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Oil's Well

Client Talking Points

Tax Break for the Consumer

With Brent oil now down nine percent from a long-term lower high that it made in February, global consumption is getting a boost. That's because lower oil prices mean consumers pay less money at the gasoline pump. Also, as the dollar goes one direction,  Brent oil goes the other, according to our models. As such, as the dollar strengthens, Brent oil should continue to fall.

S&P 500 Direction

While Brent oil has a negative correlation to the US dollar, the S&P 500 has a positive one, according to our models. That means the S&P 500 currently moves higher as the US dollar moves higher. Hence, our big move in the S&P over the past few months. But, those correlations can change quickly, and they won't last forever. We'll continue to model that correlation, and let you know if and when it changes. That's why we're risk managers.

Asset Allocation

CASH 32% US EQUITIES 24%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

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

"Happy Pi Day. Today mathematical celebration is wholly irrational." -- @GeneralElectric

QUOTE OF THE DAY

"Bummed Out" -- New England Patriots' quarterback Tom Brady after he learned that receiver Wes Welker had agreed to sign with the Denver Broncos

STAT OF THE DAY

332,000, the number of weekly jobless claims, which put the four-week moving average to a five-year low


DRI Black Book: Materials & Dial-In

We will be hosting a black book conference call entitled "DRI: The Unthinkable Long Case" today at 1:00pm EST.

 

DRI Black Book: Materials & Dial-In - DRI dialin

 

We are changing our view on Darden Restaurants, Inc. (DRI)  and will be hosting a call with clients to talk through our reasoning.  We have been bearish since July but now see little downside in the share price. 

 

KEY TOPICS WILL INCLUDE  

  • Our previously "unthinkable" short case came to fruition, now widely known
  • Fundamentals of the core concepts
  • Limited downside in the share price  
  • A "win-win" scenario emerging for investors

 

CALL DETAILS

  • Date: Thursday, March 14th at 1:00pm EST
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 437929#
  • Materials: CLICK HERE

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Bull/Bear Narratives

This note was originally published at 8am on February 28, 2013 for Hedgeye subscribers.

“Evolution does not rely on narratives, humans do.”

-Nassim Taleb

 

That’s just a money quote from Taleb on page 207 of Antifragile. Apparently Jaime Dimon liked the book so much, he called his bank antifragile. I assume he wasn’t talking about the Bear Stearns part. If you’d like my review of the book, please send me a note.

 

Reviewing the Bullish Narrative for US and Asian stocks requires one to evaluate the bearish one. The big one our institutional clients debate with me comes from a player I respect, Francois Trahan. His Bearish Narrative is grounded in inflation concerns.

 

His call is a lot like mine was at the end of 2010. I get that inflation expectations rising would be bad. But our call is Strong Dollar will drive the opposite – Commodity Deflation. That’s not just a narrative; that’s precisely what we have been seeing for all of February.

 

Back to the Global Macro Grind

 

Strong Dollar = Commodity Deflation? That’s also what we have been seeing for 2013 YTD:

  1. US Dollar Index +2.3%
  2. CRB Commodities Index -1.0%
  3. SP500 +6.3%

Within the SP500’s +6.3% YTD return, the worst performing Sector ETF is Basic Materials (XLB) which is down -1.54% for February and underperforming badly at +2.34% YTD. If you want to be bearish on something, be bearish on Commodities and related stocks.

 

There’s also a Nouveaux Bear camp that thinks Commodities falling is the leading indicator that A) Global Economic Growth is going to slow and B) the US stock market is going down in flames. I have debated Dennis Gartman on this 2x on live TV in the last week.

 

Finally, there’s the central planning camp (led by Ben Bernanke) that is still bullish on the stock market’s “valuation”, and never thought we had the inflation we are deflating to begin with (Bernanke said in his testimony “I have the best track record on inflation since WWII”).

 

So, what is the Bearish Narrative?

 

A)     Trahan: Debauched Dollar will drive us back to the bubble highs in Oil (2008), Gold (2011), and Food Prices (2012)

B)      Gartman: Strong Dollar will drive Commodity Prices down, if Oil, Gold, Corn, etc go down, stocks are going down

C)      KM: I’m actually just bearish on The Taro Aso and The Bernank lying to uninformed people

 

I usually have a decent Bearish Narrative on something (like the Yen here), but the bear case for Asian and US stocks is all over the place right now. Maybe that’s why the only down day for stocks in the last 4 came on a catalyst that none of these bears had to begin with (Italian Election). That’s not a research call, that’s being right for the wrong reasons (otherwise known as luck).

 

Another Q: KM, what about The Correlation Risk (inverse correlation vs USD) call that you used to trade Macro on during 2010-2012? First, Correlation Risks are not perpetual. And, second, our intermediate-term TREND correlation model is changing, big time, right now:

  1. Intermediate-term TREND correlation between US Dollar and CRB Index = -0.96 (short Commodities!)
  2. Intermediate-term TREND correlation between US Dollar and SP500 = +0.33
  3. Intermediate-term TREND correlation between US Dollar and MSCI Asia (Equities) = +0.52

In other words, both the Americans and the Chinese are loving Strong Dollar in more ways than one. It’s taking down Energy and Food Inflation. And it’s a tax cut that our central planning overlords are unable to provide.

 

That’s great for the one thing we haven’t had, sustainably, under either the Keynesian Bush or Obama regimes – real (inflation adjusted) economic growth. Of course, the government is always my Bearish Narrative, but I think my bullish one for stocks is still intact.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1549-1609, $110.67-112.68 (Oil is bearish TRADE and TREND now; a very bullish catalyst for the economy), $81.28-82.13, 91.71-94.67, 1.85-1.96%, and 1499-1536, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bull/Bear Narratives - Chart of the Day

 

Bull/Bear Narratives - Virtual Portfolio


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THE M3: WMS; MPEL PHILIPPINES; PACKAGE TOUR NUMBERS

The Macau Metro Monitor, March 14, 2013

 

 

WMS REFOCUSING MACAU OFFER Macau Business

According to Business Daily, WMS is likely to make a fresh bid for market share in Macau following its acquisition by Scientific Games Corp.

 

PHILIPPINE GROUP AND MELCO CROWN INK US$1 BILLION DEAL Macau Business

MPEL has finalized its partnership with Belle Corp for a US$1 billion (MOP8 billion) gaming complex at Manila Bay.  The deal effectively finalized the cooperation agreement Belle had signed with MPEL last October.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR JANUARY 2013 DSEC

Visitor arrivals in package tours increased by 18.3% YoY to 757,190 in January 2013.  Package tour visitors mainly came from Mainland China (562,722), with 250,029 coming from Guangdong Province, followed by those from Taiwan (55,473); the Republic of Korea (42,469) and Hong Kong (30,763). 

 

There were 100 hotels and guesthouses operating at the end of January 2013, providing 26,027 rooms, up by 16.5% YoY.

 

In January 2013, the hotels and guesthouses received 832,543 guests, up by 19.1% YoY, with the majority coming from Mainland China (60.3% of total) and Hong Kong (14.5%).  The average length of stay of guests decreased by 0.13 night YoY to 1.4 nights.  Meanwhile, the average occupancy rate of hotels and guesthouses stood at 82.9%, up by 3.8% points YoY, with 5-star hotels reaching 84.9%.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 14, 2013


As we look at today's setup for the S&P 500, the range is 27 points or 0.87% downside to 1541 and 0.87% upside to 1568.          

                                                                                                                     

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: 1.79 from 1.76
  • VIX  closed at 11.83 1 day percent change of -3.59%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Current Acct Bal., 4Q, est. -$112.5b (pr -$107.5b)
  • 8:30am: PPI M/m, Feb., est. 0.7% (prior 0.2%)
  • 8:30am: PPI Ex Food & Energy, M/m, Feb., est. 0.1% (pr 0.2%)
  • 8:30am: Init Jobless Claims, March 10, est. 350k (pr 340k)
  • 9:45am: Bloomberg Consumer Comfort, March 10 (prior -32.4)
  • 9am: Fed’s Raskin gives remarks at symposium in Washington
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 1pm: U.S. to sell $13b 30Y bonds in re-opening
  • 4:30pm: Fed releases Comprehensive Capital Analysis and Review

GOVERNMENT:

    • 9:30am: Joint Economic Cmte hearing on debt crisis
    • 10am: House Oversight and Govt Reform Cmte panel hearing on sequestration oversight
    • 10am: House Education and Workforce Cmte panel on guest worker programs
    • 10am: Senate Health, Education, Labor and Pensions Cmte hearing on minimum wage
    • 10am: API Pres. Jack Gerard, Inst for Energy Research Pres. Thomas Pyle testify on energy partnerships with Mexico, Canada at House Foreign Affairs panel
    • 10am: House Financial Svcs panel hearing on GAO assessment of who is “too big to fail”
    • 11:30am: Lawyers for Cisco, Adobe, SAS, J.C. Penney, J&J testify before House Judiciary panel on patent litigation

WHAT TO WATCH

  • Fed releases stress-test results related to bank capital plans
  • JPMorgan, Morgan Stanley may divulge dividend/buyback plans
  • Senate panel releases findings on JPMorgan trading loss
  • EQT said to advance with IPO or sale of Springer Science
  • Dallas Fed cap would force U.S. banking units to shrink
  • Sprecher commitment to NYSE seen receding as cost cuts play out
  • CNPC to buy stake in Eni’s Mozambique assets for $4.2b
  • Glencore said to consider sale of Australia malt unit Joe White
  • Xi assumes China’s presidency to cement transition of power

 EARNINGS:

    • Quebecor (QBR/B CN) 6am, C$1.13
    • Cominar Real Estate (CUF-U CN) Bef-mkt, C$0.45
    • Buckle (BKE) 7am, $1.25
    • Dynegy (DYN) 7:30am $(0.46)
    • Crescent Point Energy (CPG CN) 8am, $0.19
    • Ulta Salon Cosmetics (ULTA) 4pm, $0.98
    • Aeropostale (ARO) 4:01pm, $0.22
    • Molycorp (MCP) 4:01pm, $(0.30)
    • Nortek (NTK) 4:15pm, N/A
    • Bonanza Creek Energy (BCEI) 4:16pm, $0.36
    • Algonquin Power & Utilities (AQN CN) N/A, C$0.05
    • North West (NWC CN) N/A, $0.33

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Oil Drops as Supplies Gain; Brent Spread Near Seven-Week Low
  • Zinc’s Six-Year Glut Seen Ending After China Curbs: Commodities
  • Goldman Ranked No. 1 in Commodities in 2012 Followed by JPMorgan
  • Soybeans Reach One-Week Low as Harvesting Progresses in Brazil
  • Aluminum and Nickel Gain on Stronger Equities and Demand Signals
  • Gold for Immediate Delivery Falls 0.5% to $1,579.60 an Ounce
  • Robusta Coffee Falls as Prices Climbed Too Far; Sugar Advances
  • Cooking Oil Imports by India Climbing Send Inventories to Record
  • Rebar Tumbles to Lowest in Three Months After Iron Ore Slumps
  • N.Y. Farmers Learn Fracking May Mean Drilling If Neighbors Agree
  • Natural Gas at $4 Seen as Plants Beat Forecasts: Energy Markets
  • China Steel Consumption Seen Peaking in 2017, Deutsche Bank Says
  • CFTC Discussing London Gold, Silver Price Fixings, WSJ Says
  • Fire Idles 20% of S. African Gold Output at AngloGold, Sibanye

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

 

 

 

 

 

 



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