Hedgeye Director of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.
Client Talking Points
The PBOC lowered one-year lending rates by 0.25% to 5.10% and decreased deposit rates by 0.25%, lowering the benchmark one-year rate to 2.25%. The chief economist said the latest rate cuts "aren't QE." Chinese equities and Asian equities broadly acted positively on the news. The Shanghai Composite Casino was up about +3% to +34% year-to-date.
European Finance Ministers meeting today to discuss the next steps with Greece. The big catalyst for Greece is obviously a payment to the IMF that is due Tuesday. Greece has come out and said that they will make that payment where as a few EU Ministers have suggested that they might not make it. Greek equities are down about 3% and the Greek Banks are reacting accordingly.
The Bank of England kept the base rate unchanged at 0.5%, the bank rate has been at a record low of 0.5% since March 2009. They also effectively said QE will remain unchanged as well (at £375 billion/$578 billion).
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Top Long Ideas
One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand. On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.
The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.
Three for the Road
TWEET OF THE DAY
Why These Stock-Pitch Contest Winners Say Buy Badger Daylighting
QUOTE OF THE DAY
Always borrow money from a pessimist. He won’t expect it back.
STAT OF THE DAY
California grows half of the fruits and veggies produced in the U.S., including more than 90% of the country's grapes, broccoli, almonds, and walnuts.
Tickers: HLT, PENN, CCL
TODAY (1:30pm) - Stations Casino 1Q CC
May 13 - IGT 1Q CC 8am, ; PW: 2660253
May 14 - Genting Singapore 1Q CC 6am
May 14 - Macau Legend Development 1Q CC 8:30pm
HLT - announces 90m secondary offering for Blackstone. The underwriters (DB, BofA/ML, Citi) for the share sale have an option to purchase an additional 13.5 million shares. Blackstone owns 55% of HLT's shares outstanding.
Takeaway: This is the fourth 90m secondary for Blackstone. HLT recovered an average of 3% off the initial drop on the announcement in the week of trading following the previous 3 Blackstone sales.
Frasers Hospitality Trust - reached a deal to acquire five-star heritage-listed hotel in Sydney – Sofitel Wentworth for A$224 million ($236 million). The Hotel will continue to be operated by the Accor Hotel Group under its luxury-tier brand Sofitel.
Takeaway: Average price per key of $541,284 for this 5-star property in Australia.
PENN - has lost its request to reduce Bangor’s property tax assessment of its Hollywood casino in Bangor, ME by $36.8 million. PENN now has 60 days to appeal the decision.
Genting - might be interested in buying a 51% stake in Baha Mar.
Takeaway: This resort property has been long-delayed, mired with multiple operational and financial difficulties. Baha Mar is reportedly losing $10m a month with the delays.
CCL- dry dock slated for Azamara Quest this September has been moved to April 2016. The change was made as the scope of the upgrades has been expanded. Azamara Journey's dry dock remains on schedule for January 2016.
Korean cruise casinos - plans to enable its citizens and foreign tourists to wager on new cruise ship services that will serve ports around the country, reports the Korea Joongang Daily newspaper.
The Ministry of Oceans and Fisheries on Thursday announced that the government will launch South Korean cruises within the year. The initiative will establish docks exclusively for cruise ships in Busan, Incheon, Jeju, and Sokcho, Gangwon, by 2016. Existing docks will also be modified to allow cruise ship access, the newspaper added.
The Oceans Ministry said it plans to operate two trial runs to major tourist destinations in South Korea and Japan within the month. The runs are intended to check for glitches, including dock usage as well as the departure and arrival process.
According to the ministry, in 2014 the spending by each tourist on South Korean cruise ships averaged KRW1.17 million (US$1,075). Total spending exceeded 1.22 trillion won, as there were 1.05 million cruise tourists that travelled on South Korean ships.
Takeaway: Is this a precursor for an eventual lift of the ban on locals land casino betting? Kangwon Land is the only land-based casino that allows locals betting.
Indiana land casinos - Gov. Mike Pence has decided to allow legislation permitting on land casinos to become law without his signature, paving the way for Tropicana in Evansville and Majestic Star in Gary. The new law also gives other riverboats the option to build new on-land casinos on property near their current locations.
Indiana April SS revs: -3% YoY
Missouri April SS revs: +2% YoY
Illinois April SS revs: -1% YoY
Pennsylvania (slots only) April SS revs: +4% YoY
Takeaway: April has been mixed but overall, it is a little better than our model projection for flat growth.
D LV/Golden Gate - owner Derek Stevens bought all gaming machines and tables from just-shuttered Riviera, the Las Vegas Review-Journal reported. Stevens bought 852 machines, four roulette wheels and spare machine parts for an undisclosed price. He will sell about 500 slots at auction next month. Not all of the Riviera equipment was for sale, Stevens said. Popular, vendor-owned machines such as Wheel of Fortune and Megabucks were sent back to IGT. The other games will be installed at D and Golden Gate before Memorial Day.
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.
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05/04/15 Monday Mashup
05/05/15 CHUY: Pulling a Rabbit out of a Hat
05/05/15 NDLS: Earnings Disaster
05/06/15 WEN: Making All the Right Moves
Events This Week
Tuesday, May 12
- ARCO earnings call 10:00am EST
- DNKN Annual General Meeting 10:00am EST
- JMBA Annual General Meeting
Wednesday, May 13
- SHAK earnings call 5:00pm EST
- DFRG Annual General Meeting 10:00am EST
- CMG Annual General Meeting
- YUM Investor Conference (China Day 1)
Thursday, May 14
- JACK earnings call 11:30am EST
- COSI earnings call 5:00pm EST
- LOCO earnings call 5:00pm EST
- PBPB Annual General Meeting
- YUM Investor Conference (China Day 2)
Recent News Flow
Monday, May 4
- BOBE price target was decreased to $68 from $75 at APB Financial due to slower than anticipated cost cutting and continued operational weakness.
Wednesday, May 6
- WEN announced its intention to refinance its existing credit agreement through a securitization. The company will use some of the net proceeds of the facility (~$1.1 billion) to return cash to shareholders.
- WING Wingstop filed for an $86.3 million IPO through Morgan Stanley, Jefferies and Baird.
Thursday, May 7
- KKD entered an agreement to open 12 shops in Guatemala over the next four years.
Friday, May 8
- MCD reported April global comps of -0.6% vs the consensus estimate of -1.9%. The US, Europe, and APMEA regions all outperformed consensus expectations.
The XLY (+0.33%) slightly underperformed the SPX (+0.37%) last week. Casual dining stocks, in aggregate, undperformed the XLY, while quick service stocks outperformed.
From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.
Casual Dining Restaurants
Quick Service Restaurants
Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by U.S. Macro Analyst Christian Drake. Click here to learn more/subscribe.
...The weakness in the BLS report accords with the Challenger Job Cut data for April, see the Chart of the Day below, which showed energy sector job cut announcements re-ramping to +20K in April. Notably, collective net employment gains across our basket of eight energy states was -56K in March, the first delta negative month since September 2010, with the remarkable -26K decline in Texas leading job losses at the state level. For scale, the estimated -26K decline in Texas on an employment base of 11.7M would equate to an NFP print of -305K at the national level.
We’ll find out if the weakness portended by the Challenger data and emergent angst over a prospective state-level recession in Texas finds further traction in April with the release of the state level data on May 27th...
“A man willing to work, and unable to find work, is perhaps the saddest sight that fortune’s inequality exhibits under the sun”
How many people must run from a crowded theater before the next person decides to run?
That’s the analogy Jim Rickards uses to anchor his discussion of critical state dynamics in complex systems in the prophetic Fx apocalyptic, Currency Wars.
Rickards uses it as the metaphorical underpinning to a hypothetical example of how a repudiation of the Dollar by some relatively small number of people could propagate to a population wide repudiation and full currency collapse.
I like the theater metaphor because it’s vivid, mentally tractable and widely transferrable - if some stimulus perturbs a system such that the system reaches a critical state, the signal/perturbation gets propagated and amplified as it moves downstream.
In short: some people run from the theater --> which cause more people to run from the theater --> everyone runs from the theater.
Power laws and critical state thresholds are, conceptually, pretty simple. And in describing the fundamental nature of a complex system, the lessons apply equally well to the Labor Market, Stock Market or interconnected Global Macro Markets as they do to the Currency Market.
It’s probably generally accepted (or perhaps not) that the evolution of macro modeling should endogenize complexity. So, why hasn’t it been done?
Mostly because the math needed to model network effects and signal propagation at the scale of Macroeconomies is (really) hard.
However, for those waiting (im)patiently on the ivory tower evolution away from static equilibriums and linear macro, the direction of current research is encouraging.
At a recent conference of the National Bureau of Economic Research Daron Acemoglu (MIT) et al presented the following paper: Networks and the Macroeconomy: An Empirical Exploration
If you’re interested – and fully caffeinated – it’s worth a read. Even if you don’t understand the math and techni-speak, the Abstract/Intro provides some layman friendly intuition for understanding the conceptual framework.
Back to the Global Macro Grind….
How many central banks need divergent policy paths to effect a step function rise in the dollar? --> What is the critical threshold on the dollar to propagate reflexive price action in commodity markets(i.e for things priced in dollars)? --> What is the critical price threshold on Crude to propagate a capitulation in financial demand (i.e. futures and options) for energy products and further price volatility? --> How much does the oil price have to drop to cause a collapse in energy sector capex and employment and a state-level recession in Texas? --> What’s the critical threshold for an industry level recession to catalyze a derailment of a broader jobs recovery domestically?
That flow of questioning is, of course, easier to generate largely after the fact.
While Financial markets and social media propagate and discount newsflow and events in real-time, frictions and inefficiencies cause the impacts of those events to flow through ‘real’ markets and government statistics on a lag.
Friday’s employment report provided the latest update on the net impact of the current set of dissonant global macro crosscurrents on the domestic labor market. We reviewed the data on Friday but a few area’s are worth re-highlighting
Energy Employment: Job loss in the energy sector extended into March/April according to both the BLS and Challenger Job Cut data. Oil & Gas extraction employment, which includes data thru April, saw a employment decline for a 3rd time in four months. Broader energy sector employment, which includes data thru March, showed a 5th consecutive month of net decline, dropping by -9K sequentially with the rate of YoY growth dropping to -0.6% - the first month of negative year-over-year growth in 58 months.
The weakness in the BLS report accords with the Challenger Job Cut data for April, see the Chart of the Day below, which showed energy sector job cut announcements re-ramping to +20K in April. Notably, collective net employment gains across our basket of eight energy states was -56K in March, the first delta negative month since September 2010, with the remarkable -26K decline in Texas leading job losses at the state level. For scale, the estimated -26K decline in Texas on an employment base of 11.7M would equate to an NFP print of -305K at the national level.
We’ll find out if the weakness portended by the Challenger data and emergent angst over a prospective state-level recession in Texas finds further traction in April with the release of the state level data on May 27th .
Housing: 25-34 year old employment growth made a higher cycle high from a rate-of-change perspective, accelerating +80bps sequentially to +3.2% year-over-year. Accelerating employment growth in this key housing demand demographic should continue to flow through to rising headship rates and housing demand at a modest-to-moderate rate. Further, Residential Construction employment rose +3K in April alongside the strong rebound in broader construction employment which was up a big +45K on the month as activity rebounded alongside the thaw in the weather.
The rebound in construction employment and activity in April along with the increased pace of household spending in the March PCE data offer some support to the deferred consumption (i.e. weather/etc) storyline in 1Q15, although the ongoing weakness in the factory sector sits as a material offset.
Income/Spending: With no change in hours worked and earnings growth up small sequentially, the moderate gain in total employment and modest positive mix in high-wage/low-wage employment on the month should be enough to support continued Trend improvement in aggregate income in April.
As we’ve highlighted, with income growth accelerating alongside the rise in the savings rate in recent months, the capacity for consumption growth has increased more than actual reported household spending. That trend showed a moderate reversal last month with income gains softening, savings declining and spending rising. Whether that latent spending power re-emerges remains TBD.
Indeed, consumption has some heavy lifting to do as consensus forecasts for accelerating PCE continue to buttress full year GDP growth estimates which remain at +2.8% despite what will be another 1st quarter of negative growth following the 1st revision to 1Q15 GDP.
For investors, the labor market rubber ultimately meets the road in terms of expectations around the path of monetary policy. With the market having already pushed out rate hike expectation to September, the April employment report probably does little to shift that, although the bond market response on Friday looked to be discounting policy conservatism, at the margin.
More broadly, the return to middling employment growth – and the discrete lack of either collapse or escape velocity improvement – will mostly serve to perpetuate further policy uncertainty, and asset class volatility by extension, as another month is devoted to over-speculation and spurious investor activity in the attempt to front-run a Fed faced with equivocal data and a data-dependence mandate.
Uncertainty breeds opportunity. Profitably exploiting that opportunity stems from front-running the inflection or patiently awaiting the catharsis. Our cash position in the Hedgeye Asset Allocation model remains at 6-month highs.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.87-2.25%
Oil (WTI) 54.32-61.90
Best of luck out there,,
U.S. Macro Analyst
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