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SIX CHARTS FOR A BEAUTIFUL SUNDAY

Takeaway: Pollyannaish, back-end loaded estimates for growth and poor hedge fund performance are meaningful risks to the equity market.

First and foremost, Happy Mother’s Day to all the mothers out there and to the husbands, daughters and sons who support them.

 

Secondly, please go outside and add something to 2Q14 GDP if you haven’t already. The weather is amazing!

 

I’m sure every consensus economist, journalist and corporate executive will give 100% of the credit to awesome weather for what should be a marked acceleration in economic and operational performance this quarter. For what it’s worth, the top of our range for 2Q14E GDP is +3.1% on QoQ SAAR basis, so we’ll side with consensus in expecting a short-term recovery for now. If you blamed the weather on the way down, it’s only fair that you caveat any and all good data with better weather on the way up, right? Right.

 

At any rate, where we continue to be divergent from both consensus and the Fed (have been all year, btw) is that we expect accelerating inflation to slow growth, at the margins, through the balance of the year.

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - 2

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - UNITED STATES

 

Be it sector variance (XLU +9.7% YTD vs. XLY -6.1% YTD) or style factor variance, the market definitely agrees with our call. The rotation out of the growth style factor(s) is now trending and, at least in macro, the trend is your friend.

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - 1

 

The key issue here is that market participants are increasingly back-end loading growth estimates. Not only is equity volatility protection being priced cheaply on an absolute basis across the curve relative to recent years, the spread between VIX futures ~3 quarters out and front-month contracts is rather narrow – effectively implying considerable confidence that conditions for investors will remain more-or-less fine for the foreseaale future.

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - 3

Source: Bloomberg LP

 

This move has caught a lot of investors offsides in the YTD. Per StreetAccount:

 

  • The WSJ cited data from researcher HFR Inc, which showed hedge funds just experienced back-to-back monthly declines for the first time in two years. The firm said hedge funds on average dropped -0.17% in April, following a -0.33% decline in March – the first time funds have turned in consecutive monthly declines since April-May of 2012.
  • StreetAccount notes data from Preqin showed the average hedge fund returned 1.23% in Q1 – the worst start to the year since 2008.

 

Obviously, we have number of hedge fund customers, so we don’t write this to be trite or disrespectful. We only call this to your attention because if this trend of poor performance continues, there will likely be an industry-wide lowering of gross exposures and tightening of net exposures, with outflows as a key tail risk. Don’t forget how correlated equity hedge funds are to market beta (+0.75 on a DoD % change basis and +0.96 on an index value basis over the TTM).

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - 4

Source: Bloomberg LP

 

What’s even worse is that our TACRM™ global macro weathervane is signaling a breakdown in hedged equity exposure. This is likely because many funds are still long of growth (which is also breaking down) and short things like bonds and emerging markets (which happen to be among the best looking asset classes, along with inflation proxies and REITs).

 

SIX CHARTS FOR A BEAUTIFUL SUNDAY - 5

 

We’ll explain these signals in far greater detail and how to apply TACRM™ to your investment process in the coming days and weeks. For now, just accept the simple conclusion that there are thousands of hedge funds suffering from the ol’ “Texas Hedge” right now and that is a meaningful risk to the stock market if prevailing market trends continue to do just that (i.e. trend).

 

Enjoy the rest of your weekend,

 

DD

 

Darius Dale

Associate: Macro Team


The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYETV

Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough to discuss a number of important subjects in this wide ranging interview.

 

Here's a short excerpt from an institutional conference call that restaurants analyst Howard Penney held with YUM CFO Pat Grismer earlier this week.

 

Hedgeye CEO Keith McCullough takes a look at key market and economic issues investors should be focusing on right now but aren't.

CARTOONs

Buy in May and pray or just go away?

The Best of This Week From Hedgeye - Sell in May 05.05.2014 normal

 

The next crisis will be a crisis of confidence in central planning.

The Best of This Week From Hedgeye - KinKongCartoon5.7.2014

CHART

The Best of This Week From Hedgeye - Corelogic large

 

POLL

Twitter shares got royally shellacked on Tuesday falling almost 18% after its IPO lock-up period ended. Shares finished trading around $32. Click here to view the poll and results.

The Best of This Week From Hedgeye - 2

 

HEDGEYE.COM 

Penney Nails Another 'Best Idea' Short | $BLMN

The Best of This Week From Hedgeye - blmn large

A couple of weeks ago, we highlighted how Hedgeye restaurants analyst Howard Penney nailed his short call on Panera Bread. He did it again with Bloomin' Brands (BLMN) which he added as a Best Ideas SHORT back on 11/27/13. Click here to continue reading.

 

 

Did the 10-Year U.S. Treasury Go Over The Waterfall?

The Best of This Week From Hedgeye - 05.05.14 10 year yield post nfp normal

In a research note CEO Keith McCullough originally wrote before the market opened on Monday, he asked, "So, did the 10-year US Treasury Yield just go over the waterfall of interconnected risk?" Click here to read more.

 

 

When It Comes To Twitter, We Tried To Warn You | $TWTR

The Best of This Week From Hedgeye - twitter e1399390329867 normal

Twitter stock tumbled over -14% on Tuesday as the lock-up period for early investors has expired, but that doesn’t surprise Hedgeye Internet & Media analyst Hesham Shaaban. He has been the bear on $TWTR. Click here for more.

Learn more about becoming a Hedgeye subscriber.


INVESTING IDEAS NEWSLETTER

Takeaway: Current Investing Ideas: DRI, HCA, HOLX, LM, LO, OC, RH, and ZQK

Below are Hedgeye analysts' latest updates on our EIGHT 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.

 

INVESTING IDEAS NEWSLETTER - levels

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.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

HEDGEYE CARTOON OF THE WEEK

INVESTING IDEAS NEWSLETTER - KinKongCartoon5.7.2014 

IDEAS UPDATES

DRI – Managing director Howard Penney doesn’t have any updates on Darden this week, but he still considers the company stock a "generational buying opportunity" as he explains in this exclusive HedgeyeTV video.

 

HCA – There are comments in the press about HCA Holdings' intent to purchase an Australian hospital system. Frankly, we don’t know too much about analyzing Australian hospitals, but we’ll cross that bridge when we get there. We’d rather HCA focus more on the opportunity in the United States. We believe the US hospital industry is on an accelerating pace of consolidation which will lead to increase pricing and purchasing power. 

 

We spoke recently to an orthopedic surgeon who recently started receiving an income statement for his procedures and for the department. This kind of transparency, in his view and ours, will lead to better pricing from medical supply and equipment manufacturers. A long time ago we calculated the total raw material cost for a prosthetic knee at roughly $200. This is a shockingly low number compared to the $12,000 a hospital may pay for the device implies there is plenty of margin to go and get, assuming you had the right data, that is. 

 

Expanding overseas is an interesting move for HCA, but we feel there is plenty of opportunity here at home too.


HOLX ­­– We continue to like the set up for Hologic. One of potential pools of upside is located within their sentiment metrics, i.e. short interest and sellside ratings. For HOLX both of these metrics sit at multi-year highs (short interest) and lows (sellside rating). For Hologic, this is positive for returns typically. 

 

When short interest has been at this level in the past, the forward returns on a 3-month, 6-month, and 12-month duration are 14%, 27%, and 69%, respectively. The sellside rating history would suggest 13%, 20%, and 41% returns over the same time periods. If we are right on adoption for Digital Breast Tomosynthesis adoption, the shorts will cover and the sellside will upgrade their ratings.

 

LM –  In a quiet week of news flow after asset manager earnings season last week, the price action in the market spoke volumes. For the week ending May 9th, the defensive, fixed income related asset managers all had positive performance in their stocks versus the more equity related managers subcombing to fears that the strong run in stocks is stalling out which will affect their assets under management. Franklin Resources (BEN) and Legg Mason had strongly positive moves in their stocks in the most recent week ending May 9th which appreciated by 3.7% and 2.0% respectively. BlackRock (BLK), with its leading legacy fixed income business also eked out a gain this week as the market became more defensive. On a year-to-date basis, second place is first loser, with Legg Mason the only asset management stock in positive territory. The gain of 9.9% for LM is nothing to bat an eye at either considering current LM performance is over 10% ahead of the next best performer in the group and also well ahead of the S&P 500 with just a 1.5% gain this year. We are sticking with the LM story and still think it is worth in the neighborhood of the high $50 per share range on a revival in fixed income inflows from pensions and the fact that the stock has high short interest and very low Wall Street sentiment.

 

INVESTING IDEAS NEWSLETTER - 1

 

INVESTING IDEAS NEWSLETTER - 2

 

 

LO – Lorillard was relatively flat on the week, yet followed the prior week’s monster +8.5% move which we commented was mostly fueled by rumors that RAI is interested in acquiring the company. Clearly the rumors subsided this week, which is in-line with our opinion that a hypothetical deal (especially an imminent one) is challenged.

 

We maintain our bullish stance on LO (originally released in our Best Idea call on 3/4/2014, and before any takeout rumors) supported by 1.) Its leading share and profitability of its core menthol business, 2.) Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and 3.) The upside growth in its blu e-cigarette business that commands leading share in the U.S.


OC – Owens Corning’s weakest business in Q1 2014 should benefit as we head towards warmer weather. The Roofing & Asphalt segment exited Q1 with -18% in sales YoY with an operating margin of 16%. Historically, its operating margin is impacted by the colder quarters as seen in the graph below. The U.S. roofing market is still 20% below its 15 year average as noted in an OC investor presentation this past Thursday. Furthermore, the roofing industry has consolidated to 4 companies (including OC) with 90% of the U.S. market compared to 10 companies owning 90% of the market in the 1990s. This implies as roofing activity picks up in the summer – impacted by the weather and an increase in demand – the four largest players should capture the majority of the gains.

 

INVESTING IDEAS NEWSLETTER - oc

 

RH – This week, Restoration Hardware released its new Source Book showcasing a redesigned product assortment. This ‘Source Book’ is actually 13 books in one, and is made up of over 3,300 pages (Yes, RH is keeping Dunn & Bradstreet in business). Clearly too big to mail, the books will be sent out to customers via UPS. While it will be more expensive, it’s worth noting that this will give RH certainty that the books will actually be delivered to the customer instead of being thrown near the mailbox on the street, and will also give RH better data usage. We should note that the mere existence of a Source Book does not get us excited, but the fact that there is a full assortment of product around 13 different categories ultimately helps the in-store business (53% of sales) in addition to catalog/e-commerce.  In addition to the catalog launch, the company will also host a Grand Opening Gala (and make no mistake, it is a Gala) at the new Greenwich store next Thursday, May 15. Knowing how ‘Hollywood’ RH makes these events, it’s likely to be a positive experience for anyone in attendance.     

 

INVESTING IDEAS NEWSLETTER - 5 9 2014 2 03 18 PM

 

ZQK – Sector head Brian McGough has no new updates on Quiksilver this week, but in this flashback HedgeyeTV video from December 2013, he explains why he sees top-line growth for Quiksilver and, ultimately, a higher stock price for the action retailer.

 

*   *   *   *   *   *   *
 

Click on each title below to unlock the institutional content.

 

Qualified Mortgage Pressuring Housing Finance

Macro analyst Christian Drake highlights how the Fed Senior Loan Officer Survey is supportive of Hedgeye's #HousingSlowdown call as residential mortgage demand and availability continue to decline.

INVESTING IDEAS NEWSLETTER - 9 

Tapering = Rates Falling

The Financials team explains why rates have been falling since the taper began, why they think this will persist, and how to position for it. 

INVESTING IDEAS NEWSLETTER - 5

 

New Target CEO Has to Take EPS Down, A Lot

Retail Sector Head Brian McGough analyzes why the new CEO of Target has to take earnings down before they can go up.

INVESTING IDEAS NEWSLETTER - tgt


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

Week Ahead

The Economic Data calendar for the week of the 12th of May through the 16th of May is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

Week Ahead - 05.09.14 Week Ahead


Poll of the Day Recap: 53% See Pain Ahead For the S&P 500 | $RUT $SPX

Takeaway: 53% said PAIN AHEAD; 47% ALL CLEAR.

As CEO Keith McCullough wrote in today’s Morning Newsletter, the Russell 2000 small-cap index “is down -9.1% from its all-time-bubble-peak in March…Whereas the SP500 is only -0.8% from her all-time-twitter-muscles-but-but-the-market-isn’t-down-yet peak.”


That said, we asked in today’s poll: Is the big drop in the Russell 2000 predicting pain ahead for the S&P 500?

 

Poll of the Day Recap: 53% See Pain Ahead For the S&P 500 | $RUT $SPX - 4097410360 df7bd876aa z 620x413


At the time of this post, 53% agreed they saw PAIN AHEAD; 47% said ALL CLEAR.


Voters who think there is PAIN AHEAD said:

  • “$RUT led the way up, it will lead the way down. It does not have the slow growth sectors within it, like Utilities, Telecom, Staples, etc.”
     
  • “As realisation the FED is cornered takes effect the low volume won't be able to support these prices.”
     
  • “Record leverage, Yen, unrealized profits, Macd on the monthly chart looks VERY SCARY!!  Completing very defined head and shoulders. Running out of morons to buy. Volume and Breadth is absolutely pathetic.  Can’t figure out what the delay is all about except the big boys are trying to gently distribute without bringing the market down. I think the supply of idiots is beginning to run low. Looking for a big move soon.  OH, almost forgot, Keynesian economics is a fraud designed to usurp political power from morons, not really gonna "actually" work financially. Oh well I guess all of our kids and grandkids will figure it out since they will have lots of time to do their homework on it without all those pesky jobs to take up all their time.”
     
  • “Quarterly earnings seem to be more about buybacks than beating what were already lower adjusted estimates. YoY consumer spending for things other than food, gas & electricity will show deceleration. This will not bode well for next quarter.”

 

Conversely, those who believe it is ALL CLEAR said, “Don't fight the FED,” and that “this is just a bump in the road.”

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This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning

Takeaway: Reason #474 why you should be tuning into HedgeyeTV.

Don't say we didn't warn you.

 

This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning - TJ

On October 11th, Gaming, Lodging & Leisure Sector Head Todd Jordan appeared on HedgeyeTV and warned investors about Scientific Games (SGMS). The stock is down 50% since Jordan's short call.

 

It gets better (or worse -- depending on who you ask).

 

He also warned viewers about IGT.

 

This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning - TJ1

 

Click video below to see the other stock he warned about.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

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