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Volatility Returns

Client Talking Points

VIX

After making a series of higher-lows since August, front month VIX (volatility) broke out above our Hedgeye TREND resistance of 14.91 yesterday. Fed confusion is going to breed contempt. This equity market is as complacently positioned as I have seen it in six years. Yesterday’s II Bull/Bear survey hit a fresh year-to-date high of +4390 basis points to the Bull side!

DAX

Germany broke its immediate-term TRADE line of 9,148 support this week. I have no idea why (other than the machines chase price momentum). So, I’m going to stay out of the way of European Equities for the timing being. No one goes broke with no position.

GOLD

Gold prices are whipping around with rates – taper on, taper off. The UST 10-year yield up 4 basis points in 24 hours and Gold down on that. It makes sense. We sold our trading long in GLD on Tuesday at $122.12. We would like to buy it back closer to the low-end of Gold’s current 1216-1260 immediate-term risk range.

Asset Allocation

CASH 58% US EQUITIES 6%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 8% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Equity volatility starting to look primed to breakout into 2014 #VIX @KeithMcCullough

QUOTE OF THE DAY

"Success usually comes to those who are too busy to be looking for it." - Henry David Thoreau

STAT OF THE DAY

Foreigners are boosting holdings of Japanese stocks by the most on record. Buyers outside Japan pumped 12.9 trillion yen ($125 billion) into the nation’s stocks this year through November, Tokyo Stock Exchange data show, as the Topix index climbed 44% to lead developed markets.(Bloomberg)



Fragile Markets

“I’d rather be dumb and antifragile than extremely smart and fragile”

-Nassim Taleb

 

The hyperbole of that quote is that Taleb thinks he’s extremely smart. I’m definitely dumber than he is. So I guess he’d agree that I should never hire him to do what I can do better myself – manage real-time market risk. It’s a great job for a dumb hockey player.

 

Back to the Global Macro Grind

 

The reason why I thought of Taleb this morning is that I was thinking about volatility. To his credit, he was one of the first to write about risk managing volatility from a market practitioner’s perspective. That doesn’t mean I agree with everything he wrote.

 

In terms of how we measure market entropy in real-time (multi-factor, multi-duration), yesterday was a one of the few critically bearish signal days for the US stock market.

 

To boil that down to 3 basic factors in our model (Price, Volume, and Volatility):

 

1. PRICE – SP500 A) failed to make a higher-high versus the 1808 all-time closing high and B) broke 1785 TRADE support

2. VOLUME – was +13% versus my immediate-term TRADE duration average (1st mini-volume spike on a down price move)

3. VOLATILITY – front-month VIX broke out above @Hedgeye intermediate-term TREND resistance of 14.91

 

This has never happened before (because the SP500 has never been at this all-time closing high before). But historically, countries, currencies, companies (anything with a ticker) do this frequently. And when they do, I respect Mr. Macro Market’s signal.

 

What is a bearish immediate-term signal @Hedgeye?

 

1. PRICE = down

2. VOLUME = up

3. VOLATILITY = up

 

Conversely,

 

1. PRICE = up

2. VOLUME = up

3. VOLATILITY = down

 

… is a bullish immediate-term signal @Hedgeye (especially when it’s happening within a bullish intermediate-term TREND).

 

Sure, I have been buying-the-damn-bubble #BTDB pretty much all year – but while I covered a couple of oversold shorts like CAT yesterday, I didn’t buyem on the long side. An intermediate-term TREND breakout in volatility is the #1 reason for that.

 

Are there tangible risk factors that could perpetuate an intermediate-term TREND move in US Equity Volatility back towards 20 on the VIX? Big time. Here are some behavioral ones that I discussed with clients in NYC yesterday:

 

1. VIX has been making a series of higher-lows since AUG as the Fed started to confuse with Taper-on/Taper-off in SEP

2. The average “net long” positioning of the hedge fund community is testing its all-time high zone of +60% again

3. The II Bull/Bear Spread just blew out to fresh 5 year highs of +4390 basis points to the BULL side

 

That last point is one of the more fascinating migrations I have seen in my career. To put a 44% spread between bulls and bears in context, that II Bull/Bear Spread was only +1710 basis points wide in the 1st week of September 2013.

 

Early September – that’s when people may have claimed to be “bullish” but they certainly weren’t positioned Bullish Enough. All this market needed to scare the hell out of the pretend bulls was a VIX rip to 17 in late August.

 

If the VIX goes to 17-18 tomorrow, people who are buying-the-damn-bubble #BTDB will get killed. So, if you have been in the habit of doing the buy on red, sell on green #GetActive thing, you want to be more careful buying now than you were last week.

 

How about fundamental research factors that could turn bearish in the next 1-3 months?

 

1. US Dollar being devalued and debauched (no-taper) towards its YTD lows

2. US GDP #GrowthSlowing from its cycle high of +3.6%

3. Down Dollar = Up Yen = Down Nikkei (another thing people didn’t enjoy in late AUG)

 

Rather than making up my own academic sounding word like antifragile, I’ll call managing real-time market risk this way what it is – being mentally flexible. If you can Embrace Uncertainty every market day, you might feel less dumb every once in a while too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr yield 2.76-2.91%

SPX 1

VIX 14.31-15.67

USD 79.67-80.38

Pound 1.62-1.64

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fragile Markets - Chart of the Day

 

Fragile Markets - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

December 12, 2013

December 12, 2013 - Slide1

 

BULLISH TRENDS

December 12, 2013 - Slide2

December 12, 2013 - Slide3

December 12, 2013 - Slide4

December 12, 2013 - Slide5

December 12, 2013 - Slide6

December 12, 2013 - Slide7

December 12, 2013 - Slide8

December 12, 2013 - Slide9

December 12, 2013 - Slide10

 

BEARISH TRENDS

December 12, 2013 - Slide11
December 12, 2013 - Slide12


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 12, 2013


As we look at today's setup for the S&P 500, the range is 36 points or 0.18% downside to 1779 and 1.84% upside to 1815.                                                   

                                                                            

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1C

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.53 from 2.55
  • VIX  closed at 15.42 1 day percent change of 10.86%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Retail Sales Advance, Nov., est. 0.6% (prior 0.4%)
  • 8:30am: Init. Jobless Claims, Dec. 7, est. 320k (pr 298k)
  • 8:30am: Import Price Index m/m, Nov., est. -0.7% (pr -0.7%)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 8 (prior -31.3)
  • 10am: Business Inventories, Oct., est. 0.3% (prior 0.6%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change

GOVERNMENT:

    • 10am: Senate Finance Cmte votes on freezing Medicare physician-reimbursement rates, repealing growth-rate mechanism originally set up to control costs
    • 10am: House Financial Services Cmte holds hearing on Fed’s mandates
    • 10:30am: Senate Commerce panel hearing on weather forecasting
    • 11am: Sen. Kirsten Gillibrand, D-N.Y., and Rep. Rosa DeLauro, D-Conn., to introduce Family and Medical Insurance Leave Act
    • 1:30pm: House Oversight and Government Reform Cmte hearing on pharmaceutical development
    • 2:30pm: FCC meets, will hear updates on wireless device unlocking, rules on passengers mobile-phone use on airplanes, improving 911 networks
    • 5pm: ITC to announce next steps in Nokia’s patent-infringement case against HTC

WHAT TO WATCH:

  • GM, Peugeot cut synergies forecast to $1.2b by 2018; saw $2b
  • JPMorgan said near $2b settlement from Madoff case: NYTimes
  • Facebook to join S&P 500 next week with ADS, Mohawk
  • Samsung said to near antitrust settlement with EU regulators
  • Apple says no link between Pegatron deaths, work conditions
  • Korea court rules Apple didn’t violate Samsung patents
  • Yahoo apologizes for prolonged e-mail outage
  • Hellman & Friedman, JMI may sell Kronos HR software: Reuters
  • Air Canada picks Boeing 737 MAX in $6.5b narrow-body order
  • Fortis’s $2.5b deal for UNS continues co.’s U.S. expansion
  • Loehmann’s said to fire staff, cancel orders: NYPost
  • Japan passes U.S. as top spender on mobile apps: App Annie
  • Computer Sciences Corp. receives Wells notice from SEC
  • Harbinger says Philip Falcone to sell majority stake
  • Budget deal moves to passage by limiting cope to easing cuts
  • Farm bill delay risks milk price jump already at 4-yr high
  • NTSB probe of Asiana crash finds pilot error on throttle

EARNINGS:

    • Adobe Systems (ADBE) 4:05pm, $0.32
    • BRP (DOO CN) 6am, C$0.42
    • Ciena (CIEN) 7am, $0.24
    • Empire (EMP/A CN) 6:59am, C$1.09
    • Hovnanian Enterprises (HOV) 9:15am, $0.17
    • Lululemon Athletica (LULU) 7:15am, $0.41 - Preview
    • Quiksilver (ZQK) 4:01pm, $0.04
    • Restoration Hardware (RH) 4:02pm, $0.28

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China Seen by FCStone to Hermes Canceling U.S. Soybean Purchases
  • Record U.S. Bacon Prices Poised to Drop on Fat Pigs: Commodities
  • U.S. Farmers Seen Switching From Corn on Price: Morgan Stanley
  • Gold Declines on Fed Stimulus Outlook Before U.S. Retail Sales
  • Nickel Reaches a Five-Week High on Indonesia Export-Ban Concern
  • WTI Swings After Biggest Drop in Two Weeks on U.S. Fuel Supplies
  • Indonesian Ore Ban Seen by Macquarie Hitting Nickel With a Delay
  • Cocoa Rebounds in London Before Futures Delivery; Robusta Gains
  • Chavez’s 6-Cent-a-Gallon Gasoline Binge Threatened: Andes Credit
  • Rebar Falls From 11-Week High on Slower China Investment Growth
  • Where Will All the Natural Gas Go? Expected Glut May Sap Price
  • Cocoa Seen Falling on 40-Day Moving Average: Technical Analysis
  • Corn Retreats Amid Concerns China May Reject More U.S. Cargoes

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

 

 

 

 

 

 

 

 

 

 

 

 

 


HLT: BLACKSTONE PROMOTE - HOW LOW WOULD THEY GO?

Big question for management.

 

 

Following up on our Hilton IPO presentation and call yesterday, we pose another question for management.  How low would you go?

 

On July 3rd Blackstone announced that it would acquire Hilton Hotels for $26BN, writing an equity check for $6BN to seal the deal.  Despite paying over 14x 2007E EBITDA for Hilton at the top of the market, Blackstone will still make a pretty penny on the IPO which was priced at $20. 

 

While the IPO will provide Blackstone with a vehicle through which it can slowly sell its stock, BX will still be the majority shareholder of Hilton for several years to come.  Post IPO, Blackstone and other insiders will own close to 80% of the stock.  Blackstone’s lock-up expires in 1/3rd chunks over 6, 12 and 18 months, after which they will be subject to Rule 144A.  While a large insider holder can sometimes be an overhang on the stock, we believe it also has a major benefit.  BX is incentivized to keep something in the kitty to set the stage of several beat and raise quarters and potentially some assets sales.

 

At some point, Blackstone needs to return the $6BN+ of equity plus a preferred return they used to buy Hilton for their investors.  Only after investors get their preferred return does BX’s promote become in the money.  The questions HLT minority shareholders need to ask is this: If BX needs to return money to investors, at what price would they be willing to dump their shares in Hilton? 

 

To answer this question we make several assumptions:

  • BX’s total equity investment in HLT
    • $6BN was in the initial investment but during the 2010 restructuring, another ~$900MM was used to retire debt at a deep discount.  We are unsure if that additional cash came from Hilton’s balance sheet or from an additional infusion of equity from the sponsor.
      • Preferred return that BX investors are entitled to - we assume 8-9%

Assuming a $6.9BN of total equity and a 9% threshold, our analysis suggests that once BX’s lock up expires 18 months post IPO, its promote would be in the money as long as HLT’s stock price is above $14.60.  The question is would Blackstone sell their stake above $15 bucks or do they have the ability to hold on to share longer to get a better price. Alternatively, can they spin shares out to their investors as a dividend?  This is a very important question for management.

 

HLT: BLACKSTONE PROMOTE - HOW LOW WOULD THEY GO? - BX


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