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“Dude, look at your dirty shoes – you need a shine!”
Yesterday I was getting my shoes shined in NYC at one of my favorite spots – on the corner of Avenue of the Americas and 46th Street, right across from the building where I got fired.
Not that I keep track of the when and the why, but I wrote a book about it so it’s out there. Carlyle fired me for being “too bearish” on the US #ConsumerSlowing on November 2, 2007. My 1st son was born on November 7th. And the SP500 dropped 6% by the end of the month.
Yep, risk happens slowly, then all at once. You know when your shoes are dirty too. If you go to my spot, tell Joe I sent you. He’ll chirp anyone who is looking NYC serious with dirty shoes. Within a block, they all look down. They may not like it, but the truth is staring at them from their feet.
Back to the Global Macro Grind…
Our preferred US Equity Growth index to be short of in 2014 remains the Russell 2000. In addition to being down -0.5% on Friday, it dropped another -0.7% yesterday to -3.1% YTD.
BREAKING: SP500 hits all-time highs –CNBC
Yep, as bond yields crash YTD (peak-to-trough decline in the 10yr Treasury Yield = 20%) and the Russell delivers negative returns, the world’s most consensus short position (SPX Index + E-mini) hit another new high on no volume yesterday. #hooray
Whatever you do, don’t look at your shoes yet.
Total US Equity Market Volume was -28% versus its 3-month average (and the average continues to crash!) and the US Equity market’s breadth (advancing vs. decline stocks) was negative yesterday too (46% gained in price, 50% declined). #dirty
But, but, you have to buy the SP500 … because it’s up, right?
As long as you buy SPX vs short Russell (IWM), I’m into that. From a risk Style Factoring perspective, the SP500 is not the Russell:
Like the FTSE in the UK, the SP500 is much more multinational too. If you want the pure play on short US domestic growth, it’s the Russell.
While there’s no doubt that it’s a lot easier to call the macro game from the seat I have today than the one I used to be in, that doesn’t mean that market truths cease to exist. #OldWall hasn’t been there to help coach Portfolio Managers through US growth slowdowns. We have been.
Being right in an environment with Rising Variance at both the country and sector level gets easier if you know the macro economy we are in. With US #InflationAccelerating perpetuating US #ConsumerSlowing, here are the Top 3 US Equity Sectors you still want to be long:
To reiterate the Sector Style Factors you do not want to be long:
If you leave being US Equity market centric (life is easier that way), buying currencies and stocks in countries who had what the USA had last year (#StrongCurrency + #RatesRising and inflation deflating), current equity markets we still like on the long side are:
In addition to being long Bonds (TLT), Inflation Protection (TIP), and Commodities in 2014, it’s what you aren’t long when growth slows (bubble multiple stocks) that has made all the difference too.
My call wasn’t consensus in November 2007, and it wasn’t in January of 2014 either. While we need to be loud about seeing something that we don’t think the Street is paying attention to, we don’t want that to feel dirty to you. We want to help augment your process and keep your shoes shiny.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.57%
British Pound 1.67-1.69
Brent Oil 108.42-110.76
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Positive catalysts in place for BYD, PENN, PNK
CALL TO ACTION
State gaming regulators will start reporting May gaming results later this week. We expect sequentially improving trends with May’s regional gaming results and again in June (relative to Q1), which we believe will put a base under conservative Q2 regional casino estimates. Regional gaming stocks have not performed well as of late so the release of better monthly numbers and a strong Q2 earnings season (relative to current projections) could provide a nice bounce in these stocks.
Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops.
State gaming regulators will begin to report May gaming results later this week. Our proprietary regional gaming model forecasts May 2014 same store gaming revenue declines of only -2% as compared to -5% in April and -7% in March. Insight into Missouri and Pennsylvania yields surprisingly decent May results.
Additionally, we call investor attention to the developing El Niño. If the El Niño fully develops this fall/winter (Nov thru Feb), the milder weather condition will provide lower energy bills against an easy and super brutal comp of last year's polar vortex and thus, provide consumers with increased discretionary spending power.
As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.
WHAT WE THINK WE KNOW
A sneak peek into Missouri’s numbers tells us a flat to up slightly May YoY is in the cards – better than expected. We’re pretty sure PA will come in much better than previous months as well. These two months provide support for our thesis that May will show nice improvement from the rest of 2014.
Following an awful December, January and February on April 16th, we published a note “Regionals: April Flowers” then on May 14th we wrote “Regional Gaming: Trend Friend” wherein we noted we were hearing May was showing improvement from April (which improved from March). Today, we are again calling investors to action as we believe PENN and BYD are positioned to exceed company guidance as well as investor expectations.
As seen below, our early regional forecasting algorithm predicts May regional gaming revenues will decline 2%. If we are correct regarding the developing El Niño weather pattern, 3Q and 4Q results could surprise to the upside.
Bad demographics should continue to pressure regional gaming revenues. Younger generations are simply not interested in slot machines. We’ve written extensively about this secular headwind so we won’t rehash here. However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections.
With confirmation from MO and PA, we’re pretty sure the May state releases beginning this week are going to look better. Investors should begin to feel more comfortable with Q2 estimates and possible upside which could catalyze the stocks. Over the near term, PENN looks to have the most upside given it has a beaten down stock price and overly conservative guidance.
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
TODAY’S S&P 500 SET-UP – June 3, 2014
As we look at today's setup for the S&P 500, the range is 46 points or 1.71% downside to 1892 and 0.68% upside to 1938.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: It remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term.
We came across a number of articles today that discussed the possibility of China implementing western-style quantitative easing to counter its current disinflationary economic slowdown. In short, we summarily dismissed these rumors and will continue to do so until we see them confirmed by an official source (i.e. the PBoC, State Council, CSRC, MoF, etc.).
The powers that be in Beijing are akin to a management team that says what it does and does what it says. More importantly, their official guidance for ~2 years now has been and continues to be one in favor of avoiding meaningful stimulus – either fiscal or monetary (see: commentary out of the PBoC’s Ji Zhihong on the targeted RRR cut).
We would view QE in China as a meaningful deviation from their “prudent monetary policy” guidance and should be interpreted as a signal that China’s intermediate-term growth outlook is actually more dour than current, already-subdued expectations.
Chinese policymakers definitely have room to ease with respect to existing inflation and consumer confidence trends, but any easing should immediately filter through to rising inflation expectations given the annualized FX weakness we will see as we progress through this year – which is in addition to annualized dollar depreciation (the DXY is down -3.3% YoY), as the CNY is still semi-pegged to the USD.
All told, it remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term. Credit growth remains particularly robust and early indicators such as the MAY Manufacturing PMI data suggest Chinese growth is stabilizing here in 2Q (although ahead of what we see as incremental weakness in 2H).
Conversely, China’s property market remains an unmitigated disaster, but it’s unclear to what degree Chinese policymakers are incentivized to rush to shore up an industry they’ve previously identified as suffering from overcapacity anyway.
In conclusion, it’s pretty clear that China’s current turbulent growth trajectory is a function of very deliberate policy tightening that continues to be unwound, at the margins, via piecemeal fiscal and monetary easing (i.e. increased public expenditures on infrastructure, PBoC OMO and targeted RRR cuts).
The more piecemeal China gets with its easing measures, the less likely it is to shift to a policy of broad-based, meaningful fiscal or monetary stimulus – such as the QE package now being bandied about in the press.
Perhaps some form of QE is implemented, but is very small in both size and scope (i.e. confined to certain sectors) – which would effectively render it not that meaningful after all. The cost of capital in China is both artificially low and well shy of recent peaks, so it’s unclear – at least to us – what QE would effectively accomplish.
If anything, implementing something as radical as QE would likely be perceived by market participants could backfire by sending a signal to the market that they are afraid to use traditional tools to arrest the economic slowdown. We underlined the phrase “afraid to use” because Chinese authorities continue to have ample fiscal and monetary scope to ease policy meaningfully; they just would prefer not to, given that the 2009-10 stimulus package is largely responsible for getting them into this mess.
A sharp leg down in growth is indeed something that would obviously walk our expectations towards meaningful stimulus out of Beijing, but that's hard for us to get there without relying on doomsday storytelling and a heavy dose of the availability heuristic (specifically the 2008-09 GFC).
For our latest deep-dive thoughts on China and how investors should (or shouldn't) be allocated to this economy, please refer to our 5/13 note titled, "BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE".
Enjoy the rest of your day,
Associate: Macro Team
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