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Arrest Economic Gravity

Client Talking Points

DRAGHI

Since both the Fed and BOJ have proven that Policies To Inflate do not perpetuate sustainable economic growth (Kuroda acknowledged Japan’s slowdown last night, but blamed the “weather”, lol), the ECB definitely has to double down on that – or will he? He will. Draghi cut rates this morning.  Easing #expectations were huge ahead of this morning’s announcement.

VOLUME

The good news is that on yesterday’s AAPL down move, some U.S. equity volume came back (the bad news is that, in rate of change terms, it only comes back on down days); Total U.S. Equity Market Volume = +8% vs. the 1 month average, flat vs. the 3 month average.

UST 10YR

One down day for yields does not a trend make, but Old Wall media keeps writing about the “risk of rising rates” (our 2013 call) when the real risk is not buying the long bond on dips; UST 10Yr Yield 2.40% after failing @Hedgeye 2.46% TRADE resistance; no support to 2.33%.

Asset Allocation

CASH 52% US EQUITIES 0%
INTL EQUITIES 18% COMMODITIES 2%
FIXED INCOME 24% INTL CURRENCIES 4%

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.

BOBE

The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road

TWEET OF THE DAY

$MCD preparing for launch of NFC-based mobile payments system and making a bet $AAPL IPHONE6 has NFC http://www.mobilecommercedaily.com/mcdonalds-preparing-for-launch-of-mobile-payment-system-memo-shows

@HowardPenney

QUOTE OF THE DAY

Once you say you’re going to settle for second, that’s what happens to you in life.

-John F. Kennedy

STAT OF THE DAY

Aggregate coffee demand next year is expected to be around 34 million bags. Due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.



Failing Successfully

“If you try to fail, and succeed, which have you done?”

-George Carlin

 

In theory, investing is very straightforward.  You buy stocks in great companies and the stock prices goes up.  You short stock in bad companies and the stock prices go down.  Practically, of course, that’s never really how it happens, except in fundraising power point presentations. 

 

A real paradox of investing is that there are periods in which the stock prices of “weaker” companies actually dramatically outperform “stronger” companies. Over the last three months, stocks in the highest quartile of short interest have outperformed low short interest stocks by 240 basis points over the last three months - +5.5% vs +3.1%.  In part, this is facilitated by so called short covering.

  

Our lives are, of course, replete with paradoxes, so a little paradoxical market action should on some level be easy to stomach, right?

 

 Some notable paradoxes of different genres include:

  • Paradox of voting - For a rational, self-interested voter the costs of voting will normally exceed the expected benefits, so why do people keep voting?
  • Fenno's paradox  - This is the belief that people generally disapprove of the United States Congress as a whole, but support the Congressman from their own Congressional district.
  • Hedgehog's dilemma – This is the paradox that human intimacy cannot occur without substantial mutual harm (This is maybe the best philosophical defense for long term bachelors like myself!)
  • Archimedes paradox – The paradox that a massive battleship can float in a few litres of water

Lastly is one of my personal favorites - the St. Petersburg paradox.

 

According to the St. Petersburg paradox, a casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The pot starts at $2 and is doubled every time a head appears. The first time a tail appears, the game ends and the player wins the pot.

 

Thus the player wins $2 dollars if a tail appears on the first toss, $4 if a head appears on the first toss and a tail on the second, $8 if a head appears on the first two tosses and a tail on the third, $16 if a head appears on the first three tosses and a tail on the fourth, and so on.

 

What would be a fair price to pay the casino for entering the game?

 

Back to the Global Macro Grind...

Failing Successfully - Putin 09.03.2014

 

As it relates to recent events in Russia, the term circus comes more to mind than paradox.  Yesterday Russian President Putin introduced a hastily patched together seven point peace plan at a press conference.  This came shortly after President Obama upped the rhetoric in terms of the U.S.’s willingness to support Ukraine (and also NATO countries in the region) and ahead of a two day NATO summit that begins today.   

 

By some pundits, this “ceasefire” was perceived positively.  But the ever thoughtful George Friedman from Stratfor (the largest non-government intelligence agency) had a more paradoxical take and wrote the following:

 

“This rapid turnaround on the battlefield (in reference to the recent thwarting of a Ukrainian offensive) had two main purposes. The first was to assert Russian military power and convince the West that Moscow would not be afraid to use it in spite of the economic consequences. The second was for Moscow to use its military gains to make it appear that the West was utterly irresponsible in trying to wrest Ukraine out from Moscow's shadow. Now, by dangling an ambiguous cease-fire before the Americans, Russia is essentially telling the United States that to defeat Russia it must fight Russia directly, knowing that NATO is loath to engage directly with the Russian military.

 

That deal goes well beyond a cease-fire. Russia wants its buffer in Ukraine recognized and respected, along with sanctions lifted so it can get on with repairing its economy. And with winter approaching, Russia also has the means to turn the screws on Europe's natural gas supply at the same time it holds a clear military advantage on the Ukrainian battlefield.”

 

Indeed.

 

Of course, the real news in Europe this morning are the monetary moves from the ECB and not that geo-political move from Russia yesterday.  In an announcement that was a surprise to most, the ECB cut interest rates from 0.20% to 0.05%, cut the deposit rate by 10 basis points to -20 basis points, and also cut the re-fi rate and marginal lending rate by 10 basis points. 

 

Although this isn’t necessarily monetary shock and awe, with the Euro trading down about 80 basis points, Draghi was seemingly able to get his point across with this move on some level.  Practically speaking though, it is not clear that this will necessarily be a catalyst to ignite European economic activity.

 

Certainly a negative deposit rate incentivizes banks to lend out their money and sovereigns such as France, with a negative short term borrowing rates, have benefitted.   That said, at least based on the initial foray into a negative deposit rate early this summer, this policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy.

 

All eyes will now be on Draghi’s press conference where he is likely to now introduce a QE type plan that also surprises to the dovish side.  But the paradox of these surprises moves from such low levels is related to the answer to the St. Petersburg paradox, which is: infinity.   Unfortunately infinite monetary policy moves from zero do not grow an economy.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.33-2.43%

SPX 1

Shanghai Comp 2

VIX 11.34-12.95 (bullish)

WTI Oil 92.51-96.53 (bearish)

Gold 1 (neutral)

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Failing Successfully - Chart of the Day


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Hedgeye and Seeking Alpha Announce New Video Partnership

“Contributor Call” series will be produced by HedgeyeTV.

 

FOR IMMEDIATE RELEASE

 

STAMFORD, Conn., September 4, 2014 -- Seeking Alpha (SA) and Hedgeye Risk Management today announced a new partnership with the creation of a new video series called “Contributor Call.”   Produced by HedgeyeTV, the series will feature one-on-one conversations hosted by Hedgeye CEO Keith McCullough who will speak with top SA contributors about their highest-conviction investing ideas.

 

Viewers can watch “Contributor Call” on SeekingAlpha.com, Hedgeye.com, HedgeyeTV’s mobile app and on Hedgeye’s YouTube channel (youtube.com/Hedgeye).

 

The new partnership brings together Hedgeye, a leading independent investment research and media firm, with Seeking Alpha, the Internet’s #1 crowd sourced equity research platform.

 

"We're thrilled to partner with Hedgeye on this extremely exciting initiative,” said Colin Lokey, Director of Contributor Success at Seeking Alpha. “This represents a new and compelling way for Seeking Alpha contributors to share their best ideas with the investing public."

 

The inaugural “Contributor Call” features Ben Axler, founding partner of Spruce Point Capital, a long/short hedge fund, explaining to McCullough the reasoning behind one of his top short calls.

 

 

"This marks the beginning of what we think will be a great partnership between Hedgeye and Seeking Alpha,” said Keith McCullough, CEO of Hedgeye Risk Management. “Investors are thirsting for actionable investing ideas with deep, professional analysis and insight. This new pro-to-pro format gives it to them."

 

HedgeyeTV was launched last year and produces daily video content, including programs such as “Real Conversations” which has featured notable guests including national bestselling “Currency Wars” author James Rickards, Jim Grant, founder of Grant’s Interest Rate Observer and Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

 

ABOUT SEEKING ALPHA

 

Seeking Alpha is a crowd-sourced investment research platform that sources equity and fixed income analysis from over 9,500 contributors. With 3.5 million registered users and 2 million real-time alert subscribers, Seeking Alpha is the web's go-to destination for actionable investing ideas." 

 

ABOUT HEDGEYE RISK MANAGEMENT


Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Technology, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Semiconductors, Consumer Staples, Internet & Media.

 

CONTACT: Dan Holland

dholland@hedgeye.com

203.562.6500


Contributor Call: Short iRobot Says Spruce Point Capital's Axler

Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and Spruce Point Capital's Ben Axler about Axler's high conviction short idea, iRobot. It's the first video of a partnership between Hedgeye and Seeking Alpha.

 



(This is the opinion of Ben Axler of Spruce Point Capital and does not necessarily reflect the opinion of Hedgeye Risk Management)


HOT: CHECKING IN ON 2H 2014

Takeaway: Strong RevPAR should boost the sector and upcoming asset sales/more aggressive stock buyback may result in HOT closing the perf gap vs peers

A HOT End to 2014

the call to action

Starwood’s stock typically outperforms the market with better than expected RevPAR and earnings, and outperforms the sector with more capital return and announced asset sales.  We’re optimistic on the former for most lodging companies and increasingly comfortable that investors will be favorably surprised with the amount of capital activity in 2H for HOT.  Thus, the set up for HOT’s stock through 2014 looks bullish. 

THE SETUP

Similar to other hotel stocks, RevPAR, earnings, and guidance should drive HOT.  Building on that fundamental backdrop, HOT maintains several catalysts that could push sector outperformance in the back half of 2014 including heightened asset sales and capital return to shareholders.  As can be seen in the following chart, Starwood’s stock has been correlated to changes in investor perception in these critical areas.

 

HOT: CHECKING IN ON 2H 2014 - HOT1

 

Here is why we’re optimistic that the catalysts will move in favor of the HOT bulls for the rest of 2014:

 

1)       US RevPAR guidance may be exceeded:  Q3 2014 US RevPAR trends are developing nicely QTD with the Luxury segment trending toward 7.5%, Upper-Upscale segment trends exceeding 8.5% and Upscale segment trending toward 10%.  As a result, when HOT reports Q3 2014 financial results, we believe the company will be at the upper-end of guidance, if not exceeding the upper end of the guidance range.  Additionally, the composition of RevPAR with average daily rate increases exceeding gains in occupancy, should result in strong profitability flow through as well.

2)      More Aggressive Share Repurchase:  Following several quarters of disappointing investor expectations on this topic, the early August announcement regarding an enlarged share repurchase authorization as well as expedited timing was welcomed.  We now have increased confidence HOT may exceed still muted investor expectations in 2H 2014.

3)      Asset Sales Finally?  We have renewed confidence that asset sale announcements are forthcoming here in 2H.  Stay tuned for this important catalyst.

4)      New Chief Financial Officer – We understand Thomas Mangas is an investor community friendly executive with a very strong grasp of financial accounting as well as day-to-day operations.  As such, we expect Mr. Mangas to quickly acclimate into the CFO role at HOT and following strong Q3 2014 earnings, will begin meeting with investors. 

CONCLUSION

As can be seen below, HOT’s stock has underperformed year to date owing to a dearth of announced asset sales, and lower than expected capital return to shareholders.  While the stock has relatively recovered somewhat since Q2 earnings season, we think upside remains in the back half of 2014.  RevPAR tracking at the high end of company guidance should lead to a Q3 beat and we suspect that a few asset sales could provide a further catalyst.  Finally, the company appears more willing to finally purse a more aggressive buyback strategy which has historically correlated with a rebound in the share price.

 

HOT: CHECKING IN ON 2H 2014 - HOT VS PEERS

 

 


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