get free cartoon of the day!
Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox
By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.
Hedgeye CEO Keith McCullough was on CNBC this afternoon discussing the market meltdown and what is next for the global financial system. You can watch the clip here:
http://www.hedgeye.com/unlocked_ideas/12292 (copy and paste the link into your web browser to view)
This evening Keith will be joining Larry Kudlow on The Kudlow Report at 7pm eastern to accost more stock market bulls with our view that inflation is accelerating and growth is slowing.
The key points Keith will be highlighting tonight include:
1. Global Stock Markets - have been giving us Global Growth Slowing signals for 6 weeks – today’s China news shouldn’t be new news to anyone paying attention (we’ve been short Emerging Markets for the better part of 2011 and making money doing it)
2. US Stock Market – casino is as casino does. The correlation risk between stocks and the USD is surreal right now – thanks go out to The Bernank. Sadly, your buy-the-dip stock promoter can’t afford what this country really needs: inflation slowing via a strong dollar (like you had today).
3. Correction or crash? - we’ve been calling for a 3-6% correction since FUND FLOWS PEAKED in the week of February 14th – be my valentine little perma bull – here’s the 1st 3.5% of that correction. Our intermediate term downside support target for the S&P500 remains 1265.
4. Oil – trade it with a bullish bias. We sold our LONG OIL position on Monday and bought it back today. We want to be long the Day of Rage and continue to think that the Middle East will be a longer term story than consensus thinks. Any oil price > $90/barrel is a significant consumption TAX on US Growth.
5. US Economic Growth – sell-side forecasts for 2011 and beyond are still too high – US GDP of sub 3% for 2011 at oil > $90/barrel.
-Your Hedgeye Risk Management Team
Much ado about nothing.
As we mentioned in our note, GENTING SING: GOOD > BAD (3/1/11), we believe the sell side is overly concerned with Genting’s seemingly large receivable in 4Q. When looking at it within the context of high growth in VIP direct volume, Genting’s receivable doesn’t look unusual. As the charts below show, Genting’s 4Q receivable is 2.6% of direct rolling volume, which is actually lower than Marina Bay Sand’s 3.1%. When compared to some of the Macau operators, Genting’s receivables are pretty much in-line.
So, take a deep breath, sell side. For now, receivables shouldn’t be a worry, though a continuation of stagnant mass growth in Singapore may be.
Conclusion: The U.S. deficit issue continues to accelerate. February 2011 was the largest monthly deficit ever, and ever is a long time.
Position: Short the U.S. Dollar via the etf UUP
Due to seasonality, February is typically a bad month for the federal budget deficit. In fact, before February 2011, the prior worst monthly deficit on record was February 2010. According to estimates from the Congressional Budget Office (CBO), the Federal budget deficit for February was $223BN which is an increase of about 1% from February 2010.
Revenues actually grew year-over-year by 3%, which is marginally positive. This is also the 10th straight month of year-over-year revenue increases. On the flip side, and despite all of spending cut rhetoric, expenditures were up 5% from February 2010. The key driver here was a $4BN increase in interest expense, which was a function of more debt and marginally higher rates.
In the table below, we’ve outlined the year-to-date deficit numbers compared to 2010. As usual, we’ve normalized for one time expenditures, such as TARP. While revenues are showing a decent increase on a year-over-year basis, spending continues to accelerate and is up more than 5.3% in the first five months of the fiscal year. The largest gaining expenditure line item on a percentage basis year-over-year was interest expense.
Year-to-Date Deficit ($B)
To the last point on the growing expense of interest, a recent report written by Mary Meeker on behalf of Kleiner Perkins titled, “USA Inc”, highlighted the heightening threat of interest to the federal deficit. According to Meeker:
“Last year’s interest bill would have been 155% (or $290 billion) higher if rates have been at their 30-year average of 6% (vs. 2% in 2010). As debt levels rise and interest rates normalize, net interest payments could grow 20% or more annually.”
The sneaky thing about borrowing money is that the cost of borrowing increases the more you borrow.
In conjunction with writing this note, we took a look at the longer term budget history of the United States. In the chart below, we show the budget deficit going back to 1968. The chart shows a somewhat normal distribution of deficit spending and reduction and then beginning in the 2000 time frame, the deficit train wreck began.
Given this February data and the long term trend, it is no surprise that we re-shorted the U.S. dollar today in the Virtual Portfolio via the etf UUP. In God we trust, but not in debt.
Daryl G. Jones
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.