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Cut To Pieces

This note was originally published at 8am on November 19, 2014 for Hedgeye subscribers.

“Believe on this day that I will have been cut to pieces, and you not much later than I…”

-Cyrus

 

That’s a quote from the latest leadership, strategy, and #history book I have started to read. It’s one of the Greek classics that I’ve been wanting to study for a long time – Xenophon, The Anabasis of Cyrus.

 

It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD). So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be.

 

The SPY is the most widely shorted equity security in US history. In all of her manifestations you’ll find hedge fund victories and defeats. While I’ve been on the “short the Russell” road for most of this year, now I’m here, saying sell it. That is #timestamped.

Cut To Pieces - Crazy bull cartoon 08.19.2014

 

Back to the Global Macro Grind

 

I’ll get to the fundamental research view in a minute (both growth and inflation slowing, at the same time), but first I will draw my price, volume, and volatility sword on this matter:

 

  1. PRICE – SP500 signaled immediate-term TRADE overbought yesterday with no support to 2002
  2. VOLUME – Total US Equity Market Volume was -5% and -26% vs its 1-month and YTD averages yesterday
  3. VOLATILITY – front-month VIX closed at 13.86, well above my bullish TREND line of 11.34 support

 

In other words, even if I was a raging bull on US growth equity fundamentals (like I was in 2009 and 2013), I’d still have signaled sell into yesterday’s no-volume-short-covering-capitulation-overbought highs.

 

Back to the fundamentals – here are the Top 3 things confirming our bearish view on US domestic GROWTH:

 

  1. US GDP growth 2.3% (we model it year-over-year, not sequentially) continues to slow from Q413’s peak
  2. US 10yr Bond Yield = 2.32%, continues to crash (-23% YTD) alongside growth expectations
  3. Russell 2000 = 1170, still -3.1% from its all-time #bubble high (July 7th) and signaling bearish TREND

 

And here are the Top 3 things confirming our bearish view of INFLATION expectations:

 

  1. Oil continues to crash this morning, -31% since June
  2. CRB Commodities Index (19 commodities) down another -0.6% to 266 is -5% YTD now and making lower-lows
  3. Both TIPS (5Y Breakeven Rate) and Fed 5Y-5Y Forward Breakeven Rates are breaking down to fresh YTD lows

 

Then there’s sentiment (which I could give you a hocus pocus “survey” on) or use the only one that back-tests as a legitimate contrarian indicator in my 15 years of notebooks (the II Bull/Bear Spread):

 

  1. Bull’s ramped to 56.4% (from 55.5%) this morning
  2. Bear’s remain at 14.9% (just off their all-time lows)
  3. Bulls minus Bears = Bull/Bear Spread of +4160 basis pts, to the bullish side!

 

To put that Bull/Bear Spread in context:

 

A)     That’s +103% from where it was when perma equity bulls were in the fetal position on October 13th

B)      That’s just inside of the all-time wide to the bullish side

 

#Agreed. All-time is a long time. And that’s precisely why I’m willing to be cut to pieces by anyone who wants to put their own money (not other people’s) on the naked long side of SPY, from here until I say stop.

 

I’d be happy to publish your bull case to all readers of the Early Look. Remember though, your cost basis is going to be yesterday’s SPX close of 2051. This is the arena of accountability. My timing may prove to be fatal, but there’s no place I’d rather be.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr yield 2.28-2.35%
SPX 2002-2055

RUT 1151-1187

Yen 115.72-117.61

WTI Oil 73.34-76.62

Gold 1130-1205

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cut To Pieces - SPX Levels refreshed


Cartoon of the Day: Small Cap Trap?

Cartoon of the Day: Small Cap Trap? - Russell cartoon 12.02.2014

 

"What if all your money was in the Russell 2000 this year?" asked CEO Keith McCullough in today's Morning Newsletter. "That would suck. After doing literally nothing (flat for 4 straight weeks in November), the Russell #Bubble got pounded for a -1.7% loss yesterday, falling back to -0.9% for 2014 YTD."

 


ISLE F2Q 2015 EARNINGS CALL NOTES

Solid flow through but is it sustainable?

PREPARED REMARKS

Virginia McDowell, CEO

 

Q2 Operating Results Highlights: 

  • Increase in visitation
  • 2nd quarter in uptick of retail (non-rated) customer play up nearly 6%,
  • 3% increase in rated play driven by
    • 5% increase in "A" segment customers
    • 3% increase in "C' segment customers
    • flat YoY in lowest rated segment
  • QoQ and YoY increase in market share
  • Hopeful in improving lower-end segment as an indicator of a rising tide

Eric Hausler, CFO

  • Net revenues +3%
  • EBITDA Flow through 87%, due to flat cost structure
  • Special Items:
    • $1.2 million favorable Waterloo property tax relief
    • $3.0 million Referendum 68 in Colorado
  • 10 properties higher net revenues
  • 11 properties higher EBITDA margins
  • Capex: $28-$31 million additional in remainder FY15 due to South Tower renovation at Bettendorf

Q&A

Q: Colorado - how think about property positioning longer term?

  • View as positive as ISLE property is one of the first casinos on the mountain. Any increase in demand to Blackhawk area, ISLE should capture share.

Q: Consumer improvement?

  • Feel good/optimistic about improvement in upper end of data base and spend.

Q: Customers feeling better about lower gas prices?

  • Not necessarily see correlation to lower gas prices, helps sentiment.  However, unemployment rate in ISLE markets now equal to 2007/2008 - pre-recession levels.

Q: Bettendorf - future development, moving to land based?

  • Continue to look to land based opportunity, project fully scoped, could move in the spring 2015, will have an update in spring 2015 when have final plans, designs, fully-baked.

Q: Lake Charles Golden Nugget - any marketing data points around opening?

  • Lost a number of employees, because ISLE did not have a retention plan. PNK had a retention plan.  Have a marketing plan, promotions, advertising on billboards leaving Houston to Lake Charles. 

Q: Weather - November trends how impact ISLE?

  • Current trends interesting, not do anything about weather, focus on programs and marketing plans.

Q: Florida, compact renewal, gaming expansion?

  • 5 year exclusivity expires mid-2015, while complex situation, catalyst for new regulations, ISLE working with lobbyists to ensure parity of gaming regulations and tax rates.  FL legislation session begins in March.

Q: Houston - key market & Lake Charles plans?

  • New positioning, Farmers Market restaurant/buffet, new interior fixtures.

Q: Balance Sheet, Cash & Revolver?

  • Have bonds that become callable in March, will evaluate as able and continue to pay down revolver.

Q: Database & low-end improvement?

  • Seeing improvement across all properties, optimizing mail marketing, retail (unrated play) was up 5%, but lowest segment was flat.

 


Early Look

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McCullough: Devaluation Gong Show 'Ends In Tears'

In this brief excerpt from today’s Institutional Morning Macro Call, Hedgeye CEO Keith McCullough discusses current economic pressures in Japan and the U.S., as well as the exaggerated impact of falling oil prices on consumers.


Is the Russell 2000 the Canary in the Market Coal Mine?

After doing nothing in November (it was literally flat for 4 straight weeks), the Russell 2000 dropped -1.7% yesterday in a straight line. It's back to down -0.9% for 2014 and down -4.5% since July.

 

Bull market? Or still a #bubble popping?

 

Is the Russell 2000 the Canary in the Market Coal Mine? - chart

 

On a related note, Total U.S. Equity Market Volume was up +14% vs. its 1 month average yesterday as stocks fell.

 

Is the Russell 2000 the Canary in the Market Coal Mine? - table

 

In other words, the TREND of U.S. equity volume accelerating only on DOWN days continues to signal that the #LiquidityTrap (especially in small caps) remains.

 

Editor's note: This is an excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.



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20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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