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HEI vs. HEI/A: Taking the Win

Taking a Quick Win

 

We put out a note here suggesting a short HEI, long HEI/A pair.  At the time, the HEI premium was abnormally large and the extra votes for the common shares at Heico do not have much value for the average shareholder.  The HEI premium has dropped about 12% since our 8/27/13 note, which is an excellent annualized return for a well matched pair.  If readers have an interest in these kinds of trades, please ping us for background.  There is no shame in generating some alpha the easy way.

 

HEI vs. HEI/A:  Taking the Win - hei 3

 

 

 

 

 

Jay Van Sciver, CFA

Managing Director


HEDGEYE RISK MANAGEMENT
111 Whitney Avenue

New Haven, CT 06510


 


INITIAL CLAIMS: SOMETIMES BROKEN RECORDS SHOULD STILL BE PLAYED

Takeaway: The labor market remains strong like bull. Maintain overweight exposure to credit-levered Financials.

Remarkably Consistent

We're beginning to feel like a broken record with our call on initial jobless claims, stating almost every week how the data is improving at an accelerating rate. This week's data again reflects that trend. Nevertheless, we urge investors to continue to care. Why? With the broader market, and the Financials sector alongside it, gripped in uncertainty over whether we're poised for a meaningful correction, we continue to regard the claims data as the strongest indicator supporting our ongoing bullish bias and buy-the-dip view. Regrettably for those waiting patiently, there hasn't really been much of a dip. 

 

The bottom line is that the labor market is humming along nicely at this point with rolling NSA claims down 11.2% Y/Y, the fastest rate of improvement since May, 2012. Additional anecdotal evidence continues to emerge that at least a portion of the broadening base of employment is a reflection of employers responding to Obamacare. The bottom line, however, is that the labor market tends to be very self-reinforcing. Baring a significant external shock, we see little reason to expect the current trajectory to deviate from its trend.

 

As we've stated previously, we continue to think that credit-levered financials remain the best plays amid an accelerating rate of improvement in employment. Two of our favorite ideas on this theme remain Capital One (COF) and Bank of America (BAC).

 

The Data

Prior to revision, initial jobless claims fell 8k to 323k from 331k WoW, as the prior week's number was revised up by 1k to 332k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3k WoW to 328.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -10.4%

 

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Yield Spreads

The 2-10 spread rose 7 basis points WoW to 243 bps. 3Q13TD, the 2-10 spread is averaging 231 bps, which is higher by 61 bps relative to 2Q13.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


[Podcast] McCullough En Fuego

Hedgeye Risk Management CEO Keith McCullough was kicking a-- and taking names on this morning's Macro Conference Call with clients. Keith dished on #StrongDollar, stocks, interest rates and #GrowthAccelerating. No one was spared. Pretty impressive for a puck-head from Canada.

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

MPEL: Removing from Investing Ideas

We are removing Melco Crown Entertainment (MPEL), a casino operator in Macau, from our Investing Ideas list today.  

 

MPEL was added to Investing Ideas on March 18th. It closed that day's trading at $20.33. Yesterday, MPEL closed at $28.11.

 

Hedgeye Gaming, Lodging and Leisure Sector Head Todd Jordan writes, “After a long steep climb, the MPEL engine may be slowing down.”

 

Jordan writes, “We're still positive on Macau, so it’s difficult to be negative on MPEL.  However, MPEL’s recent share losses in the (higher-end) Junket segment are a little disconcerting and could continue.  Moreover, MPEL’s mass (segment) share could be at risk as Sands Cotai Central begins its push into premium mass (segment) next year.”


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%.


The Desert

This note was originally published at 8am on August 22, 2013 for Hedgeye subscribers.

“What makes the desert beautiful is that somewhere it hides a well.”

-Antoine de Saint-Exupery

 

Volumes are light, ideas are sparse and the Hamptons are packed.  Welcome to summer on Wall Street!

 

The desert is the most pertinent geographical analogy to this part of the investing year.   Deserts are defined in a number of different ways, but generally the classification is based on the amount of precipitation that occurs in any year.  Below a certain level of precipitation, the region is considered a desert.  Think of precipitation as the idea generation engine of Wall Street that slows during the summer.

 

Interestingly, while most of us likely perceive a desert as a vast region of sand and limited plant growth, the reality is that only 20% of deserts have sand.  The largest desert in the world is actually the Antarctic Desert, which is, naturally, in Antarctica and covers more than 5.5 million square miles of ice and snow.  So, no, cold desert is not an oxymoron.

 

One place you don’t want to go after a long night of cavorting and over indulging is the Atacama Desert, which is the driest place on Earth and virtually devoid of life.  The average rainfall in parts of the Atacama is less than 1mm per year.  Further, evidence suggests that the Atacama may not have had any rainfall for the four hundred year period between 1570 and 1970.  Needless to say, even if you feel your portfolio is devoid of new ideas, there have been worse droughts!

 

In the Chart of the Day, I’ve attached our current Best Ideas list, which is comprised of the ideas that our research team recommends for three months and beyond (TREND) in our models.  Independent of this list I want to highlight the three ideas that I find most compelling.  They are as follows:

 

1.   International Game Technology (IGT) – IGT makes gaming machines and is, not to mince words, a free cash flow monster.  Over the course of the past three fiscal years, operating cash flow has outpaced total capital expenditures by over a $1 billion dollars in aggregate.    Compared to the current market capitalization of just under $5BN, this provides IGT ample cash to return to investors via share repurchases or debt pay down.

 

Speaking of debt pay down and cash flow, one of the more compelling reasons to own this stock is its potential interest to private equity firms and its inherent private market value.   As our Gaming, Lodging & Leisure Sector Head Todd Jordan has oft noted, four private equity firms were interested in IGT’s competitor WMS and one made it to the final round before Scientific Games ultimately won out.

 

2.   Nationstar Mortgage Holdings (NSM) – The roll up of mortgage servicing is a trillion dollar opportunity and NSM is ideally positioned.  (Translation: this is huge market.) NSM recently put up an EPS number for Q2 of $1.37, which outpaced the consensus estimate by almost 50%.  We think there is continued upside in numbers through 2014.  Currently based on the midpoint of NSM’s 2014 guidance, the stock is trading at less than 7x earnings with upward revisions and continued acquisition catalysts on the horizon.

 

3.   Fed-Ex (FDX) – FDX is just shy of a 52-week high and has outperformed the SP500 over that period, so is not necessarily a contrarian stock.  On a valuation basis, the stock is cheap trading at less than 6x TTM EV/EBITDA and has net cash on its balance sheet (excluding leases). 


Setting aside the financials, which are bullet proof, we think a key reason for owning the stock is that investors are currently ascribing little value to FedEx Express.  We think this division, once restructured, could have a similar margin to UPS or DHL’s express margin and generate an incremental $1.5BN in additional EBIT per year.   Frankly, if the Germans can make DHL Express profitable, it should be achievable for FDX.  If FDX can’t do it, there is no doubt an activist will consider stepping up.

 

Speaking of Fed-Ex, its key competitor UPS announced late yesterday that it was going to be dropping 15,000 spouses who are eligible for coverage from their own employer from its health insurance plan due to higher anticipated costs under the Affordable Care Act.  UPS expects to save up to $60MM per year on this “initiative”.

 

We’ve long extolled the benefits of limiting governments, in large part, due to unintended consequences of policy.   In the UPS instance, it may lead to less or more limited coverage for 15,000 working women.   There has also been ample evidence of workers hours being reduced so employers can avoid the punitive impact of the Affordable Care Act on their bottom line.

 

On a more macro level, there are potentially long term impacts to the labor market.  As Chicago Economist Casey Mulligan wrote in a recent blog for the New York Times:

 

“The Affordable Care Act’s explicit taxes on employers, subsidies for layoffs and implicit taxes on employees, together amount to five or six percentage point addition to the marginal tax rate on labor income.”

 

By Mulligan’s analysis, this may contract the labor pool by 3% in 2015.  At the end of the day, this shouldn’t really surprise any of us for as Milton Friedman said on the topic of government management:

 

“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

 

Indeed.

 

Our immediate-term Risk Ranges are now:

 

UST10yr 2.74-2.96%

SPX 1631-1669

DAX 8249-8417

USD 80.91-81.81

Yen 96.21-98.56

Gold 1329-1392

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Desert - COD

 

The Desert - vp 8 22


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