The TWIB of Energy

This Week in Baseball, or TWIB, is the weekly T.V. show that provides an overview of what has transpired in the baseball world over the past seven days.  It is a must view for any real baseball fan.  The Department of Energy of the U.S. Government is an incredible source for primary information about both domestic and international energy markets.  The Department of Energy also writes a weekly overview which is called TWIP, or This Week in Petroleum.  While much less sexy that TWIB, TWIP is a must read for those following the energy markets.  Every week we find a couple of interesting nuggets in TWIP and this week was no different.


As it relates to greenhouse gas emissions, TWIP noted this week that Energy Information Administration is going to start publishing greenhouse emission data on a monthly basis due to increased demand for this data.  They also highlighted a few facts from the 2008 report, which was just released.  Most notably was the following quote:


“The August 2009 STEO expects that the economic downturn, combined with a significant switch from coal to natural gas as a source of electricity generation in some U.S. regions, will lead to a 5-percent decline in energy-related CO2 emissions in 2009. In 2010, CO2 emissions from fossil fuels are forecast to increase by 0.7 percent, due to an improving economy (see Figure 2).”


This is probably a headline that most environmental groups won’t have us focused on, but it is noteworthy that greenhouse gases will be down almost 5% from 2009.  Obviously this is partially due to the economy, but, as noted above, we are also starting to see a real impact from the transition from coal to natural gas.  This is a key longer term trend for natural gas demand that we need to keep front and center, especially as the news around natural gas is currently overwhelmingly bearish and any incrementally bullish data points could change the tone of that market.


Another interesting data point was related to the pricing of gasoline and diesel.  Both gasoline and diesel are well below last year’s prices.  Diesel is currently priced at ~$2.67 per gallon, which is $1.45 below last year’s price.  While gasoline is priced at ~$2.61 per gallon, which is $1.07 below year ago prices.  From a consumer spending perspective though, as Howard Penney has been highlighting, there has been a dramatic increase year-to-date of both gasoline and diesel prices.  On the margin, this has obviously tightened the consumer’s ability to spend since the beginning of the year.


The final noteworthy data point was related to the inventory data.  On aggregate petroleum inventories remain above their five year average and above year ago levels.   Crude oil inventories are slightly above the five average and gasoline inventories are slightly below, but distillate inventories are still dramatically above year ago levels and the five year average.  In fact, distillates (primarily diesel and heating oil) are at almost 50 days of supply versus 30 days from a year ago.  The implications of this oversupply is likely negative for the margins of refineries in the intermediate term.



Daryl G. Jones
Managing Director


Research Edge Position: Short Japanese equities via EWJ


The wife of presumptive DPJ Prime Minister  Yukio Hatoyama has been receiving heavy media coverage in the west in recent days, with special attention being paid to her  belief that she was abducted by aliens in her sleep and transported to another planet.  Unfortunately for Japanese taxpayers, our initial read on the economic measures being pushed by the victorious Democrats after their historic win is that Mrs. Hatoyama may not be the only member of her household with a head in the stars. 


With pre-election proposals that ranged from cash incentives to induce more couples to have babies in an attempt to stem the generational tsunami about to blast the Japanese pension system to reductions in highway tolls to get people on the road and spending, we anticipate that the new government will accelerate the growth of domestic Japanese government debt and accomplish little.    Although the DPJ hasn’t even taken office yet the writing already seems to be on the wall; the fundamental weaknesses in the fabric of the Japanese economy have yet to be addressed meaningfully by  leadership of either party. 


Our strategic thesis on Japan is long, involved and makes for depressing reading. Our tactical thesis on Japan is short, simple and makes for some  good trades: Yen UP/Stocks Down. In the first chart below we have illustrated this relationship over a three year horizon. In the second chart we have illustrated the way our models line up in the near term for the Nikkei.  We are currently short Japanese equities via EWJ and may have gotten in a little too early –but there is nothing but downside from here as far as we can tell barring a declining Yen.


Andrew Barber








US Employment: Making A Higher High

As Howard Penney alluded to in this morning’s Early Look, today is all about the employment report. As always, what happens on the margin matters, and the rate of change in August unemployment is significant.  As the chart below shows, at 9.7%, unemployment accelerated 30bps after declining 10bps to 9.4% in July. Additionally, on an absolute basis, 9.7% makes a higher high.


The jump in unemployment is bearish for the US dollar. Perversely, if the dollar is down everything priced in dollars will reflate, to a point.  The reality is that stagflation is being discounted due to expectations in joblessness and for this reason you’re seeing gold up 4.6% on the month.


The equation is easy: as unemployment rises, growth will stagnate. We believe this number plays into our Q4 INFLATION ROTATION call, or an increase in reported inflation in Q4. 


The dollar is currently testing our trading level. As a reminder, our immediate term TRADE line is at 78.51. We’ll continue to monitor the USD and how the market digests this unemployment number.


Matthew Hedrick



US Employment: Making A Higher High - CHART 9409


Early Look

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This is the first in a series of Hyatt posts we will provide ahead of the IPO.  A top notch hotel company finally going public, but at a fundamental low point for the industry. Does that make sense? We think so.



On August 5th Hyatt filed an S-1 or a preliminary offering memorandum, to sell approximately $1.15BN of Class A shares.  Given the weak lodging fundamentals, many investors are probably scratching their heads wondering why now?


In contrast, we think the timing is right:

  • Despite the weak fundamentals, valuations for lodging companies look rich
    • HOT is trading over 11x 2009 EBITDA
    • MAR trading at roughly 12.5x
    • HST is trading north of 13x
    • Valuations look even richer if you consider 2010E EBITDA which we believe will be lower than 2009 EBITDA for most lodging companies
  • Liquidity event for certain Pritzker family members - The Pritzker family has an agreement in place to divide the empire amongst 11 cousins by 2011.  Letting the public determine the value of Hyatt Hotels Corporation is a more impartial way of pricing this piece of the empire
  • We understand that one of the two other main investors, Goldman, is also pressing for a liquidity event
  • Having a public vehicle is probably the easiest way to raise additional capital to pursue acquisitions
    • One of Hyatt’s goals listed in the Business Strategy section of the S-1 is to “Pursue Strategic Acquisitions and Alliances”
    • As we wrote in “PICKUP IN LODGING DEFAULTS” earlier today, the pickup in large hotel loan defaults means that we should start seeing some attractive deals come to market as banks look to unload these assets

Notwithstanding the public offering, the Pritzker family will still retain control of the company through a dual class voting structure where the existing Class B shares will have 10:1 voting power.  The family, along the other two large holders, Goldman and Madrone GHC, have also agreed to vote their shares as a block when it comes to matters concerning asset sales and acquisitions. Another issue for potential investors to consider is the overhang of share sales by existing holders. Currently, Pritzker family members are restricted to selling up to 20% of their holdings each year through 2015, unless the board decides otherwise.




After a record August where gaming revenues recorded an all time high of MOP11.2bn, analyst are already starting to speculation that September will bring a 40% y-o-y increase revenues given the easy comparison since September 2008 was when the visa restrictions kicked in. However, DM does note that the past week saw a dramatic drop-off in business at the ferry terminals as the summer holidays came to an end and school season began. The Gongbei border crossing, however, remained busy and started to see an increase in traffic after lunch today as visitors began arriving for the weekend.



DM speculates on the use of proceeds of the $600MM pre-IPO bonds LVS just issued. DM wonders why LVS just didn’t wait a few more months for the IPO proceeds and what it will do with the $600MM in the meantime.  Restarting construction on sites 5 & 6 seems like a good possibility.


DM calls into question The Hong Kong Economic Journal’s claims that Wynn Macau will launch an IPO on September 25 and be traded on the HK stock exchange by October 8 as well as the $1BN size of the offering.  DM believes that given the timing a roadshow requires that an IPO in November is more likely, however, that WYNN will come before LVS is a certainty.

Wynn’s IPO application will be reviewed on Sept 10th and depending on the outcome a prospectus should come shortly thereafter.  While not questioning the desire to decouple the Macau from the sluggish fundamentals clouding Las Vegas, DM does raise the question of what the IPO proceeds will be used for.  Wynn doesn’t have any covenant issues, the Wynn Cotai project still seems a long way off, and its not really Steve’s style to buy other people’s projects, so perhaps Steve has another project in mind.



Macau Daily Post quoted the Portuguese-language Journal Tribune as saying that Wynn Macau leads the Venetian as the city’s single biggest revenue generator and provides a Top 10 ranking for the first seven months of the year, in MOP:

1. Wynn Macau – 9.64 billion on 380 tables, 1,166 slots
2. Venetian Macao – 8.88 billion (no kidding) on 585 tables, 2,478 slots
3. Lisboa Casino (old one) – 5.6 billion on 203 tables, 384 slots
4. MGM Grand Macau – 5.48 billion on 404 tables, 887 slots
5. Altira – 5.19 billion on 252 tables, 111 slots
6. Sands Macao – 5.14 billion on 414 tables, 1,406 slots
7. Grand Lisboa (new) – 4.83 billion on 289 tables, 723 slots
8. StarWorld – 4.65 billion on 243 tables, 283 slots
9. Jimei (former Oriental) – 1.3 billion
10. City of Dreams (opened June 1) – 1.21 billion



It looks like Turbojet is making a comeback after Venetian’s CotaiJet took a bite out of their business. Despite the ticket prices for TurboJet going at a significant premium to CotaiJet at the Hong Kong ferry terminal, however more traffic is still coming through the peninsula ferry terminal than the temporary ferry terminal at Pac On, on Taipa. 

Despite the more comfortable ferries that CotaiJet offers and superior customer service, the walk from the temporary Pac On to the dock at the immigration hall is still one mile, which is no fun in the summer heat.  Docking at Taipa can also add another 10 minutes which passengers in a rush may find annoying despite elimination of the need to take bus from the peninsula to get to Cotai. 

Unfortunately for the Cotai properties, it doesn’t look like the permanent Pac On terminal will be ready anytime soon. DM is hopeful that the permanent opening will follow closely behind the opening of Sites 5 & 6 and Galaxy Cotai in 2011, otherwise they fear that the Macau infrastructure will see a transportation strain.



It appears that Galaxy’s Cotai project is back on the front-burner again and the opening date can be as soon as end of 2010 or early 2011 at the latest.  The increase visitation and apparent easing of visa restrictions is a driver of the timing acceleration.



Viva airline announced this week that it is doubling its capacity to and from Narita international airport to four flights a week, which should increase the number of Japanese visitors coming to Macau since the direct flight will take half the amount of time as coming from Hong Kong when factoring the ferry trip. Japan was the only source market in East Asia to grow visitation y-o-y in the 1H09.

A Friday in September

The best way to appreciate your job is to imagine yourself without one.

-Oscar Wilde


It’s the first Friday in September and it’s all about jobs.  I have been reading over the past week how bad September is for stocks, thinking that Fridays were the worst.  Between 1999 and 2008 only 41% of Fridays were down market days – I was expecting at least 60% were down days.  In fact, for the entire month, 5 out of the last 9 years, September was a down month, but remember one  year includes 9/11 and then there was last year.  I know this is a small sample size relative to history, but I believe recent history is more relevant.  So what is all the fuss?  September is just another month! 


Who knows what this Friday in September will bring, but Research Edge’s Chief Strategist, Keith McCullough, has been recently making the call that he has shifted to expect a worse than expected unemployment report.  Ironically, this could end up being US Dollar bearish, but bullish for stocks!  For the core Research Edge client base that relationship has been part of our vocabulary since the beginning of the year.


Where I sit as a sector analyst the trends in the labor market hold the key to the future of my group.  If consensus is right and payrolls decline by another 230,000 jobs, that would bring total jobs lost since the recession began in December 2007 to 6.9 million - the biggest decline in any post-World War II economic slump. 


I’m keenly aware that a decline of 230,000 is far better than the 700,000 pace we saw in January, but many people are still losing their jobs and many others are concerned that they may be next.  This has me sitting on the sidelines.  The consumer is not dead, and therefore, it has not been easy to be short the consumer.  Yesterday was testament to that point as the Consumer Discretionary index (XLY) outperformed the S&P 500 on better than expected retail sales. 


Despite yesterday’s sequential improvement in sales trends, I contend that a prolonged weakness in the job market is bad for business and could be one factor that suggests the S&P 500’s 55% move since the March low is a head fake.  This can best be seen in a story in the WSJ today where the rising joblessness is now taking increasing toll credit-worthy borrowers.


While as a fundamental analyst I’m concerned about the consumer, the epicenter of any real weakness in the market is going to come from Washington, D.C. 


This brings me to another important THEME from the Research Edge MACRO team - INFATION ROTATION.  While this theme has generated some great banter between the Research Edge Macro team and its client base, we seem to be winning the war of important data points.  I guess it is just a coincidence that GOLD has gained 4.6% so far this month and seen the biggest three-day rally since March.  The media speculates that “a weak dollar will boost demand for precious metals as an alternative investment.”  Yesterday, the Dollar index was flat on the day and gold hit a high of $999.50.


As inflation expectations continue to climb, interest rates have to go up.  As rates head higher, the dollar will stop “burning.”  When the dollar stops burning, stocks stop going up!


If you have made it this far in reading today’s Early Look you realize that Keith is taking a well deserved day off to play golf with his father.  While getting up at 4am to write the Early Look is a challenge for sure, I’m thankful to have a job!


Function in disaster; finish in style



Howard Penney





VXX – iPath VIXWe bought volatility on its lows on 9/3 ahead of the employment report today.  


XLU – SPDR UtilitiesWe bought some low beta dividend yield on its lows on 9/2. Utilities traded down 1% and they should act ok during stagflation fears. 


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.   


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.


TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.






DIA  – Diamonds TrustWe shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).


LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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