Month: January 2017

By Chris at http://ift.tt/12YmHT5

Ok, this is getting a bit ridiculous.

Ever since Americans picked the bully over the crook, and the Mexican Peso began acting like a penny stock just after the promoters begin dumping stock, I’ve been literally inundated with questions about Mexico. It seems I’ve got a lot of American readers super keen to look for value where others fear to tread. A good thing!

I did point out back in early December what I thought about the long Mexico trade and in particular the long MXN trade idea.

I showed this chart of the iShares MSCI Mexico Capped ETF (EWW) which is a decent enough proxy for the Mexican stock market. Today it’s pretty much unchanged from when I first showed it to you over a month ago.

Here’s what I said then:

The reason I chose to show you this chart, one going all the way back to the GFC, is because I want you to see the forest and not get caught up in the gnarly branches and roots of the trees, and as such realise that despite all the brouhaha crossing your news feeds. Trump’s election is IRRELEVANT to this market. The trend was in place well before Trump began lashing out at the Mexicans and Chinese for stealing America’s rice bowls KFC.

So that was, and still is, my macro thesis and how Mexico plays into it.

Sure, the Peso is cheap and by many accounts the greenback is not, but this is knee jerk, first level thinking to simply buy something when it’s cheap. When digging down into the bowels of the market to try figure out what’s driving capital flows and liquidity, I come to a different view.

This is the nexus of the articles I wrote about the eurodollar market. I urge you to drink lots of coffee and read it as well as the subsequent two articles: “The Eurodollar Market: It’s Not Working” and “Collateral Damage”, in which I explained my thesis as to why we’ve been experiencing deflation during ridiculous monetary expansion. A lot of my investment thesis stems from those articles and the knock on effects.

I’d planned to get some thoughts on Mexico when speaking with Mark Yusko today as he’s recently back from a trip there, however the conversation went long on other topics and so that’ll have to wait for another day. Maybe I’ll hit record and publish it as a podcast, which could be fun.

Instead, today I thought to bring you my buddy Kuppy’s (Harris Kupperman) take on Mexico because it’s a topic we’ve discussed quite a bit. And since Kuppy is a great stock picker (and I’m more of a macro guy), I thought I’d share with you his thoughts on how best to play the Mexico on sale story.

Enjoy!

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I am writing to you from Santiago de Queretaro, Mexico, where the whole country is having a yuuuuge Donald Trump victory sale. Mexico is one of my favorite countries to visit. It combines a laid back attitude, friendly people and an outstanding culinary tradition.

It also helps that it’s currently one of the cheapest places on the planet—one of many reasons that I’ve spent 5 weeks here recently (Yucatan and Central Mexico thus far).

Mexico has always been known as an affordable place with cheap beer and tacos, but the last two years have taken that dynamic to an extreme.

Where else is the brand new AC Marriott $42 per night? In touristy San Miguel de Allende, we booked a 2,500 foot, 2 bedroom suite on the main square for $75 a night. Food for two with a bottle of mezcal is about $30 at the most posh of restaurants.

It’s verging on silly.

Between the two thirds decline in the Mexican Peso over the past two years and an over-dramatized fear of violence, the tourist economy is basically running on free. They’re just happy to see you and thankfully, my Mexican fiancé can translate my pathetic gringo Spanish as we travel around.  

5-year peso chart: 2/3 of the value is gone in just the last 2 years

If you don’t have a trip planned to Mexico, get working on it. I don’t think it will stay this cheap for long.

Let’s start with the obvious question—is it dangerous?

I tend to like statistics as opposed to jaundiced media reporting. The USA has a 4.5 per 100,000 homicide rate. Mexico is pushing 20, or about four times as bad. Given that I’m not terribly scared in America, four times worse doesn’t seem that bad.

When you dig into the numbers, you realize that much of this crime is drug related. In fact, if you aren’t involved in narco-trafficking, the homicide rate isn’t much worse than that of the USA.

Furthermore, most of the violence seems clustered in a few cities and states. I wouldn’t go to Baltimore or East St. Louis on vacation, why go to the Mexican version? Strip that all out and Mexico is on par with most of America.

Unfortunately, a few dramatic incidents have cost Mexico millions of visitors a year. Eventually, perceptions will adjust to reality and the tourists will flock back—especially given how affordable it is.

I have now taken two trips to Mexico during the past 10 weeks. The whole time, I’ve kept asking myself, “How do you play this?” It’s so cheap.

Despite threats of change from Trump, I know this is an overreaction. Mexico is sure to bounce back and keep growing–though, the economy may shift slightly from manufacturing towards tourism due to how cheap it is to visit.

The thing is, just because something is cheap, that doesn’t mean there’s always a “play.”

There’s an old adage in finance that you don’t buy the currency of Spanish speaking countries. Pull up a 10-year chart of any of these countries and it will be obvious why that adage has weight—pull up a 50-year chart and you won’t even be able to zoom in to where we are today. The peso has overshot recently, but it’s not an asset I want to own.

What about assets benefitting from a weakening currency?

In property, if you can borrow at a reasonable rate in a depreciating currency and get paid rent in US dollars, you’re going to make a fortune. Unfortunately, for most foreign property companies, rents are long-term and struck in depreciating local currencies.

However, the hotel sector is largely immune to this. They can adjust their room rates daily.

Fibra Hotel (FIHO12: Mexico) and Fibra Inn (FINN13: Mexico) have both borrowed in Mexican pesos. Right now, the rates they’re receiving are silly. Look up some of their hotels on the internet: $20 here, $30 there.

This is because there is a lag in how fast they can re-price room rates to take advantage of the decline in the peso—especially as many of their customers are business travelers with budgets in pesos.

However, their costs are mostly fixed, the assets were built with pre-depreciated currency—they’re now worth much more in current pesos than it cost to build them. The supply of new hotels will slow as it costs much more in current pesos to build new ones—all the old ones have a massive competitive advantage until room rates fully reset.

Meanwhile, due to Trump’s victory and the decline in the peso, Mexican hotel REITs are being priced like something awful is about to happen—instead, a weaker peso is a huge boon to them.

In terms of valuations, I don’t think annualizing current quarter cash flow is the correct measure to look at—as room rates in Mexican pesos will likely rise in future quarters.

That said, they trade at about ten times pro-forma AFFO and pay pro-forma Q4 dividends around 9% adjusted for stabilization of new assets. That’s very cheap for a property company with minimal leverage. With mostly fixed costs, I can model these companies to be trading for more like 6 to 8 times AFFO looking forward a year—due to a normalization of hotel rates on a fixed cost structure.

A more typical measure of valuation in the hotel industry is price per room. Adjusting debt for rooms still under construction, these companies trade at enterprise values of around $30,000 to $35,000 a room, while comparable rooms cost at least twice that to construct in Mexico. This would imply that they trade for less than half of replacement cost.

Interestingly, the Mexican hotel market is much more fractured than the US market. As the market consolidates, there are lots of hotels that can be purchased for 10 cap rates—even before economies of scale at a larger REIT increase the returns.

Given the low leverage at both of these companies and how cheap debt is, there is likely to be continued growth as these companies take advantage of distressed players and make highly accretive acquisitions.

Fibra Inn priced in US dollars since the IPO

Fibra Hotel priced in US dollars since the IPO

In summary, I have started small positions in each—I’m looking for further declines before I really add size.

Deep down, I don’t think they’ve bottomed yet. However, they’re very cheap based on almost any metric you can use. They have growth pathways and the re-adjustment of room rates over the next few quarters should flow through the cash flow statements.

Meanwhile, due to dividends, you’re paid well to wait. No one ever gets the exact bottom and Mexico is stunningly cheap, incredibly close for Americans and I expect that travel will increase as a result.

Over the next few quarters, one of two things will happen—either Trump and Mexico will reach an acceptable solution on trade where the currency recovers and average daily room rates reflect something closer to historical rental rates in Mexico when priced in US dollars or the cheapness of the country drives more tourists and occupancy increases, while room rates are re-priced closer to previous dollar rates.

Either way, I see RevPAR in US dollar equivalents increasing dramatically over the next few quarters.

In any case, I’m celebrating Trump’s victory with cheap cerveza, a cheap hotel room and two very undervalued REITs. I continue to seek out other opportunities in Mexico (stay tuned).

Disclosure: Long FINN13 and FIHO12

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That’s it for today folks. Have a great week!

– Chris

“Mexico’s making a fortune off the United States.” — Donald Trump

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Just yesterday we noted that, according to a Rasmussen poll, while the vocal, and often violent, disaffected Hillary protesters may get a lot of media attention, the silent majority of Americans, men and women who don’t have time to protest 24 hours a day because they actually go to work to provide for their families, support Trump’s temporary immigration ban from 7 mostly-Muslim countries in the Middle East and Africa.

Now, Reuters/Ipsos, the pollsters who mastered the application of the Democrat “oversample” in the months leading up to the presidential election last November, is out with another poll that confirms the Rasmussen results, namely that the silent majority of Americans agree with Trump’s immigration ban.  Per Reuters:

The Jan. 30-31 poll found that 49 percent of American adults said they either “strongly” or “somewhat” agreed with Trump’s order, while 41 percent “strongly” or “somewhat” disagreed and another 10 percent said they don’t know.

 

But the responses were split almost entirely along party lines. Some 53 percent of Democrats said they “strongly disagree” with Trump’s action while 51 percent of Republicans said they “strongly agree.”

 

The Reuters/Ipsos poll found 31 percent of Americans feel “more safe” because of the ban, compared with 26 percent who said they felt “less safe.” Some 38 percent said they felt the United States was setting “a good example” of how best to confront terrorism, while 41 percent said the country was setting “a bad example.”

Of course, popular opinion of the American people didn’t stop 900 Clinton loyalists in the State Department from signing a “dissent memo” in defiance of their new boss.

Roughly 900 U.S. State Department officials signed an internal dissent memo critical of President Donald Trump’s travel ban for refugees and immigrants from six Muslim-majority countries, a source familiar with the document said on Tuesday.

 

A senior State Department official confirmed that the memorandum in the department’s “dissent channel” had been submitted to management.

 

White House spokesman Sean Spicer said on Monday he was aware of the memo but warned career diplomats that they should either “get with the program or they can go.”

Seems these 900 folks may soon suffer the same fate as the acting Attorney General who decided to publicly announce her defiance of Trump’s immigration order just yesterday.

For those who missed it, below is our note from yesterday on the Rasmussen poll.

* * *

While vocal, and often violent, disaffected Hillary protesters may get a lot of media attention, a new Rasmussen poll out today reveals that the silent majority of Americans, men and women who don’t have time to protest 24 hours a day because they actually go to work to provide for their families, support Trump’s temporary immigration ban from 7 mostly-Muslim countries in the Middle East and Africa.  In fact, per the new poll, 57% of likely U.S. voters actually approve of the ban while only 33% were opposed.  

A new Rasmussen Reports national telephone and online survey finds that 57% of Likely U.S. Voters favor a temporary ban on refugees from Syria, Iraq, Iran, Libya, Somalia, Sudan and Yemen until the federal government approves its ability to screen out potential terrorists from coming here. Thirty-three percent (33%) are opposed, while 10% are undecided.

 

Similarly, 56% favor a temporary block on visas prohibiting residents of Syria, Iraq, Iran, Libya, Somalia, Sudan and Yemen from entering the United States until the government approves its ability to screen for likely terrorists. Thirty-two percent (32%) oppose this temporary ban, and 11% are undecided.

 

This survey was taken late last week prior to the weekend protests against Trump’s executive orders imposing a four-month ban on all refugees and a temporary visa ban on visitors from these seven countries.

 

Like most issues, support for the immigration ban was heavily split along party lines with 82% of Republicans supporting the executive order versus only 34% of Democrats and 53% of Independents.

The refugee ban is supported by 82% of Republicans and 59% of voters not affiliated with either major party. Democrats are opposed by a 53% to 34% margin. The numbers are nearly identical for the temporary ban on visas from these seven terrorist-plagued nations.

 

Men and women are in general agreement on both measures. Younger voters are slightly less supportive than their elders are.

 

Blacks oppose both bans more than whites and other majority voters do.

As we pointed out earlier (see “Is A Constitutional Crisis Imminent In The Wake Of Trump’s Immigration Ban?“), the ACLU, flush with $24 million in donations from just this weekend alone, has vowed to fight Trump’s immigration ban all the way to the Supreme Court on grounds that it targets people of a certain religion, in direct violation of the First Amendment. 

That said, many legal scholars have asserted that Trump’s immigration ban will stand up against Constitutional tests, with GWU professor Jonathan Turley saying the ban can’t be viewed as a “Muslim ban” given the “vast majority of Muslims around the world are not affected by the limitations placed on these seven countries.”

Still, some observers said the courts ultimately might uphold Trump’s order. Its alleged anti-Muslim thrust “is not clear to me,” said Eugene Volokh, a professor at UCLA School of Law. Judges might interpret the order as targeting people from countries where “jihadist sentiments” are common, he said. The president generally has broad authority to exclude non-citizens from coming into the country, Volokh said.

 

Jonathan Turley, a law professor at George Washington University, predicted the courts would not interpret the order as a religious ban. “It is not on its face a Muslim ban,” he said. “That dog simply won’t hunt. No judge can look at the order and analyze it as a Muslim ban because the vast majority of Muslims around the world are not affected by the limitations placed on these seven countries.”

But while the ACLU is looking for a Supreme Court battle, Trump continues to fight in the court of public opinion, which, at least according to Rasmussen, is a fight he’s winning. 

There is nothing nice about searching for terrorists before they can enter our country. This was a big part of my campaign. Study the world!

— Donald J. Trump (@realDonaldTrump) January 30, 2017

If the ban were announced with a one week notice, the “bad” would rush into our country during that week. A lot of bad “dudes” out there!

— Donald J. Trump (@realDonaldTrump) January 30, 2017

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Three weeks after the “largest US military deployment into Eastern Europe since the cold war“, consisting of thousands of tanks and troops under a planned NATO operation to “reassure the alliance’s Eastern European allies”, on Tuesday Germany started the deployment of tanks to Lithuania as part of the same NATO mission meant to “bolster confidence” in the face of what NATO member states call “Russian aggression.”

Germany is one of the countries that agreed to provide troops and weapons for the NATO mission, which involves deploying four battalions in Poland and the three Baltic states.

According to Reuters, the German army command said it was sending about 200 vehicles, including 30 tanks, by train to Lithuania along with 450 troops, the first of whom arrived last week. The transports would continue until late February. Seven decades after the end of World War Two, the movement of German
troops to eastern Europe, even on a NATO mission, remains a sensitive
issue both in Germany and the region.

On Monday the U.S. military deployed thousands of soldiers and heavy weaponry to Poland, the Baltic states and southeastern Europe in its biggest build-up since the Cold War.

The 28-nation Western alliance decided to move four battalions totaling 3,000 to 4,000 troops into northeastern Europe on a rotating basis to display its readiness to defend eastern members against any Russian aggression. The deployments focus on Poland and the Baltic states of Estonia, Latvia and Lithuania, which fear Moscow could try to destabilize them by cyber attacks, territorial incursions or other means.

The military buildup meant to put pressure on the Kremlin, is the largest since the Cold War and could put into question the NATO-Russia agreement permanently banning the deployment of significant forces by the alliance in Eastern Europe. NATO rejects such notions, saying the agreement did not specify how big a force should be for it to be considered “significant,” and insists that the deployment is rotational rather than permanent.

The bloc decided to boost its military presence on the Russian border in the wake of the political crisis in Ukraine.  The most vocal members of NATO, such as Poland and the Baltic states, claimed that Russia could attack them after the events in Ukraine, prompting leading members of the alliance to agree on the troop deployments.

Moscow has denied any aggressive intentions towards NATO members and says the bloc is using a pretext to compromise Russia’s national security. The Russian armed forces have boosted their strength near the western border in response to the buildup.

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On his first day in office, President Trump instructed Chief of Staff, Reince Priebus, to send a memo to all executive agencies imposing a regulatory moratorium that effectively froze all pending rules and regulations proposed by the Obama administration on their way out of Washington D.C.  Now, accorded to a new study from the American Action Forum, that simple one-page memo from Priebus potentially saved Americans $180 billion.

According to American Action Forum (AAF) research, this memo put a hold on $181 billion in total regulatory costs, including $17 billion in annual costs, and 5.5 million hours of paperwork. This moratorium freezes 22 rulemakings with annual costs above $100 million and 16 measures with more than $1 billion in long-term costs.

From vehicle-to-vehicle communications to efficiency standards for air conditioners and furnaces, Obama’s parting regulations ran the gamut.

The largest rules subject to the moratorium are a mix of those still in the proposed stage, recently finalized, and concluded but not yet published. Below are the top five rules likely subject to the regulatory freeze:

 

• Vehicle-to-Vehicle Communications: $108 billion in total costs
• Efficiency Standards for Air Conditioners: $12.3 billion in total costs
• Efficiency Standards for Furnaces: $9.2 billion in total costs
• Hospital and Critical Access Reform: $5.7 billion in total costs
• Efficiency Standards for Uninterruptible Power Supplies: $4.6 billion in total costs

 

Shockingly, while tiny compared to the $180 billion price tag of his new regulations, Obama did offer up $1.9 billion of cost savings tied to a new energy efficiency rule and a reorganization of the Food Stamp Program, among other things.

There are some regulations the Trump Administration might consider allowing soon. There are at least 18 recently-finalized or still-proposed measures that reduce compliance burdens. There are five additional regulations that claim notable reductions in federal paperwork. Combined, these deregulatory rules could save $1.9 billion in total costs and 41.4 million hours of paperwork.

 

The largest measure by far is a DOE proposal on general service lamps. It claims to eliminate $1.4 billion in regulatory burdens ($93 million annually) by lowering the purchase price of lamps and increasing their efficiency. The rulemaking also claims $481 million in benefits.

 

In a bit of a last-minute surprise, the Obama Administration revised its Food Stamp Program (SNAP) for eligibility and certification. As AAF detailed in the past, the previous Food Stamp paperwork burden went from 24 million hours to 118 million hours. The revised SNAP rule aims to cut 40.5 million hours of paperwork and save $286 million annually. The rule has an effective date of March 7, 2017, so it could fall under criteria three of the moratorium, but after a review, the measure could be a good candidate to keep.

Frankly, we find it shocking that America has managed to operate for the past 11 days without these parting regulatory gifts from the Obama administration. 

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U.S. equities look worryingly vulnerable, warns Bloomberg’s Mark Cudmore, warning that Trump’s doubling down on his hardline autocratic approach ensures that markets won’t be able to overlook the implications of his immigration order.

I apologize if this piece seems very similar to three of my last four columns, but markets are exhibiting exceptional complacency… That attitude may shift rapidly.

 

Today, futures are signaling that the S&P 500 Index may break the post-election upward trend and also fall below the 2017 volume-weighted average price of about 2,273.3. That means that on average, recent buyers are losing money while the technicals suggest holders of stocks that have made money may want to consider taking profit.

 

 

Trump’s initial order suddenly suspended the rights of a small minority of permanent residents, which was worrying enough. Firing the acting attorney general for questioning the legality of such a move just hammers home that the rules could change quickly for anyone dealing with the U.S. The established rule of law is now in doubt.

 

The problem this highlights is that it now becomes a subjective assessment of where this behavior stops. Trump’s willingness to rule by decree, without consulting government departments or stakeholders, means it’s impossible to rule out the prospect that he might seize assets or unexpectedly implement some form of capital controls. That seems drastic and far-fetched, but the actions of the last few days are also extreme, so how do investors know with confidence what the limit will be?

 

 

Equity volatility measures are near record lows which indicate that protection is under-owned. Traders have forgotten what a correction can look like and, given the level of hope and optimism out there, panic could spread quickly.

 

 

With both global growth and earnings looking positive, and the possibility of pro-growth Trump policies to come, there’s no reason — yet — to believe in a sustained bear market for U.S. stocks. However, the potential for a short-term shock appears to be far greater than traders are allowing for.

Notably, much has been made of the surge in macro-economic ‘data’ post-Trump, but as we noted previously, this stock-market-supportive surge has been driven solely by ‘soft’ data and not ‘hard’ actual economic data. What is perhaps more immediately worrying is the seasonal tendency for a post-fiscal-year surge in Economic data followed by a Q1 plunge…

 

If this happens, then Mark Cudmore’s warning will very quickly be proven correct.

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Rumors of AAPL’s demise have once again been greatly exaggerated. Moments ago, Apple reported Q1 earnings which not only beat on the top and bottom line, but also showed a record number of iPhone shipments in the quarter at a record 78.4 million, 2 million more than expected, and at higher ASPs. Earnings of $3.36 were higher than the $3.22 expected, on record revenue of $78.4 billion, above the $77.3 BN expected.

The result in a nutshell:

• Q1 EPS: $3.36, Exp. $3.22
• Q1 Revenue: $78.4Bn, Exp. $77.3Bn
• Gross margin: Exp. 38.4%
• iPhone unit sales: 78.3 milion, Exp. 76.3 million
• iPhone ASP: $694.6, Exp. $688

Putting Apple’s numbers in context: in Q1 2017 iPhone sales generated 69% of the company’s total revenue. This compares to 2.5% in Q1 2008.

The only fly in the ointment appears to have been a modest cut to
guidance, as it now expects to generate Q2 revenue of $51.5BN to
$53.5BN, beow the $53.8BN expected.

In an interview, Apple CFO Luca Maestri said that app store sales increased 40% y/y in the quarter. Apple also provided the following guidance for its fiscal 2017 second quarter:

• revenue between $51.5 billion and $53.5 billion
• gross margin between 38 percent and 39 percent
• operating expenses between $6.5 billion and $6.6 billion
• other income/(expense) of $400 million
• tax rate of 26 percent

Tim cook was happy:

“We’re thrilled to report that our holiday quarter results generated Apple’s highest quarterly revenue ever, and broke multiple records along the way. We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch,” said Tim Cook, Apple’s CEO. “Revenue from Services grew strongly over last year, led by record customer activity on the App Store, and we are very excited about the products in our pipeline.”

The result in chart format:

While Apple revenue grew Y/Y, Net Income failed to rise from a year ago, dipping fractionally by 2.6% even as iPhone sales rose by 5% from a year ago.

Q1 Revenue of $78.4 billion was an all time high.

 

Product sales: a record number of iPhone sold in the quarter

 

Regional breakdown: sales grew in every region expect China where they declined by 11.6%

 

Finally, the company’s record cash hoard grew once more, rising to $246 billion total, and $159 billion net. Most of this cash remains offshore.

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