This note was originally published at 8am on March 31, 2014 for Hedgeye subscribers.
“People don’t just share information, they tell stories.”
Per Jonah Berger in his new best selling #behavioral book, Contagious, that’s one of six principles that “cause things to be talked about, shared, and imitated” – storytelling. Some of the others you might want to consider are things like “social currency”, triggers, and emotion (page 23).
What makes research content #contagious? That will be topic #1 at our company meeting day @Hedgeye HQ tomorrow. All 52 of our employees will get a copy of the book and be asked to answer that question in 140 characters or less.
So tell me a story about what’s happening in markets for 2014 year-to-date. It’s the end of the 1st quarter, so don’t forget to augment your story with last price. After all, storytelling in our profession starts with a rear-view looking score.
Back to the Global Macro Grind …
“What broader narrative can we wrap our idea in?” –Berger (pg 24). Given the US economic data and how markets have scored it YTD, I think the answer to that is pretty straightforward: inflation slows growth.
That, of course, is the opposite of where consensus was when 2014 started. Virtually all of the #OldWall and Washington economists and strategists were taking up both their US GDP and SP500 forecasts. On inflation, the cover of the (Keynesian) Economist (NOV 2013) was titled “The Perils of Deflation.”
Instead, 3 months into the year:
- #InflationAccelerating = CRB Commodities and Food Indexes +8.9% and +19.3% YTD, respectively
- #GrowthSlowing = 10yr UST Bond Yield -31bps YTD to 2.72%
- YTD US Stocks = Dow Jones -1.5%, Russell2000 -1.0%, Nasdaq -0.5%, and SP500 +0.5%
Not to be confused with the Italian Stock Market (MIB Index), which has been the recipient of a #StrongCurrency Tax Cut (CPI in March fell to +0.4% y/y), and is up another +0.7% this morning to +14.2% YTD, the US consumer side of the US stock market has been flat out ugly.
Within the SP500’s roaring +0.5% YTD gain there’s a significant amount of #SectorVariance:
- US Consumer Discretionary (XLY) down another -2.1% last week to -3.8% YTD
- Whereas slow-growth #YieldChasing Utilities (XLU) were +1.2% in a down SPX tape last wk to +8.0% YTD
While we realize that both the (un-elected) Fed and the (elected) US Government say there is no impact on America when food inflation accelerates, we’ll still keep reality on your radar:
- Coffee prices were up +5.5% last week to +59.9% YTD
- Corn prices were up +2.7% last week to +14.4% YTD
- Soy prices were up +2.0% last week to +12.5% YTD
Oh, that would be in US Dollar terms.
Yes, dear linear-economists, I have a non-fiction story for you - inflation is priced locally (i.e. in local currency). So, if you get the rate of change (slope of the line) in a country’s currency right, you’ll get inflation right. If you get the slope of inflation right, you’ll get the rate of change in real growth right.
With the US Dollar Index still below our long-term TAIL risk line of $81.17, maybe that’s why we are starting to see a resurgence in the mother of all Burning Buck trades – Emerging Markets. Yep, as in the ones in Asia and Latin America that hit all-time highs when the US Dollar Index hit all-time lows (2011).
With Facebook (FB) face planting last week, look at what Emerging Markets did:
- MSCI Emerging Markets Index = +3.2% on the week to -2.7% YTD
- MSCI Latin America Index = +5.2% to -1.9% YTD
Yep, the squirrels in Brazilian Equities are running wild again as Latin America goes nuts for an alternative to being long a US social-media-bubble stock that lost 30-40% of its value in a month!
So would you rather be long socialism or social media? Tell me a story.
With a 3-5 year old story about “Flash Boys” (machines front-running monkeys) being popularized by Michael Lewis and 60 Minutes last night, I’m looking for something no one has borrowed from someone else. I’m looking for a broader narrative that can make us money by being early, instead of popular.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.64-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
“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:
- US Consumer Discretionary Stocks (XLY) down another -3.7% last week to -6.9% YTD
- S&P Utilities Sector ETF (XLU) UP another +0.6% in a down tape last week to +9.8% 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:
- Gold up another +0.6% to +9.6% YTD
- Emerging Market Equities (MSCI Index) +1.3% to +1.3% YTD
- Emerging Markets LATAM (MSCI) +2.2% to +2.9% YTD
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:
- Coffee up another +8.8% to +76.8% YTD
- Natural Gas up another +4.1% to +12.8% YTD
- Oil (WTIC) up +2.6% last week to +5.9 YTD
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:
- US inflation is accelerating
- US growth is slowing
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:
- YIELD CURVE: 2.27 from 2.27
- VIX closed at 17.03 1 day percent change of 7.17%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Retail Sales m/m, March, est. 0.9% (prior 0.3%)
- 10am: Business Inventories, Feb., est. 0.5% (prior 0.4%)
- 11am: Fed to purchase $900m-$1.15b in 2036-2044 sector
- 11:30am: U.S. to sell $25b 3M, $23b 6M bills
- 12:45pm: Fed’s Tarullo, ECB’s Noyer speak in New York
- Treasury Sec. Jack Lew, Ukranian Finance Minister Oleksandr Shlapak discuss situation in Ukraine, U.S. pledge of support for $1b loan guarantee: 9:30am
- Congressional Budget Office plans to issue new baseline deficit projections: 11am
- President Obama attends Easter prayer breakfast
- House, Senate out of session on 2-wk recess
- U.S. Election Wrap: GOP Forms Joint Fund; Rep. Petri to Retire
WHAT TO WATCH:
- Citigroup earns: Higher fee income, elevated expenses seen
- Citigroup said to cut up to 300 jobs in global markets unit
- East Ukraine clashes turn deadly as Russia seeks UN meeting
- U.S. stocks seek to rebound after worst week since 2012
- CME gave high-frequency traders peek at market, suit claims
- High-frequency traders set for curbs in EU
- Minmetals Group to buy Glencore Peru mine for $5.85b
- Memos show regulators held back as evidence grew of GM defect
- Amazon.com to introduce smartphone in June: WSJ
- UBS Chair Weber sees lev.-ratio rules tightening globally
- KKR to sell Ipreo stake for $975m, FT reports
- Goldman Sachs countersues client over commodities stocks rout
- Apollo’s Momentive files for bankruptcy with exit financing
- China tightens oversight of trust as risk of defaults increases
- Brazil’s Mantega calls for alternatives to U.S. OK on IMF
- Renewables, nuclear should triple to save climate: UN panel
- Corn planting behind schedule for second straight yr
- ’Captain America’ tops ‘Rio 2’, leads N.A. cinemas a 2nd wk
- Bank of the Ozarks (OZRK) 6pm, $0.64
- Citigroup (C) 8am, $1.14 - Preview
- JB Hunt Transport (JBHT) 8:30am, $0.61
- M&T Bank (MTB) 8:01am, $1.61
- Pinnacle Financial (PNFP) 5:30pm, $0.46
- Sensient Technologies (SXT) 4:34pm, $0.66
- Sirius XM Canada (XSR CN) 4pm, C$0.05
- Triangle Petroleum (TPLM) 5:58pm, $0.13
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Goldman Predicts Commodity Declines Amid Rally in Bullion, Crops
- Brent, WTI Crudes Pares Gains as Libya Offsets Ukraine Tensions
- Gold Bears Bet Wrong Again as Fed Talk Favors Bulls: Commodities
- Nickel Rises to 14-Month High as Goldman Sachs See More Gains
- Palladium Climbs to Highest Since 2011 on Ukraine as Gold Rises
- Wheat Climbs as Ukraine Tensions Boost Supply Disruption Concern
- Commodities Rally to Highest in Six Weeks on Crisis in Ukraine
- Sugar Climbs as El Nino Seen Threat to Brazil Crops; Cocoa Slips
- Nickel May Rise to $20,000 If Indonesian Ban Stays, Goldman Says
- Hedge Funds Boosting Bullish Crude Wagers on Output Drop: Energy
- CME Gave High-Frequency Traders Peek at Market, Lawsuit Claims
- Rebar in Shanghai Unchanged as Spot Price Gains, Inventory Falls
- China Soybean Defaults Rattle Copper Traders, Markets: Bear Case
- Goldman Stands By $1,050 Gold Target on Outlook for Recovery
The Hedgeye Macro Team
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
- Q1 2014 worldwide hotel transactions (UUP & Luxury brands) volume was close to $2.5 billion, lower than the $3.3 billion seen in Q4 2013 but slightly higher than Q1 2013's.
- The number of US luxury/UUP hotel transactions (where price was disclosed) was 12 in Q1 2014 - 5 less sequentially but 5 more than in Q1 2013
- The number of non-US luxury/UUP hotel transactions (where price was disclosed) was 11 in Q1 2014 – 3 more sequentially and 4 more than in Q1 2013.
- Relative to a two-year trailing average, US average price per key (APPK) in the UUP segment was $215k, below 6 quarter average of $266k. This is attributable to some second/third tier city sales.
- Luxury was the outperformer in Q1 2014. APPK was $453k in the US and $527k internationally. The 12 transactions were the most in a quarter since we started tracking transactions in 2010.
- RLJ Lodging Trust was the most active in the market
- There were several multi-asset sales in Q1 2014
Companies of note
- Sold Courtyard Nashua for $41k APPK
- Bought Powell Hotel for $497k APPK
- Sold Renaissance Barcelona for $499k APPK
- Sold 10 Hyatts for $201k APPK
- Sold St. Regis Bal Harbour for $1.03m APPK
- Sold Hotel Aloft Guadalajara Las Americas for $126k APPK
Our detailed transaction database is available on request.
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