Blame Yourself

This note was originally published at 8am on March 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It was a matter in which we have heard some other persons blamed for what I did myself.”

-Abraham Lincoln, 1862


That’s one of the many outstanding leadership quotes in the book I highlighted yesterday, “Team of Rivals – The Political Genius of Abraham Lincoln.” If he wants to get re-elected, President Obama should think long and hard about Lincoln’s example of transparency, accountability, and trust. Rather than giving lip-service to being like the great American leaders who came before him, Lincoln was his own man - and he lived these principles out loud.


Whether you like following politics or not, you need to get the direction of their leanings right if you want to get your Global Macro positioning right. Currency markets move on policy – policy is set by politicians. And while that’s a pathetic and sad statement about our said “free market” system altogether, you can’t get bogged down by it – you need to play the game that’s in front of you.


Currently, the most important game in Global Macro Risk Management is the cross-asset-class correlation-risk associated with what the US Dollar does. If you get policy right, you’re likely to get the US Dollar right. If you get the US Dollar right, you’ll get fewer things wrong.


This is where my only political advice to the President of the United States (or whoever realizes that they could win his office) comes into play – get the US Dollar right (strengthen it) and you’ll Deflate The Inflation. If you Deflate The Inflation, The People will believe in you.


Strong US Dollar Policy isn’t a partisan thing. It’s an American thing. Reagan had it. Clinton had it. Nixon and Carter devalued it. Nixon and Carter also had a Dollar Debauchery man at the Fed named Arthur Burns.


Reagan had Volcker. President Obama has The Bernank.


Obama will be the first to tell you he took on a lot of Bush’s baggage. He’ll be the last to tell you he made a mistake in taking on Bush’s Bernanke. So, Mr. President, let’s strap on the accountability pants, Blame Yourself, and take a walk down that path – because your General-in-Chief on all things US economic policy definitely won’t be doing it for you anytime soon. Some of his Generals in the Fed’s ranks will.


In one of the great 2011 accountability headlines coming out of the US Federal Reserve last night, Kansas City Fed President, Thomas Hoenig, explained the following by effectively blaming himself:

  1. “Once again, there are signs that the world is building new economic imbalances and inflationary impulses…”
  2. “The longer policy remains as it is, the greater likelihood these pressures will build and ultimately undermine world growth…”
  3. “…remember, I’m not advocating tight monetary policy… I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”

Now this isn’t Hoenig’s first rodeo. He joined the Federal Reserve Bank of Kansas City in 1973. He is the longest serving member at the Fed and his 8 consecutive “dissents” (English for publically disagreeing with The Bernank) recently tied Henry Wallich’s 1980 record for most disagreements with Fed policy (Wallich has been validated as being very right). Hoenig is a known inflation hawk – most likely because he faced it in the 1970s and joined Wallich and Volcker in fighting it.


Does the President of the United States really want to test the waters on $120/oil and 1970s style Jobless Stagflation? Does he want to roll the bones on The Quantitative Guessing experiments in Japan gone bad? Does he want to run against someone in 2012 who will crush him like a bug with the simple conclusion that Growth Slows As Inflation Accelerates?


I don’t think so. Remember, he’s a professional politician – after all…


As opposed to someone holed up in a room of academia’s Keynesian Kingdom, I’m in the soup. I’m managing risk in this cross-asset-class correlation-risk game each and every day. I have been writing these morning strategy notes since I started this firm without bailout moneys 3 years ago – and I’ve made 19 calls on the US Dollar since (long and short side) – and I’ve been right 19 times. If you want a USD opinion – at least ours has some credibility.


Call me politically irrelevant. Call me Canadian. Call me names from the heavens, Mr. Big Government Intervention man. But don’t call me a McClellan (1862) in this currency war, because it’s The US Monetary Policy that’s managed by you, the unaccountable generals, at the front of The Inflation lines who are perpetuating the problem.


Back to the Global Macro Grind


Now that the IMF is cutting their US GDP Growth estimate for 2011 this morning (to 2.8%), I’ll assume that our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus. The leading indicator that is the price of Dr. Copper remains bearish and broken with intermediate term TREND resistance (which was longstanding support) at $4.38/lb.


Consensus doesn’t mean that Growth Slowing signals don’t continue to flash amber lights – it simply means the 6.5% intra-quarter SP500 correction had more to do with a longer-term global reality (piling sovereign debt-upon-debt-upon debt structurally amplifies inflation and impairs growth) than a tsunami of complacency.


Japanese and Chilean Industrial Production Growth reports for February (pre quake) came out yesterday and both slowed again sequentially. Eurozone inflation (CPI) for March accelerated again, sequentially. And while the US Dollar trading up for 2 of the last 3 weeks has helped Deflate The Inflation this week (bullish for Equities), it looks like that reverts back to the mean of Burning Buck and up oil again this morning. I’m staying long oil and long gold.


My immediate-term TRADE lines of support and resistance for oil are now $102.13 and $107.95, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are now 1305 and 1333, respectively.


Looking forward to seeing everyone at Hedgeye Soho’s launch party in NYC this evening – no government bailout moneys required for us to buy you drinks.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blame Yourself - Chart of the Day


Blame Yourself - Virtual Portfolio


Notable news items and price action from the last twenty-four hours

  • SBUX CEO Howard Schultz spoke at an event in San Francisco last night and spoke on the need for companies to do more for staff benefits, the importance of local relevancy in China, and the mistakes SBUX has made in China.
  • PFCB was upgraded yesterday to “Buy” from “Neutral” at Janney Montgomery.  The stock gained on accelerating volume yesterday.
  • RUTH gained 2% on accelerating volume yesterday.
  • CMG has chosen Rokkan, a New York-based digital agency, for several digital marketing and brand awareness initiatives for 2011.  Rokkan will be working with CMG to develop its digital marketing and execution including online sales, customer service infrastructure, local store marketing strategy, and out-of-store ordering through mobile and web on
  • Pret A Manger continues to grow in the U.K. despite the shrinking services industry in that country.
  • As a result of the Latin America beverage agreement, PepsiCo will now become the largest soft drink provider for BKC restaurants in LatAm markets.
  • BNHNA results released yesterday revealed that, for the third four-week period, both total restaurant sales and Company-wide comparable restaurant sales increased 7.0% to $27.9 million from $26.1 million, representing the fourteenth consecutive period of comparable restaurant sales growth.
  • DENN said that its board has approved a 6m share repurchase program.




Howard Penney

Managing Director

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New record despite low hold



March was another record month for Macau with total gaming revenues increasing 48% off of a 42% comp.  Growth in March was achieved in spite of low market hold.  Assuming direct play of 8.7% or RC of $6.1BN, March hold was only 2.60% compared to a hold of 2.67% in March 2010 (assuming 7.0% direct play or $3.1BN).  If hold in both periods was 2.85%, March YoY GGR growth would have been up 50%.


Every property that we track appeared to have below normal hold, with the exception of Starworld and MGM.   The US operators lost share to their Asian competitors – specifically SJM and Galaxy.  MGM experienced its third best market share since opening and should have another good quarter although hold was much lower sequentially.  MPEL also had a standout month in March volume-wise but experienced some very bad luck in VIP and we think Mass. 



Y-o-Y Table Revenue Observations:


Total table revenues grew 48% YoY this month despite low hold in the month, with Mass growth of 31% and VIP growth of 54%.  Junket RC grew 55% in March.


LVS table revenues grew 17%

  • Sands was up 10%, driven by a 2% increase in VIP and a 23% increase in Mass
    • Despite an easy comp, hold continued to impact Sands for the second month in a row.  Junket RC chip grew 19%.  Hold, adjusted for 15% direct play (in-line with 4Q10), was about 2.2%, compared to 2.6% hold in March 2010, assuming a 10% direct play estimate (in-line with 4Q09)
  • Venetian was up 15%, driven by a 7% increase in Mass and 21% increase in VIP
    • Junket VIP RC increased 42%.  Assuming 19% direct play, in-line with 4Q10, we estimate that hold was 2.7%, compared to 2.5% hold in March 2010 (assuming 21% direct play).
  • Four Seasons was up 41% y-o-y driven by 34% VIP growth and 85% Mass growth
    • Junket VIP RC increased 30%. Assuming 50% direct play, hold was 2.5% compared to an estimated hold of 2.7% in March 2010 assuming direct play levels were in-line with 4Q09 at 43%.

Wynn table revenues were up 57%

  • Mass was up 59% and VIP increased 57%
  • Junket RC increased 45%
  • Assuming 11% of total VIP play was direct, we estimate that hold was 2.5% compared to 2.3% last year (assuming 10% direct play)

MPEL table revenues grew 58%, driven by Mass growth of 59% and VIP growth of 42%

  • Altira was up 45%, with Mass continuing its tear, up 71% while VIP grew 43%
    • VIP RC was up 25%
    • Hold comparisons were easy in March. We estimate that hold was 2.7% compared to 2.3% last year.
  • CoD table revenue was up 70%, driven by 38% growth in Mass and 82% growth in VIP
    • Junket VIP RC grew 122% - more than any other property in Macau.  However, bad luck heavily impacted results - despite easy comps.  March 2010 hold was 2.5% (assuming 15.2% direct play) vs. 1.9% this month, assuming 18.5% direct play (compared to 19% in 4Q2010)

SJM revs grew 46%

  • Mass was up 28% and VIP was up 55%
  • Junket RC was up 55%

Galaxy table revenue was up 46%, driven by 39% growth in Mass and VIP growth of 47%

  • Starworld table revenues grew 49%, driven by 26% growth in Mass and 51% growth in VIP
  • Junket RC grew 38% at Galaxy Group and 40% at Starworld
  • Galaxy was the only concessionaire in March to hold above theoretical levels. We estimate that Galaxy held at 3.14% this month.

MGM table revenue was up the most in March, growing 96%

  • Mass revenue growth was 40%, while VIP grew 115%
  • Junket rolling chip growth was only second to CoD’s at 121.7%
  • Assuming direct play levels of 15%, we estimate that hold was 2.8% this month – in line YoY 


Sequential Market Share (property specific details are for table share while company wide statistics are calculated on total GGR, including slots):


LVS was the biggest share loser in March with share dropping 2.4% to 15.6% from 18.1% in February

  • Sands' share decreased 80bps to 4.8% - an all-time low for the property
    • The decrease was driven by a 70bps decline in VIP market share to 3.7%, an all-time low for property.  RC share was 4.1%, up 10bps sequentially, but below the 2010 average of 4.5%.
  • Venetian’s share plunged 2.2% to 7.9% from 10.1% in March – hitting a record low for the property
    • Mass share decreased 80bps to 14.1% from 14.9% in February (an all-time low for the property)
    • VIP share decreased 2.7% to 6.0% - the second worst month for the property after Jan 2011
    • Junket RC increased 10bps to 5.8%, which compares to an average of 6.3% share in 2010
  • FS share increased 20bps to 2.5%
    • VIP share increased 20bps to 2.7%
    • Mass share increased 10bps to 1.8%      
    • Junket RC share increased 10bps to 1.5%

WYNN's share decreased 1.2% to 14.0% from 15.2% in February, driven by a combination of low VIP hold and some share loss in Junket RC

  • Mass market share increased 70bps to 11.9%, compared to an average of 10.1% in 2010
  • VIP market share decreased 1.6% to 14.3% sequentially, below with its 2010 average of 16.0%
  • Junket RC share decreased 90bps to 14.7%, below Wynn’s 2010 average of 15.2%

MPEL's market share decreased to 14.1% from 15.2% in January – beating out Wynn by 10bps for 3rd place

  • Altira’s share increased 10bps to 5.2%
  • CoD’s share decreased 1.3% sequentially to 8.7% - 80bps above Venetian’s table market share!
    • Mass market share decreased 2.2% to 8.1%, lower than February's all-time high of 10.3%
    • VIP market share decreased 1.0% to 8.9% while Junket RC share increased 1.6% sequentially to 10.4% (compared with 5.8% share for Venetian).

SJM was the largest share gainer this month with total GGR jumping to 33.8% up from 30.6% in February. This was SJM’s best share month since April 2010.

  • Mass market share increased 1.5% to 40.8% while VIP share increased 3.8% to 32.8% (SJM’s best share in 40 months)
  • Junket RC share increased to 34.2% from 33.6% in February

Galaxy was the other big share gainer in March – gaining back its February losses (-2.3%) to 11.4% share

  • Starworld's market share jumped 2.5% to 9.6%
  • Share gains were largely VIP driven

 MGM's share decreased 80bps to 11.0%, from 11.8% in February

  • Mass share decreased 30bps to 8.2%
  • VIP share decreased 1.2% to 11.5% from 12.7% in February
  • Junket RC decreased 2.0% to 10.1%, above the property’s 2010 average of 8.4%


Slot Revenue:


Slot revenue grew 42.5% YoY in March to $118MM, just $2MM below February’s record month

  • MGM slot revenues grew the most at 109% reaching $19MM – a record for the property
  • At 74% YoY, Galaxy had the second best growth – granted, on a very small base. March slot revenue reached $4MM.
  • SJM grew 61% to $19MM
  • Wynn’s slot revenue grew 46% YoY reaching $24MM – the second best month for the property following a record February
  • MPEL’s slot revenues grew 37% reaching $23MM – setting an all-time high for the company
  • LVS had the slowest slot growth at 10%, granted off of the highest base. Slot revenues were $30MM.







A Tale of Two Budget Battles

If we look at recent rhetoric from both the Democrats and Republicans, it seems that an agreement on the 2011 budget is not close.  In fact, according to Michael Steele, Speaker of the House John Boehner’s spokesperson, “the Speaker repeated to the president that there is no ‘deal,’ and he will continue to push for the largest possible spending cuts.”  This was in response to a summary briefing from the White House Press Office that stated:


“The President made clear that we all understand the need to cut spending and highlighted the progress that has been made to agree to all work off the same number — $73 billion in spending cuts in this year alone.”


Like any good political battle or negotiation, neither side is, at least publically, going to shift their position.  In this battle, the deadline is Friday to pass the budget to fund the government though this fiscal year, which ends in September 2011.


Both sides agree that cuts are needed, but the issue is both the size and location of cuts.   Currently, the Republicans are looking for $61BN in discretionary budget cuts, while the Democrats have proposed $33BN in budget cuts.  Further, some Democrats actually believe they have already agreed on the $33BN in cuts.   As Nevada Senator Harry Reid said over the weekend, “We’ve agreed on a number.”  Republicans, as emphasized by the comments from Speaker Boehner’s office above, do not concur that a number has been agreed upon.  A larger issue could be the nature of the cuts, as the Republican-proposed cuts focus on a number of areas of popular left-leaning spending, such National Public Radio, Planned Parenthood, and the Environmental Protection Agency.


Interestingly, and not surprising given the dire fiscal outlook of the United States, cutting the budget is becoming increasingly popular amongst the electorate.  In fact, according to a recent poll from Rasmussen, not only do the majority of voters support spending cuts, but 53% actually believe that the cuts proposed by the Republicans are too small.    This poll coincides with a number of polls that have shown President Obama’s approval rating on decline from its highs earlier in the year.


According to the Real Clear Politics poll aggregate, President Obama’s approval hit 12-month high on January 24th and has since been in steady decline since.  As of today, Obama’s approval rating was 46.4.  The rapid decline in approval rating in the Real Clear Politics aggregate is underscored by certain polls as well.  Specifically, the most recent poll from Quinnipiac University showed  that U.S. voters disapprove of President Obama’s performance by a margin of 48 to 42 percent and oppose his election by a margin of 50 to 41 percent.  According to the poll, the most negative areas for Obama were his handling of the economy, the budget deficit, and foreign policy.


In the budget decision that must be made by Friday, it is unlikely that President Obama wins many political points.  Regardless if a resolution is reached, it will not do much to cut the overall budget and will likely be less than the proposed Republican cuts, which, if we believe the Rasmussen poll, is a smaller budget cut than would lead to approval from the broad electorate.  In the longer term, though, coming out strongly in support of budget cuts, even if this means going along with Republican proposals, could help Obama's approval rating.


As it relates to the Republicans and the Tea Party component in particular, they likely won’t be satisfied with any reasonable outcome this week.   For many of the first term Republicans in Congress, the debt and deficit are indeed personal.  As Republican Congressman Blake Farenhold from Texas’s 27th District put it:


“The people who seem to be afraid of a government shutdown are worried about getting elected in two more years. I’m worried about having to go home and tell the folks I grew up with, and intend to spend the rest of my life with, that I’m a liar.”


Ultimately, though, it will be a political decision for the Republicans, and in particular the Tea Party wing, about winning the larger fiscal battles that loom in front of them.  While the 2011 budget is important, and even personal, the 2012 budget debate begins in earnest this week and the need to extend the debt ceiling begins shortly thereafter. Given this, it is likely that a compromise is reached this week, but, really, the battle is just beginning. Stay tuned.


Daryl G. Jones
Managing Director

A Less Consensus Way to Stay Long of The Inflation

Conclusion: The global currency market is telling us to remain long of The Inflation, which, among many things, includes being short emerging market debt. Relative to consensus, we ascribe greater probability for accelerated EM rate hikes over the intermediate term.


Position: Short EM local currency debt via the etf ELD.


On Friday afternoon, we initiated a short position in WisdomTree’s Emerging Markets Local Debt Fund (ELD) within the Hedgeye Virtual Portfolio. While certainly not a new idea (we’ve been bearish on EM bonds since early November), we did see an attractive entry point on the short side, with the ELD trading at just over 1% below its TAIL line of resistance at $52.75.


A Less Consensus Way to Stay Long of The Inflation - 1


As a recap, the core tenet of our bearish thesis on EM local currency bonds primarily stems from the intense commodity reflation we’ve seen since Jackson Hole. Such increases in commodity prices apply significant upward pressure on the reported inflation rates of developing nations, as food, energy, and other primary goods typically garner higher weightings in their CPI calculations (relative to developed nations).


As such, we’ve seen central banks from Asia, to Latin America, to Emerging Europe tighten monetary policy over the last six months or so; China, Indonesia, South Korea, Thailand, Brazil, Russia, and Poland are notable countries currently engaged in a rate-hiking cycle.


As crude oil prices continue to inch higher on weak US dollar policy and MENA instability, we anticipate the transposing effects of higher energy prices to continue percolating throughout their economies, as cost increases get increasingly passed through to consumers. That is likely to result in an accelerated pace of rate hikes, as traditionally dovish EM central banks like Mexico are forced to react to inflationary forces that are less transient in nature.


It is our official call that crude oil continues higher over the intermediate term, with potenital upside beyond $120 on WTI. We stick by our long-held view that the situation in MENA will not be short lived, contrary to many pundits who incorrectly predicted near-term resolution earlier in the year. In addition, we don’t see any meaningful-enough shifts in US monetary and fiscal policy capable of stabilizing the dollar above its TREND line of resistance.


A Less Consensus Way to Stay Long of The Inflation - 2


The US Dollar Index is in a Bearish Formation from a quantitative perspective, which suggests that inflation is more than likely here to stay over the intermediate term. While that is subject to change with more price, volume, and volatility data, for now, the global currency market is telling us to remain long of The Inflation, which, among many things, includes being short emerging market debt. And given the XLE’s run-up YTD (+17.5% vs. only +6% for S&P 500), we suspect some investors might want to start looking for less consensus ways to play this trade.


Darius Dale


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