“There’s a lot of cash on the sidelines!”
Outspoken hedge fund manager Cliff Asness of AQR recently remarked “Every time someone says, ‘There’s a lot of cash on the sidelines’ a tiny part of my soul dies. There are no sidelines.”
Asness' pet peeve for this common saying implying “this is why the market still has room to run” based on absolute historical fund flows and equity valuations is based on a slightly different interpretation than we prefer to reference. Yet we absolutely agree with his disdain for this statement at face value (although maybe not as pointedly).
With all global market participants attempting to front-run the RELATIVE positioning of each monetary authority, finding the right RELATIVE positioning across asset classes is the key starting point for global macro risk management in today’s environment. We strongly believe that our implication of the POLICY metric into our quantitative model for pinning the convexity of growth and inflation is a key differentiator. Sticking solely with a strategy that seeks fundamental value through historical, absolute metrics has been a difficult task during the second half of this 6-year bull market.
In an interview discussing his pet peeves and preferable investment strategy, Asness went on to say that in his opinion, two of the main strategies that have worked over the long-term, are value and momentum investing and that combining those works much better than either one.
Value with a catalyst as we prefer to call it?
Back to the Global Macro Grind...
This is only his high level opinion about what works, but when we look at our own process, we believe it’s plausible to back into our own process from this simple statement. We describe our process as “a multi-factor, multi-duration model that utilizes a fundamental and quantitative approach to global macro risk management.” The quantitative sequence for buying or selling a single security is as follows:
- Is the slope of growth and inflation in those economies under the guise of central banks with the ability to print money accelerating or decelerating RELATIVE to consensus expectation as reflected in market prices?
- What is the fiscal and monetary response RELATIVE to the other central banks of the “reserve currencies” who, with the confidence of all global participants for now, tighten their credit spread by printing more money? What emerging market economies benefit or suffer?
- What do the effects of a stronger or weaker domestic currency mean for real domestic growth based on the componentry of its growth dynamics? How is this observed to confirm or discredit the tendencies in markets?
- Now with this overlay, what is fundamentally happening in a domestic economy to strengthen or weaken the outlook for growth?
- Which sectors perform better or worse under each scenario (see all four below)?
- With this sector bias, pick your long-short ideas
- MOST IMPORTANTLY, how do you execute this fundamental call (HINT: Some form of momentum?)
- By studying our intermediate-term duration, we can observe key levels of support and resistance to observe the overall TREND in the market.
- If in fact the fundamental and TREND signals match up we manage the risk of the range by buying on red and selling on green on the signals.
Generating alpha in a market that has gone straight up for the last two years is no easy task. Our best way to seek outperformance begins with #1 above. There are simply four main scenarios in our GIP model (GROWTH, INFLATION, POLICY) for real economic expansion, and front-running the inflection points allows us to pick SECTORS that outperform under each scenario:
- Growth accelerating, inflation decelerating
- Growth accelerating, inflation accelerating
- Growth decelerating, inflation accelerating
- Growth decelerating, inflation decelerating
The monetary response to each scenario and the implications for the strength of an economy’s real purchasing power is predictable in our opinion, but in this never-before seen monetary experiment, front-running the RELATIVE policy response when the centrally-planned machines of different monetary authorities are confronted with the same scenario is difficult. We believe the best- way to front run the big turns is to take in the relevant economic and market data on a day-to-day basis, and position accordingly.
Janet Yellen’s commentary on Wednesday was perceived as more hawkish than the market expected. We weren’t “trading the speech” or hanging on every word, but we didn’t get any indication she is taking a hawkish turn.
Across the pond, Europe has turned severely weaker out of a strong first-half, and the market over the last month has indicated an expectation for a RELATIVELY more dovish Draghi. The tone in his most recent speech reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program) immediately if given the authority.
Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters and the FX and gold markets are expecting a relatively more dovish Draghi.
- The EUR/USD has backed off 1.5% bps over the last month
- USD breakout vs. EURO breakdown in our model
- Gold (USD and POLICY-denominated) is down 3% over the last month
CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately we don’t possess a crystal ball, but our domestic view on overly optimistic growth expectations for the full-year remains intact as it has for all of 2014.
Don’t be afraid to take up your USD exposure and put a little cash on the sidelines (When the USD is going up!)
Have a great weekend.
Tickers: BYI, CZR, IGT, PNK, H, CCL
- Aug 26: Horseshoe Baltimore Opening
- Aug 27: BYI 2Q earnings
- Aug 28: Hollywood Dayton Raceway Opening
- Sept 1/2: Revel closes
BYI – Launched and connected its "Cash Connection" wide-area progressive slot link across Nevada and New Jersey. As a result of the interstate progressive linked slot machines, jackpots should reach larger amounts more quickly and thus offer more excitement for players. The multi-state link features Bally’s hit games including TITANIC, The Magic of David Copperfield, Betty Boop’s Fortune Teller, Jackpot Empire, Hot Shot Progressive, and other titles.
Takeaway: A small but much needed catalyst for higher yields.
IGT – announced Nevada joined IGT's Powerbucks commercial multi-state Wide Area Progressive link as such Powerbucks networked games in Nevada casinos are now linked with casinos located in New Jersey and Deadwood, South Dakota.
Takeaway: All efforts to make slot machine gaming more exciting despite demographic headwinds.
PNK – Belterra Park reduced its slot floor by 35 slots in July.
Takeaway: A very disappointing opening for the racino. PENN should fare better in Youngstown and Dayton though as both racinos will open in much less competitive geographies.
H – Hyatt Hotels Corporation is now offering access to the transportation service Uber through its app for iOS and Android. Uber, a service that allows riders to connect with transportation on-demand, is present in more than 100 cities worldwide and can be accessed through a dedicated Uber button located beneath the 'My Reservations' section in the Hyatt app. According to the Wall Street Journal, the Hyatt app also estimates trip prices for each Uber segment while also automatically storing the guest's hotel address for future use.
Takeaway: Hyatt trying to fully integrate transportation into its guest reservation process.
CCL – Princess Cruises is offerings savings on more than 150 cruise vacations to sunny destinations such as the Caribbean, Tahiti, Hawaii, Panama Canal and Mexico. The “Endless Summer Sale” runs through September 10, offers guests the chance to save up to $1,400 on select cruises departing between November 2014 and February 2015. In addition to special cruise fares, guests booking balcony staterooms or above will receive an onboard credit of $200 (for cruises 11 days or longer) or $150 (seven- to 10-day cruises); and those booking interior or oceanview staterooms can get credits of $150 (cruises 11 days or longer) or $100 (seven- to 10-day cruises).
Takeaway: More discounting in the Caribbean and Mexico.
SLS Granted License – The Nevada Gaming Commission approved licensing for the SLS Las Vegas, setting the stage for the opening of the $415 million redevelopment of the former Sahara. The SLS has been reconfigured to include a 56,000-square-foot casino with nearly 800 slot machines, 74 table games and a high-limit gaming area. A sports book will be operated by William Hill.
The nine restaurants and three nightlife venues include many SBE signature brands, including Umami Burger, the Mediterranean-themed Cleo, Japanese-themed Katsuya, 800 Degrees pizza and The Sayers Club entertainment lounge.
The three former Sahara hotel towers, all built in different decades, have been reconfigured under new names — Lux, World and Story — and are aimed at different markets: the luxury customer, the tour and travel market and the younger crowd looking for a “Vegas weekend.”
Takeaway: Given the SLS' overall programming, other operators risk losing younger guests as well as the California drive-in guests to the old-meets-new SLS.
Tuberculosis at Two Tunica Casinos – (Clarion Ledger) The Mississippi Department of Health has confirmed two recent cases of tuberculosis (TB) at two Tunica casinos. One employee each at the Horseshoe Tunica Hotel and Casino and the Gold Strike Casino Resort were diagnosed. The employees are not currently at the casinos. TB is an airborne infectious disease caused by the bacterium Mycobacterium tuberculosis. Last year, 65 cases of TB were confirmed in Mississippi. TB is curable and preventable, though some drug-resistant strains of TB are more difficult to treat. Treatment for TB infection can from 12 weeks to nine months
Takeaway: As if the general public needs another reason to avoid casinos.
Indiana Casinos to remain boat based – Indiana Governor Mike Pence announced he opposes the transition of casinos from riverboats to land-based properties. Governor Pence's comments follow recent commentary by Tropicana in Evansville to transition to a land-based operation.
Takeaway: Indiana stands to lose play to neighboring states with newer land-based casinos - as if the environment wasn't tough enough.
Resorts World Manila – (Philippine Daily Enquirer) Genting’s Philippines-based Resorts World Manila (RWM) is spending about US$650 million (RM2.06 billion) to double its gaming and hotel capacity. RWM chief operating officer Stephen Reily said on an average day, some 18,000 patrons visited RWM but the number increased to between 32,000 and 34,000 during “busy days”
Takeaway: Genting trying to keep its programming current as new competition from City of Dreams Manila is about to open.
Universidade de Macau – The University of Macau (UM) will start its 2014/2015 school year next Monday on the newly developed campus on Hengqin Island. About 4,000 students will live in the Residential College in the new campus. There will be more than 9,000 students in the new school year, including 1,700 freshmen. The full move to the new campus will be complete by November as portions of the laboratory facilities have yet to be transferred. The Macau Government announced that the university’s current campus will be reserved for higher educational purposes. In addition, a one-year temporary measure of lending and renting the old campus’ dormitories to three local universities will commence in the new school year.
Takeaway: Could the old college dormitories serve as casino worker housing for the Cotai casino operators? Such a plan would appease the Chief Executive.
Hurricane Season (Finally) Heading Up – According to the National Hurricane Center, current satellite data indicate an area of low pressure located over the Leeward Islands which has a 60% chance of forming a tropical depression over the next 48 hours and a 80% change over the next five days. Environmental conditions are expected to be more conducive for development when the disturbance moves near or over the southeastern Bahamas on Saturday, and a tropical depression is likely to form over the weekend or by early next week.
Takeaway: Potential for cruise disruptions and reschedulings across South Florida, the Bahamas and the Caribbean.
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.
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August 22, 2014
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.92 from 1.94
- VIX closed at 11.76 1 day percent change of -0.17%
MACRO DATA POINTS (Bloomberg Estimates):
- No major economic reports scheduled
- 10am: Fed’s Yellen at Kansas City Fed symposium at Jackson Hole, Wyo.
- 1pm: Baker Hughes rig count
- 2:30pm: ECB’s Draghi speaks at Jackson Hole
- President Obama on vacation on Martha’s Vineyard
- Senate, House out on August recess
- U.S. ELECTION WRAP: McConnell on Shutdowns; Ernst Policies
WHAT TO WATCH:
- Labor market at Jackson Hole forefront before Yellen speech
- Theory of tech replacing workers overblown: MIT J.H. paper
- Lew Says business tax reform best for addressing inversions
- Family Dollar said open to Dollar General deal with changes
- BofA seeks to prove Buffett’s call right after settlement
- Citigroup faces curbs on hedge fund sales after deal: WSJ
- Enbridge avoids U.S. review with plan to boost oil sands flow
- GM legal dept. investigated by U.S. on recall delay: WSJ
- Co. to halt production at Russian plant for 4 periods
- Home Depot U.S. president Menear to succeed Blake as CEO
- IBM never stopped server sales to Chinese banks: China Daily
- GE says reports of FAA grounding of Air India 787 incorrect
- Keurig 2.0 to go on sale from Aug. 24: WSJ
- Aeropostale considers closing additional 175 stores
- Disney unveils new Star Wars game for mobile: NYT
- Lockheed meets with suppliers on lower F-35 costs: Reuters
- U.S.GDP, Housing, Ukraine, Tennis, Emmys: Wk Ahead Aug. 23-30
- Ann Inc. (ANN) 7:31am, $0.69
- Foot Locker (FL) 7am, $0.54 - Preview
- Hibbett Sports (HIBB) 6:30am, $0.31
- Royal Bank of Canada (RY CN) 6am, C$1.57 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Oil Set for Longest Weekly Slide Since November; Brent Drops
- Gold Advances From Two-Month Low Before Central Bankers Speak
- Palm Oil Drops Below 2,000 Ringgit First Time Since 2009 on Glut
- Too Much Corn With Nowhere to Go as U.S. Farmers Plan for Record
- Chinese Zinc Threatens Biggest Jump in 5 Years: Chart of the Day
- Pacific Tropical Storm Marie May Strengthen to Hurricane Today
- Wheat Rises as World Supply Seen Less Ample on Lower Canada Crop
- MORE: Shanghai Exchange Copper Stockpiles Drop by Most Since May
- Copper Rises to Two-Week High on U.S. Home Sales: LME Preview
- Copper Set for Weekly Gain as U.S. Housing Data Beats Estimates
- WTI Crude Seen Rising on Falling Inventories in Analyst Survey
- First Crude Tanker Departs From Hound Point After Maintenance
- Gold Traders Most Bearish in Seven Weeks on U.S. Rate Outlook
- EU Natural Gas Traders Most Bullish in Six Weeks on Ukraine Risk
The Hedgeye Macro Team
This note was originally published at 8am on August 08, 2014 for Hedgeye subscribers.
“It is the theory that decides what can be observed.”
I have a theory about performance that I developed running my own fund: it’s the score in your P&L that counts. I also have a theory about market theories: your positions reflect your theories.
We can theorize about the relationship between inflation and growth. We can highlight immediate-term market observations within their longer-term trends. We can write and rant too – but, at the end of the day, taking your position in macro is what matters.
In 2014, we’ve had a contrarian theory that as US growth expectations slow, US interest rates will fall, and both Gold and Long-term Treasury Bonds will rise. We’re not changing that theory this morning. We’d like you to keep that position.
Back to the Global Macro Grind…
But, but… you said that if the Dollar goes up and inflation expectations fall, the consumer gets a tax cut and consumption growth can accelerate. Yep, but I said that before we were 62 months into an economic expansion (in 2009 and again in 2013), not at the end of it.
Year-over-year, the US Dollar is down -0.4%. With US cost of living barely coming off her all-time highs, that isn’t going to make me tell you to run on out there and buy-the-damn-bubble in US stocks. Sorry.
If the US Dollar were to breakout from here, and crude oil were to drop to $80/barrel – now that might get me interested. But there’s this thing called #timing that we need to consider when we theorize about getting long.
In the meantime (we’re net short in Real-Time Alerts terms) and here’s the score:
- US Dollar Index stopped going up this morning (because the Euro stopped going down)
- US 10yr Yield of 2.36% is hitting a fresh YTD low of 2.36% (crashing -22% YTD)
- US Equities (SPX) have only had 1 up day in the last 11 (dip buyers #underwater)
Bull market, baby (in the Long Bond)! 2014 Score: Long Bond (in TLT terms) +15.1% vs Gold +9.6% vs Russell 2000 -3.9%.
Digging into the Sector Style performance of the SP00:
- Consumer Discretionary (XLY) leads losers at -2.2% YTD
- Industrials (XLI) aren’t far behind at -1.6% YTD
- Financials (XLF) are 3rd worst (of 9 Sectors) at +1.4% YTD
Digging deeper, you can see the real wins and losses (sub-sectors within the S&P’s major sectors):
- Housing (ITB) is -10.6% YTD
- Regional Banks (KRE) are -7.4% YTD
- REITS (VNQ) are up +15.3%
REITS are a way to be long A) slow-growth #YieldChasing and B) US Rents hitting all-time highs. Yep, we have a theory that you can check with your landlord on that too: he’s not reducing your rent tomorrow due to Russia or ebola.
You see, in theoretical-land, as our #InflationAccelerating theme from Q114 stops going straight up into the right (Coffee prices dropped -3.6% yesterday, but are still +66.2% YTD), real-world inflation still sticks. Starbucks (SBUX) isn’t cutting prices today.
Inflation (especially the cyclical stuff like wage inflation and rent), is a late-cycle economic indicator. So is unemployment. Got early cycle? That’s easy. Consumer, Housing, some Industrials, and Regional Banks.
The reason on Regional Banks is really simple. As the bond market prices in slower growth, the long-end of the bond yield curve falls, and net interest margins (i.e. how banks make money off your deposits - long-term rates minus shorter-term ones) compress.
This is called Yield Spread Compression. And it’s part of this fancy theory called gravity. I have a perverse theory that as the Q3 US Growth data slows, the Fed will get easier (on the margin), and that the long-end of the curve will perpetuate moarrr compression.
As growth slows, not only do net interest margins at banks compress, but equity market multiples do. All the while, you’ll see multiple expansion on long-term Treasury bonds.
Since there’s no long-term support to 1.70% on the 10yr, maybe we should all start theorizing about that. The observable score says that’s more likely than seeing the consensus theory of 3.25% anytime soon.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.35-2.51%
Best of luck out there today and have a great weekend,
Keith R. McCullough
Chief Executive Officer
Takeaway: RH is up 26% since Brian McGough said 'buy' on 9/13/13. He thinks significant upside remains.
Retail Sector Head Brian McGough explained to CEO Keith McCullough on HedgeyeTV last September why he loves Restoration Hardware and believes it's the best growth play in retail. The stock is up 26% since.
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