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Morning Reads on Our Radar Screen

Takeaway: A quick look at top stories on Hedgeye's radar screen.

Keith McCullough – CEO

CNBC Quarterly Ratings Fall To Lowest Level Since 1994 (via ValueWalk)

Reds' Homer Bailey throws his 2nd no-hitter in last 10 months (via ESPN)                

Egyptian army in crisis talks as Morsi deadline looms (via BBC)

Portugal’s Coalition Splinters on Austerity Fatigue (KM note: Marxists don't like the discipline … via Bloomberg)

Drone Attack Kills 17 in Pakistan’s Waziristan Region (via New York Times)

 

Morning Reads on Our Radar Screen - radar

 

Kevin Kaiser – Energy

“Mad Money” host Jim Cramer on LINN Energy Debacle  (1:05 mark via CNBC)

 

Tom Tobin – Healthcare

Obamacare’s employer mandate shouldn’t be delayed. It should be repealed. (via Washington Post)

 

Josh Steiner – Financials

For online lenders, Wall Street cash brings growth and risk (via Reuters)

 

Jonathan Casteleyn – Financials

Which way for bonds? Mapping a path forward (via PIMCO)

 

Brian McGough - Retail

Restoration Hardware Appoints Gary Friedman Chairman of the Board and Co-CEO (via Herald Online)

 

Matt Hedrick – Macro

Riksbank Keeps Rate at 1% as Krona Slump Helps Price Target (via Bloomberg)


RH: Titles Are Irrelevant, Still On It's Way to $100

Takeaway: Don't read too much into the Board's decision to tweak titles in the C-suite -- the growth plan is completely on track.

The  net of RH's announcements this morning are positive.

 

Specifically, the company announced that Gary Friedman, who had 'stepped down' from CEO to be 'Chairman Emeritus, Creator and Curator' changed his title to Co-CEO alongside Carlos Alberini.   Let's be clear about something…what Friedman does on a day to day basis won't change. The reality is that the Board stepped up and changed his title at the time of the IPO to draw a line between the company, his personal life, and percieved surrounding conflicts. But from the Board's perspective, with the stock up 150% since the IPO and the quality of the long-term growth story becoming more apparent over the past six months, it's fair to say that any credibility issues associated with his role in the company are more than ameliorated.

 

Over the past nine months, Friedman and Carlos Alberini have been operating much like how we see Ralph Lauren (Right half of the brain) and Roger Farrah (Left half), which represents one of the best and most successful creative vs. operating relationships the retail world has ever seen. Friedman and Alberini have the potential to mirror that success. 

 

Our point is that the only thing that changed pre-IPO was Friedman's title. Day-to-day he has always donned the role that represents the Right half of the brain. Alberini was the Left half.  Use the title of Curator, CEO, COO, or Chief Janitor…it really does not matter. Both gentlemen are doing the same thing today that they did yesterday, but simply with more recognized confidence by the Board (the statement in the press release from Michael Chu -- former RH Chairman -- lends ultimate support).

 

The other announcement is that RH is going to begin to curate apparel, footwear, accessories, and jewelry under the brand  'RH Atelier'. By no stretch are we going to treat this as a layup for RH, as it is a category where more concepts have failed than succeeded. But the reality is that the company already has the operating infrastructure to slowly and deliberately test the concept -- and alter it as the market opportunity dictates.

 

We continue to believe that one of the few things that can derail RH is the company's execution of the numerous business opportunities it has in the air.

 

Ultimately, we think this is all consistent with our view that the company will be viewed as having $5+ in earnings power.

 

RH: Titles Are Irrelevant, Still On It's Way to $100 - rh


THE M3: RUSSIA; MACAU LEGEND IPO

THE MACAU METRO MONITOR, JULY 3 2013

 

 

MACAU CASINO MOGUL LAWRENCE HO TO OPERATE NEW RUSSIAN CASINO WSJ

Summit Ascent Holdings Ltd, of which MPEL CEO Lawrence Ho owns 37%, has received a winning bid from the Primorye government to build a casino-resort.  The planned casino-resort in Primorye - a vast eastern region bordering China and Korea - is scheduled to open in 2H 2014.  The resort will be about seven miles from the Vladivostok airport.  It will be one of the first in Russia after the country in 2009 banned casino gambling outside four special zones.  The company is still discussing the size of the project.

 

For people in northern China, Vladivostok is closer than Macau.  A flight from Beijing to the Russian city takes 2½ hours, compared with three hours and 45 minutes to Macau.  Harbin, the largest city in China's Heilongjiang province, is an hour and 20 minutes from Vladivostok by plane.

 

MACAU LEGEND IPO BELOW EXPECTATIONS Macau Daily Times

Macau Legend Development Ltd. has raised US$282 million for its HK IPO.  David Cao’s company, which owns the Macau Fisherman’s Wharf development, originally aimed to raise up to USD788 million with the IPO.  The company sold 934.8 million shares at HKD2.35 per share, near the bottom end of its HKD2.30-HKD2.98 indicative price range. Macau Legend originally planned to sell 2.05 billion shares.

 


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 80.32%
  • SHORT SIGNALS 78.48%

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM

Takeaway: Another week of solid labor market improvement. We would take advantage of beaten down deep-value names on the long side on this data.

A Steadily Widening Divergence

This past week's claims data looks almost identical to that of the prior week. Rolling NSA claims were better by 9.6% YoY, which was a hair better than the 9.5% improvement in the previous week. SA claims were better WoW but essentially flat on a rolling basis. Clearly all eyes are on the Friday payrolls report. Historically the ability to forecast NFP with claims has been poor, i.e. there's typically a high correlation but with a fairly high standard error. Nevertheless, the 4-wk print (SA) this week was 346.5k, which was actually down from the 4-wk print for May at 352.5k. Based on this and last month's NSA print of 175k and this month's consensus of 161k, we'll go out on a limb and suggest that there's a better than 50% chance the NFP print will come in nominally ahead of expectations.

 

Tactically thinking about the Friday number aside, the real takeaway is that the fundamentals of the labor market (NSA YoY) continue to improve at an accelerating rate. Deep value, credit quality-levered longs like BAC remain among our top picks on this basis, coupled with the fact the recovering housing market shows no signs of derailing on the recent back-up in rates.

 

The Data

Prior to revision, initial jobless claims fell 3k to 343k from 346k WoW, as the prior week's number was revised up by 2k to 348k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.75k WoW to 346.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.5%

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 1

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 2

 

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INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 7 3 2013 8 45 13 AM

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 10

 

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INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 12

 

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INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 19

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 14

 

Yield Spreads

The 2-10 spread fell -7.1 basis points WoW to 213 bps. 2Q13TD, the 2-10 spread is averaging 172 bps, which is higher by 4 bps relative to 1Q13.

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 15

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Globally Interconnected Mess

Client Talking Points

ASIA

Just a nasty session for Asian Equities ex-Japan. Indonesia down -3% continues to see #EmergingOutflows. Meanwhile, the Hang Seng dropped another -2.5% (down -15.4% since January 30). It is becoming crystal clear at this point that most things Chinese equals #GrowthSlowing. Every TREND line in our model other than the Nikkei is now bearish across Asia.

PORTUGAL

So Greece was already crashing (down -30% since May). Now we've got Portugal gapping down -5.7% this morning, leading Spain to a -3% loss (down -12.5% since the January top) too. Incidentally, both the DAX and FTSE broke their TREND support a few weeks ago, so weakness there isn’t new. Meanwhile, UK Services PMI beat big at 56.9 JUN. Guess what? It didn’t matter – German Services PMI of 50.4 was another miss.

OIL

Oil is up on Egypt and whatever else is going to happen next in the Middle East. Watch this TREND line of $104.95 for Brent closely. It is key. Bottom line here is breaking out above that line would be an incremental, potential tax on consumption in July and August. 

Asset Allocation

CASH 60% US EQUITIES 14%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

And so it begins again -- guy emailed me calling my note on $BBEP "a short hatchet job." Sooo it's probably a great idea

@HedgeyeEnergy

QUOTE OF THE DAY

“I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson

STAT OF THE DAY

West Texas Intermediate surpassed $100 a barrel for the first time in nine months on shrinking U.S. stockpiles and concern that political turmoil in Egypt may disrupt Middle Eastern supply. (Bloomberg)


Taper or Tighten?

This note was originally published at 8am on June 19, 2013 for Hedgeye subscribers.

“Start slow, and taper off.”

-Harry Truman

 

If I was Ben Bernanke today, that’s what I’d tell the world I am going to do. US consumption, employment, and housing growth supports a slow start to tapering. So does the Russell 2000 closing at an all-time high  of 999 (+17.7% YTD) yesterday.

 

As we often remind history buffs, all-time is a long time, and there comes a time (within all-time) when things start to change. Gold and Treasuries have already been front-running Bernanke on this. All-time lows in US Treasury rates are ending.

 

The beginning of the end of Bernanke’s financial market “innovations” is a good thing. I think most people in this country are tired of listening to politicians preface the need for their interference in our lives and markets with “what would have happened” if they didn’t save us from the problems they perpetuated. That’s now half a decade ago. Get over it.

 

Back to the Global Macro Grind

 

I spent the entire day meeting with our Institutional Clients in San Francisco, California yesterday. And I don’t know if it was something in the air (gorgeous day) or what, but investors down here are a lot more chill about the end of QE than some folks on the East Coast.

 

In most meetings, it seemed like a generally accepted reality that A) tapering expectations are in motion and B) this is potentially a pro-growth signal. In other words, tapering is becoming yesterday’s news. The next debate is about tightening.

 

Tightening?

 

Oui, oui, mes amis. This is what happens after the tapering – the tightening. And since every measure of consensus you can consider is not considering a Federal Reserve rate hike, that’s what my sharpest clients were asking me about; not what Liesman rehashes today.

 

Six months ago, consensus didn’t expect a tapering decision at the June 2013 Fed meeting. We did. That’s why we have 0% asset allocations to Commodities and Fixed Income.

 

The fundamental view wasn’t based on getting a whisper from a Washington “consultant.” It was based on the following forecast:

  1. US Dollar was going to stabilize and strengthen from Bernanke’s burning 40 year lows
  2. Commodity Prices would deflate from their 2011-2012 all-time highs
  3. US consumption, employment, and housing growth would enjoy that and surprise to the upside

That’s not a victory lap. That was just our call.

 

So the question now is where will we be 6 months from now?

  1. Will the US Dollar continue to make a series of higher-lows and higher-highs?
  2. Will Commodity Deflation remain a 2013 reality?
  3. Will the US Housing and Stock markets continue to add to their double digit YTD gains?

I think that if Bernanke starts slow and follows through with tapering through the fall, Americans will be ok with that. And when I say Americans, I mean the 95 to 99% of us who want:

  1. #StrongDollar
  2. Down Oil prices
  3. Appreciating home and equity prices

To be clear, the dudes who are riding the Bernanke Zero-Bound train (long Mortgage Backed Securities, Gold, Treasuries, MLPs, and whatever else it was that he jammed yield chasers into like mashed potatoes into a garden hose), do not want this.

 

But what % of the population cares about being long unproductive assets likes Gold (or depleting assets like an Oil and Gas MLP) and selling ads on Sirius satellite radio about the end of the world anyway?

 

The sad reality is that the 1-5% of Americans who need the #EOW (end of world) trade to work probably control 50% of the airtime. Oh, and by the way, they also get paid to fear-monger. That’s why their ratings suck. America gets it. We are the silent majority that tweets loudly on mute.

 

Our natural intuition is to prosper and grow.  We all know that waiting on the whim of a central planning overlord’s whispers about tapering is no way to live. It’s time to tighten our belts, hold ourselves to the future’s account, and stop fighting the last 5 year’s war.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1361-1389, $104.55-106.64, $80.31-81.21, 93.27-96.17, 2.09-2.29%, 14.62-18.64, 12371-13641, and 1631-1669, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Taper or Tighten? - Chart of the Day

 

Taper or Tighten? - Virtual Portfolio


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