prev

Oil Prices Lower, But Inflation Still Sticky

Client Talking Points

OIL

Oil continues to get smoked (WTIC $91.27 this morning is down -6% and -11% on a 1 and 3 month basis) and this is easily the top thing U.S. growth bulls are pinging us on. While its better than oil $100, we would remind you that the all-time high in U.S. cost of living (rent, food, education) remains firmly intact – companies aren’t cutting prices; inflation is sticky.

RUSSELL 2000

Bubbles bounce and we gave you the levels on SPX/RUT oversold vs. VIX overbought yesterday, but those were just immediate-term signals within what we think has developed into the most epic stock market bubble we have seen in our careers (AAPL, FB, and BABA will = $1 TRILLION in market cap!).

UST 10YR

Hopes that our 2013 #RatesRising call will eventually be right in 2014 fails at yet another lower high (in July the UST 10YR topped at 2.59%), back down to 2.51% this morning and no immediate-term TRADE support to 2.31%.

Asset Allocation

CASH 41% US EQUITIES 4%
INTL EQUITIES 19% COMMODITIES 2%
FIXED INCOME 30% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

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.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Only bad thing about $LULU print is that it buys current mgmt team time. We added LULU as a top long after the Street capitulated in June

@HedgeyeRetail

QUOTE OF THE DAY

The value of identity of course is that so often with it comes purpose.

-Richard Grant

STAT OF THE DAY

The European Union has decided to slap new economic sanctions on Russia over its actions in Ukraine, diplomats said Thursday and the Russian ruble fell to an all-time low of 37.51 rubles against the U.S. dollar.


CHART OF THE DAY: At Some Point, Consumers Just Run Out of Breathing Room

CHART OF THE DAY: At Some Point, Consumers Just Run Out of Breathing Room - Chart of the Day


Boom-Bust Cycle

“The Panic of 1819 was the first boom-bust cycle of the economy caused by government monetary policy.”

-Thomas Dilorenzo

 

It was an inevitable consequence of the Hamiltonian system of government debt accumulation combined with a government-run bank that prints money in order to fund the debt.” (Hamilton’s Curse, pg 68)

 

Sound familiar? It shouldn’t. Unless you’ve studied economic history, you might actually think that all of this won’t end in panic. Unless it’s different this time, it always has. Give it some time.

 

While a sub 2% US GDP growth economy could hardly be described as a “boom”, we have had some booming bubbles develop within the Fed’s 0% experiment. From real estate, to MLP #YieldChasing, to the latest Silicon Valley bubble, I think we’ll all look back and call it epic.

 

Boom-Bust Cycle - 45

 

Back to the Global Macro Grind

 

Forget about the bubble talk for a second, rewind the tapes (or just watch it trade in real-time today) and watch Apple’s (AAPL) volume and intraday price moves. That’s no bubble – that is a mania.

 

Manias are much more fun to watch than bubbles – people do the craziest things. Watch Go Bro (GPRO) trade, or watch the new squeeze quant algos jam these no-borrow-high-short-interest stocks. It’s pure, unadulterated, price momentum chasing.

 

While mo mo manias are entertaining, the bubble in momentum chasing US equity market cap is downright frightening. Pop Quiz: if you add up Apple, Facebook, and Alibaba’s proposed market caps, what do you get?

 

A: $1 TRILLION Dollars

 

Yeah, that’s normal. And so is paying $350 for an iUgly watch and, at the same time, telling the world there is no inflation “because there’s deflation in technology” (in other news, fully loaded with Oil’s recent decline, USA’s cost of living just hit another all-time high).

 

If you add Google, the Top 4 in the Silicon Valley bubble get you to $1.25 TRILLION. To be fair, BABA is not really a “valley” name – the “smart money” in there didn’t want to give Alibaba $20 million. It wasn’t a “good idea” back then. So they’ll give them $25 Billion now instead!

 

And if you back out Exxon (just to make my storyline better), here’s what you can get for $1.25 TRILLION:

 

  1. Berkshire Hathaway = $235B
  2. Wal Mart = $230B
  3. GE = $230B
  4. Chevron = $225B
  5. Johnson & Johnson = $210B
  6. Citigroup = $125B

 

Remember that while I am sure I am wrong on my $29.99 watch from WalMart not being as cool as the iWatch, Apple (AAPL) has $600 billion reasons (market cap) why that fashion statement has been discounted by the market, just a bit.

 

Now, to be fair (again, I am a fair guy!) for those of you who know everything about Apple (AAPL), you’ll recall that there is a precedent for this stock blowing up (split adjusted, it went from where it is today to $55 in less than a year). Never mind what the US stock market bubble would do if AAPL dropped 50% from here (still trading at a $50B premium to my preferred iBear watch outlet, WMT), what if it dropped 5, 10, or (deep breaths) 25%?

 

Just asking.

 

I know. Every boom-bust bubble call needs a catalyst. Here’s mine – US #GrowthSlowing.

 

Oui. C’est tout, mes amis. En Francais, that means that is it.

 

That’s all I think I need to get right from here in order to get both bonds (long the Long Bond and anything equities, like XLU, that looks like a bond) and the stock market bubble right. I think I need to get the rate of change in US growth right.

 

While I don’t think AAPL will get cut in half from here, US GDP growth could, easily, from this headfake Q2 bounce of 4%. More importantly, US GDP growth could be half of consensus expectations (Old Wall consensus = 3% GDP growth and +3.3% 10yr yield), for Q3 and Q4.

 

And that’s our bullish scenario. The bearish one, of course, is that 1/3 of America (you and I) figures out that 2/3 of Americans are already in another early cycle recession. After 63 consecutive months of US economic expansion, that’s what booming bubbles within the cycle eventually do – they bust.

 

Our immediate-term Global Macro Risk Ranges are now (I update my Top 12 Macro Ranges in our Daily Trading Range product, with intermediate-term TREND views, daily, as well):

 

UST 10yr Yield 2.31-2.53%

SPX 1

RUT 1154-1169

VIX 11.34-13.56

Pound 1.60-1.63

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Boom-Bust Cycle - Chart of the Day


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

MACAU: HANDICAPPING THE INFLECTION AND UPTURN

Takeaway: Looking for the constructive pivot on Macau gaming operators, not yet - still too soon

Macau stocks still in decline – have we bottomed?

 

 

CALL TO ACTION

We were early and first to make the “Mass Deceleration” call (see our June 13, 2014 note). The sell-side has caught up to this second leg of the Macau bear thesis stool (VIP turning negative was the first) and the stocks are well off their 2014 highs.  We fear the third leg hasn’t yet played out which keeps us firmly in the negative camp despite valuations that are becoming more palatable.  Q2 margin disappointment wasn’t just labor related, as widely reported by analysts, but such is the Hedgeye view.  Mass margins, particularly in the premium segment, are being compressed as operators compete for a slower expanding pie – reinvestment rates are going higher.  Given our long term positive view, we are actively looking for the opportunity to pivot to a more constructive near term outlook for the stocks.  However, with no positive fundamental pivot in sight and our own models computing generally lower than Street estimates for Q3, Q4 and 1H 2015, we can only conclude that the Macau stocks are likely to retreat.  Our caveat to the negative sector outlook is Galaxy Entertainment where we are favorably inclined to buy despite our negative overall view.

 

THE SET-UP

As early as March 10, we pivoted to the sidelines when we removed LVS from our Best Ideas list - see our note “LVS: REMOVING FROM INVESTING IDEAS”- and shortly thereafter warned investors about junket issues, the Dept of State request to lower the threshold for reportable financial transactions, UnionPay, money laundering scrutiny, as well as the extreme sentiment indicator with the massive “buy” rating skew on MGM, LVS, WYNN, and MPEL.  Our view was that VIP would suffer under such scrutiny and a corruption clampdown by the Chinese authorities.  As VIP growth slowed dramatically in March and turned negative in May, the Macau stocks faltered but the sell side maintained their ratings citing continued 30%+ Mass growth expectations for the remainder of 2014.

 

On June 13, 2014 we laid out our “Mass Decelerating” theme as the second point of our bear thesis for a slowdown in gaming revenues, just as the sell-side was defending the gaming operators on the thesis of “mass segment growth of >30% remains healthy”.  Today, the sell-side has caught up to us with regard to the mass segment gaming revenue slowdown so the question is where do we go from here?

 

WHAT WE THINK WE KNOW – BACK TO THE MATH…

We apply a forecasting algorithm and process across all industries – gaming, lodging and cruise lines that incorporates both quantitative and qualitative factors.  This process has allowed us to be ahead of various trend pivots including the recent mass revenue deceleration.  Based on our model we believe Macau gaming revenue will trough sometime during Q1 2015.

 

THE FORECAST

Our forecasting algorithm is dynamic.  Recall from our June 13, 2014 “Mass Deceleration” note, we forecasted Mass Segment revenues to trough in October and November 2014, at +18% on a year-over-year basis.  At that time, we also forecasted VIP revenue growth of -5% to -8% during Q4 2014.

 

By comparison, today our forecasting model calls for Mass segment growth of +9% on a year-over-year basis during Q4 2014, nearly half the growth rate we forecast a mere three months ago – and a third of what the Street was projecting at the time.  As can be seen in the following chart, we believe Macau gaming revenues will trough during Q1 2014, maybe during January or February as noted by the green arrows. 

 

MACAU: HANDICAPPING THE INFLECTION AND UPTURN - ggr

 

CONCLUSION

While we are looking for a pivot to become more constructive on the Macau gaming operators given our favorable long-term view, we are forced to reaffirm our negative view as we believe Q3 2014, Q4 2014 and FY 2015 earnings estimates are still too high. Our caveat to the negative sector outlook is Galaxy Entertainment where we are inclined to recommend long even today as a hedge.   With its strong VIP business that seems to be less volatile than the market, Galaxy looks safer.  Looking ahead, we still think the company will open Galaxy Macau Phase 2 before the May holidays – earlier than expected - thus have at least an eight month first mover advantage as Cotai supply explodes.  Unlike the other concessionaries, Galaxy’s 2015 Street estimates look conservative. 


September 11, 2014

September 11, 2014 - Slide1

BULLISH TRENDS

September 11, 2014 - Slide2

September 11, 2014 - Slide3

September 11, 2014 - Slide4

September 11, 2014 - Slide5

 

BEARISH TRENDS

September 11, 2014 - Slide6 

September 11, 2014 - Slide7

September 11, 2014 - Slide8

September 11, 2014 - Slide9


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 11, 2014


As we look at today's setup for the S&P 500, the range is 16 points or 0.64% downside to 1983 and 0.17% upside to 1999.          

                                                                                                                     

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: 1.97 from 1.97
  • VIX closed at 12.88 1 day percent change of -4.59%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Sept. 6, est. 300k (pr 302k)
  • 8:45am: Bloomberg U.S. Economic Survey, Sept.
  • 9:45am: Bloomberg Consumer Comfort, Sept. 7 (prior 37.7)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for auction of 3M/6M/1Y bills, 10Y TIPS
  • 12pm: USDA WASDE crop report for Sept.
  • 1pm: U.S. to sell $13b 30Y bonds in reopening
  • 2pm: Monthly Budget Stmt, Aug., est. -$130b (pr -$147.914b)

 

GOVERNMENT:

    • House, Senate receive briefings on Islamic State
    • 7:30am:  National Association of Federal Credit Unions holds 3rd day of Congressional Caucus Lineup, with Sen. Toomey, R-Pa.; HUD Secretary Castro; Sen. Johanns, R-Neb.; House Foreign Affairs Chair Royce, R-Calif.; Rep. Moore Capito, R-W.Va.; CEA Chairman Furman; Freddie Mac CEO Layton
    • 8:30am: Sen. Hatch of Utah ranking Republican on Senate Finance Cmte, at U.S. Chamber of Commerce event on tax reform
    • 9am: House Armed Services Chairman McKeon, R-Calif. makes remarks Islamic State following Middle East leader mtg last wk
    • 10am Sir Richard Branson speaks at CSIS event on “Time to Rethink Global Drug Policy”
    • 6pm: GWU  discussion with Iraqi Ambassador to the U.S. Faily
    • U.S. ELECTION WRAP: GOP Cavalry Rides to Kansas; Attack Ads

 

WHAT TO WATCH:

  • RBS, Lloyds London move ‘irreversible’ after Scot turmoil
  • Investors Pull $2b From U.K. Funds Ahead of Scottish Vote
  • Credit Agricole said to near accord in U.S. sanctions probe
  • MasterCard loses fight at top EU court over card-fee limits
  • McDonald’s sued in Russia on claim of understating calorie count
  • BofA’s Merrill said to appeal $136m Takefuji verdict
  • Axa said in advanced talks to sell Hong Kong pension-fund unit
  • Paulson opposes ‘destructive’ AngloGold share sale plan
  • JDSU breakup plan said to follow push from hedge fund Sandell
  • Twitter seeks up to $1.5b in convertible debt offering
  • RadioShack financing deal said prepared by UBS, Standard Gen
  • Obama relying on Middle East allies to carry Islamic State fight

 

EARNINGS:

    • Dollarama (DOL CN) 7:30am, C$1.03
    • Kroger (KR) 8:30am, $0.69 - Preview
    • Lululemon Athletica (LULU) 7:15am, $0.29 - Preview
    • North West (NWC CN) 4:30pm, C$0.40
    • RadioShack (RSH) 6am, ($0.66)
    • Transcontinental (TCL/A CN) 10:05am, C$0.46
    • Ulta Salon Cosmetics (ULTA) 4pm, $0.82

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Food Prices Near Four-Year Low as Milk to Cooking Oils Fall
  • Commodities Drop to 4-Year Low With Abundant Corn to Oil Supply
  • Saudi Arabia Cuts Production as Brent Slips Below $100 a Barrel
  • Fungus Stoked by Warming Threatens Organic Coffee: Commodities
  • IEA Cuts Demand Estimate as Saudi Exports Drop to 2011 Low
  • Spot Gold Extends Drop to Fall 0.8% to Lowest Since Jan. 31
  • Wheat Tumbles With Soybeans to Four-Year Low Before USDA Report
  • Copper Falls to Lowest Since June as Dollar Gains Erode Demand
  • Palm Imports by India Seen Surging 60% as Prices Slump on Glut
  • Coffee Reserves in Vietnam Seen Shrinking to Lowest Since 2011
  • Glencore Offers Bonds in Australia as It Assesses Local Targets
  • Gold-Oil Link Strongest in 11 Months as Europe Woes Drive Losses
  • Raw Sugar Futures Extend Decline in New York; Cocoa Also Falls
  • California’s Water-Starved Farmers Stymied by Fish Protections
  • Brent Crude Falls to 16-Month Low With WTI as IEA Cuts Estimates

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


investing ideas

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.

next