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Q&A With Keith: The Biggest Risk to the Bear Case

Takeaway: Hedgeye CEO Keith McCullough pulls no punches in response to two questions posed on this morning's conference call.

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Q&A With Keith: The Biggest Risk to the Bear Case - bear attack bear spray

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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.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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). 


February 5, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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