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Us vs. Them

“For some of them, inflation is not so bad; they even ask for a continuation of it, because they are the first to profit from it.”

-Ludwig von Mises


“For some of them” – that’s a critical preface, to a critical economic statement, during critical global economic times. If you’re reading this right now, consider yourself just like me . We are the fortunate ones. We can make money being long inflation.


If you haven’t read von Mises’ Fourth Lecture titled “Inflation”  yet (in Economic Policy, Ludwig von Mises speeches; Argentina 1959), you should. On page 45 he goes on to write that:


“And there are always people who favor inflation because they realize what is going on sooner than other people do. Their special profits are due to the fact that there will necessarily be unevenness in the process of inflation… But of course, the politician in power who proceeds toward inflation  does not announce: I am proceeding toward inflation.”


Unlike the Big Government monetization of debt experiments gone bad of Jimmy Carter (and then Bernanke-Lite Fed Head, Arthur Burns), how appropriate the lessons of history are that stand the test of time…


I’m long inflation.


In fact I got longer of inflation on the “buying opportunities” I have seen in commodities and currencies throughout the week. I have taken my asset allocation to Cash down in the Hedgeye Asset Allocation Model from 61% (at the beginning of the week) to 49% as of yesterday’s close.


How does one get long of inflation?

  1. Buy Commodities (we’re long oil, OIL, corn, CORN, and sugar, SGG)
  2. Buy Currencies whose countries have inflationary trends and an upward bias to interest rates (we’re long US Dollars, UUP, and Chinese Yuans, CYB)
  3. Short Bonds (we’re short short-term US Treasuries, SHY)

Of course, you can be long stocks too, which we are in both Germany and the US (admittedly too light in the shoes on the US side as we are long Healthcare and Energy, but short Tech and Consumer Discretionary).


That said, too light on Equities when the rest of the world wakes up to what we are really doing to world populations with trivial things like food inflation is definitely the place that the risk manager in me wants to be.


What are we (“some of them”) doing to most of them?


We’re starving them.


Now maybe Wall Street couldn’t give a damn about this. But I do. Here’s the data on world food prices (per the United Nations, not The Ber-nank):

  1. World Food Prices hit record ALL-TIME highs in December (on historical matters, ever is a long time).
  2. The commodities basket (55 commodities in the UN’s calculations to smooth out what’s “core”) has eclipsed the 2008 all-time high.
  3. Global grain production will have to rise at least 2% in 2011 to meet demand and avoid further depletion of stocks (UN agency).

The wizardry of the US Government’s calculation of inflation (CPI) is in the data as well. Ben Bernanke stares into the 60 Minutes cameras and does God’s work, under oath, saying that he didn’t see 2008 inflation with $150/oil or 2010 inflation with all-time record high world food prices. Charlatanism redefined.


When a professional politician or anyone who gets paid on inflationary terms tells you there is no inflation in the US, this is what they mean:


Top 6 Current US CPI Weighting:

  1. Housing: 41.96%
  2. Transportation: 16.69%
  3. Food and Beverage: 15.76%
  4. Recreation: 6.44%
  5. Medical Care: 6.51%
  6. Education and communication: 6.51%

*they’ve changed the CPI calculation 9x since 1996 (I wonder why)


So, obviously, the takeaway here is that Bernanke doesn’t see inflation because, like Hedgeye, he is bearish on US Housing. Unlike Hedgeye, he must think that the entire world works in NYC or Washington DC, where you don’t cook or drive to work.


Here’s another way to think about Global Inflation Accelerating and its impact on an interconnected global economy:


World Populations:

  1. China 1.341B people = 19.5%
  2. India 1.192B people = 17.3%
  3. USA 310M people = 4.5%
  4. Indonesia 237M people = 3.5%
  5. Brazil 190M people = 2.8%
  6. Pakistan 171M people = 2.5%

And across the world’s populations, here are this morning’s fresh off the Macro Grind global inflation reports for December:

  1. India food inflation reported at +18.32% year-over-year growth
  2. Russian inflation (CPI) hitting another new high at +8.7% DEC vs +8.1% NOV
  3. Kazakhstan inflation (CPI) +7.8% DEC vs +7.7% NOV
  4. Uruguay inflation (CPI) +6.93% DEC vs +6.87% NOV

I know – who cares about them people in Uruguay and Kazakhstan anyway. Nice trade Heli-Ben.


My immediate term support and resistance lines for the SP500 are now 1262 and 1284, respectively.


Trade inflation and roll the bones out there today,



Keith R. McCullough
Chief Executive Officer


Us vs. Them - Ben


TODAY’S S&P 500 SET-UP - January 6, 2011

As we look at today’s set up for the S&P 500, the range is 22 points or -1.14% downside to 1262 and 0.58% upside to 1284.   Equity futures are trading higher mirroring trading in Europe and Asia following good US employment data yesterday ahead of the non-farm payrolls Friday.



  • 8.30am, Initial jobless claims, Jan 1, est. 408k; continuing claims, Dec. 25, est. 4080k
  • 8.30am, Net export sales (cotton, corn, soybeans, soy meal, wheat), Dec. 30
  • 10am, Freddie Mac 30-year mortgage
  • 10.30am, EIA natural gas storage change, Dec. 31, est. -131


  • LinkedIn plans to file for an IPO during 1Q - WSJ 
  • Goldman Sachs Healthcare CEO Unscripted Conference in NYC features Bristol-Myers, Medco Health, Medtronic, Amerigroup, Merck, Teva Pharma, Stryker, Celgene.
  • Boeing releases annual order, delivery figures, pre-mkt
  • Defense Secretary Robert Gates briefs Congressional leaders
  • AMR (AMR) said Dec. traffic increased 1.8%
  • Massey Energy (MEE) 4Q coal shipments missed forecast
  • Microsoft (MSFT)’s next Windows version will support System on a Chip (SoC) architectures, including ARM- based systems from Texas Instruments.
  • Resources Connection (RECN) 2Q adj EPS, rev. beat est.
  • Ruby Tuesday (RT) 2Q EPS, rev above est.
  • Sourcefire (FIRE) acquired Immunet for $21m, purchase will add to earnings after 2012
  • Symantec (SYMC) rated new market perform at Morgan Keegan
  • Tanger Factory Outlet Centers (SKT) announced two- for-one share split for Jan. 24 


  • One day: Dow +0.27%, S&P +0.50%, Nasdaq +0.78%, Russell 2000 +1.18%
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +1.26%, S&P +1.50%, Nasdaq +1.86%, Russell +1.46%
  • Sector Performance - BULLISH (Only 1 sector negative) - Financials +1.20%, Consumer Disc +0.82%, Tech +0.59%, Industrials +0.51%, Energy +0.40%, Healthcare +0.22%, Consumer Spls +0.03%, Materials 0.23%, Utilities (0.62%)               


  • ADVANCE/DECLINE LINE: 626 (+1413)  
  • VOLUME: NYSE 1042.92 (-4.35%)
  • VIX:  17.02 -2.07% YTD PERFORMANCE: -4.11%
  • SPX PUT/CALL RATIO: 1.80 from 1.50 (+20.94%)  


Treasuries were on the defensive today with the better-than-expected private payrolls and service sector data.

  • TED SPREAD: 17.33 0.539 (3.212%)
  • 3-MONTH T-BILL YIELD: 0.14%    
  • YIELD CURVE: 2.79 from 2.73


  • CRB: 329.20 +0.45%
  • Oil: 90.30 +1.03% - trading -0.41% in the AM
  • Oil Trades Above $90 Amid Signs of Economic Expansion, Fuel Demand Growth  
  • COPPER: 440.80 +0.89% - trading -0.24% in the AM
  • Copper Rises on Speculation Stronger U.S. Growth May Boost Metals Demand
  • GOLD: 1,376.72 +0.01% - trading 0.30% in the AM
  • Gold Drops for a Fourth Day as Stronger Dollar Curbs Demand From Investors


  • Rubber Futures Advance to a Record as U.S. Economy Improves, Yen Weakens
  • Australian Floods Mean Asian Steelmakers May Pay 33% More for Coking Coal
  • Wheat Declines on Speculation Higher U.S. Acreage May Ease Supply Concern
  • China Rare Earths Leave Toxic Trail to Toyota Prius, Vestas Wind Turbines
  • Robusta Coffee Gains on Speculation Higher-Quality Beans in Short Supply
  • Zimbabwe Can Hold Two Diamond Auctions This Year Under Kimberley Process
  • Nickel May Drop to $22,509, According to Commerzbank: Technical Analysis
  • Palm Oil Advances Gains as Dry Weather Threatens Argentina Soybean Harvest
  • Cotton Output in India May Exceed Estimate on Bigger Crop Area, Board Says
  • Australian Floods Slow Start of Beef Processing in Queensland, Swift Says
  • Copper Output From Sumitomo Metal Smelter May Be Reduced on Maintenance


  • EURO: 1.3183 -0.99% - trading -0.53% in the AM
  • DOLLAR: 80.258 +1.02% - trading +0.14% in the AM


  • European Markets: FTSE 100: +0.71%; DAX +1.15%; CAC 40: +0.89%
  • European indices have started the day on a firmer footing as yesterday's strong US ADP jobs report raises expectations for a supportive for todays non-farm payroll number.
  • Investors are still very much in buying mode and most sectors appear to be participating. A rebound in Basic Resource plays, plus ongoing strength in Oil are providing the main support in what has been a broad based move to the upside.
  • China has said it is willing to buy about €6B of Spanish public debt, according to Spanish newspaper El Pais.
  • Ireland would only be able to force losses onto holders of senior bank debt with the approval of the ECB, the main opposition party, Fine Gael, said today.  
  • UK Dec Services PMI 49.7 vs cons 53 and prior 53
  • Eurozone Nov Retail sales +0.1% y/y vs cons +2.2% and prior revised to +1.2% from +1.8%
  • Eurozone Dec Consumer Sentiment (11) vs cons (10) and prior revised (9.4)


  • Asian Markets: Nikkei +1.44%; Hang Seng +0.12%; Shanghai Composite (0.51%)
  • Japan rallied, but other Asian markets were mixed today.
  • Japan went up, with exporters leading the way on a weaker yen. JVC Kenwood soared 26% on an announcement it will raise equity capital.
  • Singapore +0.78%, Kim Eng Holdings was halted on reports that Maybank will offer to buy a 44% stake in a deal valuing the company at S$1.8B.
  • On a late recovery by miners and energy companies, Australia rose +0.21% slightly in light volumes.
  • Hong Kong +0.12%, with property developers extending yesterday’s gains, but mainland Chinese companies following China down. Chinese banks fell on a report that the country will not set a lending target for them this year. Li & Fung fell 2% on a midday report it will take over 490K sq ft in the base of the Empire State Building for an undisclosed price.
  • South Korea dipped -0.24%. Hyundai Motor rose 3% on raising its 2011 capex target 14% y/y.
  • Tokyo December office vacancies (13 bp) m/m, +82 bp y/y to 8.91%. 



VIP hold was high but December was still a very strong month.  Here are the property details.



As we’ve discussed, total gross gaming revenues rose 67% and slightly eclipsed October’s record setting month.  We estimate approximately 13-15% of the YoY growth was related to higher VIP hold.  Nevertheless, it was a very strong month.  Importantly, high margin Mass gaming revenue climbed 34% off of a difficult 33% comparison.  Mass growth continues to approximate the visitation plus China GDP equation.  VIP Chips (junket volume) increased 59% while VIP revenue (junket and direct VIP) climbed 82%.  Slot revenue increased 29%.


Direct play appears to have remained at 7.9% of VIP volume, similar to last year. Adjusted for direct play, market VIP hold appears to be about 3.1%, higher than last year's 2.7%.


In terms of market share, it was a great month for Wynn and MGM with both earning well above trend.  LVS suffered its second consecutive weak share month and it wasn’t hold related.  While LVS got back to trend in Mass share, VIP volume only grew 2% on a YoY basis, well below the market at 59%.  We think LVS will continue to lose share in 2011.


We are still going through the models but it looks like WYNN is tracking well ahead of consensus based on its Macau performance.  Preliminarily, we think total WYNN EBITDA could exceed the Street by 20-25% in Q4.  For LVS, there doesn’t appear to be upside to Q4 and we remain a little below the Street for company EBITDA.  Macau remains a small piece of MGM’s overall business but EBITDA there is tracking ahead of consensus which we think is sustainable and should help the IPO close this quarter.  Finally, MPEL looks like it should have no problem handily besting the consensus $106MM estimate.



YoY Table Revenue Observations


LVS table revenues rose 31% YoY as VIP revenues grew 32%, reversing the decline in November, and Mass revs increased 28%.  VIP RC only rose 2% because of underperformance at Four Seasons.

  • After two months of declines, Sands led the way for LVS, increasing 43.8% in table revenues.  Much higher hold relative to last December benefited Sands.  
    • VIP revenues increased 63%, with RC volume up 10%
    • Mass revenues increased 14%
    • Assuming 14% direct VIP play (same as 2Q & 3Q2010), we estimate that hold for December 2010 was 3.7% which compares to 2.5% hold last December, assuming 9% direct play (in-line with 4Q09).
  • Venetian was up 28%
    • VIP revenues rose 25%, with RC volume up 27%
    • Mass revenues increased 32%
    • Assuming 23% direct VIP play volume, we estimate that hold for December was 3.0% compared to 3.1% last December if we assume that direct play was 17% (in-line with 4Q09 levels).
  • Four Seasons eked out a 2% gain
    • Mass revenues soared 74%, highest growth of the year
    • VIP revenues dropped 18% as VIP RC volume tumbled 56%
    • Assuming 41% direct VIP play in December, implied hold is 1.9% compared to 1.3% in December 2009 assuming direct play was 28% (consistent with 4Q09)

Wynn Macau/Encore table revenues were up 72%, driven by an 80% increase in VIP revenues and a 39% increase in Mass revenues

  • Junket RC volume increased 40%. Assuming 12% direct VIP play, December hold was 3.9% compared to 3.0% hold experienced in December 2009 (assuming 12% direct play)

MPEL table revenues soared 120% with the growth driven by a 127% increase in VIP and Mass growth of 90%

  • Altira was up 80%, due to a 77% increase in VIP revenues and a 119% increase in Mass revenues
    • VIP RC rose a healthy 48%
    • We estimate that hold in December was 2.5% vs. 2.0% in December 2009
  • CoD table revenue increased 148% YoY, driven by 85% growth in Mass and 174% growth in VIP revenues
    • Junket VIP RC increased 85%
    • Again, hold benefited CoD.  Assuming 15% direct VIP play, hold was 3.4% compared to last December's hold of 2.3% assuming 18% direct play

SJM table revenues grew 62%

  • Mass was up 24% and VIP was up 85%
  • Junket RC volumes soared 89%
  • SJM's hold was roughly normal at 2.8%, similar to last year's.  

Galaxy table revenue grew 30%, despite tough hold comparisons, driven by a 31% increase in VIP win and a 25% increase in Mass. RC Volume increased 56.1%.

  • Starworld's table revenue increased 47%, driven by 50% growth in VIP revenues and 16% growth in Mass
  • Starworld RC volumes increased 70%.  Despite hold being close to normal, the comparisons from December 2009 were difficult.  December hold for the Group and Starworld was 2.8% and 3.1%, respectively, compared to last December's hold of 3.3% and 3.5% last year. 

MGM led the market with an astounding 209% table rev growth but December's hold almost doubled that of last year.

  • Mass revenue growth was 61%, while VIP revenues ballooned 267%
  • VIP RC grew 99%
  • Hold was high, at an estimated 3.4%, and was much higher than last December at 1.8%


Table Market Share


LVS table share rebounded 1.5% sequentially to 16.3%, still way below its trailing 12-mth average of 19.3%

  • LVS's share of VIP revenues rose to 13.3% from a historical low of 11.9%
  • VIP RC share dropped again to a new low of 10.9%, from 11.6%
  • Mass share gained 2% to 26.5%, in-line with its trailing 12-mth average
  • Sands market share increased by 110bps due to a 150bps gain in VIP share
  • Venetian gained 40bps to 9.1% sequentially, driven by a 150bps gain in Mass share
  • FS share remained unchanged at 1.2%

WYNN's table share was roughly unchanged sequentially at 16.9%, but way above recent trends

  • Mass market increased 60bps to 11.5%, its highest share this year
  • VIP revenue share decreased 30bps to 18.5% sequentially
  • VIP RC share dropped 2.5% to 14.1%

MPEL's table share decreased 50bps sequentially to 14.2%, driven by a 60bps increase in Mass and an 80bps decrease in VIP share. RC volume share increased 1.4% to 15.7%.

  • CoD's share increased 80bps
  • Altira's share decreased 1.2%, driven by a 1.5% decrease in VIP share

SJM's table share decreased by 1.5% to 30.6%, driven by a 120bps loss in Mass share and 150bps decrease in VIP share.  RC volume share increased 1% to 34%.

Galaxy kept its table share of 10.3%.

  • Starworld's market share increased 60bps sequentially to 9.1%
  • Group Junket RC share increased 40bps to 14.4%

MGM's table share continued its climb to 11.6%, the property's highest share since July 2009

  • MGM's share gain can be attributed to a 110bps increase in VIP revs
  • Mass share lost 1.7% from November to 7.4%
  • RC share increased 30bps to 10.6%


December Slot Revenue Observations


Slot revenue grew 29% YoY in December reaching a total of $99MM and accounting for 4% of total revenues

  • LVS slot revs actually decreased 3.2%
  • MPEL, Galaxy, and MGM had +70% slot rev growth
  • SJM slot revs rose 50%
  • WYNN slot revs increased 12%






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Taming inflation in China, Brazil, and India

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