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#EmergingOutflows Round II: This Time Actually Is Different | CALL INVITATION

Takeaway: We will be hosting a conference call on Tuesday, December 16th at 1:00pm EST to update our outlook for Emerging Markets in 2015.

Emerging market equities, bonds and currencies are once again selling off HARD. Please join us for a conference call Tuesday, December 16th, at 1:00pm EST to discuss why this time actually is different.

 

#EmergingOutflows Round II: This Time Actually Is Different | CALL INVITATION - HE M emergingoutflows

 

Since our September 23rd [bearish] note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”, the MSCI EM Index has declined -7.2%, the JPM EM Currency Index has declined -6% and OAS on the Bloomberg USD EM Composite Index has widened +78bps to 385bps.

 

While it’s clear to us consensus among the investment community finally understands the negative impact of a stronger U.S. dollar upon emerging market asset prices, we don’t think the associated risks are even in the area code of being priced in at the current juncture. In fact, we anticipate considerable downside from current prices, citing a plethora of risks that aren’t even being considered by the preponderance of investors.  

 

Topics covered will include:

 

  • Where is consensus on emerging markets?: a review of recent literature to help appropriately frame the debate
  • Which countries, regions and asset classes are most risky?: using our proprietary EM Crisis Risk Model to quantify and summarize the dispersion of fundamental risks among EM economies (NOTE: we have long ideas too!)
  • What are the risks no one is talking about?: quantifying the systemic risk across the EM space and how said risk might spillover into broader systemic risk for global financial markets
  • What’s the bull case?: broadening our analytical lens to show why the #StrongDollar tightening cycle has only just begun – despite the fact that we DO NOT think the Fed will hike interest rates

 

All Hedgeye Macro subscribers will receive the dial-in information and presentation before the call on Tuesday, December 16th.

 

Darius Dale

Associate: Macro Team


JOBLESS CLAIMS - 2014 VS 2007

Takeaway: Q: How can you tell when the cycle is turning? A: Rate of Change.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

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INITIAL CLAIMS: 2007 vs. 2014:

At this point in the cycle, we're less interested in the degree to which jobless claims are improving; rather, we're increasingly focused on any signs of claims beginning to negatively inflect. Here are a few different ways to think about how to evaluate the data for those signs.

 

First, one can simply look at the rolling trend (4-wk rolling average) in SA claims. Over the intermediate term (YTD) it's been steadily trending lower, while in the short-term (Last 3-4 months) it's been moving sideways. Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below. In blue we show the rolling SA claims with a second order polynomial trendline to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.   

 

Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market.

 

We'll be keeping a close eye on the data for any signs of the beginning of the turn in the credit cycle.

 

JOBLESS CLAIMS - 2014 VS 2007 - 07 vs 14 normal

 

The Data

Initial jobless claims fell 3k to 294k from 297k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.25k WoW to 299.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

JOBLESS CLAIMS - 2014 VS 2007 - 2 normal

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 



Jobless Claims - 2014 vs 2007

Takeaway: Q: How can you tell when the cycle is turning? A: Rate of Change.

At this point in the cycle, we're less interested in the degree to which jobless claims are improving; rather, we're increasingly focused on any signs of claims beginning to negatively inflect. Here are a few different ways to think about how to evaluate the data for those signs.

 

First, one can simply look at the rolling trend (4-wk rolling average) in SA claims. Over the intermediate term (YTD) it's been steadily trending lower, while in the short-term (Last 3-4 months) it's been moving sideways. Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below. In blue we show the rolling SA claims with a second order polynomial trendline to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.   

 

Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market.

 

We'll be keeping a close eye on the data for any signs of the beginning of the turn in the credit cycle.

 

Jobless Claims - 2014 vs 2007 - 07 vs 14

 

The Data

Initial jobless claims fell 3k to 294k from 297k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.25k WoW to 299.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

Jobless Claims - 2014 vs 2007 - 2

 

Jobless Claims - 2014 vs 2007 - 3

 

Jobless Claims - 2014 vs 2007 - 4

 

Jobless Claims - 2014 vs 2007 - 5

 

Jobless Claims - 2014 vs 2007 - 6

 

Jobless Claims - 2014 vs 2007 - 7

 

Jobless Claims - 2014 vs 2007 - 8

 

Jobless Claims - 2014 vs 2007 - 9 

 

Jobless Claims - 2014 vs 2007 - 10

 

Jobless Claims - 2014 vs 2007 - 11

 

Jobless Claims - 2014 vs 2007 - 19

 

<chart14>

 

Yield Spreads

The 2-10 spread fell -12 basis points WoW to 160 bps. 4Q14TD, the 2-10 spread is averaging 181 bps, which is lower by -18 bps relative to 3Q14.

 

Jobless Claims - 2014 vs 2007 - 15

 

Jobless Claims - 2014 vs 2007 - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Early Look

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OIL: BOTTOMS ARE PROCESSES

OIL: BOTTOMS ARE PROCESSES - levels chart

 

Updated levels (BEARISH TREND/TAIL)

 

TRADE DURATION RISK RANGE: $60.48-$65.38

TREND RESISTANCE: $83.83

TAIL RESISTANCE: $92.97

 

After the Thanksgiving frenzy, the market failed to recover any ground last week. WTI finished down 80bps, and the selling has continued this week:

  • BRENT -6.4% WTD
  • WTI -6.9% WTD

Now the question becomes when will the wave of downwardly revised cap-ex plans in the E&P space for 2015 hitting the tape from Halcon, Continental, Conoco Phillips, Miller, Oasis Petroleum, etc. provide support for prices? If you’re a small-cap, over-leveraged E&P company, your cap-ex plans were predicated on the existence of the cheap funding in capital markets that has existed over the last several years in the energy space.

The shale surge has been unarguably fueled by cheap access to capital markets, and this source of leverage is now much more costly. High yield spreads in the energy space are touching record levels above 9%. We outlined the spread risk in the high yield space in our Q4 macro themes deck. Feel free to reach out for access or have a look at Darius Dale’s Macro Playbook from this morning.

With debt capital markets virtually un-accessible as of today, the sell-off in small and mid-cap E&Ps also crushes capital raising alternatives on the equity side (shareholder dilution constant). The small/mid-cap wildcatter's E&P index is down ~-60% from its June 2014 highs.

 

OIL: BOTTOMS ARE PROCESSES - chart2 hy index

 

OIL: BOTTOMS ARE PROCESSES - WCATI Index

 

The cap-ex slowdown will eventually flow through to actual production numbers, but it won’t happen until your book is closed for 2014.  

Over the short-term, our process for contextualizing daily market activity continues to indicate there is a risk of further downside into year-end. WTI and BRENT finished sharply lower yesterday with the kind of momentum we would want to observe as an indicator for more downside:

  • Price: -4.0%
  • Volume: +35/+27/+19/+28% above 5-day/1/3/6-month averages
  • Open Interest (short-term indicator): higher vs 5-day and 1-month averages
  • Implied Volatility in spot contracts: +7/15/32/69% above those same durtations  

While we have been in front of the downside risk in oil in Q4, the expectation for lower prices (from here) is certainly becoming a psychological and consensus expectation, which we will fade when the time comes. The expectation for future volatility is blown-out. The commitments of traders report from the CFTC shows that the sum of aggregate positions in futures and options markets is between 1-2 standard deviations shorter than it has been over the last year. As a contra-indicator should work, the longest market positioning of 2014 was at the June highs in WTI.

We have a simple back-test model that tracks 60-day price performance in oil markets once contract positioning becomes +/- 1 standard deviation extended over different trailing durations. The result is that market positioning that chases price is a very obvious indicator to fade.

The psychological consensus bias towards lower oil prices from here can be observed in fundamental-form with the release of DOE oil and gas inventory data yesterday which surprised to the upside sending energy prices lower:

  • DOE U.S. crude oil inventories 1454K vs. -3689K prior (-2625K estimated)
  • DOE Cushing, OK Crude Inventories 1020K vs. -694K estimated
  • DOE Gasoline Inventory 8197K vs. 2141K prior (2450K estimated)

With so much attention on the sell-off in energy, the event of this weekly DOE stockpile release has induced volatile market activity followed by the narrative of global "OVERSUPPLY." In reality, aggregate crude oil inventories in the United States have been constant over the last year. DOE inventory data also has no real credibility as a directional indicator that we know of. On a y/y delta basis, crude inventories have actually declined.

 

OIL: BOTTOMS ARE PROCESSES - DOE crude inventories

 

With that being said, timing is important and with Draghi sitting on sovereign QE/Euro devaluation the dollar strength could continue over the intermediate-term. With our economy CURRENTLY still positioned in #Quad4, the returns by asset class in the table below would not suggest that it’s a good time to "buy value" in the energy space.  

 

OIL: BOTTOMS ARE PROCESSES - returns by quad

 

While demand is clearly slowing globally and the top-down signals we use suggest further downside risk, should prices remain here, we expect a decline in production in the first quarter of 2015 should prices stay put. Efficiency in extracting North American energy sources is undoubtedly improving, but cheap leverage on top of leverage is not.  

 

Ben Ryan

Analyst

 

 


Keith's Macro Notebook 12/11: Kospi | Commodities | UST10YR

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


LEISURE LETTER (12/11/2014)

Tickers:  SGMS, HLT, MAR, RHP, RCL

EVENTS

  • Dec 14: City of Dreams Manila Opening
  • Dec 17:  Upstate NY Casino Decision
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

HLT – is in talks to buy four properties from Blackstone Group LP and other owners to defer tax payments from its $1.95 billion sale of New York’s Waldorf Astoria hotel. The assets include San Francisco’s Parc 55 Wyndham, the city’s fourth-biggest hotel, at more than 1,000 rooms, two Waldorf Astoria resorts in Key West and one in Orlando. Aside from Blackstone, the sellers of the Parc 55 include Rockpoint Group, a Boston-based real estate private-equity firm. New York-based Blackstone owns the two Key West resorts, and the sellers of the Orlando property are Blackstone, Chicago-based Gem Realty Capital and Farallon Capital Management, a San Francisco-based hedge fund firm.

Article HERE

Takeaway:  While the reinvestment is entirely tax motivated, we like the profile of selling New York and buying San Francisco and Florida as well as the EBITDA growth outlook of the new assets.

COMPANY NEWS

LVS – Robert G. Goldstein will be replacing Michael A. Leven as LVS's President and COO, as Leven is retiring at the end of 2014. Goldstein joined LVS in 1995 and has served in several executive positions for the company, including president and chief operating officer of The Venetian and Palazzo and, most recently, as president of global gaming operations. 

Takeaway: Given tough times, it is easier to hire an internal candidate. 

 

200.HK Melco International Development – Development of Barcelona World could be in jeopardy following the withdrawal of the anchor sponsor Enrique Bañuelos.  Late yesterday, Mr. Bañuelos and his firm, Veremonte, announced neither will not exercise the right to purchase the land of CaixaBank in Salou (Tarragona), where they planned to build BCNWorld. Following this announcement, the Catalonia Government hopes to find another investor who takes the initiative forward. In addition to Melco Int'l Development, other development partners included:  Hard Rock, Ceasars, Value Retail, Melia and Port Aventura.

Article HERE

Takeaway: Following the land purchase delay back in July, we'd been hearing from our local contacts that the project would be delayed or potentially canceled. 

 

678.HK – Genting Hong Kong is acquiring Exa Ltd, an investment company with interests in luxury yachts and submersibles, for US$37.9 million. Genting Hong Kong, a joint venture partner in the Resorts World Manila casino resort in the Philippines, said the acquisition will “enhance the company’s competitive edge”. The deal will be done via Genting-subsidiary Star Cruises Terminal (China) Ltd, which operates casino cruises in the Asia Pacific region. Exa was previously owned by a private unit trust controlled by Lim Kok Thay and his family.  

Article HERE

Takeaway: Genting continuing to diversify

 

Konami – Shoshone Rose Casino selects Konami's SYNKORS Gaming enterprise management system.

Takeaway: IGT lost a systems client to Konami

 

GTK.IM– announced that the statutory cash exit rights in connection with the cross-border merger of GTECH with and into Georgia Worldwide PLC have been validly exercised with respect to 19,796,852 shares, for an aggregate amount of €379.6M at the liquidation amount of €19.174 per share. Such shares represent 11.3% of GTECH’s current fully paid-up share capital and 11.4% of GTECH’s shares outstanding as of 15-Jul-14, when the agreement for the acquisition of International Game Technology (IGT) was executed. 

 

Following the determination of the number of shares for which cash exit rights have been exercised, the commitment for GTECH’s 364-day senior bridge term loan credit facility for the financing of the acquisition of IGT (the “Bridge Facility”), will be further reduced to ~$6 billion.  

Takeaway:  As long it is under 20%, the merger will go as planned. The reduction in the bridge loan is a positive.

 

SGMS – Richard M. Haddrill, former CEO of Bally Technologies, Inc. ("Bally"), was elected as Executive Vice Chairman of the Board on December 4, 2014, and Judge Gabrielle K. McDonald was elected as a Director of the Board on October 30, 2014. 

 

RHP & MAR – Despite being embroiled in legal controversy, the Gaylord Rockies Hotel and Conference Center could bypass a legal quagmire dragging on and break ground by the end of next year with significant financing from Houston-based RIDA Development Corp. On Monday, Aurora City Council, acting as the Aurora Urban Renewal Authority, unanimously and with no comment approved a resolution that supports Houston-based RIDA Development Corp.  financing the construction of a project, which has been estimated to cost upwards of $800 million

Article HERE

Takeaway: Once development commences on the Gaylord Rockies, RHP would recover about $8.5 million in predevelopment costs from RIDA. Additionally, RHP has first right of refusal on acquiring the Gaylord Rockies from RIDA upon property stabilization.  MAR would be the manager of the hotel.

 

RCL –  Royal Caribbean International president Michael Bayley said the 1st new Celebrity Edge class ship will operate from the UK.  The ship is due for delivery in autumn 2018.  

Article HERE

Takeaway:  No surprise that the new ships would be positioned in the strongest European market in 2014.

INDUSTRY NEWS

Neptune's Cheung Chai Tai Linked to Paul Phua's Illegal World Cup Betting at Caesars – Recall Paul Phua alleged 14K Triad Leader was arrested for spearheading an alleged illegal World Cup betting scheme via IBCBet from a villa at Caesars Palace.  Now one of Cheung Chai Tai's companies was linked to the World Cup betting as Cheung's companies were used to help the alleged group collect and settle with gamblers.

Article HERE

 

Macau Hotels  – Macau ranks third most expensive overall in the 2014 Accommodation Price Index compiled by GoEuro.com, a Berlin-based travel search website. Macau is among the most expensive overall after New York and St. Moritz in Switzerland. While Macau ranks third in the overall survey, in the category of 5-star Hotel Price Index Macau doesn’t even get into the top 20, at US$353 per night.

Article HERE

Takeaway: While Macau is relatively expensive, many of the rooms are comped for VIP players.

 

Airfairs & Capacity Growth in 2015 – A new White Paper by ARC and Expedia, “Preparing for Takeoff: Air Travel Trends for 2015,” predicts modest capacity gains next year, but large increases by low-cost carrier while noting airfares should be flat to slightly lower to most U.S. and European cities in 2015. The report notes Frontier expects to increase capacity by 14% in the first half of 2015 and that Spirit’s capacity will be up 26% year over year in the first half of 2015 with new efforts to to penetrate Washington DC, Houston, Dallas, Detroit and Chicago. 

Article HERE

Takeaway: Airline capacity growth is positive for hotels – more seats = support for MICE, business transient and leisure demand.  Lower airfares are a positive for Association groups who tend to be more price sensitive. 

MACRO

China Banking System To Increase Lending – the PBoC increased target bank lending for 2014 to CNY10T from CNY9.5T last year and the PBoC is also allowing banks to lend more than 75% of deposits

 

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.

 


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