prev

EUROPE, INDIA & GOLD

Client Talking Points

EUROPE

Stocks are seeing follow through from the immediate-term TRADE breakdown signals we’ve been issuing for the last few weeks. Eurostoxx50 and DAX are both trading below both our TRADE and TREND lines now, illiquid equity markets like Portugal down -3% this morning to -4% year-to-date.  

INDIA

India is not Europe – and it didn’t trade like most of Asia last night either, it was up +1.3% to +22.7% year-to-date with Nikkei down -0.6%. On pullbacks the BSE Sensex remains one of our favorite equity markets in the world. Below is a Real Conversation VIDEO Keith hosted with Jim Grant on India, Gold, etc. https://www.youtube.com/watch?v=E_zkysr1cu4&list=PLuhl1D-19WCkgKMcG5DMRaCJ4ZZWxMCMV

GOLD

Love the Down Dollar, Down Rates, Up Gold move – that lagging economic report (Thursday’s jobs report) sucked a lot of people into doing precisely the opposite of what we’ve wanted you to do all year - Buy Gold Bond as U.S. growth slows sequentially (and the Fed gets more dovish) in Q3..

Asset Allocation

CASH 16% US EQUITIES 4%
INTL EQUITIES 10% COMMODITIES 24%
FIXED INCOME 26% 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

Norwegians rejoice as consumer price inflation (CPI) goes negative -0.2% y/y (JUNE).

@Keith McCullough

QUOTE OF THE DAY

“Never confuse motion with action.”

- Benjamin Franklin

STAT OF THE DAY

The EIA estimates that Oil and Gas make-up 70% of total annual exports in Russia of around $515 billion.



Managing the Eccentric

“Prepare. Perform. Prevail.”

-Dave Tate, EliteFTS 

 

In what feels like a lifetime ago now, I owned a human performance and nutritional consultation company.  The work was rewarding, but not from a pecuniary perspective.   

 

Designing transformative programs for dedicated collegiate athletes and prospective professional athletes, bodybuilders and Olympians was certainly gratifying.   Rep counting for middle-aged housewives (in what invariably devolved into pseudo-therapy sessions)…not so much.   

 

Unfortunately, only one of those demographics generally had the discretionary dollars to spend to keep us a going concern. 

 

Because broke college kids don’t have much in the way of a food or supplement budget and certainly can’t afford high frequency, hormonal profiling, we had to resort to a little empirical “bro-science” to gauge recovery and the subsequent prescription of workout intensity.

 

Q:  How do you know if cortisol levels are muted, the central nervous system is piqued, and the overall hormonal milieu is primed for hardcore training and positive physiological adaptation…in ~5s and at no cost?

A:  Wake up and pick up something heavy.

 

If your grip strength is there right out of bed, it’s almost assured the body is recovered and ready for positive stress.  

 

Another underused training technique effective at jumpstarting progress in advanced lifters is targeted use of eccentric training.  The eccentric part of a lift can generally be thought of as the “down” part of the lift  (think lowering the bar when bench pressing)  

 

Managing the Eccentric - bench


Muscle contraction during the eccentric portion is stronger, allowing you to use more weight – resulting in greater muscle soreness and, if employed correctly, faster strength & hypertrophy gains.  

 

The majority of lifters and coaches only focus on the concentric portion of the lift – which, in investment speak, is analogous to simply being long beta.  Learning when and how to manage the eccentric (down) part of the lift cycle is where training alpha is generated. 

 

Back to the Global Macro Grind...

 

In our 3Q Macro Themes call tomorrow we’ll lay out the detailed case under our expectation for a sequential slowdown in consumption growth in 3Q.   The punditry of the Early Look prose typically carries a tendency towards intentional overstatement, so it’s worth emphasizing that we’re not making a recession call or even a call for an overly protracted deceleration (yet).   

 

As the current expansion matures, however, occasional detachment from the myopia of every market moment and consideration of where we are in the longer cycle can be a useful exercise. 

 

Because we have a self-imposed 900 word limit on the morning missive and alliteration has yet to steer me wrong, we’ll use the 3-D’s of Duration, Demographics, & Deleveraging as the conceptual framework for contextualizing the prospects for the present cycle:

 

Duration (of Expansion):   The mean duration of expansions over the last century is 59 months.   Inclusive of July, the current expansion stands at 62 months.  We continue to think the reality of the ticking expansion clock weighs into the Fed’s current policy calculus  – they need to get out of QE if only to give themselves the opportunity to (credibly) get back in if need be.   Stopping QE while the fundamental data is supportive implies that QE was (at least in part) effective in its objective.  Perma-QE, however, is a de facto admission to the market of its ineffectivenss, leaving it largely impotent as a forward policy tool. 

 

Demographics:  Growth in the working age population peaked circa 2000 and won’t turn again for another ~10 years and the aged dependency ratio (the >65YOA population in relation to the 16-64YOA population) will continue to rise well beyond that.  With labor supply in secular deceleration, productivity gains will have to shoulder an increasing share of the load to support trend growth in real gdp/potential gdp.  Real Wage Growth may benefit from tighter labor supply and productivity driven demand for labor - but that remains an “if” and, either way, higher entitlement spending and debt service costs will likely sit as an offset to gains in real income.

 

Deleveraging:  Household debt-to-GDP currently sits at 77.2%, down from the March 2009 peak of 95.6% according to the latest Fed Flow of Funds data.  Rates remain pinned at historic lows, for now, and debt growth remains below income growth so (assuming borrowers want to borrow and creditors lend) credit could support consumption growth over intermediate term.  However, given the initial debt position and zero bound rates, we certainly aren’t in position to jumpstart a repeat of the prior credit based consumption cycle. 

 

The simple reality of the last 30+ years is that, with the Baby Boomers (born 1) entering prime working age (24 – 54) alongside the secular increase in female labor force participation, we had the largest bolus of people ‘ever’ matriculating through their peak years of discretionary income with peak leverage on that (peak) income – all of which also happened to occur on the right side of a multi-decade interest rate cycle which provided a steady tailwind to asset values (via lower discounting) and offered self-reinforcing support to the credit cycle as rising collateral values supported capacity for incremental debt. 

 

No central bank liquidity deluge can effectively replicate that.

 

So, is it time to start managing the eccentric part of the macro cycle? 

 

Probably not quite yet.  Viewing economic cycles as periodic functions, balance sheet recessions are generally characterized by longer periods (slower recoveries) with lower amplitude.    So, it’s probable the muddle continues for a while longer with recurrent, short-cycle oscillations in growth for the Macro Marauders of Hedgeye to continue to attempt to front run.   

 

The “3D” style thinking above isn’t particularly new or novel,  but there’s a lot of economic gravity embedded in those realities.  Their recapitulation also provides an effective counterbalance to the latest Fed projections which call for GDP to grow in excess of potential output for the next 2.5 years – which is effectively a call for an accelerating recovery over the next 30 months and an implicit expectation for the 3rd longest expansionary period in a century.  

 

Do you take their word for it or are we #PastPeak in the current cycle?

 

We don’t know, exactly, but our model is dynamic and data dependent… and our 4Q Macro themes are still up for grabs.

 

In the meantime, we’ll continue to work to evolve and fortify our process for risk managing the eccentric.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:

 

UST 10yr Yield 2.49-2.59% (bearish = bullish for bonds)

RUT 1165-1189 (bearish)

USD 79.64-80.19 (bearish)

Pound 1.70-1.72 (bullish)

Brent Oil 107.23-111.37 (bullish)

Gold 1 (bullish)

 

Winter is Coming!  Prepare. Perform. Prevail.

 

Christian Drake

Macro Analyst

 

Managing the Eccentric - Boomer Dependency


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Creative Mistakes

This note was originally published at 8am on June 26, 2014 for Hedgeye subscribers.

“Creativity is allowing yourself to make mistakes.  Art is knowing which ones to keep.”

 -Scott Adams

 

As you may already know, Scott Adams is the creator of the cartoon "Dilbert." The cartoon makes light of the corporate world and was originally created in the early 1990's as Adams was being "downsized" from a major corporation.  Even though Adams isn’t a professional investor like most of you reading this, his quote above is remains rather apropos to the investing world.

 

Most great portfolio managers and analysts are also incredibly creative.  They are creative in the types of analysis they employ and they are creative in their questions for management. But perhaps most importantly, they are creative in idea selection.  The true skill, of course, then comes in knowing which creative ideas to keep.  Some call this risk management.

 

We hired a cartoonist recently here at Hedgeye. Cartoons are a great way to communicate our often contrarian investing ideas and themes.  Take for example the cartoon posted below that we included in our 100-page deep dive short call on United Airlines (UAL) earlier this week.

 

The cartoon emphasizes the craziness (at least from our perspective), of UAL’s accounting policies.  Not unlike our short calls on certain stocks in the Master Limited Partnership (MLP) sector, we have a difficult time reconciling the valuation with UAL with its underlying cash flows.  That said, we also know, to paraphrase Keynes, that the market can remain irrational longer than many investors can stay solvent.

 

As it relates to airlines, and specifically UAL, longer term we much prefer Warren Buffet’s maxim on the industry. That is, the best way to become a millionaire is to start a billionaire and buy an airline!

 

Creative Mistakes - United Airlines cartoon


Back to the Global Macro Grind...

 

Our research team has been busy generating some very contrarian and well researched investment ideas lately.  This morning I wanted to highlight a few.  (As always, if you want more details on the idea and would like to review the more detailed work, please email sales@hedgeye.com for details on how to subscribe.)

 

First up on the runway is naturally United Airlines (UAL).  The core of thesis per our industrials sector head Jay Van Sciver is as follows:

 

“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  

 

This is just the tip of the proverbial iceberg.

 

In our Chart of the Day below, we highlight this free cash flow deficit versus its peer group.  As the chart shows, UAL appears to have severely disadvantaged economics as compared to its peers.

 

The second idea I wanted to highlight is Lululemon (LULU), a contrarian long idea.  For many a thoughtful short seller, LULU has been one of the better short plays in retail of late. Rightfully so.  Management appears to be making one misstep after another and doing virtually everything in its power to ruin what is actually a solid brand and product.  The core of our long thesis according to our Retail sector head Brian McGough is as follows:

 

“There’s a massive bifurcation between the growth potential at this company, and the lack of a plan to execute on it. If management continues to execute in a sub-par way, we see downside to about $31 (stress testing our model at 10x EBITDA). Not pleasant (18% downside), but not the end of the world from its current price ($37.61). If the company/Board adds the operational depth that is necessary, then the discussion returns to this company doubling or tripling its top line, and realizing $3.00-$4.00 in earnings power.  Pick whatever multiple you want, but the stock price on $3.50 in earnings will push it through its all-time high of $82.”

 

Finally, the last idea (and probably most controversial idea I wanted to highlight) is our short call on YELP.   From a stock price perspective, on the short call we’ve been early, but we are getting increasing confidence in our thesis the more work we do.  Our Internet sector head Hesham Shabaan actually had a call recently with the chief financial officer of YELP to discuss, which is at the core of our short thesis.  This was his takeaway from that call:

 

“Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.

 

The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”

 

This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).”

   

Clearly, Hesham didn’t get a lot of clarity on attrition in his discussion.

 

As always, let us know if you have any questions on these or any other creative investment ideas you may be working on.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.64%

SPX 1932-1973

India’s Sensex 24873-25617

VIX 10.61-12.97

USD 80.02-80.47

Gold 1297-1343  

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Creative Mistakes - 77


July 10, 2014

July 10, 2014 - Slide1

 

BULLISH TRENDS

July 10, 2014 - Slide2

July 10, 2014 - Slide3

July 10, 2014 - Slide4

July 10, 2014 - Slide5

July 10, 2014 - Slide6

July 10, 2014 - Slide7

July 10, 2014 - Slide8

 

BEARISH TRENDS

 

July 10, 2014 - Slide9

July 10, 2014 - Slide10

July 10, 2014 - Slide11
July 10, 2014 - Slide12


MACAU: LACKLUSTER EARNINGS PRICED IN BUT…

There shouldn’t be much to cheer about this earnings season but the stocks probably reflect lackluster results.  We’re not sure decelerating Mass is priced in yet.

THE CALL TO ACTION

Sure, Street estimates have come down but so have the stocks.  Thus, the Q2 earnings season doesn’t look like much of a catalyst, positive or negative, for the group.  On an individual company basis, LVS looks like it could disappoint, particularly on a hold adjusted basis since Sands China generally played lucky during Q2.  MPEL should come in light as well but we would caution would be shorts:  a big share buyback announcement could (and should) be in the works.  On the positive side, Galaxy looks most interesting to us.  In the face of a difficult junket environment, Galaxy seems to have found the special VIP sauce and we project a slight Q2 beat.  

 

But don’t forget about the upcoming mass deceleration…

THE SETUP

Q2 VIP disappointment is well known and mostly reflected in the sell side estimates.  The comparison between Hedgeye and the Street is detailed in the chart below.  Note also that we’ve included our hold adjusted EBITDA estimates for Q2 as well.  Since we mostly know property level hold percentage before the companies report, we adjust our estimates for good/bad hold.

 

MACAU: LACKLUSTER EARNINGS PRICED IN BUT… - y

 

Galaxy: Earnings Beat and VIP Strength

Galaxy looks like the only stock that could pop with earnings (maybe also MPEL if it announces a big buyback).  We’ve been very impressed with that company’s performance on the VIP side despite the well-publicized headwinds.  As can be seen in the following chart, the company’s portfolio of properties (mostly Starworld and Galaxy Macau) have performed very well on this metric to go along with the market mass strength.  While some of the share gain in Q2 could've come from the 2 Wynn VIP rooms facing construction disruption, the trend was already under way.

 

MACAU: LACKLUSTER EARNINGS PRICED IN BUT… - GAL

 

Mass Deceleration?

The bigger issue is the likely mass deceleration in 2H – not just Q3.  We think the 30-40% mass revenue growth enjoyed by the casinos could dissipate to the high teens by the end of the year.  As we pointed out in our 06/13/14 note “MACAU: HANDICAPPING MASS DECELERATION” – not only are comparisons difficult but July 2013 marks the month when casinos began jacking up table minimums on the mass floor.  Lapping that and keeping 1H Mass growth rates will be a challenge.

 

MACAU: LACKLUSTER EARNINGS PRICED IN BUT… - 3

CONCLUSION

The trade set up for Q2 earnings doesn’t look as it has in prior quarters.  However, over the intermediate term, we remain negative on the stocks overall.  We’re not sure sentiment has fully captured decelerating mass growth.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next