The Macro Show Replay | October 13, 2015


Special Guest Contributor View: End Game?

Editor's Note: We are pleased to present this special Contributor View written by Doug Cliggott. Mr. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. Incidentally, he recently sat down with us here at Hedgeye for a Real Conversations interview. Click here to watch.

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Special Guest Contributor View: End Game? - z doug cliggott

By Doug Cliggott


Business cycles in America follow a distinct pattern.   At the beginning of the cycle, as the economy climbs out of recession, corporate profits begin to grow.  The behavior of both bankers and their corporate clients remains cautious, because memories of recent declines in financial asset prices and business activity are still vivid memories.


As the economic recovery continues, realized profits continue to beat still-subdued expectations, and slowly but surely optimism builds.  It takes some time, usually a few years, but eventually “animal spirits” are ignited, to steal a phrase from John Maynard Keynes.  Corporations become more willing – even eager -- to invest and to borrow.  Bankers become more willing to lend, and investors become more enthusiastic about buying equity shares of “seasoned” public companies as well as shares of newer ventures making their initial public offerings.


This process becomes self-reinforcing as higher stock market values encourage firms to borrow more and bankers to lend more.  But this process doesn’t go on forever. Economic expansions in America are measured in years, not decades.  The reason is simple.  Bankers, investors and managers of non-financial companies are just like you and me – they are human. They make mistakes.


We all have a strong tendency to extrapolate the present into the future. When things are going well – when sales and profits are beating expectations and stock prices and corporate bond prices are climbing – we expect these trends to continue and we make decisions about the future based on these expectations.


But inevitably, some of these more optimistic expectations prove to be misguided.  Some of the new investments by businesses earn less than expected, maybe because sales disappoint or a new product fails to catch on.  In the stock and bond markets, some prices start to fall.  The price declines are few at first, almost imperceptible, since the broader market indices usually continue to climb in this phase of the credit cycle.


As time moves on, the weight of our collective errors in judgment multiply and the declines in corporate earnings become increasingly widespread.  As do the decline in the prices of financial assets linked to those earnings


Tracking our location


One clear way to track the “status” of American credit cycles is to compare the growth rate of corporate profits with that of corporate borrowing.  Profit growth in excess of borrowing growth is a powerful signal of a sturdy economy since it indicates that the fruits of new investments are – in a very broad sense – exceeding expectations.  Or put another way, we have collectively not yet become overly optimistic about the near future.


Conversely, when these growth patterns trade places, when the pace of borrowing by non-financial corporations accelerates to the point that it exceeds the growth rate of profits, that tends to be a signal of trouble ahead since it indicates that optimism may have become excessive and that it will become difficult for an increasing number of borrowers to pay back their loans if they continue to increase borrowing at a rapid rate.


This part of the business cycle also takes time, often years, to play out.  One way to think about it may be what happens on a commercial aircraft when the pilot informs us that we are leaving our cruising altitude.  The “fasten seat belt” sign may not be illuminated right away, and the ride is typically still nice and smooth.  But in a very real sense, the flight path we are on has changed.  The decent has begun – we are in the final phases of our flight.


Changes in the American economy’s flight path – to an environment where corporate borrowing growth exceeds profit growth -- happened in 1998, it happened in 2007, and it happened again in 2013.  What follows – sometimes immediately, but typically in a year or two – is an increase in financial market volatility, then a decline in corporate profits and stock prices followed by a contraction of business investment and employment, and increases in business failures and loan defaults.


To repeat, this sequence of events occurs repeatedly because borrows, lenders and investors of all stripes make errors in judgment.  And we tend to make mistakes that involve borrowing too much money, or paying too high a price for a corporate bond or shares of equity in a corporation, when we are over-confident and budding with optimism.  And these types of mistakes tend to dominate when a cycle is comfortably mature, not at the beginning of the cycle when we are usually too pessimistic and often outright skittish.


Keeping score


Looking back at the past six decades, we see a neat symmetry. There is an even split between years when profits of nonfinancial companies grew at a faster rate than their liabilities (31 years) and years when the opposite was the case (31 years).  {See Table 1.}


Special Guest Contributor View: End Game? - z doug clig chart


The performance of U.S. equities is not nearly as symmetric.  Equity prices declined during just sixteen of these sixty-two years, or roughly twenty five percent of the time.  More to the point -- eleven of these sixteen negative years occurred during periods when debt growth exceeded profit growth, and three more (1962, 1981, 2002) happened in the first year of a period when profits grew faster than liabilities.  


So not surprisingly, observed equity price declines are a recurring feature of the phase of the credit cycle when excitement and optimism turn to disappointment and pessimism.  Sadly … that appears to be exactly where we are right now.

FNGN: We Are Removing Financial Engines From Investing Ideas

Takeaway: We are removing Financial Engines from Investing Ideas today.

***Please note that we are removing Financial Engines (FNGN) from Investing Ideas today.


Hedgeye Financials co-sector head Jonathan Casteleyn doesn’t think the company is going to have a good quarter. In addition, Hedgeye CEO Keith McCullough does not like Financials or Small Caps from a style factor perspective enough to put Investing Ideas subscribers through the long-term "patience" exercise with respect to shares of FNGN. In other words, the embedded market risk doesn't match up favorably for investors right now. 


FNGN: We Are Removing Financial Engines From Investing Ideas - z yellow

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Cartoon of the Day: Slow and Steady (Wins the Race) | $TLT

Cartoon of the Day: Slow and Steady (Wins the Race) | $TLT - TLT cartoon 10.12.2015

Hedgeye's macro team reiterates its contrarian bullish call on the Long Bond. 

Special Excerpt from Hedgeye’s Q4 Macro Themes Call: #GameOfSlowing


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.


Email for more information.




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 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. 



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