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The Next Level

Client Talking Points

Grabbing The Bull By The Horns

Yesterday was one hell of a rally. The S&P 500 held its line of support at 1419 and then ripped to within 0.8% of its September 2012 intraday high (Bernanke Top, anyone?) All it took was a little deal on the fiscal cliff. No biggie. Oh yeah - The Russell 2000 closed up +2.9%, making an ALL-TIME high at 873. Keith’s multi-duration S&P sector model is blowing gaskets like a Looney Tunes clock spinning a hundred times a minute; all nine sectors are bullish on all three durations (TRADE, TREND, TAIL) for the first time since December of 2011. This is huge. Anyone who shorted yesterday’s rally got their face ripped off. 

 

So what happens next? There is a very good opportunity for the big guys - the asset managers - to move capital out of bonds and into stocks. Earning 50 basis points a year isn’t generating alpha, but participating in a full on bull rally will, provided you manage your risk. With #GrowthStabilizing, stocks on the rise and a housing market in recovery, we’re just a catalyst away from taking this market even higher.

Asset Allocation

CASH 55% US EQUITIES 18%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Buy stocks, sell bonds” -@KeithMcCullough

QUOTE OF THE DAY

“Democracy is a device that ensures we shall be governed no better than we deserve.” -George Bernard Shaw

STAT OF THE DAY

Private Sector Employment rises more than expected, up 215,000 in December.


Q4 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY)

Scarce transactions close out the year, though volume was better  

 

 

Upper upscale (UUP) & Luxury Transaction Trends for Q4 2012 

  • Q4 2012 worldwide hotel transaction volume (UUP & Luxury brands) was $3.2 billion, up from Q3 2012's $2.7 billion, and higher than Q4 2011's $1.3 billion. 2012 transaction volume reached almost $10 billion, lower than the $11 billion in 2011.
  • The number of US luxury/UUP hotel transactions was 9 in Q4 2012 compared with 12 in Q3 2012 and 9 in Q4 2011. 
  • The number of non-US luxury/UUP hotel transactions was 3 in Q4 2012, compared with 6 in Q3 2012 and the 11 in Q4 2011.
  • There were two portfolio deals: 1) The Government of Singapore Investment Corp. bought the Grand Wailea on Maui, the La Quinta Resort & Club and PGA West golf course in La Quinta, Calif., the Arizona Biltmore Resort & Spa in Phoenix - which are all managed by Waldorf Astoria Management under Hilton Worldwide’s Waldorf Astoria Hotels & Resorts brand - and Claremont Resort & Spa in Berkeley, CA.  The seller was a joint venture led by Paulson & Co. which had taken over the properties in a bankruptcy deal as part of a $600 million restructuring of Morgan Stanley's real estate funds.  The hotel properties then filed for Chapter 11 bankruptcy protection. 2) Host hotel's European JV bought five hotels from Whitehall - Paris Marriott Rive Gauche Hotel & Conference Center, Renaissance Amsterdam Hotel, Renaissance Paris La Defense Hotel, Renaissance Paris Vendome Hotel, and the Courtyard Paris La Defense West – Colombes. 
  • Relative to a seven quarter trailing average, US average price per key (APPK) in the UUP segment is in-line at $266k.  Non-US APPK in the UUP segment moved to $360k, 15% higher than its seven quarter trailing average. 

Other Chain Scale Trends for Q4 2012

  • There were two large M&A transactions:  1) Apple REIT 6 was sold to BRE Select Hotels Corp (a Blackstone affiliate). 2) InTown Suites was sold to Starwood Capital Group.
  • According to Fitch, the hotel delinquency rate in November was 9.83%, lower than the 10.82% seen in August.  The delinquency rate remains well below the relative high of 14% seen in Q3 2011.

Q4 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - uup4

 

Q4 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - l1

 

Q4 GLOBAL HOTEL TRANSACTIONS (UUP/LUXURY) - c


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 3, 2013


As we look at today's setup for the S&P 500, the range is 45 points or 2.29% downside to 1429 and 0.79% upside to 1474.              

                                                                                                                 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.58 from 1.58
  • VIX closed at 14.68 1 day percent change of -18.53%
  • ECONOMIC DATA – the 3 big engines for Global #GrowthStabilizing (China, Germany, USA) all better sequentially in the last 24hrs (US PMI 50.7 DEC vs 49.5 NOV, w/ a very good employment reading within that report of 52.7; German unemployment 6.9% was solid; and Chinese non-manufacturing PMI of 56.1 DEC vs 55.6 NOV hit a 4mth high).

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of Dec. 28
  • 7:30am: Challenger Job Cuts, Y/y, Dec., (prior 34.4%)
  • 8:00am: RBC Consumer Outlook, Jan. (prior 46.9)
  • 8:15am: ADP Employment Change, Dec., est. 140k (prior 118k)
  • 8:30am: Initial Jobless Claims, wk of Dec. 29, est. 360k (prior 350k)
  • 9:45am: Bloomberg Consumer Comfort, wk of Dec. 30 (prior -32.1)
  • 9:45am: ISM New York, Dec. (prior 52.5)
  • 10am: Freddie Mac mortgage rate survey
  • 2pm: Fed releases minutes from Dec. 11-12 FOMC meeting
  • 4:30pm: API weekly inventories
  • U.S. Treasury to announce 1Y, 3Y, 10Y, 30Y auction sizes

GOVERNMENT:

    • Congress convenes; almost 100 members will be sworn in to office for the first time
    • Centers for Medicare & Medicaid Services holds a conference call briefing on an announcement related to the Affordable Care Act, 1:30pm
    • American Bankers Association announces the release of the third quarter 2012 Consumer Credit Delinquency Bulletin, containing delinquency data for several consumer loan categories, 4pm

WHAT TO WATCH

  • Google said to be set to end FTC antitrust probe with agreement today
  • Boehner set to regain speakership as party base decries tax vote
  • Sandy aid will get vote this month following delay, Boehner says
  • Retailers may post slowest Dec. sales growth since 2008
  • Ford, GM, other automakers release December sales
  • Barnes & Noble releases holiday sales, Nook update
  • AMR asks bankruptcy judge to approve revised supplier contracts
  • China service industries expanded at fastest pace in 4 mos. in Dec.
  • Paulson & Co. named as defendant in amended ACA Goldman Sachs lawsuit
  • Al Gore’s Current TV is said to be sold for $500m to Al Jazeera
  • Rambus barred from enforcing 12 chip patents in Micron lawsuit
  • Amgen whistle-blower blocked from challenging Aranesp settlement
  • Safeway CEO Burd to retire after 20 yrs

     EARNINGS:

    • Family Dollar (FDO) 7am, $0.75
    • UniFirst (UNF) 8am, $1.33
    • Worthington Industries (WOR) 8:30am, $0.41
    • Progress Software (PRGS) 4:30pm, $0.34

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

GOLD – both bonds and gold do not like growth improving; that’s why both lagged yesterday and don’t look any better today (10yr 1.83% and Gold fails at $1690 TRADE line resistance); Gold snapping its long-term TAIL line again of $1671 is when you get paid there on the short side. A better employment rpt could easily do that.

  • Oil Drops From Highest in Three Months on Signs Gains Excessive
  • Dust Bowl Wilting U.S. Wheat as Funds Turn Bearish: Commodities
  • Gold Declines on U.S. Budget-Deal ‘Hangover’ as Dollar Rallies
  • Copper Advances on Prospects for an Economic Rebound in China
  • Soybeans Drop as Prospects Improve for South American Crops
  • Australia Swelters Amid Most Wide-Ranging Heatwave Since 2001
  • Gold Seen Sliding to $1,450 in 2013 on Investor Frustration
  • Natural Gas 4Q Price Gains Boost Producers, Challenge Suppliers
  • Coal’s Competitive Fuel Cost Advantage Over Gas Grows in 4Q
  • Chavez Cancer Imperils $7 Billion Caribbean Oil Funding: Energy
  • Rig Grounding Revives Debate Over Shell’s Arctic Oil Exploration
  • Asia Naphtha Crack Rebounds; Vitol Sells Gasoline: Oil Products
  • European Union Carbon-Dioxide Permits Decline to One-Month Low
  • Gold’s 12-Year Bull Market “Not Yet Dead,” Credit Suisse Says

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


EURO – biggest relative opportunity on the long-side potentially here this morning w/ EUR/USD moving to immediate-term TRADE oversold at $1.31 (risk range = 1.31-1.33). At a bare minimum, if you are short it, you cover here – we might buy it (which is just one more bullish signal for global macro beta right now). Haven’t bought the Euro in a while.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

The Hedgeye Macro Team

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

THE M3: SMOKING ZONES

The Macau Metro Monitor, January 3, 2013

 

 

CASINOS ACCUSED OF CONCENTRATING MOST POPULAR GAMES IN SMOKING ZONES Macau Daily Times

Several casino workers’ associations have accused all of the six gaming concessionaires of taking advantage of the new regulation’s loopholes by assembling gaming tables and popular games together into smoking areas, leaving croupiers and other workers exposed to even higher densities of cigarette smoke.  They called for amendments to the regulations as well as stricter enforcement, and some of them even warn of strikes if the situation continues. 

 

All 44 casinos across the 6 concessionaires successfully applied to operate smoking areas, ranging from 34% to 49% of their floor-space.  When asked which casinos have the worst conditions, Leong Sun Iok, Vice-President of the Association’s Board of Directors of the Macau Gaming Industry Laborers Association said that in his initial observation of the casinos, the smaller ones seem to have more serious problems because of lower ceilings and less efficient ventilation systems, while those inside the large resorts have better conditions.

 

According to the Health Bureau, SJM has secured a maximum of an average of 44% of smoking areas across its 19 casinos. 



Growth Stabilizing

“It is gone forever.”

-Jeremy Grantham

 

That’s what legendary investor, Jeremy Grantham, started off his Quarterly Letter with in November. It was titled “On the Road to Zero Growth” and was published right around the time that the Barron’s cover read “Are We Headed For A Recession” (November 12, 2012).

 

I have a tremendous amount of respect for Grantham’s long-term TAIL risk work, but that doesn’t mean I always agree with him; especially on timing. For the last six weeks, our Global Growth Model has explicitly disagreed with A) a global recession and/or B) anything that remotely resembles 1% US growth, never mind 0%.

 

Since the mid-December cover of The Economist was titled “A Rough Guide To Hell”, I think being relatively bullish on stocks (and bearish on both Bonds and Gold) here is still the contrarian call to make. I don’t make calls on forever.

 

Back to the Global Macro Grind

 

I’ll come back to the multi-duration, multi-factor, risk management support for the aforementioned research view in a few minutes. First, let’s just take a moment to respect what yesterday was – easily the most bullish 1-day move for growth expectations in at least a year.

 

  1. After holding its 1419 line of TREND support, the SP500 ripped to within 0.8% of its September 2012 intraday high
  2. The Russell 2000 closed up +2.9%, making an ALL-TIME higher-high at 873 (versus 865 in April of 2011)!
  3. Both VOLUME and VOLATILITY signals finally confirmed the PRICE moves – and it was broad based, across sectors

 

In our multi-duration S&P Sector Model, all 9 sectors are bullish on all 3 of our core risk management durations (TRADE, TREND, and TAIL) for the first time since December of 2011. We call those Bullish Formations.

 

Yes, in spite of the Fed and Congress – global growth stabilized as expectations for future Fed Intervention came down huge (CFTC Futures and Options net long contracts dropped -49.5% from their all-time top in September to the December lows).

 

Now what?

 

Rather than using Grantham’s duration (his 0% growth forecasts extend out to the years 2030-2050 – yes, you can fire me if I ever try durations like that), let’s focus on where at least 90% of money managers have to focus on these days – the intermediate-term TREND.

 

  1. Let’s start with where US GDP Growth is at – at least +2-3%, not 0 to 1%
  2. You can get mad about how Obama is getting to +2-3% (spending), but you also have to understand it
  3. Government spending is tracking +9.5% on an annualized basis – that’s a big pop

 

*Reminder: GDP = C + I + G + (EX-IM). So, given that Congress just yard-saled the can on spending cuts, the G (government spending), is not going to be a headwind for Q113 GDP either. It might be in Q2 or Q3 – we’ll let you know when we think we know.

 

And a lot can happen in between now and Q2. What if the employment report tomorrow starts getting consensus thinking about a 6% handle on the US unemployment rate?

 

Oh, no you didn’t Bernanke – you didn’t take your “experimentation” too far in targeting random numbers now did you? What if Bernanke is what he usually is – wrong on his growth forecasts? What if unemployment rate expectations start to fall towards 6.5% in 2013 instead of in 2017? Inquiring Bond and Gold bulls would like to know…

 

I have no idea what the unemployment rate is going to be tomorrow – but what I can tell you is that:

 

  1. Yesterday’s Employment component of the US manufacturing PMI reading accelerated to 52.7 in DEC vs 48.4 NOV
  2. Weekly US Jobless Claims have been tracking well below our critical employment growth level of 385,000
  3. Both Bonds and Gold have been signaling this shift in employment growth stabilizing for the last 3 weeks

 

Again, this doesn’t mean I am bullish on US growth forever. To the contrary, what I am really telling you is to really respect that Big Government Intervention perpetuating short-term economic cycles works both ways.

 

Growth scares work just as well on the upside as they do on the downside. And if the market is sniffing this one out right, wouldn’t it be ironic and deserving, all at once, for Ben Bernanke’s latest policy expectations gamble to pop the biggest bubble of them all – bonds.

 

Fund flows out of bonds and into stocks would come back to this market in a hurry. The US stock market perma-bulls have been waiting for that train since 2007. If #GrowthStabilizing holds, that loco market machine may have already left the station.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $110.39-112.61, $3.61-3.77, $79.49-80.14, $1.31-1.33, 1.78-1.85%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Growth Stabilizing - Chart of the Day

 

Growth Stabilizing - Virtual Portfolio


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