“There are lies, damned lies and statistics."
I’ve been spending the last few weeks reading up on advanced statistical analysis of hockey. Based on my initial research, hockey is very much behind the other major sports in the use of statistics to analyze and value players. Much of professional hockey is still ruled by the old boys club who make player acquisitions based on “gut feel”.
To be fair, hockey is a difficult sport to analyze, unlike baseball which has repeatable interactions, such as at bats, that can be counted, hockey is more of a chaotic game. I asked my good friend Theo Epstein from the Chicago Cubs, an early and successful user of Sabermetrics in baseball, about his thoughts related to the analysis of hockey. He directed me towards what he called a plus / minus on steroids – Corsi.
This statistic was developed by former Buffalo Sabres goaltending coach and measures, or counts, the number of shot attempts on the opposition’s net (including blocked and missed shots) for which the player receives a plus and subtracts it versus the number of shots on his own net. The theory is that shots are a proxy for possession and over the long run possession leads to goals and a positive goal differential to wins.
This stat can then be adjusted according to the relative quality of competition via a statistic called Corsi Rel QoC, which attempts to normalize Corsi for the quality of opponent. There are also addendums to this stat that look at where a player typically starts on the ice. For instance, if a player, due to his defensive proficiency is more often started by the coach in face-offs in his own zone, he is likely to have a lower Corsi rating. So, this too needs to be normalized over time and relative to other players.
But enough about hockey statistics and back to the global macro grind . . .
Yesterday the newest member of our Financials Team, Jonathan Casteleyn, launched on asset management coverage in a very thoughtful 90+ page presentation titled, “Fixing Your Income: The Danger of the Bond Market.” Akin to all of Hedgeye’s research, this launch presentation was replete with statistics (and hopefully very few damned lies!) From the macro perspective, Casteleyn raised a number of key points that I wanted to re-emphasize.
First, the U.S. bond market has $38 trillion outstanding across munis, treasuries, mortgages, corporate debt, agency debt, money markets and asset backed. This is up more than 15% over the last five years and has been dually driven by the increase in corporate bonds, up 50% in that period, and treasuries, which are up roughly 100% in five years. The ratio of stocks to bonds is now at 68/32%, which is one of the highest ratios we’ve ever seen. Reversion to the mean anyone?
Second, 10-year treasury duration is literally at an all-time high of 8.9. The implication of this is that a 100 basis point move in the 10-year equates to an 8.9% loss in value. In other words, interest rate risk is literally as high as it has ever been, so any further normalization of rates (remember we remain well below historical levels) has the potential to lead to substantial losses in the bond market. Given this, broker dealers are reducing trading exposure to interest rate products, which has the potential of exacerbating moves in the fixed income market. As we highlight in the Chart of the Day, this is already leading to accelerating bond volatility (or as Taleb would say, more fragility).
Finally, Casteleyn corroborated our macro team’s bullish view of U.S. equities on likelihood of reversion to the mean on asset flows, as alluded to above. He also pointed out that current all in yield of the SP500 is 6% (2.0% dividend yield plus 4.1% earnings yield), which compares favorably to the 2.5% yield-to-maturity on 10-year treasuries. So not only do you get a better yield on equities, but equities typically outperform when the first hike in rates occurs.
That was a Cliff’s Notes version, at best, of the presentation yesterday, but if you have institutional research access please email to receive a copy. This idea of continued and sustained outflows from fixed income is in the early innings and may have profound implications for asset returns in the coming quarters and years.
Speaking of interest rate volatility, the FOMC’s 2-day meeting begins today with a rate decision, or lack thereof, scheduled for Wednesday. This is to be followed by the ECB on Thursday. We actually would be lying, or at least have inside information, if we attempted to make a call on what either the ECB or Fed will say, but we can say this with some certainty, the potential for them to create market volatility is a real risk, so keep these events front and center on your risk management monitor this week.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.47-2.66%
I’ll sign off with one of my very favorite statistics quotes from George Bernard Shaw:
“Statistics show that of those that contract the habit of eating, very few survive.”
Stats don’t lie, my friends.
Keep your head up and stick on the ice,
Daryl G. Jones
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This note was originally published at 8am on July 16, 2013 for Hedgeye subscribers.
“I’m whatever I need to be.”
-Gemma (Sons of Anarchy)
Sons of Anarchy is not Married With Children; and Gemma Teller Morrow is not Peggy Bundy. Katey Sagal won a deserved Golden Globe in 2011 for portraying pretty much everything you probably aren’t married to.
Probably is the right word to use there – because you never know. There are some unique characters on Old Wall and I’ll never rule never out of the question. There’s always a chance!
There’s also a chance that you are feeling the market’s love right about now. After 8 consecutive up days for the SP500 and yet another all-time closing high, I think it’s time we start calling Mr. Market. Mrs. Gemma would like that.
Back to the Global Macro Grind…
USA style Charming, CA. Yep. Not only is that the name of the fictional town in Sons of Anarchy, it’s also what Mrs. Market has delivered you, on no-volume, for July to-date:
- SP500 and Russell2000 closing at all-time highs of 1682 (+18% YTD) and 1043 (+23% YTD), respectively
- Consumer Discretionary (XLY) and US Financial (XLF) stocks lead at +25.6% and +25.2% YTD, respectively
- US Equity Market Volatility (VIX) to 13.79, which is -23.5% YTD
You can twist it, whine about it, love it, kiss it, and/or yell about it – this USA stock market move is whatever she wants to be. Despite US Equity volume being down -31% versus my TREND based average yesterday (that’s bad), you have to deal with the game that’s in front of you. There is a real-time score.
On yesterday’s Q3 Global Macro Themes conference call (ping sales@Hedgeye.com if you’d like the replay), I focused a lot on the flow. No, I don’t mean Charlie Hunnam’s flow (he’s the buff blond who plays Jax Teller in Sons). I mean Mrs. Market’s flow.
If you didn’t know that capital flows, now you know. Capital flows chase performance both ways too – that’s why we call them inflows and outflows. One of the main assets Mrs. Market (USA Equities) has going for her now is that capital is running out of places to go.
Since our Top 3 Macro Themes for Q312 are:
Our New Haven, CT club’s strategy suggests you should not be flowing fresh assets into:
- Commodity Bubbles
- Sovereign Debt Bubbles (USA, Japan, Namibia, etc.)
- Asian Equities (ex-Japan)
And we aren’t particularly keen on buying anything (currencies, stocks, or bonds) in Europe right now either.
So… where does the flow go?
Yep, right back into the mother’s milk of all things liquidity:
- US currency
- US stocks
Now don’t get me wrong here - there are plenty of dysfunctional (and illiquid) equity markets out there in this world that are performing marvelously YTD. Check out the ghost of Chavez’ devalued peso past – Venezuelan stocks are +165% YTD, baby!
I know, you like it when Mrs. Market talks perf to you like that, don’t you bros. So why not chase some of the mo mo and triple down on the 3x Abu Dhabi ETF or something like that too? Dubai and Abu Dhabi are ripping, +47% and +44% YTD, respectively!
#kidding (not on the illiquid equity market performance part though)
2013 Reality Flow Show: there are only two really deep and liquid markets that are really ripping:
And in a world of #RisingRates, #DebtDeflation, and #EmergingOutflows – don’t let anyone from b-school teach you otherwise bros - size and liquidity definitely matters right now.
So where do you go from here? Stay with the process and wait for the next pullback to immediate-term TRADE supports for both the SP500 and the Russell 2000 (and probably the #WeimarNikkei too).
While chasing markets up here isn’t my style, I always need to remind myself that Mrs. Market doesn’t particular care about anyone’s style. Her rules are simple – and everyone eventually needs to be whatever her performance chasing year-end bogeys become.
Our immediate-term Risk Ranges are now as follows (we also have 12 daily Global Macro ranges in our new Daily Trading Ranges product, fyi):
UST 10yr yield 2.45-2.76%
Brent Oil 107.04-110.29
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – July 30, 2013
As we look at today's setup for the S&P 500, the range is 20 points or 0.38% downside to 1679 and 0.81% upside to 1699.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.28 from 2.29
- VIX closed at 13.39 1 day percent change of 5.27%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC retail sales
- 8:55am: Redbook weekly retail sales
- 9am: S&P/Case Shiller Home Prices M/m, May, est. 1.45%
- 9am: S&P/Case Shiller Index, May (prior 152.37)
- 10am: Conference Board Consumer Conf Index, July, est. 81
- 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
- 11:30am: U.S. to sell 4W bills
- 4:30pm: API crude, oil product inventories
- President Obama travels to Tenn. to speak on U.S. economy
- FOMC begins 2-day closed mtg on interest rates, 9am
- CFTC rules for procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades become effective
- Senate Banking Cmte hears from SEC Chairman Mary Jo White, CFTC Chairman Gary Gensler on limiting systemic risk in financial markets, 10am
- Gina McCarthy gives first speech since becoming EPA chief
- Senate confirms James Comey as new FBI director
WHAT TO WATCH
- JPMorgan accused of gaming energy bids, FERC settlement looms
- Barclays to raise GBP5.8b in rights offering
- Pfizer 2Q adj. EPS beat as co. prepares to split units
- Uralkali sees potash price slump after exiting BPC venture
- UBS to buy back Swiss central bank’s fund to boost equity
- Time Warner Cable-CBS talks pass deadline without blackout
- General Growth to sell its stakes in Aliansce for $690m
- Centrica buys Hess’s Energy Marketing business
- Zynga said to lose three top executives after CEO change
- Deutsche Bank 2Q net misses ests. on legal costs
- Alcatel-Lucent beats ests. as Qualcomm to buy stake
- Lockheed said to reach agreement w/Pentagon on 71 more F-35s
- Moore said to hear Canada wireless concerns about Verizon
- Tourre rests defense in SEC case w/out calling any witnesses
- Aetna (AET) 6am, $1.40
- Nielsen Holdings (NLSN) 6am, $0.49
- Westlake Chemical (WLK) 6am, $1.98
- Mednax (MD) 6am, $1.36
- Generac Holdings (GNRC) 6am, $0.76
- MDC Holdings (MDC) 6am, $0.58
- Lexicon Pharmaceuticals (LXRX) 6am, $(0.06)
- Harris (HRS) 6:30am, $1.15
- Pitney Bowes (PBI) 6:30am, $0.44
- RR Donnelley & Sons (RRD) 6:30am, $0.41
- Waddell & Reed Financial (WDR) 6:59am, $0.64
- Merck & Co (MRK) 7am, $0.82 - Preview
- Discovery Communications (DISCA) 7am, $0.91
- National Oilwell Varco (NOV) 7am, $1.33
- Thomson Reuters (TRI CN) 7am, $0.45
- Corning (GLW) 7am, $0.31
- Coach (COH) 7am, $0.89 - Preview
- Fidelity National Information Services (FIS) 7am, $0.70
- Rockwell Automation (ROK) 7am, $1.39
- Entergy (ETR) 7am, $1.15
- Cobalt International Energy (CIE) 7am, $(0.15)
- Alliance Data Systems (ADS) 7am, $2.30
- Western Union (WU) 7am, $0.34
- TRW Automotive Holdings (TRW) 7am, $1.69
- Xylem (XYL) 7am, $0.44
- Goodyear Tire & Rubber (GT) 7am, $0.48
- Aegerion Pharmaceuticals (AEGR) 7am, $(0.62)
- Office Depot (ODP) 7am, $(0.10)
- Boyd Gaming (BYD) 7am, $0.00
- Senior Housing Properties Trust (SNH) 7:01am, $0.44
- Affiliated Managers Group (AMG) 7:10am, $2.10
- MeadWestvaco (MWV) 7:15am, $0.28
- Occidental Petroleum (OXY) 7:30am, $1.60
- NextEra Energy (NEE) 7:30am, $1.28
- Cummins (CMI) 7:30am, $1.98
- Waste Management (WM) 7:30am, $0.55
- Public Service Enterprise Group (PEG) 7:30am, $0.45
- Vishay Intertechnology (VSH) 7:30am, $0.22
- JetBlue Airways (JBLU) 7:30am, $0.14
- Arch Coal (ACI) 7:30am, $(0.33) - Preview
- TransAlta (TA CN) 7:44am, $0.18
- U.S. Steel (X) 7:45am, $(0.78)
- HCP (HCP) 8am, $0.74
- George Weston (WN CN) 8am, $1.10
- UDR (UDR) 8am, $0.34
- 3D Systems (DDD) 8am, $0.24
- Amgen (AMGN) 4pm, $1.74 - Preview
- Fiserv (FISV) 4:01pm, $1.44
- Canadian Oil Sands (COS CN) 4:01pm, $0.52
- Kimco Realty (KIM) 4:01pm, $0.33
- Chicago Bridge & Iron (CBI) 4:01pm, $1.01
- Hanesbrands (HBI) 4:01pm, $0.94
- IAC/InterActiveCorp (IACI) 4:01pm, $0.94
- American Capital (ACAS) 4:01pm, $0.24
- Questcor Pharmaceuticals (QCOR) 4:01pm, $1.04
- NCR (NCR) 4:02pm, $0.66
- Covance (CVD) 4:03pm, $0.77
- ONEOK Partners (OKS) 4:05pm, $0.54
- ONEOK (OKE) 4:05pm, $0.28
- Trimble Navigation (TRMB) 4:05pm, $0.37
- Axis Capital Holdings (AXS) 4:05pm, $0.48
- Riverbed Technology (RVBD) 4:05pm, $0.22
- Take-Two Interactive Software (TTWO) 4:05pm, $(0.56)
- InvenSense (INVN) 4:05pm, $0.14
- Symantec (SYMC) 4:07pm, $0.36
- Aflac (AFL) 4:09pm, $1.51
- Verisk Analytics (VRSK) 4:10pm, $0.53
- Genworth Financial (GNW) 4:10pm, $0.29
- Arthur J Gallagher (AJG) 4:10pm, $0.70
- Access Midstream Partners (ACMP) 4:15pm, $0.31
- Fortinet (FTNT) 4:15pm, $0.10
- Oil States International (OIS) 4:16pm, $1.51
- Weatherford International (WFT) 4:38pm, $0.15
- Duke Realty (DRE) 4:45pm, $0.26
- Equity Residential (EQR) 4:58pm, $0.71
- Lundin Mining (LUN CN) 5pm, $0.05
- Boston Properties (BXP) 5:09pm, $1.27
- SM Energy (SM) Aft-mkt, $0.77
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Falls to Three-Week Low as U.S. Economic Growth Seen Slowing
- Gold Loss to Platinum Widening for Best Forecasters: Commodities
- JPMorgan Accused of Gaming Energy Bids as FERC Settlement Looms
- Wheat Rises on Indications of Revived Demand From Japan to Egypt
- Copper Falls as Growth Misses Targets in Most Chinese Provinces
- Einhorn’s Reinsurer Says It Cut Gold Holding Amid Bear Market
- Uralkali Breaks Potash Cartel to Grab Market Share on Price Drop
- Food-Grain Harvest in India Seen at Record on Monsoon Rainfall
- Raw Sugar Climbs to Four-Week High on Demand, Frost; Cocoa Slips
- Crude Inventories Decline a Fifth Week in Survey: Energy Markets
- Rebar Trades Near Three-Week Low as Construction Slows in Summer
- China Steel Stockpiles Seen Nearing 2012 Levels as Output Slows
- China Iron Ore Production Jumps 10.7% in June: BI Chart
- Regulators Face Scrutiny on Banks’ Commodities at Senate Hearing
The Hedgeye Macro Team
In preparation for BYD's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
YOUTUBE FROM Q1 CONFERENCE CALL
- "We are cautiously optimistic about the economic trends that have started to form late in the quarter and the overall direction of our business."
- "We are optimistic that conditions should remain relatively healthy in our Midwest and South markets in the months ahead."
- "In Atlantic City, the recovery from Sandy appears to be strengthening as the market enters its historically busy summer season."
- "We are well positioned take advantage of several significant long-term growth opportunities, including our agreements with the Wilton Rancheria tribe in Northern California and Sunrise Sports Entertainment in South Florida. Both of these partnerships could provide significant growth opportunities to our company in the next several years."
- "We're also quite optimistic about the potential of the emerging domestic online gaming market. We intend to be among the first to offer online gaming in the State of New Jersey and are confident that the Borgata brand will allow us to capture a substantial share of this lucrative market. We're evaluating the opportunity to offer online poker in Nevada as well and are determining the best way to enter what is shaping up to be a robust yet crowded market."
- [LV Locals] "Our themed slot initiatives and related marketing programs that we discussed on prior calls have been quite successful. Looking ahead, we are optimistic about our prospects in the second quarter, which got off to a good start at the Orleans with a festival celebrating the American Country Music Awards."
- "On a spend per visitor basis, we're running about flat, so sort of an improvement over the declines we had seen prior."
- [Downtown LV] "We are diligently focused on improving operating margins in this segment as well, and we're successful in mitigating the impact of lower revenues on the EBITDA line...Overall direction of our Downtown Las Vegas business remains encouraging. We continue to enjoy a great relationship with our Hawaiian customers, providing this business a solid foundation."
- [Kansas Star] "Marketing spend was unusually low during Kansas Star's introductory period in early 2012, and this quarter's results reflect more realistic customer reinvestment levels. We expect these trends to continue and visitation should grow further with the opening of our arena, capable of seating over 6,000 guests. This property continues to perform in line with our expectations and remains on track to generate about $100 million in EBITDA on an annual basis."
- "We expect wholly-owned EBITDA after the deduction for corporate expense to be in the range of $132 million to $137 million. We expect Borgata to generate EBITDA of $27 million to $29 million in the second quarter. Assuming a tax rate of 35% and with this range of EBITDA guidance, adjusted EPS for the second quarter is expected to range from a loss of $0.02 per share to an income of $0.03 per share."
- [Capital allocation] "BYD monetizing some non-core assets as we've done recently and focus on improving our core operations. We frankly think the most efficient way to continue to de-lever and strengthen our financial position is through improved operations, and so that's our number one focus."
- "Suppose if the Penn REIT came forward and wanted to pay us REIT multiples 12x or better, we'd probably take a look at it. But that hasn't happened."
- "Kansas Star today has 150-hotel rooms in total. We'll be increasing that to 300 in the next 18 months or so per our agreement with the state and our hotel operator."
- [IP] "I would tell you that the market is certainly, as we knew going in, a very, very competitive market. State of Mississippi issues numbers by sort region within the state and you have those handy. And the IP for us has been much more of an efficiency story than a revenue growth story, and we think as a result of that it has had a meaningful contribution to stock price and equity valuation, because we bought it at the right price and very much improved margins and EBITDA contribution at that property, and expect that to continue."
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.