“When you are stuck down a well, someone is bound to throw a rock on your head.”
So don’t get stuck down a performance well. Rocks to the head hurt. Technically, I’m on vaca with my family this week. But, since I don’t really see what I do (read and write) as a job, I do more of the reading part while I’m watching my kids cannonball one another at the pool.
The aforementioned quote comes from a fantastic Chinese/British economic #history book titled The Opium War. It was describing how English Naval Officer, Charles Elliott, felt after Lin Zexu dumped 20,000 chests of opium into the sea.
This happened in 1839 and became “one of the most celebrated moments in 19th century Chinese history” (pg 69). But it also gave birth to a major economic phase transition. The British found a new island to anchor their opium vessels. It’s called Hong Kong. Changing their position worked.
Back to the Global Macro Grind…
The Russell 2000, Nasdaq, and SP500 were down -3.6%, -3.1%, and -2.6% last week to -4.5%, -4.2%, and -1.8% for 2014 YTD. The current “corrections” for the Russell, Nasdaq, and SP500 are -8.0%, -8.2%, and -4.0%. If you are levered long high-multiple growth, those are rocks to the head.
Thankfully, the feedback from our battle tested long-only customers is that they didn’t do that. Instead, they are long of inflation in inflation terms (Food, TIPs, Gold, etc.) and they are long of US #ConsumerSlowing in slow-growth-yield-chasing terms (Utilities, Bonds, etc.).
Feedback from our most astute macro hedge fund subscribers couldn’t be better. Not only can they be long inflation slowing growth, but they can be short of who is taking the brunt of all this (US consumers) in one of the deepest and most liquid markets in the world (US Equities).
Here’s the US Equity Sector Return Score for the YTD:
In other words, as the social media bubbles crash (single stocks down -30-50% from their early March peaks - and we remain The Bears on names like Twitter (TWTR) and YELP), there have been plenty of places to make money, never mind “hide” from US growth beta.
In the face of the US centric bubble popping, check out last week’s top Global Macro performers:
Yep, lots of our Global Macro value buyers were simply waiting for the rockstar of all Emerging Market Equity catalysts to re-emerge – a Down Dollar. Last week, the US Dollar Index was down another -1.2% to re-test her YTD lows; in kind, Emerging Market Equities hit YTD highs.
I know, so easy a Mucker can do it.
Back to who gets pulverized by an un-elected US Policy To Inflate (courtesy of the Federal Reserve), don’t forget that there are winners who emerge versus US #ConsumerSlowing losers à the countries who get the purchasing power of their people (stronger currencies) back.
To a Keynesian central planner, all of this sounds so 16th century solar system, I am sure. But reality is that reality is priced in local currency terms – and YTD, for the US consumer at least, reality bites.
Here’s how some commodities (priced in Burning Bucks) did last week:
Sure, if you back all that out – and blame the weather (which last I checked is fantabulous)… there is no inflation.
But there is some serious YTD absolute and relative return performance!
Which, at the end of the day is what we are all after, is it not? Why would you pay 20x revenues for anything when 2 of the biggest Macro Risk Factors that matter to any economy (GROWTH and INFLATION) are going the wrong way?
Remember, it’s not about absolutes. It’s about rate of change, and:
Our competition can blame YTD lows in the 10yr bond yield (2.63% = down -39bps YTD) on anything but the most obvious. They can blame me, the weather – or whatever… but they’re stuck in a proverbial well of YTD macro market scores that disagree.
And unless they want to keep taking pucks to the head from a bunch of hockey players, they better find a new narrative come summer time…
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.60-2.72%
WTIC Oil 101.73-104.99
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 14, 2014
As we look at today's setup for the S&P 500, the range is 46 points or 1.64% downside to 1786 and 0.90% upside to 1832.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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.
Luxury leads the way
Hotel asset transactions are getting done and while the pace has slowed a touch, we're still optimistic for sellers such as HOT. Asset sales are a big part of the Starwood investment thesis and to a lesser extent, Hyatt and Hilton. While not perfect, conditions remain favorable for narrower bid/asks.
Most Lodging REIT stocks are flat to +8% on a YTD basis as of Friday's close, are within 5% to 10% of their respective 52 weeks high prices, and trading flat to +15% above their last equity issuance price. Combined with decent balance sheets, lodging REITs are well positioned to continue to be buyers of assets from the C-Corps, namely Starwood and Hyatt.
Upper upscale (UUP) & Luxury Transaction Trends for Q1 2014
Companies of note
Our detailed transaction database is available on request.
Takeaway: Current Investing Ideas: CCL, DRI, HCA, HOLX, LM, LO, OC, RH, TROW and ZQK
Below are Hedgeye analysts' latest updates on our TEN current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
We also feature three research notes from earlier this week which offer valuable insight into the market and economy.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
CCL – All cruise lines operators, including Carnival, took a hit this past week in a down market. However, CCL’s performance (-2%) fared better than that of its peers, RCL (-5%) and NCLH (-8%). There were several bad publicity reports out this week for CCL: 1) couple of operational problems on Carnival Pride and P&O Oceana (CCL brand); 2) AIDAprima delivery to be delayed by 6 months; 3) Norovirus on Crown Princess (CCL brand); 4) Harris poll showed a decline in cruiser sentiment following norovirus cases in early February.
While these cast a negative light on CCL, ultimately, investors care about what’s going on with Caribbean pricing. Based on our latest proprietary pricing survey, the large capacity increase in the Caribbean is wreaking havoc with pricing for RCL and NCLH. We will get more color on how CCL pricing is tracking for Summer 2014 in the week of April 21. Stay tuned.
DRI – There is no news to report this week pertaining to Darden. We remain bullish on the stock and are closely monitoring the ongoing saga between management and activist shareholders.
HCA – Healthcare Sector Head Tom Tobin reiterates his bullish thesis on HCA Holdings. He has no update this week.
HOLX – Healthcare Sector Head Tom Tobin reiterates his bullish thesis on Hologic. He has no update this week.
LO – Lorillard traded roughly flat on the week, about in line with the move in Consumer Staples (XLP). This week LO also moved ahead of WFM for the #220 spot in the S&P500 ranking by market capitalization.
We continue to believe LO will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes. The company will announce Q1 2014 results on April 24th.
OC – Owens Corning Q1 2014 earnings call is set for Wednesday April 23, 2013 at 11 a.m. EST. Beating or missing estimates for Q1 will not change our bullish stance on Owens Corning. In the chart below is U.S. Public Non-Residential Construction Spending YoY %.
In terms of a construction cycle, public construction spending lags residential by up to two years. Non-residential falls somewhere in between the two. People just tend to remodel and fix up their homes before that office or the dreaded DMV receive attention. Despite public construction flailing along the bottom the past four years it is beginning to show signs of stabilizing as state and local budgets approve.
RH – The setup: you have a five minute meeting with the Gary Friedman, CEO of RH. Here are two of the four key critical uncertainties that we think are relevant to the investment thesis today.
The questions then, are a) Is it realistic for some of these Next Gen Design Galleries to be running at over $100mm per box? b) At what size do you think you hit a point of diminishing returns with box size? c) You have 65 Legacy stores in the fleet that you indicated you’ll chop away one by one over time. But the reality is that many of these are solid real estate locations, and your rent terms are better there today than if you were to find new space on your own. Why not keep most of these stores open, and use them to focus on a single category – RH Kitchen, RH Baby & Child, RH Furnishings, RH Whatever…
TROW & LM – Both asset managers T Rowe Price and Legg Mason are set to report earnings over the next several weeks with TROW releasing numbers on Thursday April 24th and LM printing results on Tuesday April 29th. In an institutional report this week we examined the pricing of both earnings releases as relayed by the options market (essentially the expected stock moves on earnings day can be extracted from pricing in each company’s options series). Both companies options series are relaying fairly low expectations for the earnings print which can set up a good near term rally in the stocks with even a slightly better than expected print.
TROW has been screening well all quarter in several private surveys as having had good mutual fund inflow which should produce a good earnings result. LM conversely with very high short interest and very low stock ratings from the Street won’t need to do much to impress investors.
We think the LM story gets exciting in the latter part of this year and into 2015 with its repaired fixed income performance and by that time will be a de-risking theme from equities by institutions. The steadiest business line in JP Morgan’s earning report on Friday was Asset Management which was one of the few segments that had a revenue increase year-over-year. We expect the asset managers in this current volatile market to be more stable stocks than the other more transaction oriented financials.
ZQK – Quiksilver remains one of our top long ideas. While shares have been under pressure lately, we still see over $1 in earnings power and a stock price approaching $20. The key metric in this equation is the top line. Revenues have been on the decline for five straight quarters and we expect a meaningful inflection starting in 3Q as the company starts to bear the fruits of its cost cutting initiatives, SKU rationalization, and streamlined design process.
But, this is more than just a cost cutting story. We see revenues growing to $2.5 billion by 2018 from $1.8 billion in 2013. The big drivers we’ve identified and laid out are footwear, emerging markets, and China. This also means that sales trends in existing markets will stabilize and reaccelerate. Our survey work shows that Roxy, Quiksilver, and DC footwear are extremely relevant to the core consumer even after nearly five years of extremely limited marketing spend. We expect the reallocation of marketing dollars to help reignite the brands as new, more focused product, rolls out for the fall.
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Click on each title below to unlock the institutional content.
Retail Sector Head Brian McGough has three questions for Target’s CEO and explains why TGT is one of the better shorts in retail.
Given that Walmart is the largest retailer in the U.S., their latest move stands to create winners and loser across both organic and non-organic markets.
Healthcare Sector Head Tom Tobin takes a look at a key subgroup highly levered to one of our new Macro Themes.