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VIX, OIL & INDIA

Client Talking Points

VIX

We repeat the front month VIX has never held below 10 – NEVER is a very long time. Watch that line of complacency. If you take a look at the long term chart of the VIX this morning you will see what we mean. The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.

OIL

Oil price is ripping to the upside. What you have is called TAIL risk to the upside and TAIL risk to the downside on U.S. growth. Our immediate-term risk range for WTIC Oil is 103.21-105.67, we remain bullish trend.

INDIA

Fantastic news in India regarding their success with rate hikes. Inflation is under control. India had the only stock market that was really up. Strong currency, strong policy equates to stronger policy and stronger consumption.

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

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.

LM

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

TWEET OF THE DAY

$LULU CFO is out. I couldn’t care less what the comp is. This is so positive. What a great event to get more bullish on.

@HedgeyeRetail

QUOTE OF THE DAY

“Order and simplification are the first steps towards mastery of a subject”

-Thomas Mann

STAT OF THE DAY

The World Cup has been held every four years since 1930 with the exception of 1942 and 1946, when it was canceled because of World War II. This will be the 20th World Cup.



Pay It Forward

“For of those to whom much is given, much is required.”

- President John F. Kennedy

 

Last night Keith and I took a private car service into Manhattan to watch the New York Rangers play the Los Angeles Kings in the fourth game of the Stanley Cup Finals.   Clearly, given such an experience, there is no doubt we are among the fortunate in this fine nation.

 

While most of you that are reading this have worked hard to achieve your position, we have all also received a helping hand along the way.  That helping hand may have been from a mentor, from a coach, or just being born somewhat lucky.  But, regardless, we all now have the opportunity to give back.

 

In the spirit of #PayingItForward, Hedgeye has formed a non-for-profit called Hedgeye Cares, which will be dedicated to giving back to charities in Connecticut.  Our inaugural event will be the 2014 Hedgeye Cares Golf Challenge to be held on September 16th at the Great River Golf Club in Milford, CT.   The proceeds from this event will go to Bridgeport Caribe Youth Leaders (BCYL).

Pay It Forward - Pay it forward chart1

BCYL is non-profit based in Bridgeport, CT, one of the more economically disadvantaged cities in Connecticut, and provides athletic and enhanced educational opportunities to youths aged 5 to 18 to whom much has not been given.   Currently, the program provides opportunities for some 500 kids in the Bridgeport area and we will be focused on expanding that number.

 

We hope you will consider joining us for a golf outing on September 16th and if you aren’t a golfer and or cannot make the event, we hope that you will consider sponsorship or auction donations and join us in #PayingItForward.  Details can be found here.

 

Back to the Global Macro Grind...

 

Speaking of giving, the Kings actually gave the Rangers a fighting chance last night by losing 2 -1, so the Stanley Cup Finals return to the City of Angels this Friday.  On some level, the Rangers have already exceeded expectations by winning last night.  Specifically, of the 320 NBA, MLB or NHL teams that have found themselves up 3 – 0 in a seven game series, 65% have gone on to win the next game and close out the series.

 

In terms of coming back and winning the entire series from a 3 – 0 deficit, it has only happened four times in 171 opportunities in the NHL.  For you math geeks, that equates to right around a 2.3% chance of overcoming a three game deficit.  So is a comeback probable? No. But as they say, hope springs eternal.

 

Speaking of probabilities, as equity investors we can be pretty sure that volatility on the SP500, as measured by the VIX, won’t stay below 11 for long.   Pull back a long term chart of the VIX on your Bloomberg this morning and you will see what we mean.   The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.

 

So as investors, feel free to bet that VIX will go lower from here, but practically that is about as likely as Iran, Honduras, or Costa Rica winning the World Cup.  According to Oddshark.com, the odds on that are more than 1500 – 1.  Math doesn’t always work, just ask California Chrome, but over time life is much simpler when we play the odds.

 

Speaking of odds, the likelihood is high that many of us wouldn’t have bet on a Eurozone Industrial production number that came in well ahead of expectations this morning.   According to my colleague Ben Ryan:

 

“Industrial Production printed much stronger than expected (five-month high) for April with strength in energy and non-durable goods production which increased +2.5% and +2.1% respectively. Month-over-month, seasonally-adjusted industrial production increased +0.8%, beating expectations of +0.5%. Note that March was downwardly revised to -0.4%, so April’s increase follows a pretty bad number."

 

Following a bad number or not, that is the kind of number that we macro analysts underline with a big green highlighter (green being bullish) in our notebooks.

 

Even as European data continues to get better on the margin, we remain cautious, to say the least at current VIX levels, on the U.S. economy.  In the Chart of the Day, we’ve highlighted our U.S. GDP summary table going back two years to March 2012.

 

The key takeaway from this table is that healthcare spending was critical in supporting GDP in the 1st quarter.  With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal. 

 

According to my colleague Christian Drake:

 

Services consumption was the singular source of strength in the 1Q14 GDP report and most of that was from Healthcare Services which contributed +1.01% to GDP – that estimate of accelerating healthcare consumption just got revised to negative growth which will take the final GDP estimate for 1Q down to -2.0% plus or minus. 

 

The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014.  When combined with increasing uncertainty in the 2014 mid-term elections, see Eric Cantor, we may just have an opportunity for you equity bears to #PayItForward in the coming months.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44%-2.67%

SPX 1

RUT 1138-1178

VIX 10.74-13.34

USD 80.31-80.95

Gold 1 

 

Keep your head, stick on the ice and belief in the Rangers,

 

Daryl G. Jones

Director of Research 

 

Pay It Forward - chart of the day


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MACAU UNIONPAY: WHERE THEY AT?

Pawning UnionPay out of the casinos

 

 

There has been a lot of speculation that the Macau Government wants UnionPay retail outlets off the casino floors.  When the UnionPay issue surfaced last month we had heard that a couple of casinos moved those shops in to lobby and mall areas.  Recently, Bloomberg reported that the Macau Monetary Authority (MMA) actually notified the shops individually that they need to move by July 1st.  The only confirmation of this came from SJM CEO, Ambrose this week.

 

As you can see from the following chart, most of the big casinos maintained UnionPay retail outlets on their casino floors with the exception of Wynn Macau and MGM.  SJM’s Grand Lisboa apparently removed the UnionPay logos from pawn shops located on the casino floor.  It should be noted that Grand Lisboa offers a number of UnionPay options all around the casino.  This should be the model going forward.

 

MACAU UNIONPAY: WHERE THEY AT? - TK

 

Aside from the minor inconvenience, there shouldn’t be a major impact to the casinos’ GGR should the pawn shops be forced off the casino floor.  Wynn Macau and MGM should experience no impact, presumably.  Plenty of UnionPay options will remain and unless the MMA forces UnionPay completely out of the buildings, we see little sustainable impact from the rumored restrictions.  We believe the likelihood of a UnionPay ban altogether as very unlikely.


Best Idea Conference Call Today: Short DFRG

We recently added DFRG to the Hedgeye Best Ideas list as a SHORT.

 

We’re hosting a conference call TODAY at 11am EST to run through our thesis and field questions.


DFRG is a high-conviction short given slowing trends, concerns over the core business, rising commodity costs, positive sentiment, valuation, and more.  Our sum-of-the-parts analysis suggests significant downside.


DFRG develops, owns and operates three fine dining restaurants: Del Frisco’s Double Eagle Steak House, Sullivan’s Steakhouse, and Del Frisco’s Grille.  The full-service steakhouse company currently operates 40 restaurants in 20 states and primarily caters to the high end consumer.  The stock is up ~45% over the last 6 months.

 

 

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 713418#

Materials: CLICK HERE

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


June 12, 2014

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BULLISH TRENDS

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BEARISH TRENDS

 

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