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The Laws of Arithmetic

“They haven’t repealed the laws of arithmetic, yet, anyway.”

-John Malone

 

Malone wasn’t talking about economic-central-planning authorities, but he could have been. The American grandmaster of debt leverage, EBITDA, and equity value creation would probably be the best overlord of our markets, ever. It’s too bad he’s a libertarian.

 

Yep, the largest land owner in America (2.2M acres) not only founded Liberty Media – but he’s a libertarian. That makes some of the Yale alumni in the economic-gravity-smoothing department cringe. And I like it.

 

Born, raised, and educated in Connecticut, Malone is a Yale man. He’s rightly featured as one of the best CEOs in US history in the book I’ve been citing as of late, The Outsiders, by William Thorndike. If you want to be a hard core capitalist, you have to study John Malone.

 

The Laws of Arithmetic - 48

 

Back to the Global Macro Grind

 

Hard core capitalists who believe in things like arithmetic and second derivative math, meet your makers – these central planning “folks” are going to go to hell’s end until they get reported “inflation” – and guess what? For now they aren’t going to get it!

 

In today’s Chart of The Day we show what the Federal Reserve currently uses as its definition of “inflation” – something academic wonks call “Core PCE”, or the US Personal Consumption Expenditure Core Price Index.

 

Other than this chart going straight down for the foreseeable future (until at least Q3), here’s what this time-series means to me:

 

  1. Instead of using real-world inflation, Bernanke deferred to a made-up calculation that fit his policy narrative
  2. In 2011, the US Dollar hit its lowest-level since 1978 - that’s what perpetuated the highs in this chart
  3. But since, at $1900 Gold, “there was no inflation” (per the Fed); it said it was just about right at 2%

 

I can guarantee you that everyone Paul Krugman influences in the Yale and Princeton econ departments completely disagrees with the context I just provided you. So that means I’m probably onto something…

 

Taking this to a higher-level of an investor’s real-time education, why does this chart matter now?

 

  1. Both the 1 and 3 year “compares” (comps) for reported CPI are very difficult
  2. When the comps are hard, the central tendency of the current data is to the downside
  3. Janet is going to be waiting for Godot if she’s looking for this sucker to hit her +2% “target” again

 

As importantly, the European definition of “inflation” continues to be, well, #deflationary. This morning Belgium reported at -0.4% year-over-year Consumer Price Index (CPI). That’s both in line with other countries in the Eurozone and nowhere near the +2% “target.”

 

If you buy into our Global #Deflation Theme, you have been buying the living daylights out of Long-term Bonds on all pullbacks for the last year, and you’ve been getting paid. Here’s where Big Macro 10yr yields are falling to this morning:

 

  1. Germany Bund 10yr = 0.29% (record low)
  2. Japanese Government Bond (10yr) = 0.33%
  3. Dutch 10yr = 0.37%
  4. French 10yr = 0.60%
  5. US Treasury 10yr = 1.94%

 

Never mind that the Swiss have a 10yr yield of 0.01% for a minute and tell me how, on God’s good earth, that the US 10yr Yield isn’t going to mean revert lower… if I’m right on both Global growth and “inflation” slowing, that is…

 

As many of you who have followed me for a long-time know, I haven’t been a perma bull on the Long Bond. In fact, I was a raging Long Bond bear in 2013 when our modeling was signaling US #GrowthAccelerating.

 

But, newsflash: US growth didn’t accelerate in Q4 of 2014 – alongside Global growth, on both a sequential and year-over-year basis, it slowed. Unless they repeal the laws of arithmetic and change the “growth” definition too, that will be headline news on Friday morning.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.81-2.05%
SPX 2087-2121
DAX 11008-11302

VIX 13.39-16.71
USD 93.73-94.81
EUR/USD 1.12-1.14
YEN 118.16-120.46

Oil (WTI) 48.09-53.66

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Laws of Arithmetic - chareal


MACAU PRICING PRESSURE

Takeaway: Average table minimums continue to fall

Chart of the Day: An analysis of the monthly average minimum bet levels in Macau

 

  • Not surprisingly, average minimum bets continue to fall at the premium mass levels
  • What is surprising is that grind mass minimum bet levels are also falling at a similar rate. Grind mass shouldn’t be impacted as much by the corruption crackdown as much as VIP or premium mass.
  • Operators began lowering minimum bet levels in August – remember that July 2014 was the first month of mass revenue growth deceleration. See our 06/13/14 note “MACAU: HANDICAPPING MASS DECELERATION” which was predicated in part to the lapping of the big hike in table minimums beginning in July 2013.
  • While investor focus has rightly been on the poor performance of the VIP and premium mass segments, grind mass is also under significant pressure as the chart below indicates

MACAU PRICING PRESSURE - ab


February 26, 2015

February 26, 2015 - Slide1

 

BULLISH TRENDS

February 26, 2015 - Slide2

February 26, 2015 - Slide3

February 26, 2015 - Slide4

February 26, 2015 - Slide5

February 26, 2015 - Slide6

 

BEARISH TRENDS

February 26, 2015 - Slide7

February 26, 2015 - Slide8

February 26, 2015 - Slide9

February 26, 2015 - Slide10

February 26, 2015 - Slide11
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February 26, 2015 - Slide13

 


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Chutzpah

This note was originally published at 8am on February 12, 2015 for Hedgeye subscribers.

"It ain't what they call you, it's what you answer to."

-W.C. Fields

 

Chutzpah in English connotes courage or confidence. In Yiddish, the language from which the word originates, chutzpah means extreme arrogance.  Which describes you?

 

As stock market operators, capitalists and business builders, we are often called arrogant, when in fact we are actually just confident. We are confident in our work ethic, teammates and vision. 

 

In case you missed it, a couple of days ago the Huffington Post ran an interesting article about Hedgeye. The author, Ben Walsh, came to our office for a day and had some very thoughtful questions about our company and business.  

 

Admittedly, he also struggled with the question of confidence or arrogance.  Nonetheless, he did have some interesting insights about Hedgeye and we thought we’d share the article.

 

Click image to read. 

Chutzpah  - 88

 

The fact is, none of us will ever build anything in life if we aren't confident.

 

Speaking of chutzpah, it's clear that embattled NBC news anchor Brian Williams has some. Although now that he's sitting in the penalty box for six months, feeling shame, perhaps that will change. In the cartoon below, we actually propose an alternative job for Mr. Williams. 

 

Chutzpah  - Williams cartoon 02.11.2015

 

Back to the Global Macro Grind ...

 

Chutzpah or confidence in your analytical abilities is a truly important characteristic of being a good stock market operator. For as you all know, and as Ben Graham famously said:

 

"In the short term stocks are a weighing machine, in the long run they are a voting machine."

 

Speaking of analytical abilities, on the Hedgeye team, our Internet analyst Hesham Shabaan has been on a run of almost epic proportions with his short calls on Pandora, Yelp and Twitter.  (If you aren't currently subscribing to his research, it would be worth emailing sales@hedgeye.com to do so.)

 

His newest Best Idea short is the Chinese juggernaut Ali-Bubble. Sorry, Alibaba. The core of his thesis is as follows:

 

1.    GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV.  There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data.  That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.

 

2.    MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We were already seeing this in BABA’s financials, but the street just took notice of this last print, because...

 

3.    TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions).  That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment).  Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.

 

Yes, BABA on some level is the Chinese Internet, but if its growth is decelerating and potentially going to disappoint, does it matter?

 

The other component to the thesis on BABA is the macro economic backdrop in China.  If BABA is indeed the majority of e-commerce that occurs in China, it will be on some level hostage to economic activity in China.

 

In the Chart of the Day below, we show Chinese GDP growth going back 25 years. The clear takeaway from this chart is obviously that last year Chinese growth was at its lowest level in 24 years.  In part, the government is actively trying to slow growth, so this makes sense.  But even in a command economy like China, the ability of central bankers to manage a slow down in a perfectly orderly fashion is limited. 

 

On Sunday we received Chinese trade data, which further emphasized a Chinese economy that is slowing.   While it is always dangerous to take data in isolation, Chinese exports in January fell by -3.3% from year ago levels.  Meanwhile, imports dropped a staggering -19.9%, which was the lowest level since the financial crisis of 2009.

 

More so than the U.S., China is an economy that is largely driven by exports.  In fact, in 2014 Chinese exports totaled $2.34 trillion, which are about 50% larger than the world’s second largest exporter, the U.S.  Combined, Japan and the EU are well more than 25% of Chinese exports.

 

The implication here is pretty clear, which is that the combination of a government that is trying to at least manage growth, if not slow it, with an economy that is dependent on exports to regions in which growth is definitely decelerating, means that the Chinese economy may be set up to disappoint on the downside.

 

Frankly, if the Chinese economy is going to disappoint, we aren’t sure there is a better way to play that then a company that is levered to Chinese wealth creation and trades at almost 14x 2015 sales.  Valuation, of course, isn’t everything, but it is a good measure of expectations.  And as they say about expectations, they are the root of all heartache.

 

Our immediate-term Global Macro Risk Ranges are:

 

UST 10yr Yield 1.62-2.09%

SPX 2026-2090

VIX 15.41-20.80

USD 94.04-95.64
Oil (WTI) 46.43-53.66
Gold 1210-1249 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Chutzpah  - 02.12.15 chart


Hedgeye's Morning Macro Call with CEO Keith McCullough

Please enjoy this replay of Hedgeye's Morning Macro Call with CEO Keith McCullough and Senior Macro Analyst Darius Dale. 

 


Keith McCullough: One Minute Quantitative Analysis On Housing

In this excerpt from today's edition of RTA Live, Hedgeye CEO Keith McCullough talks about how we combine research with quantitative analysis and applies this process to our current view on housing and specifically the ITB (U.S. Home Construction ETF). 

 

RTA Live is a run-down of Hedgeye's Real-Time Alerts positions followed by live Q&A with Keith McCuollough, available EXCLUSIVELY to Real-Time Alerts subscribers. Sign up HERE for access.


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