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July 8, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Delaying Time

“With physical time, there is no need to know why a cycle exists – only that it does.”

-The Fourth Turning

 

If there’s one quote that links cycles to the behavioral side of markets in The Fourth Turning, that’s it. With the Old Wall bearish on interest rates in 2013 (and bullish on them in 2014), never have so many told macro stories about growth that have gotten so few paid.

 

Delaying Time - p7

 

You can call it framing data, confirmation bias, emotional baggage – or some combination of all three. It’s all there, all of the time. And it’s your job to fight it’s behavioral gravity.

 

Sounds easy, right? Not so much. That’s why process matters. The best we can do each and every morning of our macro day is accept what is – not what we need it to be.

 

Back to the Global Macro Grind

 

If only consensus could delay the 3rd quarter due to the 1st quarter’s “weather”…

 

In other news, it’s Q3 and US growth, as an investment style, got pounded yesterday. If you don’t want to acknowledge that Biotech Stocks (IBB) and the Russell 2000 (IWM) were down -2.6% and -1.7%, respectively, just quote the slow-growth Dow. It was -0.26%.

 

If I go all interconnected macro on you, and move beyond the typical US stock market centric naval gazing  that is the Dow or the SP500, you’ll also note that yesterday’s US #Q3Slowing signals were manifest:

 

  1. Bond Yields – 10yr UST Yield failed, hard, at yet another lower high (2.81% TREND resistance intact)
  2. US Dollar – remained no bid within the context of a bearish TAIL risk view ($81.17 USD Index resistance)
  3. Volatility – front-month fear (VIX) once again ripped off the Braveheart line of 10, closing at 11.33

 

But, but, the Russell is still “up” this year. Yep, a whopping +1.8% YTD (and it’s July).

 

Instead of trying to justify why an equity market “should see multiple expansion”, we say you deal with what you have. US Equities trade at 16x earnings because we have boomer-style-stagflation. In that part of the cycle, bonds get multiple expansion, not stocks.

 

As you try to navigate this mess of “it’s different this time” narratives, always know where the other players positions are. Here are the most recent net long/short positions in macro from a CFTC Futures/Options perspective:

 

  1. BONDS – 10yr Treasury still has a net SHORT position of -27,891 contracts (that’s -25,538 shorter wk-over-wk)
  2. US STOCKS – SPX (Index + Emini) has a net SHORT position of -53,081 contracts (that’s +39,668 LONGER wk-over-wk)
  3. US DOLLAR – ramped to its biggest net LONG position of 2014 last week = +20,197 contracts

 

In other words, post the lagging economic indicator (i.e. old news of US #GrowthAccelerating that you should have been long of, in size, last year) that was US “jobs recovery” on Thursday:

 

  1. Consensus kept shorting bonds thinking rates will rise (consensus has had this view all year)
  2. Consensus hedge funds did what they usually do in US Equities (covered shorts high, after shorting low in May)
  3. Consensus ramped up the long rates, long USD bet that it should have had on in Q1 of 2013 as growth was accelerating

 

The hedge fund net positioning part is important. Whether or not you agree with AQR’s recent research view that hedge funds have a +0.93 correlation to beta right now or not, reality is that hedge funds are highly correlated to the levered long side of growth.

 

Hedge fund assets under management are also at all-time highs (approximately $2.7T), so the confirmation bias and emotion you see in the futures and options markets is important to monitor. It’s a collective snapshot of behavior.

 

In the immediate to intermediate-term (3 weeks to 6 months) most hedge funds are forced to chase performance – and the best way to play catch-up when you aren’t beating your bogey is to get long, with leverage.

 

Yes, from the asymmetric point that is the Russell 2000’s all-time high of 1208 (March 2014), that is scary.

 

So is the concept that an un-elected-central-planning-committee can delay things like economic cycles and time. As Ray Dalio appropriately says, most successful risk managers realize that nature is testing us, and she’s not that sympathetic.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.50-2.64%

SPX 1

RUT 1168-1208

VIX 10.32-12.61

USD 79.71-80.43

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Delaying Time - Chart of the Day


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 8, 2014


As we look at today's setup for the S&P 500, the range is 19 points or 0.59% downside to 1966 and 0.37% upside to 1985.                                                   

                                                                            

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.09 from 2.10
  • VIX closed at 11.33 1 day percent change of 9.79%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, June, est. 97.0 (prior 96.6)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, May, est. 4.35m (prior 4.455m)
  • 1pm: Fed’s Lacker speaks in Charlotte, N.C.
  • 1:45pm: Fed’s Kocherlakota speaks in Minneapolis
  • 3pm: Consumer Credit, May, est. $20b (prior $26.847b)
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • House returns from recess, Senate in session
    • 6am: Quinnipiac releases survey focusing on public opinion of 2016 presidential race, 2014 congressional races
    • 10am: ICE CEO Sprecher, Citadel CEO Griffin, BATS Global CEO Ratterman scheduled to appear before Senate Banking Cmte on regulation’s role in mkt structure,  electronic trading
    • Comments close on proposed Fed rule prohibiting one financial co. combining with another where resulting co.’s liability ratio is >10% aggregate consolidated liabilities of all financial cos.
    • U.S. ELECTION WRAP: Libertarian Effect; Outside Attacks, Money

 

WHAT TO WATCH:

  • Commerzbank said next to face penalties in U.S. sanctions probe
  • GM refrains from recalling rusted brake lines; complaints rise
  • Deutsche Bank’s Jeffrey Mayer said leaving for role at Cerberus
  • Macquarie buys U.S. terminals business in commodities expansion
  • Tesla sued in China by businessman in dispute over trademark
  • Treasury 3-year note slide boosts yield before $27b sale
  • Samsung sees smartphone rebound as profit misses estimates
  • Intel takes on Qualcomm with rival connected-devices standard
  • Banks dreading drained accounts call for U.S. cyber war council
  • Air France-KLM cuts profit goal on overcapacity, weak cargo
  • Philips Healthcare chief leaves after “disappointing” profit
  • ICE, Citadel, BATS CEOs appear before Senate committee
  • Apple CEO Cook said seeking to expand board of directors: WSJ
  • S&P says Boeing faces L/T credit risk if Ex-Im shuts: WSJ
  • Maersk takes $1.7b writedown on Brazilian oil assets
  • Japan posts fourth straight current-account surplus in May
  • U.K. manufacturing unexpectedly slumps most since Jan. 2013
  • Israel strikes Gaza by air, sea in operation to halt rockets

 

EARNINGS:

    • Aerovironment (AVAV) 4:10pm, $0.22
    • Alcoa (AA) 4:03pm, $0.12
    • Bob Evans Farms (BOBE) 4pm, $0.41
    • Container Store (TCS) 4:05pm, ($0.06)
    • Jean Coutu Group (PJC/A CN) 7am, C$0.30

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Oil Erases Iraq Rally With Price Below When Mosul Seized
  • Soybeans Hurt by Weak Indian Rains to Boost Cooking Oil Imports
  • Gold Industry Seen Wanting Independent Administrator for Fixing
  • Soybeans Slide as Crop Conditions Indicate Record U.S. Harvest
  • Rubber Recovers From Three-Week Low on Optimism Demand to Rise
  • Metals May Benefit From China Easing, Morgan Stanley Says
  • Challengers Pledge to Do More for Indonesia’s Shrinking Forests
  • Egypt Plans Tax on Crops Such as Rice That Consume More Water
  • Indon Ore Ban Seen Remaining After Presidential Poll, ANZ Says
  • Panoramic May Restart Nickel Mine After Six-Year Halt
  • Citic Resources Starts Legal Action to Recover Port Material
  • Japan Seeks to Buy 109,303 Tons Milling Wheat in Tender July 10
  • Ivory Coast Floods Keep Some Cocoa Farmers From Delivering Beans
  • Gold Shines Again as Hedge Funds Increase Holdings: Commodities

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


LODGING M&A: HIGHER PRICING, FLAT VOLUMES

Firmer UUP/Luxury pricing in a steady M&A environment - positive for HOT

 

SUMMARY


Volume slips but pricing higher

UUP/LUXURY hotel transaction volume slipped a little in Q2 but we did not include 7 deals that did not disclose a transaction price. However, average price per key rebounded nicely due to multiple sales in tier one cities.

 

Based on recent comments from REIT management teams and capital markets participants during 2Q, we believe there is an increased willingness by banks and capital markets (CMBS) to lend to buyers of upper upscale and luxury lodging assets.  As a result, we expect the number and dollar volume of transactions in these segments to increase in the second half of 2014.  The environment bodes well for HOT and it's continued move to an asset light strategy.

 

There were a number of sizable portfolio transactions that were announced during 2Q and will close later this year - including American Realty Capital Hospitality Trust's agreement to acquire the Equity Inns lodging portfolio of 126 hotels totaling 14,934 rooms across 35 states for $1.925 billion from subsidiaries of W2007 Grace I, LLC and WNT Holdings LLC - both of which are indirectly owned by one or more Goldman Sachs Whitehall Real Estate Funds.

 

Intercontinental 

7 Intercontinental hotels changed hands in Q2.  There are 181 Intercontinental hotels worldwide. 

 

Upscale most active

We counted 16 upscale hotel transactions in Q2, up from 9 transactions in Q1.

 

Several large midscale/upscale acquisitions

  • Starwood Capital bought TMI Hospitality (180 hotels)
  • American Realty Capital Hospitality bought Equity Inn Hotels (126 hotels)
  • Accor bought 97 hotels from Moor Park Capital Partners
  • Apollo mgmt bought 18 hotels from Ivanhoe Cambridge
  • Black Sapphire C Cleveland bought 13 hotels from Concord Hospitality

 

UPPER UPSCALE/LUXURY TRANSACTIONS

  • Q2 2014 worldwide hotel transactions (UUP & Luxury brands) volume was close to $2.4 billion, lower than the $2.5 billion seen in Q1 2014 but slightly higher than Q2 2013's $2.3 billion.
  • The number of US luxury/UUP hotel transactions (where price was disclosed) was 11 in Q2 2014 - 1 less sequentially and year ago
  • The number of non-US luxury/UUP hotel transactions (where price was disclosed) was 6 in Q2 2014 – 5 less sequentially and 2 less year ago.
  • UUP
    • US average price per key (APPK) was $469k, above its 6 quarter average of $263k.  
    • International APPK was $315k, above its 6 quarter average of $293k.
  • Luxury
    • US APPK was $519k in the US, above its 6 quarter average of $432k
  • As usual, private equity and REITs were very active 

 

COMPANIES OF NOTE 

 

Starwood (HOT)

  • Sold Aloft Tucson University for $127k APPK
  • Sold leasehold of Park Lane Hotel 

Sunstone (SHO)

  • Bought Wailea Beach Marriott for $599k APPK

RLJ Lodging Trust (RLJ)

  • Sold Holiday Inn Austin NW for $70k APPK
  • Sold Courtyard Portland City Center and Embassy Suites Irvine Orange County for $219k APPK

FelCor (FCH)

  • Sold Doubletree Suites hotel-Dana Point and Embassy Suites BWI Airport for $121k APPK
  • Sold Doubletree Suites Charlotte for $178k APPK

Hersha (HT)

  • Bought Hilton Garden Inn Midtown East for $416k APPK
  • Bought Parrot Key Hotel & Resort for $676k APPK

LaSalle Hotel Properties (LHO)

  • Sold Hilton Alexandria Old Town for $378k APPK
  • Bought Hotel Vitale for $650k APPK

Pebblebrook (PEB)

  • Bought Prescott Hotel for $306k APPK

Strategic Hotels (BEE)

  • Sold Marriott London Grosvenor Square for $876k APPK

LODGING M&A: HIGHER PRICING, FLAT VOLUMES - L

 

Our detailed transaction database is available on request.


ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue

Takeaway: The latest survey of mutual fund trends displays continued inflows into all fixed income categories with outflows in US stock funds.

This note was originally published July 03, 2014 at 09:24 in Financials

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $3.2 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had slight outflows to the tune of $29 million with domestic equity funds contributing their 9th consecutive week of redemptions. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 20 weeks in taxable bonds and 24 consecutive weeks of tax-free or muni bond inflows) compared to over 2 consecutive months of outflows in U.S. stock funds. Interestingly however, equity ETF flows last week continue to be impressive with another $7.2 billion coming into passive equity products versus a $100 million outflow in bond ETFs. We think this reflects stronger institutional demand for equities with non-retail firms allocating into the stocks at current levels despite the strong run this cycle with institutional investors also positioning for more pain in fixed income over a longer term perspective with outflows over the past several weeks. 

 

Total equity mutual funds put up a slight outflow in the most recent 5 day period ending June 26th with $29 million coming out of the all stock category as reported by the Investment Company Institute. The composition of the $29 million redemption continued to be weighted towards domestic equity funds with $1.3 billion coming out of domestic stock funds which was offset by a $1.2 billion inflow into international products. This outflow within domestic equity funds has become an intermediate term trend with now the ninth consecutive week of outflow in the category. The aggregate redemption of $29 million for the recent five day period was below the year-to-date average for equity funds of a $2.3 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $3.2 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.1 billion. The inflow into taxable products of $2.7 billion made it 19 of 20 weeks with positive flow for the category and the inflow into municipal or tax-free products of $562 million was the 24th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, an 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). 

 

ETF results created the tale of two tapes with equity ETFs putting up another strong week of production offset by weak passive bond flows. Equity ETFs produced another robust subscription of $7.2 billion this week, off of the back of a 2014 best $11.2 billion inflow the week prior, while fixed income ETFs suffered another outflow of $102 million. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $937 million 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 positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 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 $6.7 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: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 1

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 2

 

 

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

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 3

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 4

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 5

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 6

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 7

 

 

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

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 8

 

ICI Fund Flow Survey: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 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 $6.7 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: Beast Mode In Bonds, Domestic Equity Outflows Continue - ICI chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


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