Takeaway: Rather than be wed to any particular macro theme, we’ll let Mr. Macro Market give us hints as to what we should do next here.
“Fleeting emotions tempt us to make decisions that are bad in the long term.”
-Chip & Dan Heath
That’s another important quote from the recent #behavioral book I finished this week – Decisive, by Chip & Dan Heath.
How do you overcome your short-term emotions in markets? Does loss aversion drive your decision making? How does mere exposure to something going against you affect your #process?
The Heath boys suggest that “our decisions are often altered by two subtle short-term emotions: 1. Exposure to what’s familiar to us; and 2. Loss aversion.” (pg 174) Both 1 and 2 sound like a market’s last price to me.
Back to the Global Macro Grind…
Real-time prices are very familiar to us. Unless you’re someone who doesn’t do #timestamps (in Independent Research terms) or have a buy-side P&L, so is loss aversion. Which brings me to the one major macro position that is currently going against me – the US Dollar.
If you pull up a 2 year chart of the US Dollar Index, you’ll note that:
- It made a long-term higher-low in Q4 of 2012 around $79 when we made the US #GrowthAccelerating call
- It made a #GrowthAccelerating cycle peak around $85 in Q3 of 2013 (Q313 GDP = +4.1%)
- As #GrowthSlowing took hold from Q413 to Q214, it retraced all of those gains back to $79 and change
If you only look at a 6-7 month (YTD) chart of the US Dollar Index:
- It dropped from $81.5 in January back down to $79.5 in May
- Then it bounced hard off that May low when Draghi devalued the EUR/USD
- And now it’s right back to where it was in January
In other words it really hasn’t done anything. That said, it could go up or down a lot from here. If it continues to track both Fed Policy and the rate of change (slope of the line) in US Growth, there’s no reason why it can’t go straight back down to $79.5.
But what if US growth continues to slow, the Fed gets incrementally dovish, and Draghi gets even more dovish? Unfortunately, God didn’t call me this morning with that answer – so I don’t know.
Rather than be wed to any particular macro theme, I’ll let Mr. Macro Market give me hints as to what I should do next. If the Fed does what consensus has been looking for all yr (continues to taper/tighten), and USD heads higher, that would be bearish for Commodities (and bullish for the US consumer). Everyone in America (other than the guys running #YieldChasing MLP schemes) should want that.
In other news that is un-related to my current macro mistake:
- Industrial Stocks (XLI) were -1.3% yesterday (-2.2% for July) and are now signaling bearish TREND @Hedgeye
- Equity Volatility (VIX) was up again yesterday to 13.28 (+19% since 1st wk of July) = bullish TREND @Hedgeye
- Both the Russell 2000 and UST 10yr Bond Yield continue to signal bearish TRADE and TREND @Hedgeye
What’s most interesting to me about the Industrials (XLI) joining the US Consumer and Housing stocks (XLY and ITB are down 2014 YTD too) is that some of them are classic early-cycle indicators.
“So,” setting aside my own personal US Dollar baggage, what if the bigger picture here is that the entire US economy is heading into an early cycle recession? Wouldn’t that be just peachy?
Don’t forget that we are 62 months into a US economic “expansion.” Both that and the SP500 not having had a 10% correction in 33 months (hasn’t happened since 1990) might just be a tad longer in the tooth than a 2-3 month US Dollar dead cat bounce.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.44-2.54%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – July 30, 2014
As we look at today's setup for the S&P 500, the range is 18 points or 0.51% downside to 1960 and 0.41% upside to 1978.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.93 from 1.92
- VIX closed at 13.28 1 day percent change of 5.73%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, July 25 (prior 2.4%)
- 8:15am: ADP Employment Change, July, est. 230k (prior 281k)
- 8:30am: GDP Annualized q/q, 2Q, est. 3% (prior -2.9%)
- Personal Consumption, 2Q, est. 1.9% (prior 1%)
- 2pm: FOMC seen maintaining overnight bank lending rate target near 0%, reducing QE by another $10b
- President Obama speaks on the economy in Kansas City
- Sec. of State John Kerry in India, joined by Commerce Sec. Penny Pritzker for 5th U.S.-India Strategic Dialogue
- 10am: Sen. Judiciary Cmte hearing on Violence Against Women Act, protecting women from gun violence
- 10am: Senate Banking subcmte hearing on flood insurance
- 10am: House Judiciary Cmte hearing on need for special counsel to investigate IRS
- 10:45am: Sens. McCaskill, D-Mo.; Heller, R-Nev.; Blumenthal, D-Conn.; Grassley, R-Iowa; Gillibrand, D-N.Y.; Ayotte, R-N.H.; Rubio, R-Fla. hold news conf. to introduce bill to combat sexual assaults on college, university campuses
- 12pm: Sen. Minority Leader McConnell, R-Ky.; and Rep. Kelly, R-Pa., hold news conf. on economic consequences of EPA’s proposed power plant rule
WHAT TO WATCH:
- EU joins U.S. in escalating pressure on Russian finance
- Putin jeopardizes Russian firms’ access to $600b in funds
- MSCI in “active dialogue” with global investors on Russia
- Fed Decision-Day Guide: QE tapering, job gains, inflation debate
- AstraZeneca to buy respiratory rights from Almirall for $875m
- SEC may revise speed rules on IEX exchange plans: Reuters
- McDonald’s Japan pulls profit forecast amid supplier scandal
- Toyota outsells VW, GM in 1H on rising demand for SUVs
- Former Time Warner CEO Parsons says Fox offer “Way Off Mark”
- Barclays returns to 2Q profit on costs, provisions
- ECB says bank credit standards eased for first time since 2007
- Argentine debt talks to resume today as default deadline looms
- Ending ‘too big to fail’ may rest on obscure contract language
- Shelling of UN shelter in Gaza kills 20 as fighting worsens
- Japan’s output drops most since 2011 as consumers spend less
- Osram to cut ~7,800 jobs worldwide
- ADT (ADT) 6am, $0.47
- AllianceBernstein (AB) 7:15am, $0.41
- American Tower (AMT) 7am, $0.53 - Preview
- Booz Allen Hamilton (BAH) 6:30am, $0.42
- Carlyle (CG) 6:30am, $0.74
- Cenovus Energy (CVE CN) 6am, C$0.50 - Preview
- CGI (GIB/A CN) 6:30am, C$0.73
- Dominion Resources (D) 7:30am, $0.62
- Energizer (ENR) 7:30am, $1.54 - Preview
- Franklin Resources (BEN) 8:30am, $0.95
- Garmin (GRMN) 7am, $0.76
- Goodyear Tire & Rubber (GT) 7:30am, $0.79
- Hess (HES) 7:30am, $1.18 - Preview
- Hospira (HSP) 7:30am, $0.57
- Humana (HUM) 6am, $2.19
- Huntsman (HUN) 7am, $0.48
- Intact Financial (IFC CN) 6am, C$1.55
- InterActiveCorp (IACI) 7:30am, $0.79
- Lorillard (LO) 7am, $0.88 - Preview
- Lumber Liquidators (LL) 7am, $0.63
- MeadWestvaco (MWV) 7:25am, $0.50
- MEG Energy (MEG CN) 5am, C$0.45
- Nice Systems (NICE) 5:30am, $0.59
- Phillips 66 (PSX) 8am, $1.69 - Preview
- Pitney Bowes (PBI) 6:30am, $0.46
- Public Service Enterprise Group (PEG) 7:30am, $0.51
- Revlon (REV) 6:30am, $0.46
- Rockwell Automation (ROK) 7am, $1.55
- Sealed Air (SEE) 7:30am, $0.38
- Sherritt Intl (S CN) 6:09am, C$(0.07) - Preview
- SodaStream Intl (SODA) 7:30am, $0.40
- Sonus Networks (SONS) 7am, $0.01
- Southern (SO) 7:30am, $0.67
- Sprint (S) 7:30am, $(0.05)
- SPX (SPW) 6:30am, $1.19
- Taser Intl (TASR) 7:30am, $0.08
- Thomson Reuters (TRI CN) 7am, $0.46
- TransAlta (TA CN) 7:45am, $0.01
- Valero Energy (VLO) 7:49am, $1.20 - Preview
- Valley National Bancorp (VLY) 7am, $0.14
- WellPoint (WLP) 6am, $2.26
- Wisconsin Energy (WEC) 7am, $0.52
- Agnico Eagle Mines (AEM CN) 5pm, $0.28 - Preview
- Akamai Technologies (AKAM) 4:01pm, $0.55
- Albemarle (ALB) 4:03pm, $1.10
- Allstate (ALL) 4:05pm, $0.66
- American Equity Investment (AEL) 4pm, $0.50
- Barrick Gold (ABX CN) Aft-Mkt, $0.15 - Preview
- BioMarin Pharmaceutical (BMRN) 4pm, $(0.43)
- Duke Realty (DRE) 4:11pm, $(0.03)
- Enbridge Energy Partners (EEP) 4:01pm, $0.24
- First Quantum Minerals (FM CN) 5pm, $0.25 - Preview
- FMC (FMC) 4:15pm, $1.02
- FNF (FNF) 4:03pm, $0.52
- Fortune Brands (FBHS) 4:01pm, $0.54
- Halcon Resources (HK) 4:15pm, $0.04
- Hartford Financial (HIG) 4:15pm, $0.67
- Hologic (HOLX) 4:01pm, $0.34
- Intersil (ISIL) 4:05pm, $0.18
- KapStone Paper (KS) 4:15pm, $0.60
- Kinross Gold (K CN) 5pm, $0.04 - Preview
- Kraft Foods (KRFT) 4pm, $0.82 - Preview
- Lam Research (LRCX) 4:05pm, $1.23
- LifeLock (LOCK) 4:05pm, $0.04
- Lincoln National (LNC) 4:10pm, $1.36
- Lundin Mining (LUN CN) 5pm, $0.06 - Preview
- Manitowoc (MTW) 4:25pm, $0.43
- MetLife (MET) 4:05pm, $1.41
- Moelis (MC) Aft-Mkt, $0.25
- Murphy Oil (MUR) 5:01pm, $1.22
- Noble (NE) 5pm, $0.66
- Penn Virginia (PVA) 4:05pm, $(0.04)
- Pilgrim’s Pride (PPC) 4:45pm, $0.66
- Questar (STR) 4:14pm, $0.22
- Rovi (ROVI) 4:05pm, $0.40
- RR Donnelley (RRD) 4pm, $0.35
- Ruckus Wireless (RKUS) 4:05pm, $0.05
- Service Intl (SCI) 4:15pm, $0.23
- ServiceNow (NOW) 4:01pm, $(0.07)
- Solazyme (SZYM) 4:25pm, $(0.39)
- Spansion (CODE) 4:03pm, $0.25
- Suncor Energy (SU CN) 10pm, C$0.98 - Preview
- Superior Energy Services (SPN) 4:05pm, $0.41
- Tesoro (TSO) 4:30pm, $1.82 - Preview
- Unum (UNM) 4pm, $0.87
- Weight Watchers Intl (WTW) 4:05pm, $0.77
- Western Digital (WDC) 4:15pm, $1.73 - Preview
- Whiting Petroleum (WLL) 4pm, $1.26
- Whole Foods Market (WFM) 4:03pm, $0.39
- Williams (WMB) 4:05pm, $0.22
- Yamana Gold (YRI CN) 4:20pm, $0.03 - Preview
- Yelp (YELP) 4pm, $(0.03) - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI’s Discount to Brent Shrinks as Russia Sanction Impact Muted
- Stolen India Coal Sent to Market in Modi’s Backyard: Commodities
- Commodity Assets Seen by Barclays Increasing to $325 Billion
- Thai Sugar Offered at Discount to New York, Green Pool Says
- Gold Holds Two-Day Decline as Investors Weigh U.S. Outlook
- Japan Buys 26,340 Mt of Feed Wheat 122,750 Mt of Feed Barley
- Soybeans in Chicago Climb as Much as 0.3%, Reversing Decline
- Haze Fines Win Indonesia’s Support With Caveats: Southeast Asia
- Rubber Drops as Japan Industrial Output Falls More Than Forecast
- HSBC, ABN Sue Metals Trader Detained in Qingdao Loan Fraud Probe
- Cocoa Arrivals in Brazil’s Bahia Advance 2.3%, Hartmann Reports
- China Rows Back on Shale Ambitions as Expertise Falls Short
- Aluminum Beating Copper as Supply-Demand Flips: Chart of the Day
- Oil Market Losing Faith in Libya’s Ability to Ramp Crude: Energy
The Hedgeye Macro Team
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.
Chart of the Day: Statistics cloud recent speculation that Vegas is benefiting from weak Macau VIP
- Contrary to a recent assertion, we found very little correlation between VIP volume in Macau and Baccarat volume in Las Vegas
- In fact, the weak correlation is actually positive which makes it unlikely that Las Vegas is benefiting from the weak Macau VIP volumes
- Weakness in Macau VIP appears to be secular to that market while Vegas continues its rebound
Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.
Q2 2014 CONSENSUS ESTIMATES
- Total revenues: $3,510 million
- Owned, Leased: $265 million
- Franchise Fees: $198 million
- Base Mgmt Fees: $177 million
- Incentive Mgmt Fees: $72 million
- Adjusted EBITDA: $396 million
- EPS: $0.67/share
- Comparable systemwide RevPAR on a constant dollar basis:
- North America, Outside North America & Worldwide +4% to +6%
- Total fee revenue: $440-$450 million
- D&A: approx. $30 million
- G&A and other: $165-$170 million
- Operating income: $300-$320 million
- Gains & other income: approx. $0 million
- Net interest expense (net of interest income): approx. $25 million
- EPS: $0.63-$0.68
- Comparable systemwide RevPAR on a constant dollar basis:
- North America: +4.5% to +6.5%
- Outside North America: +4% to +6%
- Total fee revenue: $1,665-$1,705 million
- D&A: approx. $130 million
- G&A and other: $640-$650 million
- Operating income: $1,105-$1,165 million
- Gains & other income: approx. $5 million
- Net interest expense (net of interest income): approx. $100 million
- EPS: $2.39-$2.53
- Tax Rate: 32%
QUESTIONS FOR MANAGEMENT
- Views on share repurchases given stock strong performance?
- Where are inflation pressures negatively impacting margins?
- Gaylord: update on booking trends, acceptance into the MAR group bookings channel; performance relative to expectations and how many Gaylord assets can the US support?
- Update on the Protea acquisition, integration, cost saves and profit contribution?
- Discuss the roll-out of AC Hotels in the US - are you having to offer key money or incentives to franchisees? How is MAR using income guarantees to promote adoption of the brand? Last quarter 28 were approved and 40 were in discussion.
- Discuss the global roll-out of Moxy - why would a developer opt for Moxy over Marriott or Courtyard? Had 12 in pipeline with first hotel expected to open later this year.
RECENT MANAGEMENT COMMENTARY
- April 1, 2014, completed the acquisition of Protea Hospitality Group covering 116 hotels and 10,148 rooms in seven African countries.
- The company paid approximately $200 million at roughly 10 times anticipated pro forma 2014 calendar year EBITDA
- Marriott now manages approximately 45% of Protea's rooms, franchises approximately 39%, and leases approximately 16%.
- Protea's pipeline is more than 65 hotels and 14,300 rooms, including more than 20 hotels and 3,000 rooms in Sub-Saharan Africa
- Protea Hospitality Group created an independent property ownership company that retained ownership of the hotels PHG formerly owned, and entered into long-term management and lease agreements with Marriott for those hotels.
- The property ownership company also retained a number of minority interests in other Protea hotels.
- Given strong transient and group demand, intentionally reducing government occupancy in many markets.
- The way transient and group grow in an economic recovery, group doesn't really, on a sustained basis, outperform transient until transient begins to weaken.
- Sees strength in corporate and leisure transient businesses.
- Very strong transient trends and improved group bookings have increased MAR's RevPAR growth outlook modestly in 2014.
- Hopeful transient business continue to grow faster than group.
- Courtyard benefited from the strong transient demand.
- Second quarter group booking pace in North America for the Marriott brand is modestly higher year-over-year, despite the timing of Easter, and see strength in corporate and leisure transient business.
- Group always takes a bit longer to come back than transient business
- Group business is building - three months ago, MAR's 2014 North American group booking pace for the Marriott brand was up just over 4%. Today, it's over 5%.
- Corporate group pace is even stronger.
- While we haven't seen an upturn in U.S. government business, government demand seems to be stabilizing and comparison should get easier as the year progresses.
- Government group business, the comparisons get dramatically easier in the second half of the year compared to the first. So, government business stayed and paid in the second half of 2014 compared to the second half of 2013 could be up meaningfully, maybe 10% or some number like that wouldn't be surprising.
- Expect low single-digit growth in RevPAR in both Europe and the Middle East and Africa regions, held back by disruption in Russia, continued weak demand in France and ongoing weakness in Egypt.
Caribbean/ Latin America
- Anticipate RevPAR will increase at a double-digit rate in the second quarter in the Caribbean and Latin America, as we benefit from strong demand in Mexico, the Caribbean and Brazil.
- RevPAR should grow at a mid single-digit rate, reflecting strong results in most markets
- Flattish in 2014
- Approx $1.25 billion to $1.5 billion could be returned to shareholders through share repurchases and dividends and expect to continue to repurchase shares in 2014.
- Investment spending in 2014 will total approximately $800 million to $1.0 billion, including approximately $150 million for maintenance capital spending
- New mezzanine financing and mortgage notes, contract acquisition costs (including the approximately $200 million payment associated with the Protea transaction)
- At quarter end, worldwide pipeline stood at over 200,000 rooms with nearly 40% already under construction.
- In the U.S., across all our brands, have a 10% share of existing rooms, but nearly a 25% share of industry rooms under construction.
- Overall development pipeline still favors smaller markets.
- Anticipates gross room additions of 6% worldwide for the full year 2014 including the Protea hotels.
- Net of deletions, the company expects its portfolio of rooms will increase by approximately 5% by year-end 2014
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