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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, HCA, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our six current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*We also feature two pieces of content from our research team at the bottom.

Investing Ideas Newsletter - InvestingIdeas12.5 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter - Card house cartoon 12.03.2014

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

Labor Market, Is That All You Got?

 

Today was nothing shy of a historic day in the domestic labor market. November’s +321k MoM gain in Non-Farm Payrolls represented the fastest sequential pace of net job growth since January 2012. Underneath the hood, the report was solid as well:

 

  • Growth in Average Hourly Earnings accelerated +10bps to +2.1% YoY.
  • Average Weekly Hours edged up to 34.6 from 34.5 prior; per Bloomberg economists: “…a one-tenth increase in the workweek is the worker-hour equivalent of about 250k additional jobs. In other words, if the workweek was unchanged, to have the same income-effect the payroll number would have had to be 571k”.
  • Growth in Total US Employees on Nonfarm Payrolls accelerated to a new cycle-high of +1.99% YoY from +1.96% prior.

 

Clearly the November Jobs Report was very strong and the fixed income market reacted as such, with the 10Y Treasury bond yield shooting up from 2.24% to 2.33% immediately following the release. It closed the day at 2.30%. 2Y Treasury note yields also shot up around ~10bps immediately following the release of the employment figures, closing just shy of its highs of the day at 0.64%.

 

The movement in the 10Y yield coincided with a -0.58% DoD return for the TLT and -0.38% return for the EDV. Considering today’s massive rip in employment growth, these moves seem quite a bit muted.

 

In fact, these returns are only in the 22nd and 34th percentiles of daily returns on a trailing 3Y basis, respectively; one would think they’d be in the bottom-10 percent given this major step forward in the domestic labor market. The fact that both ETFs closed UP on the week (+0.2% and +0.4%, respectively) is actually quite stunning in the context of the aforementioned labor data.

 

So what gives?

 

We think this golf clap of a return for Consensus Macro bond bears is the market effectively trying to communicate that the Fed isn’t going to hike interest rates anytime soon – or quite possibly ever under the tenure of Janet Yellen!

 

That’s certainly what our proprietary G3 Monetary Policy Model is suggesting. In fact, this model actually suggests there’s a fairly high probability that the Fed gets easier over the next 3-6 months, given that its score is similar to the ECB’s, which continues to set the table for open-ended LSAP.

 

Investing Ideas Newsletter - s6

 

At a bare minimum, this implies ZIRP is likely to remain in place for longer than most investors currently expect. And the longer we hang out at 0-25bps on the Fed Funds Rate, the higher the likelihood that we enter a economic downturn. As this late-cycle labor market strength ominously implies, the clock is ticking on this economic recovery, which is slightly long in the tooth by historical standards. Moreover, the labor market actually tends to peak about ~7 months prior to the start of the recession, effectively forestalling an easier Fed along the path towards economic gravity.

 

Investing Ideas Newsletter - s7

 

All told, while we do not think it’s appropriate to make the “recession” call just yet, we still think the path of least resistance for interest rates remains lower over the intermediate-term. That’s a favorable setup for long-term Treasuries, munis and for investors seeking yield pickup in the equity market (healthcare, consumer staples, utilities and REITs).

HCA

Hospital Corporation of America hit a new 52-week high this week and is up approximately +12% since we added it to Investing Ideas on 11/7.

 

We track 25+ data series that drive the fundamentals of HCA in our Hospital Monitor (see below). Three of those series were updated today with the release of the November Jobs report. Women Employment Age 25-34 continues to trend positively y/y, despite slowing in rate of change terms from the October release. This series is important because it has a high correlation with births, as an increase in employment corresponds to greater insured population (more women can afford to have a child).

 

Meanwhile, Hospital Employment was strong and continues to accelerate y/y, which correlates well to same store metrics. Results of our November OB/GYN survey will be in next week and provide us with an update in utilization trends.

 

Investing Ideas Newsletter - 2014 12 05 HRM Hospital Monitor

 

Investing Ideas Newsletter - Women Employment

 

Investing Ideas Newsletter - Hospital Employment

RH 

Restoration Hardware is set to report earnings on Wednesday December 10. We’re comfortable with our above-consensus estimate of $0.52 versus the Street at $0.46.

 

We think that the top line will be particularly important this quarter given the miss we saw in 2Q when sales only grew at 13.5%, due to problems that RH had with consolidating its 13 Sourcebooks (catalogs) into one colossal 3300 page shrink-wrapped mailing. We’re looking for an acceleration of about 1,000bp in sales growth in this quarter alone.

 

The company will be switching it up this quarter in a way that we think is a positive. Once its 8K is filed, they’ll post a video presentation highlighting the Company’s ‘continued evolution and recent performance’ on the RH Investor Relations website (approximately 1:30 pm Pacific/4:30 pm Eastern). Then they’ll host a live Q&A session at 2:30 pm Pacific/5:30 pm Eastern.

 

This one should be a winner.

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

the clock is ticking for bob evans (bobe)

We continue to believe BOBE represents an under-the-radar special situation story.

Investing Ideas Newsletter - b

ici fund flow survey: a closer eye on etfs

Mutual fund activity during the past 5 days continued to be subdued, giving way to more robust trends in exchange traded funds.

Investing Ideas Newsletter - et


The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

McCullough on Fox Business: Reading the Market Signals

Hedgeye CEO Keith McCullough on Wednesday discussed his outlook for the markets, economy and Fed with Fox Business "Opening Bell" host Maria Bartiromo.

 

McCullough: Devaluation Gong Show 'Ends In Tears' 

In this brief excerpt from Tuesday’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.

 

Hedgeye's Morning Macro Call with CEO Keith McCullough

We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers. This is from last Monday.

 

Macro Notebook 12/3: Nikkei | Euro | UST 10YR

Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook Wednesday morning.

 

CARTOON

 The (Real) House of Cards

The Best of This Week From Hedgeye - Fed house of cards 12.3.14

This central planning game will not end well.

 

A Christmas Wish...

The Best of This Week From Hedgeye - Retail Xmas wish 12.1.14

The initial data points from Black Friday weekend? Not good. 

 

CHART

 The 3 and 0 Count

The Best of This Week From Hedgeye - COD 12.5.14

 

Glacial Cascades: Are You Prepared?

The Best of This Week From Hedgeye - COD 12.3.14

Editor's note: The excerpt below is from CEO Keith McCullough's introduction in Wednesday's Morning Newsletter.

 

If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.

 

But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?

 

I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video onGlacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.

 

POLL OF THE DAY

Poll of the Day: Will Oil Prices Fall Below $60 by January 1?


"#Quad4 deflation continues," Hedgeye CEO Keith McCullough tweeted on Monday. West Texas Crude Oil continued its crash last week falling another -13.5% to -28.1% YTD.

 


Cartoon of the Day: Wages Still Weak

Cartoon of the Day: Wages Still Weak - wages cartoon 12.05.2014

Average hourly earnings were up just 2.1% annually in November. That's historically quite weak. In other words, wages have a long way to go.


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real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Keith's Macro Notebook 12/5: US Dollar | Oil | UST10YR

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


THE HEDGEYE MACRO PLAYBOOK

Takeaway: We know we're a little late today (post Hedgeye holiday party edition), but you DO NOT want to miss what we have to say about energy below.

INVESTMENT CONCLUSIONS

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. Consumer Staples Select Sector SPDR Fund (XLP)
  5. Health Care Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. iShares MSCI European Monetary Union ETF (EZU)
  3. iShares MSCI France ETF (EWQ)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

#Quad4 Asset Price Deflation in Energy Continues: As my colleague Brian McGough suggested in today’s Early Look, we aren’t perfect and we certainly don’t nail every call that we make. We often miss things, but one of the things we have fortuitously not missed this year is the pervasive deflation across the energy complex.

 

Even with tools as powerful as our GIP Model, Keith’s TRADE/TREND/TAIL model and TACRM, our asset allocation process remains far from perfect. We do, however, take solace in the fact that perfection does not exist on an ex ante basis in markets. Well, that and the fact that our process is pretty darn good.

 

Using a combination of quant signals and fundamental data to predict what “Quadrant” we’re in or headed into gives us the best probability to get our asset allocation and sector/style factor rotations right. It is truly the equivalent of perpetually stepping into the batter’s box with 3-and-0 count in hand.

 

When we started pounding the table on #Quad4 back in early August, reacting to the “3-and-0” count then was to get long of U.S. dollars and [very] short of commodities and commodity-linked equities – energy in particular. That’s probably the best macro call anyone could’ve made in 2H14. Either that or buying the mid-October lows in the stock market.

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

THE HEDGEYE MACRO PLAYBOOK - DXY GIP

 

THE HEDGEYE MACRO PLAYBOOK - BRENT CRUDE OIL

 

THE HEDGEYE MACRO PLAYBOOK - XLE

 

While we missed making the latter call, we certainly did not miss making the call for asset price deflation in energy. In fact, my colleague and rock star commodities analyst Ben Ryan has been all over this move. Please review the following notes to learn more about why we think crude oil, E&Ps and upstream MLPs have further downside from here:

 

 

After yesterday’s -3.3% plunge, domestic E&Ps (XOP) are now down -15.6% WoW and -41.3% from their YTD peak in late June. OAS on high-yield energy bonds have backed up from a YTD low of 402bps to 845bps as of this morning. As we highlighted in our #Bubbles theme, illiquidity and spread risk were the two key factors that perpetuated and continue to perpetuate our negative bias on the broader junk debt market.

 

THE HEDGEYE MACRO PLAYBOOK - energy OAS

 

THE HEDGEYE MACRO PLAYBOOK - HY Spread Risk

 

One of the hardest things to do as investors is having the guts to stick with a call like this. It’s obviously now extremely consensus; even StreetAccount appears to be bearish on the energy complex per the content of their summary note this morning at ~8:00am:

 

  • “Oil drop gives US drillers argument to end export ban: Bloomberg noted that the fall in oil prices has given oil producers a new argument for ending the US ban on exports. The article said with US output at a 31-year high and imports at the lowest level since 1995, producers seeking the best possible price for crude are stuck having to keep sales at home. Removing the ban could erase an imbalance between US and foreign crude prices. It pointed out that lawmakers are set to hold a hearing next week on dropping the ban.”
  • “Oil reserves at highest since 1975: The FT reported that US proven oil reserves rose to their highest level since 1975 last year. The article noted that proven reserves were in decline up until 2009. According to the EIA, last year US companies produced about 2.7B barrels from their reserves, but added 5.5B in new discoveries. As a result, the US ended 2013 with about 36.5B barrels of proven oil reserves, a 9.3% y/y rise. The peak remains 1970, when proven reserves were reported at 39B barrels.”
  • “Energy debt may be experiencing 'Minsky Moment': The FT said we may be seeing a "Minsky Moment" with energy and junk bonds, as investors begin to price in the potential end of the boom that funded the US shale revolution. The article said the chase for yield has begun to reverse in the energy debt market. It said currently, nearly a third of speculative-grade debt issuance by energy companies trades so poorly it qualifies as being classed as distressed.”

 

Sometimes consensus is right and that appears to be the case here. Per our Tactical Asset Class Rotation Model (TACRM), energy related sectors and subsectors continue to head up the rear among the 47 sectors and style factors we track across the U.S. equity market from a Volatility-Adjusted Multi-Duration Momentum indictor (VAMDMI) perspective. Adjusting for volume and volatility affords us the conviction needed to interpret this signal as continued pressure for investors to rotate out of these exposures.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

 

Multi-factor. Multi-duration. With conviction. That is truly the Hedgeye Macro “playbook”.

 

***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.

 

Draghi Didn’t Deliver the “Drugs”! (12/4)

 

#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.

 

#Bubbles: S&P500 Levels, Refreshed (11/18)

 

Best of luck out there,

 

DD

 

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.


LEISURE LETTER (12/05/2014)

Tickers:  MGM, RCL, NCLH

EVENTS

  • 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 Soft Opening
  • Dec 17:  Upstate NY Casino Decision

Today's Headline Story

RCL– Celebrity Cruises has ordered two EDGE Class cruise ships from STX France for 1.2 billion euros (US$1.49 billion).  The 1st vessel will be delivered in Fall 2018 and the 2nd vessel in early 2020. The two new vessels will hold up to 2,900 passengers and be 117,000 gross tons. 

  • Based upon current ship orders, projected capital expenditures for full year 2014, 2015, 2016, 2017 and 2018 are $1.4B, $1.5B, $2.3B, $0.4B and $2.2B, respectively.
  • Capacity increases for 2014, 2015, 2016, 2017 and 2018 are expected to be 2.4%, 5.5%, 6.7%, 3.8% and 4.3%, respectively. 

Takeaway:  At $257k per berth, the cost of the two new ships is on par with that of Celebrity Reflection which made its debut in 2012. 

Moderate capacity growth has been a strategic goal for Celebrity, particularly after the sale of Century.  The premium cruiser has been resilient but the battle for their dollars will be much more competitive in the years ahead. 

COMPANY NEWS

MGM– MGM China Holdings Ltd’s co-chairman, Pansy Ho Chiu King, has said the slump in gaming revenue is simply a sign of a tendency toward slower growth after a decade of rapid expansion.  “We don’t think that this presents a very pessimistic picture. It now presents a slowing trend” said Ho. She said casinos ought to respond by holding more attractive events and by getting their customers from a wider range of sources.

 

“The visa restrictions imposed on mainland visitors has added to the gaming industry’s operational pressure, and in the short term it is not easy to introduce new client sources,” Ho added.

Article HERE

Takeaway:  The problem is not slowing growth - it's negative growth.

 

NCLH– The first floating Jimmy Buffett's Margaritaville restaurant and 5 O'Clock Somewhere Bar will be aboard Norwegian Escape.  Along with the venues on Norwegian Escape, the partnership includes Margaritaville branded food and beverage locations on Harvest Caye, set to open in fall 2015 and a 5 O'Clock Somewhere Bar on Great Stirrup Cay, planned to also debut in 2015. In the future, the partnership will extend to other ships in the fleet. Norwegian Escape will begin weekly year-round cruises from PortMiami to the eastern Caribbean on Nov. 14 next year.

INDUSTRY NEWS

Philippines typhoon– Millions of people in the Philippines began seeking shelter in churches, schools and other makeshift evacuation centres on Friday as Typhoon Hagupit bore down on the disaster-weary nation. The storm, which would be the strongest to hit the Southeast Asian archipelago this year, is expected to impact more than half the nation including communities devastated by Super Typhoon Haiyan last year. Authorities said more than 500,000 families, or about 2.5 million people, in the eastern Philippines would be evacuated ahead of Hagupit's expected landfall on Saturday night or Sunday.

Article HERE

Takeaway:  Another storm to hit the Philippines, ahead of CoD Manila soft opening on the 14th. 

  

Paradise City – Paradise Sega Sammy, a joint venture of Korean casino operator Paradise Group and Japanese entertainment company Sega Sammy Holdings will open Korea's 1st IR in March 2017.   

  • 5-star hotel with 711 rooms
  • Casino:  160 table games, 388 electronic table games, 350 slot machines
  • Boutique hotel with 103 rooms
  • 1,200 person convention center
  • Multicultural complex

Article HERE

Takeaway:  With Japan likely dead, Korea may be the next Asian opportunity.

MACRO

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.


Daily Trading Ranges

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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