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Keith's Macro Notebook 3/11: Euro | Yields | Sentiment

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

What is the Risk of Oil Storage Capacity Constraints?

Takeaway: If current trends can continue (which would be a stretch for the bull case), we could likely see a problem by June in Cushing, OK.

The domestic production machine goes on for now, but a sequential deceleration in production growth is well underway.

The EIA released its monthly drilling productivity report Monday which showed more of the same. Production levels and efficiency continue to increase as storage capacity dwindles:

  • Rigs continue to come offline at an ACCELERATING rate
  • Production levels are still delta positive on both a m/m and y/y but  DECELERATING
  • Production per rig is also delta positive on a m/m and y/y basis but DECELERATING

What is the Risk of Oil Storage Capacity Constraints? - Rig Table


What is the Risk of Oil Storage Capacity Constraints? - Baker Hughes Rig Count Chart


In the recent past we have been producing approximately ~1MM B/D in excess of what we’re consuming domestically. And now the question becomes… When will this present a big problem? The case that an infrastructure lag will put a floor in prices is straightforward, but considering we’re only 2/3rds full in aggregate, there is plenty of pain between now and the point in time where the production surplus will be at a critical state.

  • For 9 consecutive weeks the EIA has reported an AGGREGATE crude oil inventory build to new all-time highs
  • For 14 consecutive weeks, the country’s main trading hub in Cushing, OK has reported a positive inventory build

Cushing, OK remains a focal point because of the transportation constraints that excess crude flow could cause if pipelines are forced to be utilized in a storage capacity. Storage capacity at Cushing is also being filled much faster than the country’s storage availability in aggregate as it is a main crossroads for crude flows to the Gulf. 


What is the Risk of Oil Storage Capacity Constraints? - DOEvf vs. Cushing Change in Inventory Build


Inventories in Cushing remain well short of full capacity, and well short of levels reached as recently as 2013.


In January of 2013, Cushing had 51.675MM barrels of Oil in storage and only about 65MM barrels of capacity which translated to:


  • January 2013: 80% capacity utilization (Spot WTI moved -12% peak to trough from January to April after capacity utilization peaked)
  • March 2015: 66% capacity utilization (using the methodology outlined below)

Cushing inventories have only recently turned positive on a Y/Y rate-of-change basis and remain below 2013 levels (a point in time where storage capacity was much lower). 


What is the Risk of Oil Storage Capacity Constraints? - Cushing Inventoriesvf


What is the Risk of Oil Storage Capacity Constraints? - Cushing Capacity Tablevf


Should current trends continue, which we peg as unlikely, storage capacity in Cushing may be full by June. The EIA only reports storage capacity data semi-annually (September 30th and March 31st), so we have assumed the average increase in 6-Month storage capacity above since the shale revolution started. 


WTI crude oil remains in a BEARISH FORMATION (TRADE, TREND, TAIL) with our intermediate-term TREND duration price deck in a range from $36.38-$58.02. 


Please feel free to ping us with comments or questions.


What is the Risk of Oil Storage Capacity Constraints? - levels chart


Ben Ryan











*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing

Takeaway: As the Fed pushes the first rate hike back and Greece buys more time, fund flows have become incrementally more aggressive.

This unlocked research note was originally published March 05, 2015 at 09:36 by Hedgeye's Financials sector team led by Josh Steiner and Jonathan Casteleyn. For more information on our services click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


With the S&P 500 up over 5.0% in February alone, investors are chasing that performance with above average equity trends. In the most recent five day period ending February 25th, total stock products outpaced total fixed income for the second consecutive week. Stocks (both funds and ETFs) took in +$5.0 billion versus total bond products with a +$3.8 billion weekly take, representing another +$1.2 billion incremental weekly total for equities. Our research shows that this performance chasing phenomenon is most commonly displayed when year-over-year equity averages are positive which pulls along the 6 month moving average for global equity fund flows. Thus as long as equity markets stay positive on a year-over-year comp basis (which stays easy until June), equity flows should remain stubbornly high.  


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI signature


Last week's slightly higher appetite for stocks followed three events that decreased risk perception in the market: (1) the Federal Reserve on February 18th releasing its January minutes in which it continued to indicate that it would be patient in raising rates, (2) Eurozone finance ministers on February 20th agreeing on a four-month bailout extension for Greece, and (3) Janet Yellen's February 24-25 testimony in which she emphasized that even once the Fed removes "patience" from its verbiage a rate increase will not be immediate.


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 1


In the most recent 5 day period, ending February 25th, total equity mutual funds put up net inflows of +$2.4 billion according to the Investment Company Institute, outpacing the year-to-date weekly average inflow of +$1.7 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$2.4 billion and domestic stock fund contributions of +$72 million.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 16 weeks of positive flows over the same time period. We continue to flag caution in shares of Janus Capital (JNS) despite a slightly improved equity category because of the domestic bend to the JNS product suite (with domestic ICI trends still soft) and also that the Bill Gross fund raising and performance trends continue to be lackluster (see our latest research here)


Fixed income mutual funds put up inflows of +$2.9 billion, lagging their year-to-date weekly average inflow of +$3.0 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.9 billion of contributions to taxable funds and +$1.0 billion of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.


Equity ETFs gained +$2.6 billion in contributions, outpacing the year-to-date weekly average outflow of -$787 million and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$927 million, trailing the year-to-date weekly average inflow of +$2.6 billion and the 2014 weekly average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 2


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 3


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 4


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 5


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 7 2


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 8


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR call-outs, investors used defensive funds such as the utilities XLU and long treasury TLT as sources of funds, withdrawing -3% (-$249 million) and -3% (-$259 million) respectively.


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 9



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (+$5.0 billion of total equity inflow net of the +$3.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been +$1.3 billion (more positive money flow to equities), with a 52 week high of +$27.9 billion (more positive money flow to equities) and a 52 week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week). 


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 10


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 11 



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA





Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%

RTA Live: March 11, 2015

Hedgeye CEO Keith McCullough breaks down the Real-Time Alerts positions as of 10:30AM ET and takes questions from subscribers.



Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR

Takeaway: TGT cutting 13% of HQ workforce, but wage pressures still remain. FINL pumping the Rbk z-pumps. ChannelAdvisor Comps and SIGMAs.


Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 9 chart2





TGT - Target Corp. to lay off 1,700, eliminate 1,400 open jobs in restructuring



Takeaway: There has already been so much coverage of this announcement, and rightly so. When the 3rd largest retailer in the country cuts 13% of HQ workforce, that's a big deal. If we add in the 1400 open job reqs and the 550 TGT Canada employees who were let go last month, Target actually reduced its fully staffed Steinhafel regime workforce by 24%. On an annualized basis it would equate to $170mm in cost savings at an average salary of $100K. That's about 20bps of margin and gets the company about 10% of the way to it's $2bil cost saving plan. But, this isn't the only labor issue facing Target. By our math, the WMT wage hikes extrapolated to TGT could mean 75bps in margin headwind at the store level.


FINL, FL, AdiBok - Finish Line Launches Mall-Exclusive Reebok ZPump Fusion



Takeaway: This press release from FINL and Rbk is so wrong for some many reasons. For starters, why is FINL pumping Reebok's tires? They get exclusive running silhouettes from Nike all the time and don't utter a peep to the street. Could it be that this technology revolutionizes running, maybe…but we are highly skeptical. The most likely explanation is that Reebok helped offset the cost of FINL's ad-cost. Something that Nike has pulled back on over the past 5yrs.

Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart1


AMZN, EBAY - Positive 2yr trend for Amazon


Takeaway: Both companies saw a slight pop in the 2yr run rate in February. For AMZN, we would have expected more given that the company included 3rd party sellers (which this data source tracks) into its free shipping minimum calculation.

Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart3



Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart4

Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart5

Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart6





AAPL - The Ugly Truth: Why the Apple Watch Already Needs A Facelift


Retail Callouts (3/11): TGT, FINL, FL, AdiBok, NKE, AMZN, EBAY, VRA, BWS, EXPR - 3 11 chart7


ICSC applauds as Marketplace Fairness Act of 2015 introduced in Congress



RAD - New store puts Rite-Aid back in growth game



HBC - Saks Fifth Avenue selling Disney dream



GOOG - Google enters bricks-and-mortar retail space through Dixons Carphone tie-up



FIVE - Five Below entering Alabama; to open total of 70 stores in 2015


LEISURE LETTER (03/11/2015)

Tickers: SGMS, HOT, RCL, CCL


  • March 11 - SGMS 4Q CC, 4:30pm pw: SGMS
  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results


Beijing -  Li Gang, the director of the city's liaison office there, said measures were in place to ensure that officials who head for the former Portuguese enclave "would be discovered". The top official did not elaborate on what specific measures had been introduced but it is common knowledge that identity checks are now carried out on every person who gambles in casino VIP rooms.


"As the crackdown on graft is stepped up, some corrupt officials - including executives of some state-owned enterprises - now dare not go to Macau to gamble. Moreover, because of measures taken by Macau's gambling industry, if such officials go gambling in Macau, they will be discovered," said Li.


Takeaway:  Beijing's watching you - corrupt officials.  And by corrupt they mean any government official.  Perception is reality.





GALAXY - A mainland Chinese worker accidentally fell to his death from scaffolding at the Galaxy Macau Phase II project in Cotai yesterday afternoon, resulting in a suspension of the works at the site ordered by the Labour Affairs Bureau (DSAL). All scaffolding works at the accident site were to be suspended, and the contractor also had to submit an accident report to DSAL.


Takeaway: Another unfortunate accident at a Cotai construction site. Galaxy Ph2 May 27 opening could be delayed.


SGMS - "MONOPOLY MILLIONAIRES' CLUB," the first-of-its kind television game show will launch a new multi-state companion lottery scratch ticket later this month -with as many as 14 state lotteries joining immediately, and more states to follow. Originally created as a multi-state lottery draw game in 2014, the following states will be the first to roll out this exciting new scratch ticket: AZ, GA, IN, KY, ME, MN, NJ, NM, NY, NC, PA, RI, SD, TN.  


Twenty-three states ended the sale of Monopoly Millionaires’ Club last December after just two months of operation, citing lower than anticipated ticket sales.

Takeaway: 2nd time a charm?


Genting Singapore - has authorized repurchase of 10% of its shares. The first repurchase of stock was for 6 million shares totaling US$3.983 million. Genting Singapore has said it will repurchase up to 1.224 billion of its 12.084 billion shares.

Takeaway: And the price keeps getting cheaper


HOT - The James Royal Palm has been sold by Chesapeake Lodging Trust and will join Starwood's yet to be named collection of independent hotels. Temporarily, the hotel will operate under Starwood's Luxury Collection brand, and is slated to join the collection of independent hotels by June.  HEI Hotels and Resorts has taken over management of the hotel.



HOT - is poised to open more than 40 new hotels and resorts across Europe in the next five years, expanding its portfolio by almost 30%.  Starwood is opening five new hotels in Turkey this year, including The St. Regis Istanbul which debuted March 1. In Russia, two new Starwood hotels are opening in 2015 and six more are in the planning stages, doubling Starwood’s presence in Russia over the next three years.


Also on tap is the launch of the Aloft brand in Stuttgart and Munich this summer, and the introduction of the W and Element brands to The Netherlands by year-end


Takeaway: It's a good time to expand in Europe as a weak euro stimulates demand. But in the near term, the plunging euro will hurt reported earnings. 


MCR development - announced it has acquired a portfolio of 18 Marriott and Hilton hotels (the “Portfolio”) for approximately $206 million. Collectively, the Portfolio represents 1,787 rooms across 11 states in growing cities including Charlotte, Savannah, Cincinnati, Tulsa and San Antonio. The Portfolio has an average age of less than 10 years and is unencumbered by management agreements. All hotels were acquired with fee simple title.


MCR will own and manage the Portfolio, which will continue to operate under its respective Marriott or Hilton brand affiliations, with long-term franchise agreements in place. The Portfolio includes multiple brands including Marriott’s Courtyard and TownePlace Suites and Hilton’s Hampton Inn & Suites, Hilton Garden Inn and Homewood Suites.


Takeaway: Large select-service transaction


RCL - Royal Caribbean will kick off a new "BOGO50" offer tomorrow that gives guests who purchase a full cruise fare, 50% off the second passenger and buy one, get one premium beverage package 50% off. BOGO50 offer excludes Quantum, Anthem, Ovation, and Harmony of the Seas, Transatlantic, Transpacific, and China sailings.



CCL - Carnival UK executive VP of operations, David Noyes,  said he believed cruise prices would continue to climb. “Cruising is such great value - we’ll always aim to make sure that’s the case. Clearly as the market continues to grow, I like to think that the price will grow in line with that.”


However, despite Britannia having been designed to emulate a luxury hotel, Noyes insisted that the ship would not always command a premium price. “Prices vary according to sailings,” he added.


Noyes also explained how he envisaged Britannia would help push the number of UK cruisers to 2 million, from the current 1.7 million which cruised in 2013 (latest figures). “Britannia will add 5% to the capacity of the whole UK market, so that will get us close to the two million point.”


Takeaway: Noyes is right. Pricing does depend on demand and so far, it's been mixed.


CCL - Harris CapRock Communications, a premier global provider of managed communication solutions, has increased the bandwith levels to enhance Internet acess in Carnival Cruise Line's ships. For a flat rate of $5 per day (RM18 per day), Carnival offers its passenger the first-ever social media package for an unlimited access to popular social media sites and apps.



Beijing- China's central government says it will soon alter the individual traveler scheme “to better suit Hong Kong’s situation”. These will include refinements to the scheme, which allows residents of 49 mainland cities to travel to Hong Kong, and another arrangement that enables two million Shenzhen residents to use one visa to visit Hong Kong multiple times, according to deputy director of the Hong Kong and Macau Affairs Office Zhou Bo.


Zhou said the adjustments would be a response to concerns raised by Hong Kong Chief Executive Leung Chun-ying over the tourist schemes, and were designed “to make the policy better suit Hong Kong’s general situation”. “The tourist capacity of Hong Kong and Macau have by and large reached saturation, as shown in the studies conducted by the two SAR governments. It does not come as a surprise certain problems occur,” he said.


Zhou did not tell when the adjustments were expected, but said they would come soon.

Takeaway: Changes to travel schemes will not only impact Hong Kong but Macau as well.


Japan-  In a long shot, some members of Abe's Liberal Democratic Party are aiming to resubmit the expired bill to the relatively minor Land and Transport Committee – which deals with issues like removing unsightly utility poles in favor of underground lines. This would bypass the busy, and far more prominent, Cabinet Committee, normally chosen for such major legal changes.


"As long as the ruling coalition can agree and win support, it doesn't matter which committee it's submitted to," LDP lawmaker Takeshi Iwaya told Reuters, adding that more discussion among ruling coalition members was needed.


Takeaway: Last-ditch effort on Japan


CT - Connecticut lawmakers said Tuesday they would introduce legislation to allow the Mashantucket Pequot Tribal Nation and the Mohegan Tribe to open as many as three more casinos in the state.


Takeaway: Exactly what US gaming needs - more supply


Feb Iowa SS GGR: +2% YoY

Feb Missouri SS GGR: +1% YoY


Tripadvisor hotel survey -  

  • While Travel is expected to rise, U.S. traveler budgets remain flat. U.S. travel budgets are expected to average $8,700 in 2015, the same as last year.
  • The U.S. is the #1 most popular destination worldwide according to the places travelers say they visited in 2014 and plan to visit in 2015.
  • In 2013, two in three hotel businesses (67%) felt optimistic about their profitability for the year ahead. This year, that proportion rises to nearly three in four (73%), and is driven largely by more hoteliers feeling "very optimistic" about their profitability for 2015.
  • Half of all properties globally (59% in the U.S.) intend to increase their room rates in 2015, according to survey respondents. 
  • More than one third (35%) of global accommodations and 42% of U.S. accommodations plan to raise rates by between 3-10%, with resorts the most likely to plan increases. 
  • South Africa (72%), Austria (68%) and Brazil (68%) are the most likely to raise rates, according to respondents, with over two thirds of businesses in these markets planning increases. 
  • Accommodations in China will see the biggest reductions in 2015, with 18% of hoteliers planning to decrease room rates, but not by more than 10%


Takeaway: Not surprisingly, US lodging optimism is the high in 2015 while China lags. 


GBTA - Global Business Travel Association slightly downgraded its forecast for Chinese business travel from its outlook published in 2H 2014 due to expectations for slower economic growth in China coupled with continued uncertainty in the global economy. Total spending on Chinese-originated business travel grew an estimated 16.6% in 2014 to $261 billion USD. GBTA projects it will continue to grow 14.2% in 2015, down from our previous projection of 18%, and will grow another 12% in 2016 reaching $334 billion USD. 


“While this is slower growth for China, it is all relative,” said Michael W. McCormick, GBTA executive director and COO. “There is simply no other market to compare China to as their economic engine continues to move forward at a phenomenal pace producing double-digit business travel spending growth. Whether China becomes the world’s largest business travel market at the end of 2016 or the beginning of 2017 does not matter—what matters is that economic policies being set are showing signs of having a long-term positive impact on the economy, which points to a healthy business travel industry for years to come.” 


Takeaway: Chinese outbound business travel growth may slow in 2015 and 2016. 


Asia cruise demand/supply - has overtaken Northern Europe as the third biggest region in terms of passenger capacity, according to independent data from the 2015-2016 Cruise Industry News Annual Report. This year, Asia will grow by 20%, accounting for just over 2.2 million passengers with 69 ships sailing in the region. While Star Cruises remains the biggest operator in the Asian market, Royal Caribbean International will grow by leaps and bounds, adding nearly 200,000 more passengers to its regional capacity YoY. Asia capacity now accounts for just over 10% of the global cruise industry, trailing only the Caribbean and Mediterranean.


Takeaway: Expectations are high for Asia cruise demand in 2015.


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.

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