Keith's Macro Notebook 11/4: Yen | Oil | Sectors


Takeaway: HPI deceleration is beginning to flatten out. Coupled with easing demand comps, this development makes us less bearish on the margin.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 




Today's Focus: September CoreLogic Home Price Report

CoreLogic released its monthly home price report for September earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index, CoreLogic is a single month index released on a one-month lag. Essentially, it gives you information 2-3 months more current than what you get from Case-Shiller. 


Corelogic reported home price growth slowed -20bps sequentially to +5.6% YoY in September vs. +5.8% in August.  There are a few notables in the release worth highlighting:


  • Volatility:  The now serial volatility in the data extended into September as July was revised to 6.4% (from 6.8%), August was revised to 5.8% (from 6.4%) and the September actual of +5.6% YoY came in almost a full percentage point below the econometric projection issued last month. 
  • Projection:  The projection for the national series is for a 0.1% MoM increase in October which equates to a sequential acceleration in prices +6.0% YoY.  They have been making a false prediction of acceleration in their projection for a few months now.  In contrast, the Ex-Distressed series is projected to decline -0.8% MoM (largest sequential slowdown since 2011) with the YoY decelerating -60bps to +4.6%
  • ROC:  September marks the 7th consecutive month of deceleration in HPI from a rate of change perspective.  However, the rate of change in the second derivative (ie. the 3rd derivative) in HPI is slowing – whereas the monthly decelerations were on the order of -100bps from February to June, they have slowed to just -60bps and -20bps in the last two months, respectively.   
  • Slope Surfing:  While a slowing macro environment remains a discrete risk to the housing market, a fledgling stabilization in HPI alongside easy demand comps and significant YTD underperformance for housing related equities has us significantly less bearish currently than we were 10 months ago when we turned negative on the complex








About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Christian B. Drake

Retail Callouts (11/4): KORS, FL, ICSC

Takeaway: KORS harping on weak mall traffic (strengthening brands don’t say that) + Hicks leaving FL + weak ICSC = bearish points about margin cycle.



Retail Callouts (11/4): KORS, FL, ICSC - 11 3 chart2B




Takeaway: These numbers are just bad. Period. This is the first time the ICSC reading has been under 2% year/year since Spring. The 2 and 3-year trends are just as bad.

Retail Callouts (11/4): KORS, FL, ICSC - 11 4 chart1




KORS 2Q15 Earnings


Takeaway: The $1.00 print was spot on with our estimate vs. consensus at $0.89, but a 16.5% comp wasn't enough -- not by a long shot. The company repeatedly talked about 'weak mall traffic' and a 'conservative consumer'. That's simply not something that a brand with significant runway talks about. In fact, we wonder how many times KORS cited traffic as a headwind in the past four years compared to the past 2 quarters.

Retail Callouts (11/4): KORS, FL, ICSC - 11 4 KORS


FL - Foot Locker CEO Ken Hicks to Retire



Takeaway: This has implications not only for FL, but says a lot about the state of retail. We moved FL up from our Short Bench to our Core Short list. See details in the link to this mornings note: FL - THE LAST STRAW


Malls Fill Vacant Stores With Server Rooms



  • "The Internet is moving to a shopping center near you."
  • "In Fort Wayne, Ind., a vacated Target store is about to be home to rows of computer servers, network routers and Ethernet cables courtesy of a local data-center operator. In Jackson, Miss., a former McRae’s department store will get the same treatment next year. And one quadrant of the Marley Station Mall south of Baltimore is already occupied by a data-center company that last year offered to buy out the rest of the building."


Retail Callouts (11/4): KORS, FL, ICSC - 11 4 bricks click


Takeaway: Interesting read about how demand is nearly nonexistent for B- and C mall properties. We continue to think that while these anchor tenant spaces are the most obvious to be shuttered for marginal retailers, they will ultimately stay open in order to help fuel the e-commerce business given our research that shows how bricks and clicks are inextricably linked. To close marginal stores means risking e-commerce sales to the customers around those stores. Unfortunately, that will put the supply/demand balance even more off kilter, which will put pressure on aggregate productivity. See our recent Department Store deck for details.




Los Angeles Port Talks Hit Snag



  • "Negotiations to finalize a key labor contract for the West Coast ports hit a major setback as the association representing the waterfront employers charged the longshoremen’s union with orchestrating slowdowns in Seattle and Tacoma in the middle of the peak holiday shipping season."
  • "The Pacific Maritime Association claimed on Monday that the International Longshore and Warehouse Union targeted select terminals in Tacoma on Friday and expanded to more terminals in that port and also in Seattle throughout the weekend. Together, the ports handle about 16 percent of cargo arriving on the West Coast."
  • "The association estimated that the slowdown reduced productivity at the terminals by more than 40 percent."


JCP, M, KSS - J.C. Penney tries to one-up rivals with even earlier Thanksgiving opening



  • "J.C. Penney said on Monday it would open its stores for Black Friday shopping at 5 p.m. on Thanksgiving Day, an hour earlier than its closest competitors Macy’s, Kohl’s and Sears, and three hours earlier than it did last year, in the latest upping of the ante in the holiday sales wars."


SHLD - Kmart to stay open for 42 hours straight, starting at 6 a.m. on Thanksgiving



  • "Sears Holiding Company joined the growing list of retailers with extended shopping hours on Thanksgiving and Black Friday."
  • "Sears and Kmart stores will open on Thanksgiving Day, with Sears opening at its earliest time ever: 6 p.m, two hours earlier than last year. Kmart will open its doors for 42 hours straight, from 6 a.m. on Thanksgiving to midnight on Black Friday."


Primark Shrugs Off Weather Impact



  • "Discount fashion retailer Primark has enjoyed a strong start to its new financial year despite warm autumnal weather that has prompted rivals to warn on profits."
  • "George Weston, chief executive of Primark owner Associated British Foods, said Tuesday that Primark's sales and profits had risen over 10 percent in the first six weeks of its 2014-15 financial year, which started on Sept. 14."
  • "'I'm really not concerned (by the weather) and we haven't had to delay or cancel any orders,' he said."
  • "'Yes, there's been an (weather) effect, but ... every year you get unseasonal weather at some point.'"

Early Look

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LEISURE LETTER (11/04/2014)



  • Nov 4:
    • Gaming Referendums:
      • Massachusetts Question 3 (repeal casino law)
      • Colorado Amendment 68 (allow casinos in Mes, Pueblo and Arapahoe counties)
      • California Proposition 48 (veto gaming compact with North Fork Rancheria for off-reservation casino in Madera)
      • Rhode Island Question 1/2 (operate table games at Newport Grand)
    • RHP Q3 earnings 10am .
    • HPT Q3 earnings 1pm
    • AWAY Q3 earnings 5pm
  • Nov 6:
    • MPEL Q3 earnings 8:30am , pw MPEL
    • PNK Q3 earnings 10am , code 27759617
    • BEL Q3 earnings 10am , ID 12457691
    • DIS Q3 earnings 5pm , pin 38177041
  • Nov 10:
    • CZR Q3 earnings 4:30pm , pin 20797507
    • SNOW FYQ1 earnings 5pm
    • SJM Q3 earnings
  • Nov 11
    • Genting Singapore Q3 earnings


DON:AU – signed an exclusive term sheet to acquire “a significant gaming and hospitality business in Cambodia” Donaco said it would fund the deal via existing cash reserves and new debt facilities, together with an equity component for the vendor. The final acquisition price has not yet been set. Donaco International operates the recently-opened, Aristo International casino hotel in Vietnam which is a brand new 5 star hotel with 428 rooms, up to 50 gaming tables, 62 slots (max 150), and max 150 electronic table games.  As background, Donaco International was founded in 2001 by MD Joey Lim Keong Yew and his late grandfather, Tan Sri Lim Goh Tong (founder and chairman of the Genting Group)

Takeaway: Joey Lim Keong Yew and Benjamin Lim Keong Hoe appear to be emulating their uncle, Genting Chairman and CEO Tans Sri Lim Kok Thay, but thus far on a smaller scale.  A new Asian regional competitor for NagaCorp?


LVS – filed a mixed securities shelf of indeterminate size with Use of Proceeds " General corporate purposes may include future construction and development projects, additions to working capital, capital expenditures, repayment of debt, the financing of possible acquisitions and investments or stock repurchases."  The filing can be viewed here 

 Takeaway:  Raising money but for what? Tender offer coming?

MGM (LVRJ) The National Finals Rodeo plans to stay at UNLV’s Thomas & Mack Center for another decade rather than move to the MGM Resorts International/AEG arena.  The 10-year agreement is expected to be signed before the 10-day rodeo opens on Dec. 4. One of the key reasons for remaining at Thomas & Mack was reportedly because Thomas & Mack has two symmetrical tunnels, which allows Thomas & Mack to efficiently handle timed rodeo events such as steer wrestling and team roping.  


SGMS – announced it has signed a new contract to continue as the exclusive provider of instant games and related services for the Tennessee Education Lottery Corporation.  The new contract, which was awarded through a competitive procurement process, continues the successful relationship Scientific Games and the Lottery have shared since 2003.  The contract will begin January 1, 2015 with an initial term of seven years plus seven one-year extension options.

Takeaway: A strong renewal for SGMS and its lottery business.


GTECH - sharesholders approved cross-border merger of GTECH into Georgia Worldwide ("NewCo").  The court-convened shareholders’ meeting of NewCo to approve the Merger will be held on December 15, 2014.  Furthermore, here is the Q/A document:


HLT – investment banks on behalf of Blackstone placed 90 million shares (103.5 million with the green shoe) at $25/share.

Takeaway: Modestly higher than HLT's September 30 closing price of $24.63/share.


RCL – repurchased 3.5 million shares of common stock held by Awilhelmsen AS (Awilhelmsen).  The repurchase price per share will be$67.45, which is equal to the price paid by a financial institution to Awilhelmsen in connection with its sale of 3.5 million shares conducted yesterday November 3, 2014 pursuant to Rule 144 of the Securities Act.  The repurchase is expected to close on November 6, 2014.

Takeaway:  While the sale is only 1.6% of RCL's outstanding shares and has a positive penny impact on 2014 EPS, it was a surprise and we wonder if Awilhelmsen will continue to unwind its 16% RCL ownership in the months ahead.  Awilhelmsen doesn't seem to imply that in its 'diversification purposes' comment but why would they admit its intention to completely unwinde? This also raises speculation that RCL and its Board may put in an official share repurchase program soon.


RCL (CruiseLawNews)  Royal Caribbean Explorer of the Seas was hit with rough weather. The cruise ship is sailing on its 14 night re-positioning cruise to Port Canaveral.  Two lifeboats on deck 4 were reportedly dislodged and water crashed through glass doors and flooded the interior of the ship. Allegedly the water temporarily disabled the aft elevators. 


Macau October GGR & Market Share (DICJ & GGRAsia) totaled HKD27.209 billion, a decrease of 23.17% YoY and up 9.63% sequentially.  According to sources, the market shares are as follows:

  • Sand China 23.7% 
  • SJM 23.4% 
  • Galaxy 21.4%
  • Melco 14.3%
  • Wynn Macau 8.9% 
  • MGM China 8.2%.

Takeaway:  MGM and WYNN were the clear laggards in October, probably due to low VIP hold. We will have the October details later this week. 


Japan (DailyMail) According to sources, Japanese lawmakers are set to indefinitely postpone legalizing casinos as Prime Minister Shinzo Abe, whose cabinet has been hit by a series of scandals, lacks the political leverage to pass a bill this year, sources directly involved in the process said.


Pro-casino lawmakers intend to push back a vote on the bill instead of trying to pass it in the current parliamentary session ending this month, three people directly involved in pushing the casino bill said.  Although they aim to keep the bill on the table, the sources said there was a considerable chance it would not come up for discussion even in 2015.  Higher-priority bills, including those related to national defense, are likely to take up debate time in the next parliament session, they said.  "If they can't pass it now, I doubt whether they'll ever be able to pass it," one of the sources said.


Another source said there was a chance legislation could be delayed by three or four years, meaning actual casino development may have to wait until around 2024.  Toru Mihara, who teaches at the Osaka University of Commerce and was one of the architects of the casino bill, said failure to pass the bill in this session would be a "total loss of face" for Abe's cabinet.  He also said the bill will be difficult to pass next year, as newer topics come up in parliament. 

Takeaway:  After all the hoopla, this happens. This year had the best chance for passage.  Now the outlook for Japan gaming is much more murky. A big potential catalyst for LVS, WYNN, and MGM is likely gone.


Chinese Corruption Crackdown(Xinhua) China will establish a new anti-graft body to further strengthen pressure on "unprecedentedly serious" corruption issues, deputy Procurator-General Qiu Xueqiang has said. Qiu said that the plan for a new anti-graft agency was put forward by the Party committee of the Supreme People's Procuratorate (SPP) and was approved by the central authority.

Takeaway: Corruption to remain the focus of Mainland Government enforcement - a persistent headwind for Macau.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.

Burning Yen: Unintended Consequences

Client Talking Points


The Yen is burnt to a bloody crisp, trading $113.31 vs. USD last and has one of the widest immediate-term risk ranges we have ever seen in FX (109.37-113.66) so that should continue to perpetuate both FX market (and equity + fixed income linked) volatility.


Yen Down = Oil Down (Dollar Up) and now you see the next leg down -2.7% WTI to $76.66/barrel as whoever was trying to defend the $80 line falls down – this is textbook #Quad4 deflation and its catching up to equity and fixed income expectations, by sector.


Sector variance continues to rise as Oil and inflation expectations crash (Oil -28% since June); Energy Stocks (XLE) -1.6% on the day yesterday to -12% year-to-date (Basic Materials, XLB, -0.7% to -5.2%) vs. Healthcare (XLV) which #Quad4 likes long (pricing power) +0.1% to +12.3% year-to-date.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


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


Let's be clear, $FL is not in trouble bc Ken Hicks (CEO) is leaving, Hicks is leaving bc FL is in trouble.



A wise man gets more use from his enemies than a fool from his friends.

-Baltasar Gracian


Japanese Household Spending is down -6% year-over-year, Japanese Housing Starts are down -14% year-over-year and Japanese Construction Spending is down -40% year-over-year.


Takeaway: Our Macro Playbook is a daily 1-page summary of our investment themes, core ETF recommendations and proprietary quantitative market context.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares US Home Construction ETF (ITB)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)



Manufacturing “Surges” In October… Or Did It?: Yesterday there was quite a bit of newsy fanfare surrounding the strong ISM Manufacturing PMI print. We think that optimism is quite a bit misguided in the sense that the Markit PMI data – which a substantially more robust indicator – slowed sharply in OCT on both the Manufacturing and Services fronts. The weakness in the Markit Manufacturing PMI data is in line with the trend of slowing growth in Durable Goods New Orders, Core CapEx Orders, as well as waning inventory build in the 3Q14 GDP print. Effectively, this would imply the Markit data series is more in line with economic reality versus whatever the heck the ISM or other widely-followed Consensus Macro “survey” data is pointing to in defense of a fledgling fundamental bull case for U.S. equities. Some might accuse us of data mining, but we’d gladly point them to our “data mining “ work from 2013 when we were equally as bullish on U.S. growth and domestic demand-oriented equities (i.e. Russell 2000) as we are bearish on those factors today.








Defense Remains Offensive: If domestic manufacturing activity was expanding at the robust pace now-widely assumed by consensus, why on earth does the U.S. equity market continue to be led higher by defensive sectors? Specifically, the three sectors exhibiting the highest degree of positive momentum on a multi-duration basis are: Utilities, Consumer Staples and Health Care. Moreover, the XLU’s +2.0x VAMDMI reading is actually the highest across all of global macro and double that of the iShares Russell 2000 ETF (IWM). The performance chase into year-end is officially on in large-cap U.S. equities, but will this behavioral factor be strong enough to offset the slowing economic cycle or the behavior factors associated with the most illiquid asset price bubble in U.S. equity and corporate credit market history? You know where we stand with respect to that question…




***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Headlines & Under-Hoods: Sept. Income & Spending (10/31)

Hangovers & Late-Cycle Juggernauts: 3Q GDP & Initial Claims (10/30)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Early Look: All Boxed In (10/22)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


Early Look: Deflated Disputants (10/30)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.