“When I suck, I’ll retire.”
I suck this morning.
While many may very well have nailed this, I did not. The Japanese economy is so bad that they just went all 1920s Germany on the rest of the world, printing 80 TRILLION Yens.
Back to the Global Macro Grind …
Just how bad does the Japanese economy suck? Well, right before they came out of left-central-planning-field with this decision, here’s what they reported, in economic growth terms:
- Japanese Household Spending -6% year-over-year
- Japanese Housing Starts -14% year-over-year
- Japanese Construction Spending -40% year-over-year
No, the down -14-40% prints aren’t typos. Abenomics is killing it, literally.
Q: “So”, what do central planners do when all else fails?
A: moarrr of the same! (*definition of insanity)
Japan’s equivalent of Janet (his name is Kuroda) said that Hedgeye nailed it on the #GrowthSlowing call and that the Bank of Japan is at a “critical point to overcome deflation.”
There’s that word again, #deflation.
Forget what 80 TRILLION is in the context of what the Germans did in the 1920s for a second (99% of people in this world don’t get the econ #history lesson anyway) and think about what this Panic Policy in Japan is going to do to the rest of the world’s economics in 2015:
- Burning The Yen = Dollar Up = Oil Down
- Oil Down = Russia Down
- Job growth in Texas, North Dakota, etc. Down
In other words, what these macro morons in Japan don’t get is that what they just did is only going to perpetuate worldwide #deflation.
Did I just call them morons? Yes. And I said I suck this morning too. Get over it and get on with the next move in the game that is Global Deflation Risk. Did you know that 27% of the high yield/junk debt market in the US is levered to some version of Energy inflation?
Again, follow the bouncing puck on that thought. Yen burnt to a crisp à #StrongDollar à Quad4 deflationary pressures à Down Oil à Down Energy stocks à Down Energy related debt #Bubble.
And, while you’re going to see the mother of all month-end markups (many mutual funds have their year-end in October too, so isn’t Japan falling into the ocean perfect timing!), what does that mean for #deflation risk to the US stock market as it re-tests all-time highs?
Technically speaking (my 4 year old daughter just pointed this out after she looked at the chart), an all-time high in the SP500 is a long time. “So”, there has never been more risk that US equities deflate, starting in November.
REMINDER: the last US stock market #bubble peaked in OCT 2007 and Japan’s Nikkei hasn’t been this high since NOV 2007 either.
If you’re looking to buy either Japanese or US stocks on this “news”, how do you explain it to your investors? ‘Well, you see, our thesis all along was that these money printings would result in economic collapse, so we wanted to be long the #PanicPlan associated with that.’
My asset allocation of 0% (net) to US equities will be dead wrong this morning. Zero percent allocation to Commodity Deflation and its related energy stocks and bonds is right though, so I don’t have to retire just yet.
Our immediate-term Global Macro Risk Ranges are now:
WTI Oil 79.03-81.65
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on October 17, 2014 for Hedgeye subscribers.
“Didn’t I ever tell you? Bumbles Bounce!”
Bounce that bumble! Oh yeah. I am going to go all Cornelius Yukon on you this morning! “The greatest stock picker (prospector) in the world!” VIDEO: https://www.youtube.com/watch?v=nsY2EeUuLj8#t=17
GenX kids like me loved this guy (so did our baby booming parents – just stick us in front of the TV and they were all set). For those of you who didn’t see Rudolph The Red Nosed Reindeer (initially released in 1964), Cornelius is a beauty.
After a rough week of dancing with the bear, here are some “high-conviction” Cornelius “picks”, I mean quotes:
“Terrible weather we’re havin’!”
“Open up! It isn’t a fit night out for man or beast”
“This is my land. And you know it’s rich with gold. Gooooollldddd!”
Back to the Global Macro Grind…
Ok. Maybe Captain Stock Picker didn’t think that was funny. Getting caught long in “the land” of levered bullish market beta wasn’t funny either. “So”, on this Bumble Bounce, do me a favor and recognize that the oncoming red light isn’t Rudolph – it’s a train.
Yep, open it up! Let this bounce rip to the high heavens of hope and sell-the-bumble-bounce #STBB. Because hope (that “everyone is bearish now”) is not a risk management process.
Neither is calling tops and bottoms. Remember, both are processes, not points. We’ll review the #process that got us bearish on both growth and inflation in the first place (before October’s “terrible weather”), on a Flash Call today at 1PM EST (email firstname.lastname@example.org if you’d like access).
I’ll keep the call to 15 mins, then take the most important part of the call (your questions). Here are some levels to consider selling into as you “observe the bumbles one weakness (the bumble sinks! Ha ha!)”:
- UST 10yr Yield – immediate-term TRADE resistance zone of 2.22-2.31%
- Russell 2000 – immediate-term TRADE resistance = 1105
- SP500 – immediate-term TRADE resistance = 1889
*Note: I am not using the 200-day moving monkey as “resistance” – our #process is built to front-run that.
Don’t worry, I get it. You get it too. We are both allowed to change our minds in real-time. This is a dynamic and non-linear system of risk we are dealing with. Being wed to a chart, ice pick, and a moving monkey isn’t the answer.
While yesterday’s gap down open in both the Russell and SP500 recovered faster than I would have thought it could. Who cares what I thought? Mr. Market certainly doesn’t.
What we need to care about is where marked-to-market risk is right here and now. Then make the best risk management decisions we can make on the bounce. Chase or sell?
That’s why I show every move I’d be making if I was back in your seat (Real-Time Alerts). If you can think of a better way for me to show what I really think in the moment, let me know. But I’m thinking the #timestamp is the best I can do.
No, that doesn’t mean my #timestamps are always right. They’re not always wrong either. But I have been arguably dumber than Cornelius in showing you, literally, every move I’d have made (over 2,800 of them, long and short) since 2008.
Back to risk managing the bounce – some of the more interesting ones will come within risk ranges that are #crashing:
- Including this morning’s bounce to 2.18%, the 10yr UST Yield is still crashing, -28% YTD
- Including this morning’s whopping +0.5% bounce to $82.89, WTI Crude Oil is still crashing, -25% since June
- Including Europe’s bounce, both Greek and Portguese stocks are still crashing, -21-22% YTD
And why are these ex-ebola items #crashing?
- Bond Yields crash when growth expectations do
- Oil crashes in #Quad4, when both global growth and inflation expectations do
- Illiquid European stocks crash, well, every time they remind you the central plan didn’t work
Oh, then there’s the crash within the Russell itself. Over 62% of stocks in the Russell 2000 have crashed (-20% peak to trough drawdowns). By my math, that is a lot of pain that was not proactively prepared for.
But everyone is going to strike it rich with their small cap peppermint stock “picks”, on the bounce, right? “Peppermint! What I’ve been searching for all my life! I’ve struck it rich! I’ve got peppermint! Wahooooo!” (Cornelius again, sorry – couldn’t resist).
Right. Right. After very few prepared for the avalanche of small cap beta risk, everyone is going to triple-down on the bounce, and the bumbles will never sink again.
Roger that. And it really is different this time. It’s Rudolph, remember (not a train on globally interconnected #GrowthSlowing and deflation risk).
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.22%
Best of luck out there today,
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TODAY’S S&P 500 SET-UP – October 30, 2014
As we look at today's setup for the S&P 500, the range is 111 points or 4.75% downside to 1900 and 0.82% upside to 2011.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.85 from 1.84
- VIX closed at 14.52 1 day percent change of -4.16%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Employment Cost Index, 3Q, est. 0.5% (prior 0.7%)
- 8:30am: Personal Income, Sept., est. 0.3% (prior 0.3%)
- 9am: ISM Milwaukee, Oct., est. 60 (prior 63.18)
- 9:45am: MNI Chicago Business (purchasing managers), Oct., est. 60 (prior 60.5)
- 9:55am: UofMich. Consumer Sentiment, Oct. final, est. 86.4 (prior 86.4)
- 1pm: Baker Hughes rig count
- Senate, House out of session
- President Obama gives speech on the economy
- Deadline for bids on Pentagon’s $11b electronic health records contract (for March 2015 award)
- 8:30am: Commerce Dept maunfacturing event; Deputy Commerce Secretary Bruce Andrews to speak at 11:45am
- U.S. ELECTION WRAP: Trouble With Polling; Ad Spending; Ratings
WHAT TO WATCH:
- Citigroup Legal Costs Jump $600m as FX Probes Accelerate
- Bank of Japan Boosts Record Stimulus as Abe Eyes Tax Rise
- Oil Set for Biggest Monthly Drop Since ’12 on Oversupply
- Russia Agrees to Terms With Ukraine for Gas Supply to Resume
- Trading in Xetra Is Suspended, Deutsche Boerse Says
- Ex-UBS Trader Defense Is Possible Threat to U.S. Forex Cases
- Android Co-Founder Rubin Leaving Google to Form Incubator
- Twitter Said to Appoint Head of Product as User Growth Slows
- Disaster Averted in NYSE Stocks as Price Feed Backup Kicks In
- Starbucks Sales Trail Estimates Amid U.S. Breakfast Rivalry
- LinkedIn New Businesses Lift 3rd-Quarter Sales Above Estimates
- Square’s Card-Reader Market Sway Slips as PayPal, Amazon Loom
- Alibaba Co-Founder Said to Back Hedge Fund of Ex SAC Trader
- BlackRock Says ETFs Aided Bond Mkt Stability After Gross Exit
- U.S. Midterm Elections, Jobs, ECB, BOE, AIG: Wk Ahead Nov. 1-8
- AbbVie (ABBV) 7:47am, $0.77 - Preview
- American Axle & Mfg (AXL) 8am, $0.62
- Aon (AON) 6:30am, $1.12
- CBOE (CBOE) 7:30am, $0.54
- Chevron (CVX) 8:30am, $2.52 - Preview
- Clorox (CLX) 8:30am, $1.03 - Preview
- CommScope (COMM) 7:30am, $0.57
- Dominion Resources (D) 7:30am, $0.95
- Exelis (XLS) 6:30am, $0.32
- Exxon Mobil (XOM) 8am, $1.71 - Preview
- Genesee & Wyoming (GWR) 6am, $1.18
- Hilton Worldwide (HLT) 6am, $0.17
- ITT (ITT) 7am, $0.60
- Legg Mason (LM) 7am, $0.01
- Madison Square Garden (MSG) 7:30am, $0.32
- Magellan Midstream Partners (MMP) 8:30am, $0.66
- Moog (MOG/A) 7:55am, $1.08
- Newell Rubbermaid (NWL) 6:30am, $0.55 - Preview
- NextEra Energy (NEE) 7:30am, $1.54
- Oshkosh (OSK) 7am, $0.82
- Pinnacle West Capital (PNW) 8:30am, $2.13
- Rockwell Collins (COL) 7:30am, $1.27
- Spirit AeroSystems (SPR) 7:30am, $0.77
- TECO Energy (TE) 7:30am, $0.33
- Telephone & Data Systems (TDS) 7:56am, ($0.08)
- United States Cellular (USM) 7:57am, ($0.30)
- Vantage Drilling (VTG) 6am, $0.02
- WisdomTree (WETF) 7am, $0.07
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Tumbles With Silver to Lowest Since 2010 as Dollar Advances
- Brent Oil Set for Longest Run of Weekly Losses Since ’02 on Glut
- Gold Slumping 17% to $1,000 an Ounce for SocGen on Oil’s Tumble
- Nickel Leads Gains by Industrial Metals as Japan Adds Stimulus
- No Guarantee Saudis to Repeat Price Cut That Drove Oil Lower
- Hurricane Season’s Eastern Pacific Finale Sends Storm to Mexico
- Shale Boom Redraws Oil Routes as Alaskans Ship to Korea: Energy
- Russia Agrees to Terms With Ukraine for Gas Supply to Resume
- Emerging-Market Currencies Hurt by Oil, Metals: Chart of the Day
- Wheat Futures Drop as Much as 1% to $5.305/bu, Reversing Gains
- Steel Rebar Pares Monthly Gain as Demand Seen Falling in Winter
- Freeport Indonesia, Labor Union Continue Talks on Planned Strike
- Copper Traders Bullish for Next Week Amid Distruption Prospects
- ‘Brouhaha’ Looming Over OPEC Oil-Production Cuts, Yergin Says
The Hedgeye Macro Team
Takeaway: Our positive regional call is likely to extend a little longer with decent October #s coming out and, of course, the REIT euphoria
Consistent with our earnings preview, another regional operator beats. Stock should be on steroids tomorrow due to the conference call REIT discussion
- Southern Nevada economy continues to strengthen
- Gold Coast/the Orleans did particularly well
- Las Vegas: Non-gaming amenities demand is increasing
- Downtown: seeing benefits from Fremont Street and new Zipline experience; also benefited from increased Hawaii visitation
- Regionals: margins were up at 9 of 12 properties. YoY revenue declines are narrowing.
- Delta Downs: record 3Q EBITDA (beating previous record by 10% and gained share). While there will be an impact from Golden Nugget Lake Charles later in 2014, they remain confident Delta Downs EBITDA will grow 6% YoY.
- IP EBITDA operating margins grew 170bps. Blue Chip grew market share in each month in 3Q. Strong visitation growth (+5%) for Blue Chip.
- Kansas Star EBITDA down 5% on lower revenues. 43% operating margin. Spend per visit up slightly but declines from visitation from casual players.
- Par-a-dice impacted by the new 18k VLTs
- Borgata: hotel business also strong driven by cash rates. Closure of competitors have resulted in a bigger customer database. Also saw additional convention business and better occupancy since early Sept.
- Borgata online: profitable throughout 3Q. Expect further improvement in 4Q.
- Goals: 1) Reduce debt, 2) target property initiatives (e.g. opened sports bar at SunCoast, in December will update 400 rooms at SunCoast, new Asian restaurant in Downtown hotel, hotel work in IP will be done by January 2015, Kansas Star expansion will be done by end of 2014 - drive higher visitation by 2015), 3) long-term shareholder value (REIT conversion/spin study)
- Reduced debt by $70m in 3Q; solidly on track to repay $200m debt in 2014 (YTD: $165m). Have reduced debt by $700mm since 2013.
- Potential REIT possibility: have spent $3m studying this....it's possible with certain circumstances.
- 3Q capex: $41m - $9m (peninsula), $3m borgata); YTD: $95m
- FY2014 capex: $110m (Boyd/Peninsula), $25m (Borgata)
- FY 2014 EBITDA guidance: $590-600m (high end of previous guidance)
- under Borgata deconsolidated basis, FY EBITDA guidance: $576-586m
- Guidance assumptions:
- Normal weather
- Current trends continue
- Normal hold at Borgata (low hold in 4Q 2013)
- No Downtown $2m favorable tax items seen in 4Q 2013),
- No Midwest/South $9.3m tax benefit for Blue Chip in 4Q 2013
- Adverse Golden Nugget Lake Charles impact. Previously, had not included its impact
- Peninsula: expect YoY EBITDA trends in 3Q to continue in 4Q
- Borgata: 4Q ($7m property tax reductions)
- Borgata items not in guidance: 2 remaining tax appeals (one-time $88m (2011-2013 property tax settlement- will be used to reduce debt), 2010 tax refund being appealed by city of AC
Q & A
- Regional trends: still more of the same consumer environment but getting less bad.
- Las Vegas Locals: all the growth came from non-gaming, broad-based across the properties. Gaming revenue was flattish.
- Resorts World Genting haven't started construction yet.
- There are not enough construction workers available for some of the Vegas projects.
- Atlantic City strategy: picking up business in conventions and nightlife. Will not overspend to capture new customers as a result of the closures
- REIT: not saying yes or no at this point; it would be obvious if we are going to go in a different direction
- How did 3Q compare to BYD's internal guidance? Generally performed in the middle of the range.
- Sept 2014 was less bad than Sept 2013
- December was very weak last year
- Possible Revel re-opening? Would bring more customers to the market.
- Pokerstars entering NJ I-gaming? no comment. Pokerstars is involved with NJ authorities.
- Lower gas prices impact: historically, have seen fairly quick reactions but people react less nowadays
- AC bond issue for tax refund: expect by at year-end
- Delta Downs impacted by lower oil prices? Too early to tell. Oil price changes are transitory.
- IP: market is flat/up a little bit but the property is competing better. Focused on EBITDA.
- As managing partner, BYD would recommend to MGM to refinance 9% 7/8 Borgata debt.
- Tribal/Native gaming opportunities: a few years into the future
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