prev

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 26, 2013


As we look at today's setup for the S&P 500, the range is 17 points or 0.58% downside to 1792 and 0.36% upside to 1809.                           

                                                                                                    

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2A

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.43 from 2.45
  • VIX closed at 12.79 1 day percent change of 4.32%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Sept., Oct. building permits; Oct. est. 930k
  • NOTE: Oct. housing starts delayed until Dec. 18
  • 9am: S&P/Case-Shiller 20-City m/m, Sept., est. 0.9%
  • 9am: S&P/CS Home Price Index, Sept., est. 165 (prior 164.53)
  • 9am: FHFA House Price Index m/m, Sept., est. 0.4% (pr 0.3%)
  • 10am: Conference Bd Consumer Conf Index, Nov., est. 72.5
  • 10am: Richmond Fed Manuf. Index, Nov., est. 4 (prior 1)
  • 10am FDIC announces 3Q bank, thrift industry earnings
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • House, Senate aren’t in session
    • Obama to discuss economy during California visit; to meet with film studio chiefs, says Hollywood Reporter
    • Supreme Court to issue list of cases it plans to take up
    • Washington State genetically modified food labeling vote count expected to be completed
    • Obama seeks Iran deal support; Reid says Senate my act

WHAT TO WATCH:

  • FDIC’s Hoenig to weigh easing bank leverage rule he championed
  • Berkshire said to cut Energy Future bond stake by a third
  • Bayer in talks to buy cancer partner Algeta for $2.4b
  • Samsung bid to put Apple patent case on hold rejected by judge
  • Einhorn’s Greenlight Capital has $402m stake in Micron
  • Silver Lake technology unit said to plan new $1b fund
  • Intel said to seek $500m in sale of web-based TV startup
  • Bain said in talks to sell Applied Systems for $1b+: Reuters
  • Citi loses bid to block Abu Dhabi investment arbitration
  • Sony says entertainment target conservative amid cost cut push
  • China said to plan crackdown on banks’ loan limit evasion
  • Prologis to lift Japan rents, build warehouses on Abenomics
  • SpaceX delays rocket launch as Musk cites being “careful”
  • Online gambling begins today in NJ

AM EARNS:

    • Alimentation Couche Tard (ATD/B CN) 8:37am, $1.23
    • Barnes & Noble (BKS) 8:30am, ($0.03)
    • Beacon Roofing Supply (BECN) 8am, $0.62
    • Brown Shoe (BWS) 7am, $0.59
    • Chico’s FAS (CHS) 7:15am, $0.25
    • Children’s Place (PLCE)  6am, $1.85
    • Cracker Barrel (CBRL) 7am, $1.15
    • DSW (DSW US) 7am, $0.58
    • Eaton Vance (EV) 8:35am, $0.60
    • Hormel Foods (HRL) 6:30am, $0.54
    • Laclede Group (LG) 8am, ($0.07)
    • Movado Group (MOV) 7am, $0.87
    • Pall (PLL) 7am, $0.68
    • Signet Jewelers (SIG) 6:30am, $0.42
    • Tiffany & Co. (TIF) 6:59am, $0.58

PM EARNS:

    • Analog Devices (ADI) 4pm , $0.58
    • Hewlett-Packard (HPQ) 4:04pm, $1.00 -- Preview
    • Infoblox (BLOX) 4:05pm, $0.09
    • TiVo (TIVO) 4:01pm, $0.06

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Fix Drawing Scrutiny Amid Knowledge Tied to Daily Eruption
  • Frozen-Turkey Pileup Signals Thanksgiving Discount: Commodities
  • WTI-Brent Crude Oil Spread Narrows for First Time in Five Days
  • Soybeans Drop From Two-Month High on South American Crop Outlook
  • Japan Dismantles Rice Output Policy as Abe Targets Farming
  • Gold Swings Above Four-Month Low as Investors Weigh Fed Stimulus
  • Copper Swings as Investors Weigh Demand View Against Drop Bets
  • Sugar Drops to 11-Week Low in New York on Ample Supply Outlook
  • Iron Ore Seen Dropping From Westpac to Goldman as Supply Expands
  • Canada Grain Exports From Vancouver Seen Rising to All-Time High
  • Brazil Ethanol Losing Competitiveness to U.S.: Chart of the Day
  • Marcellus Goliath Transforms Region to Gas Trade: Energy Markets
  • Copper Market Tightens in 3Q on Demand Rise, Output Decline
  • Tate & Lyle Urges EU to Abolish a Sugar Duty as Bloc Quotas End

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


THE M3: COD HOTEL; SANDS SLOTS

THE MACAU METRO MONITOR, NOVEMBER 26, 2013

 

 

BOUYGUES TO BUILD FIFTH CITY OF DREAMS HOTEL Macau Business

Bouygues SA says subsidiary Dragages Macau Ltd has won a HK$3.68-billion (US$474 million) contract to build a luxury hotel in City of Dreams.  Dragages Macau will put up a 39-storey building with about 151,000 square metres of floor space over the next three years.  The hotel will have 783 rooms, including some in 10 villas, a casino, restaurants, conference rooms and a sky pool.  MPEL has yet to say which chain will manage the hotel.

 

HK$24.6-MLN PAYDAY MACAU'S BIGGEST JACKPOT Macau Business

An unidentified Hong Kong gambler has claimed a HK$24.6 million (US$3.17 million) jackpot at Sands Cotai Central, which Sands China says is the biggest single jackpot won in Macau.  The company says the player won a Fa Fa Fa Grand Jackpot while playing a Fortune King slot machine on November 17.  Sands China says slot players have won more than HK$1 billion in its casinos since last month.



Correlated Causations

This note was originally published at 8am on November 12, 2013 for Hedgeye subscribers.

“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”

-Charles Darwin

 

Having fun out there yet?

 

If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?

 

Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.

 

Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:

 

“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”

Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”

 

Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?

Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:

  • 2013: In calculating monthly averages for the DXY and UST 10Y Yields, we see that the USD and US rates were most strong (on a YTD percentile basis) in the JUL/AUG/SEP periods. Coincidentally, that’s precisely when the ISM Non-Manufacturing and Manufacturing surveys, Conference Board Conference Board Consumer Confidence Index readings and the NFIB Small Business Confidence Index readings were also recording their strongest levels in the YTD (on a percentile basis). Moreover, the slope of the DXY and UST 10Y has tracked the slope of the aforementioned high-frequency growth data nearly perfectly in the YTD.
  • 1983-2013 (trailing 30Y): In calculating quarterly averages for the DXY and UST 10Y Yields, we see that concomitant QoQ appreciations in both indicators are closely associated with both relatively rapid economic growth and periods of #GrowthAccelerating. Specifically, Real GDP growth has averaged +4.2% on a QoQ SAAR basis in #StrongDollar + #RatesRising periods; that compares to +2.4% for #WeakDollar + #RatesFalling periods. From a 2nd derivative perspective, GDP growth tends to accelerate +23bps on average in the former environment and decelerate -23bps on average in the latter environment.

To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.

 

The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.

 

From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.

With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.

 

In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.

As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).

 

Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:

  • Quantitative: Solid comeback for the US Dollar Index right to our TREND line of 81.39 resistance this morning; will it hold? US Treasury rates (10Y Yields) – which are now trading demonstrably above their 2.63% TREND line – are suggesting a DXY breakout has become an increasingly probable event.
  • Fundamental: Analyzing economic data like a Fed Head would imply tapering is a spring of 2014 event at the earliest. Moreover, the lack of liquidity in the bond market should take a mid-to-late-DEC tapering squarely off of the table: primary dealer inventory is -73% off its 2007 highs and equivalent to a mere 0.8% of outstanding US corporate credit vs. a peak of ~4% in 2007. Please note our emphasis on the word “should”, as what we think the Fed should do and what the Fed does are quite often two very different things.
  • Correlation Risk: While three days does not a trend make, very immediate term correlations are signaling what may be a return to the pro-growth trade of #StrongDollar + #RatesRising = positive US equity beta amid decidedly negative EM beta that has: A) dominated much of the past year; and B) was interrupted by a return to the post-crisis playbook of “QE = short US dollars; buy everything else” in the weeks since SEP 18 (i.e. the day of the Fed’s “no taper” surprise). See the Chart of the Day for more details.

So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.

 

Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.

 

For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.

 

Our immediate-term Risk Ranges are now:

 

UST 10Y Yield 2.64-2.79% (bullish)

SPX 1748-1778 (bullish)

VIX 12.29-14.55 (bearish)

USD 80.93-81.53 (neutral)

Pound 1.58-1.60 (bullish)

Gold 1271-1312 (bearish)

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Associate: Macro Team

 

Correlated Causations - Chart of the Day

 

Correlated Causations - Virtual Portfolio


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

MCD: TESTING THE ESPRESSO-BASED BEVERAGE THEORY EARLY

As outlined at the recent analyst meeting, McDonald’s will rely on beverages to drive top line sales in 2014.  As we’ve said before, we believe that allocating resources to selling more beverages, particularly hot espresso beverages, will not generate the incremental sales needed to achieve the current estimate of +1.7% same-store sales growth in the U.S. in 2014.

 

In our opinion, McDonald’s is a food first destination and whenever management shifts their focus away from food and to selling beverages, the core business suffers.  The shift in the marketing calendar for the remainder of 2013 is an early indication of where management plans to go.

 

It was recently reported that, after selling the highly successful McRib nationally for three years, McDonald’s is switching back to offering the sandwich on a regional basis.  Rather, McDonald’s will focus the balance of 2013 on selling Mighty Wings (a disaster), the Southwest Premium McWrap (hasn’t driven incremental traffic), and now White Chocolate and Peppermint Mocha specialty beverages.

 

This implies that management believes adding a premium espresso-based beverage to the menu will generate more incremental traffic than nationally promoting the McRib.  Although the McRib will be promoted locally, it will not have the full force of the McDonald’s marketing machine behind it in 2013.

 

We don’t expect MCD to report strong same-store sales for the balance of the year and well into 2014.  Looking back on 2013, MCD was forced to shift its strategy mid-year because new products and the promotional calendar were not resonating with consumers and, as it stands, all indications are for 2014 to be a repeat of 2013.

 

MCD: TESTING THE ESPRESSO-BASED BEVERAGE THEORY EARLY - MCD

 

McDonald’s will report November same-store sales on 12/09.  We will post on anything incremental after the release.

 

 

 

Howard Penney

Managing Director

 


OIL & NATURAL GAS: SUPPLY, DEMAND, PRICES AND TRENDS - EXPERT CALL

OIL & NATURAL GAS: SUPPLY, DEMAND, PRICES AND TRENDS - EXPERT CALL  - pic1

 

Our Macro Team is hosting an Expert Call featuring Tancred Lidderdale from the Energy Information Administration (EIA) for an in-depth discussion on the outlook for oil and natural gas.  As a Hedgeye Energy client, you are welcome to listen in.

 

The call titled "Oil & Natural Gas: Supply, Demand, Prices and Trends" will be held on Tuesday, November 26th at 11:00am EST

KEY TOPICS OF DISCUSSION WILL INCLUDE:

  • Oil
    • Key variables that drive the price of oil
    • Expectations for 2014 supply and demand
    • OPEC's ability to impact price
    • Why OPEC's surplus capacity is growing
    • Declining U.S. oil demand
  • Natural Gas
    • Intermediate supply outlook for natural gas
    • Current natural gas supply versus historical level
    • Drilling and drilling productivity
    • Outlook for the renaissance in U.S. natural gas
    • Current and future natural gas demand
  • Gasoline
    • Expectations heading into 2014 for demand and supply
    • Longer term trends
    • Price set versus the price of crude
    • Price implications from the spread on WTI/Brent

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 658898#
  • Materials: CLICK HERE (Slides will download one hour prior to the start of the call.)

ABOUT TANCRED LIDDERDALE

Tancred Lidderdale is the supervisor of the team that produces the Short-Term Energy Outlook for the Energy Information Administration (EIA). Before joining the EIA in 1991, he worked for 12 years with Atlantic Richfield Company in their petrochemical and refinery operations, and foreign crude oil trading. He received his B.S. degree in Chemical Engineering from Georgia Tech, his MBA from the University of Houston, and his Ph.D. in Economics from George Mason University.

 


BUBBLE MONGERING

Takeaway: The market is expensive here. But valuation is (still) not a catalyst.

This note was originally published November 20, 2013 at 15:28 in Macro. For more information on how you can subscribe to Hedgeye research click here.

SUMMARY:

I love everything about investing except maybe the fact that I’m actually in the investment industry.  If you saw how sausage was made you probably wouldn’t eat it.   

 

The allure of a skillfully prepared valuation narrative, however, remains one of the industry’s most enticing, sirenic delicacies. The market is expensive here but valuation is (still) not a catalyst.  Tops are processes, the price signal remains bullish currently and, up through the present, we have continued BTDB’ing (Buying the Damn Bubble) while taking down our gross and net equity exposure since the September 18th, No-Taper announcement. 

 

BUBBLE MONGERING - bub1

 

VALUATION: BLOVIATION & CONSTERNATION 

It has been hard to escape the valuation discussion the last few weeks as bubble speculation has been ubiquitous alongside higher nominal (& real) highs for domestic equities.   Reviewing a cross-section of market valuation measures (below), the summary takeaway is pretty straightforward – across the balance of metrics, equities are, indeed, moving towards overvalued on a historical basis. 

 

The problem, of course, is that the overbought-overvalued market narrative is a tired one as moderately elevated valuation has characterized most of 2013 and prices advancing at a premium to profits is not a new phenomenon – particularly in what could (amazingly still) be considered an “early cycle”,  liquidity supported stage of the recovery. 

 

 

VALUATION IS (STILL) NOT A CATALYST

We use a broad range of valuation and sentiment indicators when contemplating the direction of markets and where our view sits in the context of current prices, consensus estimates, and prevailing sentiment. From an Investment decision making perspective, valuation sits somewhere near the middle-bottom of the our consideration hierarchy. 

 

So, rather than claiming right to some specific valuation-in-isolation based insight on the immediate term direction for equities, below we survey a cross-section of canonical market valuation measures to provide some historical context for current multiples.    

 

In terms of how we are managing the current environment:  With fund flows, decent macro, rising M&A activity, bullish price momentum, near universal acknowledgement of the existent “bubbliness”, and the lack of a discrete negative catalyst all supporting equities in the immediate term, we’ll continue to ride the bull until the price signal changes.  Prune & plant within our immediate term risk ranges while holding an elevated cash balance.   

 

As Keith noted this morning: “This is a raging bull market, until it isn't.”

 

CAPE/Shiller PE:   At 24.9, the CAPE ratio (inflation-adjusted SPX price divided by the 10Y average of inflation adjusted earnings) is moving into the top decile of its historical range.   Below we’ve broken the historical CAPE ratio values into deciles and looked at average market performance over the subsequent 1Y and 3Y periods.  The mapping of the Shiller PE vs subsequent market performance suggests return expectations should move systematically lower alongside incremental increases in valuation. Historically, 1Y and 3Y returns progressively decline for each decile change in the Shiller PE.   

 

BUBBLE MONGERING - drake1

 

BUBBLE MONGERING - CAPE 12M Subsequent Performance 111913

 

BUBBLE MONGERING - CAPE 3Y Subsequent Performance 111913

 

Tobins Q-Ratio:  Longer-term valuation arguments center on the premise that returns on capital should equalize to cost of capital and  market values should normalize to economic value.  Tobin’s Q ratio is not a measure we use to tactically manage risk, but we can appreciate the intuition (why buy an asset when you can “re-create” it for less and compete away existing, excess profit) underneath its application.   

 

Historically, at extremes, it has served as a solid lead signal for subsequent market performance.   We are sitting just below the 1.0 level currently and approximately 1.0 standard deviation above the long-term mean value – a level that has generally not been a harbinger of positive forward returns historically.

 

BUBBLE MONGERING - Q Ratio

 

S&P 500 Market Cap-to-GDP:  Assuming the collective output of SPX constituents credibly reflects aggregate national production (or serves as a credible proxy for it), the Market Capitalization-to-GDP ratio effectively represents a price to sales multiple for the economy.  As can be seen, on a historical basis, we are certainly entering “expensive” territory as we push towards breaching 100% to the upside.

 

BUBBLE MONGERING - SPX Market Cap to GDP

 

FORWARD/TRAILING P/E:  On conventional LTM & NTM P/E metrics, the market is moderately expensive at present.  Valuing the market on 1Y of (recurrently over-optimistic) forward earnings estimates has its pitfalls and, additionally, any perceived cheapness in current multiples should be discounted to account for mean reversion downside off peak corporate profitability (more below). 

 

BUBBLE MONGERING - SPX PE 112013

 

MARKET COMPS AND PEAK MARGINS:  Operating Margins remain near peak with Corporate Profitability continuing to make higher highs with after-tax corporate profits advancing to a record 11% of GDP in 2Q13 – some 85% above the long-term average at current levels .  Unless you think peak returns to capital provide a sustainable path to aggregate demand growth in the face of negative trend growth in real earnings, trough returns to labor, middling productivity growth and secularly depressed investment spending, then the mean reversion risk for margins remains asymmetrically to the downside.

 

Topline growth estimates for the SPX (mkt weighted) don’t look unreasonable at +4.8% for 2014.   Expectations look similar across SPX constituents on an equal weighted basis with median 2Y growth estimates reflecting modest acceleration over the next four quarters.   However, the slope on earnings growth (+10.9% for 2014) over the NTM continues to look overly aggressive given expectations for further, significant margin expansion above already peak corporate profitability.  

 

BUBBLE MONGERING - SPX Comps 111913

 

BUBBLE MONGERING - Corporate Profits   of GDP 111913

 

BUBBLE MONGERING - Investment

 

 

Christian B. Drake

Associate


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next