Today we shorted the iShares Dow Jones U.S. Home Construction Index Fund (ITB) at $20.64 a share at 3:22 PM EDT in our Real Time Alerts.


Some investors are too optimistic about the housing recovery and a lot are still long housing at these levels. Immediate-term mean reversion risk finally moves to the downside with market beta turning bearish. Another down day like today can do wonders for a short. We’ll watch and wait with this one.


TRADE OF THE DAY: ITB  - image001

What’s Next For Agriculture Prices? (Corn, Wheat, Soybeans and Protein)

Takeaway: Join us for our Expert Call with Professor Darrel Good on Monday, October 29th at 1:00pm EST.

On Monday, October 29th at 1:00pm EST, the Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website ( His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends. 


Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices next year (or next 6 - 12 months) for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken

Current subscribers of our Macro and/or Restaurant verticals will receive the dial-in information automatically, if you have any further questions please email .


Good's Background

Darrel Good has a comprehensive understanding of agricultural markets and their economic implications.

"There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Developed, along with two other faculty members at U of I, a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • Writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  


Takeaway: On balance, the storytelling for owning US stocks up here is not supported by the data.



  • All told, we continue to see a lot of storytelling as to why investors should remain long of US equities here. Unfortunately, that storytelling is not completely supported by the data.
  • In fact, our analysis suggests that the consensus long-term bull case for owning US equities up here (“stocks are cheap”, “investors are underweight equities”, “dividend yields are compelling”, etc.) actually leads investors right to one of the most supportive theses for meaningful equity market weakness over the intermediate-to-long term.
  • That thesis is: stocks are not cheap (on a cyclically adjusted basis), fund flows are likely to continue favoring fixed income in lieu of equities and one of the core reasons why dividend yields are so compelling is because of the low interest rate environment perpetuated by ZIRP, which, perversely, perpetuates a shift of even more flows into fixed income funds to supplement slowly compounding returns. We show data to support each of these claims in the note below.


On AUG 6, we published a note titled, “DEBUNKING THE STRUCTURAL BULL CASE” in which we attempted to stress test some of the common long-term supportive theses for owning US stocks – including investor asset allocation, demographics and corporate earnings. The conclusion of the note was rather simple:


“We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.”


That view, which was published at ~1,400 on the SPX, remains our base-case scenario – a scenario that continues to be well-supported by our cyclical concerns (per our 4Q12 Macro Themes; email us for replay materials):


  • #EarningsSlowing
  • Bubble #3
  • Keynesian Cliff


Mutli-factor, multi-duration scenario analysis remains a core tenet of our Global Macro research process. In expanding upon our longer-term work, we use the prose and charts below to incrementally debunk the structural bull case for owning US stocks up  here.


Before we go any further, it’s important to note that we are not perma-bears; nor do we have a bone to pick with the US equity market. Rather, we continue to register high levels of asymmetric PRICE risk across domestic stocks – particularly relative to the fundamental DATA – and view exercising caution as the prudent thing to do here. Any sell-side strategist can come  up with a 1,001 reasons why you should buy stocks hand-over-fist here; we suspect clients are looking for a more holistic view.



Nor are they particularly expensive, either. Using data from Yale Professor and author of Irrational Exuberance, Rober Shiller, we chart the US equity market’s cyclically adjusted price-to-earnings multiple on both a nominal and real basis going back to JAN 1881. The latest readings (OCT ’12) are 24.1x and 21.4x, respectively. Moreover, the latest readings are each -0.5 standard deviations relative to their respective 10yr averages – i.e. not at all expensive by any means, but also not particularly cheap either. We would consider a “cheap” market multiple to be in the area code of -2 to -3 standard deviations oversold.









Looking at the first chart, one would be keen to notice that the US equity market’s multiple on a cyclically adjusted basis has been in secular decline (i.e. making long-term lower-highs) since its late 1999/early 2000 top. There are obviously a number of reasons for the development and continuation of this long-term trend; we agree that sentiment, money supply, the velocity of money, savings rates, asset allocation decisions, earnings growth and other catalysts have all played a factor.


One catalyst that is perhaps less discussed on a broad scale, but remains blatantly obvious to us is demographics. As the following chart shows, the percentage of the US population that is generally inclined to reallocate funds from the equity market into fixed income products has grown rapidly since that peak. The data certainly supports what the storytelling implies: as baby boomers continue to age en masse, they will increasingly be inclined to shift their portfolios from capital appreciation mode to capital preservation/cash flow mode, at the margins.




It’s important to note that this phenomenon will remain a structural headwind to the US equity market’s multiple and fund inflows for quite some time. We’re already seeing undeniable evidence of this via mutual fund flows, which have been overwhelmingly in favor of fixed income funds at the expense of equity funds since the start of 2009 – despite the US equity market being up over 100% “off the lows”!





Perhaps the aforementioned headwinds are precisely why Bernanke remains staunchly committed to ZIRP (now pledged through mid-2015). Acting as an artificial levee, Bernanke may be attempting to hold back the flood of capital that would otherwise be inclined to ditch the equity market(s) for the perceived safety and income of bond funds.


On the bright side of the ledger, the Federal Reserve’s easy monetary policies have been great for corporate balance sheet repair and earnings growth – both of which have been very supportive for dividend expansion. Equity investors continue to tout dividend growth/yields as a key reason to remain long of US equities; it’s worth noting that we agree that both catalysts are indeed supportive. Also supportive has been the boost to investor sentiment and the prices of “risk assets” into and through previous iterations of QE/OpTwist.


All that being said, however, we are inclined to argue that the hole being burned into the consumer’s income statement due to a lack of yield on interest-bearing assets might actually compel baby boomers to shift even more of their savings out of equities and into fixed income funds if they are seeking to hit some predetermined target for savings at retirement (i.e. they need to front incremental capital to fixed income funds because those interest-bearing investments now compound at slower rates; see: Japan). This view is supported by the fact that dividend income growth has demonstrably failed to keep pace with the decline in interest income in recent years, rendering total personal income receipts on assets off -26.7% from their 1Q08 peak in real terms.





All told, we continue to see a lot of storytelling as to why investors should remain long of US equities here. Unfortunately, that storytelling is not completely supported by the data. In fact, our analysis suggests that the consensus long-term bull case for owning US equities up here (“stocks are cheap”, “investors are underweight equities”, “dividend yields are compelling”, etc.) actually leads investors right to one of the most supportive theses for meaningful equity market weakness over the intermediate-to-long term.


Darius Dale

Senior Analyst

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

OBAMA: Bad For Yield?

If Obama is releected, we think he’ll throw down the gauntlet on taxes from a dividends, capital gains and high earners standpoint. This puts high-yield stocks at risk. We went back and look at the original Bush Tax Cuts Round 2, which were signed into law on May 28, 2003. Utilities had the best performance then and outperformed the market by about 9% in the three week period leading up to the cuts. After that, it gave those gains back; buy the rumor, sell the news.


Utilities were the market's go-to sector to trade the news of lower dividend tax rates. The question for financials is did the market differentiate between high and low yielding stocks within the sector in anticipation of the news? The answer appears to be yes.


OBAMA: Bad For Yield?  - taxlaw1


OBAMA: Bad For Yield?  - taxlaw2


Essentially, the market does care about taxes. Banks with less than $750m in market cap offering any decent yield are at risk if Obama is reelected. NYB, VLY, PBCT, BOH, NWBI are names we think are vulnerable.



OBAMA: Bad For Yield?  - taxlaw3


In preparation for WYN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

Wyndham Vacation Ownership Acquires Shell Vacations LLC (9/14)

  • Purchase price:  $102 million cash 
  • Acquisition includes $153 million of debt, which is primarily related to consumer loan receivables.  
  • “This tuck-in acquisition is immediately accretive to earnings and generates meaningful cash flow as well as a healthy rate of return.  With strong fee-for-service revenues, this acquisition is consistent with our capital-light strategy.”



  • “We've made significant progress over the past two years with one of our key Apollo initiatives, Revenue in room nights across the brand portfolio are up approximately 20% from this channel year-to-date in part due to improved content and Web functionality.”
  • “Over the next five years, we expect annual system size growth of 8% in EMEA, 15% in Latin America and our highest growth market will be A-Pac where we expect our system size to almost double by 2016. This is from an exceptionally strong base in the region, particularly in China where we have close to 60,000 rooms.”
  • “We completed another successful release of, which included an upgrade to an innovative click-to-chat functionality with multiple language support. From when we started the project in the first quarter of 2008, through the end of 2012, we expect our migration to online transactions to improve our exchange in rentals margin by over 225 basis points.”
  • “We expect that our available cash for the year, which includes net proceeds from ABS Financings, and assumes we'll calibrate leverage to our increased EBITDA, will be approximately $1 billion."
  • “We expect 3,022 rooms from the HPT transaction that Steve mentioned earlier, to enter the system on August 1.  And that overall pipeline activity is up 3% YoY and 5% sequentially.”
  • “We are committed to EBITDA growth of 6% to 8% with high single to low double-digit growth in the Hotel Group and mid single-digit growth in the Exchange & Rentals Group and Wyndham Vacation Ownership.”
  • “We expect sustainable annual free cash flow of $600 million to $700 million. We remain committed to an investment grade profile, which will enable us to increase debt by $300 million for every $100 million that we add in EBITDA. The result is $1 billion of available cash to deploy each year to increase shareholder value.”
  • “For the third quarter, we expect earnings per share to be $1.07 to $1.10. This is below the consensus, reflecting differences in both share repurchase assumptions and seasonality between the third and fourth quarters, however our guidance for the second half of the year is consistent with street expectations”
  • “We've probably seen a little more activity recently, more deals seem to be coming to market, but it's not a dramatic change in the volume of our activity, and really kind of what has to change is the expectation of the other side because we're very disciplined. We're not going chase anything, so if deals don't make sense, they're not going to fit into our plan… I would probably characterize it as the pipeline is a little bit stronger than it was last year at this time.
  • "The HPT deal was ”basically was built into our rooms guidance, and it's part of the reason that we're comfortable that we're going to get the growth that we've been talking about during the year to deliver in the second half”
  • “We have pretty good booking visibility into the summer for the rental business, and we feel it's pretty consistent with what we've seen so far, that we're not going to see a huge uptick, but we're not seeing any decline that we think is meaningful. I think we'll be stable in that business just as we've been calling for all year long.”
  • “We have seen a compression in the booking window.”
  • “There's been a higher level of self-inflicted attrition where we're making the decision to kick people out over the last several years, frankly not just the last couple of quarters, the last several years, as the economy has been so difficult for the hotel owners and they've not been investing in their properties.”


In preparation for PNK's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Universal card deployment will continue through the fall with Lake Charles and we anticipate completing this one card system at all our properties by the first quarter of next year. We're 15 months into our revamp loyalty program and mychoice is doing exactly what we designed it to do: increasing loyalty from our best guests with proprietary and aspirational benefits. And we've done this without increasing our overall marketing reinvestment."
  • "Vietnam is expected to follow a gaming tax model that is similar to that of Singapore. The gaming tax rate is 30% in Vietnam on a mass market play; however, it is our expectation that junket commissions will be deductible for gaming tax purposes. Therefore, the VIP effective tax rate will be materially lower."
  • [River Downs] "We expect to have the first phase of development open and to the public in 2013. We're looking forward to having access to the garage later on this year, the multipurpose room will come online next before the end of next summer, and the hotel will be opened in the second half of 2013."
  • "In New Orleans, we will be building hotels to add to severely lacking amenities to this facility. The $20 million project should be completed by the end of 2013, at which point all of our current gaming properties will have a hotel. There will be very limited disruption throughout the construction and we expect the return on invested capital for this project to exceed 15%."
  • "In Lake Charles, as we mentioned previously, we plan to refresh the room product. The first phase of this project will touch close to 530 rooms in hotel corridors, most of which are about seven years old now. This phase will cost approximately $17 million and will be done over the next 18 months."
  • "We expect that transaction to close by the end of this year."
  • [Heartland Poker acquisition] "The asset is EBITDA positive. We're not yet developed the full budget for next year on that. We will do so and you'll start seeing results in our earnings at this coming quarter since the transaction closed right at the beginning of July. So, and obviously we paid it with all cash; so... almost on any metric you look at, it'll be accretive."
  • [Corp expense of ~$5MM sustainable?] "Yes, we can maintain that level."

investing ideas

Risk Managed Long Term Investing for Pros

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.