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Keith's Macro Notebook 2/26: Germany | UST10YR | USD

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


LEISURE LETTER (02/26/2015)

TICKERS: H, RCL, CCL


 

 EVENTS

  • Feb 26: RHP 4Q CC 10:00am  pw: 73087325
  • Mar 5: The 3rd Session of the 12th National People’s Congress (NPC), China’s top legislature will convene in Beijing

COMPANY NEWS

MCRI - announced details of its long-awaited project intended to transform its Black Hawk casino into a full-fledged resort. The total Monarch expansion is expected to cost $285 million to $295 million, which will double casino space, triple garage parking to 1,500 spaces and add a 500-room hotel and three more restaurants. So far, $21 million has been spent.

CEO John Farahi said MCRI is adding the hotel and resort amenities to an underserved market that has only 928 casino hotel rooms to serve the Denver metro area.

The property is currently in the middle of a three-phase $110 million to $112 million upgrade that is expected to be completed by the third quarter and will increase the number of slot machines by 13 percent to 710.

The casino and hotel expansion will be complete in late 2017, with the casino and new restaurants opening while final hotel floors are being completed.

The current upgrade and coming expansion will total $395 million to $407 million, of which $281 million to $293 million is still to be spent.

Takeaway:  PNK/ASCA Black Hawk will face greater competition

 

GTK/SGMS -  Massachusetts' Lottery is accepting bids to replace 8,500 of GTECH’s 18-year-old lottery terminals, the oldest in the nation. Lottery officials are hoping to spend less than $65.5 million to replace the machines. They expect bids from GTK, Intralot and Scientific Games.

ARTICLE HERE

 

H -  On February 24, 2015, the Company entered into a Purchase and Sale Agreement (each, a "Purchase and Sale Agreement") with each of (i) RKMP H Company LP, a Delaware limited partnership owned indirectly by a trust for the benefit of certain of the lineal descendants of Daniel Pritzker, and (ii) TGFJ H Company LP, a Delaware limited partnership owned indirectly by a trust for the benefit of Daniel Pritzker, pursuant to which the Company agreed to purchase an aggregate of 750,000 shares of Class B Common Stock at a price of $59.5389 per share, which represents the Volume Weighted Average Price for the Class A Common Stock for the three (3) trading-day period ending February 23, 2015 as reported by Bloomberg, for an aggregate purchase price of $44,654,175. 

Takeaway: H continues to surprise on the upside with the buyback

 

CCL - Princess is trimming capacity in Europe and Alaska for 2016

ARTICLE HERE

 

RCL - Harmony of the Seas features water slides, larger cabins, and new specialty restaurants.

ARTICLE HERE

Takeaway: Not as exciting as Quantum

INDUSTRY NEWS

Beijing talks on visitor cap not yet scheduled: Macau govt

Maria Helena de Senna Fernandes, director of the Macau Government Tourist Office said, “We should focus on thinking about [how to deal with] so many visitors entering the city during holidays…the most important thing is how to improve our tourism environment and minimize the impact on local residents’ lives. Visitors who come to Macau want to have a comfortable trip…they don’t want to see so many people, they want to have a relaxing trip.”

 

Ms Senna Fernandes said that before any cap was introduced, the government would conduct a public consultation and also discuss the issue with representatives from the city’s tourism industry.

 

Macau’s Secretary for Social Affairs and Culture, Alexis Tam Chon Weng  old reporters that the Macau government planned to discuss soon the issue with China’s central government. He said no cap had yet been decided and that limits could vary for different seasons of the year. Mr Tam added he hoped the cap could be introduced this year. 

ARTICLE HERE

Takeaway: It's not just premium mass and VIP under government pressure...


CNY visitation - Mainland visitation from 2/19/2015-2/25/2015 increased 5.6% over the respective CNY period last year.  Overall visitation increased 3.3% over the respective CNY period last year.

 

LEISURE LETTER (02/26/2015) - cnyaa

 

Takeaway: In-line with expectations

 

Jan visitation - overall visitation in January fell 1.5% YoY - the 2nd consecutive monthly decline.  Mainland China visitors declined 1.2% YoY, its 1st drop since March 2013.

 

LEISURE LETTER (02/26/2015) - mva

 

Mainland Chinese HK visitation- The number of mainland Chinese visitors to Hong Kong during the Lunar New Year holidays fell for the first time in about 20 years as they have felt increasingly unwelcome amid political unrest in the city. The drop, though, was a mild 0.3% over the first three days of the holiday.

 

"If we have to restrict or decrease the numbers of mainland Chinese coming to Hong Kong then we must continue to discuss this with (China)...this is a difficult task," he said.  

ARTICLE HERE

Takeaway:  20 years is a long time. HK-China tensions remain.

 

Chinese: 5m traveled abroad in Spring Festival

ARTICLE HERE

 

LEISURE LETTER (02/26/2015) - cn

 

Takeaway: South Korea has been a hot spot

 

LV McCarran airport traffic - gained 0.3% YoY in January.

Takeaway: Continuing winning streak of 17 months, barely

MACRO

Macau CPI - Jan 2015 increased by 4.75% YoY but edged down by 0.03% MoM 

 

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 anegative pivot here looks increasingly likely in 2015.

 


KSS - Initial Reaction to the Print

Takeaway: Guidance was slightly weak. But not as weak as it should be. Numbers need to come down -- a lot.

1) Results Slightly Better…The 3.7% comp was already reported, which resulted in a $2.2bn pop in KSS EV (stock from $60 to $70). Nothing new on that front today. Gross margins looked slightly less bad – down 14bps.  But the comp allowed KSS to leverage SG&A growth of 2.4%, which is rare for this company. Combined with lower D&A, lower tax rate, and fewer shares (a positive), KSS leveraged the 3.7% comp into 7.4% EBIT growth, and 17.9% EPS growth – KSS’ fastest EPS growth rate in almost 5-years.

2) But Guidance Slightly Worse – Just 4 months ago KSS issued long-term guidance of 3% comps through 2017. 2015’s guidance of 1.5%-2.5% isn’t 3%. Coming off a solid 4Q, with such supposed company-specific momentum in its business on top of macro/weather tailwinds, we wonder why so conservative. It seems pretty soon to temper expectations.

3) While the market is telling us that we’re flat-out wrong in saying this, we think that this is the last year KSS earns over $4.00. It took a lot of financial engineering to get there: D&A $886 vs. initial guidance of $950 and most recent guide of $900, and a sub 36% tax rate got them enough to earn $4.24 for the year. Without these benefits KSS would have been seen negative EPS growth on a 7% share count reduction. We think that the incremental customer acquisition with its new rewards plan is extremely costly, not to mention the underlying drivers for the change in the plan are grossly misunderstood by the Street (including the risks to credit income -- 24% of EBIT).  To buy KSS here you need to believe in $6 earnings power. That’s simply not going to happen. Real EPS power is closer to $3-$3.50. That’s a stock of around $40 – 42% below where it is today. The risk/Reward looks solid to us on the short side here. 


investing ideas

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Get The USD Right…

Client Talking Points

GERMANY

The German 10YR Bund crashes to a record low of 0.29% which is just jamming people into chasing German stocks, which are now up a big league +14.5% year-to-date (vs. boring SPX return of +2.6% year-to-date) – Italian stock market +15.8% year-to-date! #centralplanning.

UST 10YR

The UST 10YR is down -17 basis points for the week-to-date ahead of slowing U.S. CPI and GDP reports (today and tomorrow) – you’d buy the Long Bond on those fundamental factors alone, never mind a +162 basis points spread over 10YR Bunds.

USD

The USD continues to weaken (post Janet Yellen’s dovishness, and ahead of the economic data – remember the CPI deflating will spin the Fed’s rhetoric) – we think it’s just another counter-TREND move, but short-term bullish for Oil, Gold, etc.

Asset Allocation

CASH 42% US EQUITIES 9%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
EDV

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

HOLX

Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road

TWEET OF THE DAY

Tune Into Hedgeye's Morning Macro Call 2/26 LIVE at 8:30AM ET https://app.hedgeye.com/insights/42585-hedgeye-s-morning-macro-call-2-26-live-at-8-30am-et

@KeithMcCullough

QUOTE OF THE DAY

Live in the sunshine, swim the sea, drink the wild air.

-Ralph Waldo Emerson

STAT OF THE DAY

The Japanese Nikkei rips +1.1% to a new 15 year high of +7.7% year-to-date (vs the SPX +2.6% year-to-date).


CHART OF THE DAY: Paul Krugman Completely Disagrees With This

CHART OF THE DAY: Paul Krugman Completely Disagrees With This - chareal

 

This is an excerpt from today's Morning Newsletter. If you're tired of following consensus lemmings and are interested in becoming a subscriber click here.

 

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…

 


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


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