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Cartoon of the Day: Angels & Demons

Takeaway: 47% of Nasdaq stocks and 41% of stocks in the Russell 2000 are crashing from their 12-month peak. The long bond? It's up +12% YTD.

Cartoon of the Day: Angels & Demons - Equities devil  bonds angel


LVS: ESTIMATES ARE TOO DAMN HIGH!

Takeaway: Adding LVS to the Hedgeye Best Ideas list on the short side

Jimmy McMillan would be cutting estimates.


 

CALL TO ACTION

We are adding LVS to the Best Ideas list on the short side.  Consensus estimates still need to come down for Q3, Q4 of 2014 and for 2015.  Hedgeye is currently 6%, 7%, and 9% below the Street, respectively.

 

THE SETUP

LVS was a top long idea on the Best Ideas list from 01/31/14 until we removed it on 03/10/14.  We made our Mass Decelerating call on June 13th and highlighted LVS as the most at risk to estimate reduction and stock pressure.  The condition of the Macau market has deteriorated faster than even we expected and while we’ve had lower than consensus estimates for 2H for a while, we feel compelled to lower estimates once again.  Here are our EBITDA estimates versus Consensus.

 

LVS: ESTIMATES ARE TOO DAMN HIGH! - q3

 

We still like the long term outlook for Macau and believe that LVS is very well positioned to capitalize on Macau and Asian growth.  However, with the fundamentals worsening over the near and intermediate term, Mass disappointing more on the margin, and lower estimates, LVS and the Macau stocks look like they should continue to move lower.  Strong Golden Week hotel bookings notwithstanding, October and Q4 offer few catalysts and we fear the difficult market will continue into 2015.


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Darius Dale

Associate: Macro Team


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Ongoing Conversations

This note was originally published at 8am on September 02, 2014 for Hedgeye subscribers.

“There is an ongoing conversation among the different factions in your brain…”

-Dr. David Eagleman

 

That’s an important quote from neuroscientist , David Eagleman, that was cited by Brene Brown in a new #behavioral book I finished this long weekend called Daring Greatly. If you’re looking for some introspection into both your investment process and life, this one will make you think.

 

Thinking is good. So is reading/writing. These basic brain exercises help you debate yourself in that ongoing conversation “among the different factions in your brain, each competing to control the single output channel of your behavior.” (Daring Greatly, pg 76)

 

Eagleman calls your brain a “team of rivals” within the two-party system of “reason and emotion.” Brown contextualizes the back and forth conversations you have with yourself with feelings like vulnerability and shame. These are perfect things to read about right before you take your kids to a pancake breakfast!

 

Ongoing Conversations - br5

 

Back to the Global Macro Grind

 

The market is at its 2014 highs, baby! How does that make you feel? Oh, and what “market” are you thinking about when you read the word market? The long end of the US bond market has had a much better year than the US stock market (TLT = +19%, with dividends).

 

While it didn’t shame me to see the broad measure of US growth expectations (Russell 2000) rise +1.2% on no volume last week, it certainly didn’t please me to see consensus chasing a misplaced expectation that it’s had all year (for US GDP to be +3-4% and bonds to fall).

 

It evidently didn’t shame the European growth bulls to beg for a new round of Quantitative Pleasing either. If being long European stocks was always based on Europe slowing to the point that it needed moarrr money printing, my hat is off to whoever nailed that.

 

For equities-only fans, in addition to European stocks (Europe’s Stoxx 600) and the Russell 2000 being +1.2% last week, here’s what else happened:

 

  1. US Industrial Stocks (XLI) were down -0.2% to +3.4% YTD
  2. Emerging Markets (MSCI) were down -1.4% to -1.0% YTD
  3. US Utilities (XLU) were +2.0% to +14%YTD
  4. Russian stocks were -5.5% to -17.5% YTD
  5. Argentine stocks were +7% to +82.1% YTD

 

In other words:

 

  1. Slow-growth #YieldChasing (long XLU vs XLI) remains alive and well as a US Equity Sector strategy
  2. Emerging Market equities still do not like a stronger Dollar
  3. The more screwed up your country gets, the higher the stock market goes?

 

Oh, yeah. Definitely.

 

Doesn’t this all make you feel good? Like this time is different or something? With Japanese, European, and American central planning committees going all in on Policies To Inflate, even that crazy critter called commodity #InflationAccelerating came back online last week:

 

  1. CRB Commodities Index +1.4% on the week to +4.5% YTD
  2. Coffee prices up another +7.4% on the week to +67.5% YTD
  3. Cattle prices up another +3.5% on the week to +28.0% YTD

 

I know. Eat a hot dog or something. Steak is overrated. Ask the government people about the “substitution effect” on your barbeques, eh! (PS: if you bought the sausage instead of the ribeye, hog prices were up another +5.7% last week too = +17.2% YTD).

 

Now the reasoning side of the veggies and water brain couldn’t care less about this stuff. It’s we emotional guys pounding the caffeine and burgers who need to deal with ourselves. Because the US equity consumption growth bulls don’t want to talk about real things, like inflation.

 

To be clear, even the CRB Index is beating both the Russell 2000 and Euro Stoxx 600 by +360 basis points for 2014 YTD (both the Russell and Euro Stoxx 600 moved back into the black to +0.9% for 2014 last week – raging bull in emotions there!).

 

In other news, what real cost of living ripping to all-time highs in the US does is slows real growth – so last week you also saw:

 

  1. Goldman cut its Q3 US Growth estimates for the 2nd time in 2 months
  2. US 10yr Treasury Yield drop another 6 basis points on the week to 2.34%
  3. US Treasury Yield Spread (10yr minus 2yr) continue to compress, -79 basis points YTD

 

Net of all my own performance issues, emotions, and reasoning, this is where I stand on September 2nd:

 

  1. Wanting to buy more long-dated bonds (High-grade Corporates or Treasuries) on dips
  2. Wanting to be longer of our two favorite Emerging Markets (China and India) on pullbacks
  3. Wanting to avoid anything US growth equity bubble like the bubonic plague

 

Plague? Yep. I really do not like to buy the all-time-bubble highs in anything.  But that’s just me. For better or worse (we’ll see), these factions of 1999 and 2007 in my brain just won’t go away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.33-2.43%

SPX 1980-2009

RUT 1151-1179

Shanghai Comp 2199-2278

EUR/USD 1.31-1.33

Pound 1.65-1.67

Gold 1271-1299

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ongoing Conversations - Chart of the Day


Crashing?

Client Talking Points

EUROPE

ECB President Mario Draghi cuts rates weekly now? That centrally planned pop in stocks did nothing for the economy, and now equities (Italy, Portugal, France) are moving back to bearish TREND signals @Hedgeye. ZEW slows (again) in September.

UST 10YR

Whispers about “what the Fed is going to do” can only take bond yields so high - nothing slows the UST 10YR more than gravity (#GrowthSlowing), down 6 basis points this morning to 2.56% - no support to 2.34% - buying the dips in the Long Bond much more attractive in 2014 than something like the Russell 2000 which is now -1.4% year-to-date.

GOLD

Rates Down = Gold Up; so this is not where you give up on the long Gold position; it’s where you double down, especially if you agree with me that Janet Yellen talks down rate hikes on Wednesday. No Gold resistance until $1276.

Asset Allocation

CASH 36% US EQUITIES 6%
INTL EQUITIES 19% COMMODITIES 4%
FIXED INCOME 31% 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

Copper and Nickel continue to break down (that's new) - violent move in Nickel in the last wk

 

QUOTE OF THE DAY

Excellence is not a singular act, but a habit. You are what you repeatedly do.

-Shaquille Oneal

STAT OF THE DAY

UK consumer prices fall to +1.5% AUG year-over-year vs. 1.6% JUL - excellent run for the UK economy.


CHART OF THE DAY: Domestic Growth Exposure Outperforming: Is That Right Call Going Forward?

 

CHART OF THE DAY: Domestic Growth Exposure Outperforming: Is That Right Call Going Forward? - Chart of the Day


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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