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Expectations for a HK$20 BN+ month as some analysts are suggesting may be high but January should still be a record month.



Gross table gaming revenues were HK$10.08 billion in the first half of January.  Based on this data we are projecting full month gaming revenues (including slots) will come in at HK$18.5-19.0 billion.  Activity should slow in the last week given the proximity to the February 3rd start of the Chinese New Year celebration.  Still, anywhere in this range would represent a monthly record and generate YoY growth of 36-40%.


Market shares shifted significantly in the last month, at least between the two big US operators.  Wynn gave up 300bps compared to its share last week, mostly to LVS which gained 250bps.  Our intelligence in Macau tells us the shift was entirely hold related.  We will note that Wynn’s share remains above its 12 month average although below its recent elevated levels.  LVS is now right in-line with its depressed 3 month average.  We continue to be impressed with MGM and we believe they have been successful in driving bottom line results at the property as well.  Here are the shares:



Complex Simplicities

“I must forever make the complex the simple.”

-Martin Luther King, Jr.


Ironically enough, one of my best friends gave me “The Autobiography of Martin Luther King, Jr.” for my birthday a few weeks back. Notwithstanding that he didn’t know I’d be on my back reading for the last week, the timing of this gift was impeccable. Dr. King’s passion has forever made the complex the simple.


Complex Simplicities are what we chaos theorists wake up looking for each Global Macro market morning. One of my favorite risk management books of all time (“Deep Simplicity”, by John Gribbin) got me hooked on the basic principles of chaos and complexity theory back in 2006. Thank God for those teachings. They saved our clients and our firm a lot of money in 2008.


Investment opportunities in a globally interconnected ecosystem are omnipresent. While there may be Apple days in California and snow days in Connecticut, there is no such thing as “risk on” and “risk off” days in Global Macro markets. In fact, when I hear people say that, all I can do is smile. Accepting chaos theory in risk management means accepting uncertainty, every day.


Over the intermediate-term TREND, there is no such thing as market certainty. The only thing you can be certain of, after a +91.3% melt-up in US stocks since March of 2009, is that for the immediate-term groupthink session everyone on the Barron’s Roundtable is going to be bullish.


Being bullish or bearish on the amount of uncertainty you think there is going to be in a market price is an opinion. So is doing nothing. For now, from an asset allocation perspective, we’re doing more and more of nothing. As some market prices climb, we’re raising more cash.


This is what the Hedgeye Asset Allocation Model looks like to start off this week:

  1. US Cash: UP to 67% (versus 61% last week)
  2. International Currencies: DOWN to 18%
  3. International Equities: DOWN to 6%
  4. US Equities: UP to 6%
  5. Fixed Income: UNCHANGED week-over-week at 3%
  6. Commodities: DOWN to 0% (in the last 2 wks, I’ve sold all our Oil, Sugar, and Corn – and there are no rules saying I can’t buy them back lower)

Being in cash is a simple concept. While I do get some very complex questions about the nature of my cash position, most of the time the real complexity in the questions is born out of the problems associated with many institutions being mandated to be “fully invested.” I don’t have to be.


To be crystal clear on this, the Hedgeye Asset Allocation Model represents what I am personally doing with my investable capital. I’d be nuts to put my name on any other advice than that which I abide by myself. Again, from a transparency and accountability perspective, this is very simple.


Complex Simplicities: Did I think people who were jamming into bond and gold funds in Q4 of 2010 were nuts? Yes. Do I think people who are fully invested chasing US Equity indices up here are nuts? Yes. Do people who I think are nuts make money in this business? Yes.


But, sometimes (1998, 2000, 2001, 2002, 2008), people who get nutso invested blow up. The goal here, if you’ve made money in each of the last 3 years, is to make it a fourth -  not to implode.


Last week in Global Macro, other than in the $2.8 TRILLION US Municipal Bond Market, not a lot of things blew up. Here were the most important Global Macro market moves of the week:

  1. US Dollar Index was debauched for a -2.4% loss, taking it down for the 2nd week out of the last 3 as Republicans attempt to break spending promises
  2. Euro rallied +3% from its prior week’s lows of $1.29 (where we covered our short) as “I Have A Scheme” (Zero Hedge coined) on fiat paper goes global
  3. CRB Commodities Index closed at another weekly closing-high of 333; Dear Ber-nank, that was another +3.1% inflationary move in 19 commodities
  4. Oil prices inflated +4% week-over-week, and 71% of Americans say it’s an issue – really?
  5. Gold was down -0.6% and down for the 2nd consecutive week (we remain short of gold, GLD)
  6. US stock market Volatility (VIX) dropped another -9.5% to 15.46, testing its April 2010 lows when US growth bulls were last this horned up

There wasn’t enough pin action in credit spreads (US or Sovereign) for me to call it out and nominal US Treasury Yields didn’t do much on a week-over-week basis either (they remain in what we call a Bullish Formation – bullish on all 3 of our core investment durations: TRADE, TREND, and TAIL). That’s one of the main reasons why we love our cash so much. Global Inflation Accelerating is bad for de bonds, eh.


Complex Simplicities associated with our living in a higher-and-lower American society by the week aside, we’re looking forward to watching how this year’s Global Macro picture plays out post the beginning of the year “flows” thing. While in cash, waiting and watching for US stock-centric investors to react to something other than Apples and snow should be, at a bare minimum, worth the immediate-term absolute performance charge.


My immediate term support and resistance lines for the SP500 are now 1277 and 1299, respectively.


Best of luck out there today – it’s good to be back in the game,



Keith R. McCullough
Chief Executive Officer


Complex Simplicities - box

10 ways to play the spike in global inflation


This note was originally published at 8am on January 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

-Abraham Lincoln


I recently pulled off the shelf Doris Kearns Goodwin’s book "Team of Rivals" which looks at the political genius of Abraham Lincoln.  It’s an amazing account of how Lincoln, as president, was able to bring his “disgruntled opponents” together to complete the task of saving the Union.  As Lincoln did, Barack Obama must pull together a team of rivals and win the respect of his competitors to help us navigate the stormy seas ahead. 


If the United States’ economy were a vessel, it could be said that she has held up quite well over the past couple of years.  Through the Great Recession, government bailouts, flash crashes, and the most contentious political climate in some time, the United States keeps cruising. 


How much secular damage was sustained in the “economic storm” or was simply deferred by the Fed grabbing its cavernous bucket and bailing water from inside the ship back overboard is unknown. 


Consumers don’t know, politicians don’t know, CEO’s don’t know, and you can bet a dollar, I don’t know.  What I can tell you with certainty is that at some point the structural problems with the U.S. economy need to be addressed sooner rather than later.  Fans of Big Government enjoy preaching the folly of applying long term solutions to short term problems. 


While not ideal, clearly long term solutions that ensure economic progress in the long term, notwithstanding short term pain, are preferable to short term solutions that never address the long term, leaving us and our posterity to forever bail buckets of water over the side of the ship while we hope and pray for a miracle. 


All the while, the long term problem grows larger, but politicians and policymakers keep their jobs.  The mounting of debt upon debt by governments around the globe is leading to inflation on a global basis. 


I would be remiss to ignore the various supply-side shocks that have occurred around the world related to weather and other factors.  However, simply stated, the inverse correlation between the dollar and commodities denominated in dollars remains high and the U.S. consumer is feeling the effect of that.  U.S. consumers are not alone; India, Brazil, China and many other countries around the world have seen inflation break out to the upside recently. 


Food inflation, in particular, is causing significant social unrest in some countries which is drawing political attention.  India’s government has adjourned to address the problem of rising food costs there and Algeria saw riots yesterday over food costs.  For now, consumers’ wallets in the U.S. have been relatively shielded from the impact of food costs increasing over the past 6 months.  However, if and when these costs are passed along in addition to the backdrop of high gas prices, it could greatly impair the “recovery” that is now consensus.


Today, Thailand joined the party and raised its benchmark raised interest rates for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation.  And this morning, officials from Mozambique to China are signaling their belief that rates in their respective countries will be raised in the near-term. 


On a more granular note, one company that will begin to feel the pain of higher food inflation in 2011 is McDonald’s and I don’t believe the bullish consensus has fully accounted for this.  Last year McDonald’s saw its basket of commodities decline by 5-6% and, accordingly, restaurant level margin rose by over 200bps from lower food costs alone.  I have other concerns which are more structural in nature and those will be addressed, in detail, on a conference call with clients on Friday. For qualified prospective institutional subscribers, please email sales@hedgeye.com for more details.     


Also on Friday, the Hedgeye Macro team will be discussing its three themes for the first quarter of 2011 and they are:


(1)    American Sacrifice - We are bullish on the USD and we will focus on how the Q1 macro calendar of events (Ron Paul auditing Bernanke, midterm election spending cut promises, the debt ceiling debate and debt/deficit commission decisions) are supportive of a strong USD as the country begins to address its long-term fiscal problems.

(2)    Trashing Treasuries – We are bearish on US Treasuries.  The breakout in global inflation, sovereign, State, and municipal risk and rising global interest rates are a problem for treasuries.

(3)    Housing Headwinds Phase II – We remain bearish on housing and continue to believe that a decline in home prices will be a governor on consumer consumption in 2011.  We will update our view on how much further home prices have to fall over the next 12-months according to the supply and demand issues facing the industry.


It’s now just under two hours before the market opens and equity futures are trading higher in a continuation of yesterday’s modest gains with the early focus centered on Portugal's bond auction which went better than expected.  Also overnight, bullish sentiment increased to 57.3% from 54.5% in the latest Investor's Intelligence poll, while the ABC consumer comfort index improved to -40 from -45; it is now at its highest level since 2008. 


While all of this is good news for equity markets, it’s an ominous sign that all of the early dogs of the S&P 500 so far this year (YTD price changes below) are predominately consumer names that have been impacted by either weaker-than-expected consumer spending or inflation pressuring margins or a combination of both.  I expect this list to grow as debt mounts, sovereign debt concerns accumulate, and inflation is passed through to the consumer.



MACY'S: -8.14%

TARGET: -8.22%

GAP: -8.22%



GAMESTOP: -11.76%





I’m not the only one using a “stormy” metaphor today as the snowstorm continues outside and CNBC started Squawk Box today with the Doors classic song “Riders on the Storm.” 


“Into this house we're born
Into this world we're thrown
Like a dog without a bone
An actor out alone
Riders on the storm”


Function in disaster; finish in style

Howard Penney    


STORMY SAILING - EL chart of day 1.12.11

The Week Ahead

The Economic Data calendar for the week of the 17th of January through the 21st is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - calll1

The Week Ahead - calll2

Ten Ways to Play the Spike in Global Inflation

This note was originally published January 14, 2011 at 14:31 in Macro

Conclusion: Accelerating inflation globally has been a key factor in our bearish outlook for emerging market bonds and equities over the past three months. Despite our cautious stance, there are several key, non-consensus ways to play this theme on the long and short side over the intermediate-term TREND and long-term TAIL.

This morning, we came across an article that highlighted some key broker sentiment regarding emerging market investments. The article points out how Goldman Sachs and JPMorgan have been reneging on their bullish EM bets over the past few weeks and months as a result of hawkish monetary policy, instead opting for predicting outperformance by US equities.


Their retreat from emerging markets offers a tactical backboard for alpha-generating investment opportunities. Below, we’ll highlight some of the ideas we’ve been fond of on both the long and short side over the intermediate-term TREND and long-term TAIL.


For the sake of keeping this note short, we’ll be brief; simply email us if you’d like to see the research reports behind the ideas below:


COMMODITIES: FOOD – As we last saw in summer of ’08, deadly riots are breaking out globally in protest of rising food prices, currently at all-time highs. Perpetuated by global supply shortages, we anticipate a meaningful increase in import demand for many food products throughout the course of the year as developing nations look to rebuild domestic stockpiles. 

  • Long Sugar: Between flooding and droughts, adverse weather is causing key producers and exporters to revise down their production and export estimates (Brazil, Australia, Thailand, etc.). Further, we think market expectations of Indian stockpile rebuilding have gotten too hopeful. India is shortly removed from a major supply shock; if domestic production falters in any way, expect India to act quickly and resume imports as a way of alleviating any potential scarcity within its domestic market.
  • Long Corn: Current prices – at a two-year high – are supported by a global supply/demand imbalance. Domestic stockpiles are at a four-year low and demand for the grain, which is more inelastic than supply, is sticky in the US and the rest of the world. We anticipate accelerated import demand from China in the coming months in an effort to help ease domestic food inflation, currently trending at a 28-month high of 11.7% YoY. 

Ten Ways to Play the Spike in Global Inflation - 1


COMMODITIES: OTHER – Severe weather is adversely affecting many key agricultural-producing regions globally (flooding in Australia, mudslides in Brazil, etc.). Getting ahead of growing supply/demand imbalances is key, as agencies like the USDA tend to be rather hopeful with their production estimates, leading to downward revisions to their forecasts in subsequent reporting. 

  • Long Cotton: Because of severe supply-side issues, cotton prices have gone parabolic. Our best-in-class Retail/Apparel/Footwear Team tells us management teams have been delaying purchases of new inventory, citing high cotton prices. Last we checked, retailers need stuff to sell, so we anticipate an acceleration of corporate demand over the coming quarters as, which will only add to the current supply/demand imbalance. 

Ten Ways to Play the Spike in Global Inflation - 2


CURRENCIES – As monetary policy tightens globally, several countries will see their currencies move as a result of: a) slowing global growth; b) the direction of global interest rates and rate differentials; and c) key moves in their basket of counterparts. 

  • Long Chinese yuan: The last time China experienced a food-price shock, it revalued its currency roughly +20% over the next three years. We look to history to remind us that nothing gets Chinese officials more nervous than food inflation/food shortages. China’s desire to curb food inflation and prevent domestic riots and famine far exceeds their desire to support exporters with an undervalued currency. China has been adverse to hiking interest rates to fight inflation of late, but should prices get further out of hand, we expect them to implement a more forceful tightening cycle. Lastly, as China revalues the yuan upward, it gives them more purchasing power of things priced in US dollars, so expect all commodities to act accordingly and appreciate, lest China soak up the world’s supplies.
  • Long US dollar: Rising Treasury yields, which are being dragged higher by rising global bond yields and heightened inflation expectations are supportive of a stronger US dollar. In addition, the combination of a growing fear of emerging market tightening mentioned above and an illusion of accelerating US growth has many investors opting for US equities instead. Further, the dollar receives incremental bids as investors cash out of EM investments and into US stocks.
  • Short Gold: With real interest rates trekking steadily upward and the US dollar following close behind, gold prices come under pressure as this commodity is forced to join the competition for yield. Further, sober fiscal policy in the US (or at least the talk thereof) keeps a lid on the “Fear of Government” trade – at least for now.
  • Short the Japanese yen: After being trapped in a deflationary spiral since the early 90’s, Japan might be the only country in the world that welcomes inflation with such earnest. In fact, Japan may opt for additional monetary easing over the next three months if domestic growth comes in at the low end of our estimates. Japan, an economy leveraged to manufacturing and exports, will feel the brunt of a slowdown in global growth which is being perpetuated by global tightening. Lastly, as a key constituent in the yen basket, a strong US dollar lends support to this thesis. 

Ten Ways to Play the Spike in Global Inflation - 3


EQUITIES – As we have seen many times in financial market history, inflation can erode returns on equities by reducing company earnings via margin squeezes or by investors discounting slowdowns in growth as central banks tighten monetary policy. Despite this, there are ways to play this on the long and short side depending on the type of tightening measures implemented. 

  • Long Brazilian Infrastructure (BRXX): Like many countries globally, Brazil has been struggling with its own catch-22 in trying to balance the tightening of monetary policy with their desire for a weak(er) currency. Given, Brazil, like China, has been “cute” with its tightening measures, opting for fiscal conservatism among other things. This push has led newly-elected President Dilma Rousseff to loosen Brazil’s public sector hold on infrastructure development and opt for private sector involvement. The current mudslides in Rio present a major opportunity for her to prove she’ll let capitalism take hold in this burgeoning industry. Key long-term catalysts are Brazil hosting the World Cup in 2014 and the Summer Olympics in 2016.
  • Short Indian equities: Simply put, India is way behind the ball with fighting inflation. As we called for back in November, WPI inflected and accelerated in December to +8.43% YoY. The central bank’s recent efforts to add liquidity to its banking sector only exacerbate this headwind. Of all the countries we monitor, India is likely to have to tighten monetary policy the most in 2011, crimping domestic growth alongside a compression in corporate margins from higher input costs.
  • Short Japanese equities: As mentioned prior, Japan is an economy leveraged to manufacturing and exports, so it will disproportionately feel the brunt of a slowdown in global growth which is being perpetuated by global tightening. Many think a weak yen is beneficial to Japanese exporters, and it is – to a point. When commodity inflation takes off globally, input costs rise because of Japan's propensity to import inflation via a weak(er) yen. This compresses margins in Japan because neither Japanese retailers nor exporters are willing to take up price as a result of their deflationary mindsets. 

Ten Ways to Play the Spike in Global Inflation - 4


Please keep in mind that these are merely ideas to have on your screens and do not represent tactical calls to run out get long/short right this minute. When Keith returns from recovering from achilles surgery next week, we’ll be able to provide quantitative levels should you look to get involved with any of these ideas.


 Have a great long weekend,


Darius Dale


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.