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The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

In Part 2 of Real Conversations with Larry Kudlow, the CNBC senior contributor squares off with Hedgeye CEO Keith McCullough on inflation and whether market signals like gold and TIPs are forecasting higher prices.

 

In this excerpt from our Q3 Macro Themes call on July 11, Keith discusses #VolatilityAsymmetry. $VIX is up 50% since it was named a Q3 Macro Theme.

CARTOON

GDP Reality Check

The Best of This Week From Hedgeye - GDP cartoon 07.30.2014

US GDP for the first half of 2014 is 0.87% annualized (Old Wall was looking for +3-4%) and is slowing again sequentially in Q3.

CHART

GDP Newsflash: It's Q3

The Best of This Week From Hedgeye - Chart of the Day normal

To be fair to the 2014 US Growth Bulls who are looking for +3-4% GDP and a 10yr Yield > 3%, with a Q2 +4% bounce off of one of the worst Q1s since WWII on an annualized basis, 1st half of the year GDP in the US wasn’t negative. It was +0.87%. 

POLL

On Wednesday we asked if you were bullish or bearish on Chinese equities. As of 4pm on Friday 8/1, 69% of participants are BULLISH. In the video below, Senior Macro Analyst Darius Dale outlines Hedgeye's own bullish thesis. 

 

 

 

Cast your vote below.

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: BOBE, GLD, HCA, HOLX, LM, OC, OZM, RH, and TIP

Below are Hedgeye analysts' latest updates on our nine current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.

 

We also feature three recent institutional research notes which offer valuable insight into the markets and economy.

Investing Ideas Newsletter     - levs

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

Investing Ideas Newsletter     - 3  yield Godot 07.27.2014

IDEAS UPDATES

BOBE – Bob Evans and activist Sandell Asset Management are continuing to trade blows back and forth, both releasing investor presentations detailing their respective side of the case.  In our opinion, it's simply no contest.  Sandell has proposed a much more coherent and compelling plan for value creation than Bob Evans has. 

 

After years of woeful underperformance, we’re confident frustrated shareholders are ready for significant change.  That fact is, the future of the company largely lies in their hands.  We’ll find out which way they decide to go on August 20th when BOBE holds its Annual General Meeting. We’re willing to bet Sandell gets control of the board. More to be revealed.

 

GLD –  The GDP print this week was taken as a positive by the market and warranted a more hawkish tone from Yellen. In particular, she used more positive language around an uptick in fixed investment, inflation moving closer to the Fed’s target, and positive indicators from the labor market. As expected, this expectation for more hawkish policy induced a sell-off in Gold this week and an uptick in the 10-year yield. On Friday both markets reverted from the big moves (Gold bounced higher, while the 10-year moved back-down ~5bps:

 

Investing Ideas Newsletter     - gold

 

  • Gold closed in red territory Monday-Thursday with correlations over the last week and month moving much tighter relative to the longer term averages with the FOMC USD catalyst:
    • Arithmetic mean of 1-week and 1-month correlations: r= ~.85
    • Arithmetic mean of 3-month and 6-month correlations: r=~.41
    • TREND support has now moved down to $1271 from $1281 week-over-week (a level we are now watching closely with the USD testing its TAIL line)
  • The USD followed a bearish TREND from January to May and has since made a series of lower highs after Draghi:
    • Cut the benchmark deposit rate from 0.25% to 0.15%
    • Cut the marginal lending facility from 0.75% to 0.40%
    • Cut the deposit facility rate from 0.0% to -.10%
    • The 10-year ticked higher +~9bps week-over-week through Thursday and reverted -~5 bps Friday with Gold bounce

 

The Euro has backed-off 2% against the dollar since the end of June and on Friday we received much worse than expected Manufacturing PMIs on Friday out of countries that have been a staple of strength year-to-date:

  • Germany - Markit/BME Manufacturing PMI 52.4 JUL Final (52.9 est.) vs. 52.9 prior
  • U.K. - Markit Manufacturing PMI SA 55.4 JUL (57.2 est.) vs. 57.5 prior (57.2 revised)

In the currency war that is today’s centrally-planned main stage in Big Macro, the value of the dollar is directly related to the strength over other reserve currencies (whether economically or policy-induced). European economic data is retracting from the first half 2014 strength and European equities look bearish in our model. If this continues the expectation will be for a more dovish ECB.

 

Right now the USD is dancing around its long-term TAIL line of resistance and the quant signals suggest it’s looking for more clarity before confirming TREND and TAIL lines (either reversing to a bullish bias or continuing to confirm its bearish set-up). A one-quarter GDP bounce (off of a -2.1% Q1 print) and short-term commodity disinflation need to confirm sequential improvement for us to reverse our #growth-slowing, #Dollardevaluation Theme. 

 

HCA – Hospital Corporation of America presented their quarterly report this week after pre-announcing upside to their 2Q14 result.  The details of their beat were better than we were expecting. 

 

One of the highlights was a material acceleration in maternity.  During the conference call, HCA stated that "deliveries for the quarter grew 2.2%"... "Managed care and exchange deliveries grew 7.3%" and "Neonatal admissions grew 9.3%". All better than what we were looking for. 

Investing Ideas Newsletter     - hca

The Affordable Care Act tailwind was increased by an additional 1% to EBITDA, which is consistent with our view of modest upside from the newly insured.  

 

Heading into 2015, we believe consensus is still underestimating HCA.  If HCA can hit our 2015 estimates and hold the current multiple, we think the shares could trade into the $70s from here as consensus numbers move higher.  


HOLX ­­– Our recent note reviewing the HOLX quarter was titled “A LITTLE GOES A LONG WAY.”  Revenue was better than consensus (as we expected) and guidance for the rest of the year was increased. 

 

On Friday morning we updated our Tomo-Tracker which showed a material acceleration versus June.  In July we see Hologic converted a total of 35 facilities putting them on pace for significantly better sales in the final quarter of the fiscal year than even their best quarter of the year. 

 

Investing Ideas Newsletter     - holx

 

We initially thought guidance seemed aggressive for FQ414 at $630-640M.  Our initial estimate was $632 after reviewing all of the data from the filings and earnings call. 

 

We now are more confident that management can at least be in the high end of their guidance range and perhaps even better.

 

Our OB/GYN survey for July/August is launching today and we’ll have an update for you next week.

 

LM – Legg Mason reported decent earnings this week with a slight revenue miss offset by strong operating margins and earnings per share of $0.61, which eclipsed consensus by over 10% with the Street expecting just $0.55 per share.

 

Our thesis on the stock is intact with the reallocation theme of institutions moving out of equities and into fixed income firmly in place. In this quarter alone, Legg netted more new fixed income assets than its entire fiscal year prior which created annualized organic growth for LM this quarter of +2.0%. This attribute should not be discounted being that the average organic growth rate for the "Big 6" traditional managers that have now all reported 2Q14 is actually a decay rate of -0.70%.

 

Although Legg's +2.0% annualized growth in the quarter is hardly break away expansion, we note this places Legg second in the group behind BlackRock despite having the cheapest valuation in the group. 

Investing Ideas Newsletter     - lm

Legg Mason (LM) continues on our Investing Ideas list under the guises of: 1.) Growth at a reasonable price 2.) As a beneficiary of the ongoing rotation away from equities and into fixed income 3.) Having favorable market setup with the sector's second highest short interest; second lowest sell-side sentiment; and the sector's biggest share buyback program.

 

OC – With 2Q earnings season winding down, we present some commentary from several construction companies. Carlisle Construction (CSL) noted that pricing for its roofing systems business was strengthening at the end of the second quarter. Saint Gobain, the French construction company, pointed out the despite the recent declines in roofing volumes they do not expect there to be a downward trend in volume and instead volume should progressively pickup in 2H 2014.

 

Furthermore, bitumen is a type of “asphalt concrete” for roofing and paving products. Bituminous prices have recently moved upwards along with the Bureau of Economic Analysis’s Asphalt & Coating Materials PPI Index. Owens Corning’s roofing segment benefits from these price increases as you can see in the graph below. 

Investing Ideas Newsletter     - oc

Lastly some put-and-takes from recent economic data:

  • Dodge Index climbed to its highest level in 2014.
  • Architecture Billings Index (ABI) continues to build on a strong May number.
  • After 6 straight months of decline, private renovation spending on residential structures ticked up slightly for June.
  • Nonresidential Construction YoY% experienced a drop from 8.1% to 4.6% month-over-month.

 

Typically the Census Bureau revises its construction spending estimates in the coming months so we will hold out for now. But the leading indicators show promise as they become tailwind for companies like Owens Corning heading into 2H 2014.

 

OZM – There is no update on our recommendation of Och Ziff Capital Management this week. We will have new fundamental information to analyze next week as the firm will report 2Q14 earnings on Tuesday August 5th.

 

RH – Restoration Hardware remains our top long idea in Retail by a country mile. We remain convinced that the company will see earnings grow from $1.71 last year to near $11.00 in five years time. If we’re right on that earnings number, which we think we are, we think that this is ultimately a $200+ stock. 

 

We don’t think this is just a square footage growth story (which is impressive in its own right), but rather one of the biggest market share stories in retail today. In effect, we think that RH is doing to the high-end home furnishings space what Ralph Lauren did to apparel on 1980. The parallels are staggering.

 

Here’s a look at where we stand vs. Consensus for the balance of the year.

 

Investing Ideas Newsletter     - rh

 

TIP – In a week where global equity and credit markets saw significant turmoil, the iShares TIPS Bond ETF came away relatively unscathed. Its -60bps WoW decline brings its YTD performance to +4.7% – far outpacing alternative investments like the SPY or IWM, which are up +3.8% and down -4.7% respectively.

 

In this week’s deluge of high-frequency economic data, we continue to see signs of #InflationAccelerating on a reported basis and #StructuralInflation coming down the pike:

 

  • GDP Deflator: +2% QoQ SAAR in 2Q, up from +1.3% prior; +1.6% YoY, up from +1.4%
  • PCE Core Price Index: flat at +1.5% YoY
  • In a bid to counter the deflationary pressures in the casino gaming equipment sector via industry consolidation, Scientific Games Corp. (SGMS) bought Bally Technologies (BYI) for $3.3B ex-net debt

 

To be fair to inflation bears, this week we saw commodity prices (using the CRB Index as a proxy) take a major hit, down another -1.5%; that brings the MoM decline to nearly -5%. WTI Crude Oil, a key concurrent indicator for supply-side inflationary pressures dropped -4.7% WoW and are now signaling bearish TRADE, TREND and TAIL on our quantitative model.

 

Investing Ideas Newsletter     - wti

 

To the extent this developing signal is confirmed and thereby confirming a peak in the rate of change in reported inflation statistics, we will strongly consider booking the gain in TIP.

 

Stay tuned…

 

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Click on each title below to unlock the content.

 

Housing: A Sea of Red

Our Hedgeye Housing Compendium table aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

Investing Ideas Newsletter     - housing

 

MCD: McLibel 2.0?

We are bumping up short MCD to the Investment Ideas list.

Investing Ideas Newsletter     - mcdonalds

 

Should You Chase the Rally In Chinese Equities?

Both our quantitative signals and fundamental research support buying China here. This stance is in stark contrast to our previous view.

Investing Ideas Newsletter     - china


The Week Ahead

The Economic Data calendar for the week of the 3rd of August through the 8th of August is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 08.01.14 Week Ahead


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Cartoon of the Day: Mad Cow

Takeaway: Everyone makes mistakes - but only genuine morons don't learn a damn thing from them.

Cartoon of the Day: Mad Cow - Mad cow cartoon 08.01.2014


VIDEO | The Key Takeaways From Yesterday’s Big Market Selloff

In this excerpt from this morning’s macro call with institutional subscribers, Hedgeye CEO takes a granular walk through the worst day in the stock market all year.

 


HLT Q2 2014 CONF CALL NOTES

The super-charged tortoise...

 

 

"Feel great about the fundamentals of the business and positioning (the company) for this year and next year" Mr. Nassetta

 

 

PREPARED COMMENTS:

Feel good about macro economic setup which in turn translates into an improved outlook and earnings guidance.

 

Overview:

  • Transient revenues in Q2 increased 7% systemwide
  • Gov't business stabilized during Q2 with business up 3% after 5 quarters of declines. 
  • Group +5% systemwide and will pick up in H2 with M/HSD growth in 2H
  • Ancillary spend: Group spend +14% per group owned hotel and +12% across Americas portfolio. 
  • Development:
    • Opened 56 hotels, 8,000 rooms in Q2 with 694,000 rooms globally opened at Q2 end
    • 542 hotels - 106,000 rooms under construction in Mgmt & Franchise segment
    • Pipeline +18% YoY = 275,000 rooms
    • 21,000 new rooms approved in Q2
  • Curio potential for 1,200 hotel portfolio possible globally, 75 Curio's in discussions globally
  • Lifestyle Brand will be launched before year end

 

Outlook:

  • Favorable conditions in most markets.
  • US: strong fundamentals, high single digit RevPAR growth expectations
  • Mexico:  high single digit REVPAR
  • Europe: strong group and transient gains, soft France, better Turkey - confident in middle single digit RevPAR growth
  • ME/Africa: steady state, flat RevPAR due to geopolitical tensions
  • Asia/Pac: Japan & China strength, high single digit RevPAR
  • Time Share: 82% of supply is capital light
  • Corp Expense: incremental public company costs, not evenly distributed across quarters...
  • US Focused Service: 7.9% RevPAR: solid results
  • Outside the US: 8% REVPAR
  • China: 7% REVPAR
  • APAC tempered by HK and Singapore
  • Europe : Northern countries and France soft, Southern better
  • ME/Africa -3.7% in Q - virus fears, visa restrictions
  • Debt reduction:  substantially all FCF for debt retirement, $600m YTD, increasing debt reduction by $100m
  • Time Share securitization:  $350m upsized, 1.81% all in cost, tightest spread and terms
  • Cash $829m, $284m restricted

 

Q&A:

  • Outlook for H2, 5.5% to 7.5% RevPAR seems conservative versus YTD results?
    • HLT strongest results vs competition. Transient business strong.  Feel good mid-point - highest in the industry, will attempt to outperform mid-point and thus at the upper-end of guidance.
  • Pipeline: Brands/Geographies garnering interest?
    • US interest picked up on percentage basis, US today is a limited-service growth story. HLT getting 20% of new deals vs. only 10% of market currently.
  • Net-rooms acceleration in 2015?
    • Assumptions correct, great success in pipeline, most rooms under construction, but did not give specific 2015 guidance.  2014 was the nadir for units growth. Expect pipeline will accelerate.
  • Margin acceleration for owned hotel segment for H2 2014?
    • Strong H1 2014 growth, Q2 on higher end, by definition see margin growth temper, due to prior cost saves efforts.  Big 8 hotels will have an uptick from Q2 driven by group position.  Big 8 position high single digit, low double digit for Q3 and Q4
  • EBITDA growth 2015 results in 3x to 3.5x leverage by year end 2015, how should we think about capital structure?
    • Will end 2014 at low 4xs, by year end 2015 will be 3x to 4x, targeting lower investment grade rating...not in business of hoarding capital, will preserve balance sheet, but will look to return FCF to shareholders.  First a small dividend then remaining FCF through share repurchases or dividends based on ownership of company (whether or not BX is still a shareholder).
  • What has changed that will caused margins to continue to expand?
    • Today at the mid-cycle, getting high occupancy levels, ability to drive mix based on group return and strength of transient. Aggressive on mix and increasing ADR = higher flow through.
  • Real Estate: value realization at Waldorf and Hilton
    • Hilton Hawaiian Village, broke ground, expect to be selling units before year end.
    • Hilton: in design stage, construction early 1H, will product EBITDA before year end.  In registration for timeshare.
    • Waikea Village: registration for incremental time share, convert one or more towers to timeshare.  Not soon because have other inventory to sell prior to the tower conversion.  
    • Waldorf: nothing new to report, tax structure addressed to maximize value creation to shareholders.  Searching for counterpart to make deal happen. Will have more details before year end.
  • How to grow RevPAR sequentially?
    • RevPAR index gains helped HLT.  Every brand gained share.  1.7% improvement YoY. Revenue management efforts helped drive results. Have something unique vs. competitors. 
    • Market share premiums.  These premiums drive new development as well.
    • Driving customer loyalty for repeat business.
  • Key Money
    • Less than 5% involve key money, so 95% are "dry" deals.  HLT system offers real value to owners.
  • Strategic opportunities - would you consider lower fees?
    • May discount fees vs. strategic nature of new affiliation.  On occasion may consider discounting fees. 
  • Where are you interested in monetizing real estate - potential REIT spin-off? 
    • Less to do with cycle, more to do with value creation exercise. Given tax attributes of owned real estate, must do in a tax-beneficial manner. Would need to see divergence in multiples and thus value creation opportunity. Doing it today would not provide incremental value.  
  • APAC guidance - lowered?
    • Down modestly due to Singapore and Hong Kong, still feel good about Japan and China - being conservative due to Thailand disruption and Singapore weakness.
  • Waldorf - ability to pull cash out?
    • Need high quality, 5 star 400 room Waldorf Astoria branded hotel.  So opportunities to re-position. Getting timeshare is NOT a priority. Would love to get cash out, but most efficient manner will not include cash out but rather via JV and trade into other real estate.  
    • 1400+ rooms with 1.6m sq. ft. of zoned, so about 1.3m of opportunity.
  • BIg 8 - group mix last cycle?
    • About where assets were prior to downturn. Target is 40% group, today high 30%s
  •  IMFs - trajectory?
    • Would have been better but Middle East weighted on results. 80% of IMFs are outside the US.  Non-US IMFs are lower beta and do NOT sit behind a preferential return.  Mid-teens growth in 2014, but 2015 and later stronger because international assets/no prefs will see IMF growth of mid-20s%

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.

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