Hedgeye's macro team reiterates its contrarian bullish call on the Long Bond.
Last week, Hedgeye CEO Keith McCullough and our macro team hosted our live, highly-anticipated Quarterly Macro Themes conference call for our institutional subscribers. During the 73-slide presentation deck, Keith distilled the three most important macro trends our team has identified and their associated investment implications.
Keith, riffing off HBO’s Game of Thrones, compares equity markets in China and emerging markets to Eddard “Ned” Stark, who “died early and did not come back,” and the U.S. to Daenerys Targaryen, the “effervescent hope.” Here’s a small taste of what went down during the call.
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TICKERS: MPEL, BLOOMBERRY, AIRBNB, RCL, NCLH, UBER
MPEL - Melco International Development Ltd says it will persist with a solo bid for a license to run a casino near the Spanish city of Barcelona. Melco International told the Hong Kong Stock Exchange that one subsidiary no longer had a partnership with a Spanish company that had been pursuing a license, but that another subsidiary would press on with an independent bid.
BLOOMBERRY- Philippines casino operator Bloomberry Resorts Corp has acquired a 15,676-square-metre (168,735 sq feet) plot in Quezon City, one of the cities that make up Metro Manila, the national capital region of the Philippines.
The PHP1.98-billion ($43.16-million) acquisition – via Sureste Properties Inc, the hotel and resort development arm of Bloomberry Resorts – was announced on Friday in a filing to the Philippine Stock Exchange. Previous news reports stated that the Vertis North project would include residential, office, retail and hotel space. There was no mention to casino facilities.
AIRBNB - Airbnb accounted for 5% of room revenue in NYC: New research compiled by PKF Hospitality Research found that Airbnb accounted for 5% of room revenue distribution in New York City during the second quarter of 2015.
The average rate charged by Airbnb units during that time was $157 compared to $276 by hotels. The same research, unveiled Thursday at The Lodging Conference, reported 47,295 total Airbnb reservations in NYC during August. The alternative accommodations platform accounted for approximately 9% of hotel demand during that period.
Takeaway: While a glut of supply drags on NYC, Airbnb has also peeled off demand. Paris is the city most impacted by Airbnb.
RCL - Royal Caribbean plans to dry dock the 3,634-guest Liberty of the Seas in January 2016. The dry dock will give the ship new upgrades pertaining to everything waterslides to cuisine. 26 new state rooms will also be added to the ship through the dry dock process.
NCLH - Norwegian Cruise Line will introduce the first purpose-built ship customized for the China market in 2017, NCLH CEO Frank Del Rio announced today during the CruiseWorld China summit in Shanghai.
- "Our new purpose-built ship for China will have characteristics that are authentic to Norwegian Cruise Line and yet distinctively Chinese in all of its sensibility," said Del Rio.
- "With this new ship, Norwegian will unquestionably offer our Chinese guests a superior product and introduce a new standard of innovation and excellence into the marketplace, with an unrivaled level of customization for the Chinese consumer. It will perfectly suit what modern Chinese travelers value from an upscale cruise experience."
Takeaway: Supply continues to ramp up in China.
UBER - HNA Group has joined Uber China’s rank of investors, and its investment has helped boost Uber China’s valuation to nearly $8 billion, according to media reports. Uber has been actively attracting investors, and Uber’s CEO Travis Kalanick told Sina.com on September 7 that Uber China had already pocketed US$1.2 billion in its ongoing financing from Chinese investors like Baidu while other investors would also join further down the road. By September 24 it was reported that Uber was seeking to raise up to US$2.5 billion for its China operations.
Golden Week RevPAR - The average occupancy rate of Macau’s five-star hotels decreased to 88.69% during the National Day golden week of holidays in the mainland this month, 3.31% less than in the corresponding period last year, the Macau Government Tourist Office says.
- The office’s data indicate that the occupancy rate decreased in spite of the average room rate in five-star hotels falling by 19.14% to MOP1,958 ($244.75).
- The average room rates in across all chain scales fell, but the average occupancy rate rose only in four-star hotels, by 0.49% to 84.43%.
Takeaway: Wait until the new supply comes on line...
Golden Week Travel Data - A total of 526 million trips were made nationally in China over the National Day holidays and RMB421.3 billion was spent during the period, up 10.7% and 17.9% respectively compared with the same period last year, according to the China National Tourism Administration (CNTA). Travel demand was released all at once during the holiday period. Of the 526 million visitors nation-wide during the holiday, 114 million were overnight stays and 412 million were day trips, up 14.7% and 9.8% y-o-y respectively.
Takeaway: Strong visitation translated into better than expected table revenues for the casinos but still decidedly down from last year.
Atlanta Casino - Georgia Governor, Nathan Deal plans to oppose the gambling push now underway at the state Capitol, telling The Atlanta Journal-Constitution exclusively that he expects to take an active role against the effort. It’s the first time the governor has said as much — in previous comments, he indicated he would stand back despite a personal opposition to the idea.
- Deal left open the possibility he would change his mind, but only if the industry agreed to a significantly higher tax rate than the 12 percent currently proposed.
- “If they’re willing to put anywhere from 24 to 35% of their gross revenue into education…as the (Georgia Lottery) does, that will be a totally different proposition,” Deal said. “I don’t think we’re going to see any of them take us up on the offer.”
Takeaway: MGM and LVS have been interested in casino project ATL.
REGIONAL REVENUES (SEPT):
- NY Total GGR: +5.7% YoY
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The Hedgeye Gaming, Lodging, and Leisure Team hosted a call last Thursday updating our Macau long trade call, analysis on the September numbers, and our outlook/forecast. Please see the links to the video and presentation materials below.
RELEVANT TICKERS INCLUDE:
LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK
- Update to our recent long Macau trade call
- Hedgeye company EBITDA estimates vs the Street for Q3, 2015, and 2016
- Revised 2015/2016 monthly market projections
- "True" Mass trends
- Research Topic: What happens if the junkets go away? - a more quantitative look at this topic first presented in our February 2015 Macau conference call
click here for the presentation materials
Takeaway: Investors seemed to shift from fears about growth to relief over further accommodation by the Fed last week.
The focus seemed to shift last week from the negatives of the U.S. jobs report the week prior to the positive effects from ongoing accommodative central bank policy. In other words, bad news once again became good news. With the Federal Reserve holding interest rates steady, CDS spreads tightened globally and the High Yield YTM fell -65 bps to 7.5%. Short-term readings in our heatmap below are mostly green. However, the intermediate term is the opposite with mostly negative warning signals, and long-term measures are mixed.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 1 of 12 improved / 6 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS – Swaps tightened for 24 out of 27 domestic financial institutions. With the Federal Reserve holding interest rates steady at its September policy meeting, insurance against default for domestic financial institutions got cheaper; the median CDS spread tightened from 94 bps to 87 bps.
Tightened the most WoW: ALL, CB, MTG
Widened the most/ tightened the least WoW: SLM, SLM, SLM
Tightened the most WoW: CB, ALL, ACE
Widened the most MoM: GNW, LNC, TRV
2. European Financial CDS – Swaps mostly tightened among European financials last week, likely following the U.S.'s lead after Federal Reserve minutes showed rates being held steady for now.
3. Asian Financial CDS – Investors looked favorably on central bank policy last week with CDS spreads in Asia tightening, likely in reaction to both the U.S. Federal Reserve holding rates steady and a top Chinese central banker stating that the PBOC would allow the yuan exchange rate to be more flexible. In the past, China allowing its currency to depreciate has stirred fears of slowing economic growth; however, the focus last week seemed to be more on the positive effects of accommodative monetary policy.
4. Sovereign CDS – Sovereign swaps were flat to tighter on the week. Spanish sovereign swaps tightened the most, by -5 bps to 103.
5. Emerging Market Sovereign CDS – With commodity prices rising last week, emerging market swaps tightened across the board. Russian swaps tightened the most, by -51 bps to 320, followed by Turkish swaps, which tightened by -48 bps to 266.
6. High Yield (YTM) Monitor – High Yield rates fell 65 bps last week, ending the week at 7.51% versus 8.16% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1844.
8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 32 bps this week versus last week’s print of 33 bps.
9. CRB Commodity Price Index – The CRB index rose 4.6%, ending the week at 203 versus 194 the prior week. As compared with the prior month, commodity prices have increased 3.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 8 basis points last week, ending the week at 1.91% versus last week’s print of 1.99%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China fell 0.5% last week, or 11 yuan/ton, to 2176 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened to 145 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 4.6% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: We are flagging JPMorgan (Score: 96) (short) and Federated Investors (FII - Score:15) (long) on sentiment and short interest.
This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.
The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.
We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.
Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.
The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors.
This week we're flagging First American (FAF - Score: 19) as a long as our call to "hide out" in Housing favors the title insurers. We are also highlighting Federated Investors (FII - Score: 15) as screening well from both a sentiment/short interest and a fundamental research standpoint.
The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”
Let us know if you would like to receive a copy of our black book, which explains this system and its applications.
BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations. Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.
SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations. Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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