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Inflation Slowing Growth

Client Talking Points

EUROPE

Year-to-date leaders are lagging this morning – Cyprus -2.6%, Denmark -2.2%, Austria -1.8% – as the DAX dips back below my intermediate-term TREND line of 9381. We currently have no European Equity exposure – Pain Trade is probably lower, for now #Waiting.

OIL

WTI broke out back above our TREND line last week (up again this morning to +6% year-to-date). I get a lot of questions about Oil – because it was one of the few commodities not going up – so this move plus Natural Gas up +13% YTD = #ConsumerSlowing. It isn’t good.

10YR

Treasury yield of 2.63% remains decisively broken (bullish for our slow-growth Gold Bond call) as the Street continues to expect #RatesRising in 2014 (that was the 2013 call). That’s not happening if we’re right on inflation slowing growth (Fed has 0% credibility fighting inflation).

Asset Allocation

CASH 40% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 18%
FIXED INCOME 18% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

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

We remain bullish of Gold, in $GLD terms @KeithMcCullough

QUOTE OF THE DAY

"Hard work without talent is a shame, but talent without hard work is a tragedy." - Robert Half

STAT OF THE DAY

Twitter is having no trouble signing up users. But some new research provides an update on the size of an ongoing problem: getting people to tweet. A report from Twopcharts, a website that monitors Twitter account activity, states that about 44% of the 974 million existing Twitter accounts have never sent a tweet. To be sure, people don’t have to actively tweet to find the service useful, but the report highlights Twitter’s user retention issue. (WSJ)


LEISURE LETTER (04/14/2014)

TICKERS: BYD, MGM, PENN, WYNN, RCL

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

Monday, April 14

  • Atlantic City March revenues released

Wednesday, April 16

  • HTZ at BAML Auto Summit

Thursday, April 17

  • GE 1Q14 Earnings – 8:30 a.m. call – real estate comments?
  • BX 1Q14 Earnings – 11 a.m. PIN 149 943 55 – lodging comments & color?
  • TZOO  Earnings – 11 am Call
  • DIS – Investor Day – cruise & parks commentary?

Monday, April 22

  • IGT FQ2 earnings - 5 p.m. , Passcode: IGT

Thursday, April 24

  • PENN Q1 earnings - 10 a.m.  
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644

 

COMPANY NEWS

BYD & MGM - The Borgata Hotel Casino & Spa filed a federal lawsuit against Phillip Ivey Jr., claiming he won $9.6 million in a card-cheating scheme in baccarat.  The lawsuit alleges Ivey and an associate exploited a defect in cards made by a Kansas City manufacturer that enabled them to sort and arrange good cards in baccarat.

TAKEAWAY:  While we are not attorneys, this case seems to be a product liability/product defect case. This does explain some of the low hold experienced by Borgata in the 1H of 2012. 

 

PENN - CEO Tim Wilmott at last week's Mid-America Gaming Congress commented "there’s no question Ohio will be a $2 billion casino state (by 2019/2020) - assuming no added competition from neighboring states."

TAKEAWAY: Many media outlets conveniently left out the latter part of his comment.  A bold prediction on its own but does he really believe there will be no more regional competition?  

 

WYNN - Anthony Gattineri, co-owner of the site where Wynn Resorts has proposed to build greater Boston’s only casino, has refused to sign the pledge even though the Massachusetts Gaming Commission says it will not approve a casino without assurances that criminals won’t profit from it or the land sale. Gattineri’s refusals are fueling speculation that convicted felon Charles Lightbody is still part owner of the land, an assertion Lightbody’s lawyer denies.

TAKEAWAY: Wynn attempting to keep arm's length from any gray matter dealings. More hurdles to overcome.

  

RCL - (Baltimore Sun)  Hundreds of passengers on The Grandeur of the Seas became severely ill due to norovirus.  It's the 2nd incident in two weeks as the same ship also had a viral outbreak on March 28 with more than 100 sick passengers. 

TAKEAWAY: This ship is cursed.  A major fire last year, now 2 norovirus cases. The media attention on norovirus is larger than usual this year. A bad omen for the cruise industry.

INDUSTRY NEWS

LRT costs still up in the air Macau Business Daily

Macau and Taipa will not be linked by the light rail transit system before 2018/2019.  Taipa will be the first section completed, and is scheduled to be operational by 2016.  The initial project was budgeted at 4.2 billion patacas (US$525 million) but the figure soon ballooned to MOP7.5 billion (US$937 million) in 2009.  Two years later, the budget would be revised up to 11 billion patacas (US$1.37 billion).

TAKEAWAY:  This project is turning into a political joke

 

Hard Rock Hotel & Casino Sioux City - has already received about 1,500 online job applications, or nearly three for every one of the 500 positions that will be filled at the downtown gaming and entertainment venue over the next few months.  With construction of the $128.5 million project at least two months away from completion, hiring remains in the early stages. Only nine employees are on the payroll so far, including the general manager and directors of human resources, finance, slots, table games and security. The casino plans to hire about 150 dealers.

TAKEAWAY: Another negative data point for the future of Argosy Sioux City (PENN & GLPI). 

 

Texas Gambling - this Wednesday, the Texas Lottery Commission is scheduled to consider letting bingo players use “video confirmation” to show whether pull-tag tickets, which are similar to lottery scratch-off tickets, are winners.  Lottery officials say they don’t consider video confirmation an expansion of legalized gambling.

TAKEAWAY: Could this be the next, progressive step toward gaming in Texas? 

 

Avian Flu - found among chickens that died at a poultry farm in Taragi, Kumamoto Prefecture, Japan.  The prefecture began culling about 112,000 chickens - 56,000 chickens at the Taragi farm and 56,000 at another farm operated by the same person at another farm in the same prefecture. Kumamoto Prefecture is located in very southern Japan. 

TAKEWAY: Another Bird Flu case, this time larger but in a more remote region of the Asia. 

 

MACRO

China Lending Policies - IMF Asia-Pacific director Changyong Rhee called reining in credit growth, especially outside the banking sector, a "very important task to secure (China's) long-term stability".  Rhee further noted China risks a financial crisis that could cripple the world's second-largest economy and wreak global economic havoc without stronger oversight of its lending practices.  Finally, IMF financial counselor Jos Vials has said Beijing needs to ensure that lending rates more accurately reflect risks. One way to do that would be to raise borrowing costs, he said.

TAKEAWAY:  Macro risks are piling up on the mainland but so far no material impact on Macau gaming. 

  

Singapore GDP - for the three months to March 31 grew by just 0.1% on a seasonally adjusted and annualized basis compared with a revised 6.1% increase in the fourth quarter, according to the Ministry of Trade and Industry. The city-state's economy is estimated to have expanded 5.1% on year, compared with a median 5.2% increase tipped by the economists. GDP had risen a revised 5.5% on year in the fourth quarter.

TAKEAWAY:  Flat growth in Singapore

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 



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Tell Me A Story

This note was originally published at 8am on March 31, 2014 for Hedgeye subscribers.

“People don’t just share information, they tell stories.”

-Jonah Berger

 

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.

 

Tell Me A Story - co9

 

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:

  1. #InflationAccelerating = CRB Commodities and Food Indexes +8.9% and +19.3% YTD, respectively
  2. #GrowthSlowing = 10yr UST Bond Yield -31bps YTD to 2.72%
  3. 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:

  1. US Consumer Discretionary (XLY) down another -2.1% last week to -3.8% YTD
  2. 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:

  1. Coffee prices were up +5.5% last week to +59.9% YTD
  2. Corn prices were up +2.7% last week to +14.4% YTD
  3. 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:

  1. MSCI Emerging Markets Index = +3.2% on the week to -2.7% YTD
  2. 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%

SPX 1846-1878

VIX 13.89-15.49

USD 79.55-80.41

EUR/USD 1.36-1.38

Gold 1278-1324

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tell Me A Story - Chart of the Day

 

Tell Me A Story - Virtual Portfolio


April 14, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Pucks To The Head

“When you are stuck down a well, someone is bound to throw a rock on your head.”

-Chinese Proverb

 

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:

 

  1. US Consumer Discretionary Stocks (XLY) down another -3.7% last week to -6.9% YTD
  2. 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:

 

  1. Gold up another +0.6% to +9.6% YTD
  2. Emerging Market Equities (MSCI Index) +1.3% to +1.3% YTD
  3. Emerging Markets LATAM (MSCI) +2.2% to +2.9% YTD

Emerging what?

 

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:

 

  1. Coffee up another +8.8% to +76.8% YTD
  2. Natural Gas up another +4.1% to +12.8% YTD
  3. 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:

 

  1. US inflation is accelerating
  2. 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%

SPX 1

Nasdaq 3

VIX 14.52-17.99

USD 79.11-80.01

WTIC Oil 101.73-104.99

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pucks To The Head - Chart of the Day


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