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The Euro, Yen and UST 10YR

Client Talking Points

EURO

Euro...the collapse of a currency, testing 1.09 -1.08 literally straight down and in the face of that the USD is going straight up here. This only reinforces our Global #Deflation view (which is largely instructed from our USD view which is instructed by our European and Japanese policy view). To be clear we don’t think this will create any economic value.

YEN

As the YEN tumbles look at the Nikkei go, up almost 9% year-to-date up 1.2% overnight. The Yen has burned through the 1.20 line, intermediate term targets are 1.05 and 1.35 for the Euro and the YEN respectively and those targets look firmly intact at this point.

UST 10YR

We have been saying this all along, on a good jobs report number the UST 10YR hits the top end of the risk range which is 2.18 on a bad number it will see 20-25 basis points of downside. The jobs report was good, which is really not congruent with every other piece of jobs data or economic data that we look at. Either way a good jobs number is bullish for bond yields in the very immediate term.

Asset Allocation

CASH 37% US EQUITIES 12%
INTL EQUITIES 11% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.

PENN

Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.

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.

Three for the Road

TWEET OF THE DAY

VIDEO: Maria, Leo, and I on #Bubbles - Alibaba Arguably “Biggest IPO Bubble In World History" | $BABA https://app.hedgeye.com/insights/42773-mccullough-alibaba-arguably-biggest-ipo-bubble-in-world-history

@KeithMcCullough

QUOTE OF THE DAY

The most unprofitable item ever manufactured is an excuse.

-John Mason

                                                             

STAT OF THE DAY

A member of the Bush family has now been on the cover of Time magazine 51 times.


LEISURE LETTER (03/06/2015)

Tickers:  NCLH, WYNN, LVS, MGM, RCL, CCL

headline news

NCLH- Star NCLC and TPG Viking Funds, two of NCLH's major shareholders, plan to sell a combined 12.5m ordinary NCLH shares in a secondary offering.

 

Star NCLC, a Bermuda company, is a wholly owned subsidiary of Genting HK. Genting HK owns NCLH’s ordinary shares indirectly through Star NCLC. Genting HK is currently NCLH's largest shareholder, with a 25% stake. Following the sale, its holdings would go to 22.1%. TPG Viking Funds' stake, meanwhile, would go to 4.3% from 7%. Apollo, with a 24% share, will become NCLH's principal shareholder.

 

Norwegian will not sell any ordinary shares in the offering and will not receive any of the proceeds from the offering. The total number of Norwegian ordinary shares outstanding will not change as a result of the offering.

 

LEISURE LETTER (03/06/2015) - AB



ARTICLE HERE

Takeaway:  While it wasn't entirely unexpected, this has been a risk for NCLH. The question is whether Genting/TPG will continue selling shares later this year.

COMPANY NEWS  

WYNN - Forefront of Macau Gaming (FMG) Cloee Chao said Wynn Macau sent a text message to all dealers and supervisors on Wednesday morning, reminding them that ‘there are a small number of day-off quotas available for applications for the morning, afternoon and night shifts on between March 9 and March 15.’

 

Ms. Chao told Business Daily that it was the first time Wynn Macau had encouraged workers to take unpaid leave since the financial tsunami of 2008.

ARTICLE HERE

Takeaway: Can't fire but gotta reduce costs

 

LVS - A Las Vegas judge ordered First Cagayan Leisure & Resort to pay LVS $2 million for using the Sands trademark and another $150,000 fine for violating copyright laws. The complaint says the websites falsely affiliate themselves with the Las Vegas Sands Corporation to lure prospective gamblers to overseas online casinos.

ARTICLE HERE

 

MGM - will break ground on Springfield casino on March 24

 

WYNN - Elaine Wynn has launched a bid to retain a seat on the board, who is trying to oust her. 

Takeaway: The official statement for an upcoming board fight. We think the Wynn board has a point - there is a conflict of interest

 

Mohegan Sun - plans to add a $120 million, 400 room hotel tower. Mohegan says this project would help it recapture 500,000 potential room nights it turned away last year.

 

RCL - Celebrity's 'Spring into Savings' promotion is available on more than 300 sailings with savings of up to $1,000 per booking. Plus, vacationers who choose a standard veranda stateroom in Europe, or Concierge Class, AquaClass and Suite Class accommodations in Europe and other destinations, will receive the all-inclusive offer—free classic beverage package, free gratuities and up to $300 to spend on board.

 

For a total combined value of up to $3,000, travelers must book during March.

'Spring into Savings' is available for a limited time on new individual and select group reservations made through March 31 for sailings from May 2015 to April 2016.

Takeaway: Note this promotion is geared towards European itineraries.

 

RCL - For 2016, Harmony of the Seas will sail the Caribbean from Port Everglades, Oasis of the Seas will shift to Port Canaveral and Bermuda will get calls from its first Quantum-class ship, Anthem of the Seas.

 

Oasis of the Seas and Allure of the Seas will sail a western Caribbean and two new eastern Caribbean itineraries in summer 2016, all seven nights from Port Everglades. Allure of the Seas will then be joined by the new Oasis-class ship, Harmony of the Seas, to offer a seven-night eastern and western Caribbean itinerary for winter 2016-17.

 

Oasis of the Seas, meanwhile, will reposition to its new winter home of Port Canaveral in central Florida, where a new terminal is being built to accommodate it. Oasis will alternative weekly eastern and western Caribbean cruises. And Rhapsody of the Seas will take over three- and four-night Bahamas cruises from Enchantment of the Seas, which shifts to Miami.

Takeaway: Caribbean will be more crowded and competitive in 2016

 

CCL - Seabourn Encore maiden voyage sells out in 2 days

Takeaway: Strong luxury demand is still there

INDUSTRY NEWS

Macau liaison chief - Central People’s Government Liaison Office Director Li Gang said in Beijing on Thursday that the gaming industry must not be sacrificed in return for economic diversification. Li Gang pointed out that the government will conduct a review of the gaming industry from the middle of this year.

 

Li Gang also said that the tightening of visa restrictions and the ongoing anti-graft campaign in the mainland were not necessarily the main reasons for the current drop in gaming revenue. However, he admitted that the central government’s anti-corruption drive did indeed deter some government officials from visiting Macau.
 
Li Gang said that economic diversification required a big effort from the government since it was “too easy” to earn money from the gaming industry. He also said that the local economy’s diversification would take between 20 and 30 years to complete, adding that the local government should strengthen its efforts to achieve this long-term goal.

ARTICLE HERE

Takeaway: Probably positive comments on the margin: gaming will not be sacrificed and the diversification timeline is long

 

Macau Gaming Employment Stats - At the end of the fourth quarter of 2014, the Gaming Sector had 58,524 persons engaged, up by 3.4% YoY; there were 25,752 dealers, up by 2.0% YoY.   

 

In December 2014, average earnings (excluding bonuses and allowances) of full-time employees stood at MOP20,680, up by 8.2% YoY. Average earnings of dealers amounted to MOP18,000, up by 7.7% YoY.

 

Job vacancies totaled 841 at the end of 4Q 2014, down substantially by 1,145 YoY. There were 180 vacancies for dealers, down significantly by 884.

ARTICLE HERE

Takeaway: Employee costs will be higher again in 2015, despite the downturn.

 

Japan-  Lawmakers in Japan are optimistic that a bill to create the framework to legalize casinos in Japan will be passed this year. However, they also agree that a major obstacle may still be the cautious stance of the Komeito Party, a key coalition member.

 

The administration of Prime Minister Shinzo Abe has already announced its support of the concept as a means to stimulate growth in the Japanese economy. The drafting of the bill is said to be at an advanced stage.

 

It is thought that there will be no visible progress until after the completion of the unified local elections on April 26, but thereafter the Abe administration would introduce the bill and seek to pass it in the current ordinary Diet session, scheduled to end on June 24.

Takeaway:  Passage of Japan gaming is considered a long shot this year

 

Atlantic City - Golden Nugget has increased its budget for promotional gaming credits since four casinos closed last year. The average customers per day have risen from 3,000 to 5,000 said GM Tom Pohlman.


Horse racing - Handle on horse races fell 3.7% to $763.4 million in February, while the total number of races fell 3%, Equibase reported. For the first two months, handle is down 1.1%.

Takeaway:  Horse racing hasn't done as well as the commercial casinos so far this year.

South Coffeyville, OK - The Cherokee have opened their $10 million casino in South Coffeyville. The casino has 300 slots.

 

IRS - The proposal, released this week by the IRS, suggests the reporting rules for winnings from gambling on slots, keno and bingo be reduced from $1,200 to $600. The agency set a 90-day period for the casino industry to respond to the suggested regulation changes.

ARTICLE HERE

 

Florida -  Florida Lottery announced that Scratch-Off ticket sales for the week ending March 1, 2015, exceeded $91.7 million, the highest, single-week Scratch-Off sales of any lottery in the country.  

Takeaway: Florida's Instant ticket sales was hot in 2014 and is off to a great start in 2015.

 

Hotel openings - Lodging Econometrics reported that new hotel supply growth bottomed in 2011 with the opening of only 347 Hotels/37,404 Rooms. Since then, new supply growth has been slow and incremental. New Hotel Openings were a paltry 412 in 2012, 488 in 2013 and 557 hotels with 63,352 rooms in 2014.

 

LE forecasts that just 726 new hotels will open in 2015 and 797 hotels in 2016. The sharpness of the decline and the prolonged nature of the economic malaise delayed the rekindling of hotel development and continues to cause sluggish supply growth.

 

LEISURE LETTER (03/06/2015) - a

Takeaway: Hotel supply growth will be kept under control in the near future

MACRO

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.


CHART OF THE DAY: Our Highest Conviction Investment Signal? Stay Short the EUR/USD

CHART OF THE DAY: Our Highest Conviction Investment Signal? Stay Short the EUR/USD - EUROZONE

 

Editor's note: This is an excerpt from today's Morning Newsletter. Click link to learn more about the product and how to subscribe..

  • Our highest conviction investment signal is to stay short the EUR/USD
  • Our Eurozone GIP (Growth/Inflation/Policy) predictive model shows a steady move from QUAD 1 to QUAD 4 to QUAD 3 over the next three quarters. This negative economic view should force the ECB to keep its foot on the QE funnel for longer than its original target [SEPT 2016] as growth surprises on the downside (see our Chart of the Day below), all of which should pressure the EUR/USD lower.

 


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Eurozone: Buy Buy Buy?

“One Look Is Worth A Thousand Words”

-Fred R. Barnard

 

While he later changed “one look” to “one picture”, the ad man Fred Barnard is attributed with the modern day adage, which he first used in the advertising trade journal Printers’ Ink on December 8, 1921 to promote the use of images in advertisements that appear on the sides of streetcars.  

 

A year ago Hedgeye hired Bob Rich as our in-house cartoonist and illustrator. Formerly a staff illustrator for The Republican newspaper in Springfield, Massachusetts and an editorial cartoonist for The New Haven Register, Bob has won numerous awards for his work.  To say the very least, he has flourished in his role at Hedgeye.  His creative and skillful ability to depict in a cartoon what we analysts spend hours trying to put into words is enviable. And through a recent desk reshuffle in the office, I also have the pleasure of sitting next to Bob, which selfishly affords me the opportunity to encourage him to do European related cartoons, my area of coverage on the macro team.

 

Back to the Global Macro Grind

 

With news of record inflows by investors into European securities; the EUR/USD at a 11 year low; and confirmation that ECB President Mario Draghi will once again do “whatever it takes” to expand the ECB’s balance sheet, to shore up risk (including Greece) and to maintain the existing Eurozone fabric, do you go all in on Europe?  

 

Bob’s cartoons below tell it all – for us the mismatch between the Eurozone’s economic fundamentals and its financial markets still remains stark. And the rub between betting all in on Eurozone securities based on Draghi’s QE program versus the threat of blindly following him over the proverbial QE cliff, is THE risk management question. 

Eurozone: Buy Buy Buy? - 1. BRICH

 

With no crystal ball in sight, here are Hedgeye’s key Eurozone take-aways as we size up going all in on Europe:

  • Our highest conviction investment signal is to stay short the EUR/USD
  • Our Eurozone GIP (Growth/Inflation/Policy) predictive model shows a steady move from QUAD 1 to QUAD 4 to QUAD 3 over the next three quarters. This negative economic view should force the ECB to keep its foot on the QE funnel for longer than its original target [SEPT 2016] as growth surprises on the downside (see our Chart of the Day below), all of which should pressure the EUR/USD lower.
  • We expect that Fiscal Consolidation and Structural Reforms across the region over the intermediate to longer term are unlikely to be carried out (or at the very least not within the ECB’s timeline) to promote economic productivity and job creation, further muting inflation and growth targets.
  • And we expect a confluence of factors to support a strong USD, including 1). policy expectations surround when the Fed will hike rates, not IF, and 2). supportive commodity and business cycle dynamics (for more see my colleague Ben Ryan’s recent note)
  • Our quantitative models show that the EUR/USD is broken  across all durations (TRADE, TREND, and TAIL). We call this a bearish formation and do not see any long term TAIL support until $0.80.
  • On Equities… Juiced By the Draghi QE Drugs:  As risk managers we cannot turn a blind eye to the power of QE to propel equities higher, however we don’t have to be holding the proverbial bag on the way down either. We continue to recommend strong balance sheets at the country level, like Germany (etf EWG), and will tactically trade around QE’s influence on the peripheral markets . YTD we’ve already seen some monster moves across equity markets with the German DAX and Italian FTSE MIB indices each up over +17%.
  • On Fixed IncomeLow Yields Can Go Lower: In yesterday’s ECB press conference Draghi indicated a willingness to buy even government bonds with negative yields as low as the current deposit rate (-0.2%). This flexibility from the Bank, shows once again a commitment to “support” the Eurozone project at all costs. Further, his appetite to support the periphery specifically appears enormous.  Again in his statements he suggested that so long as Greece can pass its reform review, the ECB will reinstate the waver on the conditionality that it will only buy investment grade paper.  Yamas!

 

This coming Monday the ECB will commence its sovereign bond purchase program (€60 Billion/month of its ear-marked €1.1 Trillion package). While it’s tempting to point to the Fed’s QE impact to juice stocks higher, as risk managers we do not think it’s prudent to simply draw a 1-factor like-for-like comparison. This time may in fact be different.

 

As outlined, our highest conviction investment signal is to remain short the EUR/USD. That said, we’ll certainly be navigating the macro waters to trade around what influence Mr. Draghi’s QE wand has on European securities.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.89-2.18%

SPX 2085-2117

DAX 112

USD 95.07-96.68
EUR/USD 1.09-1.12

Oil (WTI) 48.20-52.04

 

Have a great weekend!

 

Matthew Hedrick
Associate

 

Eurozone: Buy Buy Buy? - EUROZONE


March 6, 2015

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BULLISH TRENDS

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March 6, 2015 - Slide5

March 6, 2015 - Slide6

BEARISH TRENDS

March 6, 2015 - Slide7

March 6, 2015 - Slide9

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March 6, 2015 - Slide10

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March 6, 2015 - Slide13


Rules & Tools

This note was originally published at 8am on February 20, 2015 for Hedgeye subscribers.

"You can’t expect the Fed to spell out what it’s going to do...because it doesn’t know."

-Stanley Fischer, Fed vice chair

 

The economy is like a pendulum.   It oscillates above and below productivity growth but never really falls exactly on center. 

 

“Potential Output” and “NAIRU” (non-accelerating inflation rate of unemployment) are nice theoretical constructs and are helpful in conceptualizing a tractable macroeconomic framework but they can’t actually be measured with precision and can only be approximated after the fact. 

 

Fascinatingly, despite the abject amorphousness and immeasurability of those concepts, the perceived real-time state of the macroeconomy relative to them remains central to the Fed’s policy calculus.    

Rules & Tools - dollar cartoon 07.02.2014

Policy makers often play the role of antagonist in our daily strategy narratives but, in truth, we don’t particularly envy their challenge. 

 

Consider the following middle school riddle:

Q: How far can you walk into a forest?

A: Halfway – after that you are walking out of the forest.

 

Macro policy making can be similarly enigmatic.  Policy makers generally know the correct direction to take (easing/tightening) but don’t necessarily know how big the forest is (the output gap) and the mapping tools (models) used for orienting oneself inside the forest to understand where you are and how far you’ve actually gone are underdeveloped…oh, and the forest isn’t static – it’s dynamic (subject to global/exogenous shocks), reflexive (policy action itself perturbs the system) and changes shape and size as you try to walk through it.

 

A perennial problem faced by policy makers is determining whether short-run deviations from potential (remember: the macro pendulum is always above/below potential & we don’t actually know the value of “potential”) represent a transient dislocation amenable to policy action and transition dynamics or if potential output/growth itself has changed.  Discerning which scenario correctly reflects the underlying reality is critical as the appropriate policy prescriptions can be antithetic. 

 

The post-crisis period has only added an exclamatory emphasis to Fischer’s characterization of the Fed’s limited capacity to convictedly forecast macrofundamental changes over any extended period.  Indeed, in the wake of the Great Recession, what were once decreed macroeconomic “Laws” were downgraded to “Guidelines” and then further decremented to something akin to “conceptual guideposts”.

 

To review some of the notables: 

 

Curve-balls ….

 

Phillips Curve: The Phillips Curve – which can also be viewed as the aggregate supply curve in the vaunted AD/AS macro model - relates the change in the inflation rate to the level of short-run economic activity.   Here, a negative output gap drives a negative change in the rate of inflation and a positive output gap drives a positive increase in the rate of inflation.  The idea is compelling, intuitively appealing, and holds up fairly well historically.  However, as Larry Summers has been apt to highlight, the relationship has failed to hold more recently: “inflation did not decelerate by much even a few years ago when unemployment was in the range of 10 percent. Nor was there much evidence of accelerating inflation in the 1990s, when the unemployment rate fell below 4 percent. “ 

 

This breakdown in the output-inflation link is important.   The conventional view is that the level of output drives inflation which, in turn, drives the policy response.  A structural break in the output-inflation connection leaves policy without its proverbial North Star.

 

Law & (Dis)order ….

 

Okun’s Law:  Okun’s Law – named for Kennedy economic advisor Arthur Okun -  links the growth rate of output to changes in the unemployment rate and says that short-run output needs to grow ~2.25% above trend to reduce unemployment by 1%. Historically, the relationship has been strong with ~70% of the annual change in unemployment explained by the change in GDP growth.  In the Chart of the Day below we show Okun’s Law on an annual basis over the 1948-2014 period.  We’ve highlighted the large dispersion/break from trend in the peri and post-crises period with unemployment spiking higher than predicted by the model in 2009/10 and subsequently falling faster than predicted over the 2011-14 period. 

 

Secular and structural changes in the economy and labor market have certainly shifted the relationship over the last 65 years and the Great Recession served to bring those changes further into focus.   But that’s also largely the point.  If the forecast error in a workhouse macro model such as Okun’s Law rises to such an extent that its practical utility is lost when it’s needed most, the conventionalist forecaster’s tackle box gets increasingly bare.    

 

Rules & Tools ….

 

Conventional expansionary policy works to increase investment (& export) demand by expanding the spread between the marginal product of capital and the real interest rate.  This works well over “normal” cycles and particularly well on the right side of an interest rate cycle (think 1983-2008) when decades of lower highs and lower lows in both real and nominal rates support recurrent layering of debt augmented demand and asset price inflation. 

 

Conventional policy breaks down in a demand vacuum perpetuated by the long-term rate cycle reaching its terminal end.  In short, no one cares if the real interest rate is below the marginal product of capital if there is no demand for the output you produce using that newly purchased “cheap” capital.   

 

Mo’ Money, Mo’…. Inflation? 

 

But #StrongDollar is sweet, right?... Lower gas prices, higher share of wallet for other discretionary purchases, cheaper imports, stronger intermediate-term domestic consumption.  Rising domestic demand, tightening capacity, and a taut labor market should support incremental wage and demand-pull inflation.  Viva la Phillips Curve!  True, but the inflationary impacts are more likely to manifest over the medium term and provided the domestic labor market remains something of an insular island of strength.    

 

Duration Mismatch ….

 

In the more immediate term, an expedited appreciation of the dollar, the associated cratering in energy/commodity prices and decline in import prices drives disinflation domestically.  Global deflationary pressures only exaggerate that impact. 

 

Keepin’ it Real ….

 

The other side of lower inflation (besides the simple fact that it’s running at <50% of the 2% target) is rising real interest rates and the goal of expansionary policy is lower – and preferably negative - real rates.  That disinflation is predominating globally and fixed investment (still) flagging with most central banks sitting on 0% six years post-crisis is not particularly comforting.  Again, there are no good analogues for the current global dynamics and conventional policy efforts have been Sisyphean. 

 

Wet Noodles & Rented Alpha ….

 

What do you do with this quasi-random redux of post-crisis creative destruction in conventional macro modeling?  

 

Mostly it’s just an incremental noodle to noodle over as you noodle over the Fed’s latest noodling over lagging macro data. 

 

More tangibly, I think it edifies Fischer’s quote above.  Effective policy action, even in “normal” times is challenged by the realities of imperfect information, incomplete understanding and structural shifts unamenable to the coarse tools of monetary policy. 

 

Those challenges have only been amplified in the post-crisis period and have only heightened the magnitude of uncertainty facing policy makers and, by extension, market participants. 

 

Uncertainty breeds volatility and volatility breeds market dislocations.  Market dislocations, however, are (still) alpha’s breeding ground.  We expect the already rampant cross-asset class volatility to persist.   

 

When I was in coaching/bodybuilding, the running punchline for steroid users with no process and marginal work ethic was that they had a “rented physique”.  Great moderations, secularly depressed volatility and leverage is like rented alpha. 

 

Our immediate-term Global Macro Risk Ranges are now: 

 

UST 10yr Yield 1.79-2.15

SPX 2078-2120

VIX 13.99-18.88

USD 93.70-95.32
YEN 118.16-120.26

Oil (WTI) 49.09-53.99

Gold 1201-1232   

 

To not being “that guy”,

 

Christian B. Drake

U.S. Macro Analyst 

 

Rules & Tools - Okuns Law


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