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VIDEO | Keith's Macro Notebook 4/1: EMERGING MARKETS EUROPE GOLD


Stall Speed: Is Economic Caution Warranted?

Editor's note: This research note was originally published March 28, 2014 by Hedgeye Macro Analyst Christian B. Drake (@HedgeyeUSA). For more information on Hedgeye, please click here.

 

Stall Speed: Is Economic Caution Warranted? - CautionTape

Summary: 

  • Both incomes and spending decelerated in February while Core PCE inflation was static at a dovish, stall speed of just 1.1%. 
  • The income/spending deceleration was broad based with some negative weather drag, but the trend is one of deceleration and the primary pockets of spending strength in February are likely to be ephemeral.
  • High End Demand: It turns out that the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February.  Wealth effect spending, however, probably continues to ebb.
  • Healthcare Spending: At ~19% of Total household expenditures, spending on Medical Care matters, and Obamacare is distorting the numbers.  
  • Confidence: March marked a second month of mixed consumer confidence reports. Sentiment continues to meander alongside the dollars descent.  
  • FINALLY! Outside of some lagging housing data, all the material domestic, fundamental macro data for February has been reported….enjoy the oversold bounce and blithely enter the weekend knowing the vexatious ubiquity of weather caveat-ed macro releases has finally ended. 

Stall Speed: Is Economic Caution Warranted? - Income   Spending Table Feb large

 

Stall Speed: Is Economic Caution Warranted? - Eco Summary Table 032814 

PERSONAL INCOME: 3 Months of Deceleration

Weather probably served as a negative distortion on reported, aggregate personal income in February, but with total Personal Income, Disposable Personal Income (DPI), DPI per capita and Private Sector Salary & Wage growth all decelerating for the 3rd consecutive month in February it feels hard to argue that weather is masking a strong underlying trend of acceleration. 

 

Stall Speed: Is Economic Caution Warranted? - Personal Income Feb

 

Private Sector Salaries and Wages decelerated by -60bps and -50bps on a YoY and 2Y basis, respectively, while aggregate government sourced wage income accelerated 30bps on a 1Y while holding flat sequentially on a 2Y basis. 

 

Alongside the spending friendly budget deal and ongoing positive state & local government employment growth, we continue to expect government salary and wage income to provide some modest upside to income growth in 2014. 

 

The savings rate ticked up to 4.3% from 4.2% but remains near historical trough levels.

 

The capacity for a further decline in savings to support incremental consumption growth remains very much constrained at current levels.   

 

Stall Speed: Is Economic Caution Warranted? - Salary   Wages

 

Stall Speed: Is Economic Caution Warranted? - Savings Rate 

 

CONSUMER SPENDING:  Healthcare & High End Discretionary supported February consumption expenditures.  The former is either transient or likely to be revised significantly and the latter isn’t likely to repeat last year’s performance.   

 

HIGH END DEMAND:  Last month we highlighted the deceleration in demand at the high end as implied by the slowdown in spending on luxury durables. 

 

As it turns out, however, the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February (see our previous note for more on the latest income division dynamics - INFLECTIONS OR FALSE POSITIVES?). 

 

The read through here is mixed as the contribution to total durables growth from higher-end discretionary helped mask more broader weakness. 

 

Further, with stocks flat YTD, housing decelerating and the Fed beginning to reign in their explicit, asset re-flation (i.e. wealth effect) policy agenda, the probability for the top income quartiles to provide incremental demand growth (in similar magnitude to last year) seems to be diminishing.

 

Stall Speed: Is Economic Caution Warranted? - PCE Luxury

 

Stall Speed: Is Economic Caution Warranted? - Luxury Goods   Contribution

 

HEALTHCARE SPENDING: DISTORTED, TRANSIENT OR BOTH?


Spending on Healthcare Services has been the notable positive outlier over the last few month and the effect stems largely from the implementation of Obamacare.

 

The reported figures are very much an estimate and the preliminary data are likely to be revised significantly over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   

 

With reported Hospital and Outpatient spending both accelerating materially, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 

 

Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~19% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.    

 

To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 

 

Unfortunately, like the now ubiquitous weather asterisk, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact. 

 

Stall Speed: Is Economic Caution Warranted? - Healthcare PCE

 

CONSUMER CONFIDENCE: Across the primary survey's, March proved to be a second straight month of meandering for consumer confidence. 

 

The final University of Michigan Consumer Sentiment reading for March declined -1.6pts sequentially to 80.0 – the worst reading in 4 months. 

 

The conference board and Bloomberg Surveys, meanwhile, showed consumer confidence improving by 4pts and 1.6pts, respectively, in March.    

 

Notably, the relationship between the $USD and confidence remains reasonably strong. The dollar is currently in Bearish Formation (Broken Trade, Trend & Tail) and with growth slowing and commodity inflation accelerating the balance of risk for the currency remains to the downside, in our view.  

 

Stall Speed: Is Economic Caution Warranted? - USD vs Confidence

 

Stall Speed: Is Economic Caution Warranted? - Confidence Table 032814

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LEISURE LETTER (04/01/2014)

TICKERS: SJM, BYI, CZR, H, MAR, RCL

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES 

Wednesday, April 2

  • March ADP Employment report

Friday, April 4

  • March NFP report

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day

 

COMPANY NEWS

SJM – (Macau Business Daily) SJM may increase leverage to fund its 2017 Lisboa Palace but the company is under no financial pressure, says SJM’s CEO Ambrose So. So said that they may have to vie for labor with other gaming operators like WYNN and MGM. MGM Cotai expected to open in 2016, requires at least 8,000 employees (same as SJM Cotai), while Wynn Palace needs “9,000 to 10,000 workers” when it opens by 2016.  “In these two or three years there will be numerous university graduates which can supplement the labor shortage,” Mr So said yesterday. “But we still have to see the human resources situation by then to decide any policy.”

 

TAKEAWAY:  We worry less about demand and more about labor shortages.

 

BYI – acquired the land-based distribution rights to a selection of social casino titles currently live on New Jersey-based developer High 5 Games’ Facebook apps.  Bally gains the rights to ten titles from the High 5 Casino and Asian-facing Shake the Sky Casino apps: Gypsy, Madame Monarch, Pasión y Fuego, Foxy Dynamite, Valkyrie Queen, Palace of Magic, Zen Panda, Night Jasmine, Silk & Steel and MISS Universe Crowning Moment.  The deal follows the companies agreeing to extend their supplier partnership in December last year following the first roll-out of H5G’s slot games repurposed as land-based games. Under the terms of the partnership H5G retains the exclusive online, social and mobile rights to the titles.

TAKEAWAY:  Setting the stage for national online gaming while trying to attract the new generation of younger gamblers who do not play slot machines.

 

CZR – the High Roller, the 550 feet tall observation deck wheel officially opened yesterday at 1 p.m.  The High Roller includes 28 cabins that can spaciously fit up to 40 people each.

TAKEAWAY:  While we expect the opening to draw immediate visitor attention, it remains to be seen if the attraction has sustainability. 

  

H – the Park Hyatt is scheduled to open July 20, 2014 in NYC and will feature 210 luxurious guestrooms, including 92 premier suites, all with floor-to-ceiling windows and nestled within the first 25 floors of the iconic, 90-story One57 skyscraper.  Nightly rates for a standard room start at $795 to $1,295. 

TAKEAWAY:  This property will likely become a go to property for NYC visitors and tourists due to its central location, newness, and up-scale amenities. 

 

MAR - $200MM Protea deal completed

TAKEAWAY:  MAR does not expect the acquisition to have a material impact on 2014 earnings

 

RCL – will send the Explorer of the Seas to Southampton, England in the summer of 2015 instead of the Adventure of the Seas as previously announced.  Prior to starting European service, Explorer will have a month-long drydock to be revitalized and receive features such as virtual balconies. RCL said, "The deployment of Explorer of the Seas to the UK is not associated with any issues with Adventure of the Seas. Stay tuned as the reason for Explorer of the Seas' deployment will become evident shortly."

 

INDUSTRY NEWS              

Macau March GGR – totaled HKD 34.42 billion (MOP 35.453 billion, USD 4.44 billion), up 13.14% YoY and down 6.72% MoM.  For the first quarter 2014, total GGR was HKD 99.222 billion (MOP 102.199 billion), up 19.83% YoY. 

TAKEAWAY:  Total March GGR was slightly better than our estimate.  For April, we forecast GGR, up 15% YoY

 

Gaming facilities are not a priority for Kinmen Macau Business

Establishing casinos on Taiwan’s Kinmen islands is not a priority.  Deputy mayor of Kinmen, Wu Yu Chin, said residents were worried that casinos would bring security problems.  The Kinmen group is close to the mainland and was one of the candidates Taipei considered as a gambling destination.  Kinmen officials have been in Macau seeking foreign investment.

 

China Graft & Corruption Crackdown –  1) Chinese authorities have seized assets worth at least 90 billion yuan (S$18.3 billion) from family members and associates of retired domestic security czar Zhou Yongkang, who is at the center of China's biggest corruption scandal in more than six decades.  2) More than 300 of Mr Zhou's relatives, political allies, proteges and staff have also been taken into custody or questioned in the past four months.   3) A former Zhou Yongkang aide Ji Wenlin had been removed from his post as a vice governor of the southern island province of Hainan.

TAKEAWAY:  Visible signs the Central Government won't allow officials to set outside of Central Government mandates and policy.

 

New York State Gaming Commission Facility Location Board – released application details for the three regions: Capital, Catskills and Southern Tier.  All applications are due by June 30th and must include a $1 million.  Additionally, the licensing fees will be: 

  • Capital Region: $50 million
  • Eastern Southern Tier: Broome, Chemung, Schuylor, Tioga or Tompkins Counties: $35 million; Wayne or Seneca Counties: $50 million; if a license is awarded in Wayne or Seneca Counties, the fee for the remaining counties in the region would be $20 million.
  • Catskills/Hudson Valley: Dutchess or Orange Counties: $70 million. If no license is awarded in Dutchess or Orange Counties, the licensing fee for the remaining five counties in the region (Columbia, Delaware, Greene, Sullivan and Ulster Counties) would be $50 million. If a license is awarded in Dutchess or Orange Counties, the fee for the remaining counties would be $35 million.

LEISURE LETTER (04/01/2014) - Chart 1   NY Gamning Regions

Source: New York State Gaming Commission

 

The Resort Gaming Facility Location Board will evaluate applications on the following scale and issue a finding on each:

  • 70% Economic activity and business development factors
  • 20% Local impact and siting factors
  • 10% Workforce enhancement factors

The timeline for the casino siting process:

  • June 30, Bids due
  • July-August, Gaming Facility Location Board reviews, evaluates submissions
  • Early fall, commission commences licensing review of applicants
  • Early fall, casino siting and operators formally announced

TAKEAWAY:  We expected the media and public relations machines to hit full speed as the battle of sound bites begins.  Expect commentary from current pari-mutuels Tioga Downs, Monticello Casino & Raceway, and Saratoga Raceway. 

 

New York State & Internet Poker – Senate Gaming Chairman John Bonacic introduced Senate Bill 6913, which would amend the current racing and pari-mutuel regulations, and allow 10 online poker licenses, each for 10 years and a $10 million licensing fee.  Internet poker would be taxed at 15%.   

TAKEAWAY:  If New York passes this legislation, we expect additional states to quickly follow.  SB 6913, however, disqualifies any company charged with accepting online wagering following the UIGEA in 2006.  


MACRO

China March Official PMI was 50.3 versus 50.2 in February; however, new export orders index was 50.1 an improvement from 48.2 in February.  

TAKEAWAY:  In-line with Street expectations

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.  

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

‘Extraordinarily’ Committed

Client Talking Points

Emerging Markets

The great bull market in Emerging Markets just so happened to coincide with the US Dollar Index hitting her all-time lows (2011). Janet “Mother of All Doves” Yellen is committed to bringing that puppy back online. After a big up week last week, EM Asia rocking right now with the Philippines and Indonesia up +1.3%-1.9% overnight bringing it to +12% and +14%, respectively, year-to-date. Meanwhile, Yellen’s Fed is “extraordinarily committed” to devaluing the Dollar and keeping the 10-year below 2.81%. Believe her.

EUROPE

Euros. They like Burning Bucks. So do European consumers. The EUR/USD is holding all lines of Hedgeye support and equity markets like Italy and Portugal continue to candy crush the Dow at +15%-16% year-to-date. 

GOLD

Gold is holding Hedgeye TREND signal line of $1,276 support and is up small this morning. The biggest headwind for Gold is that the crowd bought the living daylights out of futures/options contracts at the mid-March top (the net long position peaked at over +125,000 contracts and is finally burning off some as the price reaction does). On a related note, the SPX risk range is 1854-1878 – bubbling back up to the all-time highs (on no volume).

Asset Allocation

CASH 25% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 15% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

 

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

TREASURIES: 2.75% 10yr yield doing a whole heck of a lot of nothing this morning #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

"One can choose to go back toward safety or forward toward growth." - Abraham Maslow

STAT OF THE DAY

On this day ten years ago… April 1, 2004, Google launched Gmail and almost immediately changed the way people use email. Gmail accomplished the tricky feat of staying ahead of the competition technologically while growing to become the world's largest email service, boasting more than 500 million users. (CNN)


This Story Doesn't End Well

This note was originally published at 8am on March 18, 2014 for Hedgeye subscribers.

“Appreciate stories that do not come out well, for they are very much like a good deal of life.”

-James A. Garfield

 

According to Candice Millard in Destiny of The Republic (pg 19) , that’s what the 20th President of the United States, James A. Garfield, told his kids one night after reading them Shakespeare’s Othello.

 

Admittedly, I read my kids too many fairy tales. Maybe that’s my escape from the latest chapter of reality that is the US Federal Reserve un-officially Burning The Buck via its Policy To Inflate.

 

This morning you’ll see the initial outcrop of Dollar Devaluation – consumer price #InflationAccelerating again in the most recent made-up government CPI report. Tomorrow, you’ll see Janet Yellen officially abandon the Fed’s dual mandate and roll with “qualitative rate guidance” (i.e. price fixing interest rates, like Japan did).

 

This Story Doesn't End Well - usd1

 

Back to the Global Macro Grind

 

No, this story doesn’t end well for the US economy and at least 80% of its people. Yes, that is a forecast. And it’s aligned with at least the last 400-2500 years of economic #history.

 

But don’t worry, the Fed’s main leading indicator (the US stock market) can still go up on this. Venezuela’s was up +460% (in its burning currency) last year, and has since fallen to -5.6% in 2014 YTD. Germany’s stock market went parabolic in the 1920s too.

 

Dollar Down yesterday perpetuated another no-volume (-20% vs. @Hedgeye TREND) rip in US stocks. While @FederalReserve’s esteemed Ph.D. economists will lie to you and suggest that price fixing the long-end of the curve isn’t “causal” to currency devaluation, it is.

 

Moreover, what’s left of free-market pricing believes it is – check out these 30-day US Dollar Correlations:

 

1. SP500 -0.86 (inversely correlated with USD)

2. Commodities (CRB Index) -0.84

3. Gold -0.93

 

Yep, that’s that. The entire world is front-running Janet Yellen talking down interest rates in the face of #InflationAccelerating.

 

Since no one who calls the shots at either the White House or the Fed has ever traded macro market risk in their life, don’t expect them to get the most important aspect of risk managing markets – expectations.

 

If you want to look at the market’s most obvious expectations on US monetary and fiscal policy, look at futures and options positions in the CFTC (US Commodities Futures Trading Commission) data:

 

1. Gold = +123,007 net long contracts (vs. its 1yr avg of +60,763 contracts)

2. Crude Oil = +432,840 net long contracts (vs. its 1yr avg of +349,652 contracts)

3. US Dollar = -197 net short contracts (vs. its 1yr avg of +17,809 contracts)

 

In other words, front-running an un-elected cartel of Keynesian economists who make-up new policy rules as they go (the Fed) has turned into a big business on Wall Street. If you don’t believe that, tell yourself fairy tales too.

 

Like it did in Q1 of both 2008 and 2011, the market is expecting both Congress and the Fed to Devalue the Dollar in the face of slowing economic data. If you go back to the 2011 playbook, you can see that Gold, Bonds, and Utilities (XLU) were beating the Dow steadily.

 

To review what the market is front-running:

 

1. FISCAL policy – moar government deficit spending

2. MONETARY policy – talking down the long-end of the curve (rates)

 

On both of those currency vectors (yes, decisions your elected or un-elected bureaucrats make are causal), unlike last year (when both were Dollar Bullish with sequestration + tapering), Mr. Macro Market is taking the US Dollar to its YTD lows.

 

In other Global Macro news, Germany appears to be finally slowing. While it’s been a good run for the German economy off its European Crisis lows, here’s the real-time market update:

 

1. Germany’s stock market (the DAX) broke @Hedgeye TREND support of 9273 last week

2. Germany’s bond market has ramped in the last month with 10yr Bund Yield -10bps m/m to 1.56%

3. Germany’s ZEW (confidence reading) just dropped in March to 46.6 vs 55.7 in February

 

I know. If China, Japan, USA, and now Germany see the slopes of their economic growth curves roll over (all at the same time) what could possibly go wrong? Oh, and Russia (stock market -23% YTD) is still crashing. This story only ends well in some sadistic dream.

 

Our immediate-term Global Macro Risk Ranges are now (we have 12 ranges in our Daily Trading Range product):

 

SPX 1846-1866

DAX 8909-9273

VIX 14.72-17.56
USD 79.21-79.79

Gold 1355-1387

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

This Story Doesn't End Well - Chart of the Day

 

This Story Doesn't End Well - Virtual Portfolio



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