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MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET?

Takeaway: Hunt for longs and shorts by triangulating buy-side, sell-side and insider sentiment and positioning at the sector and industry levels.

SUMMARY BULLETS:

 

  • Using the S&P 500 Index as a proxy for the US equity market, we built a monitor that tracks performance, EPS and revenue revision trends, consensus ratings, short interest, option skew and insider buying/selling at both the sector and industry levels.
  • The purpose of the tool is to mechanically triangulate sell-side, buy-side and insider sentiment and positioning at the both the sector and industry levels, flagging extreme co-directional divergences as a contrarian opportunity on either the long or short side of a particular space.
  • At a bare minimum, our model can be used as a consistent, time-saving tool for generalist portfolio managers who are looking to quickly and efficiently identify which sectors and industries are good places to “hunt” for names that are more than likely either over or under owned.
  • Hopefully this all makes sense; email us if you have any questions, comments, suggestions or concerns regarding how we set up the model. We are happy to tweak it to your specific needs if this is a tool you can find additive to your existing idea generation process. We even have the capability of drilling down into a specific sector, industry or custom coverage universe, so don’t be shy about inquiring!

 

  • In the section below titled, “FINDINGS”, we list those sectors and industries that look interesting on either the long or short side, ranking them according to their degree of co-directional divergence with regards to the triangulation of said sentiment and positioning.
  • From the perspective of triangulating buy-side, sell-side and insider sentiment and positioning, the Metals & Mining and Diversified Telecom industries look particularly compelling on the long side. That being said, however, triangulating sentiment is just but one part of the equation; finding probable catalysts that will front-run a meaningful inflection in said sentiment and positioning is another matter altogether.
  • From our purview, we can name a 1,001 reasons why the Metals & Mining industry looks like a classic value trap here (namely the unwinding Mining CapEx Bubble), so we’d argue the market is getting this one right and should continue to get this one right. We don’t have a view on the Diversified Telecom industry, but we’ll leave that part up to you.
  • No sectors or industries currently stand out on the short side as particularly compelling from the perspective of triangulating buy-side, sell-side and insider sentiment and positioning.

 

In our latest attempt to help you uncover alpha in our favorite asset class (i.e. US equities), we us a more traditional top-down approach to scour the US equity market for longs and shorts at both the sector and industry levels. If you have yet to see our previous screen which quantified why investors should be increasing their allocations to domestically-domiciled corporations with a large US footprint, please refer to the following note: “ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL?” (7/25).

 

THE MODEL

Using the S&P 500 Index as a proxy for the US equity market, we built a monitor that tracks performance, EPS and revenue revision trends (four week deltas; sell-side consensus is lagging indicator), consensus ratings, short interest, option skew and insider buying/selling at both the sector and industry levels.

 

The purpose of the tool is to mechanically triangulate sell-side, buy-side and insider sentiment and positioning at the both the sector and industry levels, flagging extreme co-directional divergences as a contrarian opportunity on either the long or short side of a particular space.

 

At a bare minimum, our model can be used as a consistent, time-saving tool for generalist portfolio managers who are looking to quickly and efficiently identify which sectors and industries are good places to “hunt” for names that are more than likely either over or under owned.

 

MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET? - 5

MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET? - 7

 

ANALYTICAL CRITERIA

To determine if a particular sector or industry is a compelling place to “fish” in from the perspective of an investor or short-seller, we assigned the following criteria to each of the key metrics:

 

Sell-side scoring: (stocks penalized for extreme bullish sentiment; rewarded for extreme bearish sentiment)

 

  • NTM Consensus EPS Revisions: -1pt if the trailing 4WK revision is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the trailing 4WK revision is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • NTM Consensus Revenue Revisions: -1pt if the trailing 4WK revision is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the trailing 4WK revision is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • Bloomberg Consensus Ratings (1-5 scale): -1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Buy-side scoring: (stocks rewarded for extreme bearish positioning; penalized for extreme bullish positioning)

 

  • Short Interest as a % of Float: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • 3M 90%/110% Moneyness Skew Spread: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • 3M 25-Delta Skew Spread: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Insiders: (stocks rewarded for aggressive insider buying activity; penalized for aggressive insider selling activity)

 

  • 6M % Change of Insider Ownership: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Next, we assign a cumulative score of -1, 0 or +1 to each of the three buckets:

 

  • A score of -1 indicates the sum of a particular bucket is less than or equal to -1 (i.e. generally loved);
  • A score of 0 indicates the sum of a particular bucket is equal to zero (i.e. inconclusive); and
  • A score of +1 indicates the sum of a particular bucket is greater than or equal to +1 (i.e. generally hated).

 

Lastly, we amalgamate the cumulative scores into a final tally on an integer scale of -3 to +3:

 

  • +3pts: COMPELLING IDEA on the LONG side
  • +2pts: INTERESTING IDEA on the LONG side
  • +1pt: IDEA WORTH MONITORING on the LONG side
  • 0pts: INCONCLUSIVE on either the LONG or SHORT side
  • -1pt: IDEA WORTH MONITORING on the SHORT side
  • -2pts: INTERESTING IDEA on the SHORT side
  • -3pts: COMPELLING IDEA on the SHORT side

 

***Hopefully this all makes sense; email us if you have any questions, comments, suggestions or concerns regarding how we set up the model. We are happy to tweak it to your specific needs if this is a tool you can find additive to your existing idea generation process. We even have the capability of drilling down into a specific sector, industry or custom coverage universe, so don’t be shy about inquiring!

 

FINDINGS

In the section below, we list the various sectors and industries according to their respective scores (NOTE: sectors are underlined):

 

+3pts: COMPELLING IDEA on the LONG side:

  • Metals & Mining (7 stocks)
  • Diversified Telecommunication (5 stocks)

+2pts: INTERESTING IDEA on the LONG side:

  • Distributors (1 stock)
  • Household Products (4 stocks)
  • Telecommunication Services (6 stocks)

+1pt: IDEA WORTH MONITORING on the LONG side:

  • Internet & Catalog Retail (5 stocks)
  • Multiline Retail (8 stocks)
  • Personal Products (2 stocks)
  • Tobacco (4 stocks)
  • Energy (43 stocks)
  • Oil, Gas & Consumable Fuels (31 stocks)
  • Capital Markets (13 stocks)
  • Healthcare Technology (1 stock)
  • Life Sciences Tools & Services (5 stocks)
  • Aerospace & Defense (11 stocks)
  • Electrical Equipment (4 stocks)
  • Professional Services (4 stocks)
  • Road & Rail (5 stocks)
  • Computers & Peripherals (8 stocks)
  • Semiconductors (17 stocks)
  • Materials (30 stocks)
  • Independent Power Producers (2 stocks)

0pts: INCONCLUSIVE on either the LONG or SHORT side:

  • (omitted for the sake of brevity)

-1pt: IDEA WORTH MONITORING on the SHORT side:

  • Automobiles (3 stocks)
  • Beverages (9 stocks)
  • Consumer Finance (4 stocks)
  • Real Estate Management & Development (1 stock)
  • Biotechnology (6 stocks)
  • Commercial Services & Supplies (9 stocks)
  • Construction & Engineering (3 stocks)
  • Industrial Conglomerates (3 stocks)
  • Internet Software & Services (5 stocks)
  • Utilities (31 stocks)

-2pts: INTERESTING IDEA on the SHORT side:

  • Diversified Consumer Services (1 stock)
  • Wireless Telecommunication Services (1 stock)

-3pts: COMPELLING IDEA on the SHORT side:

  • N/A

 

CONCLUSIONS

From the perspective of triangulating buy-side, sell-side and insider sentiment and positioning, the Metals & Mining and Diversified Telecom industries look compelling on the long side. That being said, however, triangulating sentiment is just but one part of the equation; finding probable catalysts that will front-run a meaningful inflection in said sentiment and positioning is another matter altogether.

 

From our purview, we can name a 1,001 reasons why the Metals & Mining industry looks like a classic value trap here (namely the unwinding Mining CapEx Bubble), so we’d argue the market is getting this one right and should continue to get this one right. We don’t have a view on the Diversified Telecom industry, but we’ll leave that part up to you.

 

Darius Dale

Senior Analyst


July Employment - Not a Catalyst

We’ve beaten the drum repeatedly on the TREND slope of improvement in the labor market and the associated investing implication this week (links to those notes below) so we’ll keep it to the data here.  The short of today’s Employment release is that it's largely un-impactful to our positive intermediate term growth outlook for the domestic economy.   

 

We went to net neutral in our Real Time Alerts into yesterday afternoon’s advance, net short this morning, and would be selectively looking to add back long exposure on weakness, provided the $USD holds support.   

 

Given the general strength of the macro data thus far in July (Claims, ISM, PMI), we expect equity weakness to be met with a bid as we pullback towards immediate term support at $1690 on the SPX.

 

As summary review of this morning's Employment data:

 

NFP: Net Non-Farm Payrolls gains declined sequentially to 162K, but held flat on a YoY growth basis at +1.7% and accelerated +30bps on a 2Y basis.  

NFP Revision:  The net two month revision was -26K with May revised from +195K to +176K and June revised from +195K to +188K.  

Household Survey:  Net employment gains as measured by the Household Survey improved to +227K from +160K in June.   

Employment by Age:  All Age demographics saw accelerating employment growth in July.

Unemployment Rate:  The Unemployment Rate dropped to 7.4% from 7.6% as the total labor force registered a net decline alongside an increase of +263K in Total Unemployed and an increase of +227K in Total Employed. 

Labor Force Participation:  A positive change in the working age population alongside a net decline in the labor force pushed the Labor Force Participation Rate down to 63.40% from 63.46%.

State & Local Gov’t Employment:  State & Local Government Employment (14% of total workforce) accelerated from 0.03% to 0.10%, marking the 3rd consecutive month of positive employment growth with May marking the first month of positive growth since June of 2009.

Part-time/Temp Employment:  Temp employment increases by 8K MoM with YoY growth decelerating 40bps sequentially.  Part-time employment increased 174K MoM (77% of the total 227K gain as estimated by the household survey)  with YoY Growth accelerating 50bps sequentially.  

Industry Employment:  Retail, Business Services and Leisure the leaders this month at +47K, +36K, +23K, respectively.  Construction losing 6K on the month. 

Ave Weekly Hours for Private Employees:  Hours declined to 34.4 from 34.5 MoM and were flat vs. year ago levels. 

 

 

Please see this week’s notes for more detailed analysis and strategy discussion: 

 

  

Enjoy the Weekend.  

 

July Employment - Not a Catalyst - Employment Summary Table

 

July Employment - Not a Catalyst - Claims 080113

 

July Employment - Not a Catalyst - CPS vs CES

 

July Employment - Not a Catalyst - CES vs CPS MoM

 

July Employment - Not a Catalyst - Unemployment Rate

 

July Employment - Not a Catalyst - Employment by Age

 

Christian B. Drake

Senior Analyst 

 


Morning Reads on Our Radar Screen

Takeaway: Here's a glimpse at what some of our analysts are reading this morning...

Morning Reads on Our Radar Screen  - Screen Shot 2013 08 02 at 7.36.01 AM

 

 

MATT HEDRICK: MACRO

Putin Shows Global Mojo to Russians as U.S. Fumes Over Snowden (via Bloomberg)

 

 

 

KEVIN KAISER: ENERGY

Southwestern Energy swings to profit (via MarketWatch)

 

Mr. Sandman – Getting Proppant to the Wellhead (via RBN Energy)

 

 

 

TOM TOBIN: HEALTHCARE

Bio Hackers (via East Bay Express)

 

 

 

JONATHAN CASTELEYN: FINANCIALS

Tourre’s Junior Staff Defense Seen Leading to Trial Loss (via Bloomberg)

 

Glencore Leading in Metals Storage as Goldman, JPMorgan Cut (via Bloomberg)

 



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[PODCAST] Expectations, Unemployment, and Heartache

Expectation is the root of all heartache, and Hedgeye CEO Keith McCullough talks through expectations and unemployment by the numbers on today's morning call.

 


Awaiting The Employment Number

Client Talking Points

YEN

Japanese equities have loved a weak Yen in as much as the SPX has loved #StrongDollar and this week was rock solid for the USD/YEN cross as US Economic data for July (jobless claims 326k and ISM 55.4 yesterday) smoked the US #GrowthSlowing bears out of their holes - again.  Yesterday was a strong dollar, strong stocks day in the U.S. and, on a TREND duration, the Dollar-SP500 correlation remains strong at +0.76.   The Nikkei matched the U.S.’s performance and raised it one - closing +3.3% on the session and now up +40.5% year-to-date.   

EUROPE

What matters in Macro happens on the margin and, on the margin, the European data has been better.  Both the DAX and FTSE are back in Bullish Formations (Bullish across TRADE, TREND, & TAIL durations) but signaling immediate-term TRADE overbought here this morning.  With domestic, pro-growth leverage (XLF, XLY, etc) overbought yesterday also, there is a growing list of (very short-term) mean reversion factors that could take US and European stocks down if this jobs print is either too hot or too cold.

UST 10YR

What is too hot of an employment number? A print north of 200k in payrolls could easily push the yield on 10Y treasuries to the 2.8-2.9% range and, in the process, freak out consensus which isn’t positioned for a redo of June. What number would be too cold is easier  – a jobs miss this morning would be the 1st in 6 months, and the bears need a bone here.  Oh yeah….and #RatesRising is crushing Gold again too.  We covered our gold short yesterday and would not be buyers of weakness.   

Asset Allocation

CASH 36% US EQUITIES 24%
INTL EQUITIES 16% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

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

Securities have multi-standard deviation events though, so you need a real research team to have your back on that

@KeithMcCullough

 

QUOTE OF THE DAY

"The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."

-Thomas Sowell

STAT OF THE DAY

Today is the 16th consecutive day where all 9 sectors in Hedgeye's S&P Sector model are bullish on both TRADE and TREND durations.


THE M3: NEW AUSTRALIA CASINO PLANS

THE MACAU METRO MONITOR, AUGUST 2, 2013

 

 

CHINESE TYCOON PLANS $3.8 BLN CASINO RESORT IN AUSTRALIA Reuters

Chinese tycoon Tony Fung has proposed to build a A$4.2 billion ($3.75 billion) casino and resort project in Australia's Cairns city, close to the world-heritage Great Barrier Reef.  The Queensland state government said on Friday that Fung's casino proposal was declared a "coordinated project" on Aug. 1, the first step in the government's approval process.

 

Fung, a billionaire son of one of the founders of Hong Kong conglomerate Sun Hung Kai & Co. Ltd, is planning to build an integrated resort 13 kilometres north of Cairns that will include an "international class" casino with 750 tables and 1,500 machines, one of the world's largest aquariums and a 25,000-seat sports stadium.  Fung's planned Aquis resort "gives Queensland an opportunity to fend off its southern and regional competitors for the increasingly important Chinese tourism market," Fung said in an open letter published on the project website.

 

The Aquis Resort at the Great Barrier Reef project has a targeted opening of 2018 and could create 26,700 jobs when fully operational, according to information on Aquis' website.  The resort is also set to include 13,500 square metres of high-end retail and two 2,500-seat theatres.

 

 

 


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