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WATCH AND WAIT

Client Talking Points

VOLUME

We had a lot of questions on U.S. equity volume yesterday (there was none) – versus the 1 and 3 month average Total Equity Market Volume, it was down -16% and -19%, respectively – volume comes back on the down days, not the up ones #asymmetry.

UST 10YR

2.46% puts the UST 10yr at fresh new lows for Q3 and that fits the complexion of our U.S. economic slowing call much more so than no-volume U.S. equity market squeezes; regional bank stocks (KRE) saw this in yield spread compression yesterday #weak.

ITALY

We learn a lot more from bounces within bearish TRENDs than the selloffs; Italy’s MIB Index was the 1st major European Equity market to fail at 21,138 TREND resistance this morning and go red #watching.

Asset Allocation

CASH 26% US EQUITIES 4%
INTL EQUITIES 12% COMMODITIES 18%
FIXED INCOME 24% INTL CURRENCIES 16%

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

2 downgrades on $MCD today... #Fascinating

@HedgeyeHWP

QUOTE OF THE DAY

If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time. 

-Chinese Proverb

STAT OF THE DAY

49.3%, is the amount Lean Hogs are up year-to-date, up +2% yesterday.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 23, 2014


As we look at today's setup for the S&P 500, the range is 23 points or 1.09% downside to 1962 and 0.07% 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: 1.99 from 1.99
  • VIX closed at 12.24 1 day percent change of -4.45%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 18 (prior -3.6%)
  • 10:30am: DOE Energy Inventories

 

GOVERNMENT:

    • 8:45am: FDIC Advisory Cmte on Community Banking meets
    • 9am: Treasury Sec. Lew speaks on multilateral develp. banks
    • 9am: Bipartisan Policy Center forum on energy, Tom Fanning, CEO of the Southern Co. (11am keynote), Energy Sec. Ernest Moniz, Bank of America Chairman Chad Holliday among speakers
    • 9:30am: Senate Environment Cmte hearing on EPA proposed carbon pollution standards for existing power plants
    • 10am SEC meeting on potential money market fund rule change
    • 10am: State Dept.’s Brett McGurk at House Foreign Affairs Cmte on Iraq terrorism response
    • 10am: House Homeland Security Cmte holds hearing on unfulfilled recommendations after Sept. 11 attacks
    • U.S. ELECTION WRAP: Kingston Versus Perdue; Obamacare Ruling
    • Perdue wins Georgia U.S. Senate Republican runoff to face Nunn

 

WHAT TO WATCH:

  • Rebel stronghold holds breath as shellfire escalates in Donetsk
  • Daimler 2Q earnings rise 12% on S-Class Sedan
  • EU said to weigh extra Google concessions in antitrust probe
  • Apple hints new products near with bigger iPhones looming
  • Japan blocks imports from supplier as China meat scare spreads
  • LinkedIn to buy Bizo for $175m to expand marketing tools
  • Money-market funds getting new regime aimed at preventing runs
  • Deutsche Bank drops on report N.Y. Fed faulted oversight
  • Calstrs asked Pepsi to give Nelson Peltz seat on board: FT

 

AM EARNS:

    • Air Products & Chemicals (APD) 6am, $1.45
    • Amphenol (APH) 8am, $1.05
    • Biogen Idec (BIIB) 7am, $2.83
    • Boeing (BA) 7:30am, $1.98 - Preview
    • Delta Air Lines (DAL) 7:30am, $1.03 - Preview
    • Dow Chemical (DOW) 7am, $0.72
    • EMC (EMC) 6:52am, $0.43 - Preview
    • Freeport-McMoRan (FCX) 8am, $0.52 - Preview
    • General Dynamics (GD) 7am, $1.77
    • Hercules Offshore (HERO) 7am, $0.01 - Preview
    • Janus Capital Group (JNS) 7am, $0.18
    • New York Community Bancorp (NYCB) 8am, $0.26
    • Norfolk Southern (NSC) 8am, $1.74 - Preview
    • Northrop Grumman (NOC) 7am, $2.22 - Preview
    • Owens Corning (OC) 7:28am, $0.44
    • PepsiCo (PEP) 7am, $1.23 - Preview
    • Praxair (PX) 6:02am, $1.59
    • Ryder System (R) 7:55am, $1.39
    • SEI Investments Co (SEIC) 8:30am, $0.42
    • Simon Property Group (SPG) 7am, $0.94 - Preview
    • TE Connectivity (TEL) 6am, $0.99
    • Thermo Fisher Scientific (TMO) 6am, $1.62
    • Tupperware Brands (TUP) 7am, $1.47
    • Whirlpool (WHR) 6am, $2.91

 

PM EARNS:

    • Allison Transmission Holdings (ALSN) 4:05pm, $0.32
    • Angie’s List (ANGI) 4:01pm, ($0.24)
    • Assurant (AIZ) 4:05pm, $1.54
    • AT&T (T) 4:01pm, $0.63 - Preview
    • AvalonBay Communities (AVB) 4:11pm, $0.86
    • Brandywine Realty Trust (BDN) 4:15pm, ($0.01)
    • CA (CA) 4:05pm, $0.60
    • Cheesecake Factory (CAKE) 4:15pm, $0.61
    • Cirrus Logic (CRUS) 4pm, $0.30
    • Citrix Systems (CTXS) 4:05pm, $0.61
    • Core Laboratories NV (CLB) 4:05pm, $1.34
    • CoreLogic (CLGX) 4:10pm, $0.37
    • Crown Castle International Cor (CCI) 4:02pm, $0.15
    • E*TRADE Financial (ETFC) 4:05pm, $0.23
    • Equifax (EFX) 4:15pm, $0.94
    • Everest Re Group (RE) 4:05pm, $5.89
    • F5 Networks (FFIV) 4:05pm, $1.35
    • Facebook (FB) 4:01pm, $0.32 - Preview
    • Fortinet (FTNT) 4:15pm, $0.10
    • Gilead Sciences (GILD) 4:02pm, $1.79 - Preview
    • Graco (GGG) 4:10pm, $1.01
    • Illumina (ILMN) 4:05pm, $0.50
    • Macerich (MAC) 4:30pm, $0.12
    • Polycom (PLCM) 4:05pm, $0.18
    • QUALCOMM (QCOM) 4:01pm, $1.21
    • Raymond James Financial (RJF) 4:16pm, $0.76
    • SLM (SLM) 4:15pm, $0.09
    • Susquehanna Bancshares (SUSQ) 4:30pm, $0.20
    • TAL International Group (TAL) 5:01pm, $0.96
    • Teradyne (TER) 5:01pm, $0.40
    • Torchmark (TMK) 4pm, $1.03
    • Tractor Supply Co (TSCO) 4:01pm, $0.95
    • TripAdvisor (TRIP) 4:02pm, $0.61
    • TriQuint Semiconductor (TQNT) 4:02pm, $0.07
    • Umpqua Holdings (UMPQ) 4:05pm, $0.24
    • Varian Medical Systems (VAR) 4:05pm, $1.09
    • Weatherford International PLC (WFT) 4:40pm, $0.21

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China’s Gold Demand Drops in First Half as Bars Outweigh Jewelry
  • Rice Harvest in Thailand Seen Dropping on Drought, Subsidy Lapse
  • U.S. Steel Invoking Carnegie Legacy in Revival Plan: Commodities
  • Port Hedland Tug Deckhands Approve Strike Action for Second Time
  • Arctic Ice Melt Seen Freeing Way for South Korea Oil Hub: Energy
  • Aluminum Declines From 16-Month High as Rally Seen Excessive
  • Steel Rebar in Shanghai Falls to 1-Month Low as Demand Weakens
  • Palm Oil Drops to 11-Month Low on Rising Global Oilseed Supplies
  • Gold Holds Above Three-Day Low as Ukraine Weighed Against U.S.
  • Latvia, Slovakia Said to Back Early Carbon Permit Supply Curbs
  • Corn Lingers Near Four-Year Low as Wheat Slips on Global Supply
  • CNPC 2014 Oil-Product Trade With Venezuela to Reach 790,000 B/D
  • BHP Iron-Ore Output Rises 19% on Australia Growth Projects
  • Nickel Deficit Narrowing on China Pig Iron Output, Sumitomo Says

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHART OF THE DAY: $HLF Shorts Aren't the Only Ones Crying

CHART OF THE DAY: $HLF Shorts Aren't the Only Ones Crying - Chart of the Day

As you can see in our Chart of The Day, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).



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Fortunes Fall Short

“To go too far is as bad as to fall short.”

-Callie’s fortune cookie

 

Last night was a beauty at the McCullough dinner table. My newbie was chirping up a storm with pablum all over her face and my two older kids had a few of the best back-to-back fortune cookies ever.

 

Jack’s fortune reminded me of a critical risk management lesson: “there is nothing permanent, except change.” So I told him that that’s what my man Bill Ackman was probably thinking at his dinner table last night too.

 

Picking on the slide-deck guru is just fun and games. So please don’t take offense to my entertaining you with this topic this morning. It’s trending more than Putin/Obama. Fully loaded with the +25% short squeeze in HLF yesterday, I think the guy actually cried (sort of).

 

Fortunes Fall Short - 90

 

Back to the Global Macro Grind

 

There’s no crying in the asset management business. If you are going to well-up in public, I don’t care how much you are “worth” - I am going to give you a time-spanking and an Early Look time-out.

 

In other US stock market news yesterday…

 

  1. The Russell 2000 bounced on no-volume to lower-bubble-highs yesterday (1175 TREND resistance)
  2. Total US Equity Market Volume was -16% and -29% vs. its 1 and 3 month averages, respectively
  3. Front-month stock market fear (VIX) sold off to a higher low of 12.24, holding 11.94 TREND support

 

In other words, “rallies” continue to ramp to lower-highs on lower and lower volumes (not good) as volatility continues to make a series of higher-lows from the VIX’s most asymmetric point (10). All the while, the long bond rallied intraday yesterday and the 10yr yield is hitting fresh Q314 lows of 2.46% this morning.

 

With the Russell (IWM) still down YTD (not a good return), we’re going to keep you focused on where the real bull markets are in 2014:

 

  1. Treasuries
  2. Commodities
  3. Emerging Markets

 

The Treasuries one is easy to understand, provided that you understand that they (the Old Wall) still do not understand the link between inflation and both real wages and consumption growth.

 

As you can see in our Chart of The Day today, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).

 

Now, to be fair, someone who A) hasn’t been long of inflation in 2014 and/or B) believes anything the Fed tells them about inflation will tell you that (if you back out shelter – i.e. rent, which is hitting all-time highs, and represents 30% of cost of living for the average American consumer) “2% inflation feels about right.” #Goldilocks

 

There were a bunch of 16th century dudes hanging out in officialdom who told Copernicus that Earth was the center of the universe too. But that doesn’t change that nothing is permanent, except change. As time and price changes, real-time risk managers do.

 

It wasn’t just Chipotle (CMG) taking price above the “goldilocks 2%” inflation rate yesterday:

 

  1. Hog prices ripped another +2% to +49.3% YTD
  2. Cattle prices popped another +2% to +15.9% YTD
  3. Aluminum prices continued another +1.9% higher to +14.5% YTD

 

But, those poor CNBC producers naval gazing at Billy probably missed that. Must resuscitate ratings from hitting new lows! I have slide decks too, but I certainly don’t have all the answers to the market universe; Mr. Macro Market does.

 

And I think that’s one of the main lessons of the last half decade – whether you are a central-planning goddess, hedge fund legend, or just plain wicked smaht… you can try to tell markets, prices, and economies what to do; but they don’t have to listen.

 

You can try to gussy up the idea as your “best ever.” You can tell all your “smart” friends what you are going to do before you try to do it too. But, eventually, you’re going to jump the shark, go too far, and fall short.

 

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

 

UST 10yr Yield 2.44-2.53% (bearish = bullish bonds)

SPX 1 (bullish)

RUT 1133-1164 (bearish)

Italy MIB Index 20157-21138 (bearish)

VIX 11.94-14.26 (bullish)

USD 80.29-80.93 (bearish)

EUR/USD  1.34-1.36 (neutral)

Pound 1.70-1.72 (bullish)

WTI Oil 100.15-104.03 (bullish)

Natural Gas 3.73-4.01 (bearish)

Gold 1 (bullish)

Copper 3.17-3.23 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fortunes Fall Short - Chart of the Day


July 23, 2014

July 23, 2014 - 1

 

BULLISH TRENDS

July 23, 2014 - Slide2

July 23, 2014 - Slide3

July 23, 2014 - Slide4

July 23, 2014 - Slide5

July 23, 2014 - Slide6

July 23, 2014 - Slide7

 

BEARISH TRENDS

July 23, 2014 - Slide8

July 23, 2014 - Slide9

July 23, 2014 - Slide10

July 23, 2014 - Slide11
July 23, 2014 - Slide12


PENN: THE BENEFICIARY OF LOW EXPECTATIONS

The Q2 bar was set low and should be easily cleared.  Encouragingly, July is showing a pick up so expect higher than consensus Q3 guidance and commentary.


 

THE CALL TO ACTION

PENN reports Q2 earnings on Thursday and we project a beat.  Moreover, management guidance – while always tempered – should be better than Q3 consensus.  Our read into July is that YoY growth in regional gaming has improved considerably from the 1H 2014.  In fact, while we’re still anticipating a YoY same store decline in regional gaming revenues (see chart below), the drop could be the smallest since October/November.  Certainly not the most powerful long term thesis but on the margin, for a stock suffering from the “soft bigotry of low expectations”, a beat and raise could spark a nice move higher.

 

THE ESTIMATES

We’re projecting Q2 EBITDA and EPS of $82 million and $0.10 versus the Street at $77 million and $0.08, respectively.  For Q3, our estimates are $68 million and $0.07 – again above the Street at $60 million and $0.03.

 

THE SETUP

In our note on May 14, 2014 titled "Regional Gaming: Trend Friend" we highlighted:

  • Q2 is shaping up nicely relative to reduced guidance as we were hearing May was showing improvement from April.
  • Insiders at both PENN and PNK have bought stock in the last week – obviously, a positive signal.  BYD management, did you hear that?

Then, on June 3, 2014, in our note "Regional Gaming Catalysts, Positive?" we focused on:

  • Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops
  • As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.

Since then, June monthly results were down versus May and lower than our projections.  Reworking the models has us less enthusiastic regarding BYD and PNK Q2 earnings but not for PENN. 

 

Looking ahead to July, our model is projecting only a 2% YoY decline in same store sales for the mature regional gaming markets versus the 7% drop generated in June.  Morever, our advance read into Missouri and Pennsylvania suggests our estimate could be too low.  We believe both of those markets are markedly in the black on a YoY basis relative to our expectations of another monthly decline.  Could the regionals post their first monthly increase in SSS since November 2012?  Now that would be a catalyst. 

 

PENN: THE BENEFICIARY OF LOW EXPECTATIONS - ff

 

THE CONCLUSION

While always sober, management could be a little more positive with their forward commentary on the conference call tomorrow.  We’re already expecting a beat and higher than consensus Q3 guidance.  Indeed, anecdotal evidence more than supports our sequential improvement thesis.  Yes, the environment remains challenged and the demographic headwinds stiff, but with a high beta stock such as PENN and low expectations, pivots like this should have an outsized impact.


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