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What Information Is the Yield Curve Yielding?

Conclusion: The yield curve is a supportive data point in the Hedgeye Mosaic projecting slowing sequential growth.

 

We were interested to see the IMF raise global GDP growth forecasts last week.  The IMF is now expecting world growth to be 4.5%.  Collectively, the IMF is projecting 3.25% growth in the United States, 1% growth in the Euro region, Japan at 2.5%, and emerging economies at 6.75%.

 

Most interesting to us is that the IMF actually upped its forecasts for U.S. growth.  For 2010, the forecast for U.S. growth was revised up 0.2% to 3.3% and for 2011 U.S. GDP growth estimates were raised by 0.3% to 2.9%.  Given that U.S. GDP grew 2.7% in Q1, the IMF is actually suggesting that from its prior estimate, in April 2009, growth in the United States has been accelerating.  Needless to say, we are not seeing this same acceleration in economic growth.

 

In our Q2 Theme Call on July 1st, we actually went in print with our view of GDP growth for 2010, 2011, and 2012, which are 2.5%, 1.7%, and 1.7% respectively.  Obviously, the point of GDP estimates is to provide directional views, not precise numbers.  More specifically, the point of our estimate is simply that we expect growth domestically to slow sequentially in the coming quarters and years.

 

The foundation supporting our view is that debt and deficit issues will constrain the ability of the U.S. government to provide additional stimulus, and in fact may lead to some form of austerity.  Either lower government spending or an implementation of austerity, will lead to slower sequential growth over the coming quarters and years.

 

Interestingly, the yield curve seems to be predicting even lower GDP growth in the United States than Hedgeye.  According to recent paper from the Cleveland Federal Reserve:

 

“Since last month, the three-month rate has dropped to 0.09 percent (for the week ending June 18) from May’s 0.17, and this also comes in below April’s 0.16 percent. The ten-year rate dropped to 3.26 percent from May’s 3.33 percent, also down from April’s 3.85 percent. The slope increased a mere 1 basis point to 317 basis points, up from May’s 316 basis points, but still below April’s 369 basis points.

 

Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.00 percent rate over the next year, just up from May’s prediction of 0.98 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”

 

We’ve also attached a chart of the yield curve. Directionally the curve seems to be more supportive of the Hedgeye view of a sequential deceleration of growth versus the IMF’s view of a sequential acceleration.

 

Daryl G. Jones

Managing Director

 

What Information Is the Yield Curve Yielding? - 10Y 3M


THE M3: MACAU LABOR BANS; CHINESE JUNE PROPERTY PRICES DECELERATE; MORE JAPAN TIDBITS

The Macau Metro Monitor, July 12th, 2010


SIX-MONTH BAN APPLIED TO ALMOST 400 NON-RESIDENT WORKERS Macaubusiness.com

From April 26 to June 30, a total of 382 non-resident workers have received a six-month ban on working in Macau.  The law states that the six-month ban should only be applied to the cases of termination of labor contracts without just cause by the non-resident worker within the effective term of the contract.
 

CHINA'S PROPERTY PRICES ROSE AT SLOWER PACE IN JUNE Channel News Asia

Housing prices in 70 major cities rose 11.4% YoY in June, compared with 12.4% YoY growth in May.  June prices fell by 0.1% from May's, the first MoM decline since March last year, according to sources.

 

Chinese media reports have said a property tax could be imposed on a trial basis in Beijing, Shanghai, the southwestern mega-city of Chongqing and the southern city of Shenzhen.  

 

JAPAN'S GREAT GAMBLE Japan Times

There is optimism that a casino bill may be passed in Spring 2011.  The prefectures that have expressed interest in building a casino include Tokyo, Okinawa, Nagasaki (the plan is to build one at the Huis Ten Bosch amusement park), Osaka, Wakayama, Kanagawa, Chiba, Miyagi, Akita and Hokkaido.

 

Toru Mihara, one of Japan's leading authorities on gambling law and casinos and an adviser to the current league of Diet members, believes that lawmakers are currently thinking of two casinos. "There will be a three-part process: 1) national government selects prefectures where casinos will be located. 2) those prefecture governments select private-sector operators via an open tender. 3)  The winning bidder will need to acquire a casino operating license from the national government — probably through a dedicated casino control authority set up under the Cabinet," said Mihara.

 

Mihara also said Okinawa may be an option to relieve some of the tension from the US military base relocation issue.  But Michael Leven, Sands' COO, has said, "We'd be interested in a place like Tokyo or Osaka.  If they were going to do it in Okinawa, we wouldn't be."  Mihara believes Konami and large-scale property developers may also bid for a domestic casino license.


WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK

Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis, while four were neutral and two were negative. 

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. MCDX Municipal Bond Credit Default Swaps

8. AAII Bulls/Bears Sentiment Survey

 

1. Financials CDS Monitor – Swaps came in across the board last week.  AXP, WFC, and XL were the most improved, while only TRV had wider spreads week-over-week.  Conclusion: Positive.

 

Tightened the most vs last week: WFC, AXP, XL

Widened/Tightened the least vs last week: TRV, SLM, AGO

Tightened the most vs last month: AXP, ACE, XL

Widened/Tightened the least vs last month: SLM, LNC, PGR

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - 1 cds

 

2. High Yield (YTM) Monitor – High Yield rates dropped 11 bps last week. Rates closed the week at 8.95% down from 9.06% the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - high yield

 

3. Leveraged Loan Index Monitor - The Leveraged Loan Index rose 2 points last week, closing at 1456 versus 1454 the week prior. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - levered loan

 

4. TED Spread Monitor - Last week the TED Spread rose slightly, closing at 38 bps, up from 37 bps in the week prior. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - ted spread

 

5. Journal of Commerce Commodity Price Index – The  JOC smoothed commodity price index is a useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index was down slightly, closing the week at 8.6, down just over 1 point versus last week’s close at 9.8. Conclusion: Neutral. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - joc

 

6. Greek Bond Yields Monitor – Greek bonds yields and CDS continue to show turmoil in the Aegean. Last week yields rose modestly, ending the week at 1033 bps versus 1020 bps the prior week. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - greek bond

 

7. Markit MCDX Index Monitor – We are replacing the Markit ABX Index with the Markit MCDX Index, a measure of municipal credit default swaps.  We believe this index will be a useful indicator of pressure in state and local governments.  Each index is a basket of 50 municipal reference entities, both revenue and GO, and the chart displayed is the average of four indices with 5-year tenors.  After rising for much of the last month, it fell on Friday to book a decline for the week.  Spreads closed at 228 versus 252 a week ago. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - mcdx

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week, reaching its most bearish reading since the market bottom in March 2009. Bulls decreased by 3.8% to 20.9% while Bears rose 15.1% to 57.1%, pushing the spread to 36% bearish, versus 17% bearish the prior week.  Conclusion: Negative.

 

One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.

 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MIXED WEEK - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur


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GENTING SINGAPORE Q2 PREVIEW

While volumes will not be as strong as Q1, Q2 should prove out our projection of an annual EBITDA run rate well north of S$1 billion.


 

We estimate that RWS will report S$665MM of revenues and S$272MM of EBITDA for Q2.  Obviously, there will be some slow down in daily volumes compared to Q1, and lower win per position as more positions opened.  Longer term we believe the Singapore market could easily grow at 10% a year for the next few years.  If and when junkets get licensed, VIP revenues should grow at a faster clip than Mass since there are no junkets operating in Singapore.  While some junkets may get licensed by Q3, they are likely to be the Singapore-based junkets and are unlikely to grow the market materially.  The hotels and the theme park should be positive EBITDA contributors this quarter, albeit at lower margins than the gaming operations as they are still ramping. 

 

We believe our Q2 estimates are above Street consensus.  Here is how we get to our numbers.

 

Modeling Assumptions:

  • Non-gaming revenues of S$97MM
    • Hotel
      • Average of 1,000 rooms operating at a rate of S$250 and occupancy of 70%
      • Assume that all 1,300 rooms are open by 4Q2010
    • Universal Studios
      • Spend per visitor of S$100 and 8k average daily visitors
      • Breakeven visitation of 6k/ day
      • Assume that by 4Q2010, daily average visitation increases to 12,000
  • Net gaming revenue of S$557MM
    • Slot revenue:  S$128MM
      • 1,200 slots and electronic table gaming positions at an average win per day of S$1,170
      • Assuming a 8% win rate, slot handle in 1Q2010 was S$871MM which we believe will increase to ~S$1,600 in 2Q2010
    • VIP Gross revenue of S$350MM
      • Rebate rate of 1.2% & net VIP win of S$209MM
      • Assume 3% hold, which implies that the first 46 days produced RC volume of S$6.35BN 
      • We assume that RC volume in 2Q2010 grows to S$11.6BN
      • Increased # of tables to 115 from 100 in 1Q2010
    • Mass table revenue of S$220MM
      • Assuming a 22% hold rate, 1Q2010 drop was roughly S$535MM and we assume that 2Q2010 drop will be about S$1BN
      • Increased number of operating tables to 235 from 200 in 1Q2010

Sitting Tight

“The market does not beat them.  They beat themselves because, though they have brains, they cannot sit tight.”

-Jesse Livermore

 

Waiting and watching for my SP500 level of 1076 last week wasn’t easy. Shorting Slowly into a bear market bounce never is, but I made 6 moves into Friday afternoon’s low-volume strength: 5 short sales (including shorting the SPY) and 1 sale on the long side (Baxter - BAX).

 

Five and ten years ago, I wouldn’t have been able to sit tight. I would have started shorting the SP500 on Wednesday and averaged up the entire way. The best way to learn how to manage risk is by doing it with live ammo.

 

There are 3 ways that I generally look at a market: Bullish, Bearish, or Not Enough of one or the other. Last week’s price action in the US reminded me that institutional investors are not yet Bearish Enough. Plenty of bulls still have the same catalyst – “earnings”. They are going to be “great”, allegedly…

 

Despite the SP500 rallying to where it should have, we have to give credit where credit is due. The bulls just realized their first 4-day rally since early April. From the YTD closing low established on July 2nd at 1022, the SP500 went up +5.4% in a straight line.

 

That’s bullish on a 4-day basis, but that doesn’t mean that anything has changed from a risk management perspective when you look out past 3 weeks toward our 3 core investment durations (TRADE, TREND, and TAIL). As of Friday’s close, here are my refreshed lines of resistance for the SP500:

 

1.       TRADE = 1078

2.       TREND = 1144

3.       TAIL = 1094

 

So the way I look at my risk in being short the SP500 is that a closing price greater than 1078 will continue to put pressure on me to sit tight and wait for the more influential line of resistance up at 1094. If the SP500 cannot close above 1078 and the bulls are forced to sell into week 1 of their “earnings” catalyst, the step downs in the SP500 are real. First line of support is down at 1048, then there is no support until 1005 (-6.7% downside from here).

 

We’re just past the half way mark of this 2010 game and I see no reason why I wouldn’t sit tight here. With the SP500 down -11.5% from its April 23rd high and down -3.4% YTD, the better benefit of the doubt remains in the bear camp. The question I ask myself every morning isn’t whether I should be bullish, but whether or not I am Bearish Enough?

 

This morning’s run of global macro news reminds me of three things:

 

1.       Sovereign Debt issues are here to stay

2.       American Austerity is on the way

3.       Global growth is going to continue to slow

 

On the sovereign debt side:

 

1.       Japan’s latest Prime Minister, Naoto Kan, has already lost the Upper House. Apparently the Japanese don’t like tax hikes and austerity.

2.       Spain’s stock market is less impressed with the country’s definition of a “stress test” than it is their World Cup win, trading down this morning.

3.       Russia is looking to start selling Eurobonds!

 

In terms of American Austerity:

 

1.       The US Dollar closed down for the 5th consecutive week last week and is starting to look a lot like the Euro did in December of 2009. Ominous.

2.       US Bond yields on the short end of the curve remain at record lows, reminding us that reflation by devaluing a currency isn’t economic growth.

3.       Washington Post story by Dan Balz today: “Co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked…”

 

Finally, from a global growth perspective, the intermediate term TREND lines on our Bear Market Macro model continue to hold above current prices:

 

1.       China’s Shanghai Composite Index TREND line of resistance = 2798

2.       WTIC Oil’s intermediate term TREND line of resistance = $78.71/barrel

3.       Dr. Copper’s intermediate term TREND line of resistance = $3.21/lb

 

From India to China this morning you are seeing more of the same – both year-over-year prices and growth continue to slow. India’s industrial production growth for the month of May slid to +11.5% versus +16.5% in April. At the same time, China’s white hot real estate market continued to cool for the 2nd straight month. Property prices have now dropped to +11.4% y/y (June) versus the April peak of +12.8% y/y price growth.

 

There is plenty of fresh data in this interconnected global macro world to absorb. There is also plenty of time for the bears to keep Sitting Tight.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sitting Tight - bmark


US STRATEGY – TIME WILL TELL

Last week ended on a positive tone with the S&P up 5.4%, rising every day last week.  The week’s strong performance left six sectors positive on TRADE and one that is positive on TREND in the Hedgeye Quant models.  All nine sectors closed higher on Friday and for the week. 

 

Until Friday nearly all the MACRO data points pointed to clear slowing in the economy.  May Wholesale Inventories rose 0.5% vs. consensus 0.4%; April’s number was revised to 0.2% from 0.4%.  Whether the rise is ultimately attributed to increased confidence or decreased end demand will be told in future quarters.

 

Last week also benefited from optimism for a strong earnings season from early reporting companies this week.  The first to report will be Alcoa then joined by GOOG, JPM, and GE; giving investors a preview of what's to come from a broad range of sectors.  All four of these stocks are down on average 20% over the past three months.

 

On Friday, for the third day in a row, treasuries were weaker with the dampened risk aversion in the markets and the VIX declined 2.8% yesterday. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.73) and Sell Trade (29.36).

 

The U.S. Dollar Index traded in a tight range on Friday and closed down 0.6% for the week.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (82.93) and Sell Trade (84.60).

 

 The EURO declined slightly on Friday, but closed up 0.6% for the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.28).

 

The three best performing sectors on Friday were those leveraged to a stronger economy - Materials (XLB +2.4%), Financials (XLF +1.4%) and Industrials (XLI +1.0%). 

 

The XLB benefited from the optimism surrounding Alcoa's upcoming earnings report, and also rising commodity prices; copper and gold traded up over 1% on the day.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.10).

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,227). 

 

Despite the strength in commodity prices Energy (XLE) was the worst performing sector on Friday.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.81) and Sell Trade (78.71).  

 

Ahead of some key earnings announcements this week the Financials (XLF) was the second best performing sector on the day.  The move in the XLF was driven by the BKX which was up 2.4%; regionals led the way higher on general optimism for the economic recovery and the beta shift up.

 

As we look at today’s set up for the S&P 500, the range is 42 points or 2.8% (1,048) downside and 1.1% (1,090) upside.   Equity futures are trading below fair value, as we are face with a very quiet MACRO calendar. 

 

Howard Penney

 

US STRATEGY – TIME WILL TELL - S P

 

US STRATEGY – TIME WILL TELL - DOLLAR

 

US STRATEGY – TIME WILL TELL - VIX

 

US STRATEGY – TIME WILL TELL - OIL

 

US STRATEGY – TIME WILL TELL - GOLD

 

US STRATEGY – TIME WILL TELL - COPPER


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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