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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

 

 


Idea Flow

This note was originally published at 8am on August 21, 2014 for Hedgeye subscribers.

“I don’t really make decisions, I go with the flow.”

-Nicole Kidman

 

For most, Academy Award-winning actress Nicole Kidman requires no introduction; in this analyst’s humble opinion, her role as Dr. Chase Meridian in Batman Forever should forever be remembered as one of cinema’s all-time great damsels in distress.

 

Idea Flow - forever08

 

Lacking adequate contextualization for her quote above, we thought we’d spend some time this morning discussing “flow” in a more relevant context: investment ideas.

 

Be it the Surf Lodge in Montauk or the White Briar/Princeton combo in Avalon, NJ, I’ve done my fair share of “going with the flow” this summer. In fact, how I’ve approached social life in my late-twenties is not unlike how I’ve approached generating investment ideas – by remaining open-minded and gravitating towards those destinations that others are also likely to find most attractive.

 

That’s easier said than done, however, especially in the context of investing. How does any investor – fully equipped with his or her confirmation biases – remain open-minded enough to consistently and presciently spot those attractive destinations? While I’m sure asking 20 different analysts and portfolio managers will net about 19-20 different responses, my answer to that omnipotent question is simple: by doing the same thing each and every day.

 

Back to the Global Macro Grind...

 

My repeatable process commences each morning by writing down 186 unique, color-coded quantitative signals into my notebook. These signals can be anything from the MoM delta in India’s OIS spread, to the SPY’s Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) score per our Tactical Asset Class Rotation Model (TACRM), to the top-20 and bottom-20 VAMDMI scores across the universe of global macro ETFs. It culminates with absorbing all of the relevant economic data and policy rhetoric in my geographical coverage area and categorizing the deltas as sequential accelerations, decelerations, tightenings and/or easings.

 

While this process is far from perfect, it does tend to afford me a consistent opportunity to kick the tires on many developing investment themes and ideas. From there, we apply a healthy dose of “secret sauce” to determine whether or not a particular theme or idea is worthy of communicating to our subscribers.

 

For those of you who with the ability to invest capital internationally, we thought we’d create the table below to help synthesize and hold accountable our investment ideas across the Asia, LatAm and EM space, which is my primary coverage responsibility for the team. In addition to updating you on the active recommendations therein, we are also taking this opportunity to provide post mortem on our closed ideas over the TTM.

 

Active Long Ideas:

 

  • FXI: We continue to think the shaky foundation on which the Chinese economy currently resides will force officials to ease monetary and fiscal policy, at the margins. This should be supportive of industries tethered to China’s fixed asset investment bubble. (TREND duration)
  • EPI: If we could LBO a country, India would be our top choice. The country’s new “management team”, led by RBI Governor Dr. Rajan and Prime Minster Modi, is implementing the kinds of policies needed to structurally elevate India’s growth potential. (TREND and TAIL durations)
  • EEM, EMB, EMLC and CEW: When we were making the opposite call ~18M ago, there were not a lot of investors who agreed with us that US monetary policy was the driving factor behind capital flows, monetary conditions and asset prices in emerging markets. Now everyone gets it and the fundamentals (i.e. US #GrowthSlowing) and quantitative signals (see slide #4 of TACRM deck above) support remaining long of EM assets here. (TREND duration)
  • EIDO: Definitely long in the tooth as it relates to Jokowi hoopla, but the comps in our GIP (i.e. Growth/Inflation/Policy) model portend a favorable investing environment for at least the next 2-3M. (TREND duration)

 

Closed Long Ideas (TTM):

 

  • ARGT: Booking the loss here. Loose fundamental thesis on our part with even looser results.
  • EWT: Great trade. Semiconductor stocks (SOX Index) have done nothing but go straight up over the past two weeks; a failure to make a higher-high would auger negatively for the consensus storytelling about a sustained recovery in CapEx.
  • ENZL: Decent timing on booking the gain. It’s been lower-highs and lower-lows for New Zealand for ~3M now amid marginally dovish monetary policy.
  • EWZ, BZF and PBR: Great [near] bottom-tick back in FEB; booked the alpha too early amid fears of a growing probability of a Rousseff reelection. Silva’s entrance into the presidential race throws a wrench in the trade, but we think Brazil is setting up to be a nice short heading into 2015 if either of the female candidates emerges victorious.
  • FXY: Not much to see here; we merely traded around what we saw as likely consolidation amid a fiscal and monetary policy vacuum in Japan.
  • CQQQ and CHIQ: Great trade. Our long “New China”/short “Old China” theme would’ve returned +1,154bps on an equal-weighted basis.
  • EPI: Booked substantial alpha ahead of the election, fearing consternation. Rotated back into it a few weeks later and haven’t looked back since.
  • DXJ: Calling for Japanese equity reflation to occur concomitantly with aggressive yen debasement back in 4Q12 remains one of the hallmark calls of my analytical career.

 

Active Short Ideas:

 

  • FXA: While his latest guidance on rates isn’t necessarily supportive of our view, it’s clear that RBA Governor Glenn Stevens wants a lower Aussie dollar, citing Australia’s deteriorating labor market. Just wait until Aussie CPI decelerates for the next 1-2 quarters, which is something our GIP model currently identifies as the most probable outcome.
  • General commentary: You’ll note that there aren’t a ton of active short ideas here. That’s by design, as both the bottom-up fundamentals and top-down quantitative signals continue to support a long bias towards EM assets at the current juncture.

 

Closed Short Ideas (TTM):

 

  • KRW: Booking the loss here. We couldn’t have been more right about South Korea’s deteriorating GIP dynamics or the aggressive spate of fiscal and monetary easing we’ve seen in recent months. Conversely, inflows from international equity investors have buoyed the won – likely well above where the BoK and Finance Ministry want it to trade.
  • EWA: Booking the absolute return loss/relative return alpha here. The glass half-empty reads: we underestimated the resiliency of the Aussie housing market and the Aussie consumer. The glass-half full reads: Australia’s substantial underperformance relative to global equities highlights some of the structural headwinds we were calling for back in mid-2012.
  • DXJ: Good trade. As we predicted, Japan did not participate in the rally across global equities from the early-FEB lows through our late-MAY note to stop fading consensus on the “Abenomics Trade”.
  • CHIX and CHXX: See commentary above RE: CQQQ and CHIQ.
  • EPHE: A bad play by us that could’ve been much worse. The EPHE ETF has appreciated +15.5% since we turned broadly positive on EM assets earlier this year – inclusive of backing away from the short side of Filipino equities.
  • CLP: A decent play by us that could’ve been much better, had we stuck with it. The Chilean peso has declined an additional -5% versus the US dollar since we backed away from it on the short side.
  • EWZ: Outstanding call. Not much more to be said.
  • EEM, EMB, EMLC and CEW: This round of #EmergingOutflows was far less severe than the first (see below).
  • FXY: This is the centerpiece of the aforementioned Abenomics Trade (i.e. short yen/long Nikkei) and one of the best calls of my analytical career. We more-or-less top-ticked the all-time lower-high in the Japanese yen. It’s been mostly straight down ever since – and by a lot!
  • CHIX: Great thesis; terrible timing. Reminded us of the one thing many investors forget when they ponder Chinese tail risk: China is a state-run economy. At the drop of a dime, they can manufacture both liquidity and economic growth. While reflation policies are obviously unsustainable over the long term, they can be a lot more sustainable over the near-term than the P&L of anyone trying to short China at such favorable turns in policy.
  • EEM, EMB, EMLC and CEW: Another one of the hallmark calls of my analytical career. Turning bearish on EM assets when we did was greeted with a substantial amount of disbelief and contempt from investors – until after they went down in price… by a lot!

 

Obviously the nuggets above are intended to be brief, so please feel free to reach out if you’d like additional color on anything you see above.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.46% 

SPX 1955-1994 

RUT 1120-1167 

VIX 10.83-15.52 

USD 81.48-82.39 

Gold 1271-1321 

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Associate: Macro Team

 

Idea Flow - Asia COD


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September 4, 2014

September 4, 2014 - Slide1

 

BULLISH TRENDS

September 4, 2014 - Slide2

September 4, 2014 - Slide3

September 4, 2014 - Slide4

September 4, 2014 - Slide5

September 4, 2014 - Slide6

 

BEARISH TRENDS

September 4, 2014 - Slide7

September 4, 2014 - Slide8

September 4, 2014 - Slide9

September 4, 2014 - Slide10


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 4, 2014


As we look at today's setup for the S&P 500, the range is 19 points or 0.64% downside to 1988 and 0.31% upside to 2007.                                 

                                                                                              

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: 1.89 from 1.88
  • VIX closed at 12.36 1 day percent change of 0.90%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England seen maintaining bank rate of 0.5%
  • 7:30am: Challenger Job Cuts y/y, Aug. (prior 24.4%)
  • 7:30am: RBC Consumer Outlook Index, Sept. (prior 51.5)
  • 7:45am: ECB seen maintaining refinancing rate of 0.150%
  • 8:15am: ADP Employment Change, Aug., est. 220k (prior 218k)
  • 8:30am: ECB’s Draghi hold news conference in Frankfurt
  • 8:30am: Trade Balance, July, est. -$42.4b (prior -$41.5b)
  • 8:30am: Initial Jobless Claims, Aug. 30, est. 300k (prior 298k)
  • 8:30am: Nonfarm Productivity, 2Q final, est. 2.4% (prior 2.5%)
  • 9:45am: Markit US Services PMI, Aug. final, est. 58.5 (pr 58.5)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 31 (prior 37.3)
  • 10am: ISM Non-Mfg Composite, Aug., est. 57.7 (prior 58.7)
  • 10:30am: EIA Natgas storage change
  • 11am: DOE Energy Inventories
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
  • 12:30pm: Fed’s Mester speaks in Pittsburgh
  • 7pm: Fed’s Powell speaks on Libor in New York
  • 8:15pm: Fed’s Fisher speaks in Dallas
  • 9pm: Fed’s Kocherlakota speaks in Helena, Mont.

 

GOVERNMENT:

    • Obama attends NATO summit, meeting of NATO-Ukraine Commission, attends dinner on security challenges at Cardiff castle
    • Senate, House out on final week of summer recess
    • 11am: Investors, activists hold news conf. on 1m comments filed in support of political spending petition to SEC “to expose the hidden influence of corporate money”
    • 11am: FCC Chairman Tom Wheeler delivers remarks on future of broadband
    • Noon: Treasury Sec. Jack Lew delivers remarks commemorating Treasury Dept’s 225th anniversary
    • U.S. ELECTION WRAP: Ballot Initiatives; Ads Pulled in Alaska

 

WHAT TO WATCH:

  • Tibco said to pitch sale to private equity amid strategic review
  • Manulife strengthens Canada hold with Standard Life purchase
  • Commerzbank said near $650m settlement on Iran violations
  • August U.S. comp. sales seen in line on school shopping
  • Home Depot working with Symantec to investigate suspected breach
  • Samsung unveils wraparound Note to counter large-screen iPhones
  • Draghi push for ECB easing intensifies as ABS plan in focus
  • Germany’s factory orders rebound in sign of returning growth
  • BOJ keeps record easing as Kuroda aims to sustain recovery
  • Computers for hire said to send stolen JPMorgan data to Russia
  • Export-Import plan said to leave companies without loan clarity
  • PVH rises after second-quarter profit tops analysts’ estimates
  • China said to limit foreign TV content on streaming websites

 

AM EARNS:

    • Ciena (CIEN) 7am, $0.29 - Preview
    • Hovnanian Enterprises (HOV) 9:15am, $0.09 - Preview
    • Joy Global (JOY) 6am, $0.84 - Preview
    • Mattress Firm (MFRM) 6am, $0.60
    • UTi Worldwide (UTIW) 8am, $0.01
    • VeriFone Systems (PAY) Bef-mkt, $0.35 - Preview

 

PM EARNS:

    • Ambarella (AMBA) 4:05pm, $0.28
    • Cooper Cos (COO) 4pm, $1.90
    • Finisar (FNSR) 4pm, $0.32
    • Infoblox (BLOX) 4:05pm, $0.01
    • Quiksilver (ZQK) 4:04pm, $0.03
    • Seachange Intl (SEAC) 4:02pm, $(0.21)
    • Verint Systems (VRNT) 4:05pm, $0.60
    • Zumiez (ZUMZ) 4pm, $0.23

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Nickel Rises to Seven-Week High on Philippine Ore-Export Concern
  • Iron Ore Slump No Bar to Supply as China Mines Shut: Commodities
  • WTI Crude Declines on Rising U.S. Fuel Inventories; Brent Falls
  • Philippine Ore Ban May Almost Triple Nickel Deficit: Bull Case
  • Gold Trades Little Changed Above 11-Week Low on Demand to Dollar
  • Corn Holds Near Lowest Since 2010 as U.S. Harvest Seen at Record
  • Vegetable Oil Prices Seen Recovering, Oil World’s Mielke Says
  • LME to Start Aluminum Premium Contract Early 2Q15: Chamberlain
  • U.K. Power Jumps as EDF Delays Start of Four Nuclear Reactors
  • Christie in Mexico Calls for U.S. to End Oil Export Restrictions
  • Saudi Arabia Selling Oil to U.S. Imperiled by Shale Boom: Energy
  • Rio’s Andrew Woodley to Take Over Oyu Tolgoi Mine Amid Disputes
  • Bean-Hoarding Epidemic Deepens Dollar Shortage: Argentina Credit
  • Philippine Ore Ban Wins Support While Implementation Far Off

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Cartoon of the Day: Russian Circus

Takeaway: Russian President Vladimir Putin tries to be the global ringmaster.

Cartoon of the Day: Russian Circus - Putin 09.03.2014


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.

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