Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.
Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.
Tickers: IKGH, PENN, IHG, L, LQ, FCH
China Conducts Immigration Sweep in Macau – through our local contacts in Macau, we understand Mainland Chinese immigration officials recently conducted an immigration sweep through Macau bars, restaurants and casinos and rounded up several thousand Chinese nationals who had overstayed their visas. Chinese officials then returned the nationals back to mainland China.
Takeaway: Combined with yesterday's news of the new Transit Visa scheme, the sweep indicates that Macau/China are serious about the cleaning up Macau before the China President's visit in a few weeks. VIPs are likely to stay away this month which could dampen GGR even more than the 20-25% YoY decline we're forecasting.
GENS.SP – Genting Singapore today repurchased 10 million shares (43.7% of today's trading volume) for S$11.284 million, following Monday and Tuesday's similar repurchase activity of 10 million shares each day. Cumulative shares repurchased year-to-date = 97,665,000. Following today's share repurchase, the total shares outstanding = 12,150,371,480
IKGH – acquiring small junket operators in Macau is one of its main opportunities to grow its business.
Takeaway: While this could be a good growth strategy for IKGH given the likely low valuations, it would be a risky one. The smaller junkets are in difficult financial positions right now. #riskreward
PENN – Hollywood Casino in Lawrenceburg is laying off “a limited number” of employees this week in response to a weak gaming market in Cincinnati. The company has not confirmed how many employees are being let go this week but its total employment after this week's cuts is 450 less than its 1,400-person head count after a big round of layoffs in 2012.
Takeaway: Not surprising given steep revenue declines and suffocating competition e.g. OH, WV, MD
L & IHG – Loews Hotels & Resorts has a new CEO, and it's Kirk Kinsell, who is currently president of the Americas for InterContinental Hotels Group. He is replacing Paul Whetsell, who was held the top job at Loews Hotels since 2012, with the charge to expand the brand's footprint, which he did mostly through acquisitions and conversions.
Takeaway: We knew Kinsell in some of his roles at IHG. Looks like a good hire.
LQ – announced Mit Shah was appointed as Chairman of the Board. Mit Shah has served on the boards of directors of La Quinta and its predecessor entities since 2013 and is currently Chief Executive Officer and Senior Managing Principal of Noble Investment Group, which he founded in 1993 and which specializes in making opportunistic investments in the lodging and hospitality real estate sector.
Silversea– Silversea Cruises designated 31 cruises as part of its 2015 Silver Wave program, which provides a suite upgrade and up to $1,000 in onboard credits as a booking incentive. The offer, which expires Dec. 31, applies to both Silversea’s traditional luxury cruises and its expedition ships. It is capacity controlled and subject to availability, Silversea said.
Takeaway: Rare luxury promotion.
FCH – Tom Corcoran Jr. Chairman of FelCor Lodging Trust sold 75,000 shares in two non-option related sales of 72,100 at an average price of $10.2535/share and 2,900 at an average price of $10.2089/share on December 1 and 2, respectively. Mr. Corcoran now directly owns 417,215 shares as well as 32,847 shares indirectly.
Takeaway: Not a lot of insider buying in hotel stocks these days
Chinese Corruption Worse in 2014 than 2013 – Despite this year's well-publicized campaign to combat graft and crack down on corrupt public officials, China was labeled more corrupt this year than it was in 2013. China posted one of the worst rises in corruption of any country in this year's "Corruption Perceptions Index" by lobbying group Transparency International. The country dropped to 100th out of 175 countries, from 80th in 2013.
Takeaway: This report will not likely sit well with the CPC officials in Beijing given the CPC's efforts to improve transparency and accountability by party officials.
Macau Economic Recession – The gaming slump will deprive the industry of MOP60 billion (US$7.51 billion) in revenue and the government of MOP20 billion in direct gaming taxes in the 12 months ending next June and the shortfalls mean the economy will contract for four quarters in a row, thus causing a recession.
Takeaway: We noted yesterday Macau GDP contracted by 2.1% in Q3 2014. Given Q4 2014's sickening GGR contraction, we'd bet Q4 GDP will also be negative. Two consecutive quarters of negative GDP is a recession.
Pachinko Arrives in Hong Kong – following the successful HKSE listing by Dynam Japan Holding (6889.HK) at least four additional pachinko-hall operators are considering similar HKSE listings.
Atlantic City Casino Tax Relief – Atlantic City's eight surviving casinos would get a break on taxes and the city would get help making up for lost revenue under a rescue plan unveiled by two New Jersey state senators. The plan, introduced in the Legislature late Monday and announced on Tuesday by State Senate President Steve Sweeney and Sen. James Whelan, would let the casinos collectively pay $150 million in lieu of taxes for two years. It would redirect an investment alternative tax, currently used for redevelopment projects, to help pay off $25 million to $30 million of Atlantic City's debt a year.
Takeaway: This would be an important lifeline for the AC casinos and would help stem their losses. $BYD and $CZR
Group Hotel Bookings Uptick in November – According to TravelClick North American Hospitality Review, new group hotel reservations increased 10.5% during November 2014. Additionally, for the first quarter of 2015, group hotel bookings experienced an increase in ADR of 2.6% and increase in occupancy of 4.3%.
Takeaway: Strong Group lodging segment fundamentals provide a positive look through for RHP as well as HLT.
China November PMI data
Official services PMI 53.9 vs 53.8 in October
HSBC services PMI 53.0 vs 52.9 in October
Employment 49.5, fifth consecutive month below 50
New orders rose at quickest pace in 2 1/2 years
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis.
Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.
Takeaway: Below we highlight the ongoing weakness in domestic consumption data and debate a potential inflection in Chinese economic growth.
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
QUANT SIGNALS & RESEARCH CONTEXT
Quick Check-In w/ the U.S. Consumer: While it’s been nothing shy of fascinating to watch the legacy financial media [positively] spin poor Black Friday and disappointing Cyber Monday results, the data was actually brutal – both from a rate of change perspective and relative to the Consensus Macro “falling gas prices” narrative. While I can spend the next 20 minutes ranting about how embarrassing such mischaracterizations are to our profession, you are probably already well versed in our disappointment with the #OldWall and its bull market marketing appendages. Sparing you from that diatribe, we thought we’d take a second to highlight recent consumer spending data, which remains unequivocally negative from a 2nd derivative perspective on both a sequential and trending basis. Friday’s Jobs Report is the next major data point; will the trend of deceleration inflect or will it continue as U.S. corporations increasingly opt for inflating shareholder returns at the expense of American job growth? As we detailed in our November 26th edition of the Macro Playbook, we still think it pays to wait on rotating into early-cycle consumer exposure.
“I Bout ‘Em Because China Told Me To”: To borrow a key excerpt from our 11/21 note titled, “CHINA: WHY DID THE PBOC CUT? WILL IT EVEN MATTER?”: “From a forward-looking perspective, this [rate cut] a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now… In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.” Again, Chinese economic growth continues to slow precipitously and the rate cut only confirms our bearish bias on the Chinese economy (i.e. NOT its stock market). If, however, we see continued stabilization in China’s property market and a continuation of more aggressive policy support, it is likely that China joins the U.S. in #Quad1 in 1Q15, which would, in fact, support recent optimism among U.S. equity investors. The next few weeks of guidance out of Beijing are crucial in that regard. All told, if you bought ‘em on the Chinese rate cut news, we hope you allocated capital to the right sectors. In a hypothetical game of 8-on-8, #Quad4 is clearly winning the U.S. equity market; the top-8 VAMDMI readings are all sectors and style factors that tend to outperform in #Quad4, while the bottom-8 are those that tend to deflate in #Quad4.
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TRACKING OUR ACTIVE MACRO THEMES
#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
Early Look: Golden Headfakes (12/2)
#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.
#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.
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The Nikkei was +0.3% overnight, taking its centrally planned ramp to +22% since Oct 17th, and now (into the FX event in Europe tomorrow) the Yen is signaling immediate-term TRADE oversold at $119.56 (and, not surprisingly, the Nikkei is signaling immediate-term TRADE overbought). If there was a spot to play for a short-term reversal, we think this is it…
Especially when you have serial money torchers running the show, you need a catalyst to do something like cover Yen – so why not a bounce off the $1.23 EUR/USD line? How much ECB President Mario Draghi can do tomorrow vs. what a lot of shorter-term U.S. based investors think he’ll do remains the question…
The UST 10YR bounced to yet another lower-high of 2.29% into A) ECB meeting and B) U.S. jobs report Friday – if A and/or B disappoint, we can see 2.16% on the UST 10YR, fast – and that’s what we would be setting up for. Long the Long Bond in the U.S. remains our best Macro long idea in 2014 as Italian 10s break below 2.0% this morning.
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The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Check out @KeithMcCullough today on Fox Business with @MariaBartiromo for the full hour at 10am. Always a great show.
If we did all the things we are capable of doing we would literally astound ourselves.
- Thomas Edison
Russian stock market crash update, down -0.3% to -33.4% year-to-date.
Takeaway: Purchase apps rose modestly during the holiday week. Bigger picture, more evidence emerges that housing is shifting from bad to less bad.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended November 28th.
The -7.3% decline in the Composite Index belied more sanguine growth on the purchase side where demand rose +2.5% sequentially.
In short, “stabilization” remains the apt characterization for current HPI and purchase demand trends. Housing, like most things Macro, is more about better/worse than good/bad and while the data remains soft on an absolute basis, from a rate of change perspective, less bad is good.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Editor's note: The excerpt below is from CEO Keith McCullough's introduction in today's Morning Newsletter.
If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.
But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?
I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.
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