As we look at today’s set up for the S&P 500, the range is 19 points or 1% (1,115) downside and 0.7% (1,134) upside.
“I toil beneath the curse,
But, not knowing the universe,
I fear to slide from bad to worse.”
-Alfred, Lord Tennyson
Keith was off managing domestic risk last night taking his wife out for their anniversary dinner, so I’ve been handed the pen for the Early Look this morning. Later today our firm will be having our annual picnic at our colleague Todd Jordan’s lake house in rural Connecticut. It has just been over two years ago since we welcomed our first client, and the growth trajectory since has been meteoric. On behalf of all of my teammates I’d like to thank all of our clients that have helped make this possible. It has been a pleasure working with every one of you.
We now have close to forty employees. We have three offices around the globe, with plans to open our fourth this fall. And with the pending launch of Energy Sector Head Lou Gagliardi in September, we will have seven senior sector heads who cover close to 50% of the SP500. Following our firm meeting yesterday, I can tell you this, we are just getting started.
So, as I was contemplating our firm’s growth yesterday at the Hedgeye Happy Hour following the firm meeting, I was also mulling over the future economic growth of the United States. While I’m not in the double dip camp, I do “fear to slide from bad to worse”. As Lord Tennyson would say. (Incidentally, Tennyson is the second most quoted person in the English language after Shakespeare.)
Earlier this week, Keith and I presented to our clients on the topic of U.S. Sovereign Debt. Debt and deficit issues in the United States are not exactly non-consensus as they are widely discussed and contemplated. In fact, in the spirit of “watch what they do and not what they say”, we had the second Obama administration economic official resign today in Christina Romer, the chair of the Council of Economic Advisors. This of course comes on the back of the July departure of Peter “The Paparazzi” Orzag, who ran the Office of Management and Budget. Watch what they do and not what they say . . .
Undoubtedly, both Orzag and Romer have come to the same realization as us, which is that U.S. economic growth is poised to slow in coming years. In our presentation on Tuesday, we narrowed this projection down to one key variable in our multi factor, chaos theory based model. This factor is sovereign debt. So if you are staffed with managing the budget or the economy in a slow growth environment, you better either wave the white flag and go back to teaching at Berkeley (Romer), or prepare your stomach for the new reality of Bad To Worse.
While many of you have read Reinhart and Rogoff’s book, “This Time is Different”, which studies the long term implications of large sovereign debt balances, the professors also wrote a fascinating paper earlier this year, “Growth in a Time of Debt.” This paper looks at over 210 years of data relating to sovereign debt balances and future economic growth. The key conclusion is that as debt-as-percentage-of-GDP crosses the Rubicon of 90%, future growth slows. And in dramatic fashion.
According to their paper, from 1790 to 2009, for 20 of the most modern economies, as debt exceeded 90% of GDP, average annual economic growth was 1.7%. This was compared to economic growth of 3.7% at less than 30% of debt to GDP, economic growth of 3.0% with debt to GDP from 30% to 60%, and economic growth of 3.4% with debt to GDP of 60% to 90%. In effect, as debt as a percentage of GDP passes the Rubicon of 90%, growth falls below the average by more than three standard deviations. As the quants will tell you, that is statistically significant!
Being the industrious young analysts that we are, we actually applied this thesis to Japan. In the attached chart of the day, we outline this point graphically. In the last three decades in Japan as we see a step up in debt, we see a corresponding step down of economic growth with the inflection point being . . . you guessed, it 90% debt-to-GDP. Specifically,
As they say, facts don’t lie, politicians do. And the facts as it relates to debt and growth are quite clear, as debt climbs and exceeds the Rubicon of 90%, economic growth will slow. If you don’t believe me, believe the 200+ years of data.
It is clear to me that, “The old order changeth, yielding place to new.” With the new order being a meaningfully different growth trajectory for the United States than the prior thirty years.
But as always, “Tis better to have loved and lost, than never loved at all.”
The Poet Laureate of Hedgeye,
Daryl G. Jones
The Macau Metro Monitor, August 6th, 2010
SJM MARKS COTAI LAND Macau Daily Times
SJM has started putting up fences encircling an area near the Macau Dome, in Cotai. However, CEO So said no land concession approval has been received. So also said that its future Cotai resort will maintain SJM's theme but with some "diversification".
SYDNEY CASINO STAR CITY SEEKS TO WOO HIGH-STAKES GAMBLERS WITH JET PLANES Bloomberg
As part of a facelift for Sydney's only casino, Star City, CEO Elmer Funke Kupper of Tabcorp Holdings Ltd said the company will send $146 million to woo high rollers from Crown Ltd, Macau, and Singapore. The new look would include new luxury suites, private gambling rooms and its first two jet planes. The Star City refurbishment is being overseen by Larry Mullin, who joined the company from Borgata Hotel Casino & Spa.
TOP 5 FAVOR TRAVEL DESTINATIONS FOR MAINLAND VISITORS Macau Daily News
Macau is no longer a top 5 destination for mainland visitors. According to the Visa and PATA travel association's "Travel & Tourism 2010 Outlook", the top 5 destinations this year are: Australia, Japan, HK , Singapore and Taiwan.
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Here are our notes from the Hyatt Q2 conference call.
"We are pleased with improved transient demand experienced by many of our properties in the second quarter. At several properties, particularly those in international markets, average rate increases resulted in strong RevPAR growth versus the second quarter last year. Our fees increased over 16% due to RevPAR growth and new hotels in our portfolio. The group booking cycle continues to be short but we saw increased levels of booking activity for future periods during the second quarter. We experienced strong margin performance in our owned hotels despite the fact that the revenue increase was driven primarily by occupancy gains."
- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation
HIGHLIGHTS FROM THE RELEASE
CONF CALL NOTES
Below we provide a number of charts we’ve been looking at recently in Europe. Taken together, we’ve been impressed with the fundamental data from Europe over recent weeks (especially compared to the US). However, we caution that:
On the margin, we maintain a bullish bias on German Equities (EWG) and the British Pound (FXB).
See our commentary below on the charts:
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.