Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: In today's Macro Playbook, we show how the current quantitative setup within the equity market supports reiterating our #Quad4 theme.
Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
Short Ideas/Underweight Recommendations
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
If you tangentially followed our research in the YTD, you’d probably arrive at the conclusion that we’re ultra bearish and/or always negative on the stock market – insomuch as you would’ve arrived at the polar opposite conclusion(s) when we were the bulls of bulls in 2009 or in 2013.
Fortunately for those who are actually paying attention, our research views are much more nuanced. Specifically, being bearish on growth and/or inflation affords us the opportunity to BUY and SELL a number of sectors and style factors.
Along those lines, we reiterate our BULLISH bias on the sectors and style factors associated with #Quad4 outperformance (healthcare, consumer staples, REITs, mega caps) and our BEARISH bias on those that are associated with #Quad4 underperformance (energy, materials, regional banks, small-to-mid caps).
Both recent performance and current levels of momentum support reiterating that view. On a WoW basis, the XLV, XLP, VNQ and USMV ETFs are up +1.6%, +1.1%, +1.5% and +0.8%, respectively. This contrasts with the XLE, XLB, KRE and IWM being down -9.4%, -4.0%, -2.4% and -1.5%, respectively. The domestic E&P ETF (XOP) – another one of our core short ideas – continues to crash, having dropped -19.2% in just the last week alone!
Looking to our Tactical Asset Class Rotation Model (TACRM) we are pleased to see this theme continuing to play out from a volume-weighted perspective across multiple durations. Specifically, among the 47 domestic equity sectors and style factors we track, healthcare (XLV, IHI, IHE), consumer staples (XLP), REITs (VNQ) and mega caps (USMV) account for 6 of the top 8 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Meanwhile, mall-to-mid caps (IWM, IWO, IWN), materials (XLB, GDX) regional banks (KRE) and energy (XLE, XOP, IEZ, AMLP) account for 10 of the bottom 11 VAMDMI readings.
To top it all off, trends across key economic indicators continue to augur for a continuation of our #Quad4 theme in the domestic equity market (click HERE and HERE to review said data). As both Black Friday and Cyber Monday sales and traffic data suggest, Consensus Macro remains dead wrong on its [lazy] “lower gas prices = consumer renaissance” thesis.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#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.
Early Look: Golden Headfakes (12/2)
#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.
#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.
Best of luck out there,
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.
Takeaway: Cyber Monday as big a bust as Black Friday. KSS fesses up that on-line mgns are 4% vs 10% in store. Wait til it has to offer free shipping.
EVENTS TO WATCH
Early Cyber Monday Data Points
Takeaway: The Cyber Monday numbers don't look any prettier than the data points we saw coming out of the weekend. Sales were up 8.5% compared to the 20.6% growth rate we saw last year, according to IBM (numbers that we've found to be reliable). That's not going to cut it. Especially when you consider the fact that average ticket was down and units were up which translates to an AUR down mid-singles.
The department store numbers are even uglier. According to IBM on Black Friday online sales growth was 23% versus 61% on the same day last year. Similarly, on Cyber Monday online sales grew 17.9%, down from 70.3% LY with average ticket down 10%.
One concern we have with the shift to online is 1) e-commerce is lower margin for department store and multi-line retailers -- full stop. It's higher margin for brands like Nike and Ralph Lauren. But not for any retailer with a basket size under $150. 2) Retailers don't know where sales will show up -- in store or on-line. As such, they need to keep stores fully-staffed (at 2-3x pay on Thanksgiving) in order to satisfy demand that might or might now be there. Our point is that the kick off of the holiday season is a dilutive event both ways.
We still think shorting KSS is the best move here. We'd also short TGT, M, FL, DKS, and DG.
KSS - Kohl's has 4% online operating margin, vs 10% for brick and mortar
KSS CEO Kevin Mansell said in a WSJ interview that "online operating margins at Kohl’s are about 4%, less than half the 10% operating margins of its nearly 1,200 physical stores."
Takeaway: Tough sledding when the only line item on the P&L that is growing is 600bps below the core. Especially when you put that up against where the company guided 2017 targets at its Analyst day in late October. Just to refresh, the company guided to $21bn in revs at a 9% operating margin. Not only does the company have to comp nearly 3% for the next 3 years, but we also have to see operating margin expansion as the company moves back towards national brands and pushes its 'Greatness Agenda' online. We made a big deal about this when we added KSS to our Best Ideas short list. The only line on the P&L that's growing (besides SG&A) is on-line sales. And yet consensus has KSS earning $5 in two years versus $4 today. After this year ends, we don't think KSS will ever earn $4 again. We're at $3.50 versus the Street at $5.
PETM - Apollo leading the pack in PetSmart bid, sources say
- "Black’s Apollo Global Management is seen as the most aggressive suitor, and likely winner..."
- "Private-equity firms BC Partners and the team of KKR and Clayton, Dubilier and Rice are also still in the running, sources said."
WMT - Wal-Mart to Cut 250 Jobs in China -- Update
AMZN - To Gain the Upper Hand, Amazon Disrupts Itself
- "But people are not going to be getting their stuff from an Amazon store in Midtown Manhattan this holiday season. A spokeswoman said in a statement that the 470,000-square-foot building was “primarily” corporate office space, and that the ground floor retail shops would be subleased."
AMZN - Moody’s Cuts Outlook After Amazon Debt Offer
- "Moody’s Investors Service in turn cut its outlook on the company’s “Baa1” credit rating to negative from stable."
TGT - Target to Open Second Brooklyn Store
- "Target is planning to open its second Brooklyn store in 2016, a CityTarget in downtown Albee Square, Brooklyn."
Black Friday breaks records at John Lewis
- "The lure of Black Friday bargains lifted weekly sales at John Lewis to the highest levels recorded in its 150-year history, with one tablet computer sold every second in the rush for pre-Christmas bargains."
WMT - Wal-Mart Canada adding more Grab and Go lockers
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Tickers: IGT, LVS, MPEL, MGM, BEE, NCLH, RCL
- Dec 2: 11 am ISLE Q2 2015 earnings
- Dec 8: 10:30 MTN Q1 2015 earnings
- Dec 8: Golden Nugget Lake Charles Opening
- Dec 12: Trump Taj Mahal Closing
- Dec 14: City of Dreams Manila Opening
- Dec 17: Upstate NY Casino Decision
959.HK – Macau junket investor Amax Holdings Ltd. posted a loss of HK$18.40 million (US$2.3 million) during the first half of its fiscal year ended September 30. Facing increased losses of revenue, Amax Holdings noted the loss ‘was mainly attributable to the increase in general and administrative expenses and finance costs during the period under review.’
Takeaway: More challenging VIP gaming operations hinder results and performance as Amax looks to diversify into resort operations with its Vanuatu casino resort development.
GENS.SP – Genting Singapore today repurchased 10 million shares for S$11.356 million, following yesterday's repurchase of 10 million shares. Cumulative shares repurchased year-to-date = 87,665,000. Following today's share repurchase, the total shares outstanding = 12,160,371,480
Takeaway: Genting share repurchases continue. Pristine balance sheet suggests there will be more.
IGT & GTK.IM – GTECH S.p.A. announced that based on the communications received from the custodians, GTECH believes that cash exit rights have been exercised for less than 20% of the Company shares outstanding as of July 15, 2014, when the agreement for the acquisition of International Game Technology was executed. GTECH and IGT continue to work towards completing transaction final results of the cash exit rights to be announced by December 12, 2014.
Takeaway: GTECH/IGT merger remains on track.
LVS & 1928.HK – Sands China announced the 400-room St. Regis Macao, located in Sands Cotai Central, will open in the third quarter of next year.
Takeaway: We think it will open on August 1, 2015.
MPEL & MCP.PM – According to Lawrence Ho Yau Lung, co-chairman and chief executive of Melco Crown, City of Dreams Manila is to have a soft opening on December 14.
Takeaway: As expected.
200.HK – Melco International Development Ltd has subscribed to 26,062,294 new shares of common stock in Entertainment Gaming Asia Inc (EGT). Melco International paid more than US$14 million for its subscription to new shares in EGT, via an entity called EGT Entertainment Holding Ltd, which was already EGT’s largest stockholder. Upon completion of the rights issue, Melco International’s subsidiary owns 37,512,294 shares of common stock in EGT, representing 64.81% of the outstanding shares of common stock of EGT’s enlarged capital. EGT operates slot machines on a participation basis and also supplies gaming chips and plaques to casinos in Asia.
MGM – As the company works to obtain all the necessary permits to begin breaking ground in early 2015 for its $800 million Springfield casino, MGM Resorts International is also preparing to shell out nearly $2 million to eight Western Massachusetts communities on Friday, Dec. 5.
Takeaway: MGM ensuring an expeditious approval and permitting process with the payment of the surrounding communities funds to help improve traffic flow.
BEE – announced a 20 million share offering through JP Morgan and intends to use the proceeds from the offering to fund the acquisition of the Four Seasons Resort Scottsdale at Troon North as well as to redeem all of the issued and outstanding shares of its 8.25% Series B Cumulative Redeemable Preferred Stock and general corporate purposes.
Takeaway: Interesting to us is how management conveyed at NAREIT (November 5 and 6) their view that BEE shares were undervalued (stock was $12.60 to $12.90/share) then various C-Level individuals sold stock on November 6 and 7 at $12.64 and $12.59/share...and now we have an equity issuance near $12.50/share.
NCLH – announced that Jason Montague has been named President and Chief Operating Officer of Prestige Cruise Holdings, Inc. following the resignation of Kunal S. Kamlani.
RCL – Royal Caribbean Cruises Ltd. will replace Bemis Company Inc. (BMS) in the S&P 500 effective after the close of trading on Thursday, December 4.
WYN – EVP and General Counsel Scott McLester sold 6,834 shares (not options related) on November 28 at $83/share and now owns 7,675 shares directly and an additional 56,004 via restricted stock units.
Macau Additional Transit Visa Restrictions – Effective as of yesterday December 1st additional transit visa restrictions between Zhuhai to Macau transiting to a third country have been implemented at the China – Macau border crossings and had an immediate effect.
The new regulations now require:
1. Must hold valid passport
2. Must have valid destination country visa
3. Airplane ticket to the destination country
All three documents must be presented at the dedicated customs check point in order to clear immigration into Macau from Zhuhai. GongBei border customs officials have dedicated two channels (lanes 21 & 22) to exclusively process this type of visa application and to demonstrate their intent have an exit lane to return to China immediately adjacent for those applicants deemed unsuccessful. News reports suggests this exit lane was well used yesterday immediately the new requirements were enforced. Multiple outlets in and around the GongBei border shopping district that provided this service of selling airline tickets and visas were apparently vacated with shutters down within hours of the new regulations coming into force.
Takeaway: Another blow to the Mass business that generated it's 2nd consecutive YoY decline in November (even after adjusting for the table reclassifications). December continues to look worse and worse.
Macau's New Secretary for Economy & Finance – Lionel Leong Vai Tac, Macau’s new Secretary for Economy and Finance, the official in charge of the city’s casino industry, said – on Monday said the government would “pay special attention” to the current decline in gaming revenue. He added he would carefully assess the development of the city’s gaming industry ahead of the renewal of the gaming licenses. The current rights of the city’s six Macau gaming concessionaires expire on various dates between 2020 and 2022.
CPC New Anti-Graft Investigations – Disciplinary inspectors have arrived at all target state organizations in a new round of campaign initiated by the Communist Party of China (CPC) to put a check on officials' misconduct. The third round of inspection for 2014 targets 13 state organizations: the Ministry of Culture, the Ministry of Environmental Protection, China Association for Science and Technology, All-China Federation of Industry & Commerce, China Radio International, China Southern Airlines, China State Shipbuilding Corporation, China Unicom, China Shipping Company, China Huadian Corporation, Dongfeng Motor Corporation, Shenhua Group and Sinopec. These inspectors will be stationed in their respective target unit for about one month, aiming to uncover officials' misconduct, especially that concerning corruption, undesirable work styles and personnel selection and appointment.
Takeaway: No end in sight for CPC crackdowns and in fact the investigations appear to be more "in plain sight".
Hong Kong Occupy Central Movement Shutdown – Three founders of Hong Kong pro-democracy movement Occupy Central with Love and Peace said they would surrender to the police today, hoping the student protesters who have been leading the street occupations will retreat.
Vietnam Drawing Renewed Gaming Interest – Chow Tai Fook Enterprises Ltd, a privately held firm founded by Hong Kong businessman Cheng Yu Tung, is interested in investing in a US$4 billion casino in Vietnam. The company is already a partner in a bid for a casino in Australia and has recently committed to build an integrated resort in South Korea. VinaCapital Group, Vietnam’s largest fund manager, is developing the Quang Nam project and said it has almost completed negotiations with an unnamed foreign partner, according to an October report by the Vietnam Investment Review. Chow Tai Fook Enterprises would replace Malaysia’s Genting Malaysia Bhd as investors in the project. Vietnam’s government is currently considering a draft decree allowing local citizens to enter casinos and plans also to reduce regulatory barriers for casino operators to do business in the country in a bid to attract more foreign investors.
Maine Gaming Expansion – At the Maine State House, a legislative committee agreed to draft a report for incoming lawmakers to guide their discussion on future gambling venues. The report, which was authorized by the Legislature, could set the stage for a new discussion around creation of two more casinos, one in southern Maine and another that would benefit the state's Indian tribes. However, State Sen. Linda Valentino, plans to submit a request for a bill later this month that would lay the foundation for three more gaming facilities. Valentino says she'd make the case for a facility in southern Maine and for smaller operations in Aroostook and Washington counties. And she says the state could still meet its cap for 3,500 slot machines by distributing them proportionately
Taj Mahal Closes Hotel Tower & Stops Issuing Gaming Credit – Yesterday, Trump Entertainment Resorts announced it closed the Chairman Tower, the newer of its two hotel towers, and halted the issuance of gaming credit. In its filing with the New Jersey Division of Gaming Enforcement, Trump Entertainment outlined Taj Mahal will close at 5:59 a.m. on Dec. 12, and the final hotel guests have until noon that day to check out. Cars have to be out of the garage by 5 that evening.
Takeaway: Taj Mahal on track to close.
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: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 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.
Client Talking Points
After doing nothing in November (literally flat for 4 straight weeks), the Russell 2000 dropped -1.7% yesterday in a straight line and is back to down -0.9% for 2014. Bull market? Or still a #bubble popping? (-4.5% since July).
Total U.S. Equity Market Volume +14% vs. its 1 month average yesterday, so the TREND of U.S. equity volume accelerating only on DOWN days continues to signal that the Liquidity Trap, especially in small caps, remains.
Gold was straight up yesterday, then straight back down -1.4% this morning after failing @Hedgeye TREND resistance of $1225; WTI Oil failed to recover our 1st line of $69.69 resistance too; still looks like #deflation risk.
|FIXED INCOME||29%||INTL CURRENCIES||6%|
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
1/3 of the distressed high yield issues in the U.S. are, you guessed it, energy http://mobile.reuters.com/article/idUSL2N0TG1S720141202
QUOTE OF THE DAY
The pain of discipline is far less than the pain of regret.
STAT OF THE DAY
Russia's largest bank, Sberbank, which holds roughly half of all retail deposits for the country, is now trading at over 400 basis points on its credit default swaps. The "danger zone" is generally regarded as anything north of 300 basis points.
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