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Lowered Expectations: FLAT Trade Update

Conclusion: Economic growth is slowing at a slower rate, which is a leading indicator for accelerating growth. As such, we’ve decided to part ways with the flattener.

 

Earlier this morning, Keith booked a rather sizeable gain vs. our cost basis in the Hedgeye Virtual Portfolio via a sale of the iPath U.S. Treasury Flattener ETN (FLAT). Having held the position since late FEB ’11, our use of the time-tested buy-and-hold technique was driven primarily by our once highly-contested belief that: 

  1. U.S. economic growth was slowing based on our PTA analysis… supported by Reinhart and Rogoff data (sovereign debt structurally impairs growth beyond 90% of GDP);
  2. Consensus (both sellside and buyside) estimates for U.S. economic growth were going to be dragged dramatically lower as the data came in light; and
  3. The U.S. Treasury yield curve would flatten from a near all-time wide as a result of #1 and #2. 

As a result of point #3, the FLAT ETN finished 2011 up +26.8%.

 

Lowered Expectations: FLAT Trade Update - 1

 

Looking ahead to the game that’s in front of us, our process continues to focus on the slope of growth – rather than the absolute – as macro markets continue to be driven by slopes, spreads, probabilities, and ranges, NOT neatly-wrapped full-year growth and inflation targets. We’ll be discussing these modeling concepts in greater detail on our 1Q12 Themes Call next Wednesday; for now, refer to Howard Penney’s Early Look from yesterday for more on this subject.

 

From a slope perspective, U.S. economic growth is still slowing. It is, however, slowing at a slower rate than before, which means that the intermediate term slope of probable economic growth scenarios is flattening out (no pun intended). While certainly not an outright bullish catalyst for beta, it is decidedly less bearish than it was a year ago. 

 

Bottoms, like tops, are processes, not points.

 

What would get us to start sending emails titled: U.S. Growth Accelerating?: 

  1. Further strength in King Dollar, which has shown a positive correlation to improving labor market trends over the past 40-plus years of data;
  2. Further Deflating of the Inflation as a result… a direct benefit to the “C” in the C + I + G + NetExp equation (i.e. ~70% of the total);
  3. Quantitative confirmation of the Bullish Formation in U.S. equities in the Treasury bond market… key yield breakout/FLAT breakdown levels to watch are included in the charts below. 

Until then, manage the immediate-term risk associated with the proactively predictable game of tug-o-war between perma-bulls and perma-bears that occurs at every top or bottom.

 

Darius Dale

Senior Analyst

 

Lowered Expectations: FLAT Trade Update - 2

 

Lowered Expectations: FLAT Trade Update - 3


Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY, Long Utilities (XLU)

 

No one said that being a stock market operator in a centrally planned Keynesian world was for the faint of heart. But this continued strength and stability in the US Dollar has positive implications for the purchasing power of Americans. I bought back WMT and EAT today.

 

Across all 3 risk management durations in our model, here are the lines that matter most: 

  1. TAIL support = 1267
  2. TRADE support = 1264
  3. TREND support = 1218 

So I have TRADE and TREND support (immediate-term) below my TAIL…

 

And, I guess, that’s what every man needs when managing the implied risks of his birthday.

 

Cheers,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TAIL: SP500 Levels, Refreshed - SPX


MPEL: TRADE UPDATE

Keith bought MPEL in the Hedgeye Virtual Portfolio at $9.61.  According to his model, there is TRADE resistance at $9.98 and TREND support at $9.19

 

 

As we mentioned yesterday in "MACAU: A DETAILED ANALYSIS OF THE DECEMBER #S", we believe MPEL should exceed consensus Q4 EBITDA estimates by the largest margin among the Macau operators.  Currently, we're 12% ahead of the Street.  MPEL’s continued growth in Mass revenues should boost margins and the company will benefit from a strong January due to the timing of Chinese New Year.  MPEL trades at a 30-40% discount to the peer group and at under 7x 2012 EV/EBITDA is near an all-time low.

 

MPEL: TRADE UPDATE - mpel


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.

WMT: Buying

KM buying WMT back on retail weakness after selling higher last week. We like WMT over all three of Hedgeye’s risk management durations for the following reasons…

 

1) US business is inflecting after years of investing to turn the cruise ship. This is partially apparent in WMT outperforming peers this holiday -- in part due to layaway plan, but also due to better alignment outside of consumables.    

     

2) Great play on stronger dollar heading into 2012. 


3) Street estimates are low next year by 3-4%. Not huge, but meaningful for WMT. 


4) Though not really 'new' is share repo is a part of many investors' thesis, the fact is that the Walton Family is slowly but surely taking the company private. 


5) Sentiment (per our backtested indicator) has never been worse.  

 

WMT: Buying - WMT update

 

WMT: Buying - WMT sentiment


Q4 HOTEL TRANSACTIONS

Scarce US transactions in Q4 but 2011 was a better year overall

 

 

Market M&A Trends for Q4

  • Q4 US hotel transaction volume fell to $1BN from $3BN in Q3 2011 and $4BN in Q2 2011.  But US transaction volume ended 2011 almost doubling that of 2010’s total.
    • The number of US hotel transactions in Q4 was significantly lower QoQ
    • US Average Price per key in the Upper Upscale segment has dropped steadily since Q2 2011
    • The European market, particularly in the UK, was more active than that of the US
  • REITs/JVs accounted for the majority of the market activity
  • Accor took part in several deals as part of the firm’s Group Asset Management strategy 
  • According to Fitch, hotel delinquencies continue to improve as November’s 12.7% rate was below September’s 13.3%

Luxury Segment

  • Average Price per Key
    • Q4 2011
      • US average: $224,785 (3 transactions)
      • Elsewhere average: $621,382 (6 transactions)
    • Q3 2011
      • US average: $632,270  (2 transactions)
      • Elsewhere average: $858,612 (2 transactions)
    • Q2 2011
      • US average: $406,250 (4 transactions)
      • Elsewhere average:  $788,461 (3 transactions)

Upper Upscale Segment

  • Average Price per Key
    • Q4 2011
      • US average: $207,026 (6 transactions)
      • Elsewhere average: $348,667 (5 transactions)
    • Q3 2011
      • US average: $253,736 (8 transactions)
      • Elsewhere average: $338,661 (4 transactions)
    • Q2 2011
      • US average: $355,382 (13 transactions)
      • Elsewhere average: $250,152 (2 transactions)

Chain Scale

L: Luxury

UU: Upper Upscale

U: Upscale

M: Midscale

E: Economy

 

Q4 HOTEL TRANSACTIONS - 111


JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011

Initial Claims: Closing Out the Year on a Positive Note

The headline initial claims number fell 9k WoW to 372k (down 15k after a 6k upward revision to last week’s data).  Rolling claims fell 3.25k to 373k. On a non-seasonally-adjusted basis, reported claims rose 37k WoW to 535k.

 

We've pointed out for the last several weeks that in the last two years claims have shown a tailwind from week 36 through year-end, and then tend to reverse that trend in the opening 1-2 months of the new year. This morning's print is consistent with that trend as this was the last print of 2011 (it reflects claims through 12/31/11). That said, the larger, secular trend in place at the moment is ongoing improvement in claims. This is obviously a tailwind for lenders from a delinquency standpoint. That said, it will be dwarfed by the elimination of reserve release that will rear its head in 4Q earnings when companies start reporting in two weeks. We often look at Discover as a leading indicator on this front as they're an off-cycle reporter (November fiscal year-end). Discover's quarter told the tale quite clearly. Although they beat estimates and generally reported solid metrics, the optical sequential slowdown driven by the absence of reserve release led the stock to get sold. Don't be surprised when the impact is far greater at the big banks. 

 

We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not persisted. Right now the divergence is suggesting that either claims back up to ~425k or the S&P 500 puts on a move to ~1390. Last time a comparable divergence emerged it was in the Fall of 2011. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.   

 

As a final point, for those astute observers who notice a 53rd week in our charts below, we're not crazy. There are, in fact, 52.14 weeks per year (365/7) which means that every 7 years there is an extra week in the year. We've selected this year (2011) to be that 53-week year simply because it ended on 12/31/11. 

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - Rolling

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - Raw

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - NSA chart

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - S P

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - Fed Claims

 

2-10 Spread

The 2-10 spread widened 7 bps versus last week to 172 bps as of yesterday.  The ten-year bond yield increased 6 bps to 198 bps.

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - 2 10 spread

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - 2 10 QoQ change

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS: THE POSITIVE TREND CONTINUES THROUGH THE LAST PRINT OF 2011 - Subsector Performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.   

 

 


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