prev

Boxing Day

This note was originally published at 8am on December 26, 2013 for Hedgeye subscribers.

“If money is your hope for independence you will never have it.  The only real security that a man will have in this is a reserve of knowledge, experience, and ability.”

-Henry Ford

 

In Canada, today is more commonly known as Boxing Day.  The origin of Boxing Day is believed to be in medieval England when servants, and those of lesser means, were given Christmas Boxes, which were filled with money and other small gifts.  The boxes were given in appreciation for service throughout the year.

 

In much of the Commonwealth, Boxing Day is still a bank holiday even though the Commonwealth is largely independent of Great Britain.  Across the current and former Commonwealth, the day has morphed from a day to recognize servants into becoming one of the most prominent shopping days of the year.

 

In addition, Boxing Day is another day to spend with one’s family and community.  Personally, I am back in my small hometown of Bassano, Alberta, and have been enjoying every minute of it.  In the Chart of the Day today, I’ve shown a picture of me with a few friends from our annual town hockey game with the growth in Canadian oil production over the last two decades graphed in the background.

 

Speaking of independence, as you can see from the chart, Canada has seen massive growth in its oil production over the last couple of decades.  This growth has been primarily driven by accelerating production in non-conventional oil from Alberta’s oil sands.  When combined with the fact that the United States is, as of last month, producing more oil than it imports, one can envision a future in which oil from the Middle East plays a much less significant role in Western economies.

 

Will there be a future of complete energy independence in the Western world?  Certainly, the growing production in the U.S. and Canada is a hopeful sign.  The other hopeful sign of course is the increasing efficiency of fuel consumption in motor vehicles (no irony that Henry Ford is in the opening quote).   According to the Energy Information Administration in their most recent long term outlook:

 

“The decline in energy imports reflects increased domestic production of petroleum and natural gas, along with demand reductions resulting from rising energy prices and gradual improvement in vehicle efficiency. The net import share of total U.S. energy consumption is 4% in 2040, compared with 16% in 2012 and about 30% in 2005.”


Clearly, the path forward is one of increased energy independence in the United States and not less.

 

Back to the Global Macro Grind...

 

For those that measure annual performance, this year is all but in the bag with basically less than four trading days left in the U.S. stock markets.  Either you made your bogey this year and beat your respective benchmark, or you didn’t.  Regardless, the only move left this year is likely some tax loss selling.

 

In terms of global equity market performance, 2013 was certainly an interesting one.  The top five performing global equity markets for the year were as follows:

  • Venezuela +478%
  • Dubai +102%
  • Argentina +88%
  • Abu Dhabi +58%
  • Japan +56%

Now admittedly, playing some of the stock markets above are akin to going to our Gaming, Lodging and Leisure Sector Head Todd Jordan’s favorite American city, Las Vegas, and putting down your year-end bonus on the roulette table, but those are some juicy returns nonetheless.

 

On the flip side, of course, are the global equity market losers.  Based on the markets we actively monitor, the top five worst performing equity markets in 2013 were the following:

  • Peru -25%
  • Ukraine -18%
  • Brazil -16%
  • Chile -15%
  • Turkey -12%

The other story of haves versus have nots is the performance differential seen between hedge funds and traditional long only money managers.  According to Absolute Return Magazine, the top performing hedge fund strategies from January through November of 2013 were distressed (up +13%), U.S. equity (up +13%), and event driven (up +12%).  While positive, this performance certainly pales in comparison to the return of the SP500 500, which is already up 29% for the YTD and the MSCI world index up 23% for the YTD.

 

Domestically, sector allocation was likely one of the more significant drivers of outperformance. Of the nine major U.S. equity stock market sectors, the outperformance between the top performing sector of Consumer Staples and the worst performing Sector of Utilities was more than 2,000 basis points. Simply getting the allocation to those two sectors correctly weighted, would have made an equity manager’s year.

 

Speaking of style factors and hedge fund returns, one key reason for the relative underperformance of the hedge fund industry is the relative out performance of high short interest stocks.  According to our U.S. Style Factor Performance Monitor, a report published by my colleague Darius Dale, high short interest stocks (so the 10% of U.S. stock with the highest short interest) are up almost +42% in 2013.  Obviously, the short book going up more than long book is a tricky recipe for any long / short hedge fund.

 

We are going to continue to hammer on the importance of getting style factors and sector allocations correct in 2014.  As noted, simply avoiding the most underperforming sectors or style factors would have been a boon for anyone’s personal or professional portfolios in 2013. 

 

As rates continue their upward climb, fixed income and bond portfolios should be the focus for any asset allocators.  Historically, gentleman, and retirees have preferred bonds, but as the proverbial Queen Mary of global macro factors turns (interest rates), a factor to consider is underperformance in bond markets.  Specifically, as The Wall Street Journal today notes, the Barclay’s muni-bond index is down -2.6% on the year.  One thing I know for sure, bonds rarely trade independent of interest rates.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.90-2.99%

SPX 1802-1845

VIX 11.91-14.05

USD 80.48-80.91

Gold 1179-1218

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Boxing Day - Chart of the Day

 

Boxing Day - Virtual Portfolio

 


WHERE WILL EQUITY ALPHA COME FROM IN 1H14?

Takeaway: Stay with what’s been working from a style factor perspective, but be mindful of likely leadership rotations at the industry level.

CONCLUSIONS: In the note below, we highlight the key takeaways from six different analyses that will help portfolio managers appropriately allocate capital over the intermediate term.

 

  1. Quantitative risk management levels;
  2. Style factors – narrow focus;
  3. Style factors – broad focus;
  4. Hedgeye Macro GIP Model historical backtest results;
  5. Industry and sub-industry momentum; and
  6. Relative valuation.

 

We consider our primary responsibility to be the consistent identification of the most important top-down trends that will have an outsized impact on your P&L – be it from a beta, alpha or draw-down risk perspective. The vast majority of the time our efforts are focused on getting the directional component of market beta right, as well as trying to front-run meaningful drawdown risk(s).

 

Often times, we tend to help our subscribers generate alpha by simply having the correct non-consensus call on beta (e.g. our 2013 US equity bull case) or by helping them avoid the stuff that is blowing up (e.g. our 2012-13 gold and commodity bear case). #Alpha via happenstance, if you will.

 

Today, however, we’re applying a more proactive approach to the search for alpha. Sourcing analyses from a host of proprietary quantitative tools, we think over at least the next 3-6M US equity market alpha will be found by employing the following strategies:

 

1) Stay long of market beta, fading the top end of Keith’s immediate-term risk range and Buying the Damn Bubble (#BTDB) at the low end of said range. CLICK HERE for our latest S&P 500 risk management levels note.

 

2) Continue to be overweight low dividend-yielding stocks and underweight high dividend-yielding stocks as long-term interest rates continue to make a series of higher-highs and higher-lows amid pervasive bond fund outflows.

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - MACRO Indicator

 

3) High growth stocks continue to outperform across all noteworthy durations, and investors would do best to position for a continued widening of the spread between high-growth stocks – on both LT EPS growth expectations and NTM sales growth expectations – and low-growth stocks, as well as for a continued widening of the spreads between high-rated stocks and low-rated stocks and low debt stocks and high debt stocks. The relative performance of the aforementioned style factors since the DEC 9th bottom in domestic inflation expectations (via 5Y breakevens) has generally confirmed prevailing trends. Lastly, the spread between high beta stocks and low beta stocks has actually been accelerating of late and we think investors should capitalize on this momentum accordingly.

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - S P 500 Style Factor Divergence Monitor

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Taper  1

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Taper  2

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Beta

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Consensus Rating

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Debt

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Dividend Yield

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - EPS

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Insider Ownership

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Market Cap

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Sales Growth

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Short Interest

 

4) Consider overweighting the Internet Retail, Semiconductor Oil & Gas Drilling and Biotech GICS Level 4 Industries and underweighting the Trucking, Tires & Rubber, Home Furnishings and Department Stores GICS Level 4 Industries as the US economy moves into a state of #InflationAccelerating (i.e. either Quad #2 or Quad #3 on our GIP model).

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - UNITED STATES   YoY

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Quads  2 and  3

 

5) Those focused on long/short, absolute return strategies are likely to do well by pairing off the following GICS Level 4 Industries:

 

  • Long ideas (ranked according to highest-to-lowest VAMDMI score*):
    • Education Services
    • Electronic Equipment & Instruments
    • Health Care Equipment
    • Other Diversified Financial Services
    • Airlines
    • Casinos & Gaming
    • Life Sciences Tools
    • Regional Banks
    • Cable & Satellite
    • Aluminum
  • Short Ideas (ranked according to lowest-to-highest VAMDMI score*):
    • Food Retail
    • Tobacco
    • Trading Companies & Distributors
    • Electric Utilities
    • Computer & Electronics Retail
    • Personal Products
    • Household Products
    • Oil & Gas Equipment Services
    • Wireless Services
    • General Merchandise Stores

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - VAMDMI

 

6) From a valuation perspective, the Footwear, Retailing, Specialty Retail, Apparel Retail, Home Improvement Retail, Food Retail, Distillers & Vintners, Research & Consulting Services, Data Processing & Outsourced Services, Application Software and Gas Utilities industries and/or sub-industries are all grossly overvalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).  

 

The market has been straight-up-and-to-the-right for over a year now, so there’s not a ton value out there for those looking to load up on “cheap” names. That said, however, we do flag the Oil & Gas Drilling, Oil & Gas Equipment Services, Technology Hardware & Equipment and Communications Equipment industries and/or sub-industries as being relatively undervalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).  

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  1

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  2

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  3

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  4

 

Feel free to ping us with any follow-up questions or if you’d like a list(s) of the specific tickers comprising any of the aforementioned industries and/or sub-industries. As always, we’re here to help.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team

 

 

VAMDMI SCORE EXPLANATION

VAMDMI is short for “Volatility-Adjusted, Multi-Duration Momentum Indicator”. The VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.

 

  • Short-term z-score: 1-3M sample
  • Intermediate-term z-score: 3-6M sample
  • Long-term z-score: 6-12M sample

 

Each independent sample size is determined dynamically by prevailing trends in US equity market volatility. Specifically, if the VIX Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the VIX Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.



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 80.28%
  • SHORT SIGNALS 78.51%

AND THERE IS MORE TO COME…

Only a handful of states have released gaming revenues for December but the verdict is in

 

  • Not sure the Street was ready for the onslaught of bad numbers but they’re here.
  • Ohio and Pennsylvania – relatively new gaming states – are already out with high single digit/low double digit same-store declines
  • The mature gaming state of Illinois released a -13% YoY same-store decline
  • We think the sell side will likely lower Q4 estimates for PENN, PNK, and BYD 

AND THERE IS MORE TO COME…   - ssss


Video Preview: Q1 2014 Macro Themes

In the video below, Keith walks you through our top 3 global macro themes ahead of our Q1 2014 Macro Themes conference call tomorrow.

 

 

 

REMINDER: We will be hosting our Quarterly Macro Themes conference call tomorrow, January 9th at 11:00am EST. The accompanying presentation will detail the three most important macro trends that our team has identified for the quarter, as well as the associated investment opportunities.

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 897866#
  • Materials: CLICK HERE (slides will be available one hour prior to the start of the call)

Q1 2014 THEMES OVERVIEW

#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

 

#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.

 

#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering.   

CONTACT

Please email  for more information. 


Stock Report: Quiksilver, Inc (ZQK)

Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK boxes 1 8 14

THE HEDGEYE EDGE

Consensus is not bullish enough on Quiksilver (ZQK). The consensus view is understandably focused upon the new management team, cost cutting, and improved efficiency. We think that gets the stock to where it is today.  Ultimately, in order to really get this stock to work, we need to see significant top line growth.

 

The only way we think we can gauge the viability of top line growth coming to fruition (for the first time in 5-years) is to roll up our sleeves, ask actual “action sports” and “surf consumers” (over 1,000 of them) an array of very detailed questions to understand the relevance of the brands, and subsequently determine whether the brands are powerful and relevant enough for the new management team to use effectively as an offensive weapon to create value. 

 

So that’s what we did.

 

Our key takeaway here is that the brands – Quiksilver, Roxy and DC – all scored far better than we even hoped.  We believe these brands all possess the relevance needed to grow from here. Statistics regarding brand authenticity, desirability, and customer loyalty (versus 20 other brands) came through as much more positive than we’d have thought, and certainly more than the consensus currently believes.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

This is the only part of the story we’re not thrilled with. Why? 2014 will be all about cost cuts and modest (2%ish) top line growth.  As such, our estimates for 2014 are not too far off of consensus. This is all a logical progression. The management team started in early 2013. The first and easiest thing to do is reorganize the company, cut redundant functions and ensure that the team is filled with ‘A’ players.  Earnings in 2014 should be slightly positive vs. a loss of ($1.53) last year. That’s all due to restructuring. The good news is that this is largely baked, suggesting to us that there’s likely little risk of failure. That gives us confidence in minimal downside in the stock in 2014.

 

LONG-TERM (TAIL) (the next 3 years or less)

2015 and beyond is a much different story. Our long-term model has ZQK adding $600mm in revenue on top of a $1.9bn base. As a frame of reference, our top line growth forecast is over 1,000 basis points ahead of consensus.  

 

Ultimately, we’re at over $1.00 per share in 2017, which is 45% ahead of the consensus. In the end, this is a 40%+ EPS grower that’s a double if we use a 20x p/e, which we think is more than fair based on the soon-to-be-realized growth profile.

 

Bottom line: Put this stock in your portfolio and forget about it. You’ll be pleasantly surprised a year or two from now.


ONE-YEAR TRAILING CHART

Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK chart 1 8 14


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.

next