“A government institution that is not dominated by politics is as likely as a barking cat.”
To be balanced, I like to fact check what high profile economists have stated as fact. And while Friedman’s statement was more of a probability-based one, there’s a YouTube video (click here to watch) that shows a cat that was (allegedly) barking, but resumed meowing. There are 19,624,067 views of this thing. #Riveting
There was an article in the Wall Street Journal yesterday that suggested that the Mother of All Doves (Janet Yellen) attacks like a hawk. While everything in the Currency War is relative (when Draghi devalued the EUR/USD, she looked relatively hawkish), in the face of slowing US and European economies, Yellen raising rates is as likely as my dog purring.
Oh, and I don’t have a dog.
Back to the Global Macro Grind…
So what do you do if Janet reverts to meowing like a dove?
1. Buy the Long Bond (TLT)
2. Buy stocks that look like bonds (XLU)
3. Buy Gold (GLD)
That’s what Mr. Market told you to do yesterday. That’s what he told you to do in 2011 (when Europe slowed last time) too. Here are your timestamps in what was a big time diverging US equity tape yesterday:
1. Utilities (XLU) up +0.3%
2. US IPO Bubble (IPO) -2.1%
3. Russell 2000 (IWM) -1.1%
To be fair, away from the 40% of IPOs that have blown up already (-20% from peak in the last 12 months), 60% of these puppies have been barking alpha to the upside. If you’ve played lucky on that front (or are just a supreme stock picker), congrats!
The Nasdaq got tagged for a -1.1% drop yesterday too. The beta-chasing there (and in small/mid cap stocks) has been epic this year, if only because you could have been neutered (dogs don’t like that either) on the long side 40-50% of the time.
Pardon? Mucker, I thought the “market doesn’t go down.” If you call the SP500 (+7% YTD) or the long end of the Bond market (TLT is +12% YTD), the “market”, I guess that is accurate. Unfortunately, most of us don’t get paid to buy the index.
Here are some more US stock market #bubble stats for you:
1. 47% of stocks in the Nasdaq are crashing from their 12-month peak
2. 41% of stocks in the Russell 2000 are crashing from their 12-month peak
3. 6% of stocks in the SP500 are crashing from their 12 month-peak
*note: crash = a decline in price of -20% or more
That’s why I am overly comfortable calling the momentum and small cap side of the US stock market a #bubble these days – it’s easier to do when they are already popping!
It’s also why this year you will see who can really pick stocks. There’s a huge difference between a PM who is up +10-15% YTD with 5-10 positions that have been really right than ones who are -10% to +5%, with 50-100 positions that are trying to not blow up.
As all of you who run money and/or manage your own know, the key to compounding your net wealth is not losing money. Warren Buffett called it rule #1. Believe him. He’ll do anything these days to make his preferred investment a guaranteed win.
In other IPO #bubble news (in both market cap and names that have come public, we are beyond 1 now):
1. The Ali-bubble (BABA) has raised the top-end of its IPO price range to $68
2. Dave and Buster’s is trying to come back from the dead with a $100M IPO
3. Freshpet is going to try to get $100M of other people’s money through GS and Credit Suisse
Don’t get me wrong. If you are long all of this stuff at a lower-cost basis (pre-IPO) before the Old Wall jams it into the indexes, you are crushing it. That is capitalism and I am a big fan of your being early.
But as I watch this damn Freshpet website shuffle between slides this morning (“Healthy meals, so tasty, dogs and cats might just beg for more!” – is that a CS line for eat this IPO and I’ll give you more BABA?), I can’t say I support coming to this IPO bubble late.
While I am sure there’s another dog you can find purring somewhere on YouTube, I’m not in the risk management business of telling you that everything I learned during the 2000 and 2007 stock market bubbles is different this time.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.62%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Just when you think it couldn’t get any worse – we’re now projecting a YoY GGR decline of 14-18% in Sept
A review of the 1H numbers
CALL TO ACTION
We see no reason to buy any Macau related stocks with the possible exception of Galaxy Entertainment. Even Galaxy looks more suitable as a long hedge, with upcoming higher labor costs this year. For the first 2 weeks of September, average daily table revenues (ADTR) fell 20% from the comparable period in 2013. The weakness resides in both VIP and Mass and while hold percentage was likely low for the casino operators in the aggregate, lower than expected volumes were also to blame. We are currently projecting a YoY full month GGR decline of 14-18%. Q3 2014, Q4 2014, and 2015 estimates look like they need to go lower for most of the Macau operators.
THE MARKET DATA
ADTR of HK$745 million over the first 14 days of September was the lowest since the 1st week of July. Unless there is a miraculous recovery, full month gross gaming revenues (GGR) should fall in the mid to high teens which would represent the largest YoY decline since 1H 2009.
The dismal results look broad based: VIP and Mass volumes were weak and overall hold percentage was likely low. On a YoY basis, we would expect ADTR in 2H of September to look better than 1H. However, play levels are seasonally soft heading into Golden Week so on an absolute basis, 2H may mirror 1H ADTR. The only glimmer of hope is that forward bookings seem to portend a decent Golden Week – only if full rooms convert into strong gaming play levels.
In terms of market share, Galaxy is the standout with MGM and MPEL also producing above trend. LVS is finally holding unlucky and that portfolio of properties dropped well below recent share levels. SJM is also lagging badly.
Our negative “Mass Decelerating”call – as first articulated in our 06/13/14 note – remains fully intact. In fact, the slowdown has been steeper than even we expected. We remain negative overall on the Macau stocks and would use Galaxy Entertainment as the long hedge. Estimates need to go lower across the board for Q3 and Q4 and with the possible exception of Galaxy (owing to an earlier opening of Phase 2), 2015 estimates look high. LVS in particular looks ripe for a meaningful earnings downgrade.
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TODAY’S S&P 500 SET-UP – September 16, 2014
As we look at today's setup for the S&P 500, the range is 18 points or 0.36% downside to 1977 and 0.55% upside to 1995.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.02 from 2.05
- VIX closed at 14.12 1 day percent change of 6.09%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:30am: PPI Final Demand m/m, Aug., est. 0.0% (prior 0.1%)
- 8:55am: Redbook weekly sales
- 11am: Fed to purchase $2b-$2.5b in 2021-2024 sector
- 11:30am: U.S. to sell $30b 4W bills, $25b 52W bills
- 2pm: Net Long-term TIC Flows, July, est $25b (prior -$18.7b)
- 4:30pm: API weekly oil inventories
- 8:30am: FCC holds Open Internet Roundtable discussion
- 9am: Sen. Johnny Isakson, R-Ga., remarks at Bipartisan Policy Center summit
- 9:15am: SEC Chairwoman Mary Jo White keynote at SAIS Global Conf. on Women in the Boardroom; 1:30pm Sec. Penny Pritzker
- 10am: Business Roundtable 3Q CEO Economic Outlook Survey results, including tax reform’s impact on U.S. investment
- 12pm: American Constitution Society hosts Supreme Court preview
- 2:30pm: CDC Director Tom Frieden speaks before Senate Health, Education Cmte
- 2:30pm: Senate Commerce panel holds hearing on oversight of NHTSA
- U.S. ELECTION WRAP: Polls in N.C., N.H; Attack Ad Responses
WHAT TO WATCH:
- Alibaba boosts U.S. IPO size to $21.8b or $66/shr-$68/shr
- Calpers to cut entire $4b in hedge funds on costs, complexity
- Allergan agrees with Pershing, Valeant on Dec. 18 meeting
- Pioneer to sell DJ business to KKR for ~60b yen: Nikkei
- World’s biggest banks said to overhaul FX trading
- German ZEW Sept. investor expectations at 6.9, est. 5.0
- Orange offers to buy Jazztel of Spain for $4.4b
- Google algorithm must be transparent, German minister says: FT
- House GM defects probe said to fault federal regulators: NYT
- U.S. said to complain to China over anti-monopoly crackdown
- Boeing, Lockheed JV to develop new rocket engine: Reuters
- Fed rate raises seen as gradual in survey as inflation muted
- Adobe Systems (ADBE) 4:15pm, $0.26
- Apogee Enterprises (APOG), 4:30pm, $0.33
- FactSet Research Systems (FDS) 7am, $1.31
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Uranium Enters Bull Market Amid Russian Sanctions, Strike
- WTI Trades Near One-Week High Before Supply Data; Brent Stable
- U.S. Can’t Get Sugar for Dum Dums With Import Limit: Commodities
- Gold Rises in London on Signs of More Buying as Fed Meets Today
- Copper Advances O.5% to $6,856 a Ton in London Trading
- Rubber Climbs to 1-Week High as Lower Prices Reduce Thai Output
- India’s Rice Crop Prospects Improve as Rains Revive, Group Says
- Rebar Falls to Near Record Low After Foreign Investments Drop
- China Bans Use of Coal With High Ash or Sulfur to Fight Smog
- China Reduces Wheat Irrigation as Farming Depletes Groundwater
- Nigeria to Triple Natural-Gas Production to Meet Power Needs
- World Hunger Declines as One-in-Nine Seen Chronically Underfed
- Scotland Gold Demand Seen Rising Before Independence Referendum
- Gold Party Ends as Volatility Drops to 4-Year Low Before Fed
The Hedgeye Macro Team
Takeaway: If you’re worried about revenue growth in 3Q – don’t be. It should accelerate significantly.
There’s a lot of moving parts around RH right now, but none more important to the near-term story than the cadence of revenue growth – something that has accounted for 90% of our conversations with investors since the print. We don’t think that anyone thinks we’ll see a repeat of the 2Q sales hiccup, but there’s definite skepticism over company guidance for an uptick in 3Q sales growth. We’re extremely confident in a meaningful sequential step up in growth. Here’s why…
First off, let’s look at the company’s deferred revenue. This line item has been an exceptional indicator of growth in the upcoming quarter. Due to product ordering patterns and revenue recognition accounting, each quarter RH will defer a given amount of revenue, which then accrues to the next quarter. Everyone knows this, it was an issue last year as sales shifted from one quarter to the next. We already went through the analysis of why the change in revenue happened in our note on Sept 10, but our point here is that we’re headed into 3Q with what we’ll call Accrued Revenue growth of 35%. There’s not a one-to-one relationship between deferred/accrued revenue and sales growth, but it’s pretty darn close – and it’s spot-on directionally (as outlined in the chart below).
There’s one time where deferred revenue was not a good indicator, and that was in 1Q13. That was when RH was experiencing delivery issues and did not have enough inventory to meet demand. But those constraints are no longer. Since 1Q13, the company has increased DC square footage by 40%. Importantly, inventory is up 35% (vs. accrued revenue of 35%) and company guidance of 20-23%. We’re slightly above that (24%) and are very confident in our model.
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