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Fortune's Inequality

This note was originally published at 8am on May 11, 2015 for Hedgeye subscribers.

“A man willing to work, and unable to find work, is perhaps the saddest sight that fortune’s inequality exhibits under the sun”

-Thomas Carlyle

 

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.  

 

Fortune's Inequality - Z Century Cycles

 

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%

SPX 2095-2127
VIX 11.86-15.76
USD 94.01-96.17
Oil (WTI) 54.32-61.90

Gold 1168-1204 

 

Best of luck out there,,

 

Christian Drake

U.S. Macro Analyst

 

Fortune's Inequality - Z Challenger


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: GLD, SHAK, VNQ, EDV, ITB, TLT, MUB & HIBB

Below are Hedgeye analysts’ latest updates on our current high-conviction long and short investing ideas and CEO Keith McCullough’s updated levels for each. 

 

Please note we added Gold as a long and Shake Shack as a short this week.

 

As always, we also feature two additional pieces of content at the bottom. 

Investing Ideas Newsletter      - levels

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter      - Growth cartoon 05.19.2015

IDEAS UPDATES

shak

The mind-boggling Shake Shack valuation and chart below bring to mind the famous quote attributed to German writer Karl Gutzkow. 

 

"Oh, how powerfully the magnet of illusion attracts."

 

Investing Ideas Newsletter      - z howard

 

What we're witnessing here is an epic bubble being blown before our very eyes.

 

To provide you with some sense of context, prior to lockup expiration, Chipotle (CMG) was trading at around 18x and peaked at 25.9x. Right now SHAK is trading 6x higher than CMG's peak valuation!

 

The SHAK bubble is a long-term negative for sales trends. The looming crash in the stock will be bad news for the brand's image.

 

On Friday's edition of The Macro Show, Howard Penney explains how investors are getting carried away by Shake Shack's concept, much like the Planet Hollywood hype in the late 90's. (If you recall, Planet Hollywood has gone bankrupt twice).

 

 

Bottom-line: Howard believes the result of $SHAK's "cult-like" status is a perilous overvaluation. 

HIBB

We think that HIBB is one of the most structurally challenged retailers out there. Top line trends are decelerating, costs are accelerating, and capital requirements are going nowhere but up. Any form of growth from here on out – in existing stores, new stores, and online, will all come at an incrementally lower margin. Numbers in the current year are coming down, but we think next year’s earnings miss becomes explosive. Still one of our top shorts following the 1Q print.

 

Top Line:

  • Comps in March (+8.6%) and April (-3.1%)  weren’t enough to make up ground from the negative 8.6% comps in February. This is the first time since 2009 HIBB has comped negative as the trend line continues to march lower. 2QTD comps are up LDD as the company started to see some snap back in demand from the 1,900 store closure days in 1Q and improving weather trends. A push in a Brand Jordan footwear launch helped inflate that number, but the combination of lapping the World Cup in June/July 2014 and the shift of 35% of state tax holidays into 3Q will add additional pressure as we move through the quarter.
  • If we compare the comp trend to what we’ve seen printed at DKS, the slope of the comp line is not surprising. At DKS the e-comm business has been driving more than 100% of the comp growth with store comps negative for 7 of the past 9 quarters. Clearly there is a secular shift in buying behavior in this industry. As HIBB exists today, the company can capture 0% of that shift (more on that below). Even positive WMT traffic in the quarter didn’t help.
  • To get to the current consensus comp numbers for the year HIBB would need to average a 3.2% comp for the next 3 quarters to dig itself out of the negative hole in the company’s most significant revenue quarter. To get to the 3% level needed to leverage SG&A and occupancy that number climbs up to 4.5%.

Investing Ideas Newsletter      - HIBB chart

ITB

Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.

What about Existing Home Sales Thursday, that missed right? EHS in April were certainly underwhelming, missing estimates and declining -3.3% sequentially (although they were still +6.1% YoY).  Below is how we contextualized the data in our institutional note yesterday:

 

Here’s the primary issue at play:  Pending Home Sales and Existing Home Sales have shown recurrent bouts of divergence and re-convergence in recent quarters. Definitionally, Pending Home Sales (PHS) represent signed contract activity while Existing Home Sales (EHS) represent actual closings. The two measures are invariably tethered and, given the mechanical nature of the relationship, PHS serve as a strong leading indicator for EHS with the relationship strongest on ~1mo lag.

 

There is some chop in the data from month-to-month but, absent some acute shock to the qualifying ratio, the two only diverge for so long and so much in magnitude before re-convergence between the two series occurs.  Practically, this can only occur in a few ways – one series can fully re-couple with the other on a lag, both see subsequent revisions in opposite directions and/or both series (for whatever reason) move in opposite directions with spread compression from both directions. 

 

As can be seen in the chart below, the recent tendency has been for EHS to re-converge with PHS.  Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months.  Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not.   

 

Investing Ideas Newsletter      - housingchart

GLDVNQ | TLT | MUB | EDV 

 

We added GLD back to investing ideas long-side this week for two reasons:

  • Yellen will likely be forced to speak to the slowing of domestic economic momentum at the June 17th FOMC meeting
  • The downward revision in growth and inflation that is likely to manifest will send rates and the dollar lower  as the market adjusts more dovish policy

We remain bullish on bonds and bond-like equities and we think U.S. interest rates are likely to put in yet another lower-high into the June event (see chart below on continued trend in downward revisions to growth and inflation).  

 

Investing Ideas Newsletter      - BR chart A 

 

Gold trades inversely to the USD as rates go both ways, but gold particularly likes lower growth expectations and a weaker currency. This relationship has played out over a long period of time.

 

Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.

 

Investing Ideas Newsletter      - BR Chart B

 

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.
  • Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

 Investing Ideas Newsletter      - BR Chart C

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

ATHN: Shorts fighting an uphill battle?

It seems that absent a complete derailment of the growth story, the probability of mass capitulation on the long side is low.

Investing Ideas Newsletter      - z dude

FUND FLOWS: RISK AVERSION IN EQUITIES

"ETFs partially recovered last week's lost ground but active equity trends continue to accelerate to the downside," writes Hedgeye Financials analyst Jonathan Casteleyn

Investing Ideas Newsletter      - z 44


The Week Ahead

The Economic Data calendar for the week of the 25th of May through the 29th of May is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 05.22.15 Week Ahead


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BULLISH TRENDS

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BEARISH TRENDS

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LEISURE LETTER (05/22/2015)

TICKERS: 27.HK, MGM, BYD, SGMS, H, RCL

EVENTS

  • May 25: 11pm - Aristocrat 1H 2015 earnings: (; pw: 8770122)
  • May 28: MGM Annual General Meeting: Proxy "Fight"
  • June 4- CCL: special press announcement in NYC

headline news

Macau visitation falls again - Visitor arrivals decreased by 3.4% YoY. The average length of stay of visitors decreased by 0.1 day YoY to 0.9 day. Visitors from Mainland China decreased by 6.4% YoY, with those traveling under the Individual Visit Scheme rising slightly by 0.5%. Visitors from Hong Kong and Taiwan increased by 3.0% and 11.0%, respectively. Guangdong visitors fell 3% while Beijing and Shanghai fell 10% and 13%, respectively. 

ARTICLE HERE

Takeaway: Fewer visitors, shrinking length of stay. And this is before the supply onslaught.  Base mass will continue to be pressured.

 

LEISURE LETTER (05/22/2015) - m1

 

LEISURE LETTER (05/22/2015) - m2

COMPANY NEWS  

Galaxy- Galaxy will get 150 new gaming tables for its HKD19.6-billion (US$2.5-billion) Galaxy Macau Phase 2 property, said Macau’s Secretary for Economy and Finance, Lionel Leong Vai Tac. Leong told reporters that the government’s decision was made based on the new non-gaming features to be offered by Galaxy Macau Phase 2 and sister property Broadway at Galaxy Macau, both opening on May 27 in the city’s Cotai district. The official added these features would help diversify the city’s tourism offering. 

 

Leong stated that the allocation of 150 new tables to the project complied with Macau’s table cap system. He added that Galaxy could move around its overall table inventory between properties better to meet the firm’s operational needs. Leong added that the Macau government had not received requests for more gaming tables from any of the other five casino operators in the territory.

ARTICLE HERE

Takeaway: Didn't MPEL submit a request for tables at Studio City? 

 

SJM - Following the resumption of construction works in the renovation of the former Casino Jai Alai earlier this month, the property opening date has now been postponed to after 1Q 2016 instead of this year, the chief executive of SJM Ambrose So Shu Fai said. “There has been a delay in the issuance of [the construction] permit to Jai Alai; but two to three weeks ago, we already received permission,” So explained.  “The property will open next year but by the first quarter it may not be ready. So the opening date will be later than that,” So added.

 

A total of some HK$1 billion (US$129 million) has to be invested in the Jai Alai revamped project, So said.  In the 2014 annual report filed on March 31, SJM said the firm had entered into capital commitments in connection with the revamp project – named ‘Jai Alai Palace’ - for a total value of about HK$657 million.

ARTICLE HERE

Takeaway: Higher capex and delayed opening for Jai Alai

 

SJM - CEO Ambrose So says that VIP business has been down 30 to 40% in the past few months and he doesn’t know if it has hit the bottom yet. So said that gaming tables in VIP rooms that are no longer in use would be transferred to the mass market to adjust to market changes. However, he pointed out that although there has been a slight growth in the mass market, the growth has “not been enough to fill the gap left by the VIP [market]”. According to So, just “one or two” VIP rooms have closed down at SJM so far.

ARTICLE HERE

 

MGM - MGM Resorts International filed an application with the Public Utilities Commission to purchase power without the state's dominant utility, NV Energy. MGM's application follows the filings this month of Wynn Resorts and Las Vegas Sands, highlighting an attempt at mass departure by the state's influential companies and sparking a debate about consumer choice and protecting ratepayers from higher power bills. Caesars is expected to submit an application in the coming days.  

ARTICLE HERE

Takeaway: Strip operators trying to save money on utilities. 

 

Paradise - is aiming to sell about 1,000 more live multi-game (LMG) machines in Macau this year, while deploying 700 of such machines in the US market, the company's chairman, Jay Chun said.


The company currently has over 3,500 live multi-game machines installed in 16 casinos in Macau. Chun said that Galaxy Macau Phase II, opening in less than a week, is also one of the clients that his firm is targeting to sell up to 1,000 LMGs.

ARTICLE HERE

 

BYD-  issued its $750 million, 6.875 percent senior notes due 2023. Proceeds will be used to repay its 9.125 percent senior notes due 2018.

Takeaway: The transaction allows BYD to lock in a lower borrowing rate and have more flexibility on their balance sheet.

 

SGMS- renewed its contract for its instant games and cooperative services program for four more years with De Lotto, the national lottery of the Netherlands.

 

H - invested in onefinestay, a closely held company that enables travelers to rent upscale private homes, the rare instance of a major hotel operator aligning with the burgeoning home-rental industry. Onefinestay matches homeowners looking to rent their residences in London, New York, Los Angeles and Paris with travelers. It manages a portfolio of more than 2,500 homes with a combined value of more than $5 billion, said the company. It is unclear how much Hyatt invested in onefinestay, but a person familiar with the matter said it was part of a nearly $40 million round of funding that was completed at the end of last year.

Takeaway: Hyatt is taking the right step in investing in the home-rental business. Despite mired in legal challenges, home rental companies, highlighted by AirBnB and Homeaway, is a real threat to the hotel industry.

 

RCL - Allure of the Seas emerged from its 18-day drydock at Navantia with 10 new suites, a revamped Izumi Hibachi & Sushi restaurant, a Sabor Taqueria & Tequila Bar, a Coastal Kitchen and new boutiques.

ARTICLE HERE

INDUSTRY NEWS 

SK Cruise- A South Korean government ministry is facing resistance from vested interests inside the country and a lukewarm response from another department in its bid to enable local citizens to gamble aboard cruise ships flying the national flag, reports Yonhap News Agency.

 

Critics say the proposal amounts in effect to backsliding on a near-nationwide ban on locals gambling. That policy applies specifically to land-based casinos. The ministry promoting the local casino cruise ships idea says there would be tough rules to protect citizens from harm and that South Korean citizens are already using foreign cruise ships for such activities.

 

According to Yonhap, Maritime Minister Yoo Ki-june, from the Ministry of Oceans and Fisheries, said locals using such South Korean cruise ships would only be allowed to gamble for five to six hours at most per day while the ships are sailing in international waters. The maximum betting amount for individuals would be below US$100 for a five-day trip, the report added.

ARTICLE HERE 

 

Atlantic City - Millennials want to party, not gamble in Atlantic City. Customer surveys conducted for the alliance last fall showed that young singles strongly identify with the city’s nightlife, but they were worried the casino closings had robbed them of their entertainment hotspots. “The closed facilities were of concern,” the survey concluded. “Nightlife was a driver of their trips.”

 

Borgata Hotel Casino & Spa, known for its cutting-edge entertainment, is building a $15 million expansion that includes an outdoor concert venue opening in June and a new nightclub that will make its debut at year’s end.

ARTICLE HERE

Takeaway: Bad demographics plaguing US gaming nationwide

 

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.


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