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THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we show how consensus is not in area code of being bullish enough on the U.S. dollar and how that is likely to impact U.S. stocks.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. iShares U.S. Home Construction ETF (ITB)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. iShares MSCI Emerging Markets ETF (EEM)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

The U.S. Dollar Is Crushing Naysayers: Those of you who are familiar with our work know that core to our research and risk management processes is a behavioral finance overlay that centers mostly on sentiment. Specifically, we believe there are three states of sentiment that investors must attempt to contextualize prior to taking a position in or formulating a view on a specific security or market:

 

  1. Bullish
  2. Bearish
  3. Not enough of either

 

In that context, we continue to believe that consensus is not in the area code of being Bullish Enough on the U.S. dollar.

 

As you know, we’ve been dollar bulls for nearly six months now in conjunction with our #Quad4 theme and what continues to amaze us about the strength in the U.S. Dollar Index is the level of disbelief among investors with respect to the velocity of its appreciation.

 

THE HEDGEYE MACRO PLAYBOOK - DXY GIP

 

Anecdotally speaking, I can count on one hand the number of institutional clients that expect parity in the EUR/USD cross and/or reversion to the August ’98 highs of ~147 on the USD/JPY cross.

 

THE HEDGEYE MACRO PLAYBOOK - EUR   JPY

 

But why use anecdotes when you can use math?

 

Specifically, the sell-side (i.e. Bloomberg consensus) expects the U.S. Dollar Index (DXY) to appreciate +1.3% to 95.68 by EOY ’15 based on our weighted amalgamation of all the constituent currency forecasts.

 

That sounds reasonable, but not in the context of them expecting it to appreciate +2.2% to 92.27 by EOY ’15 at the end of last year. It’s worth noting that 92.27 is a full -2.5% lower than where the DXY is trading today – just four weeks later!

 

In line with their institutionalized processes, sell-side forecasts for key USD crosses are likely to continue chasing trending price momentum – within one sigma of the median forecast, of course! Can’t risk being isolated from the herd…

 

THE HEDGEYE MACRO PLAYBOOK - DXY Bloomberg Consensus NTM Forecast

 

What about the buy-side? Have institutional investors been any better at forecasting where the dollar has been headed? Absolutely not. Far from it actually.

 

For example, let’s review how buy-side consensus was positioned ahead of the ECB smoking the EUR/USD cross to ~12yr lows with the announcement of its QE program last week. At the end of last year, the most probable spot price range for January 22nd was 1.2131-1.2162 according to Bloomberg’s FX Rate Forecast Model. The left tail of the 95% confidence interval band was 1.1526. The EUR/USD cross closed at 1.1366, a 0.24% probability just some ~3 weeks earlier!

 

THE HEDGEYE MACRO PLAYBOOK - ECB

Source: Bloomberg

 

Why was the precipitous YTD decline of -6.6% on the EUR/USD cross considered such a low probability among investors?

 

Anecdotally, some investors were myopically focused on the hawkish commentary emanating from the Bundesbank – Wolfgang Schaeuble in particular – in their relatively hawkish handicapping of ECB QE risk(s). Other investors were myopically focused on the Fed and what a deteriorating outlook for growth and/or inflation would do to the FOMC “dot plot” and, ultimately, the U.S. dollar.

 

While both views can be considered to be well within reason at the time(s), the fact of the matter is that both views were ultimately proved wrong by the market. Fortuitously, our team has been on the right side of the long-dollar trade all along.

 

With respect to the Fed in particular, the “dots” continue to get punted at every interval yet the dollar continues to ascend to new heights.

 

Specifically, according to the Fed Funds futures curve, the probability of “liftoff” (i.e. a rate hike) by the December 2016 FOMC meeting at the May 6th 52-week low in the DXY was 90.8% (100% less a 1.4% probability of 0% less a 7.8% probability of 0.25%). It regressed to 86.1% by the end of last year and further to 65.3% currently.

 

THE HEDGEYE MACRO PLAYBOOK - 5 6 14

Source: Bloomberg

 

THE HEDGEYE MACRO PLAYBOOK - 12 31 14

Source: Bloomberg

 

THE HEDGEYE MACRO PLAYBOOK - 1 29 15

Source: Bloomberg

 

With long-duration Treasury bonds continuing their moonshot higher (yes, we’ve been bullish on those too), the rates market clearly gets this dynamic.

 

What the currency market is failing to appropriately price in is the global monetary policy divergence we have identified and continue to view as supportive of the USD over the intermediate term and potentially over the long term if the 2016 election cycle portends a structurally hawkish shift in monetary and fiscal policy.

 

THE HEDGEYE MACRO PLAYBOOK - G 3 MONETARY POLICY DIVERGENCE

 

THE HEDGEYE MACRO PLAYBOOK - DXY 1Y   2Y OIS

 

In short: the ECB and BoJ are simply more dovish than the Fed at the current juncture and that is likely to continue at least until a clear trend of deteriorating labor market fundamentals takes hold in the U.S.

 

We repeat: the ECB and BoJ will likely remain more dovish than the Fed until a clear TREND of deteriorating labor market fundamentals takes hold in the U.S. We are simply not there yet according to how the Fed analyzes labor data.

 

Hopefully by now we’ve done a good job using our #process trifecta of History, Math & Behavioral Finance to make a compelling case for material U.S. dollar appreciation from here. Our bearish call on commodities, emerging market financial assets and dollar-denominated high-yield corporate debt is an easy call to continue to make in light of that.

 

How will that impact equity portfolios, however? Based on historical return patterns, a continued strengthening of the USD vis-à-vis peer currencies is likely to continue to perpetuate a performance divergence between the “haves” (i.e. high domestic revenue exposure) and the “have nots” (i.e. high international revenue exposure) in the domestic equity market.

 

THE HEDGEYE MACRO PLAYBOOK - 1

 

THE HEDGEYE MACRO PLAYBOOK - 2

 

Email us if you have questions on how to replicate this equity screen or if you have any other questions we may be able to help with. Best of luck out there.

 

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

 

TRACKING OUR ACTIVE MACRO THEMES

Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

 

EARLY LOOK: Late-Cycle Slowdown (1/27)

 

#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

 

The Hedgeye Macro Playbook (1/23)

 

Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

 

HOUSING: Riding Strong Through the Actual and Arithmetic Blizzard of Crummy Macro Data (1/27)

 

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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.  


LVS – WHAT SLOWDOWN? WE’LL SHOW YOU

CALL TO ACTION

The stock should be flat on this earnings release.  Macau disappointed on already reduced numbers, Las Vegas was surprisingly weak, and when one-time items and good luck is stripped away from Marina Bay Sands, Singapore performed in line.  So why shouldn’t the stock be down?  Well, the quarter wasn’t awful and could’ve been worse.  However, management’s repeated mantra – Where’s the slowdown? – rang hollow.  There was ample evidence of a slowdown across many metrics across all properties.

 

There’s a lot to like about LVS over the long-term and we will be positive on this stock again.  For now, we will stay on the sidelines.  There is no evidence of a fundamental bottom in Macau and in fact, January looks worse to us than Q4.  Optically (on a YoY basis), February will be awful.  Risks remain high and visibility low.  We wouldn’t be surprised to see another leg down.

 

Please see our detailed note: http://docs.hedgeye.com/HE_LVS_Slowdown_4Q2014_1.29.15.pdf


Macro Stars

This note was originally published at 8am on January 15, 2015 for Hedgeye subscribers.

“Stars can’t shine without darkness.”

-Unknown

 

It is indeed the contrast that draws one’s eye towards something that is different.

 

Every once in a while in Independent Research we earn an opportunity to see that light develop before consensus does. God willing, the search for macro stars is what has my two feet on the floor each morning of every risk management day.

 

While it would be convenient to skip over the #deflation part of an epic central planning experiment, unfortunately that’s not the way the cycle from day to night works. There will be darkness before America’s free market economy can shine again.

Macro Stars - 445

 

Back to the Global Macro Grind

 

Don’t forget that I had the lowest grade in my freshman creative writing course @Yale. “So”, I’m still working on it (thanks for bearing with me over the years!). I’d love to go back to New Haven and slap some hash-tags on my English Lit prof’s desk.

 

While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:

 

  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice
  2. OIL – follow the #Deflation Dominos – Yens, Euros, Francs panic/burn > Up Dollar > Crashing Oil Spreads blow out in High Yield Energy > Energy States lose moneys and jobs > Financials and Industrials follow (late-cycle rolls) > Fed doesn’t hike … this was the call I made in our Macro Themes Deck for Q1, reiterating it this am
  3. FINANCIALS – yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst perf #divergence vs Utilities, ever. XLF already -5% for the YTD and the Regional Banks are in the midst of a 10% draw-down since that no-volume all-time SPX high on December 29th (2090)

 

“So” how are you feeling about some of our #Quad1 US equity long ideas now? After seeing the US stock market drop in 10 of the last 12 trading days, I’m thinking some of those look a tad early!

 

What’s really cranking for us are these #Quad4 Deflation ideas (Long #TLT!). And that makes complete sense to me, because:

 

  1. In Q1, globally #Quad4 doesn’t bounce to #Quad1 anywhere but in the USA
  2. USA is still coming to grips with the #Quad4 slowdown that happened in DEC and Q4 of 2014

 

Slowing? Yeah, that “everything is awesome” LEGO gas station thesis that everyone and their brother in long-only USA equity land ended up being almost as fictional as the movie. At -0.9% month-over-month, that was a big US Retail Sales miss.

 

It wasn’t recessionary, and that wasn’t our call anyway. It was simply A) slower in rate of change terms (both sequentially and on a 2yr comp basis) and, more importantly, B) way worse than the Old Wall was prepped for.

 

Go back and read their tweets. My boy Lavorgna was tweeting in sync with Bloomberg/CNBC’s new editorial JV macro team that the US economy was “booming” and that it was a “closed economy, unaffected by the global slowdown.”

 

Then they got Swissy’d.

 

Don’t you hate when that happens? When an un-elected Swiss dude wakes up in the morning and whacks his country’s stock market for a 7% down day and takes out Zervos’ spoooz at the knees?

 

Yes, I am going to call these people out by name this time. Oh, right – I did last time too. And, no, it’s not “mean” or unprofessional. It’s what someone with a spine needs to do, or our profession will never be held to account and evolve.

 

Due to the countless conflicts of interest associated with the aforementioned brokers, banks, and advertisers, the consensus complacency about risk remains the greatest risk to your country, children, and their future stars.

 

Our immediate-term Global Macro Risk Ranges are now (I’ll give you all 12 Big Macs in our Daily Trading Ranges report from this morning – in brackets is our intermediate-term TREND views):

 

UST 10yr Yield 1.78-1.97% (bearish)

SPX 1991-2031 (bearish)

SMI (Swiss Index) 8471-9016 (bearish)

FTSE 6230-6467 (bearish)

VIX 19.27-22.51 (bullish)
USD 91.48-93.11 (bullish)
EUR/USD 1.16-1.19 (bearish)

Yen 116.43-119.12 (bearish)
Oil (WTI) 44.43-48.97 (bearish)
Natural Gas 2.74-3.31 (bearish)

Gold 1213-1245 (neutral)

Copper 2.45-2.71 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Stars - 01.15.15 chart


Early Look

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LVS 4Q 2014 CONFERENCE CALL NOTES

Takeaway: Details don't live up to the headline beat. Underlying metrics look weak across the board

CONF CALL REMARKS

  • Despite Macau challenges, pretty good quarter
  • Mainland China visitors are increasing (14% YoY)
  • 13K room supply in Macau (45% market share)
  • $1.4m net sq ft of retail mall offerings (70% of Macau)
  • After completion of Parisian, expect to double retail offerings in future
  • CoD Dancing Water do not have much repeat customers
  • Sands' 15k arena in contrast brings back plenty of repeat customers
  • 35% EBIDTA share in 1st 9 months of 2014 (up from 32% for same period in 2013)
  • Singapore:  MBS has 60% EBITDA share
  • 80% of operating profit in both Macau and Singapore was due to Mass and non-gaming
  • Macau strategy:  anchored about mass market
  • Mainland Chinese to HK grew 16% YoY
  • Over the past four years, the VIP component of GGR have hardly grown
  • Have been delivering on Macau's diversification (MICE, retail, entertainment, convention, employment opportunities on tour sights)
  • 2015 MICE attendance will represent >80% of Macau's convention attendance
  • 95% leased at Parisian
  • 22,000 employees (promoted just under 2,500)
  • Hedgeye thinks VIP/mass hold-adjusted, ex property tax refund, MBS EBITDA was closer to US$355m, which would be close to our estimate of US$347m but below the Street.
  • Asian opportunities:  Korea/Japan/Vietnam
  • S&P/Fitch:  investment grade rating for LVS
  • The Company's Board of Directors Raised the 2015 Annual Dividend to $2.60 per Share, an Increase of 30% Over 2014; increased dividend will be made on March 31, 2015
  • $1.66bn stock capacity remaining under its buyback program

 

Q & A

  • Macau mass margins (slide 13):  why not move more tables to base mass since they are higher margin?  The reason is because the market is in flux. 
  • MBS mass:  premium mass ex Singaporeans have grown that property's business 
    • Didn't mass volumes fall at MBS?
  • Macau VIP margins:  don't move that much, dependent on hold
  • Macau premium mass margins: in downturn, they can't adjust payroll that quickly; focusing on reducing opex other than labor
  • Pleased with overall Macau margins but room for improvement
  • Parisian govt:  nothing wrong with $11/12k win/table.  Want fair share of tables.  Earn more EBITDA/table in Macau than double gross in Vegas 
  • Sands China:  leader in non-gaming income (80% market share)
  • Sands China special dividend is because of a special reason
    • Would rather have regular dividends since they are reliable and predictable
  • Mass competitive environment:  it is changing.  Confident on 'new Macau' model - mass based, non-gaming based model.  Other operators' margins will come down a little bit because there 'is less at the top'. 
  • Las Vegas:  REVPAR down 2.7%; no change in strategy.  Competitors have done better.  Wynn/Bellagio dominant players in baccarat.
  • Full smoking ban?  Will abide by whatever government says 
  • Intent to grow dividend by 10% each year
  • Hurt by lower performance from a concentrated super premium mass segment but growth in base mass may offset some of that
  • Plenty of gaming capacity in Macau.  Big believer ETGs will grow.  Slots not as bullish.
  • Venetian Macau REVPAR decline: revisiting strategy on premium mass and base mass 
  • Parisian opening date: sometime in 2016.  Thinking about a possible partial opening (restaurants/entertainment)... will talk to new macau govt regarding construction labor. Will shuffle labor from St. Regis building once that is done to the Parisian. Do have the permits to complete the property. 
  • There are people looking for more labor
  • Sands has 58% of all concessionaires rooms
  • $91m property tax rebate:  relates to 5-year period. 9 cent after tax impact. Going forward, it will be a smaller property tax.
  • LVS stock down a lot more than where it deserves
  • Adelson have not sold one share of stock since 2006 (it was a secondary sale for diversification purposes)
  • Wondering when Galaxy will put in some MICE in their Galaxy Macau Phase 3/4/5/6


Cartoon of the Day: Hike?

Cartoon of the Day: Hike?  - Fed cartoon 01.28.2015

If the Fed raised interest rates with the world slowing, and deflation doing what it's doing right now, well.... look out.


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