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LEISURE LETTER (07/21/2014)

Tickers: PENN, GLPI, WYNN, DRH

EVENTS

  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am) ; pw: Wyndham
    • PNK 2Q call (9am) ; pw: 27759616
    • LHO 2Q call (930am)
    • RCL 2Q call (10am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am) ; pw: 61542222
    • AWAY 2Q call (4pm)
    • LA June revs released
  • July 25: PEB 2Q call (9am)
  • July 29: 
    • IGT 2Q release
    • GLPI 2Q call (10am)
  • July 30: 
    • MGAM 2Q earnings
    • MAR 2Q call (10 am) : , pw: 59383825

COMPANY NEWS

PENN & GLPI – The Iowa Supreme Court granted a motion for an emergency stay on the Argosy Casino's closure in Sioux City, Iowa and Argosy Sioux City, which was slated to close July 21, will be open until the Iowa Supreme Court sets a hearing date. The IRGC has until today to file resistance to the supreme court's stay.

Takeaway: Again, good news for PENN but don't they still need to show this in discontinued operations?

 

CWN:AX – Australia’s Crown Resorts Ltd is teaming up with a subsidiary of Chinese property developer Greenland Holding Group Co Ltd to bid for a casino resort in Brisbane. If their bid is successful, Crown will manage the integrated resort and will have an ownership interest in that part of the precinct. 

Takeaway: Packard continues to play his hot hand.

 

SINO:PM – the company is progressing with the reorganization and name change to Premium Leisure Corporation.  Following the reorganization of the gaming assets in Sinophil, which will be entitled to half of the earnings from gaming operations at City of Dreams Manila, Belle will own close to 90% of the future gaming arm.  According to media reports, Belle Corp is expected to increase the public float of Sinophil/Premium Leisure Corporation ahead of the opening of City of Dream Manila phase one. 

Takeaway: Belle Corp looking to capitalize on the media attention and investor interest in City of Dreams Manila. 

  

MNTG – MTR Gaming Group, Inc. announced that, at its special meeting of stockholders, a majority of the outstanding shares of MTR’s common stock voted to approve the merger agreement with Eldorado HoldCo LLC.

Takeaway: The final step in the delayed merger. 

 

WYNN (Boston Globe) Wynn Resorts has offered the City of Boston $5 million for road improvements, $1 million upfront and $2.6 million annually, along with hiring preferences for city residents, as compensation to offset the possible effects of a planned hotel and gambling resort on the Mystic River waterfront in Everett.  The offer is the richest deal Wynn offered to any community around the company’s planned resort, but far less than the $18 million annual payment promised to Boston by a rival applicant, Mohegan Sun, which is proposing a Revere casino. Wynn has won arbitration hearings with Chelsea and Somerville, settling compensation packages worth about $650,000 annually with each community as each city had asked for more. Boston Mayor Martin J. Walsh last week announced that his administration would not participate in the arbitration, leaving the Massachusetts Gaming Commission in charge of setting the city’s compensation package

Takeaway: Boston is the city that initially didn't want a casino, but then fought to block casinos in neighboring towns, only to receive a surrounding city offer, but then walked away.  Boston Mayor Walsh seemingly can't make up his mind...or is he simply playing the role of gadfly.


Insider Transactions:

DRH - CEO Mark W. Brugger sold 40,000 shares of the stock on Wednesday, July 16th via a 10b5-1 transaction, at an average price of $13.05, and now owns 864,213 shares.

Takeaway: More insider selling in lodging

INDUSTRY NEWS 

World Cup Betting (SCMP) Police in Hong Kong and the neighbouring province of Guangdong in China seized $750 million ($96.7 million) in illegal World Cup bets, more than double the amount estimated to have been gambled on the previous tournament. Hong Kong police broke up 97 operations after raiding some 140 locations including bars and residential flats. A separate report recently cited Chinese authorities as saying that illegal gambling during the World Cup on the mainland was thought to have been a much as $3.9 billion

Takeaway: $3.9 billion, that's HKD 30.225bn or roughly one month of Macau GGR!

 

Japan Gaming Legislation (Kyodo News) The Japanese government plans to set up a new body that could help speed up the process of opening the first casino resorts in Japan in time for the Tokyo Olympics in 2020. Officials from various government agencies will come together to work on the matter, Chief Cabinet Secretary Yoshihide Suga told reporters on a conference. According to a Japanese legislative memo, lawmakers give the clearest indication yet that they are interested in foreign casinos operators participating in integrated resorts.

The note mentions a “need to work with appropriate operators as well as the domestic industry”.  The note also shows that an entry levy could be imposed on foreigners as well as locals were casinos to be legalized in Japan.

Takeaway: "Integrated resorts are widely viewed as a main feature of my growth strategy,” said Mr Abe when he visited Singapore’s casinos during an official visit to the Lion City in May.


Bermuda Gaming Expansion – Bermuda legislators have completed a draft of a bill that would regulate casino gaming in the territory, said Shawn Crockwell, Bermuda’s tourism minister. The legislation will be presented before the end of 2014, said Crockwell. 

 

Cruise Lines Philippines Expansion – Carnival Corp., Royal Caribbean International and Norwegian Cruise Lines have expressed interest to help develop the Philippines as a cruise-ship destination, according to the Philippine Embassy in Washington, D.C. 

Takeaway:  Another Asian destination in focus. 

 

Macau International Airport Traffic – Macau International Airport Co Ltd released 1H 14 statics which included a 10.7% increase in passenger traffic to over 2.61 million passengers and the handling of 1,206 aircraft private jet movements, an increase of nearly 30% over the same period last year.  The rise in passenger volume was registered when two new routes, launched between here and Dalian in mainland China and between here and Siem Reap in Cambodia.

Takeaway: Decent passenger growth

MACRO 

Pearl River Delta Manufacturing – (SCMP) According to the Chinese Manufacturers’ Association of Hong Kong, 29.6% of Hong Kong manufacturers are likely to scale back their investment in the next three years, an increase of 2.7% over last year. The survey also shows that 32% of Hong Kong manufacturers with factories in the area were planning to move their factories to other areas with lower labor costs, namely Southeast Asia and remoter parts of Guangdong or other provinces in mainland China. The increase in labor costs is the main reason these Hong Kong based companies are retreating from the area. According to the Association Hairman Irons Sze, labor cost in the area have increased 10% to 15% every year.

Takeaway: A potential headwind for Macau mass gaming if manufacturing jobs move elsewhere. 

 

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.


Just Charts – Kicking Off Earnings Season

INVESTMENT IDEAS

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts – Kicking Off Earnings Season - 1

EVENTS THIS WEEK

7/21/14 CPB Investor Day 12:30pm EST

7/22/14 MO Earnings Call 9am EST

7/22/14 MJN Earnings Call 9am EST

7/22/14 KO Earnings Call 9:30am EST

7/22/14 KMB Earnings Call 10am EST

7/23/14 PEP Earnings Call 8am EST

7/23/14 TUP Earnings Call 8:30am EST

7/24/14 JAH Earnings Call 8:30am EST

7/24/14 HSY Earnings Call 8:30am EST

7/24/14 CCE Earnings Call 10am EST

7/24/14 DPS Earnings Call 11am EST

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples fell -0.1% week-over-week versus the broader market (S&P500) up +0.5 %.  XLP is up 5.2% year-to-date versus the SPX at 7.0%.

 

Positive Divergence:  EL 2.1%; SMG 1.3%; KO 1.1%; CCE 0.9%; DF 0.9%

Negative Divergence:  NUS -10.6%; BNNY -6.6%; LO -6.6%; HLF -5.7%; RAI -5.0%

RECENT NOTES 

 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Kicking Off Earnings Season - 2

 

The Hedgeye U.S. Consumption Model shows 7 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Kicking Off Earnings Season - 3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.6x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 37.5 versus 37.6 in the prior week

Just Charts – Kicking Off Earnings Season - 4

Just Charts – Kicking Off Earnings Season - 5

Just Charts – Kicking Off Earnings Season - 6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD - bullish TREND w/ 109.97 support

Just Charts – Kicking Off Earnings Season - 7

 

DEO – bearish TREND w/ resistance = 126.49

Just Charts – Kicking Off Earnings Season - 8

 

KO – bullish TREND support = 40.92

Just Charts – Kicking Off Earnings Season - 9

 

PEP – bullish TREND support = 86.88

Just Charts – Kicking Off Earnings Season - 10

 

GIS – bullish TREND support = 52.39

Just Charts – Kicking Off Earnings Season - 11

 

MDLZ – bullish TREND support = 36.52

Just Charts – Kicking Off Earnings Season - 12

 

KMB – bullish TREND support = 110.41

Just Charts – Kicking Off Earnings Season - 13

 

PG – bullish TREND support = 79.71

Just Charts – Kicking Off Earnings Season - 14

 

MO – bullish TREND support = 40.52

Just Charts – Kicking Off Earnings Season - 15

 

PM – bullish TREND support = 84.15

Just Charts – Kicking Off Earnings Season - 16

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND

Takeaway: Domestic indicators reflect growing risk aversion. High yield is blowing out while cash seeks safety (Treasuries).

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 19

 

Key Callouts:

In spite of the mounting tensions abroad, the risk parameters that are showing the most strain are domestic. For instance, high yield rates soared last week, rising 27 bps. Meanwhile, the 2-10 yield spread continues to compress, shaving another 6 bps to end the week at 200 bps. The only relief comes from falling commodity prices as the CRB was down 1.3% last week and is now down 4.6% on the month. Meanwhile, internationally, Sberbank widened by 35 bps to 265 bps as the condemnation of Russia grows.

 

* High Yield – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 15

 

1. U.S. Financial CDS -  Swaps were fairly uneventful in the US with a median change of 0 bps. Large banks tightened by an average 4 bps as concerns around EU contagion receded while bank earnings came in modestly better than expected. Overall, swaps widened for 14 out of 27 domestic financial institutions.

 

Tightened the most WoW: AGO, MBI, MS

Widened the most WoW: ALL, ACE, AON

Widened the least/ tightened the most WoW: TRV, CB, SLM

Widened the most MoM: MBI, AGO, WFC

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 1

 

2. European Financial CDS - Swaps across Europe were narrowly changed with one exception: Russia's Sberbank, which widened +35 bps to 265 bps. 

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 2

 

3. Asian Financial CDS - Bank swaps across Asia were modestly higher last week, rising by an average 3 bps. India saw a slightly larger increase at +8 bps.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 17

 

4. Sovereign CDS – Sovereign swaps were little changed last week as the largest move came from Italy at +3 bps, while the average move was 0 bps. 

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 18

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 3

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1883.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 6

 

7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 21.9 bps this week versus last week’s print of 21.56 bps.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 13 bps.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 3.25% versus last week’s print of 3.29%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 10

 

11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3144 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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.

MONDAY MASHUP: EARNINGS KICKOFF

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

MONDAY MASHUP: EARNINGS KICKOFF - 11

 

Recent Notes

07/14/14 MONDAY MASHUP: YUM ON DECK

07/15/14 YUM: THOUGHTS INTO THE PRINT

07/17/14 YUM: EARNINGS RECAP

07/18/14 CMG: THOUGHTS INTO THE PRINT

07/18/14 DRI: PERPETUALLY MISGUIDED (FOR 46 MORE DAYS)

 

Events This Week

Monday, July 21st

  • CMG earnings call 4:30pm EST

Tuesday, July 22nd

  • DFRG earnings call 8:30am EST
  • DPZ earnings call 10:00am EST
  • MCD earnings call 11:00am EST

Wednesday, July 23rd

  • CAKE earnings call 5:00pm EST

Thursday, July 24th

  • DNKN earnings call 8:00am EST
  • BJRI earnings call 5:00pm EST
  • SBUX earnings call 5:00pm EST

Friday, July 25th

  • No events

 

Chart of the Day

MONDAY MASHUP: EARNINGS KICKOFF - chart2

 

Recent News Flow

Monday, July 14th

  • EAT Brinker was upgraded to overweight at JP Morgan with a $52 PT.
  • RRGB announced it is two weeks away from opening its newest restaurant on Long Island.

Tuesday, July 15th

  • MCD Janney released a report noting the growing long-term threat McDonald's is facing from privately owned Chick-fil-A.
  • RRGB completed an acquisition of 32 franchised restaurants in the U.S. and Canada for approximately $40 million in cash.
  • DRI Starboard delivered a letter to the Board of Darden, calling for new leadership and a series of operational improvements.

Wednesday, July 16th

  • BOBE delivered a letter to stockholders stating their case for the Board's director nominees at the annual meeting on August 20th, 2014.

Thursday, July 17th

  • CAKE The Cheesecake Factory announced that its licensee, S.A.B. de C.V., opened its first restaurant in Mexico (Guadalajara, Jalisco).
  • TAST Carrols Restaurant announced its agreement to acquire 21 Burger King restaurants from Kessler Group, Inc.
  • MCD announced a quarterly cash dividend of $0.81 payable on September 16, 2014 to shareholders of record on September 2, 2014.

Friday, July 18th

  • No news

 

Sector Performance

The XLY (+0.2) underperformed the SPX (+0.5%).  Both casual dining (-1.6%) and quick service (-0.7%) stocks, in aggregate, undperformed the XLY Index.

MONDAY MASHUP: EARNINGS KICKOFF - chart3

MONDAY MASHUP: EARNINGS KICKOFF - 44

 

Consumption

The Hedgeye U.S. Consumption Model is signaling bullish, with 7 out of 12 metrics flashing green.

MONDAY MASHUP: EARNINGS KICKOFF - 3

 

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

MONDAY MASHUP: EARNINGS KICKOFF - chart6

 

Casual Dining Restaurants

MONDAY MASHUP: EARNINGS KICKOFF - chart7

MONDAY MASHUP: EARNINGS KICKOFF - chart8

 

Quick Service Restaurants

MONDAY MASHUP: EARNINGS KICKOFF - chart9

MONDAY MASHUP: EARNINGS KICKOFF - chart10

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


HOPE FADES

Client Talking Points

EUROPE

Bounced to lower-highs late last week, but all of the majors failed @Hedgeye TREND resistance. DAX is down  -0.9% this morning and its TREND line = 9759; Italy’s MIB Index down -1.1% (TREND resistance = 21192).

GOLD

After correcting to higher-lows last week = +0.3% this morning to $1314 with no resistance to $1324, then $1345 – the best way to play our inflation slowing U.S. growth theme in Q3 is long Gold, TIP, and the long bond.

UST 10YR

UST 10YR yield ticks down to 2.47% this morning as our model signals a series of lower-highs. The Yield Spread (10yr – 2yr) is dipping below 200bps for the first time in 2014 today, new lows (another #Q3Slowing signal for USA).

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 24% 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

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.

Three for the Road

TWEET OF THE DAY

INDIA: our favorite equity market in the East = +23% YTD

@KeithMcCullough

QUOTE OF THE DAY

Gratitude is the sign of noble souls.

-Aesop

STAT OF THE DAY

Despite dropping -0.1% last week, Food Prices (CRB Food Index) are still up +19.1% YTD.


Moments of Discontinuity

This note was originally published at 8am on July 07, 2014 for Hedgeye subscribers.

“Each circle of time has a great moment of discontinuity.”

-The Fourth Turning

 

No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.

 

In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.

 

Moments of Discontinuity - clock2

 

After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.

 

Back to the Global Macro Grind

 

On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.

 

With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:

 

1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)

2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance

3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)

 

Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.

 

But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.

 

If I’m wrong, well, consensus is going to be really right.

 

Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:

 

1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)

2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)

3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)

 

This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).

 

To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.

 

In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.

 

“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”

-William Strauss and Neil Howe (The Fourth Turning)

 

And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.50-2.67%

SPX 1946-1989

VIX 10.11-11.54

USD 79.73-80.35

Pound 1.69-1.71

Brent Oil 110.03-112.99

Gold 1310-1330

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moments of Discontinuity - Chart of the Day


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