According to Chan Chak Mo, who heads the Second Standing Committee of the Legislative Assembly, pressure from several industries led to this decision. “ After two years, the government says that a revision of the law should be done in order to decide if the suspension continues in the third year or not,” added Chan.
April 18, 2011
LEGISLATURE APPROVES SMOKING BILL Macau Daily Times
As expected, the tobacco bill passed the final reading. Ng Kuok Cheong, Au Kam San, Chan Wai Chi, José Pereira Coutinho, Ho Ion Sang voted against the partial smoking ban in casinos. They believed that casinos should be subject to a complete smoking ban. The smoking law will be enacted on January 1, 2012, while casinos will be required to build a smoking area with a size not larger than 50% of total public area by January 1, 2013.
An order from the Macau CEO regarding the smoking ban was published in the Macau Gazette on November 5th and is summarized below:
- Rules apply to all table games and slot machines
- Smoking areas cannot be greater than 50% of the total area for the public
- This rule excludes non-gaming establishments
- Smoking areas must display the following:
- Posters addressing no-smoking zones
- Label with minimum dimension (40cm x 30cm) in Chinese, Portguese, and English
- Separation from other installations
- Ventilation systems
- Smoking area locations
- In casinos with several floors and an atrium, smoking areas should be located on the upper floors
- In casinos with a single floor, smoking area must be located opposite and separate from the non-smoking area.
- Non-smoking areas can be achieved through the following measures:
- Air curtain system
- Transition area with inflation system
- Transition area of at least 4 meters
- Installation of a wall or fence with a minimum of 2 meters
January 1, 2013
Chief Executive Fernando Chui Sai On said that while the government is strictly enforcing the partial smoking ban in casinos they are still fine-tuning some of the rules. The partial smoking ban that took effect on January 1, allows casinos to have smoking areas in up to 50% of the gaming floor area. The rules do not set up a minimum ratio for the number of slots and tables to be included in smoking and non-smoking area.
The Macau Health Bureau repeatedly tested the casinos for air quality during 2013
Many casinos fail the air quality tests… Trade unions blamed the government for being too lenient towards casinos in the enforcement of partial smoking bans in all gaming venues.
Takeaway: TAIL risk is on (to the upside) in the bond market and we think investors should react accordingly.
Is your portfolio prepared for this?:
FOLLOW THE FLOWS
Every week Jonathan Casteleyn, co-head of our Financials Vertical, publishes a in-depth update on all the puts and takes in fund flow space. In going through his piece this week, there were a number of data points that commanded my undivided attention:
- “In the most recent 5 day period, the combination of taxable and tax-free bond funds had the best week all year with $5.5 billion in inflow, well above the running year-to-date average of $1.9 billion. Conversely, equity funds had a very light inflow of just $754 million, well below the year-to-date average of $3.3 billion.”
- “ETFs had polarized trends this week, with a substantial weekly redemption in equity ETFs and a solid week for bond ETFs. Equity ETFs experienced an $8.7 billion outflow w/w, while Fixed Income ETFs experienced $3.0 billion in inflows. The previous week saw a $4 billion inflow into stock ETFs and a $818 million inflow into bond ETFs. The 2014 weekly averages are now a $385 million weekly inflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs.”
- “The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $16.4 billion spread for the week ($8.0 billion of total equity outflow versus the $8.5 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds).”
If you’ve internalized any of our research in the YTD, the fund flow reversal from stocks to bonds is not new news, as that is one of the contrarian calls we’ve been making all year. What is new news, however, is the acceleration of funds flowing into the bond market at the expense of equities.
TAIL RISK: “ON”
Not surprisingly this coincides with the aforementioned snapping of our long-term TAIL line of support on the 10Y Treasury bond yield. Whenever this happens (irrespective of direction) please listen to us. Our track record using this point of entropy to front-run major asset class rotations is not inconsequential. Going back to May of 2013:
- EARLY LOOK: THE WATERFALL: 5/21/13 (one day prior to Bernanke’s now-infamous taper speech; 10Y UST yield @ 1.93%):
- The recent 1-month move in both JGBs (we’re short them) and US Treasury Yields are 2 of the 3 most important things in my notebook this morning. The 3rd is gold. And all 3 of these major macro factors are interconnected to a causal factor with a catalyst.
- Let’s review what I am looking at this morning:
- Japanese Government Bond Yields (10yr JGBs) = up another +5 bps to 0.89% this morning; +31bps in the last month
- US Treasury Yields (10yr) = up +1 basis point this morning to 1.96%; +25bps in the last month
- Gold continues to crash from its 2011 #BernankeBubble top, backing off -0.5% this morning after a 1-day dead cat bounce
- As always, contextualizing these moves across our multi-duration model matters too:
- JGB long-term TAIL risk line = 0.81% (so we’re breaking out above that)
- UST 10yr long-term TAIL risk line = 1.82%
- Gold snapped its long-term TAIL risk line of $1681 in January (not new)
- You can ignore the entropy associated with 1 or 2 of these TAIL lines snapping (I hope you didn’t ignore our Gold signal 6 months ago), but it’s really hard to ignore all 3 of them; especially when the mother of all bursts of entropy (#StrongDollar) is in motion.
- What matters most in macro is what happens on the margin. That’s why Ben Bernanke acknowledging what we have been signaling on employment, housing, and consumption #GrowthAccelerating will matter in his testimony to Congress tomorrow. That’s your catalyst.
- JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK UP IN GLOBAL INTEREST RATES?”: 5/22/13 (10Y UST yield @ 2.04%):
- In recent weeks, both our fundamental research and quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate. Sure, it could be a massive head fake, but we certainly won’t be the ones holding the bag if we’re sitting here at EOY ’14 with G-7 bond yields +150-200bps higher than they are now. At a bare minimum, this is an increasingly probable scenario worth looking into.
- As we’ve shown in previous research notes (HERE, HERE andHERE), a demonstrable backup in JGB rates could serve to apply selling pressure upon global sovereign debt securities, dragging up rates across various markets. Per the most recent Bank of America Merrill Lynch data, the spread between the nominal yields on G-7 notes and JGB yields narrowed to 61 basis points last week, the lowest since 1990!
- While it’s not new news that investors have been increasingly shunning duration risk, we think it’s important to understand allof the moving pieces, rather than just relying on consensus expectations for what the Fed is going to do next. To recap those moving pieces:
- 1) Domestic labor market improvement driven by a housing market recovery that itself is driven by a timely and marked acceleration in US births and household formation and a domestic consumption acceleration that is fueled by a commodity tax cut that is perpetuated by #StrongDollar are all reasons why we think Fed policy is poised for a major inflection over the intermediate term.
- 2) A weakening yen that facilitates rising JGB yields that are more attractive on a relative basis should serve as an incremental drag on demand for US Treasuries stemming from Japan, which, as a country, currently represents 19.2% of total foreign demand for US Treasuries.
- 3) Lastly, in a global currency war, manipulators simply need to buy less dollars to remain competitive if the USD continues to rally on trade-weighted basis (the Trade-Weighted US Dollar Index is already up +6% YTD). That ultimately equates to the central banks of commodity producing nations (many of which are EMEs) buying less US Treasuries, at the margins, in order to hold down their nominal exchange rates. The very recent blood-bath we’ve seen across the commodity currency spectrum is supportive of this view.
GETTING WHIPPED AROUND
Let us not forget how grossly unprepared both sell-side and buy-side macro consensus was for our 2013 #RatesRising theme. The sell-side had a EOY ’13 forecast of 2.18% for the UST 10Y yield. That was obviously way off (it finished 2013 at a cycle-high of 3.03%) and it pales in comparison the Bloomberg consensus EOY ’14 estimate of 3.24%.
Not to be outdone, the buy-side was net long of Treasuries in the futures and options markets to the tune of +21.4k contracts, which stands in stark contrast to the maximum net short position of -176k futures and options contracts, which they coincidentally held at the beginning of this year. That’s come in quite a bit as Treasuries have rallied substantially in the YTD (TLT etf +11.9% vs. IWM etf -5.8%), but only to a net short position of -65.7k futures and options contracts.
Conclusion: both the buy-side and sell-side are inappropriately stuck on the Hedgeye Macro Team’s 2013 #RatesRising theme.
TACRM™ SAYS STICK WITH THE PLAYBOOK
Also not surprisingly, TACRM™ has been front-running the aforementioned acceleration in fund flows into the bond market for months (specifically, since JAN). For those of you who are unfamiliar with TACRM™, just think of it as that super-smart, geeky kid who sat in the front of your math class and was too shy to raise his hand to answer questions – even though he knew all of the answers. As such, it is my job to explain and interpret his signals to you.
There are four primary tools our TACRM™ All-Weather System employs to accomplish its stated goals of helping you front-run major asset class rotations alongside us:
- TACRM™ Global Macro Thermodynamic Monitor: We first take the “temperature” of nearly 200 global macro ETFs that represent individual markets or specific plays within each market. From there, we can track the current temperature of any market and compare it to both other markets and its own recent trends.
- TACRM™ 20/20 Vision Thermodynamic Monitor: By plotting a similar thermodynamic analysis with the “hottest” 20 and “coldest” 20 markets, we can get a sense of what secondary asset classes are really in or out of favor.
- TACRM™ Global Macro Weathervane: By taking the temperatures of all the individual markets that comprise a particular primary asset class, we can then calculate a measure of relative momentum by first calculating intra-asset class dispersion and then normalizing said dispersion. The result is a generalized dynamic asset allocation reading for each primary asset class on a 0-100% scale. From there we can track the current reading (i.e. the “weather”) of any asset class and compare it to both other asset classes and its own recent trends.
- TACRM™ Global Macro Barometer: By taking each asset class’ current reading from the aforementioned weathervane system and normalizing it as a percentile of its respective TTM and trailing 5Y peaks, we can get a generalized sense of how much “pressure” is developing in any given asset class.
(CLICK HERE to download)
From a thermodynamic perspective, TACRM™ is signaling a considerable degree of heat across various components of the fixed income space – both in nominal and inflation-linked securities (shhh… did someone say #InflationAccelerating?):
From a weather perspective, the spread between the relative momentum in Fixed Income & Yield Plays and DM Equities continues to widen, with the former taking share from the latter in marginal capital flows:
From an atmospheric perspective, pressure for investors to chase returns in Fixed Income & Yield Plays is near peak from both a TTM and trailing 5Y perspective, while the opposite is true for DM Equities:
All told, TAIL risk is on (to the upside) in the bond market and we think investors should react accordingly.
For those of you who’d like to learn more about TACRM™ and how it can add value to your investment process, please shoot us an email and we’ll gladly set up a call. The user guide can be accessed via the following link: http://docs.hedgeye.com/HE_TACRM_2014.pdf.
Have a fantastic weekend!
Associate: Macro Team
Takeaway: April's headline starts/permits print looks great, until you look closely. Single family continues to trudge wearily, going nowhere fast.
Welcome to The Hedgeye Housing Research Vertical
Yesterday we introduced our Hedgeye Housing Vertical research product. The effort is being led by Josh Steiner and Christian Drake from the Financials and Macro teams. Subscribers to Financials and/or Macro verticals are currently set up to receive this product. If you'd prefer not to receive our housing-focused research going forward please let us know.
Our goal is to help investors understand the trends and spot inflection points in the US housing market by tracking 15-20 different housing data series and presenting them in a hyper-simple format. Whenever data hits we will publish a brief note summarizing its importance, or lack thereof. Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
We've broken the market into four main categories: Home Prices, the existing home market, the new home market, and other miscellaneous data. The focus is on simple supply and demand measurements and whether they're weakening or strengthening, on the margin. We're using red and green to make it easy for investors to gauge, at a glance, whether there's widespread improvement, deterioration or a mixed bag.
As the housing research effort evolves we hope you'll engage us with questions and feedback.
Today's Focus: April Housing Starts & Permits
The Census Bureau released its monthly Housing Starts & Permits data for April this morning. The big takeaway is this: don’t be fooled by the headline.
While total starts and permits bounced sharply in April vs March, the bounce was entirely attributable to multifamily. Single family starts and permits did not show any bounce from normalizing weather and continue to show slug-like progress in renormalizing back to pre-crisis levels. Multifamily starts and permits remain strong and are showing a nice, weather-related bounce, suggesting that rental demand continues to benefit from the conjunction of a strengthening labor market, ongoing household formation and QM’s negative effects on would-be first-time buyers.
Taking a look at the data, single family starts grew 5k month-over-month or 0.8% to 649k, while single family permits grew 2k, or 0.3% m/m to 602k. Multifamily starts, however, grew by an impressive 120k m/m (+39.6%) to 423k and permits were up 78k m/m, or +19.5% to 478k. Said differently, multifamily accounted for 96% of the growth in Starts and 98% of the growth in Permits month-over-month.
One interesting observation is the apparent trendline divergence between LTM SF starts and permits. Take a look at the first chart below. SF starts are exhibiting a positive upward slope, but permits are showing the opposite. Permits, by definition, lead starts, so the lack of any upward trajectory in permits should tamp down expectations for a coming bounce in starts.
Yesterday’s soft NAHB HMI print of 45 taken with today’s soft single family data paints an ongoing picture of a housing market that continues to stumble through the first half of 2014. Interestingly, these most recent two data points reflect the new home market, which is actually faring better than the existing home market due to the slightly higher affluence of the average buyer.
We think three factors are principally responsible for this weak 1H14 performance. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.
About Housing Starts & Permits:
The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.”
Joshua Steiner, CFA
Christian B. Drake
CEO Keith McCullough looks at key style factors within the market that’s signaling him what to do now.
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