It looks like average daily table revenues (ADTR) fell 30% YoY in the first days of October and not the 40% as some initial reports indicated. Either way, ADTR of only HK$1.17 billion vs. HK$1.68 billion for the first 6 days of October 2013 was disappointing. The 2nd half of this October will be quite volatile as there were placeholder weeks in October 2013. We are estimating full month October GGR to fall 15-20% YoY.
High rollers continue to be relatively sparse during Golden Week, affecting VIP volumes. It doesn't help that hold was below average as well; Grand Lisboa saw negative hold for a few days and WYNN/GALAXY/Four Seasons also had bad luck during Golden Week.
Some smoking tidbits we're hearing:
SCL had designated the Four Seasons Plaza entire casino Premium mass but because no smoking parlors are set up, the place is entirely non-smoking. Construction of yet to be approved smoking parlors may disrupt the small casino floor.
COD smoking rooms operational but not officially approved by Health Bureau
In terms of market share, we think low hold may have played a small role – Wynn Macau held poorly – but volumes were the main culprit overall. Wynn Macau also held low in Golden Week 2013.
We typically introduce the Hedgeye Industrials research process using the shipbuilding cycle and industry structure as an illustration. The discussion typically goes something like “after WWII, war related tonnage was converted to commercial use, but ships last for only, give or take, 30 years, so there was a replacement cycle in the mid-1970s”…and so on. But shipbuilding is not just an example of a capital equipment cycle and a flawed industry structure, it has also been, and will likely continue to be, a once in a career short opportunity.
Beyond the Fishfinder updates, we have only written on shipbuilding occasionally because not much happens that is relevant to our thesis. Basically, our view is that shorting South Korean shipbuilders should work for several years; the next move for investors is to buy Chinese shipbuilders in roughly 2030 (only partly kidding). Recently, however, there has been more action.
Industry Structure: Extremely Fragmented, Government Subsidized
We focused on Samsung Heavy in our launch deck and subsequent notes because it had fewer non-shipbuilding exposures. Samsung Heavy shares have dropped about 45% in the past year, significantly underperforming the KOSPI. Below, we provide some updates.
We continue to believe that Samsung Heavy is, well, somewhat doomed and that the shipbuilding industry is good hunting for shorts. While SHI may have a numerically substantial backlog, the margin on that backlog need not be good or even positive and a portion is pass-through. SHI’s plan to add capacity and merge with Samsung Engineering looks like a strategy developed by a flailing capital intensive enterprise caught in a long downcycle. That said, the inheritance tax issue, pressure on commodity prices, and sell-off in the shares would probably leave us looking for a bounce (like the one CAT recently completed) to press or enter a short. While we expect the shares to eventually trade much lower, we might wait for a better short-run entry point.
(Interested readers should feel free to ping us for our earlier materials.)
Takeaway: The must-read below walks through why the preponderance of our quantitative signals support our view that the US economy is mired in #Quad4.
Keith is on the road this week visiting with customers and prospective customers in London; no doubt he’s accumulating reps at the one thing I am personally most passionate about as it relates to being some version of a sell-side research analyst: explaining why we’re different.
One of the core tenets to our process that differentiates us from our perceived competitors across the independent research landscape is our ability to consistently extract predictive color from financial markets. Furthermore, we apply those top-down quantitative signals in a reflexive manner to our bottom-up qualitative analysis (e.g. our Growth/Inflation/Policy framework) in order to generate actionable investment ideas and themes. Our process isn’t perfect, but 6+ years of growing a business with no banking, trading or asset management fees to help “keep the lights on” would seem to suggest it’s as valuable as an input to your respective processes as we’d humbly submit it is.
Today, the preponderance of the aforementioned quantitative signals support our fundamental research view that the US economy is mired in #Quad4 – which is an economic scenario whereby the 2nd derivatives of both real GDP and headline CPI are negative. If either the anticipated delta into this quadrant is meaningful or the setup is expected to last for more than one quarter, it becomes a meaningful macroeconomic headwind to the valuation of most financial assets.
Keith’s Model Is Signaling #Quad4
For example, take Keith’s proprietary factoring of Price/Volume/Volatility data across multiple durations (i.e. TRADE, TREND and TAIL) for various asset classes and style factor exposures. If you too subscribe to the view that financial markets are leading indicators and that various periods throughout history often rhyme with the present setup, it’s easy to conclude from these signals that the market is pricing in a #Quad4 setup at the current juncture – especially in the context of our GIP Model backtest results:
TACRM Is Signaling #Quad4
If that combination of History, Math and Behavioral Psychology isn’t robust enough for you, then let’s expand this search for quantitative confirmation to our Tactical Asset Class Rotation Model (TACRM). On this measure, there are a number of indicators that suggest the market is pricing in a #Quad4 economic scenario. To highlight a few of the most noteworthy signals:
For those of you’d who’d like to learn more about TACRM and how to fully harness the power of its signals within the scope of your respective investment mandate, please review the following presentation or ping me directly (): http://docs3.hedgeye.com/macroria/TACRM_10-7-14.pdf.
The Median Consumer Is Signaling Recession
Lastly, one of the things we don’t do that many of competitors anchor on is survey work. This is because:
That being said, we will happily cherry pick survey data that supports our fundamental conclusions when the preponderance of high-frequency economic data is not yet supportive of our forecasts as it is currently.
Given that so few investors actually analyze macroeconomic data in a repeatable and robust manner, we constantly find ourselves having to debate what we think are moot points regarding lagging indicators such as continued strength in the labor market and the 2Q14 GDP print.
So in light of that, we thought we’d use the following PwC survey data to highlight the ongoing “early cycle slowdown” Keith has being writing about all year:
All told, at least 2/3rds of the country thinks we’re already in or heading into what may ultimately turn out to be a recession or, at best, a recession scare. This conclusion is very much in line with our work on the median consumer as part of our #ConsumerSlowing theme.
If you’re buying risk assets at these valuations and spreads, you better have some darn good edge on why the 1/3rd will prevent that from occurring. Refer to our #Bubbles theme for a detailed discussion of the still-egregious mispricing of many financial assets.
Investment Conclusion: Continue Rotating Out Of #Quad4 Losers and Into #Quad4 Winners
We obviously understand that most investment mandates will prevent you from raising what we perceive to be adequate levels of cash or from tilting defensively enough to weather such volatility. In light of that, we’ve created a daily product – The Hedgeye Macro Playbook – to help you better incorporate our research conclusions into the scope of your respective strategy. Be on the lookout for that 1-page summary every weekday prior to the market open.
Beyond that, we’ve put together the following list of US equity subsectors that have historically fared really well (i.e. quarterly performance in the ~90th percentile and above) or really poorly (i.e. quarterly performance in the ~10th percentile and below) in #Quad4:
NOTE: If any of the aforementioned GICS Level 4 industries have recorded at least 10 quarters in #Quad4, we did not include the number of historical occurrences in parenthesis; most had 14.
Best of luck out there,
Associate: Macro Team
Takeaway: We are removing FXB from our high-conviction stock idea list.
Our macro team is removing the British Pound (via the etf FXB) from Investing Ideas.
We are removing the FXB because:
FXB was added to Investing Ideas on 8/13/2014. We’ve been offsides on our position in recent weeks, despite resilient fundamentals to support our positioning.
Going forward, should Fed policy become increasingly dovish alongside the ECB, we could return to the FXB on the long side.
As the 10-year yield drops back below 2.40%, we reiterate our non-consensus, best macro long idea of the year: Long the Long Bond.