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Client Talking Points


The Nikkei got royally crushed for a -4% move overnight after the Yen rallied versus the US Dollar. Incidentally, the Bank of Japan is meeting tomorrow, and I generally assume that someone, somewhere, always knows something in terms of government front-running. We shall see. No position in DXJ right now. But I am interested in buying this pullback again. We will need to wait and see the BOJ river card before I do that and short more Yen. The Nikkei TREND support is 13,499. Keep an eye on that level.


#CommodityDeflation is bad for commodity linked equity markets. Well, Brazil has been the consummate poster child of that and what we call #EmergingOutflows here at Hedgeye. The Bovespa was down -2.1% yesterday and continues to crash. It is down a whopping -22.2% year-to-date. On a related note, the only country that’s worse off year-to-date is yet another mining tape. You guessed it. It's Peru which has gotten whacked -25% year-to-date. 


So... is it going to be a 1% or a 2% correction this time? From the all-time closing high of 1709, it could be either. From our perch, the two immediate-term TRADE momentum lines of support that matter most right now are 1693 and 1676. Either could happen; maybe neither do. The reality is that stock market corrections have been few and far between. So our advice is simple: stay the course and stick with what’s been working for eight months now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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. 


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


What’s a 0.7%-1% $SPY correction (from the all-time high) when you have the Nikkei moving 2-4% up/down per day?



Men are born to succeed, not fail.

- Henry David Thoreau


500 years of YouTube video are watched every day on Facebook, and over 700 YouTube videos are shared on Twitter each minute. (ReelSEO.com)

Expert Call TODAY: PWC Head of Aerospace Defense Practice on Contract Accounting/Pensions

Takeaway: Please join us TODAY @11AM to discuss defense accounting with the head of PWC's US Aerospace & Defense practice (EACs, Pensions, etc)

Expert Call TODAY: PWC Head of Aerospace Defense Practice on Contract Accounting/Pensions - def2



The Hedgeye Industrials Team, led by Jay Van Sciver, will be presenting an expert call titled "Defense Contract Accounting: Pro-cyclical?" with Scott Thompson, U.S. Head of PWC's Aerospace & Defense (A&D) practice.  The call will be held on TODAY at 11:00am EDT.  



Examine the impact of declines in defense spending on contract accounting and discuss the relevance of new EAC disclosures.







  • EACs: Estimates at Completion background, disclosure and SEC interest
  • Pro-Cyclical Aspects of EACs: To what degree are EACs pro-cyclical and what should investors look for in a spending downturn
  • Pensions:  Relevance, background and trends in FAS vs. CAS
  • Segment Changes:  Relevance with respect to impairment charges
  • Other Areas of Flexibility/Interest:  While contract accounting is a major factor, what else matters









Scott Thompson is the US A&D practice and Assurance leader. He leads a cross-functional team of professionals dedicated to the A&D sector in disciplines of audit, tax and advisory and has responsibility for assurance quality and service to A&D clients.  For more information about Scott please CLICK HERE



Attendance on the call is limited. If you are not a current client of our Industrials research please email to obtain the dial-in information for this call and a copy of the presentation.

A Thousand Pebbles

This note was originally published at 8am on July 24, 2013 for Hedgeye subscribers.

“Fragility is the quality of things that are vulnerable to volatility.”

-Nassim Taleb


We have quoted Nassim Taleb a number of times at the start of the Early Look and, admittedly, I didn’t check to see if this was a recycled quoted. Nonetheless, it is a very apropos quote for the topic of today’s Early Look and for contemplating risks in markets generally.


 The title for today’s note comes from a story, which is referenced in Taleb’s most recent book “Antifragile”, that emanates from rabbinical literature (Midrash Tehillim) and is about a king that is angry at his son.  In fact, the king is so angry at his mischievous son that he explodes one day and tells his son he will crush him with a large stone. 


Herein lies the dilemma according to the story: a king who breaks his oath is considered unfit to rule.  The king is now faced with the decision to either crush his son, or to give up his throne.  Luckily before the poor prince was crushed, an advisor (the Hedgeye of the era perhaps?) came up with a solution.  The king should cut the stone into very small pebbles and pelt his son with these pieces.


Taleb’s point in this analogy is to explain how fragility stems from non-linear effects.  That is, if you double the dose, you get more than twice the effect.   By way of a practical illustration, if you have five shots of Jack Daniels, you have a buzz.  But if you have ten shots of Jack Daniels, your wife (or husband) makes the couch up for you to sleep on that night.


Back to the global macro grind . . .


As it relates to non-linear impacts on the global markets as of late, interest rates have certainly had the most critical impact.  In the Chart of the Day, we highlight a slide from our most recent Q3 Theme Presentation that looks at quarter-over-quarter moves in interest rates.  As the slide shows, the move in interest rates in the last quarter was the largest percentage increase in fifty years.  (Yes, the last time this happened Sandy Koufax was pitching for the L.A. Dodgers.)


We were on the road in Europe talking to clients last week and not surprisingly interest rates were a key topic of discussion.  Many of the more astute investors actually narrowed in on this precise point of interest rate volatility.  Our view is that volatility of rate increases will be more benign moving forward, which, as we’ve been stating, should be positive for the U.S. dollar, domestic economic activity and U.S. stocks.


To the extent that volatility picks up, the effects of interest rate increases will be non-linear.  In reality, a move from 1.63% on the 10-year treasury to 2.63%, or an increase of 100 basis points, shouldn’t have a meaningful impact on asset classes or the economy.  The markets become fragile, though, when this 63% back up in rates occurs in a very compressed time period, as it did in May – June.   In pushing the interest rate ball under water, the global central banks have created a set up in which interest rates are very fragile (to use Taleb’s definition).


In addition to the risk of rates increasing at a rate that is highly volatile, the other key focus area of investors in Europe on our visit related to the impact of #RatesRising to housing.  This is certainly a legitimate question as the wealth impact from home price increases is a key reason we are bullish on U.S. consumption.  Specifically, as a consumer’s balance sheet improves via an increasing home price, so too does their confidence, ability to borrow and subsequently spend.


Based on our long run analysis of housing, the recent accelerated move in rates has not altered the fact that the affordability of purchasing a home remains at historic lows.  On the basis of median mortgage payment as a % of median income, the housing market is at 22% and well below the twenty-five year median of 28%.  On the basis of median mortgage payment to median rent, the housing market is at 99%, which is also well below the long run average of 131%.


This is not to say, of course, that housing won’t be impacted by a volatile move in rates, but the housing market is still so depressed based on historical levels it should have the ability to manage through #RatesRising.  June data from the NAR seems to support this as existing home sales were up 15.2% year-over-year and the national median home price in June was up 13.5%.  So yes, housing can do well if rates continue to rise.


Switching to infomercial mode for second, I want to highlight that we will be expanding our U.S. financials research coverage and are launching on U.S. asset management stocks on Monday July 29th at 11am.  Jonathan Castelyn has joined Josh Steiner’s team in a senior role and will be initiating on these names.   As always, we will be actionable and Jonathan will have 2 short ideas and 2 long ideas.  Please email sales@hedgeye.com  for access.


Our immediate-term Risk Ranges are now:


UST 10yr 2.47-2.71%

SPX 1684-1702

VIX 11.59-13.54

USD 82.01-82.89

Brent 107.21-109.14

Gold 1249-1346


Keep your head up and head on the ice,


Daryl G. Jones

Director of Research


A Thousand Pebbles - Treasury L vs NL


A Thousand Pebbles - Virtual Portfolio

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August 7, 2013

August 7, 2013 - dtr



August 7, 2013 - 10yr

August 7, 2013 - spx

August 7, 2013 - nik

August 7, 2013 - ftse

August 7, 2013 - dxy

August 7, 2013 - euro

August 7, 2013 - oil



August 7, 2013 - VIX

August 7, 2013 - yen

August 7, 2013 - natgas
August 7, 2013 - gold

August 7, 2013 - copper






According to research published in the British Medical Journal (BMJ), it was very likely that the H7N9 flu virus that emerged in eastern China this year was transmitted directly from human-to-human.  "To our best knowledge, this is the first report of probable transmissibility of the novel virus person-to-person with detailed epidemiological, clinical and virological data," the scientists wrote.


Experts commenting on the research said while it did not necessarily mean H7N9 is any closer to becoming the next flu pandemic, "it does provide a timely reminder of the need to remain extremely vigilant."  The scientists who led the study stressed, however, that the virus has not yet gained the ability to transmit from person to person efficiently - meaning the risk is very low that it could cause a human pandemic in its current form. 


The new bird flu virus, which was unknown in humans until February, has so far infected at least 133 people in China and Taiwan, killing 43 of them, according to the World Health Organization.



Lei Chin Ion, director of the Health Services, said, “We are now collecting opinions and our work is progressing well, so we will conduct a first revision of the law in 2015.”  Lei Chin Ion said that, following an assessment period, the government will reveal what kind of measures will be applied to casinos that do not meet air quality standards.  He said that the administrative regime predicts the reduction or removal of smoking areas for casinos that do not comply with the Health Bureau standards. 


This month it was revealed that 28 casinos failed the first air quality test conducted by the Health Services Bureau.  Those casinos had to undergo a second test and the Bureau is currently analyzing the results and looking to decrease the size of some smoking areas.

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