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EUROPEAN AND DOMESTIC TRENDS

Client Talking Points

EUROPE

Both the EuroStoxx50 and the DAX are breaking our immediate-term TRADE lines of support this morning (3265 and 8999, respectively). Pay attention, because it’s new.  

RUSSELL 2000

The RUSSELL 2000 wandered on up to its March 2014 closing high of 1208 and stopped there, abruptly (-1.7%) – since the SPX hasn’t had a +/- 1% day in 55 trading days, we are certain that risk exposure mattered to many yesterday.

UST 10YR

One up day on a lagging indicator (jobs report last week) does not a TREND @Hedgeye make. UST 10YR drops straight back down to 2.59% and had no immediate-term support to 2.50%, then 2.42% - we remain Bond Bulls.

Asset Allocation

CASH 14% US EQUITIES 4%
INTL EQUITIES 10% COMMODITIES 24%
FIXED INCOME 28% INTL CURRENCIES 20%

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

Semiconductor dividend & buyback investor theme reinforced this morn as $KLAC raises dividend by 11% and authorizes $1B buyback.

@HedgeyeBerger

QUOTE OF THE DAY

“Pearls don’t lie on the seashore.  If you want one, you must dive for it.”

-Chinese Proverb

STAT OF THE DAY

125, the number of years ago the Wall Street Journal published its first issue. That was all the way back on July 8, 1889.


July 8, 2014

July 8, 2014 - Slide1

 

BULLISH TRENDS

July 8, 2014 - Slide2

July 8, 2014 - Slide3

July 8, 2014 - Slide4

July 8, 2014 - Slide5

July 8, 2014 - Slide6

July 8, 2014 - Slide7

July 8, 2014 - Slide8 

BEARISH TRENDS

July 8, 2014 - Slide9

July 8, 2014 - Slide10

July 8, 2014 - Slide11



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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


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.


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