TODAY’S S&P 500 SET-UP – May 27, 2014
As we look at today's setup for the S&P 500, the range is 28 points or 1.19% downside to 1878 and 0.29% upside to 1906.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Once again the weekly Macau numbers cannot be relied upon
According to the release, Macau generated HK$996m in average daily table revenue this past week, up 27% YoY, and bouncing back from last week’s daily of HK$886m. However, we believe both weeks were placeholders and cannot be relied upon. Week 2 of May generated revenues of HK$6.2m - the most common placeholder amount. This past week generated HK$6.975m which has also occurred too many times to be statistically random . We pointed out the placeholder concept in many notes over the past year. See "WE'VE BEEN PLACEHOLDERED!" from 04/29/14 for our latest thoughts.
Per usual when a month contains a placeholder week or two, the last week is volatile. If the month to date numbers were accurate, May would be tracking to finish the month up mid teens YoY. However, we expect a big catch up in the final week and still believe May could come close to our 20% growth target.
Anecdotally, we're hearing the Mass floors are busy and Premium Mass is doing well. Mixed reports on VIP but overall, volumes appear decent.
In terms of market share, Galaxy is the only significant outlier with share well above recent trend. MPEL and SJM remained below their respective 3 month average market share trend.
This note was originally published at 8am on May 12, 2014 for Hedgeye subscribers.
“There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government.” –Woodrow Wilson
I had a fantastic Real Conversation (HedgeyeTV video here: https://www.youtube.com/watch?v=hN7-u7Sd7Gk) with best-selling author Jim Rickards last week. Since he suggested we “quarantine the Princeton Economics Department”, I figured I’d quote the 28th US President (who was also President of Princeton).
Princeton is a cool place; especially if you go there wearing Blue and White and crush their Tigers at the Hobey Baker rink. While that may be easier for more recent Yale Hockey teams to do, back in my day Princeton was as tough as any team in the league.
There was tough love for the Keynesians in my conversation with Rickards. We talked about the broken Fed model and how the US government doesn’t think about financial market risk the right way. The feedback on this video has been tremendous. Evidently this taps into a new reality – The People Are Aware.
Back to the Global Macro Grind…
People in our profession are also very much aware of the real-time score on US Growth expectations falling, fast:
But, but, the Dow “hit an all-time high” on Friday (which puts it dead flat on the YTD #joy). So make sure you own everything in the Dow that is:
But you already have that on because that has been the strategy and asset allocation decision to make for the last 4.5 months. While that may not be trivial to someone who hasn’t evolved their process, in modern day markets real-time risk managers look at what we call Style Factors:
“So”, what is driving slower-growth-hamster-on-the-wheel #YieldChasing? That’s too easy. It’s the Fed’s Policy to Inflate:
Of course you’d have to let go of most academic ideologies that bonds don’t do well during #InflationAccelerating, and embrace that the Bernanke/Yellen Fed has 0% credibility on fighting inflation. I don’t know how many more times I can rant about this in print – that’s why I went to the video!
How about that stuff the Fed calls “non-core” (like ripping US rents and food) last week?
Yep. If you don’t like that definition of #InflationAccelerating, eat a REIT – and like it. Last week the MSCI REIT Index was up another +1.2% to +14.1% YTD, which means that you can bet your Madoff that rents are going higher in this country, not lower.
Oh, did I mention being long of US Housing in housing and/or related construction stocks terms (ITB) sucked wind again last week? For some reason this and most of the aforementioned market realities didn’t make it into Hyman’s weekly update. ITB (Housing) is down -6.4% YTD.
But never mind what Old Wall economists who missed calling the Q1 08’ and Q1 11’ slowdowns in US consumption growth think. As the early response to my un-plugged video with Rickards reminds us, The People Are Aware now. And that’s progress.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.56-2.67%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Current Investing Ideas: GLD, 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.
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.
GLD – We added Gold to Investing Ideas this past week. Click here to read the full report.
HCA – Hedgeye Healthcare sector head Tom Tobin remains bullish on HCA Holdings, but has no new updates this week.
HOLX – We’re continuing to see a nice acceleration in facility conversions to 3D Tomosynthesis in our data. The chart below shows the result from the update we ran earlier this morning. Facility counts and the placement rate continue to climb. The pace needs to pick up next month, however to hit our near term estimates, although the announcement of a reimbursement code should help if we’re right on what we think the agency does. Next week we are hosting a call with a leading expert in the field. He has one of the most detailed perspectives on what CMS will decide for a reimbursement for 3D Tomosynthesis.
LM – Our weekly tracking of mutual funds flows from the Investment Company Institute remained defensive this week with the combination of taxable and tax-free bond funds having another strong week of production with $3.9 billion in inflow, well above the running year-to-date average for 2014 of $2.1 billion per week. Conversely, equity funds had only the third net outflow of the year with $1.0 billion leaving all equity mutual funds, well below the year-to-date average of a $3.1 billion inflow. This emerging defensive posture by investors is very favorable for Legg Mason with 55% of its assets-under-management in bonds, the largest exposure in the traditional asset manager group.
LO – Once again rumors swirled this week that Lorillard is going to get taken out. We think the market is getting over its ski tips on an imminent timetable for a deal given acquisition challenges.
We maintain our Best Idea Long Call Lorillard (presented on March 4 of this year). We think investors are best served to ride out the rumor mill pushing the stock higher as we don’t expect an imminent deal, and maintain that LO is fairly valued as a stand-alone or takeout target at $80/share (more below).
We view a hypothetical deal (especially an imminent one) between RAI and LO as challenged on three main factors:
A scenario suggests that RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ, however all of this shopping would take time.
As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the decision to replace CEO Daan Delen with Susan Cameron, who held the CEO seat for 7 years ending in 2011, is contributing fuel to the speculation that she wants to come out of the box “strong” with this deal.
Our thesis is built on the superior fundamentals of the Lorillard portfolio:
We maintain a fair value $80/share target would equate to a price 30% higher than today’s, so we think it pays to hold on to LO amidst the rumor winds!
OC – While the US residential housing market appears to be softening, residential home improvement spending continues to rebound from its post financial crisis lows. Owens Corning should benefit from tightening building codes and improved competitive dynamics in coming years. Shorter-term, we suspect that the company may benefit from a bounce-back in activity from earlier weather-related weakness.
RH – William’s Sonoma (WSM) reported earnings on Wednesday (5/22) after the close and the company reported a 10.0% consolidated comp – 85% above consensus estimates. More importantly, WSM’s two flagship furniture banners, Pottery Barn and West Elm, posted 9.7% and 18.8% comps respectively.
We view the event as a ‘State of the Union’ on the high-income consumer. There has been some trepidation surrounding the US consumer, much of it warranted in light of the less than positive 1Q earnings season to date. But, the concepts skewed towards the high-income subset have been resilient, i.e. KATE, TIF, and WSM. This gives us stronger conviction in our 1Q Restoration Hardware estimates which call for a 15% retail comp compared to the street at 10%.
ZQK – Quiksilver had a 9% rally over two days for one reason and one reason only – the company announced its quarterly reporting date of June 2. The company has had a wall of silence since the second quarter ended last month and gave zero indication to the Street as to when it would release earnings. That might be acceptable for a $10bn market cap company that actually earns money, but in this market it is certainly not acceptable for a company like ZQK. This is a company that has to be massively shareholder-friendly – and the fact is that it is not. It has to seriously upgrade its investor relations/communication program. Most notably, the Street perceives the announcement as an indication by ZQK that it will not tank the quarter. Presumably, if the company were to preannounce, it would have done so alongside the announcement of its earnings date. We still think that ZQK is just emerging from its darkest hour. After 1.5 years of a new management team making all the tough decisions, we should start to see margin improvement and top line growth in 2H. As we’ve stated all along, we think it will be acquired at a double digit price sometime over 24 months.
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Internet & Media analyst Hesham Shaaban had an honest and forthcoming conversation with YELP CFO Rob Krolik but is reiterating the short.
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