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China, Bonds and USD

Client Talking Points

CHINA

The 2% Yuan devaluation may seem small, but it was a meaningful capitulation from Beijing in reaction to an awful month of economic data. Retail sales, industrial production, and fixed asset investment reported overnight all slowed and missed expectations. Fixed asset investment has grown at the slowest pace in 15 years through the first 7 months of this year and property investment slowed to +4.3% y/y in July which is the slowest pace since March 2009. You can’t centrally plan real economic growth. 

BONDS

UST  10YR Yields retreated -9 basis points yesterday on the news and are seeing follow through today, trading down another -8 basis points to 2.05% with the yield curve flattening towards a new 52-week low.  German 2YR Yields at -0.29% are back on year-to-date lows as well as slower (growth) and lower (rates) for longer continues to manifest globally. 

USD

With the U.S. pursing a divergent monetary policy pass and currency wars in re-crescendo globally, tacit acceptance of a stronger currency by domestic policy makers equates to de facto tightening. Policy makers anchor on real rates and the real cost of capital in determining policy’s impact on investment spending.  In so much as ↑ Dollar = ↓ Inflation = ↑ Real Rates, a stronger currency = tightening without explicit policy action. Jackson Hole is the next currency event catalyst and a prime platform for ECB President Mario Draghi to jawbone the Euro lower (and $USD higher).  

Asset Allocation

CASH 60% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
HOLX

In an analysis of the demographics of the newly insured, Pap testing, HPV, and mammography were at the top of the list of products that would be positively impacted by the ACA.  As we reach the #ACATaper stage, will HOLX take a hit to their Diagnostic segment? It is possible, in our view, but so far a minor risk. As we learned last week from a lab operator, Qiagen is likely to continue to cede their 14% HPV testing share to HOLX. So while the #ACATaper appears to be finally here, there are offsets. On a disappointing note, our 3D Tomo Tracker update for July came in at 24 facilities. Down sequentially from June, and down from a peak of 54 in May. Our forecast algorithm, which is based on these updates, remains unchanged. While 20 is low, it is probably a blip in the longer term adoption cycle.  

PENN

PENN has emerged as the first domestic gaming growth story in 10 years with a new casino in Massachusetts this year and one in San Diego next year. Meanwhile, regional gaming trends have stabilized, providing near term earnings visibility and upside. Upcoming catalysts include the monthly release of State gaming revenues for July, including Massachusetts, and positive earnings revisions.

TLT

Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities and REITS remain the go-to sectors for growth slowing, defensive yield exposure.  

Three for the Road

TWEET OF THE DAY

Panic! China Central Planning Style https://app.hedgeye.com/insights/45762-panic-china-central-planning-style… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The most powerful weapon on earth is the human soul on fire.

Field Marshal Ferdinand Foch

STAT OF THE DAY

Hilary Clinton is rolling out a $350 billion college affordability and student debt relief plan, which includes cutting student loan rates for ~25 million borrowers through refinancing programs for both private and federal loans and a “Borrower Bill of Rights” to increase servicer responsibilities.


The Macro Show Replay | August 12, 2015

 


CHART OF THE DAY: A Less Than Stellar 2Q Earnings Scorecard

Editor's Note: The chart and excerpt below are from this morning's Early Look written by U.S. Macro Analyst Christian Drake. Click here for info on how you can become a subscriber. 

 

...With ~91% of SPX constituent companies having reported earnings for 2Q, the results have been less than inspiring – particularly for a private sector economy purportedly  in position for an escape-velocity handoff from the Fed.   

...As can be seen in the Chart of the Day below, lackluster beat-miss trends have not been buttressed by positive operating performance which has, once again, been underwhelming with just 38% and 43% of companies registering sequential acceleration in sales and earnings growth, respectively.  

 

CHART OF THE DAY: A Less Than Stellar 2Q Earnings Scorecard - z CoD 2


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Headaches

“I’ve had a perfectly wonderful evening. But this wasn’t it.”

-Groucho Marx

 

I’ve never had a headache.  Not one. 

 

It’s probably some recessive trait resulting in reduced gene expression and enzymatic/receptor activity along the CNS pain conduction pathway.  Or, perhaps I’ll prove to be an X-Man progenitor …. that seems cooler.

 

Headaches - z ty

 

The #MacroFates, however, have endowed Global Central Bankers with less luck as the growth and inflation headache remains both persistent and acute. Japan’s economic maladies continue to get chronic-er, China begrudgingly upgraded to prescription strength, EM & Commodity markets remain in strong-dollar hospice, and Europe is trying to change the locks while Draghi is away on holiday. 

 

Back to the Global Macro Grind...

 

Welcome to (what are supposed to be) the dog days of domestic macro.  Mid-August, Post-Jobs Friday hangover, a relative scarcity of macro data releases and a soft FOMC speech calendar – perhaps the slowest, non-holiday week of the year.      

 

Despite the dearth in high frequency domestic data, there’s always some macro hay to bale.  Here’s a quad-fecta of choice highlights: 

 

China Syndrome:  With China devaluing and choosing to support export growth at the risk of capital flight and IMF indignation, they were, in effect, explicitly acknowledging the growth problem.  Canada, New Zealand and Australia – the canonical “commodity currencies”  – got tagged on the news and capital flowed into treasuries, taking 10Y yields down -9 bps to 2.14% with the yield curve flattening toward 52-wk lows. 

 

The growth data (china housing starts down -21% YoY, Industrial production down to +6.0% YoY from +6.8% prior) and allocation rotation is seeing follow through this morning with the German 2Y trading back down to -0.29% (2015 lows)  and the U.S. 10Y down another -8 bps and flirting with a 3-month low at 2.05%. 

 

We’ve been strumming the slower (growth) and lower (rates) for longer tune for a while now and view these high-entropy events as crescendo’s in the larger, secular Macro symphony.   

 

Who Likes lower rates – mostly stemming from OUS turmoil? 

 

Homebuilders for one.  Global tumult is insidious, but usually manifests on a lag domestically so, in the nearer term, ↓rates =  ↑ affordability = ↑ room for prices to rise = ↑ housing.  Housing was actually green on the day yesterday along with Utes, Reits, bonds and all things low-beta, defensive yield.   

 

Sticking with housing, the Starts and Permits data set for release next Tuesday may prove interesting. 

 

Housing Starts:   The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  Indeed, after rising a resounding +385% YoY in May, permits in NY state went vertical to +632% YoY in June.   A reversal of that pull forward sets the stage for a potential retreat in the reported July data.  For context, a decline back to the TTM average in permits in the Northeast implies a -12-13% sequential decline, taking the total back below 1.2 MM from the post-crisis high of 1.34 MM recorded last month.     

 

2Q Earnings Scorecard:    With ~91% of SPX constituent companies having reported earnings for 2Q, the results have been less than inspiring – particularly for a private sector economy purportedly  in position for an escape-velocity handoff from the Fed.   

  • Sales/EPS:  In the aggregate, Sales growth is running -4.3% while Earnings growth is tracking at -2.73%.  Granted, the weakness is centered on energy and the industrials complex but those sectors represent large swaths of economic activity and they don’t operate in a vacuum – and commodity price deflation remains a real and ticking risk and the hedge protection that supported 2014/2015 is a lot thinner in the coming year.
  • Beat/Miss:  Just 48% of companies have beaten topline estimates while 74% (in-line with recent qtr averages) have beaten on EPS.  Of course, as has been the case for the last 5 years, the progressive deflation of expectations ahead of the quarter remains the best means to manufacturing a “beat”.  This quarter has not been an exception as consensus estimates for 2Q15 have drifted steadily lower for SPX constituents into and through 1H15.    
  • Operating Performance:  As can be seen in the Chart of the Day below, lackluster beat-miss trends have not been buttressed by positive operating performance which has, once again, been underwhelming with just 38% and 43% of companies registering sequential acceleration in sales and earnings growth, respectively. 

 

U.S. Budget:  The Treasury will release the July Budget data this afternoon.  The CBO, however, releases a monthly budget review ahead of the official treasury release which is typically dead nuts.  The CBO estimates the budget deficit for July at $149B, putting the fiscal YTD total (10-months) at $463B.

With revenue’s growing at a 3% premium to outlays this year, and after adjusting for payment timing issues, this represents a -$41B decline relative to the same 10-month period last year and the lowest total in the post-crisis period.  The deficit-to-GDP ratio has improved to just 2.4% (from peak of 10.3% in 2010) alongside those favorable fiscal flows and in spite of uneven and middling growth. 

 

An improved and improving fiscal balance is $USD supportive although that remains a 2nd order consideration as monetary policy continues to control the speculative FX flow.  Relatedly, given the pervasive dollar strength and expectation for a divergent policy path for the U.S., it’s interesting to note that $USD performance in the peri-liftoff period across the last five cycles has been fairly distinct.   The market tends to discount the policy action with the currency  strengthening ahead of the move and subsequently weakening once rate hikes actually commence.  Whether the extraordinary conditions currently prevailing globally represent a unique dynamic will be an interesting one to risk manage. 

 

One for the road:   If you missed it, last week the SEC approved a rule requiring public companies to disclose the pay ratio of the CEO to that of the company’s median worker.   The disclosure is unlikely to affect material change, but the baby-stepping towards transparency is positive on the margin and, at the least, will provide headlines and fodder for the inequality debate.  

 

Yesterday (& today) proved to be a massive headache for global policy makers, EM and commodity markets and “reflation” portfolio’s.  The timing of high-entropy macro events can be surprising, but their manifestation is not.  If you’ve been following the Macro Playbook of the last month with growth/inflation slowing (TLT) and defensive yield (bond proxies, XLU) anchoring your starting line-up,  you’ve had a perfectly wonderful evening.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.11-2.24%

SPX 2064-2098 

VIX 11.88-15.18
USD 96.35-98.46
Oil (WTI) 41.82-46.09

Gold 1079-1121

 

Christian B. Drake

U.S. Macro Analyst

 

Headaches - z CoD 2


SJM 1H 2015 CONFERENCE CALL NOTES

Takeaway: Down across the board. SJM Palace on track for 2017 opening.

cONF cALL 

  • GGR down 40.3% YoY in 1H of 2015
  • EBITDA down 49.1% YoY 
  • Profit down 54.1% YoY
  • EBITDA margin down 8.5% YoY 
  • cost of labor increasing
  • Mass GGR down 26.8% YoY
  • VIP down 48.7% YoY
  • Slots down 12.3% YoY
  • Share of Macau GGR stood at 22.3% YoY 
    • 25.5% of Mass Mkt share 
    • 21.2% of VIP
  • Grand Lisboa 
    • GGR down 43.5% YoY 
    • EBITDA down 49.6% YoY
    • Profit down 53.3% YoY
    • OCC down 15.2% YoY
    • ADR up 2.3% YoY
  • Dividend of HK10 cents p/s was declared 
  • Challenging conditions in the market place and regulation to blame for the slow down in GGR. Tough to pin point where the bottom is. 
  • They remain optimistic on the Chinese economy, which will continue to drive GGR in the future. 
  • Junket closure and downsizing common theme, and could continue. 
  • OCC down due to VIP business decline 
  • New system has been deployed to sell rooms which has driven OCC in July. focus shift to mass and premium mass player has aided the uptick in OCC. 
  • Confidence remains very strong. Lisboa Palace is well underway. Foundation work is nearly fully complete. 
  • Cost control initiatives have already started. 
  • CapEX HK5.9billion in 2015, due to the opening of Palace. 
  • Major focus to still return capital to shareholders despite the challenging market.
  • Always looking to shift tables, feel that they have some opportunity to shift around more tables in 2H. 
  • Adding 11-14 tables for mass segment in Q4. 

Q & a 

 

Quantify the cost savings going forward?

  • Annualized savings are roughly HK50 million. Mostly due to labor attrition and decrease in headcount.

OCC up in July? To what levels? 

  • Targeting close to the high 80's low 90's 
  • Infrastructure is in place to accommodate the mass customers

CapEx tied to construction of SJM Palace? Plan with Adjacent properties?

  • Not a focus right now. Simply focused on finishing the SJM Palace.

Hold adjusted EBITDA for the Q?

  • No, do not have it calculated. 

Cost cutting measures? Potential in the future for more cost cutting vs. the competitors that are opening sooner than you? 

  • SJM pure gaming company, do not have a lot of non gaming initiatives that they can cut. 
  • Not replacing some of the labor they lost to attrition has been the opportunity to reduce costs. Might see more potential for this in the future, but it is not a focus.

Are you more socially responsible than your competition?

  • Yes, they feel as though need to remain a paternalistic employer. Many 2nd generation employees and even 3rd generation employees. 

Premium mass and base mass are outperforming competition through the summer

 

CapEx to peak in 2H and into 2017, what does that do to the dividend?

  • Dividend policy still stands, regardless of additional CapEx. 

Transit visa loosening, a tailwind?

  • Yes, starting to see stronger trends in July and August, especially on the mass and premium mass segment. 

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BULLISH TRENDS

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BEARISH TRENDS

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