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Steering The Boat

“My only plan is to keep coming to work…”

-Henry Singleton

 

I had a lot of encouraging feedback about the book I cited yesterday, The Outsiders, where William Thorndike analyzes the best practices and processes of some of the best CEOs in US history.

 

Henry Singleton, of Teledyne fame, tops the list and had some fantastic day-to-day leadership advice as a follow-on to the aforementioned quote:

 

“... I like to steer the boat each day rather than plan ahead way into the future… I know a lot of people have a lot of strong and definite plans that they’ve worked out… but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” (pg 53)

 

If only our un-elected-central-planners of everything from markets to economic gravity embraced that risk management #process and humility…

 

Back to the Global Macro Grind

 

#Flexibility and “data dependence” be damned. Today our almighty overlordess of market expectations (not to be confused with economic realities), Janet Yellen, will predict the parting of the heavens and the smoothing of the seas.

Steering The Boat - Fed cartoon 02.23.2015

Since Mr. Macro Market tends to front-run inside information fairly efficiently, it will be interesting to see if yesterday’s move (lower) in US interest rates will get a love-tap from the Janet’s testimony.

 

But be careful not to mistake the “rates” trade with the US Dollar #Deflation one. I’ve been on the road telling investors from CA to MA in the last week that while these are not mutually exclusive macro moves, they are moving on different catalysts.

 

Here’s what that looked like yesterday:

 

A)     #StrongDollar (+0.5% on the day) > Oil Down -2.8% > CRB Index -1.2% > Energy Stocks (XOP) -0.9%

B)      #RatesDown (10yr -5bps intraday) > Long Bond (TLT) +0.9% > REITS (VNQ) +0.7% > Healthcare (XLV) +0.7%

 

Healthcare stocks (XLV) have positive quarter-over-quarter performance (returns) in both USD up/down and Rates up/down scenarios (we call those macro environments Quad1 and Quad4), so that’s the easiest S&P Sector to be long (you win both ways).

 

What’s not easy is being long Energy stocks when the USD ramps and/or REITS when Long-term Rates ramp (i.e. neither work). So this puts a lot of pressure on immediate-term monthly performance chasers as neither A) nor B) are cooperating week-to-week!

 

Another obvious observation here is how A) and B) are linked on the intermediate-term TREND duration:

 

  1. USD up + Rates Down > Global #Deflation… and
  2. #Deflation > Junk Debt Risk > Emerging Market Risk > Corporate Earnings Risk

 

But, have no fear, the San Francisco Fed’s John Williams is here! Being a lifer at the Federal Reserve is not a compliment. John has been there since 1994 and, alongside Janet, missed some large predictions about risk (2000, 2008, to name a few) along the way.

 

Not to be confused with one of the best American composer’s in US history (The John Williams of Jaws, ET, Star Wars, etc. film score fame), this Williams is more like Brian – a storyteller, but with less NBC Nightly pizzazz.

 

In assessing the US economy yesterday, Williams said two things in particular that caught my attention:

 

  1. Employment – he called the jobs market “remarkable” (as in booming, strong, etc.)
  2. Oil – he called the recent #Deflation “transitory” (as in oil is going higher, not lower)

 

Yes, in case you didn’t know – now you know. Some of the worst forecasters in our profession now have forecasts for everything.

 

Notwithstanding simple things like long-term mean reversions, price history (Oil averaged sub $20/barrel during both the 1 and 1 real US economic demand booms), etc., this storytelling from Fed heads is becoming a massive risk to the economy.

 

Why? Well, let’s start with where Henry Singleton would… and ask ourselves what is the risk that A) Williams is wrong (Oil remains #deflated, and jobs are at a late-cycle peak) and B) Yellen makes a policy mistake based on these Williams’ forecasts?

 

I don’t have answers to how all of this plays out. But I do have advice: keep both hands on the wheel and life preservers in the boat.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-2.16%

SPX 2066-2123
USD 93.79-95.36
Oil (WTI) 48.42-51.26
Gold 1185-1215
Copper 2.52-2.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Steering The Boat - 02.24.15 chart


February 24, 2015

February 24, 2015 - Slide1

 

BULLISH TRENDS

February 24, 2015 - Slide2

February 24, 2015 - Slide3

February 24, 2015 - Slide4

February 24, 2015 - Slide5

 

 

BEARISH TRENDS

February 24, 2015 - Slide6

February 24, 2015 - Slide7

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February 24, 2015 - Slide9

February 24, 2015 - Slide10

February 24, 2015 - Slide11
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February 24, 2015 - Slide13

 


Zero To Something

This note was originally published at 8am on February 10, 2015 for Hedgeye subscribers.

“Every moment in business only happens once.”

-Peter Thiel

 

I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:

 

“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”

 

If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.

 

Zero To Something - zero to one

 

Back to the Global Macro Grind

 

Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.

 

This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.

 

But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?

 

Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?

 

  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that

 

I’m not sure what got rates to go up more:

 

A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation

 

As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?

 

It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.

 

For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!

 

Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:

 

  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN

 

Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.

 

Then what?

 

  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was

 

Then what?

 

Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!

 

Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?

 

That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.99%

SPX 1987-2075
VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Zero To Something - Labor cycle table CoD


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GENTING SINGAPORE 4Q 2014 CONFERENCE CALL NOTES

Takeaway: Disappointing all around. Even on a hold-adjusted basis, Q4 missed expectations. Lower market share and cautious VIP commentary.

CONF CALL

  • Jeju:  will be 1st major integrated resort in Korea
  • Market share #s:
    • GGR: 42%
    • RC volume: 54%
    • mass drop: 43%
    • Slot/ETGs: 43%
  • 4Q VIP hold rate: 2.2%; hold-adjusted win is 2.85%
  • Genting: has become more prudent, not accepting as much VIP players as before; VIP has become more risky and players getting more cash-strapped. 
  • VIP 2015 outlook: challenging. 
  • Will look closely at their provision for bad debt. It will not be pretty for one or two quarters
    • Bad debt increased 42% YoY in Q4.
  • Q4 Mass revs as a % of GGR: 56%
    • 75% revenue contribution in slots/ETGs? You could say that.
    • Slots have gone up slightly while ETGs have been flat. 
    • Mass table revenues slightly down
    • Very focused on promos
  • Japan: lot of activity to try to push the casino bill through. Still hopeful the bill gets through some time in May.
  • Scaling back VIP business.  Will focus on mass and premium mass business. Expect no growth in VIP for rest of year.
  • Jeju:  has received construction approvals for IR. Waiting for bill to be presented to Jeju govt. Once that is done, govt will gazette the regulations. Expect casino license in 6-12 months.
  • Jurjong:  soft opening in April 2015. Fully open by June 2015. Expect 80-85% occupancy in initial stages. Expect 1,500/1,600 people to visit the attractions. Should boost casino attendance. 
  • Korea:  no information on junket operations.  
  • Share repurchases: stopped in January because of quiet period (blackout period).  No comment on further share repurchases.
  • Large gains in Q4 balance sheet:  exiting most of the portfolio investments in preparations for Jeju/Japan.  Needed cash.
  • More optimistic on Japan than other people.  Diet Parliament ends in June. 
  • Why not raise dividend of 1 cent?  Still need to consider where they stand on cash flow.  May raise in future.
  • Q4 VIP RC Volume decreased 12% YoY
  • 2014 VIP RC volume unchanged YoY
  • Provision for bad debt:  jump in longer-term debt. In Q4, number of customers either they negotiate for longer-term payment or that they have no money.  Going forward, provisions may be higher.
  • Jurong hotel vs RWS pricing: Jurong pricing will be much lower than Sentosa. Room rates of S$200 (RWS had S$422 in Q4). Room sizes are smaller.
  • Jeju # of tables:  unsure until casino bill is enacted
  • RW Jeju:  casino license will be issued by Governor of Jeju
    • Genting HK Korea license is different but gaming tax will be the same
  • VIP volume:  softness throughout but impact from Mainland China particularly strong 
  • Japan:  hasn't been less enthusiastic on gaming legislation
  • 2015 Capex:  nothing major. Opening Puss/Boots at USS and Battlestar in April
  • 20k visitors (12k USS, 8k in MLP).   USS $80 spend/visitor; MLP $30 spend/visitor
  • Jurong construction costs not major: $50-60m
  • Jeju capex for rest of year: do not need to put in any more money
  • Mass initiatives: coming up with few more programs along with Jurong hotel

McCullough: Plan for Uncertainty

The remarks below were delivered by Hedgeye CEO Keith McCullough as part of an update to our macro team's #GlobalDeflation theme at Asset Allocation 2015: Liquidity, a conference hosted by The Boston Security Analysts Society. He was asked how he expects the Fed to dance its way through the next 6-12 months.

 

McCullough: Plan for Uncertainty - 34


In the past, six or seven years ago, I would mistakenly start with what the Fed should do, versus what the Fed could do. Of course, these are two very different things.

 

I’m not Janet Yellen, I never want to be Janet Yellen. And she doesn’t want to be me. What she could do here is raise rates, with the deflationary force and global growth slowing at the same time. That would be a huge policy mistake.

 

What the Fed is effectively trying to do—and this is the core of central planning—is promise you, my mom, my dad, and the whole world, certainty. That’s not possible. So whatever their plan is, I’m not buying it. I don’t think you can plan certainty with respect to things like economic gravity.

 

So, what would I plan for? I’d plan for uncertainty.

McCullough: Plan for Uncertainty - dollar cartoon 07.02.2014

And I think the most uncertain thing you could have right now is not only how the Fed reacts to their inability to forecast accurately, but also, how they act in the moment.

 

Again, I think if Janet Yellen is sitting there, raising rates into what I think is going to be a sub-1% CPI and deflation rolling out like it did between September and January, that could be a very nasty thing that she will have to address in Jackson Hole later this year.

 

Don’t forget, we have only had one Jackson Hole in the last four, where we didn’t have to get a big central plan from the Fed.

 

It’s going to be an interesting dance to watch. 

 

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Cartoon of the Day: Batty Fed

Cartoon of the Day: Batty Fed - Fed cartoon 02.23.2015

Investors will be all ears when Janet Yellen testifies this week, hoping for a hint about when the Fed will finally raise rates from their crisis-era lows.


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