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Buy Everything!

Client Talking Points

USD

We have been waiting for Janet Yellen to clarify for weeks, and that she did – no rate hike policy mistake; instead, doubling down on her long-standing rate targeting (lower for longer) policy as she cut both her inflation and growth forecasts closer to ours = Down Dollar, Down Rates --> Reflation + Yield Chasing, worldwide.

OIL

Janet Yellen’s reflation of front-month WTI lasted less than a Viagra moment (biggest pop yesterday was in the commodity and Oil & Gas equities), so now this gets really interesting with WTI retesting the $42 handle and no immediate-term support down to $41.32/barrel – EUR/USD backed off hard too; the Dollar was down for a day, but it’s not out!

UST 10YR

We continue to think that the lowest-volatility and largest asset allocation call to all of this is long-term bonds; 1.94% on the UST 10YR (and new lows of 0.19% for the 10YR German Bund); Janet is “data dependent”, and the March #deflation data (to be reported in April) is going to be ugly = lower rates for longer.

Asset Allocation

CASH 37% US EQUITIES 16%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 11%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. The low-end of our sum of the parts valuation is $26, and the low-end is not based on a MIDD comp (not that there is anything wrong with a MIDD comp).  In theory, spin-offs and break-ups unlock shareholder value while increasing operating potential of the formerly smothered units. 

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road

TWEET OF THE DAY

1 Min Fed Video | You Buy Everything! https://app.hedgeye.com/insights/43029-1-min-fed-video-mccullough-you-buy-everything… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Many of life's failures are people who did not realize how close they were to success when they gave up.

- Thomas Edison      

STAT OF THE DAY

85.8% of males and 66.5% of females in the U.S. work more than 40 hours per week.


CHART OF THE DAY: Consensus Bond Bear Squeeze!

CHART OF THE DAY: Consensus Bond Bear Squeeze! - 03.19.15 chart

 

Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you're an active investor/trader and you're not subscribing, you're bathing in gasoline next to a roaring bonfire. Click here to learn more and sign up.

 

Yellen’s decision keeps our non-consensus view of lower-rates-for-longer on the table (US Treasury 10yr Yield smoked back down to 1.94%, German 10yr Bund Yield at all-time lows of 0.19%, etc.) and she reiterated our #deflation call.

 


Buy Everything?

“A smile is a curve that sets everything straight.”

-Phyllis Diller

 

Oh, you’re not smiling this morning? Then you didn’t buy and cover everything within 3-6 minutes of the Fed statement yesterday. Consensus Long Bond Bears were not positioned for that!

 

Rather than rehash the who said what and when in yesterday’s epic Global Macro move (Dollar Down, Rates Down à Everything Reflation and Yield Chasing Up), here’s the replay of the LIVE coverage I did:

 

https://app.hedgeye.com/feed_items/43018-replay-fed-coverage-hosted-by-hedgeye-ceo-keith-mccullough

 

In the spirit of trying to “ESPN Finance” (i.e. provide live coverage and analysis from pros instead of journos), I figured I’d put myself and my analyst, Ben Ryan, to the real-time test. I’m glad we did. Evolving this profession is a big growth opportunity.

 

Buy Everything? - espnfinance

 

Back to the Global Macro Grind

 

The thing about ESPN is that they became the world’s curator of what mattered in sports (replays!). After yesterday’s macro market game was played, you know the score – and I highly doubt you want to watch 25 minutes of me analyzing, post game…

 

So go to minute 13 of that video, and I get to the highlight that mattered most. Apologies in advance for my tone and choice of words – when it’s game time, I care less about style, and more about results.

 

From an immediate-term perspective, “the call” yesterday was simple – buy everything.

 

Ok, maybe not everything – in immediately acknowledging the statement as dovish, you obviously wouldn’t have bought the US Dollar or TBT (Ultra Short 20yr Treasury ETF)… but you could have bought damn near anything else!

 

To review:

 

  1. Not only did Janet Yellen NOT make a Policy Mistake (signaling explicit rate hikes)…
  2. She masterfully pushed out the “dots” on both the timing and pace of hikes (if there will be any at all)

 

In doing so, she basically crushed whoever was betting on “rate liftoff” and may very well have put the guys who trade on inside information out of business too!

 

Can you imagine you had what you thought was the river card in hand (that she was going to remove the word “patient”) and put on a massive Long USD, Long Rates position with Utilities and REITS on the short side?

 

She removed the word alright – and then said “but that doesn’t mean we’ll be impatient.” Ha! Inasmuch as I am no fan of central planning, that was one of the best one-liners of the year. Bravo Janet – and shame on you insider-trading-bro!

 

In order to get these big macro moves right, you have to know where consensus is positioned in levered terms (in order to monitor that, we look at CFTC Non-Commercial futures and options positioning):

 

  1. US Dollar Bulls hit YTD highs at +81,210 NET long contracts at the beginning of the week
  2. Euro Bears hit all-time highs with a net SHORT position of -185,661 contracts
  3. SP500 (Index + Emini) net SHORT position was at YTD high of -39,891 contracts
  4. Russell 2000 net SHORT position hit a YTD high of -40,793 contracts
  5. Long-bond Bears ramped the net SHORT position in the 10yr Treasury to -173,194 contracts

 

Therefore, the call to “buy everything”, in the moment was more like a call to do the opposite of how the crowd was positioned. This job is not easy, but that’s why it was an easy call to make.

 

Context is the most important thing when making a high conviction “call.” I don’t make them frequently.

 

Ok ESPN guy - now what?

 

I’m just going to go back to doing what we always do – executing on our process. While the Fed could have changed everything yesterday, it did not. The USA has another month left in #Quad1, then moves back into #Quad4.

 

Yellen’s decision keeps our non-consensus view of lower-rates-for-longer on the table (US Treasury 10yr Yield smoked back down to 1.94%, German 10yr Bund Yield at all-time lows of 0.19%, etc.) and she reiterated our #deflation call.

 

With commodities having crashed again in March (and Oil’s Down Dollar Viagra bounce from yesterday fading, fast), reality is that Janet’s Fed is going to get more, not less, #deflation data when the March data gets reported in April.

 

As a Long Bond Investor (total Return of TLT up approximately +5% YTD vs SP500 +2%), you can smile this morning. If you’re still long the Russell 2000 (IWM), Healthcare (XLV), Consumer Discretionary (XLV), and Housing (ITB) stocks, you can smile too.

 

Thanks Janet, for keeping everything less-straight!

 

Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND views in brackets):

 

UST 10yr Yield 1.88-2.05% (bearish)
SPX 2076-2105 (bullish)
RUT 1 (bullish)
DAX 11811-12239 (bullish)
VIX 13.51-16.12 (bullish)
USD 97.39-100.93 (bullish)
EUR/USD 1.04-1.09 (bearish)

Oil (WTI) 41.32-46.34 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buy Everything? - 03.19.15 chart


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 80.65%
  • SHORT SIGNALS 78.62%

March 19, 2015

March 19, 2015 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

March 19, 2015 - 7

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GALAXY Q4 2014 CONFERENCE CALL NOTES

Takeaway: Margins missed expectations in Q4 and fell to lowest level since Q1 2012. Ph2 table request application submitted yesterday.

CONF CALL

  • Special dividend of HK$0.28 on May 22
  • Q4: Playing lucky benefited EBITDA by HK$35m
  • Galaxy Ph2 opening: on time
  • Operating velocity remains unchanged
  • Galaxy Macau: Playing lucky benefited EBITDA by HK$40m
  • Opened 2 VIP rooms (1 in December 201`4 and 1 in February 2015)
  • Starworld: bad luck of $5m
  • Galaxy Macau Ph2: invested HK$10.8bn (HK$1.8bn in Q4 2014).
  • Q4 2014: $790m total borrowing capacity

 

Q & A

  • Galaxy Ph2:  
    • Not as much VIP offering as you would expect given there is not much junkets out there
    • Cost of running property shouldn't change much per laborer
    • Officially submitted table requests yesterday.  Govt will be pragmatic about the process. Will be sitting down with govt very soon. Will not talk about table # expectations on the call.
  • 5 small VIP operators ceased operations in 2014 at Galaxy
  • 1-2% margin impact on employee retention program
  • Direct VIP:  growing but still very small part of overall VIP business. That segment has done well.
  • Labor cost pressures:  increasing staff numbers, compensation costs up ~20%.  Will continue to offer competitive package to employee and will evaluate pay costs in mid-year.
  • Full smoking ban:  very serious issue. Working with govt. 
  • Mainland China not only targeting Macau on corruption issues
  • Cannibalization between Starworld and Galaxy Macau:  not an issue since one property in Peninsula, one on Cotai. 
  • Galaxy Ph3/4 opening: 2018 (unchanged from previous commentary)
  • Want have some flexibility regarding dividends

WSM/RH – The Only Chart That Matters

Takeaway: This is pretty much the only WSM chart we really care about.

WSM/RH – The Only Chart That Matters - WSM RH comp 2

 

The 4Q WSM comp was uninspiring at face value at 5.1%, though to be fair the 2-year trends held steady across every concept except for PB Teen (only 6% of rev). But the key for us is that comps trended down for WSM, and trended up for RH (which already preannounced the quarter it will report next week). These two names are often mentioned in the same sentence. But keep in mind that one of them (WSM) grows square footage at 2% on its best day and is comping mid-single digits. The other has square footage growth accelerating to 25% by the end of 2015, and just comped 24% (the second best comp in all of retail behind Kate Spade’s 28%).

 

WSM took down 1Q guidance, which was almost entirely due to the impact of the West Coast Port issues. The Street will probably look through this, and it should. We certainly will.  But the question about the impact on RH from labor issues has already come up in the hours since the WSM call.

 

Could RH see some impact? Yes. It definitely could, and we expect there to be mention of it on the call. The company is far less mature than WSM and therefore has less experience dealing with issues like this. But keep in mind one important factor…the business that is at risk of being lost forever is what we’d call ‘cash and carry’. That means that the consumer goes into the store, and walks out with the merchandise in their hands. If it’s stuck on a container ship, the consumer is likely walking away empty handed. Consider the following…

a)      An apparel company (which is near 100% ‘cash and carry’), that has delayed containers, gets the merchandise several weeks into the season – after the consumer has already made full price purchases. The goods ultimately get sold, but at a deep discount. That’s problematic.

b)      By our math, WSM is closer to 30-40% ‘C&C’. Far from optimal, but the nature of its category carries less risk than apparel, footwear, or some other non-durable category.

c)       RH, however, has an estimated 5% of its business that walks out of the store with the consumer on the day of purchase. Could some of that be lost? Yes, and some will. But the remainder of the impact should come down to an extension of the time it takes to deliver product. Maybe it takes 12-weeks on a custom order instead of 7-8 weeks, and yes, that could push revenue into 2Q. If anything, this will simply come down to when the revenue is recognized. When all is said and done, we’d argue that RH is structurally more insulated from lost revenue than any other type of retailer. It will probably come down to a matter of timing.


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