“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).
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%
Keep your head, stick on the ice and belief in the Rangers,
Daryl G. Jones
Director of Research
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.
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.
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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.
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This note was originally published at 8am on May 29, 2014 for Hedgeye subscribers.
“Visual polish frequently doesn’t matter if you are getting the story right.”
-Ed Catmull (President of Pixar)
While it’s month-end-no-volume-markup time here in the US equity market, no matter where you go – and no matter how you have been positioned for the last 5 months, here we are. The score doesn’t lie; consensus expectations for #RatesRising in 2014 does.
Sure, there’s a polish to the reports and a gravitas to once great names in finance that still remain on their doors. But, to be clear, there is no responsibility in recommendation from the Old Wall anymore. Instead, every time they are wrong, “it’s different this time.”
The right story in 2014 has been to be long slow-growth bonds and/or anything that looks like a bond (Utilities +11.5% YTD). The 10yr US Treasury yield has crashed to a fresh YTD low of 2.42% this morning. US Growth (Russell 2000) and US Consumer (XLY) stocks are down over -2% YTD. And, depending on what piece of inflation you are long (food and/or energy) you’re up +8-22% YTD.
Back to the Global Macro Grind…
Yes, I hate losing. But I really hate it when people who are losing (including any of my teammates) try to say they really aren’t. This is a confirmation bias embedded in a society where no one is actually allowed to fail. Every lazy player in the league gets a trophy.
Instead of acknowledging what no Old Wall firm called (for US GDP Growth to be NEGATIVE) in Q114, all I hear are excuses instead of the most obvious call they don’t want to make – bond yields fall (and the yield curve compresses) when growth is slowing.
Sure, I have my own biases on leadership in action, transparency in process, and accountability in recommendation. And I am fully aware that on mornings like this that I can sound like the prickly coach. That’s who I am.
But who you or I are as flawed human beings doesn’t change the score. As the great Bobby Orr once said:
“Forget about style; worry about results.”
Having worn a black silk dress shirt and a mauve screaming eagle tie to work on my first day on Wall Street, I’d be hard pressed to convince you that my style has been consensus over the years. What I really care about is #process.
Our #process has now signaled the biggest “surprises” to both the upside (2013) and downside (2014) in US Yields, and I’m not going to apologize for it. Unlike most macro research I used to pay for when I was in your seat, our #process goes both ways.
*Note: our process takes a full team effort – here’s what our Senior US macroeconomic analyst, Christian Drake, had to say about the 10yr bond yield crashing (-20% YTD) to 2.42% this morning:
“The pro-growth panglossian contingent can take solace in the fact that after today’s negative GDP print, it can only really get better sequentially. Q114 GDP probably wasn’t as bad as the headline and Q214 won’t be as good.”
“Taking the average of the two quarters is the easiest smoothing adjustment and it will show we’re a high 1% economy – which is about right. #Hedgeye – we came here to drink the milk, not count the cows.”
It’s a 1-2% (at best), not a 3-4% US economy. And that’s why the 10yr is going closer to 2%, not 3%. Roger that, Dr. Drake.
Yes, I have fostered a culture of confidence. I don’t know one successful athlete who wakes up every morning not wanting to crush his or her competition. I’m not going to apologize for being that way either.
This is America – a country that I came to in the early 1990s when being a winner mattered more than being the whiner who wanted my winnings. We stand alongside you every day, committed to excellence. We refuse to accept mediocrity in big macro forecasting.
There is no I in Hedgeye and we reiterate our top non-groupthink Global Macro Themes for 2014 to-date:
- US #InflationAccelerating
- US #ConsumerSlowing
- US #HousingSlowdown
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:
UST 10yr Yield 2.42-2.52% (bearish)
SPX 1888-1917 (bullish)
RUT 1089-1146 (bearish)
Nikkei 13905-14806 (bearish)
VIX 11.03-13.76 (bearish)
USD 79.89-80.61 (bearish)
EUR-USD 1.35-1.37 (bullish)
Pound 1.67-1.69 (bullish)
Brent Oil 109.06-110.97 (bullish)
Natural Gas 4.47-4.66 (bullish)
Gold 1249-1296 (bullish)
Copper 3.10-3.20 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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