prev

UP: POUND, OIL, & GOLD

Client Talking Points

BOE

Our un-elected central planning overlords at the Fed should be taking down their U.S. growth estimates today. Bank of England, on the other hand, is basically chirping group-thinking economists, telling them to take up their expectations for a rate hike; not surprisingly, the Pound loves that ($1.694 vs USD, +8% year-over-year); the FTSE likes it too – We like it.

OIL

After last week’s ramp, oil prices holding strong; WTI crude up another +0.3% this morning to +$106.68/barrel, all but assuring you that the new year-to-date highs you saw in U.S. CPI yesterday (May +2.1% year-over-year) are going to continue higher in June #InflationAccelerating.

GOLD

Starting to make a stealth series of higher lows (vying for its 3rd consecutive up week at +6% YTD); if the Fed freaks on housing (MBA mortgage application awful again this morning) and/or growth, we think Gold continues higher in 2014.

Asset Allocation

CASH 10% US EQUITIES 4%
INTL EQUITIES 12% COMMODITIES 22%
FIXED INCOME 30% INTL CURRENCIES 22%

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

42 days since $SPX has had a +/- move of 1% (2nd longest streak in 15yrs)

@KeithMcCullough 

QUOTE OF THE DAY

The strength of a family, like the strength of an army, is in its loyalty to each other.

-Mario Puzo

STAT OF THE DAY

Today in 1940, Winston Churchill gave his "Finest Hour" speech.


CHART OF THE DAY: A Lunar Landing for Oil Prices?

Takeaway: We're keeping a close eye on this rising macro risk.

 

CHART OF THE DAY: A Lunar Landing for Oil Prices? - 06.18.14 Chart of the Day


Seeing Stars

“Measure what is measurable, and make measurable what is not.”

-Galileo Galilei

 

According to legendary theoretical physicist Stephen Hawking, Galileo likely bears more responsibility for the birth and development of modern science than anyone. This is a heady compliment from one of the most prominent physicists of the modern era. In terms of measuring accomplishments, Hawking is probably right.

 

Seeing Stars - 44

 

While he was well versed in physics and mathematics, Galileo (like the artist Banksy, Galileo was known mononymously) was best known for his work in astronomy.  Among other things, he confirmed the phases of Venus, discovered the four largest satellites of Jupiter, and discovered sunspots.  Galileo could literally see in the stars things that his contemporaries could not.

 

As insinuated in the quote at the beginning of this note, Galileo was truly one of the first modern thinkers to establish and vigorously defend the idea that laws of nature are governed by mathematics.  In other words, if it could be measured, Galileo measured it. And if it could be counted, Galileo counted it.

 

This lesson of measuring and counting can also be applied very directly to a less scientific profession, that of investing.  The more we can quantify any investment, the better decisions makers we become.  Anecdotes are convenient shortcut for the less informed.  Math doesn’t lie, people do.  As Galileo also advised:

 

“If I were again beginning my studies, I would follow the advice of Plato and start with mathematics.”

 

Wise advice, indeed

 

Back to the Global Macro Grind...

 

Speaking of outer space, an increasing macro risk we see, especially heading into the summer driving season, is that oil prices are potentially “going to the moon” due to the heightened conflict in Iraq.  Iraq currently produces about 3.3 million barrels per day, but it is the second largest exporter after Saudi Arabia in OPEC. 

 

On a percentage basis, over the next five years Iraqi is projected to see the most production growth globally.  Net-net, Iraq is the key global swing producer and also has the fifth largest reserves.  In the world of commodities, what happens on the margin matters and the Iraq oil industry plays squarely on that margin.

 

Seeing Stars - 06.18.14 Chart of the Day

 

Of course, to the punditry that is arguing commodity inflation is temporary in nature, this adds fuel to the fire.  The heightened tensions in Iraq are clearly “temporary” in nature.  Currently, the CRB index is up +10.5% in the year-to-date and 16 of 19 of its key components are up as well.  For those of us that, like Galileo, like to count things, that means that 84% of componentry of the CRB index is up on a “temporary” basis this year.

 

As well, for those of us that work in the hallowed halls of Wall Street, or for those that eat iPhones, this might not matter much.  But for the median American consumer who has pre-tax income of $47,000, you can be damn skippy it does matter.  Assuming those consumers also drive, then accelerating oil prices are only going to accelerate the vise like grip that commodity inflation has on their pocket books.

 

Coincident with accelerating commodity prices domestically is the fact that real weekly earnings, released yesterday morning, turned back to negative in May.  At down -0.10% year-over, this is the worst reading, assuming you believe negative earnings growth is bad, since January of 2013.  Food, energy and shelter prices are inflating and real income is turning negative.  Clearly, this is an elixir for a strong economy (#SarcasmAlert).

 

Luckily enough, given the high correlation between many  commodities and the U.S. dollar, our policy makers do have a choice, which is to implement strong dollar policy.  Seemingly, this has worked for the United Kingdom, where its rational, and Canadian, central banker Mark Carney has protected the currency and the pound is now up 8% year-over-year versus the U.S. dollar.  Subsequently, the U.K. economy has outperformed.

 

Sadly, about the only meaningful move we can expect out of the Federal Reserve later today is that they will once again have to take down their U.S. GDP estimates.  Nothing new there though as the Federal Reserve’s economic projection have been about the best lagging, or some instances just wrong, economic projections that devalued U.S. dollars can buy.

 

Clearly, though, any concerns we may have are misplaced.  In fact, this morning, Portugal is selling 12-month t-bills at 0.364% versus the prior level of 0.617% and 3-month t-bills at an average yield of 0.18% versus the prior yield of 0.432%.  The Spanish government even got a better deal, selling five year paper at a yield of 1.402% with a bid-to-cover of, are you ready for this, 2.32x!  Aye carumba!

 

Meanwhile, in the most recent U.S. Investor’s Intelligence poll, a mere 22.3% of respondents expect a correction in U.S. equity markets . . . but, hey,  the Utility subsector of the SP500 is up +12.7% on the year-to-date, that must be healthy for the U.S. economy.  Right? Or maybe the hockey heads at Hedgeye are just seeing stars.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44-2.66%

SPX 1

VIX 10.73-13.21

Pound 1.68-1.70

Brent Oil 110.23-113.98

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research


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 78.64%

LEISURE LETTER (06/18/2014)

Tickers: MCP:PH, MGM, WYNN, LHO

EVENTS

  • Wed-Thur June 18-19: Todd in Macau for meetings
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released

COMPANY NEWS

MPEL, MCP:PM – Melco Crown Philippines Resort seeking to raise as much as $129 million via an offering of as many as 485.2 million shares at 11.30 pesos to 11.70 pesos per share.  The capital raise follows an announcement of a 37% increase in the budget for its Manila casino and total development costs are expected to be 37 billion pesos (US$832 million), up from US$680 million.

Takeaway: Another budget increase from an Asian resort project.  This is getting ridiculous.

 

MGM –  signed a community benefits agreement with Prince George's County on Tuesday that ensures 50% of the jobs slated for the $925 million MGM National Harbor will go to local residents.

Takeaway: As expected given recent headlines and also provides MGM cover as supporting and improving the local economy while providing jobs for local residents. 

 

WYNN – as it pertains to the proposed Wynn Everett casino resort, the city of Boston was granted one additional week to reach a neighboring community or host community agreement with WYNN. If no agreement is reached, both parties will submit to arbitration. Desiring a host community agreement, Boston Mayor Walsh has reserved the right to sue in the event such an agreement is not reached or awarded via arbitration.

Takeaway: Who will blink first, if at all? 

 

LHO – announced it closed on the sale of the Hilton Alexandria Old Town for $93.4 million. The Company acquired the hotel in May 2004 for $59.0 million. Proceeds from the transaction will be used to reduce borrowings on the Company’s Senior Unsecured Credit Facility and redeem the remaining $58.7 million of 7.25 percent Series G Preferred Shares. The Preferred Share redemption will close on July 3, 2014.

Takeaway: On time and on track.

 

RCL - Targeting affluent couples with Quantum-class ships Travel Weekly

Quantum-class ships will allow RCL to reach beyond its traditional family market and target affluent couples, the cruise line has claimed.  Stuart Leven, the line’s managing director for the UK and Ireland, said the facilities on board Anthem of the Seas, due to launch next spring and to sail from Southampton, would be the same but the shows would be tailored to the UK market. 

Takeaway: This cool ship can appeal to multiple demographic groups.


Insider Transactions

  • HLT - EVP Matthew W. Schuyler (Chief Human Resources Officer) sold 373,968 shares at an average price of $22.79 and now owns 574,886 shares.
  • HST – EVP Minaz Abji sold 99,150 shares at an average price of $22.15 and now directly owns 162,137 shares.
  • H - Peter Fulton sold 8,459 shares at an average price of $59.38 and owns 27,391 shares.
  • PNK - EVP Neil E. Walkoff sold 10,000 shares of stock at an average price of $25.30 and now owns 47,539 shares.

INDUSTRY NEWS

Japan Gaming Legislation – as expected the Liberal Democratic Party introduced discussions within the Japanese Parliment regarding the legalization of integrated resorts and casinos.  The bill, which was submitted to parliament last December, will not be passed before the end of the session on June 22 and will be taken up again when the Diet resumes in autumn. Komeito party members indicated that while difficult to pass the legislation in the current session (which will end June 22), the bill has a good chance of passage in the next session which is scheduled to begin in late September/early October. 

Takeaway:  The formal process of "nemawashi" has started but nemawashi can take a long time by Western standards, so find your inner gaman.  If the current talks are constructive, it bodes well for passage of the 1st gaming legislation this fall followed by the second legislation by June 2015.

 

Malaysia Gaming Expansion (New Strait Times) The founder of Berjaya Group, Tan Sri Vincent Tan, recently announced Berjaya Group would apply for a licence for a casino in Malaysia’s Berjaya Hills Resort. Berjaya Hills Resort is a hill resort in Bukit Tinggi, Pahang, Malaysia near the Genting Highlands. It is known for its French-themed village, Colmar Tropicale

Takeaway: The proliferation of gaming across Southeast Asia appears poised to rapidly expand, similar to US Regional gaming in the early 2000's.

 

Macau Economic Growth (Macau Business) The Economist Intelligence Unit forecasts that Macau’s gross domestic product will grow at an average annual rate of 11 percent this year and next. The EIU expects economic growth of 11.3 percent this year and 10.6 percent next year. It says economic expansion will be due to “healthy growth in exports of services”, meaning tourism and gaming.

The EIU forecasts that the annual rate of consumer price inflation will be more or less steady at 6 percent this year and 6.3 percent next year.

Takeaway: Strong growth driven by increased hotel, gaming, and tourism revenues.

 

Macau Mass Segment Yield – (GGRAsia) Casino executives confirm mass floor minimum bets for casino table games in Macau are now commonly in the range of HK$1,000 to HK$5,000 even at non-peak times,

Takeaway: Confirming our research note from last week Friday titled "Handicapping Mass Deceleration" and our yielding up of mass table minimum bets. 


Saipan Gaming – Marianas Stars Entertainment, one of two companies competing for a casino license on Saipan has called on the government to consider allowing both projects to go ahead,

Takeaway: We noted in our April 28th Leisure Letter, inbound tourism to Saipan can not support a single casino...so why would the administration consider two casinos?

 

Las Vegas Hotel Opening – The SLS Las Vegas announced it will open on August 23, one week earlier than planned.

 

New York Update Gaming – Foxwoods/Muss Development dropped their plan for a proposed Sullivan County casino near the former Grossinger’s resort due to fears over a casino license potentially issued to an Orange County based developer which would effectively head off traffic bound for Sullivan County.

Takeaway: A prudent decision all things considered.

 

Lenders open vault for Hotel Deals – WSJ

Lenders made $31 billion in hotel loans last year, nearly double the 2012 level, according to the Mortgage Bankers Association.  Credit is flowing against a backdrop of rising room rates, limited new construction and a spike in leisure and business travel in big cities such as New York and Los Angeles.  "There's been a sea-change during the past two months," says Monty Bennett,  CEO of Ashford Hospitality Trust. "It's pretty close to the 2007 lending environment again."

Takeaway:  Low financing is supporting the hotel M&A environment

MACRO

China Residential Real Estate - May new home prices +5.6% YoY, a deceleration from +6.7% YoY in April.  On a MoM basis, prices fell 0.2%.

Takeaway: 1st MoM decline in over two years adds to the list of disappointing macro data points coming from China

 

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.


DEMAND DROPS BACK BELOW 180

Takeaway: As expected, the post-holiday bounce was followed by the post-post-holiday slump. Mortgage demand drops sharply on the latest week.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

DEMAND DROPS BACK BELOW 180 - Compendium 061814

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 13. 

 

Mortgage purchase application volume fell -4.7% week-over-week, retracing much of the post-holiday week gain of +9.3% and returning the index to a sub-180 level (178.6, to be precise). On a year-over-year basis, purchase application volume in the latest week is tracking down -15.1% YoY vs -13.6% YoY in the week prior. The QoQ is currently running at +3.4%.

 

Recall that last week we saw a big bounce in both purchase and refi activity, but we speculated at the time it was at least partially driven by the post-Memorial Day week bounce. As such, this week's activity level is the better gauge. 

 

Activity dropped off on the refi side as well as the index saw its largest sequential decline since November. Though rates only backed up 2 bps to 4.36% from 4.34%, refi application volume fell +12.7% W/W, more than reversing the +11.0% print in the prior week. 

 

As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.

 

Our expectation remains that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.

 

DEMAND DROPS BACK BELOW 180 - Purchase   Refi YoY

 

DEMAND DROPS BACK BELOW 180 - Purchase Apps LT w Summary Stats

 

DEMAND DROPS BACK BELOW 180 - Purchase Apps qtrly

 

DEMAND DROPS BACK BELOW 180 - Composite Index Qtrly

 

DEMAND DROPS BACK BELOW 180 - Composite Index LT w Summary Stats

 

DEMAND DROPS BACK BELOW 180 - 30Y Rate

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

Joshua Steiner, CFA

 

Christian B. Drake


June 18, 2014

June 18, 2014 - Slide1

 

BULLISH TRENDS

June 18, 2014 - Slide2

June 18, 2014 - Slide3

June 18, 2014 - Slide4

June 18, 2014 - Slide5

June 18, 2014 - Slide6

June 18, 2014 - Slide7

 

BEARISH TRENDS

 

June 18, 2014 - Slide8

June 18, 2014 - Slide9

June 18, 2014 - Slide10

June 18, 2014 - Slide11
June 18, 2014 - Slide12

June 18, 2014 - Slide13


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next