“Opportunity is missed by most people because it is dressed in overalls and looks like work.”
I recently picked up a new book called, “A Mind for Numbers”. The book is written by Dr. Barbara Oakley, a professor of engineering at Oakland University, who, like many people, struggled with math and sciences while in high school. Unlike most people with these struggles, she went on to become a very prominent professor in a very math oriented field.
The essence of the book is really about how to make a break through while studying any subject. In doing so, the book proposes on relying on the two modes that our brains naturally work in: focused and diffused. In focused thinking your brain logically works through problems in a careful and attentive manner. Meanwhile, diffused thinking occurs more in the background, your brain processes while you are doing other things like jogging, driving, playing sports, and so on.
Some of the most productive thinkers of our time actually systematically shifted theirs brains between the two modes. In particular, Thomas Edison had a unique trick for shifting how his brain was operating. Edison was known for his focus and work ethic, but he would also often take “cat naps” during the day.
During these small naps while sitting in a chair in his laboratory, Edison would hold a steel ball in his hands. As he would nod off into a deeper and deeper sleep, Edison would drop the ball and it would fall to the floor and naturally wake him. Thus Edison was able to switch into diffusive thinking, without getting into a much deeper sleep that would potentially make him groggy and slow his efforts.
Now for many of us stock market operators, a mid-day nap on the trading floor is probably not practical, but as Oakley writes in her book:
“The key is to do something else until your brain is consciously free of any thought of the problem.”
In effect, you need to distract your brain, so you can shift into diffusive thinking, so that the big picture part of your brain can kick into gear and help you solve the problem at hand.
Back to the Global Macro Grind . . .
Like many of you, we tend to get in early and grind away at Hedgeye, but lately we have also been doing some diffusive thinking. On this front yesterday, my colleague Darius Dale prepared a 50 page presentation yesterday (after some long walks around our office park) that is titled, “Are You Prepared for Quad #4?”
As most of you know already, we look at economies based on our propriety GIP model (growth, inflation and policy). In our view, as supported by historical studies, asset price returns are driven by shifts in growth, inflation and policy within an economy. In the Chart of the Day, we highlight this graphically with a definition of the four quadrants. Quad 4 occurs when growth slows and inflation decelerates, which typically elicits a dovish policy response.
If you’d like to see the full length presentation, please email your institutional sales contact or simply email . Also CLICK HERE for a short video that Darius did on HedgeyeTV going through the key points.
A key catalyst for a shift in our thinking, aside from long walks or baths, has been the break out in the U.S. dollar. As Darius notes in the presentation, the investment conclusions from a shift into Q4 for the domestic economy are as follows:
- Bonds over stocks;
- Defensive equities over cyclical equities;
- Late cycle investments over early cycle investments;
- Buy U.S. dollar and short commodities.
As it relates to translating this directly into what we would recommend selling and owning under this scenario, we’d focus on the following:
- Long – Long term treasuries (TLT), Muni Bonds (MUB), Healthcare (XLV), and Old China (FXI)
- Shorts (or Underweights / Sells) – Russell 2000 (IWM), High-yield credit (JNK), Homebuilders (ITB), Regional Banks (KRE), Retailers (XRT), and Eurozone (EZU)
On the last point of selling the Eurozone, over the last month European equities have been getting crushed. Every major European equity index is down over the last month ranging from the U.K. down -4% to Russia down -14%. Germany is also clearly in the midst of a World Cup hangover as German benchmark equities are down -9.5% and now down over 5% for 2014.
Speaking of Germany, German factory orders were an unmitigated disaster for June. Consensus expectations were for an increase of 0.9% from May and the actual number came in at -3.2%. On a year-over-year basis, the numbers were just as abysmal as factory orders that declined -2.4%. This marked the largest decline since September 2011. For those long of Germany, hopefully Oktoberfest is a positive catalyst!
Switching gears for a second, our Restaurant and Consumer Staples Sector Head Howard Penney has had a very successful alpha generating year within the restaurant sector and after rolling up his sleeves, focusing, and then taking a break (yoga?) to diffuse the thoughts, he has a healthy pipeline of Best Ideas in the Consumer Staples Sector.
The next idea he is rolling out will be a short call on Hain Celestial Group (HAIN). We added the idea to our Best Ideas list as a short on Monday and the deep dive call on the name will occur on Thursday August 14th at 1pm eastern. If you’d like the materials for the call, please email sales at Hedgeye (this call won’t be pro bono though, alpha doesn’t come cheap!).
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Mass stalled for the 2nd straight month with July Mass segment growth at least 1,000bps below consensus growth estimates. Our Mass Decelerating thesis is occurring faster than we thought.
The Street’s bullish thesis of Mass in overdrive has grinded to a halt with the release of the July Macau detail. Mass revenue grew only 17% YoY, well below our projection of +24% and consensus of +30%. The disappointing Mass performance is in line with our Mass Decelerating theme for 2H 2014 but the slowdown is occurring faster than even we thought. As we highlighted in our 06/13/14 note “MACAU: HANDICAPPING MASS DECELERATION”, July 2013 was the month where the concessionaries jacked up the table minimums on most of their Mass tables. Turning to VIP, hold percentage for the market was normal, not low as we had anticipated – so the VIP downturn was entirely volume driven.
Looking ahead to August, we see sequential improvement to flat to low single digit YoY GGR growth. The calendar is actually favorable with one extra Saturday in August 2014 (DICJ reports data with a 1 day lag). For that reason, Mass should look slightly better than July, potentially up high teens to low 20s%.
LVS, WYNN, and Galaxy were the market share winners in July relative to trend
but in the case of LVS, the market share gain was entirely hold driven as the company lost share in both Mass and VIP Rolling Chip. Galaxy remains the only operator we like from a stock perspective. LVS looks vulnerable given our Decelerating Mass theme coupled with the macro issues in Singapore.
Here are some takeaways:
- Mass revenue grew only 17% YoY, well below expectations, following June’s disappointing 27% gain.
- July’s Mass growth was the lowest since July of 2009
- Adjusting for direct play, VIP hold percentage was normal in both July of 2014 and July 2013
- Rolling Chip (RC) volume fell 13%, the worst performance since March of 2009
- What looked like a solid month for the Sands China properties now looks disappointing
- The properties held high on VIP (including Direct) at an estimated 3.44% versus 3.23% last year and average hold of 3.01%
- Despite GGR share in July above recent trend, Mass and RC volume share both fell below recent trend
- GGR actually fell for the 1st time since September 2011
- YoY Mass revenue growth of 15% was the worst performance for LVS since January 2011
- RC volume fell 19% YoY on top of June’s 27% decline
- On a relative basis, Wynn Macau actually had a decent month
- The property gained share relative to recent trend in all segments
- GGR growth of 6% led the market driven by a 36% increase in Mass
- VIP hold percentage was slightly above normal but well above July 2013
- MGM’s relative performance was hindered by low VIP hold estimated at 2.31% versus an average of 2.88%
- Market share improved versus recent trend only in RC volume but fell sequentially in VIP and Mass revs
- YoY Mass growth of 40% led the market while the RC volume decline of 9% was 2nd best
- Another disappointing month
- GGR share fell below recent trend driven by RC volume and lower relative hold %
- Hold percentage was an estimated 2.61% versus average hold of 2.95%
- Mass revenue grew in line with the market at 17% but RC volume fell 21%
- On a relative basis, July was a strong month for the Galaxy properties
- GGR share was slightly above trend but Mass share grew sequentially and so did RC share
- GGR was flat YoY but held back by a low VIP hold percentage
- Mass growth was in line with the market but Galaxy was the only company to post YoY growth in Rolling Chip volume
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Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.
Q2 2014 CONSENSUS ESTIMATES
- Total revenues: $1.284 billion
- Adjusted EBITDA: $346 million
- EPS: $0.38/share
QUESTIONS FOR MANAGEMENT
- Update on CoD Manila timing. Why the long delay and increased capex?
- We're hearing that MSC may open in late 2015 or even early 2016. What's the construction schedule there?
- Outlook on 2H 2014 VIP business
- CoD margins are in record territory. How much more cost savings is there?
- What was the board decision on a share repurchase program?
- Any competitive pressures (margins) in the Mass business? The flow through has been disappointing with the other Macau operators.
- Mass looks like it's decelerating at fast rate? What is your outlook?
- Was July an anomaly for Mass growth? up "only" 17% for the market.
- Update on the timeline on the Manila project. Outlook on the competitive landscape.
- Update on the October smoking ban - will it be October or potentially later? will premium mass be excluded?
RECENT MANAGEMENT COMMENTARY
City of Dreams
- Have shifted a meaningful number of tables to the mass market floor at City of Dreams in 1Q
- (Temporary disruption) Continue to make numerous enhancements to amenities at City of Dreams, including extremely well received premium slot area, which opened before May golden week, as well as other upgrades to gaming core layout and F&B offerings.
- Confident they will continue to take market share in the mass market segment in Macau.
- City of Dreams Manila is due to open later this year (mid-2014); don't want to open a property that MPEL is not ready to. Studio City is to open in mid 2015 and 5th CoD tower is due to open in early 2017.
- MSC: Government will decide on table allocation much closer to opening date
- Are discussing that at the board.
- All the supporting structure is already out of the water and right now it's on schedule for some time at the end of 2016.
- From a CapEx perspective in 2Q, MPEL looking to spend $375 million, in third and fourth quarters about $475 million.
- For Studio City about $120 million in second quarter, $250 million in the third quarter, $350 million in fourth and for the fifth hotel tower about $40 million to $45 million per quarter for the second, third and fourth quarter.
- D&A: $95-$100m
- Corp expense: $24-26m
- Consolidated net interest expense: $31-33m, which includes finance lease interest of $10 million and interest on Philippine notes of $6 million relating to City of Dreams Manila and approximately $17 million of interest expense associated with Studio City, net of approximately $19 million capitalized interest relating primarily to Studio City and City of Dreams Manila.
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This note was originally published at 8am on July 23, 2014 for Hedgeye subscribers.
“To go too far is as bad as to fall short.”
-Callie’s fortune cookie
Last night was a beauty at the McCullough dinner table. My newbie was chirping up a storm with pablum all over her face and my two older kids had a few of the best back-to-back fortune cookies ever.
Jack’s fortune reminded me of a critical risk management lesson: “there is nothing permanent, except change.” So I told him that that’s what my man Bill Ackman was probably thinking at his dinner table last night too.
Picking on the slide-deck guru is just fun and games. So please don’t take offense to my entertaining you with this topic this morning. It’s trending more than Putin/Obama. Fully loaded with the +25% short squeeze in HLF yesterday, I think the guy actually cried (sort of).
Back to the Global Macro Grind…
There’s no crying in the asset management business. If you are going to well-up in public, I don’t care how much you are “worth” - I am going to give you a time-spanking and an Early Look time-out.
In other US stock market news yesterday…
- The Russell 2000 bounced on no-volume to lower-bubble-highs yesterday (1175 TREND resistance)
- Total US Equity Market Volume was -16% and -29% vs. its 1 and 3 month averages, respectively
- Front-month stock market fear (VIX) sold off to a higher low of 12.24, holding 11.94 TREND support
In other words, “rallies” continue to ramp to lower-highs on lower and lower volumes (not good) as volatility continues to make a series of higher-lows from the VIX’s most asymmetric point (10). All the while, the long bond rallied intraday yesterday and the 10yr yield is hitting fresh Q314 lows of 2.46% this morning.
With the Russell (IWM) still down YTD (not a good return), we’re going to keep you focused on where the real bull markets are in 2014:
- Emerging Markets
The Treasuries one is easy to understand, provided that you understand that they (the Old Wall) still do not understand the link between inflation and both real wages and consumption growth.
As you can see in our Chart of The Day today, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).
Now, to be fair, someone who A) hasn’t been long of inflation in 2014 and/or B) believes anything the Fed tells them about inflation will tell you that (if you back out shelter – i.e. rent, which is hitting all-time highs, and represents 30% of cost of living for the average American consumer) “2% inflation feels about right.” #Goldilocks
There were a bunch of 16th century dudes hanging out in officialdom who told Copernicus that Earth was the center of the universe too. But that doesn’t change that nothing is permanent, except change. As time and price changes, real-time risk managers do.
It wasn’t just Chipotle (CMG) taking price above the “goldilocks 2%” inflation rate yesterday:
- Hog prices ripped another +2% to +49.3% YTD
- Cattle prices popped another +2% to +15.9% YTD
- Aluminum prices continued another +1.9% higher to +14.5% YTD
But, those poor CNBC producers naval gazing at Billy probably missed that. Must resuscitate ratings from hitting new lows! I have slide decks too, but I certainly don’t have all the answers to the market universe; Mr. Macro Market does.
And I think that’s one of the main lessons of the last half decade – whether you are a central-planning goddess, hedge fund legend, or just plain wicked smaht… you can try to tell markets, prices, and economies what to do; but they don’t have to listen.
You can try to gussy up the idea as your “best ever.” You can tell all your “smart” friends what you are going to do before you try to do it too. But, eventually, you’re going to jump the shark, go too far, and fall short.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now as follows:
UST 10yr Yield 2.44-2.53% (bearish = bullish bonds)
SPX 1962-1985 (bullish)
RUT 1133-1164 (bearish)
Italy MIB Index 20157-21138 (bearish)
VIX 11.94-14.26 (bullish)
USD 80.29-80.93 (bearish)
EUR/USD 1.34-1.36 (neutral)
Pound 1.70-1.72 (bullish)
WTI Oil 100.15-104.03 (bullish)
Natural Gas 3.73-4.01 (bearish)
Gold 1299-1324 (bullish)
Copper 3.17-3.23 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer