Client Talking Points
It's late August on Wall Street. Volumes are light, ideas are sparse and the Hamptons is packed. Now's as good a time as any to reiterate Hedgeye's three core Q3 Macro Themes. At the top of the list? You guessed it. #RatesRising. 2.91% last on the 10-year. It's been a monster move. A generational shift is going on. We are not likely to see the 2012 lows on 10-year bond yields ever again. Yes, "ever" is a long time. Meanwhile, as the slope for interest rates turns up, so much that has been tied to declining rates will unravel.
Total global debt outstanding is 3X total equity. This has created a massive Supply/Demand mismatch, as the supply of debt dwarfs the availability of equities. Nearly every major investment class is broken on Hedgeye's macro screen including Gold, 10-year Treasurys, Emerging Markets and high-yield bonds. The trends have reversed, and you should expect the outflows to be just as poorly planned as the inflows were. Indeed, the real risk is that there is a rush for the exits, leading already-crumbling asset classes to implode.
Ex-Japan, Asian equity markets do not look good. Just pull up a chart on India's Sensex. Or Thailand. Or Indonesia. Japan is after 2% inflation, and they may get it by Burning Yens. The trade is Short Yens and Long Japanese equities. There's a lot of upside in the deep, liquid Nikkei. I know it's a tough pill to swallow. Look, Asia is not for the faint of heart. The Weimer Republic tried all this monetary madness. It didn't end too well. Bottom line is get out of the way of these highly suspect Asian currencies in a rising rate environment.
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Top Long Ideas
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
QUOTE OF THE DAY
"Great minds discuss ideas; average minds discuss events; small minds discuss people" -Eleanor Roosevelt
STAT OF THE DAY
Americans spent $11.8 billion on bottled water in 2012. Americans account for 15% of total world consumption of bottled water, which stands at about 61.4 billion gallons annually. At an average cost of $1.22 per gallon, US consumers are spending 300 times the cost of tap water to drink bottled water.