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The Holy Grail

This note was originally published at 8am on April 16, 2015 for Hedgeye subscribers.

“We have a lot of rookies in the lineup.  More than anybody, I would say.  It’s going to be something new for them. They have to understand that it’s totally different hockey in the playoffs.  Starting with the fans, the intensity of the game, every mistake counts.”

-Jaromir Jagr


Last night the pursuit of Lord Stanley’s Cup began in earnest with the first series of games in the NHL Playoffs.  Certainly, the team at Hedgeye is over indexed to the love of the great game of hockey.  But whatever your athletic passion, it’s hard to deny that playoffs are an exciting time of year.


For those of you who don’t follow hockey closely, the quote at the outset is from one of the true iron men of the NHL.   At 43 years of age, Jagr was the oldest player to play in the NHL last season.  His first season was 1990 and with the exception of a few seasons in Russia, Jagr has been playing in the NHL ever since.  In fact, he is the only player in the history of the NHL to play in the playoffs as both a teenager and a 40-year old.


Being the wily vet that he is, Jagr’s aforementioned quote is spot on.  Whether in sport or business, you need to let the rookies play, but as their GM or boss you also need to realize that their experience is limited and when the intensity picks up during crunch time they need to know that every mistake does matter.   And if they don’t, the experience will teach them that very quickly.


Before we get into the macro grind today, I’ll give you my pick to win the holy grail of hockey.   Since the team Keith and I own with some friends, the Arizona Coyotes, is out of the running, I’m going with the New York Rangers over the Chicago Blackhawks with New York winning at home in game 5.


Who is your pick to win the Cup?


The Holy Grail - a. Jagr


Back to the Global Macro Grind


It seems that our friends at the IMF weren’t settled into their chairs watching playoffs last night.  The Financial Times is reporting this morning that the IMF is warning that the Fed’s first rate hike could lead to a so-called “Taper Tantrum”.  In effect, the IMF is concerned that volatility in U.S. rates will spike dramatically in conjunction with the first rate hike.


In the Chart of the Day we look at the U.S.  10-year yield versus U.S. unemployment going back as far as the data was available.   In stating the obvious, as the chart shows, we are certainly in an unprecedented period of monetary policy.   Will we get a massive spike in interest rate “vol” when the first hike happens?  It’s tough to say without a crystal ball.  But what IS already happening is a spike in opinions on when and how to raise rates.


On that front, the esteemed Bernank (aka former Fed Chair Ben Bernanke) weighed in this morning on when and how to guide rates higher.   Not surprisingly part of the Bernank’s plan is to keep the balance sheet larger for longer and also focus on the repo rate and other short-term money market rates.   Some of his views probably have credibility, but whatever happened to central bankers focusing on the data?!


Speaking of extremes, the Energy Information Administration (EIA) yesterday reported that crude inventories rose less than expected by a mere 1.3 million barrels on the week to 483 million barrels in total.  According to EIA records dating back to 1920, this is the most inventory the U.S. has had on hand since the 1930s (that was back when the NHL only had six teams for crying out loud!).


In conjunction with that, a Federal Reserve index showed that crude production rose 1.3% in March.  This increase took it to the highest level since 1973, which was before I was born and I’m no spring chicken.   If that isn’t enough, Iraq crude exports hit a record of 3.0 million barrels in March and the Saudi’s did exactly what they said they would do and took production up to 10.3 million barrels per day.


Earlier in the week we used a quote from Templeton about waiting to buy when there is blood in the street.  Certainly there is truth to that if we look at investing history.  When it comes to getting long of oil, due to the lack of storage, we may literally get a chance to buy it when it is in the streets!


In Europe, Greek’s clock is running down.  Yesterday, it was leaked that the Greeks approached the IMF about a rescheduling of repayments and were told categorically that no rescheduling of debt is possible.    As a result, yields on 2-year Greek notes spiked by more than 180 basis points to 25.7% and 10-year yields were up 100 basis points to 12.65%.  If the IMF wants interest rate volatility, they got it.


As for Greek catalysts, there are a couple to focus on:

  • The Eurogroup meeting next week on April 24th; and
  • The next payment to the IMF due on May 12th of 747 million euro.

Overtime for the Greek debt market is here! Let’s hope they have a good goaltender in PM Alexis Tsipras.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-1.96%

SPX 2083-2117
VIX 12.34-15.49
USD 98.01-100.24
EUR/USD 1.04-1.08
Oil (WTI) 48.19-56.69

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Holy Grail - 04.16.15 chart

April 30, 2015

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April 30, 2015 - Slide5

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VIDEO REPLAY: Fed Day Live on HedgeyeTV

Watch the replay of our analysis of the FOMC statement below.


Today we live-streamed our recap of the FOMC statement and our outlook for financial markets over the immediate and intermediate terms. The discussion runs just shy of 30 mins and hits on every major risk investors must consider from here. It’s a real must-see in our opinion; we recommend finding the time to review it soon.


Key conclusions:

  • Within equities: It’s a good spot to book the #Quad1 trade and rotate into the #Quad4 asset allocation from a sector and style factor perspective.
  • Within fixed income: The April Jobs Report is the next catalyst for Treasury bonds and could prove decidedly bearish insomuch as slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop. Ultimately, we think our #lowerforlonger theme prevails, but volatility is likely to pick up in the interim.
  • Within foreign exchange: We still think that both the Europeans (ECB) and Japanese (BoJ) are unlikely to allow a sustained rally in either of their respective currencies, which would also imply a sustained correction in their respective equity markets. We expect one or both central banks to jawbone and/or expand their LSAP programs over the intermediate term. As such, we remain bullish on the U.S. dollar with respect to the intermediate-to-long term.
  • General: The next few weeks will be a difficult time for any investor to gain conviction in either the deflationary trend in place since fall of last year or the counter-trend reflation rally we’ve seen in recent months. We certainly do not have a ton of conviction in either direction, specifically as it relates to our thematic investment conclusions. As such, we’d be raising cash and reducing our over and under weights across the board. Lastly, the risk of a “sell in May and go away” outcome is high in our opinion.


As always, feel free to ping the desk () to the extent you have any follow-up questions and would like to set up a call.


Best of luck out there!


-The Hedgeye Macro Team

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Cartoon of the Day: $#&% | $TWTR

Cartoon of the Day: $#&% | $TWTR - twitter cartoon 04.29.2015

Our Internet & Media analyst Hesham Shaaban remains the bear on Twitter.

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues

Fed Day Cometh… and the US Dollar Index is trading down around -1% intraday.


Position/Outlook Updates:

  • EUR/USD – trading higher within our intermediate-term TREND bearish outlook.  We shorted the cross (via FXE) today as the price collided with our immediate-term TRADE line of resistance ($1.10)
  • EUR/USD – the Fed’s FOMC statement proves the Bank has a more moderate assessment of economic conditions/momentum, which could lead to further expectations of a delay in a rate hike, weakening the US Dollar from here.  
  • German Equities – weak in the face of a stronger EUR/USD (the DAX fell -3.2% today and is +20.3% YTD); we remain bullish on an intermediate-term TREND duration as Draghi’s foot remains on the QE pedal. 
  • German Equities – while not necessarily “trading” on fundamentals, recent data is mixed, with German CPI jumping 10bps to 0.3% in APR Y/Y while last week’s release of German PMI Manufacturing and Services figures fell for the first time this year (APR reading).


Shorting FXE


TRADE: Today Keith recommended shorting the EUR/USD (via the etf FXE) at $109.13. He wrote: “There are plenty of macro positions pushing to the top/bottom ends of their immediate-term ranges right now. My strategy during these counter-TREND moves is to wait/watch for the bullish/bearish TRADE to tap the top/bottom end of the range - sometimes it takes time.


I've been waiting for the Euro (vs. USD) to do that for a few weeks now, and this is my 1st SELL signal. There's no immediate-term TRADE support in the EUR/USD cross to $1.06.” 


Additionally, we believe the US Dollar has been pushed to 2 month lows as investors expect the Federal Reserve’s more moderate assessment of economic conditions/momentum will push the dots (again) on a rate hike. A worse than expected US Q1 GDP and inflation report could drag the USD lower over the immediate term. 


The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. eur 1


TREND/TAIL: Longer-term bearish: we continue to think a whole host of reasons will drag the common currency lower, including:

  • ECB President Mario Draghi’s willingness to do “whatever it takes”, including a QE package that may win him the ‘Currency Wars’ over the USD
  • There’s no end in sight for an exit of the Eurozone’s weaker countries, and in particular Greece’s debt hang will play out in multiples of years, not months
  • A monetary policy across uneven economies will be highly conflicting
  • Cultural differences that will limit cross-border labor movement 
  • Bearish demographics

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. ecb 2



Bullish German Equities

The German equity market (DAX) had a significant -3.2% pullback today. We continue with the stance that the Eurozone’s equity markets do not like a strong euro.


The DAX is up 20.3% YTD, and we continue to think that over the TREND/TAIL it will pay to obey the commands of the central planners, in particular by being long of German equities.


To reiterate our TREND thesis:

  • QE is only just beginning; the euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation
  • The German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong inverse relationship that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)

If you missed our call titled “Germany: Still Bullish” on 4/14, CLICK HERE for a 30 minute video replay that walks through 40 slides of supporting material.


While German Equities are not necessarily “trading” on fundamentals, recent data is mixed. A couple notable call-outs include:

  • German CPI jumping 10bps to 0.3% in APR Y/Y
  • German PMI Manufacturing and Services figures fell for the first time this year (APR reading), in-line with the Eurozone average

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. cpi 3


From a quantitative perspective, the DAX recently broke its immediate-term TRADE line of support (to become resistance), but remains firmly above its intermediate-term TREND and long-term TAIL levels, a bullish signal.  


The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. dax 4





Takeaway: Strategic alternatives exploration overshadows a strong Q1


  • Opened 20 hotels in 1Q (double 1Q 2014); 8 of 20 were conversions (high priority for HOT)
  • Signed deals for 33 more hotels (highest # of deals signed in Q1 since Q1 2008)
  • Q1 North American signings are up 70% YoY
  • Independent 3rd party interviewed owners including HOT and competitors:  
    • Results are in. HOT can be more communicative and speeding up HOT decision making.
  • Tribute brand: 4-star independent hotel brand
  • Expect to get to 100 Tribute hotels in next 4-5 years
  • Sheraton:  represents 40% of global room footprint
  • On track to open more select-service hotels in 2015 than in any other year since 2009.
  • Transaction market remain strong
  • Will make transactions evenly throughout 2015 rather than back end loaded
  • $25m SG&A savings in 2016
  • Will save $50-60m in centralized services
  • Canceled the lease on Starwood corporate aircraft
  • Constant dollar core fees was up 5%
  • Southeast Asia and Macau were weak
  • Owned hotels: up 8.4% in REVPAR, well above expectations
  • Aloft NA and international REVPAR: 24% and 13%, respectively
  • Vacation ownership/residential: strong resort performance, made adjustment to loan loss reserve. Expect to file Form 10 in next couple of months. Still expect spinoff in 4Q 2015.
  • Expect to incur additional expenses during the year as HOT restructures to become more efficient ($30-35m over next several quarters, ending in mid-2016)
  • US:
    • Double digit REVPAR growth in the West esp. San Francisco/Phoenix
    • South: REVPAR grew 8% (solid in Atlanta, Ft Lauderdale)
    • Hawaii remained weak due to lower inbound travel from Japan
    • North: REVPAR only up 4.6% (NYC declines)
      • REVPAR at owned: flat
      • Compared to REVPAR index, up 550bps. Owned/managed grew 800bps
    • Double digit REVPAR increases in Boston/Chicago
  • Overall did not see material decrease in inbound travel to US due to strong dollar however, ADR in NY was affected
  • Group revenue in 1Q was +6% at owned/managed
  • Corporate group up ~10%
  • Revenue in the Q for the Q up double digits
  • Looking ahead, group revenue production into all years also up double digits
  • Expect group revenue on the bookings for 2015 up mid single digits. That's an increase from lower single digit pace in 4Q 2014. 
  • Transient up 4%, driven mostly by increases in rate
  • Latin America: Mexico REVPAR up 20%, Brazil REVPAR down as a result of continued weak economic situation. Argentina performance has stabilized. Expect similar trends in future
  • Europe: ahead of expectations. Spain/Austria strong. Looking ahead, expect system-wide Europe REVPAR SS to be slightly softer against stronger prior year base. Southern Europe strong; weaker trends elsewhere.
  • Double digit growth in demand for US and Middle Eastern travel into Europe and an increase of roughly 30% in Chinese travel into their European hotels which they attribute to the weaker Euro.
  • Middle East/Africa REVPAR: +0.8%: strong Abu Dhabi offset by Dubai hotels. Expect MEA to remain soft in 2Q
  • China: weak demand from HK and impact from Macau anticorruption campaign. Mainland China REVPAR: +3.2%. Expect current trends to continue in Macau/HK. In Mainland China, expect REVPAR improve modestly in 2Q. Strong REVPAR in Australia and Thailand
  • 2Q 2015: SG&A will be up 3-5% due to Tribute launch and incremental Aloft investment
  • Have fully offset FX headwinds they experienced since last conf call
  • Leverage ratio: 2.5x (S&P), 2.8x (Moody's)
  • Made 60 page presentation to Board of Directors diagnosing Sheraton underperformance - fixing Sheraton has been tried many, many times over the years
  • Maintaining current leverage levels of 2.5-3x
  • Midscale brands: sticking with Aloft/Element/Four Points. Will not say if they will pursue another brand.
  • Search for new CEO proceeding as planned.
  • Capital Markets are good
  • Committed to asset light
  • Mainland China improvement in 2Q:  Feb REVPAR down due to CNY comp, but March REVPAR improved sequentially. Sees better trends.
  • Aloft: grew in NA but grew even more substantially in Asia, EUrope, Africa, Middle East.
  • Element: increasing marketing spend in 2Q to accelerate growth
  • 2015 guidance:  increase FY guidance by $10m largely due to vacation ownership success in 1Q and better SG&A, offset by FX headwinds. 
  • NA performed in-line with expectations. Outlook hasn't really changed since beginning of year.
  • REIT structure?  HOT suffers from a lack of critical mass that could fit well into a REIT structure. Several assets in Europe/South America that can't benefit from REIT spend. But not taking anything off the table.
  • Increase ownership by using balance sheet? A possible option too.

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