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What's Working (and What's Not)

Client Talking Points

COMMODITIES

The CRB Index (19 commodities) was up another +1% yesterday to +2.5% year-to-date versus the S&P 500 which is down -5% YTD and Consumer Discretionary (XLY) -7.5% YTD. Incidentally, this northeast weather isn’t going to slow this trend either. We will be hosting a call on why this morning at 11AM EST. Ping sales@hedgeye.com for access.

GOLD

Gold registered another buy-signal on red yesterday in #RealTimeAlerts. That's the 6th buy signal in my model since November when commodities bottomed. What Gold needs to really breakout is already in motion, a 10-year bond yield confirming a bullish to bearish TREND reversal.

YEN

The Yen is also signaling a potential bearish to bullish reversal on my intermediate-term TREND duration (breadown line for US Dollar versus Yen is $102.23). How many people are positioned for that? Seriously? The Japanese retail dudes who were short Yen, long Mothers #nope.

Asset Allocation

CASH 54% US EQUITIES 4%
INTL EQUITIES 4% COMMODITIES 14%
FIXED INCOME 8% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

JAPAN: is that all they got? +1.2% Nikkei to -13% YTD as the government buys ETFs? @KeithMcCullough

QUOTE OF THE DAY

"Most of the shadows of this life are caused by our standing in our own sunshine." - Ralph Waldo Emerson

STAT OF THE DAY

At its peak in January, the S&P 500 had rallied 173 percent from its 2009 bottom, a bull market that was almost a year older than the average since World War II. (Bloomberg)


Call Today at 11:00am - U.S. Economic Update: What Is Priced In?

Call Today at 11:00am - U.S. Economic Update: What Is Priced In? - usclient

 

We will be hosting a flash call updating our U.S. Economic Thesis today at 11:00am EST.

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 944389#
  • MaterialsCLICK HERE (slides will be available approximately one hour prior to the call time)

We'll provide an update to our 1Q14 Macro Investment Themes of #GrowthDivergences and #InflationAccelerating, while highlighting the current quantitative setup for domestic equities, bonds, and the $USD. We will review how to be positioned for slowing growth and rising inflation as well as host a live Q&A Session at the end of the call.

KEY TOPICS WILL INCLUDE

  • #GrowthDivergences:  Since our call on 1/9/14, the incremental fundamental data has continued to reflect a deceleration in the slope of domestic growth.  We'll survey the latest income, housing, manufacturing and consumption data and the implications for equity and asset class positioning. 
  • #InflationAccelerating:  Long inflation expectations and #GrowthSlowing has been the positioning playbook YTD with the CRB commodities index accelerating, Utilities and Healthcare leading sector performance and low short interest, low Beta, and large Cap style factors driving relative equity out-performance. We'll discuss whether to remain long this trend.     

 

Please email for details.


THOUGHTS ON SOFT JAN IN MACAU

Only 7% growth for January is disappointing but anecdotal evidence suggests strong Mass start to February.

 

 

More likely than not, low VIP hold played a role in the soft January that saw GGR grow only 7.3%.  Street consensus was for +13% and we were much higher earlier in the month.  So what are the explanations?

  • Low hold – we had heard even before the last week of January that some operators had experienced some bad luck
  • The placeholder strikes again – as we wrote about on 1/27/14 “MACAU WEEKLY PLACEHOLDER REEMERGES?”, the reported HK$775 million average daily table revenues for the 3rd week of January may have been a placeholder for incomplete data.  We’ve seen that number used many times with the following week as the catch up week.  For January, if the HK$775 was the correct number, that would imply the last 5 days of January generated an insanely low ADTR of HK$545. 
  • Macau volumes just fell off the cliff ahead of the Chinese New Year celebration

We think that a combination of low hold and slow volumes for the last 2 weeks of January contributed to the disappointing YoY growth.  While it’s possible that the last week was that bad, it is more likely the HK$775m reported as daily table revs in the 3rd week was indeed a placeholder.

 

So where does that leave Macau going forward?  If February bounces back to up 20% - our projection – not many will care that the pre-Chinese NY was softer than usual and VIP held low.  Why do we think February could be up 20%?

  • Our model predicts it – we quantitatively look at volume trends sequentially and seasonally and calendar adjust to project monthly revenues.  February faces a relatively easy comp at 12% last year.  Rolling Chip volume actually declined slightly last year.
  • Contacts suggest Mass is off the charts here in February.  Table minimums are higher and some casinos may have opened more than tables temporarily - surely the Cotai properties because they have the space. 
  • Junket biz is expected to accelerate later this week.

The disappointing January growth reported today will no doubt pressure the stocks.  Not sure they need to be bought today as the sentiment could linger until the next data point.  Upcoming data points should be the release of the January detail (later this week) which could reveal a low hold percentage and the first February weekly table revenues (Monday). 


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.

February 5, 2014

February 5, 2014 - Slide1

 

BULLISH TRENDS

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February 5, 2014 - Slide3

February 5, 2014 - Slide4

February 5, 2014 - Slide5

 

BEARISH TRENDS

February 5, 2014 - Slide6

February 5, 2014 - Slide7

February 5, 2014 - Slide8

February 5, 2014 - Slide9

February 5, 2014 - Slide10

February 5, 2014 - Slide11

 

 



Do You Wish To Find Out?

“What we need is not the will to believe, but the wish to find out.”

-William Woodsworth

 

I know. I’m going all #behavioral on you this year. When combined with #history and #math, it gives me an edge. And god knows, I’m not the smartest player in this league – so I need one!

 

The aforementioned quote comes from the introduction in the latest #behavioral book we’ve been discussing in the office, Counterclockwise, by Harvard Applied Psych professor, Ellen Langer.

 

Langer’s research is unique in that she was really one of the first women (1st woman to ever get tenure in Psychology @Harvard) to break the ice on a lot of topics that make us think about how we think. Her most popular book was Mindfulness in 1989. She wrote Counterclockwise in 2009 and it’s relevant to how you think about your risk management day.

 

Back to the Global Macro Grind

 

Do you wish to find out why almost every major macro position that was working for you last year sucks for 2014 YTD? If I needed to believe that the Japanese-burning-currency thing was going to work, I could – but I’d be losing a lot of money on that.

 

Last night’s pathetic bounce in Japanese Equities (Nikkei +1.2% to -12.9% YTD) tells you all you need to know about Japanese consensus – all the locals (brokerage clients getting margin calls) were short Yen and long Mothers (as in the index Japanese dudes lever up on).

 

Most of Wall Street was in the same trade too. It was only 1 month ago today that the CFTC (futures and options) net short position in Japanese Yen hit all-time highs (-135,000 net short position in terms of contracts). This morning that net short position is -89,420 contracts.

 

Next to short Yen, what have been the other major consensus long/short positions in Global Macro options?

  1. LONG Oil – 3 month average = +363,977 net LONG contracts
  2. LONG SP500 (Index + E-mini) – 3 month average = +78,356 net LONG contracts
  3. SHORT US Treasuries – 3 month average = -115,078 net SHORT contracts

And how’s that going YTD?

  1. Brent Oil = DOWN -4.2% YTD (vs the CRB Commodities Index +2.5%)
  2. SP500 = DOWN -5.0% YTD
  3. 10YR US Treasuries = UP (with yields -13%, or 40 bps YTD)

Why? Do you want the answer that consensus needed to believe on December 31, 2013, or do you wish to believe what Mr. Macro Market is telling you about growth (hint: on the margin, with #InflationAccelerating, US growth is slowing)?

 

And it’s not just a USA thing. As you can see in our Chart of The Day (where we show “Hard Growth Comps” for countries versus “Easy Comps”), Japan and the United States were setting up to slow from their 2013 momentum peaks irrespective of this US weather.

 

Oh, and by the way, the weather on the Merritt in Connecticut this morning isn’t what the dude in Tokyo is dealing with via his margin calls. Japan actually just reported a 16 year low in wages. When his government has a Policy To Inflate the dude’s cost of living, that is not good!

 

How does the Burning Your Currency thing work again?

  1. Government prints lots and lots of moneys
  2. Currency goes down, and purchasing power of The People goes down
  3. Real (inflation adjusted) consumption growth slows

Then pop a “consumption tax” on your people (Japan’s is pending) and what people who need to believe about “Abenomics” (that it’s good because the stock market was going up) isn’t aligned with what politicians “wish to find out” about economic reality.

 

Back to the wage inflation (or deflation) thing, I’ll show you what’s going on in the USA on our US Economics Flash Call this morning at 11AM EST. After seeing big time pressure on wages throughout the 2008 crisis, aggregate private sector wages are actually tracking up +5% on a 2-yr comp basis. .  If you need dial in details for the call, email .

 

I know your run of the mill academic doesn’t model the US economy how we do (we model it on a 1, 2, and 3 yr comparative basis so that we don’t get run-over by changes on the margin in trends), but that’s cool. It seems to work.

 

What seems to be a developing bearish to bullish reversal in a @Hedgeye TREND may not turn out to be a long-term reality. But can you afford to miss 3, 6, and 12 month accelerations and decelerations in big macro stuff like growth and inflation?

 

We can’t. And that’s all I have to say about that.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TRENDs, bullish or bearish, in brackets):

 

SPX 1 (bearish)

Nikkei 14036-15004 (bearish)

VIX 15.49-21.63 (bullish)

USD 80.78-81.43 (neutral)

Gold 1 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Do You Wish To Find Out? - GDP Comps

 

Do You Wish To Find Out? - 556


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%
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