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Dynamic Debauchery

Client Talking Points

The Clan In Japan

Japan’s dynamic duo of Finance Minister Taro Aso and Prime Minister Shinzo Abe are really on a roll with this whole “plan” of theirs. They want to “stabilize” the  Yen and target “2% inflation.” And yet since the Bernanke Top in September 2012, the Yen has fallen -17%. In turn, the Nikkei is up +32.4% since mid-November when #GrowthSlowing stopped. You can’t have your cake and eat it too, so the question remains: when is enough, enough? You can only devalue that Yen so far and you can only artificially pump stocks so much higher. Keep in mind that when consumption slows, growth slows, and that’s not something Aso & Co. want to see. 

Asset Allocation

CASH 40% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“When did RBS think their LIBOR investigation was going poorly? Maybe it was when they saw a trader talk about LIBOR fixing in an email.” -@PeteSchroeder

QUOTE OF THE DAY

“If you haven't found something strange during the day, it hasn't been much of a day.” -John A. Wheeler

STAT OF THE DAY

MBA MORTGAGE APPLICATIONS W/E FEB 1ST: +3.4% V -8.1% PRIOR


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 6, 2013


As we look at today's setup for the S&P 500, the range is 14 points or 0.61% downside to 1502 and 0.31% upside to 1516.               

                                                                                                                

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: 1.72 from 1.74
  • VIX  closed at 13.72 1 day percent change of -6.48%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Feb. 1 (prior -8.1%)
  • 9am: U.S. Treasury quarterly refunding announcement for auction of 3Y, 10Y and 30Y debt
  • 10:30am: DoE Energy Inventories
  • 11am: Fed to purchase $3b-$3.75b debt in 2018-2020 sector

GOVERNMENT:

    • House Budget Cmte hears from CBO Director Douglas Elmendorf on budget, economic outlook, 9:30am
    • House Financial Services Cmte holds hearing on role of FHA in housing insurance market, 9am
    • John Kerry to be sworn in as 68th U.S. Secretary of State
    • Bloomberg Government, Nuclear Energy Institute host discussion on fracking, tax credits, offshore drilling, nuclear energy, w/ Sen. Johnny Isakson, R-Ga., Rep. John Shimkus, R-Ill., 8:45am
    • Postmaster General Patrick Donahoe makes announcement about Postal Service operational changes, 10am

WHAT TO WATCH

  • Malone’s Liberty Global to acquire Virgin Media for $16b
  • Obama urges delay of U.S. spending cuts to avoid economic harm
  • Chief executives’ confidence in U.S. economy improves in survey
  • Google said in talks to invest $50m in Vevo Music service
  • Biogen to pay Elan $3.25b for full rights to Tysabri
  • JPMorgan said to cut investment bank pay 3%, asset managers gain
  • RBS said to face up to $783m Libor manipulation fine
  • Morgan Stanley bankers Whayne, Rashid said to depart amid cuts
  • Flagstar ordered by N.Y. judge to pay bond insurer $90.1m
  • Boise Cascade raises $247m pricing IPO above range
  • Facebook director James Breyer sells $74m worth of shares

EARNINGS:

  • WR Grace (GRA) 6am, $1.06
  • Macerich (MAC) 6am, $0.87
  • TMX Group (X CN) 6am, C$0.73
  • Coventry Health Care (CVH) 6:30am, $0.68
  • Wyndham Worldwide (WYN) 6:30am, $0.60
  • CVS Caremark (CVS) 6:45am, $1.10 - Preview
  • Intact Financial (IFC CN) 6:55am, $1.34
  • Time Warner (TWX) 7am, $1.10
  • Westjet Airlines (WJA CN) 7am, $0.43
  • Scotts Miracle-Gro (SMG) 7am, C$(1.13)
  • Apollo Investment (AINV) 7:30am, $0.21
  • Cummins (CMI) 7:30am, $1.75
  • AGL Resources (GAS) 7:30am, $0.97
  • Husky Energy (HSE CN) 7:30am, C$0.57
  • IntercontinentalExchange (ICE) 7:30am, $1.74
  • Nu Skin Enterprises (NUS) 7:30am, $0.95
  • Marathon Oil (MRO) 7:39am, $0.67
  • Melco Crown (MPEL) 7:40am, $0.21
  • Madison Square Garden (MSG) 8am, $0.36
  • Prologis (PLD) 8am, $0.41
  • Ralph Lauren (RL) 8am, $2.20 - Preview
  • USG (USG) 8:30am, $(0.25)
  • IAC/InterActive (IACI) 4pm, $0.74
  • Akamai Technologies (AKAM) 4pm, $0.50
  • Green Mountain Coffee Roasters (GMCR) 4pm, $0.65
  • News Corp. (NWSA) 4pm, $0.43
  • Spectrum Brands Holdings (SPB) 4pm, $0.71
  • WMS Industries (WMS) 4pm, $0.15
  • Cincinnati Financial (CINF) 4:01pm, $0.49
  • CYS Investments (CYS) 4:01pm, $0.39
  • Mettler-Toledo International (MTD) 4:01pm, $3.20
  • Two Harbors Investment (TWO) 4:01pm, $0.33
  • Stericycle (SRCL) 4:02pm, $0.86
  • CBRE Group (CBG) 4:04pm, $0.48
  • PartnerRe Ltd (PRE) 4:04pm, $(0.46)
  • Allstate (ALL) 4:05pm, $(0.05)
  • Atmel (ATML) 4:05pm, $0.02
  • Everest Re (RE) 4:05pm, $0.27
  • Visa (V) 4:05pm, $1.79
  • Yelp (YELP) 4:05pm, $(0.05)
  • Equifax (EFX) 4:07pm, $0.75
  • Plains All American Pipeline (PAA) 4:07pm, $0.76
  • Prudential Financial (PRU) 4:07pm, $1.74
  • Lincoln National (LNC) 4:08pm, $1.06
  • Assurant (AIZ) 4:15pm, $(0.31)
  • Gildan Activewear (GIL CN) 4:21pm, $0.30
  • RenaissanceRe Holdings Ltd (RNR) 4:22pm, $0.30
  • FMC (FMC) 4:30pm, $0.81
  • Tesoro (TSO) 4:45pm, $1.39
  • O’Reilly Automotive (ORLY) 6:30pm, $1.08
  • Fifth Street Finance (FSC) Post-Mkt, $0.27

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Merchant Commodity Hedge Fund Cuts Jobs After Second Losing Year
  • Carmakers Use Aluminum Over Steel in Boost for Rio: Commodities
  • Platinum Climbs to a 16-Month High, Extending Premium Over Gold
  • Copper Falls as Commodities Drop on Euro-Area Political Concern
  • WTI Crude Slips, Discount to Brent Widens to Most This Year
  • Soybeans Decline as Brazilian Harvest Estimate Raised on Yields
  • Sugar Falls as Price Drop Seen Needed to Curb Glut; Cocoa Slides
  • Palm Output Plunging Most Since ’10 in Malaysia to Cut Reserves
  • Rebar Declines Amid Waning Liquidity Ahead of Lunar New Year
  • Palm Oil Drops to One-Week Low as Inventories Seen Near Record
  • Iran Cash Faces Tighter Squeeze as Oil Export Rules Stiffen
  • Duke Reactor Shutdown Plan Shows Shale’s Sway Over Power: Energy
  • India’s Cabinet May Consider More Wheat Exports Tomorrow: Pawar
  • China Gold Imports From Hong Kong Climb to Record on Wealth

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

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

 

 

 

 


Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

-Door is about to slam shut on high-rolling holidays to Macau

 

Rob Campagnino (Consumer Staples):

 

-ADM lifts profits despite US drought

 

Kevin Kaiser (Energy):

 

-Suncor Energy reports 2012 fourth quarter results

 

-Nuclear Talks Between Global Powers Set to Start

 

Brian McGough (Retail):

 

-Penney's Johnson seen slashing jobs

 

Howard Penney (Restaurants):

 

-Sex sells burgers


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.

WHAT WE GOT OUT OF THE PNK/ASCA PROXY AGREEMENT

Yes, there was another bid but that was unsolicited as well.  No wonder the rest of the industry players were caught off guard.

 

 

The ASCA/PNK proxy agreement was an interesting read.  It certainly increased our optimism that there could be a competing bid and confirmed our belief that the rest of the industry was a bit caught off guard.  No other bids were solicited so potential buyers such as MGM, PENN, BYD and maybe PE firms were likely unaware.  But there was more including a surprise 2nd bidder (unsolicited), some questionable advice by bankers, a pretty big payout to ASCA management, and a more dismal outlook for 2013 fundamentals than maybe the Street was expecting.

 

Here are our takeaways:

  • CHDN was likely “Bidder 1”.  The Agreement mentioned that Bidder 1 made an unsolicited offer that included stock, had a stock that was near an all-time high, was licensed in fewer jurisdictions than ASCA, and that the acquisition would be transformational to that company.  The only other companies with stocks near all time highs are PENN and MPEL, but we can rule both of them out because ASCA would not be a transformational acquisition to either.
  • ASCA’s advisors convinced the ASCA Board that soliciting other bids would not have resulted in a price significantly higher than $26.50 and would’ve jeopardized the PNK offer due to the a longer timetable.  The advisors felt that no other bids would be forthcoming since ASCA conducted a process to sell the company in 2010 and were unsuccessful.  We would argue that it was a different time and operators are in a much better position financially today.  Moreover, given the reaction in PNK’s stock, ASCA left a lot on the table indicating that higher bids could’ve been successfully solicited. 
  • Other issues brought up by the advisors were that:
    • Bidder 1 refused to release non-public info requested by the Board to evaluate the value of their stock  - Probably due to competitive reasons related to CHDN’s on-line business
    • Pressure from some shareholders wanting to cash out could have put selling pressure on Bidder 1 stock – In retrospect, CHDN’s stock would’ve likely gone up materially. 
    • Bidder 1’s stock was close to all-time highs – We don’t find this relevant.

The advisors also made a claim that investors would not have been appreciative of the tax advantages of a partial stock deal.  This seems spurious.

  • The fact that MGM, PENN, BYD, nor any other operator was involved in the process increases our optimism that there could be a competing bid.  PENN could obviously pay the highest multiple given their future REIT structure and strong balance sheet but MGM could do a deleveraging and very accretive deal while adding additional value through the use of its NOLs.
  • ASCA can still negotiate unsolicited bids until the shareholder vote
  • It is possible that CHDN’s offer of $26 with 40% in stock could’ve actually been superior.  PNK’s stock appreciated 21% the day they announced the transaction and CHDN would’ve no doubt experienced a big increase in the share price as well which would’ve ultimately accrued to ASCA shareholders.  Moreover, the favorable tax treatment for investors receiving ASCA would have to be factored in as well.
  • There are a number of lawsuits arguing that ASCA is not acting in the best interest of shareholders.  We also believe that some institutional owners are not happy that additional bids were not solicited.  There seems to be a lot of pressure on the company to certainly entertain unsolicited bids.
  • ASCA management’s projection for 2013 EBITDA was approximately 3% below current consensus estimates.  We think the sell side continues to be a little aggressive on regional gaming projections for 2013.  Our thesis remains that US casinos face structural (fewer slot players) and economic (highly economically sensitive) headwinds.  Of course, this could argue against accepting stock from a bidder since any fundamental weakness would theoretically accrue to the buyer and potentially hurt its stock price.
  • ASCA spent $6 million on professional fees
  • A whopping $43 million of severance is owed to management


Happy Veggies

“Should I be turned into a vegetable or a happy imbecile?”

-Nassim Taleb

 

That’s a quote from Chapter 3 of Taleb’s book, Antifragility, where he discusses everything from “Crimes Against Children” to the misguided interpretation of “equilibrium” by social scientists.

 

Clearly, Taleb doesn’t like social scientists. There’s a little bit more than a little anger in some of what he writes, but there’s also plenty of truth. Sometimes the truth makes some people angry.

 

Personally, I like socially oriented scientists. I just don’t want them running my money. For that, I don’t need a philosopher either. I need a real-time Risk Manager.

 

Back to the Global Macro Grind

 

The thing that non-market people generally don’t get about risk is that it works both ways. There is no such thing as risk “on” and “off” inasmuch as there is no Mr. Miyagi running the Bank of Japan (yet) either.

 

Risk is always on. It can squeeze you to the upside as fast as it can crash on you to the downside. There is no better example than that in the Land of The Rising Sun itself. Since Bernanke’s Top (September 2012) where he completed his US Dollar Debauchery, the Japanese Yen is down approximately -17%. Since US stocks stopped going down on #GrowthSlowing (mid November), the Nikkei is up +32.4%!

 

The Nikkei (for all the social scientists out there still trying to prove out their Ph.D in Keynesian Economics) isn’t something you can export. During today’s Currency War, it’s what squeezes (and pleases) politicians in the short-term (the stock market), while it impales their people’s purchasing power for the long-term.

 

Enough about that.

 

Why do I keep buying the damn dip?

  1. Fundamental Research: Macro Economic Data in Asia and in the USA continue to improve
  2. Quantitative Signals: my model continues to signal higher-lows of support and higher-highs of resistance

Why make it any more complicated than that?

 

I used to.

 

Then I started reading a lot of books and realized how much I do not know.

 

That’s why the best fundamental framework I can find right now is grounded in Chaos Theory. No, that doesn’t mean I am a philosopher. Neither does it mean I’m turning into a happy bullish imbecile. It simply means I fully Embrace Uncertainty.

 

What does the mean?

  1. I obey the signal, not the noise (Quantitative Signals)
  2. I then attempt to confirm or disprove the signal alongside my team (Fundamental Research)

I know, I keep saying the same thing, over and over and over again. I guess that might make me somewhat antifragile, for now. Then I’ll get clocked, and I will feel shame – then it will be time to evolve my process all over again.

 

As US and Asian Equity markets (our 2 largest allocations in the Hedgeye Asset Allocation Model) move back to immediate-term TRADE overbought, here are some mixed signals to consider amidst your daily noise from the #OldWall:

  1. SP500 immediate-term Risk Range remains tight and trade-able (for now) = 1
  2. US Equity Volatility remains bearish and breaking down relative to 5yr lows; TRADE support = 12.15
  3. US Equity Market Volumes are now trending bullish on up days and bullish (down volume) on down days
  4. US Dollar Index continues to make higher long-term lows, holding its TAIL of $78.11 support
  5. Chinese Equities (Shanghai Composite) are crashing to the upside into a Bullish Formation (2274 TAIL support)
  6. Both our Hong Kong (EWH) and Singapore (EWS) long ETF positions aren’t as overbought as the SPY at 1516
  7. Japan’s Nikkei flashed an immediate-term TRADE overbought signal overnight at the Yen signaled oversold
  8. KOSPI continued to diverge, like Brazil’s Bovespa has, breaking its TRADE and TREND lines of support
  9. EuroStoxx600 was down -0.5% last wk and is confirming an immediate-term TRADE breakdown again today
  10. France, Italy, and Spain have all seen their respective stock markets snap TRADE lines of support
  11. CRB Commodities Index failed, again, at its long-term TAIL risk line of 306 so far this week
  12. Gold continues to look like Treasury Bonds, awful relative to US and Asian stocks
  13. Oil remains the biggest NEW headwind to our Fundamental Research call on global #GrowthStabilizing
  14. US Treasury Yields (10yr) are now confirming a Bullish Formation (bullish TRADE, TREND, and TAIL)
  15. Yield Spread (10s minus 2s) is plenty wide at +174bps this morning; bullish for the Financials (XLF)

There is no “equilibrium” in a multi-factor, multi-duration, Global Macro risk management model. There is no happy place either. Like in any dynamic, non-linear ecosystem, what you want to embrace is the uncertainty of time and space.

 

So eat your veggies, buy red, sell green, and keep moving out there as risk factors do.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $114.96-117.41, $79.11-79.94, $1.34-1.36, 91.63-94.33, 1.91-2.10%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Happy Veggies - Chart of the Day

 

Happy Veggies - Virtual Portfolio


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%
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