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Durable Goods, Reflation and China

Client Talking Points

DURABLE GOODS

The sequential gain in June was largely a function of wholesale negative revisions to the May data.  Headline New Orders were down -2.8% year-over-year, marking a 5th consecutive month of negative growth, and growth across the various sub-aggregates were not much better. Indeed, Durables Goods Orders Ex-Defense & Aircraft (i.e. the stuff the average Household buys) declined -2.0% year-over-year (vs. -0.7% prior) while core Capital Goods orders declined a notable -6.6% year-over-year.  In short, the 13% of Household Consumption and 9% of GDP that is Durable Goods remains in anti-escape velocity mode. 

REFLATION TRADE UNWIND

The “reflation-trade”, “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms. The Energy (XLE), Materials (XLB), and Industrials (ITB) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers. If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.  

CHINA

Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.

Asset Allocation

CASH 48% US EQUITIES 7%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

The @AtlantaFed model has 2Q growth coming in at +2.4% QoQ SAAR -- 10bps below our est. Will @Hedgeye be closest to the pin 2qtrs in a row?

@HedgeyeDDale

QUOTE OF THE DAY

The word [because] is one of the most dangerous in the world of finance.

Benoit Mandelbrot

STAT OF THE DAY

The most beer-drinking country in the world is the Czech Republic with a per capita beer consumption of almost 40 gallons a year.


CHART OF THE DAY: Pending Homes Sales (Courtesy of Dr. Drake)

Editor's Note: The chart and blurb below are from today's Early Look which was written by resident Hedgeye macro guru and housing analyst Christian Drake. For more info on how you can supercharge your investing prowess click here.

  • Wednesday:  Pending Home Sales for  June – which is the lead indicator for Existing Sales (90% of the housing market) - should be strong from a rate-of-change perspective given the recent trend and easy comp.  Consensus is expecting +11% year-over-year growth and another new post-crisis high in activity.  We’d view that expectation as ballpark correct. 

CHART OF THE DAY: Pending Homes Sales (Courtesy of Dr. Drake) - Z PHS Comps CoD


Slope Surfing

“Do you really want to buy House?  It’s sort of like having a baby … and it’s a headache”

-Robert Shiller

 

Macro profiteering is predicated on forecasting and front-running 2nd derivative inflections in growth and inflation – as well as the causal factor that is Policy which, in turn, carries consequences for the currency which, in turn, has flow through effects on Growth/Inflation.

 

It’s all very #incestuous

 

Anyway, the point is that the appropriate framework for contextualizing macro data is not good/bad, it’s better/worse - and successfully slope surfing those marginal changes through the capsized absolutist debris to the rarified shores of (repeatable) alpha remains the sport of macro kings.    

 

There are, of course, undercurrents of additional complexity. 

 

Divining what’s already discounted by the market and reflected in prices is a ubiquitous challenge.   

 

Equally challenging is the reality that everything is relative.   Not only are the current and forward prospects - & thus investibility - for a given security/sector/economy contextualized relative to their historical selves but relative to the prevailing dynamics and prospects for every other asset class.   

 

Less abstractly, suppose domestic growth goes from Great to Good.  In the conceptual, rate-of-change framework just described, that is Bad. 

 

But what if developed market growth across the rest of the globe see’s a double decrement – going directly from Great to Bad.  Does that re-elevate the read-though on the domestic economy/markets from Bad to Good given the positive relative change?

 

The daily macro dance is difficult and delicate, but certainly not boring ….. 

 

Slope Surfing - z jcvd

 

Back to the Domestic Macro Grind…

 

Keeping with the rate-of-change theme – and continuing the Early Look chronicling of our evolving view on Housing -  we titled our 3Q15 Housing Themes Presentation back on 7/9, IS GOOD, GOOD ENOUGH?

 

The title alludes to the fact that after showing significant improvement and putting up the best growth figures in all of global macro in 1H, reported growth across the preponderance of housing demand data should transition from great-to-good in 3Q.   

 

Our themes deck (ping if you’d like to see it) is over 120 slides of data intensive analysis but the overarching theme can be sufficiently captured conceptually: 

 

The Housing data in 3Q will be “good” but the large-scale positive reversal we’ve seen over the last ~9-months is now rearview, the comps get tougher after the reported June data and we don’t have any discrete catalysts in the nearer-term.   Further, performance seasonality in the stocks is recurrent and pervasive and 3Q has historically been the soft-patch period.   

 

From a longer-term perspective, the mean reversion upside to average and peak levels of activity remains both conspicuous and compelling.  However, the leverage to our expectation for a positive inflection in both fundamentals and investor attitudes following our reversal to bullish back in November of last-year has, in large part, played out.  

 

Again, in absolute terms, we think the data will remain “good”.  Indeed, with Purchase Application demand flat sequentially in 3Q (but holding near 2Y highs) and New Home Sales declining in the latest month (but still above the TTM ave) “good” is proving an apt characterization.

 

Sure, if we get dealt decelerating global growth, global deflation and transient US decoupling on the Flop with continued employment gains on the Turn and sub-2% rates on the River, the investibility of Housings’ transit from Great to Good is probably still good relative to the seven-high hands held by high beta, inflation leverage exposures.   When growth gets scarce, whatever growth does exists gets bid (see yesterday’s Early Look).

 

But, as it stands, we think the prospect for aggregate homebuilder outperformance in the near-term carries a diminished probability. Indeed, the modest builder underperformance QTD (ITB down -1.31% vs. the SPX +0.22) is largely in-line with our expectation for the group.    

 

If you need to maintain some housing related exposure, the Title Insurers and Mortgage Insurers – where seasonality is more muted - offer some tactical cover while moving upstream towards larger cap/lower beta/liquidity/quality style factors make sense in terms of direct builder exposure.  

 

So, summarily, that’s our tactical view of the quarter.  What else do you need to know across Housing/Macro for the balance of this week:

 

  • Today:  Case-Shiller HPI will probably show further re-acceleration in Home prices.  It’s important to remember that while investors still anchor on the Case-Shiller release it is, in fact, the most lagging of the home price series.  It’s calculated as a three month moving average, released on an almost 2-month lag with today’s release for May representing average price data across the March, April and May period.  In contrast, we’ve had the CoreLogic price data for June for almost a month already.    

 

  • Wednesday:  Pending Home Sales for  June – which is the lead indicator for Existing Sales (90% of the housing market) - should be strong from a rate-of-change perspective given the recent trend and easy comp.  Consensus is expecting +11% year-over-year growth and another new post-crisis high in activity.  We’d view that expectation as ballpark correct.

 

  • Wednesday:  FOMC Announcement:  No Presser, No Dots – expect no hard-line commentary from the Fed ahead of 2Q GDP on Thursday.  The Fed messaging team has done their best to keep Sept/Dec lift-off optionality on the table.  They’ll keep their head (or mouths) in the sand as long as they can before acknowledging the non-transience in the data and explicitly shifting expectations around the path for policy normalization.

 

  • Thursday:  GDP – This one could be good.  Not only will we get the advance estimate for 2Q but we will get the annual revision to the GDP data which will  cover the 2012-1Q15 period.  This year’s revision will also include statistical changes designed to reduce the much talked-about residual seasonality  in the data (i.e. the marked & recurrent 1stquarter softness).   A significant, positive revision to 1Q15 data would, to some degree, come at the expense of reported growth for 2Q.  Further, the BEA will launch the reporting of 2 new series:  Gross Domestic Income (GDI) and Final Sales to Private Domestic Purchasers. 
    • GDI:  GDI takes an income approach to measuring economic activity and should be the same as GDP but due to data source and measurement differences the two series differ in practice.  GDI has shown less residual seasonality and has offered a more stable and sanguine view of growth over the last few years.  The BEA will begin releasing a composite GDP/GDI, representing a 50/50 mix of the two series, alongside the 2Q release on Thursday.
    • Final Sales to Private Domestic Purchases:  This measure represents the sum of Consumer Spending + Private Fixed Investment and excludes changes in inventories, net exports, and government spending.  The reading excludes the most volatile components of GDP and provides perhaps the cleanest read on aggregate private sector demand.  Economists already calculate this measure independently and the BEA already reports a slightly different measure which includes Government Purchases but for a modern, consumption economy like the United States, private domestic demand (ie. total demand for both domestic and foreign produced goods) is a telling and relevant metric.   

 

There are compelling and justifiable reasons for updating the measurement and calculation methodologies. Still, I can’t help but feel that the latest attempts at “refinement” will primarily serve to further muddle Janet’s mosaic reading of her “data dashboard” while affording policy makers further runway to baffle with quantitative B.S..  After all, if you have enough “indicators”, one will always comport with the prevailing (or fabricated) narrative. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22-2.33% (bearish)

SPX 2047-2096 (bearish)

VIX 12.88-16.22

USD 96.11-98.30

Oil (WTI) 46.69-49.89

Gold 1063-1112 

 

Best of luck out there today,

 

Christian B. Drake

 

Slope Surfing - Z PHS Comps CoD


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 80.64%
  • SHORT SIGNALS 78.61%

LEISURE LETTER (07/28/2015) - MPEL, G13.SI, WYN, CCL, Airbnb

TICKERS: MPEL, G13.SI, WYN, CCL, Airbnb


 EVENTS   

 

July 28 8:30am: WYN 2Q CC ; PW: WYNDHAM

July 29 10:00am: HLT 2Q CC ; PW: 74328196

July 30 9:00am: HST 2Q CC

July 30 10:00am: MAR 2Q CC ; PW: 66506287

July 30 1:00pm: HOT 2Q CC ; PW: 69941686

July 30 8:30am: STAY 2Q CC (1877)

July 31 10:00am: RCL 2Q CC 

August 1

  • Wild Rose Jefferson opens
  • St Regis Macau opens

August 3: 8:00pm: CTRIP 2Q CC ; PW: 40828276

August 4: 11:00am: MGM 2Q CC ; PW: 0575269

August 4: 5:00pm: AWAY 2Q CC

August 6: 8:30am: MPEL 2Q CC ; PW: MPEL

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)

COMPANY NEWS      

MPEL -  Casino operator Melco Crown Entertainment Ltd says that next Monday, it will publicly announce the date of the "Grand Opening” of Macau casino resort Studio City.  The company has organized a tour of the venue for the media, followed by a press conference in the afternoon that day.  

ARTICLE HERE

Takeaway: We're hearing only a 150 table allocation for Studio City. The property probably won't reach its potential until the ownership issue is resolved. 

 

G13.SI - Genting Singapore bought back 3.6 million shares on July 28 at $0.895. 

 

WYN - Recently welcomed three new affiliated resorts in China to its vacation exchange network.  The properties are Shangshanqi Villa Resort and Taoyuan Hot Spring International Hotel in Chengdu, Sichuan Province, and Bo'ao Holliyard Seaview Resort in Hainan Island.  The signing of these agreements expands RCI's portfolio of resorts in China to more than 55 properties.

ARTICLE HERE

 

CCL - Today announced that its Italian brand, Costa Cruises, will build two new cruise ships as part of an agreement with Meyer Werft to construct four next-generation cruise ships with the largest guest capacity in the world. In June, Carnival Corporation announced the other two ships included in this multi-billion dollar contract are destined for its German brand, AIDA Cruises.  

  • The two new ships for Costa Cruises will be built by shipbuilder Meyer Werft at the company's shipyard in Turku, Finland, with deliveries expected in 2019 and 2020. Each new cruise ship will exceed 180,000 gross tons, offering more than 2,600 passenger cabins and 5,200 lower berths to comfortably accommodate a total capacity of 6,600 guests.
  • Pioneering a new era in the use of sustainable fuels, these new ships will use LNG to generate 100 percent of the ship's power both in port and on the open sea – an industry-first innovation that will significantly reduce exhaust emissions to help protect the environment and support the company's aggressive sustainability goals.
  • The four-ship contract with Meyer Werft is part of a larger previously announced strategic memo of understanding with leading shipbuilders Meyer Werft and Fincantieri S.p.A for nine new ship orders between 2019 and 2022.

ARTICLE HERE

Takeaway: Cost efficient and Eco friendly appears to be the new mantra for cruise ship construction. 

 

Airbnb - Airbnb is planning its Africa Expansion. The San Francisco company, which allows people to rent rooms in their private homes to travelers over the Internet, held an event July 27 in Johannesburg, where Airbnb Chief Executive Officer Brian Chesky walked local reporters through the company’s ambitions in the world’s second-most populous continent. 

  • With news spreading mainly through word of mouth, some 9,400 homes are for rent in South Africa, making it the company’s largest market on the continent. The biggest cities for Airbnb are Cape Town and Johannesburg, and the company says listings in South Africa are increasing 138% a year. 
  • The number of people staying in Airbnb homes in the country is growing 257%.
  • In the coming weeks, Airbnb says it will also roll out its “host guarantee” in Africa, which reimburses hosts for up to $1 million U.S. dollars if a guest damages their homes.

ARTICLE HERE

Takeaway: Regulations may be a headwind in some markets, but it hasn't stopped Airbnb's relentless push for growth and expansion worldwide. 

INDUSTRY NEWS 

Macau Blue Card Holders - The number of non-resident workers, commonly known as blue card holders, rose 16.2% YoY to 180,523 at the end of June, the Human Resources Office (GRH) announced on Monday.  The number increased by 1,107 between May and last month.   Mainlanders accounted for 65 percent of all imported labor. Other major segments were hired from the Philippines (23,152), Vietnam (14,203), Hong Kong (9,708), Indonesia (4,087), Nepal (3,521), Taiwan (1,600), Myanmar (1,249), Malaysia (1,232), and Thailand (1,034).

ARTICLE HERE

Takeaway: Good news for Casino operators with current projects and those planning to build. 

 

Saipan Casino - Imperial Pacific International Holdings Ltd says it has opened its casino on the western Pacific island of Saipan.  The company told the Hong Kong Stock Exchange that its temporary casino premises in Garapan on the island had opened for business on July 26.  Imperial Pacific International has plans to build a casino-resort on Saipan in five phases.  It has a 25-year licence to run a casino.

ARTICLE HERE

Takeaway: Let's not confuse Saipan with Japan

 

Thailand Casino - Thailand’s latest outbreak of casino speculation began in June. Two members of the post-coup military government’s National Reform Council suggested casino to bolster tourism.  The pair said they represented about a dozen members of the advisory panel and planned to submit a more detailed proposal to the government.  

  •  “We want to invest in Thailand if we are given permission,” LVS vice president for communications in Singapore Krist Boo said
  • “For Thailand, we would love to have an integrated resort at a place close to the city center or financial center, near the international airport,” Boo said, according to Thailand’s The Nation newspaper.

ARTICLE HERE 

Takeaway: Could this be what LVS's Adelson was referring to?

 

Lifestyle Hotels and Threats to the Industry - Lifestyle hotels might be lodging option du jour for investors, operators and consumers, but they aren’t immune from some of the challenges facing the rest of the hotel industry.  The most notable challenges, according to panelists speaking during the second stop on the ALIS Summer Update tour last week at the Chicago Athletic Club Hotel, involve rising pressure on the wage and rental-economy fronts.

  • “To our business, (the biggest issue) is the wage issue, and particularly as it relates to labor unions,” said Niki Leondakis, CEO of San Francisco-based Commune Hotels 
  • “Airbnb is a concern,” said Raul Leal, CEO of Virgin Hotels. “It should be a concern for properties that don’t provide an experience.” 
  • Because Airbnb tends to be most successful in high-density, urban markets where lifestyle hotels also thrive, regulatory issues will have a big impact, panelists said.
  • The executives agreed that facing these pressures can be beneficial for all hoteliers.
  • Leondakis pointed to the growing trend of ditching 24-hour room service in favor of a grab-and-go concept in which guests get their food to-go from a lobby restaurant concept as an example. 
  • “You’ve got to think about F&B completely differently with this cost of labor,” she added. 
  • “In some ways, Airbnb has caused all of us to up our game,” he said. “They’re doing some things that are really, really relevant that consumers want.” 

ARTICLE HERE 

Takeaway: More commentary on the realistic threats to hotels. Airbnb and rising labor costs are major rising in that industry. 

MACRO 

Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.


LNKD: Thoughts into the Print (2Q15)

Takeaway: LNKD doesn’t need much to produce upside to rebased 2015 estimates, especially following its considerable investment into its salesforce.

KEY POINTS

  1. NEW BEST IDEA LONG: We recently went long LNKD on 7/14.  The 1Q15 hiccup that led to a +20% gap down in the stock was largely due to a big salesforce investment into improving selling environment (accelerating macro tailwinds).  Management used the 1Q15 hiccup to rebase consensus expectations, which are now inline with guidance (vs. over) for the first time in over a year.  LNKD doesn’t need much to produce upside to 2015 estimates, especially given the aforementioned salesforce investment, which we see as a coiled spring.  See note below for more detail.
  2. 2Q15 = COILED SPRING: Mgmt gave themselves enough breathing room with the light 2Q guide.  Consensus concentrated their estimate reductions into its Marketing Solutions and Premium Subscription segments, making the swing factor its Talent Solution segment, which is where we are most bullish.  We’re expecting a 2Q15 beat and 2015 raise, with 3Q guidance coming in above consensus.  There is a small risk that 3Q guidance falls to impress for no other reason than mgmt conservatism, but we believe mgmt already played that card when it cut its full-year outlook after beating its 1Q15 guidance.  

 

LNKD: New Best Idea (Long)

07/14/15 08:00 AM EDT 

[click here]

 

 

See link above for incremental detail and analysis.  Let us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 

 


July 28, 2015

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BULLISH TRENDS

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July 28, 2015 - Slide4

 

 

BEARISH TRENDS

July 28, 2015 - Slide5

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July 28, 2015 - Slide13


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