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Our New Year's Fight

This note was originally published at 8am on December 31, 2013 for Hedgeye subscribers.

“All hockey players are bilingual. They know English and profanity.”

-Gordie Howe

 

Yes, it can be a profane game. We aren’t exactly politically correct when we’re all fired up playing it either. Fans call it passion. Foes call it petulance. If you catch our emotions just right, you can watch us fight – and a hockey game might just break out in the meantime.

 

It’s 37 below in my hometown of Thunder Bay, Ontario this morning. But after the World Junior Hockey tilt between Canada and the USA today, lots of little boys and girls will be tugging at their Dad’s red and white jerseys to get them suited up to play on their outdoor rinks. There is no such thing as a PTA snow day. There’s always time to play hockey.

 

While the love of a childhood game can’t be replicated in this Canadian’s craw, I wanted to thank you all for putting up with how I play this one. I’m well aware that I can be an irritating player who likes to stir the pot and start fights. But I love the game and it’s all in good competitive fun. Best of luck and health to you, your families, and firms for a fantastic 2014 Macro season.

 

Back to the Global Macro Grind

 

As Teddy Roosevelt was coming up through the US political ranks, the Boston Evening Times wrote that “he isn’t afraid of the newspapers, and he is always ready for a fight… his aggressiveness is a great factor in a good cause.” (Doris Kearns Goodwin’s The Bully Pulpit, page 141)

 

Calling it like it is isn’t for everyone. Neither are the principles of transparency, accountability, and trust. But, as you’ll see from the World Junior Hockey Championships in Sweden today, on NFL Playoff Sunday, or in any arena of competitive life, these are the foundations of leadership. And we intend to stand by your side upholding them.

 

As I wrote yesterday, I have no idea what is going to happen wire-to-wire across the 12-month period that will be 2014. That would be like hearing Randy Carlyle (Coach of the Toronto Maple Leafs) have the hubris to predict how each and every play of tomorrow’s NHL Winter Classic versus the Detroit Red Wings will go – oh, and then predict every other game of the season after that.

 

The best prediction we can make is to proactively prepare ourselves to Embrace The Uncertainty of the game.

 

You were either long growth (as an investment style) when you had opportunities to position yourself that way in 2013, or you were not. The game always lets you in – it’s your job to realize that, and play the game that’s in front of you.

 

We won’t “predict” 2014 – we will begin with our position and start playing the game from there. There will be wins. There will be losses. And god help me if I don’t get into any Twitter fights.

 

Here’s how we are positioned on the last day of 2013 in the Hedgeye Asset Allocation Model:

 

1. Cash = 37%

2. Foreign Currency (FX) = 30% (Pound, Euro, Kiwi, etc.)

3. International Equities = 15% (Germany, Italy, Japan, etc.)

4. US Equities = 15% (Growth Equities, not Utilities)

5. Commodities = 3% (Natural Gas)

6. Fixed Income = 0% (it was 0% for 184 trading days of 2013)

 

Lets sprinkle a little color on these “allocations.” For starters, I may be a Mucker but I am not yet brain dead. Buying-the-damn-bubble #BTDB in US and International stock markets that continue to hit all-time highs is not for the faint of heart. So I have a big pad of cash.

 

Cash is cool.

 

In fact, having a nice fat asset allocation to cash beats being in bonds or something commodities that continues to crash. Never forget that Rule #1 of Risk Management is “don’t lose money” (Buffett). That starts and ends with not allocating your assets to a Fisher Price looking pie chart that keeps you in bubbles (Gold and Bonds) that are in the midst of imploding.

 

On the FX side, remember that our Top Global Macro Theme for Q413 was called #Eurobulls. Pivoting from bullish to bearish on the US Dollar like we did from Q313 to Q4 means it’s a lot easier to have a big asset allocation to other currencies. The British Pound is popping to a fresh YTD high this morning of $1.652 versus USD. That and the Euro remain in Bullish Formations @Hedgeye.

 

When I think about asset allocation, I don’t ignore the concept of diversification. While allocating to cash is a risk managed choice, so is capping my max allocation to any asset class at 33% of my total net wealth. That’s precisely the number I invested into Hedgeye in 2008 and going to 30% international FX right here and now (i.e. 91% of my max conviction to an asset class) is the same.

 

Some people call going to 90-100% of your max “conviction.” And while it’s really important for me to communicate where my investment convictions are (and where they are changing), don’t confuse that with what I have the highest conviction in of all – our process.

 

Thank you again for providing me and my teammates an opportunity to play this game out loud and in front of you every day. Making mistakes out on the proverbial ice for all our fans and foes to see has helped expedite our learning and maturation process immensely. The day I stop learning how to get better at this game is the day I’ll realize it’s time to retire. God willing, I have a lot of years in me yet.

 

Our immediate-term Global Macro Risk Ranges are now (with bullish or bearish TREND in parenthesis):

 

UST 10yr Yield 2.94-3.06% (bullish)

SPX 1823-1861 (bullish)

VIX 11.84-14.91 (bearish)

 

Best of luck out there today, and Happy New Year!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our New Year's Fight - cod

 

Our New Year's Fight - ruff


THE M3: NEPTUNE; VIETNAM; LOUIS XIII; PACKAGE TOURS

THE MACAU METRO MONITOR, JANUARY 14, 2014

 

 

NEPTUNE BUYS INTO CITY OF DREAMS JUNKET OPERATOR Macau Business

VIP gaming investor Neptune Group Ltd says it is buying the right to 5% of the earnings of junket operator Ocean Star Entertainment Co Ltd.  Neptune will pay HK$208.3 million (US$26.9 million) for its portion.  Ocean Star Entertainment runs a VIP gaming club at CoD.  The club has at least 11 tables and average rolling chip turnover of HK$6.43 billion a month.  The deal is part of Neptune’s expansion of its presence in the junket business in Cotai.

 

ROCKEFELLER'S FIRM PLANS $2.5 BILLION VIETNAM DEVELOPMENT Bloomberg

Rose Rock Group, a Rockefeller family-backed alternative investment management firm, will help develop a $2.5 billion residential and hotel project in Vung Ro Bay.  The project will include 350 marina berths, hotels with more than 760 rooms, 4,300 residential apartments, 100 townhouses and retail shops.  

 

Vietnam’s VinaCapital Group, the country’s largest fund manager, is planning to build a $4 billion casino-resort complex in Quang Nam province on the south-central coast after developing a beach resort in Danang about six years ago, Chief Executive Officer Don Lam said.

 

LOUIS XIII BORROWS HK$3 BN TO BUILD COLOANE HOTEL Macau Business 

Louis XIII Holdings Ltd says it has arranged a HK$3.05 billion (US$393 million) loan and will spend the money on building its casino-hotel on Coloane.  Its subsidiary New Concordia Hotel Ltd agreed on a six-year loan facility with the Hong Kong branch of a mainland bank, which it did not identify.  Louis XIII expects its Coloane casino-hotel to open in 2016.  The government has yet to formally approve any gaming facilities in the hotel.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR NOVEMBER 2013 DSEC

Macau visitor arrivals in package tour totaled 769,447 in November 2013, down -9.9% YoY.  Visitors from Mainland China (567,931) decreased by 11.7% YoY, with 276,156 from Guangdong Province, which was followed by Taiwan (58,163); the Republic of Korea (35,726); and Hong Kong (35,190).  The average length of stay of guests held stable as November 2012, at 1.4 nights. 



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#GROWTHDIVERGENCES: ALL EYES ON JAPAN

Takeaway: While our conviction over the next 3-6M is unlikely to be anywhere near where it has been, we think it pays to #BTDB in the Abenomics Trade.

CONCLUSIONS:

 

  1. We remain bearish on the Japanese yen and bullish on Japanese equities with respect to the intermediate-term TREND and long-term TAIL durations.
  2. With respect to the former duration, however, our conviction is dramatically lower than it was 12-15M ago.
  3. Specifically, we think Japanese economic growth is likely to slow throughout 1H14. To the extent that catalyst results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market.
  4. A immediate-term TRADE breakdown in the aforementioned currency cross (TRADE support = 102.68) will likely result in the exchange rate testing its intermediate-term TREND line of support at 100.06. An immediate-term TRADE breakdown in the Japanese equity market (TRADE support = 15,698) will likely result in the index testing its intermediate-term TREND line of support at 15,045.
  5. The aforementioned TRADE lines a good levels to buy protection to the extent you are looking to hedge for more noteworthy downside in your existing SHORT yen or LONG Japanese equity exposure(s). The aforementioned TREND lines would be a good place(s) to add to existing positions – to the extent you have pared them back or have plans to do so.
  6. Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.

 

JAPANESE ECONOMIC GROWTH IS LIKELY TO SLOW FROM THESE LEVELS

The consumption tax hike (scheduled for APR 1st) has likely been the most over-analyzed fiscal policy catalyst in the world over the past 6-12M, so we’re not going to waste your time adding to the slew of analysis. Japanese growth is a near-lock to slow in second quarter.

 

Where we are divergent from consensus is that we think Japanese economic growth slows in 1Q14E as well (i.e. sooner than the market might expect; Bloomberg consensus forecasts currently call for an acceleration to +3.1% YoY real GDP growth in 1Q14).

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - JAPAN

 

Considering that Japanese economic growth data has been white-hot in recent months/quarters, it’s not exactly going out on a limb to call for it to cool off, at the margins. Tough comps and #InflationAccelerating are threatening to suppress Japan’s consumer-aided recovery from currently elevated growth rates.

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - GDP Comps

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - CPI

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - PPI

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Imports

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Wages

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Consumer Confidence

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Retail Sales

 

Moreover, despite marked improvement in domestic industrial production, manufacturing, capital goods orders, business sentiment, exports, etc., we believe that Japanese corporations have yet to fully buy into the sustainability of Abenomics – as evidenced by their forecasts for the USD/JPY cross and CapEx guidance that remains well off the peaks of previous economic cycles.

 

As such, the growth rates/index levels of the aforementioned indicators is at risk of slowing from currently-elevated levels until Japanese corporations get substantially more color on the much-anticipated “Third Arrow” of Abenomics (allegedly to be detailed in JUN).

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Industrial Production

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Manufacturing PMI

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Capital Goods Orders

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Economy Watcher s Survey

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Exports

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - CapEx Guidance

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Tankan JPY Forecast

 

DOES SLOWING GROWTH = DECLINING INFLATION EXPECTATIONS OR HAS “KURODA’S CASINO” BROKEN THAT RELATIONSHIP?

To the extent a noteworthy slowing of Japanese economic growth results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market. It’s worth noting that the USD/JPY cross has a +0.85 correlation to Japan’s 5Y breakeven rate over the trailing 3Y.

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - Breakevens

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - JPY vs. Breakevens

Source: Bloomberg L.P.

 

That said, however, it’s hard to have a high-conviction view on that relationship at the current juncture. The next 6-9M is likely to present Japanese policymakers with their first real test on the economic growth front since Kuroda materially altered the way the BoJ conducts its monetary policy operations.

 

If Shirakawa were still in charge, we’d actually think about shorting the USD/JPY cross and shorting the Nikkei on a TRADE breakdown in the respective markets. Recall that Japanese capital and currency markets were constantly testing Shirakawa’s will to implement the necessary measures to overcome deflation – a task he ultimately failed miserably at.

 

Haruhiko Kuroda is a different animal altogether, however. It remains to be seen how much faith the market will have in his willingness to add to the BoJ’s “Quantitative and Qualitative Easing” program and how quickly they anticipate him doing so (80% of economists surveyed by Bloomberg expect additional stimulus measures by SEP). Faith, as evidenced by the net length in the futures and options market remains high – for now at least.

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - JPY Net Length

 

We too think Kuroda & Co. will continue to fight hard to achieve “+5% monetary math” and that expectation underpins our respective long-term TAIL biases on the yen and Japanese equities as outlined at the onset of this note. Moreover, the preponderance of recent commentary suggests they stand ready and willing to react to any confirmation of lost momentum on either the growth or inflation fronts in the interim.

 

#GROWTHDIVERGENCES: ALL EYES ON JAPAN - 5  Monetary Math

 

Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.

 

These views lead us to conclude that the current correction in the USD/JPY cross and the Japanese equity market are just that – corrections. As such, while our conviction over the next 3-6M is unlikely to be anywhere near where it has been in months and quarters past, we still think it pays to #BTDB in the dollar-yen and Japanese equities if and when the opportunity presents itself.

 

Feel free to ping me with follow-up questions if you’d like to dig in further on a specific topic(s).

 

DD

 

Darius Dale

Associate: Macro Team



IS THE STREET DISCONNECTED FROM REALITY?

DISMAL DECEMBER


This weekend Black Box gave us a look at December sales trends, which are, on the margin, negative for the industry.  Same-restaurant sales and same-restaurant traffic trends were both negative during the month and down sequentially from November.  Before we delve further into the details of the release, we thought it would be useful to highlight which casual dining chains had same-restaurant sales estimates adjusted since December 2nd.

 

Zero of the casual dining companies that we track had 4Q13 same-restaurant sales estimates revised up over the course of December.

 

The following companies had 4Q13 same-restaurant sales estimates remain flat over the course of December: BOBE, BWLD, CAKE, CBRL, CEC, DIN, IRG, KONA, RUTH, RRGB, TXRH


The following companies had 4Q13 same-restaurant sales estimate revised down over the course of December: BBRG, BJRI, BLMN, CHUY, DFRG, EAT     


Moving back to the release, Black Box reported that December 2013 same-restaurant sales decreased -2.0%, a 280 bps sequential decline from November.  Same-restaurant traffic trends were down -4.5%, a 360 bps decline sequential decline from November.  These same-restaurant sales and traffic estimates come against results of -1.1% and -3.7%, respectively, in December 2012.  3-month same-restaurant sales and same-restaurant traffic declined 70 bps and 90 bps, respectively, on a sequential basis. 

 

December was hurt by winter storms and a shortened shopping season due to a late Thanksgiving.  Furthermore, Thanksgiving was included in December figures which hurts the majority of casual dining same-store sales, as they typically see lower weekly sales due to the holiday.  California was the best performing region during the month, with same restaurant sales up +0.7% and same-restaurant traffic down -3.4%.  NY/NJ was the worst performing region, with both same-restaurant sales and same-restaurant traffic down -5.5% and -8.1%, respectively.

 

In aggregate, December numbers imply that same-restaurant sales and same-restaurant traffic were down -0.1% and -2.3%, respectively, in 4Q13. This suggests that casual dining chains continue to lose share to fast casual and fine dining chains, both of which had positive same-store sales in the quarter.

 

On an annual basis, same-restaurant sales and same-restaurant traffic were down -0.1% and -2.1%, respectively, in 2013.   

 

IS THE STREET DISCONNECTED FROM REALITY? - BB SALES

 

IS THE STREET DISCONNECTED FROM REALITY? - BB TRAFFIC

 

 

One bullish data point, however, is the 2 point sequential acceleration in the Restaurant Willingness to Spend Index (which resembles consumer willingness to spend).  At 95, this marks a 3-year high in the index suggesting consumers are willing to eat out.  Unfortunately, these consumers appear to be frequenting chains outside of the casual dining industry.

 

IS THE STREET DISCONNECTED FROM REALITY? - consumer willingness to spend

 

 

Clearly, December was a let-down month for the  industry after a solid October and November and, judging by the weather thus far, we suspect January will be another difficult month.

 

 

IS THE STREET TOO BULLISH?

 

 

IS THE STREET DISCONNECTED FROM REALITY? - same store sales estimates

 

 

What is remarkable is that despite Knapp estimates indicating same-restaurant sales will be down -0.7% in 4Q and Black Box estimates indicating same-restaurant sales will be down -0.1% in 4Q, our index (composed of Consensus Metrix estimates for the 25 casual dining chains we track) indicates the street is expecting +1.2% same-restaurant sales growth in the quarter.  This is further evidenced by the fact that only 6 out of the 17 casual dining companies we track had their same-restaurant sales estimates revised down over the dreadful month of December.  In our opinion, the street appears to be disconnected from reality.  

 

Below, is our Hedgeye Sales Monitor for the casual dining sector.  Same-store sales are color coded green (if above) or red (if below) the sub-sector's mean.  2-year averages are color coded green (if accelerating) or red (if decelerating) on a sequential basis.

 

IS THE STREET DISCONNECTED FROM REALITY? - sales monitor part1

 

IS THE STREET DISCONNECTED FROM REALITY? - sss chart2

 

 

Howard Penney

Managing Director

 


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