Client Talking Points
What isn’t bearish is how people were positioned at the SEP $SPX highs and this morning’s – II Bull Bear Spread (bulls minus bears) is +99% to the bullish side since OCT 13th (14.8% Bears tracking all-time lows).
Saw a lot of “charts” in which people were claiming Europe was “breaking out yesterday” – in other news this morning, Italy leads losers -1.6% - MIB Index, the DAX -0.9%, and Eurostoxx50 -0.9% all confirming bearish TREND @Hedgeye).
UST 10YR Yield is down 3 bps this morning (after falling last week on a bad jobs report) to 2.33%, continues to crash (-23% year-to-date) vs. misplaced U.S. growth expectations of +3-4%; we still see sub 2% for the year when it’s all said and done (Q4 slowing).
|FIXED INCOME||28%||INTL CURRENCIES||3%|
Top Long Ideas
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).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Three for the Road
TWEET OF THE DAY
BoE growth outlook cut: 2015 GDP at 2.9% vs 3.1% in August and 2016 GDP at 2.6% vs 2.8%. Inflation outlook also revised down #EuropeSlowing
QUOTE OF THE DAY
Either write things worth reading or do things worth writing.
STAT OF THE DAY
Wal-Mart isn’t concerned about slowing growth in China; the Company is sticking by a plan to have around 480 Wal-Mart stores in China by the end of 2016.
We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers. Watch for a special appearance by retail analyst Brian McGough during the Q&A.
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Tickers: MGM, H, HLT, RCL
- Nov 13-16
- Macau Grand Prix
- Hedgeye Cruise Pricing Survey
- Nov 16-18
- Quantum of the Seas cruise to nowhere
880:HK SJM – Chief Executive Officer Ambrose So is bearish about Macau gambling revenue from high rollers over the next six months as Chinese President Xi Jinping escalates his anti-corruption drive. The executive of Asia’s largest casino operator expects industry-wide gaming revenue to be flat or drop slightly this year. So forecast a “high single digit” growth for 2015.
Takeaway: Mr. So isn't bearish enough - we'll take the under on high single digit growth for 2015.
AC:FP – listed for sale the Sofitel Bora Bora Marara Beach Resort, Sofitel Bora Bora Private Island and Sofitel Moorea Ia Ora Beach Resort in a move to focus on investment in Europe. JLL Hotels & Hospitality Group has been exclusively appointed to offer the resorts for sale.
Takeaway: Such luxury properties are expensive to run and are often targeted for points redemption by its frequent guests and
H – filed an SEC Form 8K and disclosed "after the repurchase there are 111,405,463 shares of Class B Common Stock outstanding and 38,763,686 shares of Class A Common Stock outstanding, and the Company has approximately $110 million remaining under its repurchase authorization."
Hyatt disclosed on November 5, the Company repurchased an aggregate of 1,122,000 shares of Class B Common Stock at a price of $60.1987 per share from an affiliate of Daniel Pritzker, which represents the Volume Weighted Average Price for the Class A Common Stock for the three (3) trading-day period ending October 31, 2014 as reported by Bloomberg,
HLT – announces the management agreement for Hilton on The Park Melbourne will expire on December 31, 2014 and will not be renewed. Hilton on the Park Melbourne was the first Hilton hotel in Australia with a 40 year history.
Takeaway: While a unit loss, Hilton is adding 40+ new hotels per quarter to its managed and franchised segment, so the loss is negligible to revenues. Finally, based on the pictures we've viewed, it would appear the hotel is in need of capex to maintain the Hilton brand standards.
RCL – said it will be several years before the Sea Pass wristbands being used for room keys on Quantum of the Seas can be rolled out fleetwide. The radio-frequency identification (RFID) wristbands are simple, but they go hand-in-hand with a new shipboard property management system that takes a fair amount of time to install.
Takeaway: Ultimately a device which should lower operational expenses.
SHO – COO Marc Andrew Hoffman sold 13,395 shares of stock on Monday, November 10 and at an average price of $15.62 and now owns 165,450 shares.
Takeaway: Another non-options related insider sale in the lodging industry.
Macau Concession Renegotiation Risks Rising? – According to Macau's Chief Executive Fernando Chui Sai, the government will conduct a study to assess the development of the gaming industry, ahead of the negotiations to renew the licenses of the six Macau gaming concessionaires. The Chief Executive noted, “We have to conduct a study about the gaming industry and take into consideration if the concessionaires have followed the terms set in their contracts. We have to look at all features of their projects, including gaming and non-gaming elements, in order to speed up the economic diversification [of Macau]."
Takeaway: Looks to us, like the concession renewals could be more contentious than currently expected.
Macau 2015 Government Budget – The Macau government is being cautious about next year’s budget due to the slowdown in casino gross gaming revenue. The government has forecast total public revenue of MOP145 billion for 2015, excluding revenue raised by special bodies such as Macao Foundation. That is up 2.7% from the public revenue tally expected for 2014, but nonetheless a much smaller increase than in forecasts for previous years. In 2015 the government expects to collect MOP125 billion in direct taxes; however, the amount of taxes the administration is expecting from direct taxes on gaming is not disclosed and will be revealed when the Secretary for Economy and Finance discusses the draft budget with legislators.
Takeaway: Gaming and the associated gaming taxes, once viewed as Macau's salvation are now viewed as too closely tied to the economic welfare of the SAR - thus the calls for increased economic diversification.
Macau 2015 Tax Rebates – Chief Executive Fernando Chui Sai called for residents’ understanding for their annual cash handout next year remaining unchanged at 9,000 patacas, adding he hoped a 6.75% increase in public servants’ salaries could take effect on January 1 which followed a public servants’ salary raise of 5.71% in May 2014.
Texas Historical Racing Appeal Likely – In late August, the Texas Racing Commission approved a rule change to allow historical racing at Texas horse and dog tracks, despite objections from several state lawmakers. Two lawsuits were filed — one in Tarrant County by state Rep. Matt Krause, R-Fort Worth, who said commissioners lacked the the authority to allow the race betting machines (which some critics argue closely resemble slot machines), and one in Travis County by a coalition of charitable bingo groups that said the machines might run them out of business. The Fort Worth lawsuit was dismissed. But state District Judge Lora Livingston in Austin ruled the commission exceeded its authority and that such decisions should be left to the Legislature.
Takeaway: Texas one of a few remaining growth markets for regional gaming and thus an appeal is likely.
Las Vegas F1 Gaining Speed – the driving force behind it is Farid Shidfar, founder of digital meeting service rundavoo.com and pioneer of the Los Angeles media and entertainment practice at consultancy firm Accenture. Mr Shidfar is understood to have been analyzing the opportunity to bring F1 to Vegas since 2011 and has boosted his efforts over the past year. On January 17 he founded the Nevada company P2M Motorsports Management LLC. According to Forbes, Mr. Ecclestone has handed Mr Shidfar a contract for a Vegas Grand Prix
Takeaway: As we wrote on October 20, the city would benefit from the energy, excitement, and significant foreign visitation related to the race and events.
Lodging 2015 RevPAR – Even as supply growth accelerates in 2015, PwC predicts that industry-wide occupancy levels will reach 64.9%, the highest levels since 1984. The strong outlook for group demand, combined with continued strong transient travel activity and a positive economic environment, will drive an 8.2% increase in RevPAR for 2014. By comparison for 2015, PwC is projecting that RevPAR growth will moderate to 7.4%, but at the same time ADR growth will tick upward by 150 basis points from 2014 projection of 4.7% to 6.2%, the largest year-over-year gain since 2007. PwC’s outlook expects supply growth to accelerate to 1.4% in 2015, given the increasing momentum of new construction: development was up 40% year-over-year in Q3.
Takeaway: Peak occupancy, peak ADR and peak margins and low supply growth - the perfect back drop for strong earnings growth but do investors believe?
China Economic Growth - The China Securities Journal noted that H1 2015 growth will likely fall to 7% before rebounding in H2, highlighting policies to support real estate and infrastructure investments, looser monetary policy, improvement in export environment, and lower commodity prices as supporting the rebound.
Japan Economic Growth - The Japan Center for Economic Research released its monthly estimates of GDP and inflation for FY14 and FY15. Real GDP is seen growing at +0.18% y/y in FY14 and +1.31% in FY15, while the nominal growth rates are +2.07% and +2.26%, respectively. GDP is seen growing +2.47% y/y in Q3 and +2.51% in Q4. Core CPI was seen at +3.11% in FY14 and +1.77% in FY15, excluding the effects of the consumption tax +1.10% and +1.11%, respectively.
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.
“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius —and a lot of courage —to move in the opposite direction."
-E. F. Schumacker
The most challenging thing to do as a stock market operator is to make a trade or investment against consensus. If you are wrong for any period of time, you hear about it in spades. Especially in this day and age when every Jamoke under the sun has a soapbox and/or a twitter feed. (Admittedly, though, we do applaud the democracy that Twitter has brought to the media world!)
The fact is, the harder consensus leans, the higher your probability of being right in fading that view. Conventionally speaking, one way in which this is manifested is in value investing. Now, to some, value investing is about deep dive company analysis, which we get, but on a higher level it is really about the implications of company valuation. Simply put: when a company’s valuation is high, the prospects for its future are perceived as rosier than when the valuation is low. (That is a simplification, but you get the point.)
In effect, valuation is an opinion, so when the vast majority of stock market operators give a company a low valuation, their opinion of that company is low. Ironically, or not, this consensus opinion is consistently wrong over the long run. In fact, Dreman Value Management proved this in spades in a study of “cheap” stocks:
- First, the study showed that for the period of January 1st, 1970 to December 31st, 2010, stocks in the lowest P/E quintile outperformed stocks in the highest P/E quintile by a margin of 15.4% to 8.3% in terms of annual return;
- Second, in the 52 quarters when the S&P 500 declined between 1970 – 2010, low P/E stocks outperformed the market by an average of +2.4% versus an under performance of -1.9% for high P/E stocks; and
- Finally, from 1973 to 2010 the lowest quintile P/E stocks went up +1.2% on a negative surprise versus a return of -7.4% for the highest quintile P/E stocks on a negative surprise.
Now valuation is obviously only one factor, and not always the best factor for shorter term tactical trading, but over the long run it is a great gauge of the consensus opinions of companies. And over the very long run, fading well loved “names” as based on high P/E multiples has provided enormous outperformance.
Back to the Global Macro Grind...
This morning it is not difficult to find the consensus view of U.S. equities. The II Bulll Bear Spread (bulls minus bears) is +99% to the bullish since October 12th. As well, Bears are tracking near all-time lows at 14.8%. If you are a lemming, of course, this makes sense. As markets go up you get more bullish and as markets go down you get more bearish. Practically speaking, as we highlight in the Chart of the Day, chasing this rally is fraught with risk given how unconvincing the volume has been.
Complacency seems to once again be setting into the view of European equity markets as well. We’ve seen a few notable chart followers suggest the turn is in for European equities and today they may have some fodder for the case with Eurozone Industrial production, which beat expectations.
Specifically, Eurozone September Industrial Production rose by +0.6% year-over-year versus the consensus view of -0.3%. This compared to the August reading, which was a -0.5% decline (also an upward revision from -1.9%). As well, the German economic minister was out this morning saying that the “German economy stabilized in Q3 after a Q2 contraction and now has slight upward momentum”. Now, of course, if this is the best the Eurozone can do, fading any rally is certainly worth considering.
Over at the Bank of England today, the honest Canadian, BOE Governor Mark Carney, is at least being forthright in saying, "it’s appropriate that markets now expect easier monetary conditions” based on the real-time growth and inflation data the BOE is seeing. The challenge with easier monetary conditions for many global central banks is that while they are not out of bullets, the bullets are increasingly ineffective.
Yesterday we hosted a call for our Institutional Macro subscribers with Professor John Taylor from Stanford on this very topic. Taylor is an outspoken advocate for rules based central banking (hence the eponymous Taylor Rule) and also highlighted in spades a point we’ve been harping on for some time, which is that the extreme QE monetary policy in the U.S. has became increasingly ineffective. As Taylor noted on QE3:
“When started 10-year Treasury was 1.7%, then rose and has remained higher
- Effects of QE on yield spreads
– 1-year vs 10-year US Treasury spread
– 2003-2008 non-QE period……1.3%.
– 2009-2013 QE period……………2.4%”
It obviously begs the question of whether the biggest no-brainer “Fade Trade” has become to fade the increasingly impotent global central banking regime? You likely already know our answer on that.
If you’d like to listen to the replay of our discussion with Professor Taylor, the replay and his presentation can be accessed below.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.26-2.39%
WTIC Oil 75.61-78.97
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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