Hedgeye CEO Keith McCullough weighs in from Caesars Palace with his latest take on the market, Fed and economy before speaking at the Traders Expo later this morning. According to Keith, it's Buy-The-Damn-Bubble (for now).
Client Talking Points
So here's what we're looking at this morning: #TaperTalk equals Up Dollar equals Down Yen equals Nikkei Up +1.9% to +50.2% year-to-date. Cool, no? That’s exactly the global macro environment we had for nine months until Ben Bernanke decided not to taper.
A strong currency is “bad for exports” right? Wrong! UK Factory Orders hit an 18 YEAR-HIGH this morning with #StrongPound. A little austerity and no QE goes a long way towards the purchasing power of the people and producer margins.
The 10-year Treasury yield tested the top-end of my immediate-term 2.63-2.81% risk range on #TaperTalk and backed off. A) I don’t think the Fed is going to taper in December and B) I think this will foster a 2.3-2.9% type 10-year risk range for the intermediate-term. Confusion on tapering should eventually breed contempt (volatility) in both stocks and bonds. Stay tuned.
|FIXED INCOME||6%||INTL CURRENCIES||22%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
Buy-the-damn-bubble (for now) @KeithMcCullough
QUOTE OF THE DAY
"I love everything about investing except maybe the fact that I’m actually in the investment industry." -Christian Drake (Hedgeye analyst)
STAT OF THE DAY
Got Pounds? A measure of new orders at U.K. factories rose to the highest in almost two decades in November and expectations for the next three months improved, the Confederation of British Industry said. The CBI’s manufacturing gauge climbed to 11 from minus 4 in October, the highest since March 1995.
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“I love everything about investing except maybe the fact that I’m actually in the investment industry. If you see how sausage is made you probably wouldn’t eat it.” - Yours Truly, ~10 hours ago
One day back in high school my friend Michael decided to start referring to himself as “Mike Nice.” Quoting yourself to jumpstart an investment missive is about as cool as trying to give yourself your own nickname....but the message fits the theme today, I can’t think of anything else and at 4am, questionable ideas have a sneaking ability to cloak themselves as appealing.
Anyway, back to the Global Macro Grind….
It has been difficult to escape the valuation discussion the last few weeks as bubble speculation has been ubiquitous alongside higher nominal, and real, highs for domestic equities. We added our own speculative cogitations to the already teeming cauldron of valuation commentary yesterday (see BUBBLE MONGERING for more) in a note surveying a current cross-section of market valuation measures. We reprise those below, but the takeaway was fairly straightforward - across the balance of metrics, equities are, indeed, moving towards overvalued.
To recapitulate the selection of metrics we considered yesterday:
Shiller PE: The Shiller PE ratio attempts to normalize the price to earnings ratio by adjusting for economic cyclicality. It does so by dividing the price of the S&P500 by the 10Y average of inflation adjusted earnings. At its current reading of 24.9X, the CAPE ratio is moving into the top decile of its historical range. Mapping the Shiller PE by decile vs subsequent market performance suggests return expectations should move systematically lower alongside incremental increases in valuation. Historically, 1Y and 3Y returns progressively decline for each decile change in the Shiller PE (ie. average forward returns by decile decline as multiples move higher).
Tobins Q-Ratio: Longer-term valuation arguments center on the premise that returns on capital should equalize to cost of capital and market values should normalize to economic value. Tobin’s Q ratio is not a measure we use to tactically manage risk, but we can appreciate the intuition underneath its application – after all, why buy an asset when you can “re-create” it for less and compete away existing, excess profit. Currently, the q-ratio sits just below the 1.0 level and approximately 1.0 standard deviation above the long-term mean value – a level that has generally not been a harbinger of positive forward returns historically.
S&P 500 Market Cap-to-GDP: Assuming the collective output of SPX constituents credibly reflects aggregate national production (or serves as a credible proxy for it), the Market Capitalization-to-GDP ratio effectively represents a price-to-sales multiple for the economy. On a historical basis, we are certainly entering “expensive” territory as we push towards breaching 100% to the upside. At current levels we are approximately equal to the 2007 highs and well above the long-term average.
FORWARD/TRAILING P/E: On conventional P/E metrics, the market is moderately expensive currently at 17X trailing earnings and 15X forward earnings. Valuing the market on a single year of (recurrently over-optimistic) forward earnings estimates has its myopic trappings and, additionally, any perceived cheapness in current multiples should be discounted to account for mean reversion downside off peak corporate profitability (more below).
PEAK MARGINS: In the Chart of the Day below we show after-tax corporate profits as a percentage of GDP. The latest 2Q13 data marked another higher high in corporate profitability at 11% of GDP – this is some 85% above the long-term average. Unless you think peak returns to capital provide a sustainable path to aggregate demand growth in the face of negative trend growth in real earnings, trough returns to labor, middling productivity growth and secularly depressed investment spending, then the mean reversion risk for operating margins remains asymmetrically to the downside.
ESTIMATES: Topline growth estimates for the SPX (market weighted) don’t look unreasonable at +4.8% YoY for 2014. However, the slope on earnings growth (+10.9% for 2014) over the NTM continues to look overly aggressive given expectations for further, significant margin expansion (+100 to +250bps in incremental expansion over 2014) above already peak corporate profitability. Of course, iteratively ratcheting down expectations and subsequently beating deflated growth estimates over the course of the year remains the prevailing (and hereto successful) playbook strategy for higher equity prices.
So, generally speaking, we are overvalued. Practically, what do you do with that?
A chief problem for the bear camp is that that the overbought-overvalued market narrative has become a tired one as moderately elevated valuation has characterized most of 2013 and prices advancing at a premium to profits is not a new phenomenon.
Valuation-in-isolation narratives are some of the sell-sides finest sausage and sirenic when expertly crafted. But Valuation isn’t a catalyst.
At Hedgeye, we use a broad range of valuation and sentiment indicators when contemplating the direction of markets and where our view sits in the context of current prices, consensus estimates, and prevailing sentiment. From an Investment decision making perspective, valuation sits somewhere near the middle-bottom of the our consideration hierarchy.
We get that valuation matters in anchoring return expectations over the longer term. Underneath the technicals, acute policy catalysts, and reflexivity that drives immediate and intermediate term price trends sits the steady drumbeat of fundamentals and an accordion-like tether to ‘fair value’.
However, Price, not deviation from estimated intrinsic value, together with our view on marginal changes in macro fundamentals are the signals we use to risk manage immediate and intermediate term exposure.
With the Price signal bullish (SPX and all nine S&P sectors in Bullish Formation) and fund flows, decent domestic and global macro data, rising M&A activity, near universal acknowledgement of the existent ‘bubbliness’ (can you really be in the terminal stage of a bubble if everyone agrees it’s a bubble?), and the lack of a discrete negative catalyst all supporting equities in the immediate term, we’ll continue to lean long until the price signal changes.
Tops are process and we have continued to Buy The Bubble on shallow corrections within our published risk ranges while taking down our gross and net equity exposure since the No-Taper announcement in September. We’ll probably continue to run tight and #RemainActive as yesterday’s FOMC Minutes only extended the confused communication policy out of the Fed.
Raise some cash. Embrace the uncertainty and volatility of it all. Don’t eat the sausage. Eat a snickers… Don't invest like a Diva.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.67-2.83%
Christian B. Drake
THE MACAU METRO MONITOR, NOVEMBER 21, 2013
NEPTUNE MAY BUY SLICE OF JUNKET OPERATOR'S TAKINGS Macau Business
Neptune Group Ltd has agreed to buy all of Macau VIP gaming room operator Ocean Star’s profits from its junket arrangement. Neptune Group, Ocean Star and So Wai-chi have signed a memorandum of understanding to this effect. They have until the end of this year to negotiate the deal. Ocean Star runs at least 11 VIP tables in the City of Dreams, which have average monthly rolling chip turnover of HK$6.43 billion (US$ 830 million).
MACAU CPI DSEC
October 2013 CPI increased by 6.18% YoY and 0.15% MoM.
MORE VISITOR ARRIVALS TO SINGAPORE IN Q1 2013, BUT TOURISM SPENDING DROPS Strait Times
According to the Singapore Tourism Board's (STB) quarterly report, there were 3.9 million tourists in 1Q 2013, +9% YoY. But overall tourism spending dropped by 6% to $5.7billion. The report showed that visitors spent less on accommodation, shopping, and sightseeing and entertainment. They spent the same amount on food and beverage. The decline in spending was driven mainly by a 6% drop in the number of business travellers.
SINGAPORE RAISES 2013 GDP GROWTH FORECAST ON MANUFACTURING Bloomberg, Channel News Asia
Singapore trade ministry bumped up its 2013 GDP forecast to 3.5-4.0% from 2.5-3.5% earlier. GDP may expand 2%-4% in 2014. 3Q GDP grew an annualized 1.3%, beating estimates of -0.3%.
SINGAPORE CHANGI AIRPORT TRAFFIC Changi Airport Group
October passenger movement grew 3.2% YoY to 4.4 million.
DONACO SEEKS EQUITY TO FUND VIETNAM EXPANSION WSJ
Donaco International Ltd., led by two nephews of Genting Bhd.’s chairman K.T. Lim, is seeking up to 25.8 million Australian dollars (US$24.2 million) to fund the expansion of its five-star hotel and casino in Vietnam. The company said last week that Vietnam’s Ministry of Planning and Investment had provided conditional grants which allow the business to operate a maximum of 50 gaming tables. Its existing 30-year gaming license will be reset in 2014, and run through 2044.
INDIA'S LARGEST CASINO RESORT TO OPEN IN DAMAN NEXT YEAR Indiawest
India’s largest integrated casino resort, spread over 10 acres with 60,000 square feet gaming space in Daman, is likely to open early next year, according to Delta Corp. Limited Chairman Jaydev Modi. The 187-room property will open up new markets for Delta Corp. since it is near Mumbai and within convenient distance from the key cities in Gujarat. This would be the first land-based casino in Daman. The company has three offshore casino vessels in Goa.
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