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FINANCIALS SENTIMENT SCOREBOARD - First American (FAF)

Takeaway: The title insurers have been our go to Housing long in 3Q. FAF (+7% QTD) remains compelling on its still bombed out sentiment (17).

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

This week we're flagging First American (FAF - Score: 17) as a long as our 3Q15 call to "hide out" in Housing favors the title insurers.

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


SPECIAL | Excerpt From Dr. Drake's "Early Look" Note This Morning on "The Mom Test"

Editor's Note: Below is a special one-time excerpt from today's Early Look written by our U.S. Macro Analyst Christian Drake. (Our CEO and Risk-Manager-In-Chief Keith McCullough typically writes these morning notes.) It offers a small taste of what our longtime subscribers have come to expect from this contrarian product. It's $29.95/month. A dollar a day to keep the grim market reaper away? We think it pays for itself many times over. Click here to subscribe and see for yourself.

*  *  *  *  *

SPECIAL | Excerpt From Dr. Drake's "Early Look" Note This Morning on "The Mom Test" - Bull and bear extra cartoon

...Last week, I extolled the merits of The Mom Test and its unique ability to bring clarity to an investment thesis.  Some readers rightly pointed out that while I described the merits of “the test,” I didn’t actually offer an answer to it.

 

Here’s the laymen, common sense, sleep-fine-at-night, largely passive management frame-up: 

 

What if I told you:

  1. We are 76 months into the current expansion (the mean & median over the last century are 59-months and 50-months, respectively. Meanwhile, Fischer’s Fed, is forecasting above trend growth through 2018 – implicitly forecasting the longest expansion ever)
  2. Global growth is slowing currently and given global leverage and demographic dynamics, slower for longer will remain the prevailing reality
  3. Policy has proven to be impotent in printing sustainable real growth and the capacity for another large scale and sustained easing and asset purchase campaign is low.
  4. The market is up 186% off the 2009 lows – it’s been a great run, maybe there’s some modest runway left but the expansion is certainly in its twilight. 

 

Would you:

  1. Raise some cash
  2. Downshift equity beta exposure
  3. Allocate to long-duration fixed income on pull backs
  4. Buy stocks that look like bonds and/or equities with solid free cash flow yields, relative inelastic demand and pricing power – particularly with a fundamental catalyst, negative sentiment and elevated short interest
  5. Or, my Mom's answer:  Buy a bigger mattress?

CHART OF THE DAY: The "Smirnoff Trade" (Dovish, Kinda Hawkish...Growth Slowing, But Mostly..."

Editor's Note: The chart and brief excerpt below are from today's Early Look written by Hedgeye U.S. Macro Analyst Christian Drake. Click here if you'd like to learn more about the Early Look and begin your mornings ahead of consensus.

 

CHART OF THE DAY: The "Smirnoff Trade" (Dovish, Kinda Hawkish...Growth Slowing, But Mostly..." - z CoD Smirnoff Trade

 

...You know Janet?  Heavy set, thin lady … dovish, kinda hawkish … super conventional, mostly ZIRP-y …  hyper Bullish, but also a pretty Bearish ... (dehydrated, but super healthy)

 

Ahh …. the life of a central planner charged with equivocating in all messaging while simultaneously smoothing volatility by providing the market with absolute certainty.   

 

(If you’ve never seen the Smirnoff ad above, check it out, it’s good)  

 

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

U Know Sergio?

“You Know Sergio?”

-Smirnoff Ad

 

You know Janet?  Heavy set, thin lady … dovish, kinda hawkish … super conventional, mostly ZIRP-y …  hyper Bullish, but also a pretty Bearish ... (dehydrated, but super healthy)

 

Ahh …. the life of a central planner charged with equivocating in all messaging while simultaneously smoothing volatility by providing the market with absolute certainty.   

 

(If you’ve never seen the Smirnoff ad above, check it out, it’s good)  

 

If there’s been a voice of non-prevarication in recent years on the policy side, it’s probably been Stanley Fischer – FOMC vice-chair and former head of the Bank of Israel (and not to be forgotten – the 1st central banker to raise rates and pursue policy normalization coming out of the recession)

 

Here’s my hack theory on Fischer:

 

You know how when people get old they get to the point a lot faster.  What is lost in tact is made up for in unfettered insight –   a kind of unadulterated, politically quasi-correct truth serum.   Little kids don’t know better, old people do but don’t care anymore. 

 

While I think Greenspan has probably lost it,  I think Fischer’s entered still-coherent, old-dude, truth serum prime time. 

 

Consider some of his more recent quotables: 

 

  • Fischer On Forward Guidance:  "if you give too much forward guidance you do take away flexibility ….we don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise ….you can’t expect the Fed to spell out what it’s going to do...because it doesn’t know."

 

  • On Fed Forecasting Credibility:  “Year after year we have had to explain why the global growth rate has been lower than predicted.”

 

  • On Patience & Policy Lags:  “We tend to underestimate the lags in receiving information and the lags with which policy decisions affect the economy …. Those lags led me to try to make decisions as early as possible, even if that meant there was more uncertainty about the correctness of the decision.”

 U Know Sergio? - Fed cartoon 04.30.2015

 

Back to the Global Macro Grind...

 

You know Bergoglio? … from Buenos Aires?  … the guy who has all the streets shut down in NYC on Thurs/Fri while we’re trying to get through a stacked schedule of meetings in the papal party zone?

 

Pope Francis has shouldered the charge of change and evolution at the Vatican.  Raised in Argentina during recurrent LatAM hyperinflations and currency devaluations, the Pontiff could probably also produce some positive P&L in the current Global Macro chop. 

 

Argentina offers a convenient and relevant case study in interconnected global macro and its derivative impacts, so let’s stick with it:

 

Argentina Currency Crisis:  In an attempt to quell recurrent hyperinflations, Argentina adopted a formal currency board in 1991 – which means they held a dollar (& gold) against every peso in circulation and stood willing to exchange the two one for one.   The goal of a currency board, in effect, is to import another country’s monetary policy – in this case Argentina wanted to displace the lost credibility of its own central bank by importing the legitimacy of the U.S. central bank and its monetary policy with the goal of re-anchoring inflation expectation.   

 

The regime was stable and successful for a decade before collapsing spectacularly in late 2001. 

 

Why?

 

Brazil (not Argentina).  The flow of impact can be sufficiently captured in the following way: 

 

Brazil Currency ↓  -->  Argentine Currency (relative to the Real) ↑  -->  Exports to Brazil (largest trading partner) ↓ --> Argentine Growth ↓  --> Argentine Unemployment ↑/Budget Deficits ↑ --> investor angst over Argentine growth/deficit ↑ --> Argentine interest rates↑/ability to tap credit markets ↓/ability to service debt↓ --> currency board abandoned/Peso devalued  --> Argentine Peso ↓

 

In other words, Brazilian fiscal and monetary policy and the government budget constraint ultimately manifest in the massive devaluation of Argentina’s currency.

 

What’s the point:

  1. Interconnectedness:  Global Interconnectedness is real, dynamic, and non-linear – when a particular set of circumstances will reach a critical state and catalyze a “phase transition” in an asset class or macroeconomy is not always obvious
  2. Macro Bread Crumbs: The ability to forecast and front-run 2nd and 3rd derivative effects of Growth/Inflation/Policy/Currency phase transitions remains the wellspring of non-consensus macro alpha. 
  3. Re-Runs:  Hmmm … This Brazil slowing, Real currency collapse movie feels familiar.   

 

Timing markets and front-running major macro inflection is our job – it’s also hard and requires dynamic risk management.   While maximizing macro alpha necessitates an active management strategy - particularly when volatility is percolating - it’s not for everyone. 

 

Last week, I extolled the merits of The Mom Test and its unique ability to bring clarity to an investment thesis.  Some readers rightly pointed out that while I described the merits of “the test”, I didn’t actually offer an answer to it.

 

Here’s the laymen, common sense, sleep-fine-at-night, largely passive management frame-up: 

 

What if I told you:

  1. We are 76 months into the current expansion (the mean & median over the last century are 59-months and 50-months, respectively. Meanwhile, Fischer’s Fed, is forecasting above trend growth through 2018 – implicitly forecasting the longest expansion ever)
  2. Global growth is slowing currently and given global leverage and demographic dynamics, slower for longer will remain the prevailing reality
  3. Policy has proven to be impotent in printing sustainable real growth and the capacity for another large scale and sustained easing and asset purchase campaign is low.
  4. The market is up 186% off the 2009 lows – it’s been a great run, maybe there’s some modest runway left but the expansion is certainly in its twilight. 

 

Would you:

  1. Raise some cash
  2. Downshift equity beta exposure
  3. Allocate to long-duration fixed income on pull backs
  4. Buy stocks that look like bonds and/or equities with solid free cash flow yields, relative inelastic demand and pricing power – particularly with a fundamental catalyst, negative sentiment and elevated short interest
  5. Or, my Moms answer:  Buy a bigger mattress?

 

Active management and the pursuit of peak alpha is cool.  So is “sufficiently simple”. 

 

Bluish, whitish collar …. Long and Short … sophisticated but sufficiently simple. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.07-2.21% 

SPX 1 

VIX 19.98-26.51
USD 94.41-97.11
Oil (WTI) 43.65-47.82 

Gold 1125-1155

 

You Know Hedgeye?

 

Christian B. Drake

U.S. Macro Analyst

 

U Know Sergio? - z CoD Smirnoff Trade


LEISURE LETTER (09/25/2015) - 0880.HK, 0027.HK, SGMS, HOT, QUNR, AIRBNB, UBER

TICKERS: 0880.HK, 0027.HK, SGMS, HOT, QUNR, AIRBNB, UBER

EVENTS     

  • Hedgeye call on BYD: Sept 25
  • G2E (Sands Expo): Sept 29-Oct 1
  • Hedgeye cruise call: Oct 5

COMPANY NEWS 

0880.HK - Casino operator SJM Holdings Ltd executive director Angela Leong On Kei expects no big upturn in Macau’s gaming business over the National Day golden week of holidays in the mainland next month.  Ms Leong told reporters in Hong Kong that it was improbable that the number of visitors to the city over the holidays would be 10% or more greater this year than last.  But the F&B business might do well, she said.

ARTICLE HERE

Takeaway: Not exactly useful insight. Golden Week will be stronger than recent weeks but likely down from last year.

 

0027.HK - Macau’s gaming market has “stabilized”, said Lui Che Woo, chairman and founder of casino firm Galaxy Entertainment Group Ltd.  Below are some of his comments from his interview. 

  • “I think the situation there [Macau] has already calmed down. It has stabilized. I am optimistic that in one year or two years, it will improve,” said Mr Lui, in an interview with BBC. 
  • Mr Lui said a slowing in the Chinese economy would allow the nation to move in a “new direction”. China’s Premier, Li Keqiang, this week called for the country’s manufacturers to focus on “innovation.”
  • He added: “At the moment the Chinese economy is turning a corner. It is changing direction. You can’t be accelerating at the same time. They have to figure out a new direction. If they succeed, the future would be incredible.”

ARTICLE HERE

Takeaway: On the margin bullish comments from Galaxy's chairman. We think Mass may have stabilized - minimum bets levels have not declined the past 2 months - and October is a much easier comparison. However, there is little evidence of junket stability.

 

Tiger Resorts - Tiger Resort, Leisure and Entertainment Inc has confirmed it has been given a construction timetable extension for its Manila Bay Resorts casino venue (pictured in a rendering) and that the “projected opening of the property will be December 2016.” It additionally mentioned “expansions and “improvements” to the casino project, including “an additional 97,000 square metres [1.04 million sq feet] of gross floor area, covering two hotel towers.” 

ARTICLE HERE

 

SGMS -  announced that the Company has signed a new two-year contract with four two-year extension options to provide instant games and related services to the Ohio Lottery. The contract, began in July 2015 and includes instant games as well as marketing, licensed brands and interactive services.  Ohioans purchased a record $1.5 billion in instant games in fiscal year 2015, an 8.8% increase YoY.

ARTICLE HERE

 

HOT/QUNR - Qunar, a Chinese OTA platform, announced a partnership with Starwood Hotels & Resorts Worldwide, Inc.  Under the new partnership, Qunar's travel user base, one of the largest in the world, will get instant and direct access to Starwood's global hotel inventory through Qunar's mobile and PC transaction platform.
ARTICLE HERE

 

AIRBNB - An Airbnb representative says the company has experienced a 270% increase in Philadelphia listings since April, and that demand there is eight times the norm. Airbnb also pushed Philadelphians to offer more inventory. The company introduced a charity incentive, promising that for every new host who lists property by December 31, it would donate $250 to charity. Philadelphia is the first city where Airbnb has offered such an incentive.

ARTICLE HERE

Takeaway: Airbnb continues to get creative in order to drive listings growth.  

 

UBER - A Belgian court upheld a ban of the ride-sharing app UberPOP on Thursday, giving it 21 days to cease operations in the country or face substantial penalties. The more expensive UberX service is unaffected, however.  

ARTICLE HERE

INDUSTRY NEWS   

Overnight Subsidy - Macau Government Tourist Office director Maria Helena de Senna Fernandes has denied a newspaper report that her office means to subsidize tours for overnight visitors.  The Portuguese-language Jornal Tribuna de Macau reported that the government had plans to pay tour operators MOP200 (about $25) per head to accommodate tourists in the city overnight.

ARTICLE HERE

 

Macau Smoking Ban - Macau’s Health Bureau has said in a written reply to a Macau legislator that it expects – if implemented – a full smoking ban in the city’s casinos would result in a 2.7% to 4.6% reduction in casino GGR.  

  • The report quoted the written reply saying the assessment was done in conjunction with Macau’s gaming regulator, the Gaming Inspection and Coordination Bureau. 
  • The government forecast was based on estimates regarding the percentage of Macau gamblers that are smokers and the potential impact of a reduction in the number of their visits to casinos.

ARTICLE HERE

Takeaway: Most Street estimates project a bigger hit. We're in the 5-10% range but in terms of the profitability impact, it's much lower. 

 

Macau Unemployment - Statistics and Census Service (DSEC) indicated that the unemployment rate for June-August 2015 was 1.9%, up slightly by 0.1% from May-July; the underemployment rate remained stable at 0.4%.  

 

Total labor force was 402,700 and the labor force participation rate stood at 73.3%. Total employment decreased by 2,800 from May-July, at 395,100. Analysed by industry, employment in Construction and Retail Trade registered decrease, while that in Hotels, Restaurants & Similar Activities saw increase.

ARTICLE HERE 

 

McCarran August Traffic - Las Vegas visitor traffic continues to rise. August saw 7.2% YoY growth in arriving and departing passengers. Domestic air traffic led the way with a 7.8% YoY growth while international and helicopters posted 3.3% and 0.8% growth respectively. This is the second consecutive month of 4 million or more visitors to Las Vegas. 

LEISURE LETTER (09/25/2015) - 0880.HK, 0027.HK, SGMS, HOT, QUNR, AIRBNB, UBER - mccarran

Takeaway: Air traffic continues to push higher, but are these people gambling? 

 

Singapore Smog - Singapore has closed its schools after the pollution levels caused by the smoky smog enveloping the city hit dangerously high levels.  On Friday the PSI hovered near the hazardous range again, hitting 255, with the 24-hour figure at 264-321.  Reports suggest, that the El Nino phenomenon, which results in very dry weather, means the haze could continue until the monsoon season begins in November.  

ARTICLE HERE

Takeaway: Could impact visitation if the reports prove to be true. 

 

Singapore Manufacturing Output - Manufacturing output in the Republic fell 7% YoY in August, the Economic Development Board (EDB) said on Friday.

ARTICLE HERE

 


ADDING BOYD GAMING (BYD) AS A BEST IDEA LONG

The Hedgeye Gaming, Lodging, and Leisure Team is adding BYD as a best idea LONG, and will be hosting a call today at 11am to discuss our views on the stock. Here is a brief summary of our thesis.

 

SUMMARY OF OUR THESIS:

  • Regional Gaming Stability = Earnings Visibility 
    • As predicted, August would look weak and pressure the stocks. However, the states will begin releasing stronger September results beginning next week. 

    • The underlying demand/supply fundamentals in regional gaming are much improved and likely sustainable

  • Operational improvements and favorable market exposure could drive upside

    • Atlantic City and LV Locals could be surprise growth drivers. Supply exodus in AC is mostly to Borgata and the sustained housing recovery is finally translating into gaming revenue growth. These markets generate higher incremental margins for BYD's aggregate portfolio.
    • BYD's management changes are paying dividends  
  • Valuation

    • 15% free cash flow yield and 8x EV/EBITDA. PNK going out ~10x EV/EBITDA and PENN/GLPI split around 10-11x.
    • We believe BYD is undervalued at current prices 



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