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The Most Important Macro Theme Right Now

Takeaway: We're banging this drum loud and hard. For good reason.

#InflationAccelerating remains our  #1 non-consensus Macro Theme.

 

The Most Important Macro Theme Right Now - hair

 

Check out the CRB Index which closed up another +1.1% yesterday. It’s now up almost +8% year-to-date (and it’s still only February). Compare that with the S&P 500 which fell -0.65% yesterday and is down -1.1% YTD.

 

Gold? It rose another +0.2% to over +9% YTD.

 

What's that? Consumer Discretionary has fallen -3.2% YTD? Exactly. There’s no question that inflation is a tax on U.S. consumption expectations. 

 

The Most Important Macro Theme Right Now - XLF 10Y


Keep a close eye on the Financials (XLF). As the US Dollar and Rates go, so goes the Financials (they were down -1.4% yesterday) and the market. The long-end of the yield curve needs to rise for the XLF to work – not get “rate guided” down by un-elected bureaucrats in Washington.

 

Got US #GrowthSlowing yet?

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[video] Keith's Macro Notebook 2/20: #INFLATIONACCELERATING YEN XLF


INITIAL CLAIMS: RECENT PRESSURE ABATES

Takeaway: The labor market catches its breath this week with modest sequential improvement.

Two Steps Back, One Step Forward ...

Labor market data had been deteriorating steadily for the last 4 weeks in a row. This week it got slightly better. The year-over-year rate of improvement in rolling NSA initial jobless claims accelerated to -5.5% from -5.1%, marking an inflection from the decelerating trend we had been seeing for the previous month. On a one-week basis, the rate of improvement was fairly impressive at -7.9% vs -0.9% the week prior. As a reminder, we monitor deviations from the trendline rate of improvement in claims as the best real-time indicator for labor market turning points. It's important to remember that claims hit a frictional support level of ~300k, so as the data approaches 300k the rate of improvement should be expected to converge towards zero. We're mindful of this, which is why we look for trendline deviations.

 

The Numbers

Initial jobless claims (SA) fell 3k to 336k from 339k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2.5k WoW to 338.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.1%

 

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Yield Spreads

The 2-10 spread rose 3 basis points WoW to 242 bps. 1Q14TD, the 2-10 spread is averaging 243 bps, which is higher by 2 bps relative to 4Q13.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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GLPI 4Q 2013 CONFERENCE CALL NOTES

First one out of the block - not too shabby

 

 

CONF CALL

  • 4Q:  3 months of operating results from Hollywood Baton Rouge and Perryville
  • 4Q:  2 months included for real estate entity
  • Columbus/Toledo variable rent:  less than 10% of total rent
  • Rent coverage expected to exceed 1.8%
  • Rent escalator will begin on Nov 1, 2014
  • 2 OH race tracks will open Fall 2014

Q & A

  • Pleasantly surprised with strength of Perryville
  • Baton Rouge will improve as L'Auberge Baton Rouge property ramps up
  • Horseshoe Baltimore competition is reflected in 2014 guidance
  • Non-gaming acquisitions?  Not soon.
  • At least a few years of 'happy entertainment' before thinking about outside of gaming
  • Pretty confident more transactions will be done this year
  • People more interested in talking with GLPI given tough gaming environment; focused on rent coverage
  • Investment opportunities:  Independent properties that are owned by families, trusts, etc.
  • Queen acquisition:  GLPI loan 7% has a 5% spread on revolver (2%)
  • No pushback on GLPI; just ongoing conversations 
    • Number of opportunities haven't changed given environment
  • AFFO reduction due to PENN stock options: $12MM in 2014 and more reductions in years farther out
  • May be included in other indices; will approach relevant parties
  • Need to raise equity to fund new transactions?  Yes.  Leverage ratio goal is 5.5x.  Currently, under 6x.  Expect to reach investment grade.
    • Expect revolver to be around $200MM by end of 2014
  • Private transactions/greenfield development projects (e.g. MA) are most likely for transactions
  • Rent coverage across each property:  range from 1.4X to 3.5X
  • When looking at potential transaction, will access risk of gaming market, heath of earnings, margin trends, will set target rent coverage of 2x
  • Run rate on taxes:  40% on TRS

Inflation Matters (Big Time)

Client Talking Points

#InflationAccelerating

Accelerating inflation is still Macro Theme #1 here at Hedgeye. Check out the CRB Index which closed up another +1.1% yesterday to up +7.8% year-to-date (compare that with the S&P 500 which was -0.65% on the day, down -1.1% YTD). There is no question that this is a tax on U.S. consumption expectations. What's that? Consumer Discretionary has tumbled -3.2% YTD? Yes, exactly.

YEN

The Yellen Fed moving to “rate guidance” (i.e. price fixing) along with Treasury Secretary Jack Lew encouraging the world to reflate is totally nuts. Or at least nuts enough that even the Yen looks healthier than the US Dollar right now (policy is causal). The Nikkei fell -2.2% overnight to down -11.3% year-to-date.

Financials

Watch the Financials (XLF) very closely. As the US Dollar and Rates go, so will go the Financials (they were down -1.4% yesterday) and the market. The long-end of the yield curve needs to rise for the XLF to work – not get “rate guided” down by some un-elected bureaucrat.

Asset Allocation

CASH 53% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 16%
FIXED INCOME 10% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
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.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

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

GOLD: up another +0.2% to +9.3% YTD with US #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

“Eat me alive right now.” - Zinetula Bilyaletdinov, head coach of Russia's hockey team which was just eliminated

STAT OF THE DAY

In a play to dominate messaging on phones and the Web, Facebook has acquired WhatsApp for $19 billion. WhatsApp has been able to hold its weight against messaging heavyweights like Twitter, Google and Microsoft's Skype. WhatsApp has upwards of 450 million users, and is adding an additional million users every day. It's the most popular messaging app for smartphones, according to OnDevice Research. (CNN)


ICI Fund Flow Survey - Equity Products Outperform Across The Board

Takeaway: Both equity mutual funds and equity ETFs had more positive flow trends than fixed income products in the most recent week

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, both equity vehicles including mutual funds and ETFs produced higher net inflows than commensurate fixed income products.

 

Total equity mutual funds produced a strong week of inflow with $7.2 billion of net subscriptions, an acceleration from the $1.8 billion inflow the week prior. The $7.2 billion inflow was balanced during the most recent 5 day period, with $4.1 billion flowing into domestic equity funds and $3.1 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.8 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 12th with $1.1 billion flowing into all fixed income funds. The breakout of the slight inflow amounted to $968 million into taxable products and a $162 million inflow into tax-free or municipal products, the 5th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a slight $128 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs, across the board, had a strong week of subscriptions with stock ETFs drawing in $6.9 billion in net inflow with bond ETFs taking in $3.0 billion in net new money. This was an improvement on the stock side this week after a record all time withdrawal in equity ETFs the week prior of $27.4 billion. The bond inflow this week of $3.0 billion decelerated from the record all-time inflow the week prior of $14.0 billion. The 2014 weekly averages are now a $5.4 billion weekly outflow for equity ETFs and a $2.8 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $10.0 billion spread for the week ($14.2 billion of total equity inflow versus the $4.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.6 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey representing 95% of the investment management industry's mutual fund assets. This data largely represents the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 1

 

 ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

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Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

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Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $10.0 billion spread for the week ($14.2 billion of total equity inflow versus the $4.2 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.6 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of -$36.9 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 11 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise.

 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 12 

 

ICI Fund Flow Survey - Equity Products Outperform Across The Board - ICI chart 13 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


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