Keith's Macro Notebook 2/4: USD | Commodities | Financials


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

LEISURE LETTER (02/04/2015)




  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)



    CCL - Carnival Vista will homeport in Miami. The move is part of an extended deal between Carnival Corp. and PortMiami that would require Carnival to sail Vista out of Miami for at least 24 months in the three years after the ship launches next year. The 3,954-passenger Carnival Vista will launch May 1, 2016. After a season of 18 sailings in Europe, the ship will embark on a 13-night transatlantic crossing October 21, 2016, arriving in New York City on November 3. 

    Article HERE

    Takeaway: As expected.

    HOT - Bahrain-based International Investment Bank (IIB) has announced that its mixed-use real estate development in Sarajevo has signed a memorandum of understanding (MOU) with Starwood Hotels and Resorts concerning the project's second tower, which would house a luxury five-star hotel. Sarajevo City Centre (SCC), which is based in Sarajevo, the capital of Bosnia and Herzegovina, is a partnership between IIB and Saudi-based business group Al Shiddi Group.

    Article HERE







    Jimei – The company says it is expanding its gambling junket business in Macau. Jimei told the Hong Kong Stock Exchange that it had an agreement with New International Club Ltd to participate indirectly in the gaming promotion business in the city. New International Club is in negotiations with casino operator Wynn Macau Ltd about managing several VIP gaming rooms. The agreement will give Jimei all New International Club’s share of the revenue from these rooms in exchange for taking all the risk.

    Article HERE

    Takeaway: More VIP rooms coming for WYNN? 


    North America

    Alaska– The Alaska market may have found its perfect supply and demand scenario, as market capacity will remain flat year-over-year from 2014 to 2015 according to the 2015-2016 Cruise Industry News Annual Report. The market accounted for 900,000 passengers in 2014, and 2015 numbers remain the same, although still somewhat below a peak of 1 million passengers in 2008, before the infamous Alaska head tax drove 20 percent of the beds elsewhere.

    Article HERE


    New York - Again, NYC set a record for visitors, drawing 56.4 million of them in 2014. The total was a 3.9% increase over the 54.3 million visitors in 2013, which had been the all-time high for the city. The number of international visitors grew 7%, to 12.2 million. Domestic visitors totaled 44.2 million, a 3% increase. Also a city record: 32.4 million hotel room nights sold. The average daily rate was $295 and average hotel occupancy was 89% — both highs in the U.S. for 2014, said the city’s tourism organization, NYC & Company.

    Article HERE

    Takeaway: NYC was a hot spot for lodging in 2014 but Fx will be a hurdle in 2015?





    China PBOC announces system-wide reserve ratio cut by 50bp to 19.50%.  

    • Cut reserve ratio by additional 400 bps for agricultural development bank.
    • PBoC said it will continue to implement prudent monetary policy.
    • Maintain an appropriate degree of credit and social financing.

    Takeaway:  Largely expected by the market. Nevertheless, this is a positive for the VIP segment, on a 9-11 month lag.


    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.

    Morning Macro Call Replay: If USD Goes Up, Gold Will Go Up


    Please enjoy this complimentary look at our Morning Macro Call, a daily conference call for institutional investors.  In today’s Morning Macro Call, Hedgeye CEO Keith McCullough explains why inverse correlations matter, talks about the recent moves in oil, and debates Macro Analyst Darius Dale about which moving average is best.  

    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.


    Takeaway: Quick thoughts on a big number. Will be back tonight with a detailed playbook.

    1) We were expecting a release from KSS this week, with a best case comp of 3%. The company came in at 3.7%, with solid flow through to EPS with growth of 15%. Assuming SGA was up 1%, it suggests flat gross margin (which makes sense given flat inventory coming out of 3Q). Simply put, this is the first time in 13 quarters that KSS comped positive in its stores (about 0.7% assuming 25% dot com growth). 


    2) One X factor this quarter is last year's January washout. KSS comps were -8%, assuming a 14% weight for the month. To be fair, we completely knew about this, and thought we modeled it appropriately. And Macy's had an even greater impact with -10% last Jan, and it put up a 2% owned comp last night for the quarter which implies a 1.5% comp for January. KSS is the rare standout. 


    3) The big tell for us will be JCP.  If JCP comps somewhere in the low single digits, then we have some very serious questions to ask and answer, as it will suggest that there's something that KSS is doing to separate itself from the pack. If JCP comps high single, KSS trades down as the 'could I be wrong with the structural short call' concern abates. 


    4) To play devil's/bull's advocate, we'd say that the change in the rewards program at KSS caused an increase in loyalty and store traffic that will help the company finally comp sustainably positive for the first time in 3 years. 


    5) We think that logic is fundamentally flawed -- and the company's choice to decouple the credit card from the rewards program will ultimately sustain traffic, but will jeopardize a 400mm sg&a offset (9.5% of SG&A) that KSS receives from Capital One and books as a counter cost. This will play out over the course of 2015. 


    Finally, while this seems even more counter consensus today than when we made the call, we still think that that FY15 will be the last year KSS will earn better than $4 per share 


    If the market freaks out (as it appears to be) we'd short more based on what we know today. On the road this morning. Will return with a detailed playbook later this evening. 



    Takeaway: The quarter was bad across the board with January offering a sliver of Mass hope.



    It’s not all bad for WYNN. Yes, Q4 was all bad but Wynn’s Mass business started the Western New Year off with a bang.  Sure, hold was likely high and the Mass comparison will be the easiest until October. But at least we didn’t have to lower Q2015 estimates, although we were below the Street already.


    So where do we go from here? As everyone knows, the February comp is +40% and we think February 2015 could fall 32-36% YoY. Wynn’s recent efforts in attracting new high end Mass players should continue to bear Q1 fruit on a relative basis but is that enough? Relative to expectations, March could be the real disappointment.  Unless trends rebound, we think the market could fall 25-30% YoY in March which could surprise people more than a 34% decline in February. 


    And what about Vegas? Two companies have had disappointing YoY declines in EBITDA in that supposedly rebounding market, but Vegas means more to WYNN than LVS.  Our contention has been that Las Vegas gaming revenues are not actually rebounding – flattish is status quo – and RevPAR, while positive, still trails the rest of the country.  What’s all the excitement about?


    Please see our detailed note:


    Takeaway: In today's Macro Playbook, we review and reiterate our bullish bias on housing and the homebuilders. Many investors remain skeptical.


    Long Ideas/Overweight Recommendations

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

    Short Ideas/Underweight Recommendations

    1. SPDR Barclays High Yield Bond ETF (JNK)
    2. iShares MSCI Emerging Markets ETF (EEM)
    3. Industrial Select Sector SPDR Fund (XLI)
    4. SPDR S&P Regional Banking ETF (KRE)
    1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
    1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



    Housing #Working: Among the most staunch of intellectual pushback against our current macro themes is our team’s bullish view on U.S. housing and homebuilder stocks. We definitely understand the nature of the resistance given that we continue to contend that the U.S. economy is in the early innings of a late-cycle slowdown – which effectively means we believe the topping process has begun for all things late-cycle (i.e. employment, inflation, earnings, manufacturing and CapEx).


    But how can we be bullish on housing if we think the labor market is cresting?


    The easy answer is that the housing market and homebuilder stocks both sucked last year when employment growth ripped to the upside. The more nuanced answer is as we laid out in the 1/16 edition of the Macro Playbook:


    “[Our bullish view on housing] is threefold: 1) macroprudential regulation is being unwound, at the margins, which should perpetuate a positive inflection in mortgage demand growth; 2) demand growth leads home prices by ~1yr and demand growth troughed in early 2014, which implies home price appreciation is poised to positively inflect [soon]; and 3) the comparative base effect for home price appreciation – which carries a +0.90 correlation to housing equities since 2008 – gets incrementally supportive throughout 2015. Lower interest rates are a nice kicker as well as it relates to stimulating incremental demand. The 30yr fixed rate mortgage is now 3.8%; it was 4.42% one year ago. Many headwinds still exist in the U.S. housing market (e.g. low household formation, student debt bubble, etc.), but more [factors] are shifting into the tailwind category, at the margins.”


    As Josh Steiner and Christian Drake highlighted in a note yesterday:


    “CoreLogic HPI data for December released this morning showed home prices growing +5.0% YoY – a modest sequential acceleration relative to the +4.9% growth reported for November. Price trends in the Ex-Distressed series were moderately better, accelerating to +4.9% YoY from +4.6% last month… Net-net-net, however, the conclusion is largely unchanged. The 2nd derivative trend remains one of stabilization even as we traverse the hardest 1Y and 2Y comps into the February peak.  Stable-to-improving home price growth stands in stark contrast to the marked deceleration in HPI (& significant Housing underperformance) that characterized the February-Sept period last year and should support the complex alongside improving demand trends.”




    Looking to our Hedgeye Housing Compendium – which aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume – it’s clear to see that demand trends have inflected materially from last year’s prolonged trend of deceleration. Specifically, Mortgage Applications, Existing Home Sales and New Home Sales are all accelerating on both a sequential and trending basis. To top that off, both Single-Family Starts and Single-Family Permits are accelerating on a sequential and trending basis as well.


    THE HEDGEYE MACRO PLAYBOOK - Compendium 020415


    Generally speaking, the general hue of green across the table is in stark contrast to the sea of red we saw into the mid-October lows on the ITB ETF (from 10/16):


    THE HEDGEYE MACRO PLAYBOOK - 2 4 2015 7 46 49 AM


    Since our 12/17 conference call on housing in which we outlined our bullish thesis, the ITB ETF has gained +4.43%, besting the performance of the SPY ETF by 292bps.


    All told, we anticipate the recent outperformance of the homebuilders to continue over the intermediate term. Investors got a great opportunity to buy the homebuilders in mid-to-late January. Since we’re not so sure they’ll get a better chance than that, that effectively increases the propensity for eventual “panic buying” of this sector exposure by those investors that missed the move off the lows.


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



    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.


    The Hedgeye Macro Playbook (2/3)


    #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.


    Rearview Report:  Income & Spending Diverge in December (2/2)


    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.


    CoreLogic HPI | Scads of Revisions, Same Conclusion (2/3)


    Best of luck out there,




    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.                

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