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VEGAS BABY YEAH? NO?

Takeaway: The Strip’s recovery is not very deep or sustaining

CALL TO ACTION

It’s almost the anti-Macau play but not really:  Buy MGM because the company has less Macau exposure.  How about buying something without any Macau exposure? I suppose the best way to play the Strip would be to buy MGM and short 2882.HK.

 

So let’s look at what you’re getting if you could isolate Strip exposure. Solid RevPAR growth? Yes, but if you’re looking for that why not buy a hotel stock like HLT or HOT. Las Vegas RevPAR has actually lagged the rest of the country.  Gaming revenue growth?  Outside of Baccarat we’ve seen very little actually.  And the 2nd derivative in Baccarat went negative in August and the 1st derivative turned in November.

 

Unlike Macau, Las Vegas is at least stable.  Stability is hardly an investment thesis, though.

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_Vegas_2.5.15.pdf


Cartoon of the Day: Oil Bottom? Bueller? Bueller?

Cartoon of the Day: Oil Bottom? Bueller? Bueller? - Oil cartoon 02.05.2015

Investors are jockeying to find the bottom of an epic oil plunge that saw prices crash as much as 59% since June.


XLU: Adding Utilities to Investing Ideas

Takeaway: We are adding Utilities to Investing Ideas.

Please note that we are adding Utilities (XLU) to Investing Ideas today.

XLU: Adding Utilities to Investing Ideas - 4u

According to Hedgeye CEO Keith McCullough:

 

Keep playing my macro view forward... 

 

Bad jobs report could very well:

 

1. Weaken USD

2. Strengthen Oil

3. Ramp The Long Bond

 

And give a relative bid to any major US Equity Sector Style that looks like a bond.

 

Ah, the Utilities - hated, probably. Making people money, definitely.

 

 

Our macro team will further outline our bullish thesis in this weekend's edition. 


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YUM: In Need of a Nudge

YUM remains on the Best Ideas list as a long.

 

YUM reported 4Q14 adjusted EPS of $0.61 (-29% y/y), well short of the $0.66 consensus estimate.  Despite this, strong relative topline trends appear to have saved the day.  China delivered a better than feared comp of -16% (-19% est), while Taco Bell (+6%) and KFC (+4%) also exceeded consensus estimates.  Pizza Hut (0%) fell short of feeble estimates, which is particularly disappointing considering the new menu and “flavor of now” launch.  Needless to say, this quarter did nothing to dismiss our view that the Pizza Hut business should be sold

 

China's Woes Persist

The majority of the earnings call was spent talking about the pace of the recovery in the China business.  Management hinted that things are progressing slower than they originally imagined and voiced at the December analyst day in NYC.  In our view, setbacks like this are what will push an activist to get involved in the name.  To be honest, management deserves a lot of credit for building a strong business in China that has proven to be very profitable in the past.  But it’s been two painful years and misjudging the pace of a recovery is not encouraging.  The perception that they don’t have a handle on this business, to whatever extent it may be, simply adds fuel to the activist fire.

 

Clearly, the top priority is getting China KFC back to 2012 form which, management estimates, would add $1.7 billion in incremental revenue.  KFC’s average unit volumes in 2014 were 20% off their peak levels, thanks in large part to back-to-back supplier incidents.  But consumer scores appear to be improving in the region, which should lead an acceleration in comps.  The team also has two menu revamps scheduled in 2015 and the rollout of premium coffee which will be in 2,000 restaurants by year-end.  Pizza Hut is much less of a concern and is trending in the right direction.

 

Estimates Need to Come Down

Despite a slower than projected recovery in the China business, management reiterated its FY15 EPS growth goal of “at least 10%.”  This, in and of itself, looks like a tough hurdle and is dependent on a strong second half recovery in China.  The street, modeling 15% growth, will need to bring their estimates down. 

 

Upshot

We expect the stock to be range bound for the first half of 2015, until we see a material uptick in the business.  It won’t be smooth, but we continue to like the long setup here given limited downside and the potential for significant upside.  There are a number of levers management can pull to immediately create value, the easiest of which would consist of undergoing a leveraged recapitalization to bring its debt ratio in-line with peers.  Management may be getting the benefit of doubt for now, but if the anticipated second half snapback doesn’t materialize, they will face serious pressure to make a transformational transaction.

 

YUM: In Need of a Nudge - 1

Source: Company Filings

 


WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU?

Market factors are contextualized differently based on our own trials and errors, experiences, and personal biases. As a sell-side independent research firm, we believe our process is positively differentiated with the active risk management overlay to our research. With this model comes the responsibility to consistently communicate and revisit this process.

 

Volatility in oil (and across asset classes for that matter), hit historic lows this summer at the highs in crude oil. The OVX index bottomed in June and reached its highest point yesterday since 2008.

 

The question then becomes, does the 3-day rip in energy prices and oil volatility starting last Friday support the case that oil has found real support in the $40’s?

 

We outlined the fundamental factors in the energy space moving to support prices, but the other side of our process tells us to fade this move for now. If history is any indication, two conclusions about prices and volatility in oil markets can be made:

 

1)      Volatility’s relationship with price looks very similar to equity markets.  Volatility and price have a tight inverse correlation

2)      The U.S. dollar is a leading indicator for big turns in prices and volatility

 

Regarding the first point, the 3-month, 1-year, and 3-year correlations are straightforward between WTI and WTI volatility and also WTI vs. the OVX Index. The short-term reversal is a counter-TREND head-fake.

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - Price vs. realized and implied vol

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. WTI correls

 

If you get the outlook for the U.S. dollar right you’ll get a lot of other things right. The dollar tends to lead turns in the oil market, as it has in each of the last four big downturns in oil. Our view on the outlook for the dollar is always communicated clearly (see this morning’s edition of the Hedgeye Macro Playbook for a refresher).

 

We covered our OIL SHORT position yesterday, our COPPER SHORT position today, and our USD LONG today. With the GDP miss and a preponderance of bad economic data, a bad jobs report tomorrow could be a catalyst for a near-term pullback in the U.S. dollar leading up to the Fed meeting in March.

 

The table below shows the performance of the U.S. dollar and OVX indices for the last four >20% peak-to-trough moves in oil along with a few supporting charts:

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - Peak to Trough Oil vs. vol. vs. USD

 

Looking at OVX vs. the USD, longer-term they are positively correlated. A USD break-out to the upside has never been met by a sustained pullback in OVX. 

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. USD correls

 

OVX vs. WTI vs. USD

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. USD vs. WTI

Source: Bloomberg

 

3-Month WTI Volatility Index vs. Price

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - 30 Day vol vs. WTI

Source: Bloomberg

 

We sent our first short oil signal via OIL to RTA subscribers on Monday at $11.22 (3:22 p.m.). We were early and shorted more on Tuesday at $12.02 (3:15 p.m.) for an average cost basis of $11.62. The position was covered yesterday at $11.01 (3:44 p.m.).

We will continue to short on strength on these exhausted moves to the upside unless the model tells us differently (bottoms are processes, not points).

We anchor on price, volume, and volatility factors for market signals within intermediate to longer-term market TRENDs for generating buy and sell signals.

 

To use the example of oil, what we would want to see for bullish confirmation is:

  • rising price
  • rising volume and open interest; On the back of
  • decelerating realized volatility; And,
  • a deceleration in front-month implied volatility

Rising volatility on the up move against a counter-TREND move (down dollar within a BULLISH TREND) is a leading indicator of continued volatility and widening risk ranges (more downside on the move back down)

The following link is a clip explaining this process on yesterday’s morning macro call:

 

Hedgeye Macro Call   

 

Oil had an epic move to the upside but on increasing volatility (OVX). Rising vol. while prices are rising on a counter-trend move (Bad econ, dollar down, commodities up) is not a good signal. While trending implied volatility in S&P front-month VIX hasn’t broken its bullish trend (still bullish). A widening range is a leading indicator for rising volatility.”

 

We often reference widening volatility as a signal for widening risk ranges, but these are in some ways complements of one another.

When volatility is increasing, the exhaustion points on both sides of a market (resistance bands) are farther away from where it is currently.

More involved than just using standard deviation to bet on a reversion, the volatility assumption is key to modeling the probabilistic expectation for different price movements.

For our bearish bias to be changed we need what look like longer term resistance levels to break and hold (the intermediate and longer-term lines did not on last Friday or Tuesday’s move). the price reached the top-end of our IMMEDIATE-TERM risk ranges, we is why we blasted the sell signal to subs.

 

Our intermediate-term TREND line (3-months or more) in oil is up at $56.68. Unless oil can break that line and hold, we’re viewing it with an intermediate-term bearish bias, and we’ll short on green and cover on red. By modeling this longer-term TREND we don’t capitulate on our thesis based on the day-to-day battle between all the robots. 

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - levels chart

 

 

Ben Ryan

Analyst

 

 

 

 


 

 

 


China Market Follies

Let’s get this straight: First they had the rate cut… then they had the rumor of the rate cut… then they had the rate cut, after the rumor of the rate cut…and the stock market went down.

China Market Follies - ch5

 

The Shanghai Composite was down -1.2% overnight, and is now down 6 of the last 7 days to -3% year-to-date.

 

It’s now bearish on our trend duration, with the immediate-term risk range for the Shanghai Composite at 2917-3212.

 

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Editor's note: This is an excerpt from our morning research. Click here to learn more and subscribe to Hedgeye’s Daily Trading Ranges.


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