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The Idea Generation Game

“It constipates the whole process.”

-Stephen King

 

While I am sure he has plenty of it, that’s what the King pin of American supernatural fiction had to say about cash. “Money is great stuff to have, but when it comes to the act of creation, the best thing is to not think of it too much.”

 

Sadly, that is not how some think about what they call their “dough.” On the independent research battle front, I can’t count how many people told me we’d be wrong on interest rates falling because guys with a lot more money than me thought otherwise.

 

Who raised these people to think that way? America was built on a meritocracy of new ideas replacing broken ones. The day we wake up thinking that only the people with money are “smart” is the day we start losing. Anyone can win the idea generation game.

 

The Idea Generation Game - 2 it

 

Back to the Global Macro Grind

 

Fast or slow, you probably can’t win this year’s game. Not with our July 2014 call for a breakout in cross asset class volatility in play. Just watch Greece go from -13% to -2% YTD on a floater headline that their “new” Finance Minister is “creative”, and you’ll get my point.

 

Don’t confuse moving slowly with moving patiently either. There’s a big difference. #Patient players can move both fast, and slow. That’s the point. There’s a time to risk manage your active portfolio – and there are times to wait and watch.

 

Risk manage your portfolio? Yes. It’s commonly called trading – and while you can feel really “smart” buying and holding stocks at 10 VIX, at VIX 15-25… not so much. Look what led yesterday’s v-bottom rally off the terrible January ISM report’s lows:

 

  1. US listed Oil & Gas Stocks (XOP) = +6.1%
  2. US listed Energy Stocks (XLE) = +3.1%
  3. US listed Financials (XLF) +1.6%

 

Yes, 2015’s biggest losers led yesterday’s gains. Unless you made some counter-TREND moves (i.e. booked gains in shorts that were working and went long some of the inversely correlated sectors and asset classes linked to a Down Dollar move), you lost ground yesterday.

 

While generating both absolute and relative returns, every day, would be nice – that only happens on either Twitter or in fictional novels about rainbows and puppy dogs. Real world risk management is far closer to Stephen King’s “It!”

 

What is it? What is that thing that helps Portfolio Managers and Self Directed Investors alike beat the market year-in and year-out? I’d say it has a lot do with having a more flexible #process than a constipated one.

 

Did consensus really think the US Dollar was going to go up, every day?

 

  1. Friday’s GDP miss/slowing was a clean cut negative for the US Dollar
  2. So was yesterday’s ISM slowdown from an already slowing 55.5 in DEC to 53.5 in JAN
  3. And so would be a bad jobs report on Friday…

 

But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:

 

  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95

 

In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!

 

Seriously. Getting that right is not that easy.

 

But not being Consensus Macro is easier than thinking it’s “smart.” Here’s where the “smart” hedge fund futures and options bets were (non-commercial CFTC net futures/options positioning) going into yesterday’s counter-TREND macro move:

 

  1. Peak multi-year net LONG position in US Dollars of +70,456 contracts (vs. the 1yr avg of +24,739)
  2. Peak multi-year net SHORT position in the Euro of -177,296 contracts (vs. the 1yr avg of -83,603)
  3. Net SHORT the Russell 2000 at its peak net short position of the year (-30,174 net short contracts)

 

That’s right, after all of these things have worked, big time, for 6 months – all of the “smart” money has crowded into them.

 

Sure, there was a net LONG position of +324,181 in Crude Oil going into yesterday’s rip, but don’t forget that Wall Street was been levered long Oil the entire way down too (the 1yr avg net LONG position in Crude is +366,487 contracts!).

 

“So”, don’t constipate yourself with consensus. Motivate yourself to open your mind and move aggressively when the big things moving macro markets move. That sure beats counting your moneys. “There’ll be time enough for countin’, then the dealing’s done.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.78%

SPX 1

VIX 18.25-21.92
USD 93.41-95.82
WTI Oil 42.84-51.31
Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Idea Generation Game - 02.03.15 chart


WYNN Q4 2014 EARNINGS PREP

Takeaway: We expect a miss and sobering commentary from Macau and Vegas.

WYNN Q4 ESTIMATES

 

Revenue

  • $1.18 billion (Hedgeye) vs $1.19 billion (Street)

EBITDA

  • $373 million (Hedgeye) vs $385 million (Street)

QUESTIONS FOR MANAGEMENT

  1. Latest on Wynn Palace budget/opening date.
  2. Update on the construction labor situation?
  3. Wynn Palace table numbers
  4. More color on the 2 VIP rooms opening in Jan/Feb
  5. How much cost cutting is available in OpEx other than labor?
  6. How are junket commissions trending in a declining revenue environment?
  7. Mass promotional environment
  8. Thoughts on reinstating proxy phone betting
  9. What's behind the recent improvement in Wynn's Mass business?

FORWARD LOOKING COMMENTARY

 

Smoking

  • The new regulations in smoking, the turmoil in Hong Kong late in the month of October and, of course, the policy of the central government in being very, very aggressive about what appeared to be a misconduct and corruption of the government has put a lot of the wealthy businessmen in the foxholes.
  • The smoking rooms established at Wynn Macau have been successful. Wynn’s in the process of establishing an additional smoking room based on location. But overall, they don’t believe that that’s had a huge effect on business. There’s been some effect but it’s been marginal.

 

Wynn Cotai

  • As far as construction goes, Wynn states they are, on target, on budget and on time.
  • Cotai’s budget remains within 1% of expectations.
  • The Wynn Palace is very luckily set up for the smoking ban due to deciding to build balconies for all of the VIP and Mass rooms. This will allow players to gamble and then step outside to smoke.

 

Mass competition

  • Increased margin pressure in Macau. Competition is viewed as extremely intense.
  • Mass market area margins have been fairly constant over the last three quarters.  Wynn has seen its mass area and premium mass area margins stabilize.
  • Wynn remains confident he can secure 550 gaming tables from the government  

 

New junket rooms

  • Junkets conservative
  • Building junket rooms in 2 gorgeous VIP areas
    • We believe it could be 36 tables in total, opening in mid-Feb.

Predicting Age

This note was originally published at 8am on January 20, 2015 for Hedgeye subscribers.

“People do predictable things as they age.”

-Harry Dent

 

People also do unpredictable things. Give them more than a few cocktails and you’ll see that prediction in motion! While simple, the aforementioned quote is true too. It comes from a macro research book I just finished reviewing called The Demographic Cliff:

 

“The average family borrows the most when parents are age 41, typically the time of their largest home purchase. They spend the most at age 46, although more affluent households reach that peak later… People save the most at age 54 and have their highest net worth at age 64…” (pg 11). These are obviously generalizations, but they are about the most important spending generation in American #history (Baby Boomers).  

 

Interestingly, but not surprisingly, Life-Cycle Economics was one of the most talked about macro topics when Darius Dale and I were on the road seeing Institutional Investors in NYC last week where I’d ask everyone the question we have on slide 22 of our Q1 Macro Themes Deck: “What Matters Most: Gas Prices, Jobs, or Demographics?”

 

Predicting Age - 90

 

Back to the Global Macro Grind

 

While many like to call themselves “long-term investors”, when it comes to answering the question in our Chart of The Day thoroughly, I think you should call yourselves multi-duration, multi-factor, risk managers. That’s my new marketing pitch!

 

Here’s one way to think about all 3 factors, across durations:

 

  1. GAS PRICES – immediate-to-intermediate-term (bullish TRADE and TREND duration impact to consumers)
  2. JOBS – intermediate-term (making a bearish turn? The cycle tends to be less lumpy and cyclical, or TRENDING)
  3. DEMOGRAPHICS – long-term (what was a long-term tailwind in the USA, Japan, and Europe is now a headwind)

 

Yep, after a long weekend, that’s a lot to think about – and I’m thinking that the immediate-term positioning of Consensus Macro futures/options in both the Spooz and Long Bond doesn’t quite agree with me yet on JOBS and DEMOGRAPHICS:

 

  1. SP500 (Index + Emini) = +110,971 net LONG position (-59,269 last wk but up big vs the 1yr avg of -11,681)
  2. US 10yr Treasury = -(187,997) net SHORT position (+62,166 last wk but a lot shorter than 1yr avg of -62,100)
  3. Crude Oil = +326,134 net LONG position (+11,230 last wk vs. 1yr avg of +368,447 net LONG contracts)

 

What consensus continues to think about is perpetually being long Macro Style Factors (growth and inflation) that have worked in the past. This implies nothing but volatility around these changing expectations in the future.

 

Let’s go through these (SPX, 10yr, Oil) one by one. First on US equity beta (SPX):

 

  1. SP500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240
  2. But the SPX didn’t pay the bulls, closing down for the 3rd straight week last week during its -3.5% correction
  3. Within the SP500’s -1.9% YTD return, the Top 2 Sectors are #GrowthSlowing + #Deflation winners
  4. Top 3 YTD = Utilities +2.6% last wk to +3.0% YTD, Healthcare (XLV) +2.9% YTD, Consumer Staples (XLP) +1.6% YTD
  5. Bottom 3 YTD = Financials -2.6% last wk to -5.0% YTD, Energy (XLE) -5.0% YTD, Consumer Discretionary (XLY) -3.4% YTD

 

Then on the best way to be long our global #GrowthSlowing + #Deflation view:

 

  1. UST 10yr Yield was down another -11bps last week to -33bps (-15% YTD) to 1.84%
  2. Yield Spread (10yr minus 2yr) was down another -3bps last wk to -15bps YTD
  3. Long-term Treasury (TLT) is already smoking everything US stocks at +6% YTD (pre-int payments!)

 

Finally, on the beloved Oil “space”:

 

  1. WTI Crude has its 1st up week in the last 8, closing up a whopping +0.7% last week
  2. WTI Crude has already given up another -3.1% to start this week and is already -11.4% YTD
  3. Whoever bought me the falling steak knives catching set for my birthday isn’t invited to next year’s party

 

In other words, you and I are having a great time to start 2015. Consensus Macro is not. And that’s mainly because consensus does predictable things as a global growth, inflation, and demographic cycle ages past a long-term cyclical peak.

 

Before I leave the keyboard this morning, here are some other big movers in Global Macro from last week that you need to keep front and center ahead of the BOJ and ECB central planning decisions this week:

 

  1. The Euro (vs. USD) was -2.3% last wk and signaled immediate-term TRADE oversold at $1.15
  2. Gold ripped +5% last week and is showing follow-through, up another +1.3% this a.m. to $1291
  3. Dr. Copper got blasted for another -5% #deflation last week and is down again this morning to $2.56

 

Of all that, what matters most?

 

All of it does. It’s interconnected. And I think it’s suggesting that Mario Draghi might not be able to deliver the Policy To Inflate drugs that central planning fans are begging for on Thursday.

 

Any short-term bottom in Euros = Down Dollar (from overbought highs) – and Gold loves nothing more than Down Dollar + Down Rates, at the same time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.76-1.90%

SPX 1984-2037
USD 91.94-93.11

EUR/USD 1.15-1.19

Gold 1235-1297

Copper 2.48-2.65

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Predicting Age - 01.20.15 Chart


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.

Cartoon of the Day: Groundhog Day for the Fed

Cartoon of the Day: Groundhog Day for the Fed - Groundhog cartoon 02.02.2015

 

Expect more of the same from the world’s unelected central planners including America’s own Fed chief Janet Yellen.

 


Rearview Report: Income & Spending Diverge in December

We received the 4Q growth estimates on Friday so there was little in the way of surprise in the aggregate household spending and income figures for December released this morning.  There are, however, a few dynamics worth highlighting in the detail data.

 

In short: Consumption growth slowed in December alongside a rising savings rate and likely moderation in revolving credit growth.  Aggregate Disposable Income growth, meanwhile, continued to accelerate alongside an accelerating employment base and rising salary and wage growth.  The annotations in the summary table below highlight these trends.

 

Rearview Report:  Income & Spending Diverge in December - Income   Spending Table

 

Spending: Real household spending declined -0.1% sequentially while decelerating modestly on both a 1Y & 2Y basis. 

 

Spending growth slowed across all of Services/Durables/NonDurables with goods spending leading the December slowdown.   The rise in the savings rate to 4.9% in December from +4.3% in November was responsible for most of the retreat in spending.

 

Revolving consumer credit growth broke out of its 3Y slumber in 2Q14 alongside accelerated spending on durables and the two have moved in lockstep the last 6+ months.  It’s likely card spending moderates alongside the moderation in higher ticket discretionary consumption.

 

Rearview Report:  Income & Spending Diverge in December - PCE YoY

 

Rearview Report:  Income & Spending Diverge in December - Revolving Credit YoY

 

Rearview Report:  Income & Spending Diverge in December - Revolving Credit vs Durable Goods

 

Income:  Aggregate disposable income growth, per capita income growth and salary and wage growth all accelerated on both a 1Y/2Y basis in the latest month.  Note, however, that the reported acceleration in December comes against a very easy comp and that compares get decidedly harder beginning in January.    

 

Rearview Report:  Income & Spending Diverge in December - Salary   Wage Dec

 

HOURLY WAGE vs AGGREGATE INCOME GROWTH: The following, somewhat conflicting trends in Wage growth and Income growth have characterized the better part of the last 6 months: 

 

  • Wage Growth The trend in nominal wage growth in the private sector has been stagnant at ~2% (a bit better for production & nonsupervisory workers)  and decidedly soft in December with average hourly earnings growth slowing to 1.7% YoY.  Note that the more recent ECI data – a more comprehensive measure of compensation – showed stronger compensation trends than those reflected in the monthly wage figures released alongside the establishment survey.   

 

So, wage growth remains soft, but……

 

  • Aggregate Income Growth:  With total employment growth accelerating (ie. an accelerating employment base) in recent months, aggregate personal income growth has been able to accelerate in spite of middling hourly/weekly wage growth.  The aggregate figures tell us nothing about distribution effects, but with the highest income quintile supporting the bulk of consumption spending and with the correlation between aggregate income growth and total household spending extremely tight over decades of data, the aggregate figures are the predominant driver of reported PCE growth.  

 

Rearview Report:  Income & Spending Diverge in December - PCE 3D

 

Accelerating salary and wage growth and a rising savings rate are favorable fundamental developments although the rising savings rate mutes the flow through to actual spending growth. 

 

Fundamental positives manifesting as a reported slowdown in household spending - in conjunction with a discrete deceleration in ROW growth – all (further) complicate dynamically allocating capital across asset classes, equity  sectors, and style factors. 

 

Consider the typical thought train and level of confliction/cognitive dissonance prevailing in recent investor discussions:   OUS is slowing and we’re late cycle domestically.  Late-cycle exposure is underperforming significantly alongside negative deflation leverage and the more recent domestic manufacturing data suggest the US is not divorced from the broader global reality.  However, select early-cycle exposure could work alongside lower energy prices, TTM underperformance, stable labor market trends and lower rates catalyzed more by global than domestic forces.  But, wait, how could early-cycle exposure work when we’re late-cycle, when shale state woes are beginning to pressure what had been accelerating improvement in initial jobless claims data and when while the preponderance of domestic macro data – while still okay on an absolute basis – is slowing on a rate of change basis. 

 

Our rejoinder has simply been to remain long the long bond as both the fundamental data and quantitative setup continue to support it.  We also continue to like defensive yield sectors along with select early-cycle exposure such as housing, but not at every time and every price.  

 

Rearview Report:  Income & Spending Diverge in December - Eco Summary

 

 

Christian B. Drake

@HedgeyeUSA


Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH

Takeaway: Idea Bench Update. Tory Burch trading hands for $3.5bn. LULU’s Chip saga updated. Confusing brand messages in Aussie Open Final (UA).

HEDGEYE RETAIL IDEA LIST

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart1

CHANGES THIS WEEK

  1. HBI: Removed HBI from our Long Bench. We like the balance sheet story, but now it's printing bad numbers even with the benefit of acquisitions. Not for us.
  2. COH: Took COH off Long Bench. This name was there for all of 2 weeks (an odd call for us). After it bought Stuart Weitzman -- which we think is perhaps the worst deal we've seen in retail in a year, we actually added to our LONG bench. The reason is that COH -- a company whose net income is below levels experienced in the Great Recession, would finally manufacture earnings growth with this deal. But we think that COH will end up having to pay closer to $1bn vs the reported $574mm due to underinvestment by the former owner. This stock might work for a few bucks on the 'less bad' trade. But it should start with a $2-handle.
  3. DG: Removed from Short Bench. Our short bias was a "lose if they win, and lose if they lose" scenario as it relates to Family Dollar. Either DG pays too much (12-13x EBITDA), or it loses and the stock falls back to where it was when it started.  The deal appears to be a non-starter, and DG is only 6% above where it was when the bidding began. With gas prices having fallen so far, there's likely no catalyst on the downside here.

 

EVENTS TO WATCH

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart2

 

 

COMPANY HIGHLIGHTS

 

LULU - lululemon athletica Founder Chip Wilson Announces Resignation from Board

(http://tinyurl.com/oamojsn)

 

Takeaway: No surprise here at all. First Wilson traded in his Chairman title in exchange for the Board putting through Laurent Potdevin as new CEO (despite his lack of qualifications). But handing in his Chairman title, in effect, neutered Wilson -- a) could no longer call a Board vote, b) did not have anything close to a majority vote on the Board, and c) was banned from the building except for Board meetings due to his behavior.  Within six months, Wilson sold half of his stake to Advent International at $38 for $845mm. For the record, that investment is now worth $1.38bn not six months later. Wilson has stated publicly that he feels 'handcuffed' to LULU due to his ownership. To his credit, he's a successful entrepreneur at heart, and his family members are trying to start up a retail concept without his 'official' involvement.  It makes all the sense in the world that he'd pull away from the Board, and we wouldn't be surprised to see him sell the rest of his stock in a negotiated transaction -- like with Advent. In fact, if he doesn't, it probably means that the pool of buyers out there is slim, which will worry us.

 

Tory Burch's Growing Value: Firm Now Worth $3.5B

(http://www.wwd.com/business-news/mergers-acquisitions/tory-burch-firm-valued-at-35b-8157064?module=hp-topstories)

 

Takeaway: A good article outlining the ownership of Tory Burch -- something we think equity investors will need to know in 12-18 month's time when the company goes public.  The $3.5bn valuation implied by recent private transactions makes sense to us. Kate Spade is trading about $4.3bn, 23% higher despite the fact that it's footprint is actually a third smaller than Burch.  This isn't a function of KATE being overvalued -- in fact we'd argue the opposite.  Getting in at $3.5bn for Tory appears to be a no-brainer.  We think that the bankers couldn't have made this name more marketable by getting Roger Farrah on board from Ralph Lauren. The Burch/Farrah co-CEO one-two punch is easily good for another 5-10 multiple points -- whether Roger actually succeeds or not. Wall Street will definitely give him the benefit of the doubt (they'll remember his success at RL, and forget his failures at Foot Locker and Federated).

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart5

 

UA, FAST - Murray/Djokovic Sport Confusing Brand Images

 

Takeaway: We got confusing brand messages in the Final of the Australian Open.


In one corner was Novak Djokovic, who wore his trademark Uniqlo apparel, while donning nondescript white Adidas court shoes. We've grown to accept that, as his primary endorser -- Uniqlo -- does not make shoes.

 

But it was Andy Murray who was more interesting. After signing a deal with UnderArmour on Dec 30th, he was proudly covered head to … knee in UnderArmour product.  His toes, unfortunately, were still wearing Adidas.   This simply shows the complexity of the footwear business model vs apparel. The day UA announced the deal, Murray was proudly wearing top-of-the-line UA apparel. But five weeks later, UA does not have a shoe that he is comfortable performing in at a major event. That's not a knock on UA -- as it's almost impossible for most brands to work that fast (Nike probably could).  But the design, development and production process might mean that Murray has to wear dual-brands for another few months at least.   On the bright side, UA can blame Murray's loss on Adidas (and believe us, they will).

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart3

 

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart4

 

 

OTHER NEWS

 

DKS - DICK'S Sporting Goods Announces that Chief Financial Officer Andre J. Hawaux will Assume Additional Responsibilities as Chief Operating Officer

(http://otp.investis.com/clients/us/dicks_sporting/usn/usnews-story.aspx?cid=982&newsid=28540&show=1)

 

TGT - Target to seek two-month extension of protection from creditors

(http://www.theglobeandmail.com/report-on-business/target-to-seek-two-month-extension-of-protection-from-creditors/article22718993/)

 

RSH - Chapter 11 as Early as Today

(http://www.wsj.com/articles/standard-general-radioshack-may-act-as-lead-bidder-for-radioshack-1422832873)

 

Neiman Marcus, Office Depot to accept MasterPass

(http://www.chainstoreage.com/article/neiman-marcus-office-depot-accept-masterpass)

 

L Capital Acquires 50% of Ba&sh

(http://www.wwd.com/business-news/financial/l-capital-acquires-50-of-bash-8157435?module=Business-latest)

 

Gucci to Appeal Guess Case in Paris

(http://www.wwd.com/business-news/legal/gucci-to-appeal-guess-case-in-paris-8157356?module=Business-latest)

 

DSW - DSW shifts exec roles, responsibilities

(http://www.chainstoreage.com/article/dsw-shifts-exec-roles-responsibilities)


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