Takeaway: We're keeping a close eye on this rising macro risk.
“Measure what is measurable, and make measurable what is not.”
According to legendary theoretical physicist Stephen Hawking, Galileo likely bears more responsibility for the birth and development of modern science than anyone. This is a heady compliment from one of the most prominent physicists of the modern era. In terms of measuring accomplishments, Hawking is probably right.
While he was well versed in physics and mathematics, Galileo (like the artist Banksy, Galileo was known mononymously) was best known for his work in astronomy. Among other things, he confirmed the phases of Venus, discovered the four largest satellites of Jupiter, and discovered sunspots. Galileo could literally see in the stars things that his contemporaries could not.
As insinuated in the quote at the beginning of this note, Galileo was truly one of the first modern thinkers to establish and vigorously defend the idea that laws of nature are governed by mathematics. In other words, if it could be measured, Galileo measured it. And if it could be counted, Galileo counted it.
This lesson of measuring and counting can also be applied very directly to a less scientific profession, that of investing. The more we can quantify any investment, the better decisions makers we become. Anecdotes are convenient shortcut for the less informed. Math doesn’t lie, people do. As Galileo also advised:
“If I were again beginning my studies, I would follow the advice of Plato and start with mathematics.”
Wise advice, indeed
Back to the Global Macro Grind...
Speaking of outer space, an increasing macro risk we see, especially heading into the summer driving season, is that oil prices are potentially “going to the moon” due to the heightened conflict in Iraq. Iraq currently produces about 3.3 million barrels per day, but it is the second largest exporter after Saudi Arabia in OPEC.
On a percentage basis, over the next five years Iraqi is projected to see the most production growth globally. Net-net, Iraq is the key global swing producer and also has the fifth largest reserves. In the world of commodities, what happens on the margin matters and the Iraq oil industry plays squarely on that margin.
Of course, to the punditry that is arguing commodity inflation is temporary in nature, this adds fuel to the fire. The heightened tensions in Iraq are clearly “temporary” in nature. Currently, the CRB index is up +10.5% in the year-to-date and 16 of 19 of its key components are up as well. For those of us that, like Galileo, like to count things, that means that 84% of componentry of the CRB index is up on a “temporary” basis this year.
As well, for those of us that work in the hallowed halls of Wall Street, or for those that eat iPhones, this might not matter much. But for the median American consumer who has pre-tax income of $47,000, you can be damn skippy it does matter. Assuming those consumers also drive, then accelerating oil prices are only going to accelerate the vise like grip that commodity inflation has on their pocket books.
Coincident with accelerating commodity prices domestically is the fact that real weekly earnings, released yesterday morning, turned back to negative in May. At down -0.10% year-over, this is the worst reading, assuming you believe negative earnings growth is bad, since January of 2013. Food, energy and shelter prices are inflating and real income is turning negative. Clearly, this is an elixir for a strong economy (#SarcasmAlert).
Luckily enough, given the high correlation between many commodities and the U.S. dollar, our policy makers do have a choice, which is to implement strong dollar policy. Seemingly, this has worked for the United Kingdom, where its rational, and Canadian, central banker Mark Carney has protected the currency and the pound is now up 8% year-over-year versus the U.S. dollar. Subsequently, the U.K. economy has outperformed.
Sadly, about the only meaningful move we can expect out of the Federal Reserve later today is that they will once again have to take down their U.S. GDP estimates. Nothing new there though as the Federal Reserve’s economic projection have been about the best lagging, or some instances just wrong, economic projections that devalued U.S. dollars can buy.
Clearly, though, any concerns we may have are misplaced. In fact, this morning, Portugal is selling 12-month t-bills at 0.364% versus the prior level of 0.617% and 3-month t-bills at an average yield of 0.18% versus the prior yield of 0.432%. The Spanish government even got a better deal, selling five year paper at a yield of 1.402% with a bid-to-cover of, are you ready for this, 2.32x! Aye carumba!
Meanwhile, in the most recent U.S. Investor’s Intelligence poll, a mere 22.3% of respondents expect a correction in U.S. equity markets . . . but, hey, the Utility subsector of the SP500 is up +12.7% on the year-to-date, that must be healthy for the U.S. economy. Right? Or maybe the hockey heads at Hedgeye are just seeing stars.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.44-2.66%
Brent Oil 110.23-113.98
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Tickers: MCP:PH, MGM, WYNN, LHO
- Wed-Thur June 18-19: Todd in Macau for meetings
- Wed-Thurs June 18-19: Hedgeye Cruise survey (pre-CCL F2Q)
- Thurs June 19: LA May revs released
MPEL, MCP:PM – Melco Crown Philippines Resort seeking to raise as much as $129 million via an offering of as many as 485.2 million shares at 11.30 pesos to 11.70 pesos per share. The capital raise follows an announcement of a 37% increase in the budget for its Manila casino and total development costs are expected to be 37 billion pesos (US$832 million), up from US$680 million.
Takeaway: Another budget increase from an Asian resort project. This is getting ridiculous.
MGM – signed a community benefits agreement with Prince George's County on Tuesday that ensures 50% of the jobs slated for the $925 million MGM National Harbor will go to local residents.
Takeaway: As expected given recent headlines and also provides MGM cover as supporting and improving the local economy while providing jobs for local residents.
WYNN – as it pertains to the proposed Wynn Everett casino resort, the city of Boston was granted one additional week to reach a neighboring community or host community agreement with WYNN. If no agreement is reached, both parties will submit to arbitration. Desiring a host community agreement, Boston Mayor Walsh has reserved the right to sue in the event such an agreement is not reached or awarded via arbitration.
Takeaway: Who will blink first, if at all?
LHO – announced it closed on the sale of the Hilton Alexandria Old Town for $93.4 million. The Company acquired the hotel in May 2004 for $59.0 million. Proceeds from the transaction will be used to reduce borrowings on the Company’s Senior Unsecured Credit Facility and redeem the remaining $58.7 million of 7.25 percent Series G Preferred Shares. The Preferred Share redemption will close on July 3, 2014.
Takeaway: On time and on track.
RCL - Targeting affluent couples with Quantum-class ships Travel Weekly
Quantum-class ships will allow RCL to reach beyond its traditional family market and target affluent couples, the cruise line has claimed. Stuart Leven, the line’s managing director for the UK and Ireland, said the facilities on board Anthem of the Seas, due to launch next spring and to sail from Southampton, would be the same but the shows would be tailored to the UK market.
Takeaway: This cool ship can appeal to multiple demographic groups.
- HLT - EVP Matthew W. Schuyler (Chief Human Resources Officer) sold 373,968 shares at an average price of $22.79 and now owns 574,886 shares.
- HST – EVP Minaz Abji sold 99,150 shares at an average price of $22.15 and now directly owns 162,137 shares.
- H - Peter Fulton sold 8,459 shares at an average price of $59.38 and owns 27,391 shares.
- PNK - EVP Neil E. Walkoff sold 10,000 shares of stock at an average price of $25.30 and now owns 47,539 shares.
Japan Gaming Legislation – as expected the Liberal Democratic Party introduced discussions within the Japanese Parliment regarding the legalization of integrated resorts and casinos. The bill, which was submitted to parliament last December, will not be passed before the end of the session on June 22 and will be taken up again when the Diet resumes in autumn. Komeito party members indicated that while difficult to pass the legislation in the current session (which will end June 22), the bill has a good chance of passage in the next session which is scheduled to begin in late September/early October.
Takeaway: The formal process of "nemawashi" has started but nemawashi can take a long time by Western standards, so find your inner gaman. If the current talks are constructive, it bodes well for passage of the 1st gaming legislation this fall followed by the second legislation by June 2015.
Malaysia Gaming Expansion – (New Strait Times) The founder of Berjaya Group, Tan Sri Vincent Tan, recently announced Berjaya Group would apply for a licence for a casino in Malaysia’s Berjaya Hills Resort. Berjaya Hills Resort is a hill resort in Bukit Tinggi, Pahang, Malaysia near the Genting Highlands. It is known for its French-themed village, Colmar Tropicale
Takeaway: The proliferation of gaming across Southeast Asia appears poised to rapidly expand, similar to US Regional gaming in the early 2000's.
Macau Economic Growth – (Macau Business) The Economist Intelligence Unit forecasts that Macau’s gross domestic product will grow at an average annual rate of 11 percent this year and next. The EIU expects economic growth of 11.3 percent this year and 10.6 percent next year. It says economic expansion will be due to “healthy growth in exports of services”, meaning tourism and gaming.
The EIU forecasts that the annual rate of consumer price inflation will be more or less steady at 6 percent this year and 6.3 percent next year.
Takeaway: Strong growth driven by increased hotel, gaming, and tourism revenues.
Macau Mass Segment Yield – (GGRAsia) Casino executives confirm mass floor minimum bets for casino table games in Macau are now commonly in the range of HK$1,000 to HK$5,000 even at non-peak times,
Takeaway: Confirming our research note from last week Friday titled "Handicapping Mass Deceleration" and our yielding up of mass table minimum bets.
Saipan Gaming – Marianas Stars Entertainment, one of two companies competing for a casino license on Saipan has called on the government to consider allowing both projects to go ahead,
Takeaway: We noted in our April 28th Leisure Letter, inbound tourism to Saipan can not support a single casino...so why would the administration consider two casinos?
Las Vegas Hotel Opening – The SLS Las Vegas announced it will open on August 23, one week earlier than planned.
New York Update Gaming – Foxwoods/Muss Development dropped their plan for a proposed Sullivan County casino near the former Grossinger’s resort due to fears over a casino license potentially issued to an Orange County based developer which would effectively head off traffic bound for Sullivan County.
Takeaway: A prudent decision all things considered.
Lenders open vault for Hotel Deals – WSJ
Lenders made $31 billion in hotel loans last year, nearly double the 2012 level, according to the Mortgage Bankers Association. Credit is flowing against a backdrop of rising room rates, limited new construction and a spike in leisure and business travel in big cities such as New York and Los Angeles. "There's been a sea-change during the past two months," says Monty Bennett, CEO of Ashford Hospitality Trust. "It's pretty close to the 2007 lending environment again."
Takeaway: Low financing is supporting the hotel M&A environment
China Residential Real Estate - May new home prices +5.6% YoY, a deceleration from +6.7% YoY in April. On a MoM basis, prices fell 0.2%.
Takeaway: 1st MoM decline in over two years adds to the list of disappointing macro data points coming from China
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.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: As expected, the post-holiday bounce was followed by the post-post-holiday slump. Mortgage demand drops sharply on the latest week.
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.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 13.
Mortgage purchase application volume fell -4.7% week-over-week, retracing much of the post-holiday week gain of +9.3% and returning the index to a sub-180 level (178.6, to be precise). On a year-over-year basis, purchase application volume in the latest week is tracking down -15.1% YoY vs -13.6% YoY in the week prior. The QoQ is currently running at +3.4%.
Recall that last week we saw a big bounce in both purchase and refi activity, but we speculated at the time it was at least partially driven by the post-Memorial Day week bounce. As such, this week's activity level is the better gauge.
Activity dropped off on the refi side as well as the index saw its largest sequential decline since November. Though rates only backed up 2 bps to 4.36% from 4.34%, refi application volume fell +12.7% W/W, more than reversing the +11.0% print in the prior week.
As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.
Our expectation remains that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
This note was originally published at 8am on June 04, 2014 for Hedgeye subscribers.
“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”
Last week I took the pen on the Early Look from Keith and talked about complacency in global markets. In that note, I highlighted both volatility (VIX) and the level of certain European peripheral yields on government debt, specifically in Spain and Italy. The simple takeaway was that there was not a lot of fear baked into market prices.
Yesterday I was forwarded a chart from the always thoughtful research firm Nautilus Capital Research. The chart looked at the trend and duration of rallies of SP500 from 1900 – Present without a 10% correction. According to their analysis, the current rally from October 2011 is greater than 97% of prior rallies over the last 114 years in duration without a correction. This is, of course, another way to say that investors are currently not very fearful.
The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants. From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain. Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.
This Friday at 10:30am EST. we will once again be joined by Yale Professor Charles Hill for a briefing on foreign affairs. Professor Hill is former Chief of Staff at the State Department, aid to U.S. Secretary of State George Schultz, and special consultant to U.N. Secretary Boutros Boutros-Ghali. He currently teaches the renowned seminar Grand Strategies at Yale.
In the briefing on Friday, Professor Hill will give us his view of the top three foreign policy risks facing both the United States and the World. The dial-in instructions will be sent to all Hedgeye Macro institutional subscribers. If you are not a subscriber, email email@example.com for details.
Back to the Global Macro Grind . . .
We made a key move on the macro front on our Best Idea List as we removed the Brazilian Real (BRL) from our Best Ideas List. Since making it a key research call, the BRL posted a total return of ~+4.7% versus the U.S. dollar, which compares to a mean return of +2.7%, and is good for the sixth largest gain amongst the 24 EM Currencies tracked by Bloomberg over that time frame.
As our Asia and Latin America Analyst Darius Dale wrote late yesterday:
“Brazilian growth data is flat-out awful; as you can see in the Chart of the Day, there is a hardly a meaningful economic indicator in Brazil that isn’t rapidly decelerating on both a sequential and trending basis. That this is coming amid accelerating headline inflation means Brazilian policymakers are now forced to choose between promoting growth or combating inflation – the latter of which we still view as the country’s key political issue.
Unfortunately for investors, the Rousseff administration is resorting to the tired Keynesian playbook of fiscal stimulus ahead of the election, choosing to ramp up deficit spending ahead of what is likely to be Brazil’s most contested presidential race since 1989. Recent policy initiatives include:
A +4.5% increase in income tax exemptions starting next year;
A +10% increase in Bolsa Familia cash transfers starting next year worth R$9B… this latest increase takes Bolsa Familia transfers – which benefit ~25% of the Brazilian population – up +64% in real term since the Rousseff administration took office on JAN 1st, 2011; and
Extending a $9.7B payroll tax cut for various manufacturing industries.
These promises of fiscal sweetness come amid heighted pressure to raise the minimum wage, which has increased +42.2% in real terms since 2007. Both Rousseff and her runner-up in the latest polls, Aecio Neves, are on board with another hike.”
The combination of flat out bad Brazilian economic data combined with murky policy outlook makes us cautious on Brazil, but not on all emerging markets. In fact two that we like, in lieu of Brazil, are Taiwan and India. Although we aren’t quite ready to pound the table and add them to our Best Ideas list, both countries screen positively on our Growth, Inflation and Policy model.
Stepping back from the emerging markets, the most interesting domestic data point that our internal research team picked up yesterday was related to Treasuries. Specifically it was that J.P. Morgan’s institutional clients haven’t been this net short of Treasuries since 2006, which occurred shortly before a major crash in yields.
I’ve been emphasizing the risk of being complacent, but there is also another key risk to consider, which is the risk of being consensus. In the Treasury market, the consensus view is that yields must go higher. Unfortunately, markets normally don’t do what the crowds want them to do.
Certainly on a reversion to the mean basis the following trades make sense:
- Long VIX;
- Long Treasury Yields;
- Short Utilities;
- Long Interest rates broadly; and
- Short European peripheral sovereign debt;
The list could go on to be sure, but if there is one truism in managing global macro risk it is simply that markets can stay irrational longer than investors can stay solvent. So if you aren’t going to wait on the Hedgeye quantitative signal on these reversion to the mean plays, at least keep some fire power dry.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.61%
WTIC Oil 102.09-104.88
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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