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Keith's Macro Notebook 3/10: USD | Deflation | Bunds

 

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


Current Global Macro Market Risk Summed Up In One Word

deflation

 

The US Dollar Index continues to go parabolic… making another fresh new high at $98.40. That puts it up over +9.0% YTD versus Euros and Yens (which remain flaming balls for devaluation.)

Current Global Macro Market Risk Summed Up In One Word - Dollar cartoon 03.09.2015

 

It’s an ugly morning for everything commodities, including Russian stocks which failed @Hedgeye TREND resistance and are down -3% today

                                                               

As far as #Deflation is concerned, it’s mathematically impossible for the Europeans, Japanese, and Chinese to create reported inflation well into the summer time. Including the commodities bounce to lower-highs in February, Chinese producer prices dropped -4.8% y/y (Norwegian PPI -9.9% y/y).

Current Global Macro Market Risk Summed Up In One Word - Deflation cartoon 01.21.2015

 

Newsflash: many producers report lower revenues and earnings during #deflation.

 

***This is a distillation of some of Hedgeye CEO Keith McCullough's notes earlier this morning. For a deeper dive into our thinking on deflation and the market opportunities and economic implications, subscribe to our Morning Newsletter.


USD Driven #Deflation

Client Talking Points

USD

The U.S. Dollar Index continues to go parabolic, making another new high at $98.40, which puts it +9.1% year-to-date vs. Euros and Yens which remain flaming balls for devaluation – ugly morning for everything commodities, including Russian stocks which failed @Hedgeye TREND resistance and are -3% today.

#DEFLATION

It’s mathematically impossible for the Europeans, Japanese, and Chinese to create reported inflation well into the summer time – including the commodities bounce to lower-highs in FEB, Chinese producer prices dropped -4.8% year-over-year (Norwegian PPI -9.9% year-over-year) – many producers report lower revenues/earnings during #deflation.

BUNDS

10YR German Yield retesting the lows at 0.31% (Swiss 10YR is negative -0.13) and that puts the spread between the German 10YR and the UST at +188 basis points (widest of the cycle). We think this mean reverts with the UST yield falling again – Janet Yellen just needs to breathe dovish on –t-bonds for that to happen. 

Asset Allocation

CASH 34% US EQUITIES 14%
INTL EQUITIES 12% 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

LIVE @ 1230pm today Healthcare Sector Head @HedgeyeHC Talks SHORT $ZMH & Answers Your Questions Click here to watch: https://app.hedgeye.com/insights/42844-hedgeye-healthcare-sector-head-tom-tobin-talks-short-zmh-and-answers-y

@Hedgeye

QUOTE OF THE DAY

Tomorrow hopes we have learned something from yesterday.

-John Wayne

STAT OF THE DAY

9% of American adults have never sent an email.


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LEISURE LETTER (03/10/2015)

Tickers: GTECH/IGT, SGMS, CCL

events

  • March 11 - SGMS 4Q CC, 4:30pm pw: SGMS
  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results

HEADLINE NEWS

GTECH/IGT

  • GTECH will delist from Milan bourse April 2
  • Planned IGT acquisition could be complete on April 7 (subject to approval of UK court), with merged company trading on NYSE
  • GTECH took a 22m euro loss related to IGT transaction in 4Q 2014
  • 4Q Conf call:
    • In the Americas, same-store revenues were essentially unchanged, as the solid 4.5% growth in Instants and Draw Games was offset by a drop in Jackpot.
      • Contraction in large jackpots: Only 1 Jackpot in the $300m range in Nov
    • Sharp increase in product sales (Oregon VLTs and machines in Latin America)
    • Will retain IL facility mgmt agreement at least through June 2021
    • Achieved lottery contract wins in Minnesota and Mexico
    • Belgium Jackpot was a bright spot
    • Greece: were awarded up to 5,550 of the initial 16,500 OPAP machine in addition to the central system that GTECH had previously won. Still no visibility on timing.
    • Operating income of the Italy segment was impacted by the mix of Machine Gaming revenues, higher remuneration paid to retailers in order to strengthen long-term partnership and the timing of a large marketing campaign for the launch of a new family of annuity tickets. On a full-year basis, however, these factors were more than neutralized, yielding a 3% increase excluding one-off items.
    • Italy sports betting was unlucky despite higher drop
    • IGt transaction: Redeemed 2016 notes in December
    • Jan/Feb 2015: 
      • Italian Lotto performing well.
      • Sports betting significiant growth but with high payouts
      • Stable AWP, declining VLT - but has kept market share
      • International same-store sales are robust

Takeaway: The completion of the integration is proceeding faster than expected.

COMPANY NEWS  

SGMS - Spirit Mountain Casino selected the Company's Bally systems solutions for its property in Mohave Valley, Arizona.  Spirit Mountain will replace a competitor's systems with the Bally SDS slot management system, which will be deployed across 250 slot machines to manage casino, slot, and hospitality data. 

Takeaway: We believe Bally replaced Aristocrat's Oasis system at Spirit.

 

CCL - "There may be some people who experiment with both [ships], but I don't see them in competition. Britannia is cruising for U.K. people, Anthem is not that...we welcome [Anthem] to the fray," said Arnold Donald, CEO of CCL.

 

P&O reports that Britannia, which was built at a cost of £473 million, saw the fastest-ever sales for a maiden voyage in the line’s history.

Takeaway: We don't see a war between Britannia and Anthem either. But both ships will compete with the P&O UK core fleet and some RC brand ships, which has pressured their pricing recently.

INDUSTRY NEWS

Li Gang - The Liaison Office director remarked that the tourist number of Macau cannot grow without any limits because it would affect the quality of life of Macau residents. Asked about the tourism capacity in Macau, Mr. Li said there is no confirmed data related to the capacity. However, he reckons that how much the city can afford depends on whether it can increase its resources for tourists.

 

Regarding the Macau Government’s suggestion to improve the current Individual Visit Scheme (IVS) for Chinese tourists, Mr. Li perceives that the government should first decide the scale of tourism development by consulting public opinion.  He indicated that only after setting the scale could the government make decisions on whether it should expand, tighten or stay with the current IVS policy.

ARTICLE HERE

Takeaway: Window dressing for the public or a serious effort to impede tourism? One more risk factor for this troubled market 

 

Construction safety record -  While the city is busy with construction works in the Cotai casino-resort sites and other public infrastructure projects, the number of construction-related injuries and deaths are on the rise. This is due to overworking to meet completion schedules and because of the lack of stringent checks on work safety, a contractors’ trade chamber and a labor union maintain.

 

From January to September last year, a total of 890 people were injured at work on construction sites - a jump from the 789 in 2013 and 564 in 2012.

ARTICLE HERE 

Takeaway: More scrutiny will likely result in higher costs and delayed projects.

 

Smoking fines -Between January 1 and February 28 this year, a total of 1,154 instances of smoking in prohibited areas were recorded by authorities, the Health Bureau said in a statement.  Officers have conducted a total of 728,574 inspections in different areas across the city since the Tobacco Prevention and Control Law came into force in 2012. So far, 25,307 people have been accused of smoking in prohibited venues.

ARTICLE HERE

 

Indiana Feb GGR: -2% YoY

Ohio Feb SS GGR: +1% YoY

Takeaway:  February regional revenues is trending into negative territory. Cold and snowy weather offset what should've been a fairly good month

 

Okada Philippines resort - Tiger Resort, Leisure and Entertainment Inc – developer of Philippine casino project Manila Bay Resorts, originally slated as a US$2.3 billion venture – has reportedly been told it will be allowed to “complete” the resort by the first quarter of 2017.  

ARTICLE HERE

 

 

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: Are Central Planners Arresting (Or Perpetuating) #Deflation?

CHART OF THE DAY: Are Central Planners Arresting (Or Perpetuating) #Deflation? - COD

 

Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.

 

Can the world’s central-planners arrest the #deflation? Or are they now perpetuating it?

 

To review slide 8 of our current macro deck:

 

  1. Burning Euros are not going to magically create inflation
  2. Burning Yens are not going to produce inflation “targets” either

 

Instead, $1.07 Euro (-11% YTD vs. USD) and $121.67 Yen (-1.5% YTD vs. USD) are creating the mother of all ramps in the US Dollar. Picking up right where it spiked to last week, the US Dollar Index is already +0.7% this week to +9.1% YTD.

 


The Right Words

“A powerful agent is the right word.”

-Mark Twain

 

From San Francisco to Boston to New York (and today Chicago) I’ve been on the road meeting with a lot of investors in the last few weeks. Finding the right words for macro market risks gets less hard when I boil it down to one - #deflation.

 

That’s it. One word. You are either positioned for its risks or you are not.

 

Its risks are far reaching, inasmuch as the opportunities it presents will be. For the average household in America that doesn’t own stocks and bonds it’s a big tax cut. For the average corporation who sells anything with deflating prices, it’s a big headache.

The Right Words - Deflation cartoon 12.29.2014

 

Back to the Global Macro Grind

 

Can the world’s central-planners arrest the #deflation? Or are they now perpetuating it?

 

To review slide 8 of our current macro deck:

 

  1. Burning Euros are not going to magically create inflation
  2. Burning Yens are not going to produce inflation “targets” either

 

Instead, $1.07 Euro (-11% YTD vs. USD) and $121.67 Yen (-1.5% YTD vs. USD) are creating the mother of all ramps in the US Dollar. Picking up right where it spiked to last week, the US Dollar Index is already +0.7% this week to +9.1% YTD.

 

What we call the Correlation Risk (of #deflation) to #StrongDollar remains obvious at the epicenter of where you should be crushing it on the short side and/or have a 0% asset allocation (Commodities):

 

  1. CRB Commodities Index was down another -0.4% yesterday to -4.7% YTD (with US stocks and Treasuries up on the day)
  2. Gold is down another -0.7% this morning to $1159 (-2.1% YTD)
  3. Copper is down another -1.8% this morning to $2.62 (-7.1% YTD)

 

In other words, in terms of what to avoid, the easiest question I’ve been answering on the road for the last 6 months remains one word too – Commodities. Why on god’s good earth of deflationary forces would you buy what was the most levered bet on US Dollar destruction into 2011-2012?

 

Moreover, if you have intermediate-term targets of $1.05 and $135 Euro and Yen, respectively (vs. USD)… and those targets look increasingly probable by the day, why wouldn’t you keep pressing the long Consumer (XLY), short Energy (XLE) position?

 

A: in a word – “valuation”

 

Especially when Oil was bouncing, we were getting a lot of “but everyone is short oil and underweight Energy stocks – there’s a lot of value here – why can’t Oil go back to $70?”

 

In Hedgeye process terms, the words I’ve been using to answer that line of questioning are:

 

  1. Oil (WTI) has an intermediate-term TREND “price deck” in our model of $36.23-57.82/barrel
  2. Both the net LONG position (futures/options contracts) and curve is looking for higher prices than that
  3. Levered Energy Equities (and their Debts) are not pricing in either the top or bottom end of our range

 

To be sure, I’d definitely be using the wrong words to describe the most probable #deflation scenario for Energy stocks and bonds if I was a banker. But I’m not a banker. I’m a risk manager. And the only thing I care about is getting to the right words and answers.

 

If you’re on board with our Global #Deflation theme, we still think the wrong asset allocation answers are:

 

  1. Buying Russian stocks because they are “cheap”
  2. Buying Greek stocks because they are “cheaper than German stocks”
  3. Buying “your own oil well”

 

Yes, listen to the radio, you too can buy your own oil well and be called what every other person who got sucked into doing the same for the last year of oil #deflation (one word – lemming).

 

Finally, we’ve been getting a ton of questions on why German Bund Yields can remain this wide versus US Treasury Yields (0.31% 10yr Bund yield this morning vs. UST at 2.19% = +188bps spread, widest of the year)…

 

A: I don’t know.

 

Those are 3 words I have no problem using as I age. The more I learn about macro markets and their histories, the less I know. That said, I still think that if Janet keeps one word in the Fed’s “language” at the March 18th meeting (#patient), US 10yr Yields are coming in hot.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.92-2.27%

SPX 2065-2101

RUT 1

USD 96.85-98.47
EUR/USD 1.07-1.10

Yen 119.21-121.81
Oil (WTI) 48.14-51.77
Gold 1153-1197
Copper 2.55-2.73

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Right Words - COD


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