Rates Rising: Rinse & Repeat

Client Talking Points

USD

Don't look now but #StrongDollar is clocking a 6-week high this morning. The greenback is up for the 4th straight week. It's starting to look a lot like late June on that side of the Macro correlation scorecard. The trend correlations remain positive at +0.6 between the S&P 500 and US Dollar. Meanwhile, the last week or so of US economic data clearly support this move.

UST 2YR

As you may have already surmised, I spend more time worrying about the long-end of the yield curve (because Ben Bernanke marks the short end to model), but that hasn't stopped the 2-year yield from putting on a monster rip show in the last few weeks to 0.48%. What exactly constitutes a big rip? How about a 60% surge in a month! Kaboom. Look, lots of (most?) people don’t model entropy risk on a percentage basis. We do here at Hedgeye. It works. Got #RatesRising yet?

GOLD

We have no position in anything Gold right now. But with #StrongDollar and #RatesRising, I certainly don’t wake up in the morning thinking about anything other than where can I re-short it. When an asset’s price is in full-on crash mode, we aren’t smart enough to catch falling knives. The trend resistance for Gold is firmly intact at $1483. Tail risk resistance is well above that at $1661. Don't catch a falling knife.

Asset Allocation

CASH 28% US EQUITIES 25%
INTL EQUITIES 23% 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

UST 10yr 2.92% taking another run at the YTD highs for the right reasons #RatesRIsing

@KeithMcCullough

QUOTE OF THE DAY

"I have to believe that when things are bad I can change them." -James "Cinderella Man" Braddock

STAT OF THE DAY

Treasury prices sank this morning, sending the 10-year Treasury note yield to its highest level since July 2011 as it continues its steady march toward 3%. The 10-year note was up 5 basis points at 2.951% while the 5-year note yield was up 7 basis points at 1.819% and the 30-year bond yield was up 3.5 basis points to 3.835%.


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