We are removing "short" ROYT and BBEP from our Best Ideas list.
Short ROYT has worked well since we added it to our Best Ideas list on 7/2/13 at $17.99/unit. We believe that the NAV of the trust is ~$9.00 – 10.00/unit; it’s still overvalued, but not the opportunity that it was when it was trading at $18 before the insiders unloaded units.
There could be a trading opportunity in ROYT in 2Q14, so we may revisit. ROYT has 2,000 bpd (45% of production) of Brent crude swapped at $115/bbl through March 31, 2014. After that date, the trust will be 100% exposed to spot pricing (California crudes: Midway-Sunset and Buena Vista). Thus, depending on those spot prices in April 2014, there could be a steep decline in the monthly distribution in June, as the June distribution will be paid from April production and prices; that distribution will be announced around May 23rd, 2014. We’ll be watching the California crude prices closely over the coming months.
Short BBEP has not worked since we added it to our Best Ideas list on 7/2/13 at $18.42/unit. Our negative thesis was built on BBEP’s understated maintenance CapEx, aggressive non-GAAP accounting, aggressive hedging strategies and accounting, weak capital efficiency (F&D), excess leverage, its need to raise dilutive equity capital, poor corporate governance, and valuation.
We don’t believe that we are wrong on the fundamentals here, but they don’t seem to matter at the moment (and that’ll happen). Long-term, we are still negative. But we believe that there are better short opportunities in the MLP space, and in the E&P MLP space in particular, than BBEP here and now. BBEP almost went away in 2008/9; it’s our view that at some point it'll be staring down the barrel of that gun again. For relative performance-focused investors, we expect BBEP to continue to underperform the broader MLP sector, especially if it weakens, given BBEP’s outsized leverage, serial acquisition business model, and understated maintenance CapEx.
Ping me for any of the old ROYT and/or BBEP notes.
Takeaway: The trend of "clean" labor data rises to two weeks with this morning's print, and the conclusion remains bullish for Financials.
Two Clean Weeks
The last two weeks have finally provided a glimpse of normalcy in the labor market. The most recent week of data showed a 9.5% year-over-year improvement in initial claims while the week prior showed an 8.2% y/y improvement. The three months preceding that have been riddled with distortions, adjustments and comp issues making them all but unusable. Fortunately, the clean data at year-end reveals a continuation of trend for the labor market: strength. While we would no longer argue that the rate of change y/y is still accelerating, a high single digit rate of y/y improvement at this stage of the recovery is still quite strong.
As we've been arguing for some time now the strengthening labor data is exerting upward pressure at the long end of the yield curve. Based on this we continue to expect banks to have a macro tailwind into 1Q14 and builders to have a headwind.For more on that, see our publication from 11/22/13 entitled #Rates-Rising: A Current Look at Rate Sensitivity Across Financials.
Prior to revision, initial jobless claims fell 1k to 339k from 338k WoW, as the prior week's number was revised up by 3k to 341k.
The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 9.75k WoW to 357.25k.
The 4-week rolling average of NSA claims, which we generally consider a more accurate representation of the underlying labor market trend, was -2.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.0%. However, as mentioned above, the distortions that have been present in the data up until just recently have rendered this 4-wk rolling average slightly less valuable. We expect that in a few weeks it will again become the most important data point we track on the strength of the labor market.
The 2-10 spread rose 11 basis points WoW to 265 bps. In 4Q13, the 2-10 spread averaged 241 bps, which is higher by 7 bps relative to 3Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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.
Client Talking Points
It was an ugly session for Asian stocks which kicked off 2014 with Thailand down -5.2%; KOSPI in South Korea down -2.2% (it broke its Hedgeye TREND); India down -1.3% and China down -0.3% (after being down almost -4% for 2013.) What's that all about? Inflation expectations rising are not good for Asian growth.
So, Silver is up over +3% to start the year after totally crashing in 2013. It's leading the whole inflation expectations rising move this morning as Oil, Copper, etc. are all showing some follow through from what was a strong December of price performance. Thankfully, we covered our Platinum short on red.
No, it's not normal for the 10-year to stay pinned up here and also have precious metals rally. But there’s no such thing as a perpetual normal in macro, so embrace it. 3.03% on the 10-year is signaling more of the same (higher-lows and higher-highs for yields)
|FIXED INCOME||0%||INTL CURRENCIES||27%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
QUOTE OF THE DAY
Every man should be born again on the first day of January. Start with a fresh page.” -Henry Ward Beecher
STAT OF THE DAY
The richest people on the planet got even richer in 2013, adding $524B to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals. Bill Gates was the biggest gainer. The 58-year-old tycoon’s fortune increased by $15.8B to $78.5B, according to the index, as shares of Microsoft rose 40%. (Bloomberg)
Takeaway: Below we rank our top read notes from December. Click the note title for access.
TOP 10 MOST READ NOTES: DECEMBER 2013
- 12/19/13 – Best Idea Update: Short PNRA
- 12/19/13 – DRI: Not Enough
- 12/20/13 – DRI: Clarence’s Legacy, A Half-Baked Plan
- 12/18/13 – SBUX: Losing A Little Momentum
- 12/09/13 – MCD: Rebuilding Not Strengthening
- 12/17/13 – Best Idea Update: Long DRI
- 12/03/13 – KKD: Déjà Vu (Buy The Dip)
- 12/05/13 – Casual Dining Anomaly
- 12/04/13 – YUM Analyst Day
- 12/11/13 – Restaurant Impossible: Fixing Olive Garden
Feel free to contact us if you have any questions, or would like to discuss any of our work in more detail.
THE MACAU METRO MONITOR, JANUARY 2, 2014
DECEMBER 2013 GGR DSEC
Macau GGR reached a new record of 33.46BN MOP (32.48 BN HKD, 4.19 BN USD) in December, 18.5% YoY growth (consensus +13.6%)
SINGAPORE'S ECONOMY GROWS 4.4% ON-YEAR IN Q4 2013 Channel News Asia
According to advance estimates from the Ministry of Trade and Industry, the Singapore economy grew 4.4% YoY in 4Q 2013. On a quarter-on-quarter basis, the economy contracted by 2.7% in 4Q.
HK CONFIRMS H9N2 HUMAN INFECTION Macau Daily Times
A rare case of a human contracting H9N2 bird flu was detected in HK yesterday, according to the HK health authorities. An expert in HK said that the virus does not spread to humans easily, and that there is currently no evidence of human transmission. The Macau Health Bureau warns that the flu virus could become active again as temperatures decline.
real edge in real-time
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.