Takeaway: Hedgeye called the move in Treasuries and small caps.
The Russell 2000 is a certified train wreck down double-digits (-10.2%) from where we called it the all-time #bubble high in small cap illiquidity.
Meanwhile, overall market volume continues to accelerate on the down days (Total Equity Market Volume was up +25.7% yesterday vs. 3 month average on the -1.5% sell-off in the Russell 2000). Don’t underestimate how hard it is for funds to get out of some of these exposures.
Meanwhile, we’ve remained long the Long Bond (in TLT terms), despite Old Wall consensus saying otherwise. It's up over 18% YTD. Yields can, in fact, go a lot lower from here. There’s no long-term support for the UST 10YR Yield to 1.7%.
Why settle for Old Wall research? Join the winning team today.
Tickers: BYI, ISEL, LVS, H
- Oct 2: G2E Las Vegas
- Oct 8: HT Investor Day
BYI/GTK:IM – GTECH’s board has approved the merger of GTECH into Georgia Worldwide, or what GTK is calling the NewCo, which is part of its deal to buy IGT. The board also approved the repurchase of 16.676 million GTK shares, which is part of the transaction.
Takeaway: The merger progressing seemingly faster than projected.
ISLE – The Davenport Planning and Zoning Commission approved a plan to alter a comprehensive plan for a 108-acre site at the southwest corner of Interstates 74 and 80 to accommodate a casino and seven-story hotel. The property rezoning will allow Dan Kehl and his casino company to migrate the Rhythm City Casino from a riverboat to a land based casino. The proposed the casino will encompass a $110 million, seven-story, a 143-room hotel, a 1,500-seat event center and 33,800 square feet of gaming space.
Takeaway: The development a land based casino in Davenport will likely cannibalize ISLE's Bettendorf riverboat.
LVS – (Bloomberg) Mr. Adelson suggested the VIP gambling business in Macau could see a recovery in two months following a Chinese government crackdown on corruption sapped demand.
Takeaway: What constitutes "recovery"?
LVS – (Bloomberg) During a discussion at G2E, Mr. Adelson said Las Vegas Sands would be interested in building a casino at the Meadowlands racetrack in New Jersey, if proposals to expand casino gambling beyond Atlantic City were approved by state legislators.
Takeaway: Low tax rate needed to move the needle.
H – announced Interval Leisure Group has completed the previously announced acquisition of Hyatt Residential Group from affiliates of Hyatt Hotels Corporation. The purchase price of approximately $220 million includes Hyatt's interest in a joint venture that owns and is developing Hyatt Kanapali Beach, a 131-unit shared ownership property in Maui. In connection with the acquisition, a subsidiary of ILG has entered into a global Master License Agreement with respect to the exclusive use of the Hyatt brand in shared ownership.
Macau Golden Week Visitation – October 1st visitation was 136,908, +10% year-over-year while visitors from mainland China was 104,569, an increase of 2.3% year-over-year
Takeaway: Overall strong visitation growth, but visitation from mainland China trailing expectations.
Communist Party China Add'l Reform – the Political Bureau of the CPC Central Committee released a statement announcing that the fourth plenary session of the CPC 18th Central Committee, which is set to discuss rule of law, will be held from Oct. 20 to 23. This will be the first time a plenary session of the CPC Central Committee has taken rule of law as its central theme. And rule of law is a must if the country wants to build a prosperous society and comprehensively deepen reform. All in all, the 65th anniversary of the PRC's founding seems a new start for further reform and exploration of socialism with Chinese characteristics.
Takeaway: Stay tuned for additional reforms.
Occupy Central spills into Macau – In Macau, organizers say about 500 activists are gathering at the Praca Da Amizade to show solidarity with Hong Kong protests. The gathering had been approved by the territory's government. The meeting was first planned to take place in front of Macau's Legislative Assembly, but later moved
Takeaway: Growing discord moves from Hong Kong to Macau but very unlikely to be sustained there.
New Jersey Sports Betting – (mycentralnewjersey.com) Two New Jersey state senators, Democrat Raymond Lesniak and Republican Joseph Kyrillos announced that they intend to introduce the legislation when the Senate meets Oct. 9. They say the bill would reinforce the state attorney general’s position that the state can legally lift the ban on sports betting, so long as it does not specifically authorize the wagering.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye
Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
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Client Talking Points
The Russell 2000is now down double-digits (-10.2%) from where we called it the all-time #bubble high in small cap illiquidity; volume continues to accelerate on the down moves (Total Equity Market Volume +25.7% yesterday vs. 3 month average); don’t underestimate how hard it is for funds to get out of some of these exposures.
It didn’t take much (one ISM sequential slow-down print yesterday) to get us paid on the core Long Bond positions; just wait until another bad jobs report and/or multiple GDP misses; Yellen will freak like Draghi has, and there’s no long-term support for the UST 10YR Yield to 1.7% vs. 2.39% last.
Many bought “consumer stocks” on the falling oil thesis – that didn’t work (Consumer Discretionary, XLY, is -4.6% in the last month with Oil hitting new lows); this is what happened in what we call #Quad4 in 2008 as well; both inflation and growth is slowing, at the same time (we’ll outline this on the Macro Themes Call at 1:00pm EDT).
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Top Long Ideas
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.
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.
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
WTI Crude Slips Below $90 for First Time in 17 Months – http://mobile.bloomberg.com/news/2014-10-02/wti-crude-slips-below-90-for-first-time-in-17-months.html
QUOTE OF THE DAY
Perseverance is the hard work you do after you get tired of doing the hard work you already did.
STAT OF THE DAY
Europe is slowing; Italy leads losers -1.4%, Portugal -1.3% and Russia continues to crash -20.7% year-to-date.
“Did you think I’d lay down and die? Oh no, not I – I will survive.”
I’m thinking some of the bond bears need some love this morning, so I thought I’d bring you some of that with Gloria Gaynor’s 1978 Grammy Award Winning disco love track, I Will Survive!
“At first I was afraid… I was petrified.
Kept thinking I could never live without you by my side…
But then… I grew strong. And I learned how to get along”
‘Oh, as long as I know how to buy the Long Bond, I will get along… I know I will stay alive. And I’ll survive. I will survive! Hey, hey…’
Back to the Global Macro Grind…
Being born in the 1970s, I still get what living without all of the entitlements in the world means. Savings matter. So does saying thank you to the people who helped bring me along in my #blessed life.
One of the greatest gifts I’ve ever received was the time in which I entered this business. From my first trading internship at Williams Trading in the summer of 1998, to my first job @FirstBoston in 1999, I saw both the hedge fund business hockey stick and the Tech #Bubble manifest, then collapse.
For my 1st three years on the buy-side, the SP500 was down on the year (2000, 2001, 2002), so I learned how to A) not lose other people’s moneys first, then B) get really long when people hated stocks in 2003-2006. Oh, and then another #Bubble in 2007. Market crash. Epic recovery. Then this…
But what is this?
- #Quad4 – where both US growth and inflation (in rate of change terms) are slowing, at the same time
- #EuropeSlowing – and why Draghi’s central planning drugs will be hard pressed to arrest it
Oh, yes. #Bubbles.
How does your portfolio survive an early cycle global recession as asset prices are deflating and #Bubbles are popping?
- Raise Cash (mine is at 62% in my asset allocation model this morning)
- Be big on the long side of Long Term Treasuries (TLT, EDV, etc.)
- On pullbacks add to Munis, and maybe some Healthcare and Consumer Staples stocks
While this call may have sounded aggressive with the 10yr UST yield at 2.63% less than 3 weeks ago, it should have. While I don’t get paid like I used to (just putting the position on, in size), I still wake up at 4AM wanting to win, just like you do.
In Signal Terms (Real-Time Alerts), I issued 33 SELL signals (13 BUYS) in the month of September. Most of the sells were in US and European equities. Most of the buys were bonds. And I’d still buy more long-term bonds if there’s another opportunity!
When something big and contrarian like this is going your way, you don’t run for the exits during no-volume market head-fakes. You press it (or, as the great Stan Druckenmiller would say, “you spread your wings”).
That said, almost 100% of the questions I got in mid-September had to do with:
- Selling Bonds
- Buying Stocks
When the right questions should have been:
- How big do I make the Long Bond position on the recent pullback?
- How big do I get on the short side of the Russell 2000’s liquidity trap?
Markets don’t go from #bubble mode to buys on a -3.2% correction (that’s where we are for the SP500). However, on a -10.2% draw-down (Russell 2000’s drop from its all-time #Bubble high on July 7th 2014), levered long players start to freak out.
As they should.
What is the catalyst to reverse the Long Bond’s (TLT) total return of over +18% (vs Russell -7% YTD loss)? I don’t think there is one. If there is one catalyst we have been warning investors of all year long that matters most here, it’s the cycle.
That is it. The cycle, slowing.
And if one ISM slow-down print (yesterday’s was reported at 56.6 for SEP vs 59.0 for AUG) can smoke the 10yr Treasury Yield down to 2.39% in a day, what do you think the next bad jobs report and/or US GDP miss is going to do?
Personally, I don’t say buy FogDog.com or the FireEye on that. Stay with our Macro Playbooks, and you will survive this #bubble.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.36-2.53%
WTI Oil 89.01-92.14
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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