“Football is a simple game; 22 men chase a ball for 90 minutes and at the end, the Germans always win.”
I’m flying to London this morning, so I figure that if North Americans reading this don’t know who Gary Lineker is, the investors I am meeting with in the UK tonight will! Lineker still holds the English record for goals at the World Cup with ten.
The OT winner yesterday was only Mario Gotze’s 2nd career goal at the World Cup, but that’s because he is only 22 years old. He and his sniper teammate Andre Schurrle were the only two players on the team who were born after Germany’s unification.
As times change, people and countries do. The spirit of selfless teamwork displayed by the German side was something all of Germany should be proud of this morning. Alongside a passionate veteran effort, Germany empowered its youngest players to lead. There’s a lot to learn from that.
Back to the Global Macro Grind…
Who are your best up and coming people? Do you foster a meritocracy where they can thrive? Or are you more or less set with a traditional hierarchy? How about your investment process? How often does it evolve? Does it embrace change?
If the boomer generation’s US political establishment was a soccer team, here’s how some of its media represents it:
"Ever since Cantor lost his primary, a lot of people are scouring the map, saying: Which House incumbent will be next to fall? Well, don't hold your breath. I was checking in with sources in both parties this week and Democrats say they don't think any of their incumbents will lose primaries.” –John King, CNN
It’s a good thing that politicians in both the Republican and Democrat party who have lost the trust of The People have it all figured out. But what if Hedgeye’s forecast for #Q3Slowing takes hold, both the US Dollar and Bond Yields fall, and domestic growth expectations fall alongside them?
Do you think 2015 will look any different from a political perspective? Or do you think America’s younger people (my generation and Millenials) will let un-elected bureaucrats at places like the Fed (and the IRS) continue with these tired, old, slow-growth Policies To Inflate?
Right when everyone didn’t think it could happen, that’s precisely what happened last week:
- US Dollar Index was down for the 3rd out of the last 4 weeks and remains below our TAIL risk line of $81.19
- US 10 Year Treasury Yields fell another 12 basis points to 2.52% (that’s -51 basis points for the YTD)
- US Domestic Growth Stocks (Russell 2000) got tagged for a -4% loss, putting it back in the red for the YTD
I know. When it’s mid-July and the Russell 2000 is down YTD, that means everything growth is ripping. Right. Got it. And Brazil looked mint against Germany too.
Back to reality… On the other side of domestic growth expectations being marked down last week:
- Slow-growth Utilities (XLU) had another up-week in a down equity market, closing +0.8% to +12.8% YTD
- #YieldChasing REITS jammed Americans with new all-time highs in rents, +1% on the week to +16.3% YTD
- Gold and Silver were up another +1.4-1.7% to +11.2% and +10.4% YTD, respectively
Yep, we’re talking big time bull market now – in growth slowing expectations!
At the same time, US Equity Volatility (VIX) ripped off its most asymmetric long-term TAIL line of support (VIX 10) closing the week +17.5%. But no worries… Janet Yellen is going to say everything is just dandy at her semi-annual-central-planning testimony to Congress this week.
Or will she?
I don’t think Yellen will be as bullish about the US economy as Old Wall Street’s estimates are for “year-end” bond yields and US GDP growth to accelerate. Don’t forget that at the last Fed meeting she took down her US growth estimates. Since then, real US consumption data has deteriorated.
Yellen isn’t a young baby boomer. She was actually born on the front-end of the boomer cycle (1946). She and I probably think about economics, markets, and risk as differently as Gotze does about Germany, post the Berlin Wall coming down.
I’m not saying that older generations are all wrong. In fact, many of the most thoughtful investors I meet with are boomers (born 1) and are more adamant about changing monetary policy than I am! If Americans want to start winning again, they need to change the players they have on the field.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.49-2.59%
WTIC Oil 100.03-104.13
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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.
TODAY’S S&P 500 SET-UP – July 14, 2014
As we look at today's setup for the S&P 500, the range is 32 points or 0.74% downside to 1953 and 0.89% upside to 1985.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.07 from 2.07
- VIX closed at 12.08 1 day percent change of -4.05%
MACRO DATA POINTS (Bloomberg Estimates):
- No major economic reports expected
- 1:30pm: ECB’s Draghi speaks to EU Parliament Committee
- Sen. Lisa Murkowski plans to meet Commerce Sec. Penny Pritzker this wk to discuss lifting 39-yr-old ban on crude oil exports
- U.S. Treasury Chief China Coordinator Sharon Yuan, key figure negotiating trade pacts involving banking, securities, travels to Brussels for T-TIP talks
- 8:45am: U.S. Energy Information Administration begins 2-day 2014 Energy Conf.
- 5pm: House Rules Cmte meets on H.R. 5021, highway funding bill
WHAT TO WATCH:
- Shire willing to recommend $53.7b takeover by AbbVie
- Citigroup said poised to end mortgage-bond probe for $7b
- Aecom Technology agrees to buy URS Corp. for $4b
- Whiting to purchase Kodiak for $3.8b to lead Bakken
- Lindt to buy Russell Stover to expand in N. America
- GE’s CFM gets $2.6b American Airlines A320 engines order
- Bank of China leasing unit said to near Airbus, Boeing deals
- Generali sells Swiss private bank BSI to BTG Pactual for $1.7b
- KKR is said to buy stake in BlackGold
- EBay in partnership to stream Sotheby’s sales worldwide: NYT
- Israel strikes back against fire from Gaza, northern neighbors
- T-Mobile says potential Sprint review could last 2 yrs: HSBC
- Singapore GDP unexpectedly shrinks as manufacturing declines
- U.S. gasoline falls to $3.6699 a gallon in Lundberg Survey
- Bank of Ozarks (OZRK) 5pm, $0.34
- Citigroup (C) 8am, $1.05 - Preview
- Peregrine Pharmaceuticals (PPHM) 4pm, ($0.07)
- Sirius XM Canada (XSR CN) 4:09pm, C$0.01
- Wintrust Financial (WTFC) 4:01pm, $0.72
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Palm Oil Enters Bear Market as U.S. Sees Record Soybean Reserves
- Standard Chartered Sues Decheng Owner Chen for $35.6 Million
- Goldman Stays Gold Bear as Bullish Wagers Increase: Commodities
- Sugar Market Reversal Seen by Rabobank as Demand Tops Supply
- Oil Contango Close to Incentivizing Storage of Crude on Tankers
- Zinc Trades at Highest in Almost Three Years as Stocks Shrink
- East Libya Rebels Commit to Keep Open Largest Crude Export-Port
- Sugar Rises as Surpluses Seen Ending in 2014-15; Coffee Advances
- Nickel Market Seen by Citi Depleted Faster Than Expected on Ban
- Natural Gas Supply Gains Keep Driving Bulls From Market: Energy
- Gold Drops as Advance to Four-Month High Spurs Investors to Sell
- Whiting’s $3.8 Billion Kodiak Deal Crowns New Bakken Shale King
- Iron Ore Seen Rangebound This Half Before 2015 Slump, Citi Says
- Corn Extends Drop to 4-Year Low as Global Supplies Seen Climbing
The Hedgeye Macro Team
Takeaway: Current Investing Ideas: BOBE, GLD, HCA, HOLX, LM, LO, OC, OZM, RH, and TIP
Below are Hedgeye analysts' latest updates on our TEN current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
*Please note that we added Bob Evans Restaurants (BOBE) to Investing Ideas this week. We will send out a full report this coming week.
We also feature two recent institutional research notes, as well as Keith McCullough's Friday morning macro call, all of which offer valuable insight into the markets and economy.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
HEDGEYE CARTOON OF THE WEEK
BOBE – Restaurants sector head Howard Penney added Bob Evans Restaurants to Investing Ideas earlier this week. We will send out his report next week outlining his bullish case.
GLD – Gold broke out above its long-term TAIL Line of $1324/oz. this week and we remain long into the second half of the year (TREND Support = $1272). We added GLD to investing ideas in May and we still like it here for the same reasons outlined in our report.
Full-year growth expectations from the Fed have already been downwardly revised since we made the call moving into this year (GLD +11% YTD). The revised expectations for growth are reflected in the bond market. The market expected Fed tapering as growth improved. This expectation for a steepening in the long-end of the yield curve has reversed as growth has slowed:
- Yield Spread (10yr – 2yr): -22% YTD to +206 bps wide
- More money is expected to enter the system relative to previous expectations (tapering slower-than-expected so far)
- The USD is expected to weaken under the feds predictable, linear model for countering these data points
- Investors choose gold over a depreciating currency
Our GIP model, which predicts forward-looking growth and inflation, indicates growth expectations from both the Fed and consensus macro are still too optimistic. Growth will be slower than expected, and investors move to hedge a devaluing currency (rotation into Gold Over dollars).
On the growth miss, the Fed responds with more money in the system and dollar devaluation squeezes consumer margins. We continue to be short of the U.S. consumer and long of defensive sectors which outperform as growth decelerates and inflation accelerates. The divergence below which has already taken-shape will continue to generate alpha into the third quarter. This divergence is perpetuated from the policy response to overly optimistic expectations:
- RUSSELL 2000: -0.30%
- Consumer Discretionary (XLY) : +0.5%
- GLD: +11%
- Treasuries (TLT): +11%
- Utilities (XLU): +14%
- REITs (REIT Index): +17%
- Energy (XLE): +11%
HCA – We received the results for the June/July installment of our monthly physician survey. As it relates to HCA, it appears patient volume appears solid through 2Q14. The results were not completely without issue, but there were two Key Drivers we are most focused on. The first is volume reported by physicians who have a high percentage of commercially insured patients, and practices with higher income patients, both of which remain positive on a rolling 3-month basis. The other is maternity trends. Our model using monthly data from the US Census and yields a birth forecast is pointing to acceleration which the June physician survey data is now confirming both for reported pregnancies and deliveries. At 25% of hospital inpatient volume, we should see sequential improvement in admissions from here.
Orthopedics is holding up. As we have commented on previously, the Orthopedics surgical arena is the largest by revenue for the Hospital industry. Incidentally, Biomet reported their recent quarter earlier this week and while growth slowed sequentially, the results continue to show positive growth.
HOLX – CMS did not offer any comment on reimbursement for 3D breast tomosynthesis when they released their proposal for 2015 rates. The commentary included only a proposal to eliminate codes created for digital reimbursement several years ago transition the rates to codes currently used to reimburse for film based mammography. We were expecting more, but we’ll look for the final rule which will be published in October.
Our Pap survey continues to suggest a manageable decline in Pap volume of -10% over the coming 2 to 3 years. In a separate analysis of the data, we may be overestimating the total decline. It appears physicians who consider themselves compliant with the Cervical Cancer Screening Guidelines currently test a higher percentage of women on 1 year intervals than we would expect. The total decline from here, if their testing intervals are where the market stabilizes, the rate of decline from here for Pap testing approaches -5%, a much better outcome for Hologic.
LM – Legg Mason reported its June ending assets-under-management (AUM) on Friday morning with another inflow into its fixed income product suite which was offset by slight outflows in its equity funds. Being that LM has over 50% of its AUM in fixed income (versus 27% in equities and 19% in money markets), it is their bond results that matter most. With June tallies now in, which complete the company’s first quarter period (calendar second quarter), Legg’s results are quite impressive.
LM netted $2.5 billion in new fixed income flows in calendar 2Q14 alone which is more than the entire annual period of 2013, where LM netted just $1.1 billion in new bond business.
We continue to view the Legg as an underappreciated turnaround story that is still not recognized by the Street with low sell-side sentiment and also stubbornly high short interest. We think the next leg of the LM’s trajectory higher will be driven by deal making, as Legg as refinanced its long term capital and has been a successful acquirer and integrator of other asset management companies.
LO – Big news Friday … all parties that may be involved in a deal to acquire Lorillard (directly or not) acknowledged through press releases that in fact the parties are underway in discussions, yet noted that there is “no certainty that any deal will take place.” This not-so-new-news (rumors have persisted since March of this year of a deal between RAI and LO), bolted LO as high as 5%+ intraday (to $66).
We are riding out our long position in LO, which we added to Investing Ideas on 3/7/14, to a price target of $80. We expect to see RAI and LO work closely to get this deal done, and attach an 85% probability that a deal in fact gets done. Assuming Thursday’s (7/10) closing price of $63.09, we assume there’s an additional 26% upside to our target, and around 8% of downside to $58 should a deal not get done.
OC – Next Wednesday on July 16, we are hosting a special call with Bob McNally, a former General Manager of TAMKO Building Products. TAMKO is among the top four largest companies in the U.S. Asphalt Roof Shingle industry. Here are some of the key points we will cover:
- Were margins unsustainably high for the industry coming into 2Q?
- How do producers react to changing input prices & demand trends?
- What are the relative competitive advantages and cost structures of the key competitors?
- What is driving downward pressure on roofing prices? Is it inventory overhang?
Even with the drop in roofing sales we still believe it is better for OC to hold price than gain market share. Management even mentioned a stronger back-half of the year for its roofing business is still in the cards. With that said, insulation and composite margins are reverting back to their long-term averages. The uptick in the other segments’ sales can help recoup losses from the often volatile roofing segment and add overall improvement to OC’s operating profits.
Owens Corning reports earnings on Wednesday, July 23rd.
OZM – Och Ziff Capital Management had a soft week of stock performance as most of the Financial sector declined on emerging fears of renewed banking system weakness coming out of Portugal. OZM as a leading hedge fund has quite a bit of beta sensitivity (the stock is quite sensitive to broader market reactions) and thus the 4% decline during the past 5 days is not unexpected or overly worrisome to us.
The fundamental picture for OZM continues to brighten with its monthly multi-strategy performance for June, which was released last week, having being quite positive again. OZM stock sold off sharply in March and April as the firm’s core multi-strat portfolio spit off negative performance, however this trend has reversed with positive performance in May and June.
OZM continues to have the industry’s fastest organic growth rate in new client assets at 24% year-to-date supported by a U.S. pension fund market which is heavily allocating to Alternatives. With a 5% dividend yield on core management fees alone and an additional 4% yield possible on year end incentive fees, there are many ways to get paid on an investment in OZM.
RH – We will be releasing our second Black Book on Restoration Hardware next week, outlining in specifics the key issues that we think are critical to our investment thesis and the stock price at this point in the company’s growth trajectory. The reality is that some of the key factors to this story deserve greater scrutiny today than they did just $30 ago.
We’ll hit on several topics, but the key focus will be real estate. The crux of our commentary will focus on the likelihood of success in RH’s buildout of its large format Full Line Design Galleries. We’ll outline the biggest opportunities, potential risks, and whether or not the company is set up to execute on this opportunity.
Ultimately, we’re going to flesh out the real estate profile and potential store growth in the same way and using the same tools many retailers use to analyze their own store growth opportunity.
KEY TOPICS WILL INCLUDE:
- What does RH’s addressable market look like, and how will that evolve over the next five years?
- How many markets in the US can support a Full Line Design Gallery at the sales productivity standards that RH is setting for its’ new stores?
- A look at trends we’re seeing in anchor tenant space, and why we’re seeing more premium space available than most people might think.
- Category expansion, and which categories present the biggest opportunities (and potential risks) at retail.
- How much of a risk is a housing downturn to the RH story?
Look for updates on our work in the coming weeks.
TIP – It was a semi-quiet week on the domestic inflation front. The US Dollar Index was flat-to-down WoW, while the CRB Commodity Index dropped nearly -3% amid a sharp decline in crude oil and natural gas.
There were no relevant high-frequency datea releases with respect to the cyclical inflation story. Next week, however, we’ll likely see a continued acceleration in both Import Price Inflation trends (Tues) and Producer Price Inflation (Wed) trends.
With respect to the structural inflationary pressures building up across the US economy, two data points should contribute to rising fears of accelerated wage growth among investors:
- According to the Dice‐DFH Vacancy Duration Measure, the average duration of a US job opening is 25.1 days, which is up 64% since JUL 2009 and exceeds all prior peaks.
- Within the NFIB Small Business Optimism Index, the “Job Openings Hard To Fill” sub-index ticked up +2pts MoM in JUN to a net 26% of respondents in favor of the question as worded. That’s a new cycle high and the highest reading since JUN ’07.
As such, we believe investors should remain long of the iShares TIPS Bond ETF (TIP) as a way to profit from what we continue to see as a forecasting no-brainer: accelerating rates of reported inflation over the intermediate term.
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Hedgeye Semiconductors analyst Craig Berger likes Qualcomm. He explains why he thinks shares have room to run in this recent research report.
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