Here’s an excerpt from Hedgeye CEO Keith McCullough’s morning call to institutional subscribers.
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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.
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.
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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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!
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:
- US Industrial Stocks (XLI) were down -0.2% to +3.4% YTD
- Emerging Markets (MSCI) were down -1.4% to -1.0% YTD
- US Utilities (XLU) were +2.0% to +14%YTD
- Russian stocks were -5.5% to -17.5% YTD
- Argentine stocks were +7% to +82.1% YTD
In other words:
- Slow-growth #YieldChasing (long XLU vs XLI) remains alive and well as a US Equity Sector strategy
- Emerging Market equities still do not like a stronger Dollar
- 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:
- CRB Commodities Index +1.4% on the week to +4.5% YTD
- Coffee prices up another +7.4% on the week to +67.5% YTD
- 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:
- Goldman cut its Q3 US Growth estimates for the 2nd time in 2 months
- US 10yr Treasury Yield drop another 6 basis points on the week to 2.34%
- 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:
- Wanting to buy more long-dated bonds (High-grade Corporates or Treasuries) on dips
- Wanting to be longer of our two favorite Emerging Markets (China and India) on pullbacks
- 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%
Shanghai Comp 2199-2278
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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