Takeaway: Expect a strong May labor market print next Friday. This should set the stage for more tapering and more downforce on long-term rates.

Claims Strong = Rates Down

Yesterday the 10-Year Treasury yield dropped 8 bps to close at 2.44%, down from 2.52% on Tuesday. In early May we put out a note entitled "Tapering = Rates Falling", in which we argued that the Fed's ongoing taper, facilitated by strong labor market data, was indirectly causing downward pressure on long-term rates. This was based on the idea that following the expiration of both QE1 and QE2 we saw 100+ bps declines in long-term rates. See our note for more detail.


With that in mind, today's initial jobless claims data is very strong, and the ongoing taper of QE3 should continue and, by extension, the ongoing decline in long-term rates should persist over the short/intermediate term. The y/y change in NSA initial claims came in at -15% and the 4-week rolling average is now lower by 10.4% y/y vs the prior week being lower by 5.3%.  It's fair to say that this is some of the strongest labor market data we've seen in a while, and it bodes well for next Friday's May labor market report. It's also interesting in the context of the negatively revised 1Q GDP print.


To reiterate our conclusion from our early May note, falling rates means more tough sledding for Financials positively correlated to long-term rates such as banks (R = +0.62), Life Insurers (R = +0.75) and Online Brokers (R = 0.67). Conversely, negatively correlated Financials include the agency mortgage REITs like NLY, MFA (R = -0.90) and select bond fund managers (i.e. AB, where R = -0.45). Squaring these values will tell you the magnitude of the headwind you're fighting being long. Yield plays also do well amid falling rates so our recent Best Idea addition, OZM, should fare well alongside our traditional fixed income asset manager idea LM. 


The table below is from our May 6 note and shows the correlations of various Financial stocks to the 10-Year Treasury yield over the past year.


INITIAL CLAIMS: STRONG LABOR = FALLING RATES - rates correlation table 2


The Data

Prior to revision, initial jobless claims fell 26k to 300k from 326k WoW, as the prior week's number was revised up by 1k to 327k.


The headline (unrevised) number shows claims were lower by 27k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -11k WoW to 311.5k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.3%




























Yield Spreads

The 2-10 spread fell -10 basis points WoW to 208 bps. 2Q14TD, the 2-10 spread is averaging 224 bps, which is lower by -15 bps relative to 1Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Waterfall of Risk

Client Talking Points


The yield crashes to 2.42% after snapping our 2.61% TAIL risk signal line a month ago – consensus (long rates) has had plenty of time to prepare for the waterfall of risk, but instead continues to send out emails saying why this “shouldn’t be happening” and why “it’s different this time.” US #ConsumerSlowing, reiterated.


Not interested in selling off versus USD after testing Hedgeye TREND support. This is an important signal as both the MOTHERS Index and Nikkei are signaling immediate-term TRADE overbought as well (highly correlated to the YEN/USD).


Food/energy now taking turns plundering the people as cost of living (US Rents) hits all-time highs. Brent sold off small yesterday but held all lines (TRADE, TREND, TAIL) of support. Buy #Inflation + Energy stocks (XLE, XOP) and stay short growth (Russell2000).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason. 

Three for the Road


RUSSIA: leads gainers this morning +1.1% as Putin's Petro Dollars rip humanity a new one #InflationAccelerating @KeithMcCullough


"Stop worrying about the potholes in the road and enjoy the journey." - Babs Hoffman


Apple is officially buying Beats for $3 billion. The company will pay $2.6 billion up front, plus another $400 million over time. (CNN)

LEISURE LETTER (05/29/2014)

Tickers: LVS, HOT, CCL


  • Monday, June 2 - Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 
  • Monday, June 2 - Tuesday, June 3 - Midwest Gaming Summit, Rosemount, IL
  • Tuesday June 3 - Thursday, June 5 - REITWeek, New York, NY


LVS (Macau Business) Sheldon Adelson hopes a visit to Marina Bay Sands by Japanese Prime Minister Shinzo Abe will speed up the legalization of casinos in Japan.  The news agency quotes Mr Adelson as saying the prime minister will tour the Marina Bay Sands casino-resort in Singapore on May 30 and get a “scripted plea” to push for legalization. Prime Minister, Shinzo Abe, is visiting Singapore where he is giving a key note address at the IISS Asia Security Summit Shangri-La Dialogue. 

Takeaway: When will the Gaijin learn, the Japanese people and systems move at their own speed and pace?


HOT – signed a new 430,000-square-foot, 20-year lease for a planned $30 million expanded global headquarters at One StarPoint in Harbor Point, Stamford CT - made possible by a state loan of up to $5 million and $20 million in state tax credits. The two-tower One StarPoint is a 430,000-square-foot Class A office property that was originally built in 1989 and renovated in 2011. Starwood currently occupies 300,000 square feet, and under the new lease will be able to expand into additional space as it becomes available.

Takeaway: Confirmation that this company is not relocating to a foreign domicile anytime soon.


CCL - Ibero Cruises to be absorbed into Costa Cruises (Cruise Currents)

Earlier this month, Costa Cruise’s CEO, Michael Thamm, announced the line would absorb the smaller Ibero Cruises into the Costa brand by the end of the year.  The decision to absorb Ibero into the Costa brand will allow Costa to significantly expand in the Spanish cruise market, a market Costa has been eyeing for some time.  Prior to the final transition into the Costa fleet, one of Ibero’s two ships, Grand Celebration, will be renovated and redesigned to coordinate with the remainder of the Costa fleet. The ship will be renamed Costa Celebration and has reportedly received a new hull design, reflective of the white hulls of the current Costa fleet. The Grand Holiday is expected to be either transferred from the Ibero fleet or sold before the transition is finalized.

Following the transition, Thamm states Costa will increase their calls in Spanish ports by 6% in comparison with 2013.  

Takeaway:  The Spanish market has rebounded somewhat in 2014.  We're seeing it in our pricing survey.


BX (Las Vegas Sun) Executives responsible for Blackstone's investment in Cosmopolitan of Las Vegas indicated they "believe that gaming revenues can increase there very quickly by 50 percent."  They also indicated this is not their (Blackstone's) first foray into Las Vegas. In addition to a previously unknown equity position in the Cromwell and Drai’s Beach Club and Nightclub, they also have made a substantial billion-dollar-plus investment separately in Caesars Entertainment.

Takeaway: Tough to bet against Jonathan Gray's track record, but this will be a challenge. 


Japan Lower House Staff:  Casino Bill Won't be Discussed this month (WSJ)

As a result, lobbyists and lawmakers said they believe it will be nearly impossible for the bill to get passed during the current parliament session, which ends June 22.  A committee on Japan's lower house won't have time to address the casino bill in its next session on Friday because it has to handle another item regarding the country's Atomic Energy Commission, a representative from the cabinet committee in charge of bill discussion told WSJ.  Toru Mihara, an adviser to the 200-member bipartisan group pushing the bill, said Wednesday that he remained optimistic the bill would still be passed, just "not in the near future."  Some casino advocates such as Mike Tanji, executive adviser at Gaming Capital Management Inc., said they are now setting their sights on the next parliament session this fall.

Takeaway: WSJ confirmed the rumors of last week.


UnionPay – (Macau Daily Times) despite the crackdown on non-Macau registered UnionPay POS (point-of-sale) machines in local casinos, people are still using the loophole posed by the machines to illegally withdraw money.  Allegedly, a reporter from the Hong Kong newspaper Apple Daily found a man from the mainland who solicits people to make illegal UnionPay withdrawals in a Cotai casino. The currency transaction would be conducted in a hotel room via a Mainland UnionPay machine. 

Takeaway: No surprise that illegal transfers are continuing.


UnionPay –  announced it will spend 200 million yuan ($32.02 million) to promote its payment functions and services to cardholders. The promotion is to change cardholder habits from swiping cards to paying with phones. 

Takeaway:  Recall in our May 13 Leisure Letter we noted Apple is likely to incorporate a near field communication payment function in the net generation iPhone and Apple reached an agreement with China UnionPay on a mobile payment service whereby users would download the UnionPay bank card app to Passbook in their iPhones and make mobile payments on over three million China UnionPay ‘QuickPass’ POS machines in China.


US Online Poker Legislation –  new online gambling bill that includes a carve out for online poker is floating around Washington DC.  The bill draft is titled the “Internet Gambling Prohibition and Control Act of 2014”as is viewed as a potential path to compromise between Mr. Adelson and his adversaries. 

Takeaway: Poker is likely the only form of internet gambling to be legalized federally.  This has been our contention all along.

Iowa Gaming – Warner Gaming LLC's Hard Rock Sioux Falls announced August 1 will be the opening date for the new casino. 

Takeaway: The stage is set for a showdown between Argosy Sioux City's desire to remain open (subject to their bankruptcy proceedings) and the Hard Rock's desire to open without competition from another local casino. 


Downtown Las Vegas – a Las Vegas committee will consider a new liquor law allowing people to drink only from plastic cups in a 32-block area around Fremont Street downtown. The proposed amendment to city ordinances is meant to help police enforce regulations prohibiting the outdoor consumption of alcohol purchased from liquor stores within 1,000 feet of those stores. The 1,000-foot law has been in effect for several years but never strictly enforced. The law would apply within an area bounded by Stewart Avenue to the north, Bridger Avenue to the south, 8th Street to the east and the Union Pacific Railroad right of way to the west, which is essentially Main Street.

Takeaway: The City of Las Vegas is trying to clean up the image of downtown Las Vegas and this is but one of many small actions in that process.


Las Vegas Home Prices - the S&P Case-Shiller Home Price Index increased 21.2% YoY in March.  While the area has experienced a strong rebound in home prices over the past 18 months, values remain below peak levels of 2007.

Takeaway:  Positive data point for the locals casino business but climbing housing prices have yet to boost gaming revenues.


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.


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding

Takeaway: It was another week of decent fixed income subscriptions at the expense of equities with stock fund flow lackluster

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, the combination of taxable and tax-free bond funds had a decent week of production with $2.3 billion in inflow, slightly above the running year-to-date average of $2.1 billion. Conversely, equity funds mustered just a $678 million inflow, well below the year-to-date average of a $3.0 billion inflow. In our charts of weekly fund production herein, the 12 week linear charts depict the intermediate term trends of these fund flows displaying the more positive backdrop for fixed income versus the ongoing decline in interest in equities.


Total equity mutual fund flows put up only a slight inflow in the most recent 5 day period ending on May 21st with just $678 million coming into the all stock category as reported by the Investment Company Institute. The composition of the slight inflow was again made up of a moderate outflow of $1.8 billion within domestic stock funds which was offset by the $2.4 billion inflow into international products. Both equity categories ran below their respective 2014 weekly averages with the combined weekly mean for all equity products settling in at $3.0 billion inflow, now in-line with the $3.0 billion weekly average inflow from 2013. 


Conversely, fixed income mutual fund flows continued on much strong footing for the week ending May 21st, with a solid $2.3 billion flowing into all fixed income funds. While this production was a deceleration from the $3.9 billion that came into bond products the week prior, the inflow into taxable products was the 15th consecutive week of positive flow and the inflow into municipal or tax-free products was the 19th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETFs followed in suite with mutual fund flows during the week with weak production in the equity ETF category offset by a substantial inflow into bond exchange traded funds. Equity ETFs experienced a sizeable $7.0 billion outflow, while fixed income ETFs put up a $5.4 billion subscription. The 2014 weekly averages are now a $476 million weekly inflow for equity ETFs and a $1.2 billion weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $14.1 billion spread for the week ($6.3 billion of total equity outflow versus the $7.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 1



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 2


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 3


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 4


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 5


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 7


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $14.1 billion spread for the week ($6.3 billion of total equity outflow versus the $7.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - 12 Week Linear Trend Says It All - Equities Hurting - Fixed Income Rebounding - ICI chart 9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


Cute NYC Rats

This note was originally published at 8am on May 15, 2014 for Hedgeye subscribers.

“A squirrel is just a rat with a cuter outfit.”

-Sarah Jessica Parker


“So”, Obama and I were in NYC yesterday talking about inequality (at separate events, using separate explanations on the why – a 1500 sq/ft apt in midtown going for $3.47M has nothing to do with his Policy To Inflate – eat your ripping rents, and like it)…


And I came across an exhibition of sorts from some of de Blasio’s new city tenants. These dudes had few teeth and stunk to high-heaven, but still appeared to have the American Capitalist spirit. They’d spray painted a shopping cart full of rats and were selling pics to tourists.


I thought the pink ones with the fluorescent blue were cute. And evidently the high school girl who was posing for her Mom (with two live ones on her shoulders), thought so too. Everyone smiles until someone gets bit.


Cute NYC Rats - rat


Back to the Global Macro Grind


With the Russell 2000 down another -1.6% yesterday, US Growth Style Factors got bit again yesterday. Bond yields crashed to fresh YTD lows too. It was a great day for risk management. The CNBC “we’re at all-time highs” thing is cute and all, but still reeks like a rat.


As Detroit’s very own Lily Tomlin once said, “the problem with the rat race is that you’re still a rat.” And having been called more than a few names of this nature on the ice, I can sympathize with those who are forced to chase Wall Street’s performance bogeys.


But that doesn’t mean we have to be brain dead about it…


To review a very basic if, if, then statement in the Hedgeye Macro Playbook:


  1. If inflation is accelerating (you buy inflation)
  2. If growth is slowing (you buy bonds and anything slow-growth-yield-chasing that looks like a bond)
  3. Then, you will win the relative performance rat race of 2014


So easy a Mucker can do it, eh?


Congrats to the Montreal Canadians for keeping all the Canadian rink rat hopes alive by knocking the Boston Bruins out of the Stanley Cup Playoffs last night. Canadian Olympic Gold medal winning goaltender Carey Price proved that the best offense is a great defense.


I’m not sure why some people I talk to get so defensive about being long the defensive slow-growth playbook. Maybe it’s because they are losing. Maybe because it just doesn’t make sense. But maybe it does, and consensus is simply not positioned for it.


When people ask me where the proof is of inflation slowing US consumption growth, at this point I simply refer to the data. Don’t forget that US GDP growth was 0.1% in Q1, Retail Sales for April (Q2) missed this week, and US inflation (PPI yesterday) “surprised” to the upside.


Looking ahead at the calendar:


  1. Post the+2.1% y/y Producer Price (PPI) report for April (versus +1.4% y/y in March)
  2. Today you’ll get another “surprise” to the upside in CPI (Consumer Prices)
  3. Then on Friday, you’ll get more data on US #HousingSlowdown


It wasn’t just the Russell Growth Index that got crushed yesterday. US Housing stocks (ITB) got sold to YTD lows too. For 2014 YTD:


  1. US Housing Stocks (ITB) are now -6.7% YTD
  2. US Consumer Discretionary stocks (XLY) are now -4.6% YTD
  3. Slow-growth #YieldChasing Utilities (XLU) was UP +0.5% yesterday to +11.1% YTD


But you already know that. And you know that I know that almost everyone I talk to says “well, I get it, but I can’t buy Utilities up here after this move.” Why not?  I’m not trying to be a Kenny Linesman rat about this. I’m just trying to make and/or save you money by calling out Sector and Style Factors for what they are – huge competitive advantages in a performance chasing rat race that eventually forces everyone to buy what’s working.


We all make mistakes. But the biggest ones I have ever made in this game were doubling and tripling down on losers that kept going down. The Russell 2000 and Bond Yields are going down because consensus US growth expectations are – not because it’s different this time.


Don’t let your daughters pose with live pink rats and a toothless guy in NYC. That’s not different this time either.


UST 10yr Yield 2.54-2.61%

RUT 1089-1121

USD 79.11-80.29

EUR/USD 1.36-1.38

Brent Oil 108.41-110.36

Gold 1283-1315


Best of luck out there today,



Cute NYC Rats - Chart of the Day

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