Buffett Behavior

“Human behavior, not monetary behavior, is the key…”

-Warren Buffett (May 1977)


“And when very human politicians choose between the next election and the next generation, it’s clear what usually happens.”


That’s clear, Mr. Buffett. Crystal.


I wrote my senior thesis on Warren Buffett while I was banging away on a typewriter here in New Haven, CT almost 15 years ago. Time flies. But history’s lessons don’t.


The aforementioned quotes come from a Fortune article Buffett wrote in May of 1977 titled “How Inflation Swindles The Equity Investor.” This was during the post Arthur Burns (last Fed Chief to attempt to monetize the US Debt) and Richard Nixon period, when Jimmy Carter promised to carry on the dual Fed/Presidential office mandate to attempt to inflate their way to prosperity.


The problem, of course, is that too much inflation slows growth… And Growth Slowing As Inflation Accelerates perpetuates The Jobless Stagflation… And the stock market pays a lower multiple for The Stagflation.


Back to our very human Keynesian politician …


Tonight, Le Bernank will be speaking in Atlanta where he’ll talk around A) cutting his GROWTH forecast and B) raising his INFLATION forecast (again, after the fact). While being a lagging indicator isn’t a new position for the Fed’s Chief, it’s important for Risk Managers to focus on Gaming His Almighty Policy. Across asset classes in the US, here’s how we think the market will respond:

  1. UST Bonds – Indefinitely Dovish (Q2 Macro Theme); upside in long-term bonds to 4.16% on the 30 year yield (immediate-term)
  2. US Stocks – Jobless Stagflation (1-1.5% GDP growth w/ 3.5% headline CPI; markets pay a lower multiple for The Stagflation)
  3. US Dollar – Indefinitely Dovish; should equate to further downside pressure in USD to 73.76 (a higher-low)

My lowest conviction Global Macro position is long USD into and out of this political pandering. I still like long-term bonds (TLT), UST Flattener (FLAT), and Gold (GLD).


On the short side, I covered some shorts yesterday and will look to re-short strength opportunistically today/tomorrow. So far, the best proxy product I can produce to express my risk management view of a traditional hedge fund’s NET EXPOSURE (longs minus shorts) is the LONGS minus SHORTS component of the Hedgeye Virtual Portfolio (chart below).


I know that’s not a perfect proxy, but I also know it’s a lot better than whatever the sell-side is still using to communicate their pre-2008 horse-and-buggy-whip research. With the SP500 being down now for 4 consecutive-days and 6 consecutive weeks, at Hedgeye we called yesterday a “short covering opportunity”, moving from net neutral in the Hedgeye Virtual Portfolio to 13 LONGS and 10 SHORTS.


That doesn’t make me wild and crazy long. It just means that I won’t lose an eyebrow as the machines fire up this morning’s S&P Futures. If you want to survive The Stagflation, you need to manage risk, real-time – and yes, that does include trading.


Managing risk (or trading) around the aforementioned Stock, Bond, and Currency market catalysts isn’t easy. Neither is attempting to justify being long the US Financials (XLF) with “valuation” as your backboard. Valuation isn’t a catalyst when stock prices are falling. The Financials (XLF) are down -13.1% since their YTD high on February 18th, 2011. “Cheap” stocks get cheaper.


In the same 1977 Fortune article, in asking Buffett “why does a man who is gloomy about stocks own so much stock?”… Buffett said: “Partly, it’s a habit…”


He’s partly human too. And “human behavior, not monetary behavior, is the key…”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.46-102.47, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett Behavior - Chart of the Day


Buffett Behavior - Virtual Portfolio


MCD will announce sales numbers for May on Wednesday, June 8th, before the market open.  April was a strong month for MCD, with comps comps coming in at 6% on a global basis and +4%, +6.5%, and +6.5% in the U.S, Europe and Asia, respectively.  For the U.S., this print constituted acceleration in two-year trends of approximately 30 basis points (all coming from increased pricing). 


Despite the April U.S. number far outstripping consensus, we are looking for a slowdown in two-year average trends of approximately 70-80 basis points, slightly worse that consensus at 65 basis points.  There was a slight calendar shift between the number of weekdays and weekend days in May 2011 versus May 2010.  May 2011 had one additional Tuesday, and one less Saturday, than May 2010.  I would expect a slight, negative calendar impact on May comps as a result.


Overnight, McDonald’s Japan (35% of the comp base) announced that May same-store sales we 0.9%, which was a significant slowdown from the 3.6% level in April.  I would also note that the BBC is reporting this morning that Australian butchers are reporting a drop in beef sales of 10-15% after ABC broadcast an investigation into animal cruelty in Indonesian abattoirs.  The program featured graphic footage of animals being slashed and whipped.



For the U.S., which remains the most important division for MCD, I remain cautious on the company’s ability to “comp the comps” as we head into the key selling season for beverages and lap the national roll-out of beverages last year. 


Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts. 



U.S. – facing a compare of +3.4% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world).  To keep the beverage sales momentum going, Frozen Strawberry Lemonade was launched in May as compared to the official National rollout of Frappes was in May 2010.  I’m looking for the USA to come in at +3%, between the “neutral” and “bad” ranges outlined below.


GOOD: A print above 4% would be perceived as a good result, implying two-year average trends roughly 20 basis points below those seen in April.  Depending on the magnitude of any negative impact that may result from the aforementioned calendar shift in May, the calendar-adjusted two-year average trend from a 4% one-year print could even accelerate from April’s level.


NEUTRAL: A print between 3% and 4% would be received as neutral by investors, given that expectations are for a softer month than in April.  However, I would weight this range to the higher end; the lower quartile of this range would likely raise some questions after the April sales results went a long way toward reassuring investors of the viability of MCD on the long side.


BAD: A print below 3% would imply a significant sequential deceleration in monthly two-year average trends.  As the economic data has shaken investor confidence of late, it will be interesting to see how MCD fares following the release of April sales.  Historically, MCD has been a value destination for consumers and I have no doubt it will remain so, but the effect could be diluted by the compelling value being offered at other concepts within quick service and casual dining.


MCD: MAY SALES PREVIEW - mcd sales chart



Europe – facing a compare of +5.7% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world).  It was reported that the Eurozone April Retail sales rose +1.1% y/y vs consensus 0.0% and prior (1.7%); Eurozone April Retail sales +0.9% m/m vs consensus 0.4% and prior revised to (0.9%) from (1.0%).


GOOD:  A print of 4% or higher in Europe would be received as a good result as it would imply two-year trends that had slightly retreated from the levels seen in April, which were very robust compared to recent months. The skyward trajectory of the Icon Germany Consumer Confidence Indicator Index was arrested at the end of 2010 and has declined through April.  In addition, Germany Manufacturing PMI plummeted in April causing, along with several other factors, Hedgeye’s macro team to lose some confidence in its long position via the EWG ETF in the Hedgeye Virtual Portfolio.


NEUTRAL:  Between 3.5% and 4% would be received as a neutral result by investors.  While the result would imply a slow-down in two-year average trends, the two year trend would remain strong, continuing the departure from the softer two-year trends from the end of 2010 and maintaining the strong performance in Europe year-to-date.  Some degree of a slowdown, I think, is expected given the ongoing political and economic turmoil in the Eurozone.


BAD:  Below 3.5% would not be received well by investors as it would imply a significant sequential decline in two-year average trends.   The Europe number will likely be watched closely given the political events there of late and, it is also important to note, the E Coli situation on the continent is likely to impact consumer behavior to a degree.  Should a meaningful slowdown have taken place in May, investors may lose a degree of faith in MCD’s prospects in June with the E Coli scare taking hold.



APMEA - facing a compare of +5.7% (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):


GOOD:  Above 5% will be received as a strong print despite the fact that it would imply a slowdown in two-year average trends of almost 100 basis points.  Nevertheless, the trend would be strong and it would also constitute a second consecutive month of strong growth after the disappointment of March.


NEUTRAL: Between 4% and 5% would be received as a neutral number.


BAD:  Less than 4% would imply a sharp fall off in two-year average trends and would be received poorly by investors.



Howard Penney

Managing Director


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As of last Fridays jobs report, there is likely no further public support for any version of QE3 or other liquidity injection that would equate to a prolonging of the Keynesian Experiment that Americans have become all too accustomed to. 


Nevertheless, the Indefinitely Dovish nature of the professional politician of 2011 means that, before long, horror stories of “the alternative” will be circulated in a desperate bid to bring QE3 back to the table.  For now, though, it seems that we are quite a ways off QE3.  Knowing what we know now, it should not come as a surprise that Peter A. Diamond announced in the NY Times over the weekend, that he was withdrawing his nomination to serve on the board of the Federal Reserve.  While the title was somewhat off-putting; “When a Nobel Prize Isn’t Enough”, Professor Diamond’s op-ed offered a valuable insight into how many academics think about the current state of the economy and how best to go about bringing about an improvement. 


The nomination of Diamond to serve as one of the seven governors of the Fed was bound to spark controversy.  Partisan politics certainly played a role as Senator Richard Shelby called the Nobel laureate “an old-fashioned, big government Keynesian” at his nomination hearing.  However, the reality of the slowing GDP and Jobless Stagflation has also played a significant role.  The notion of growth slowing and inflation accelerating has been at the forefront of our macro view for several months and, as things have played out recently, that call seems to have been a prescient one.  Oftentimes amongst academic circles, there is a view that accelerating inflation and slowing growth cannot coincide.  While wage inflation has been benign, there is significant inflation in other areas of the economy and it is impacting the ability of businesses to hire.  The uncertainty around the cost structure – from healthcare to raw materials – is weighing on business sentiment.  That has been Hedgeye’s view and we are now seeing it play out as GDP estimates continue to roll over and management teams highlight inflation as a concern plaguing the near-term outlook. 


As Professor Diamond penned on Sunday, “concern about the (seemingly low) current risk of future inflation should not erase concern about the large costs of continuing unemployment.”  As we see it, the two economic ills are not necessarily mutually exclusive.  It is convenient for some to assume so, but both the 1970’s and the present day tell us that Jobless Stagflation is a real problem for economies that are seeing growth impaired by limitless debt and overly dovish monetary policy.  Small businesses, the engine of job growth in this economy, need confidence and not uncertainty.


For some time, in the Early Look, Keith has been outlining the how and the why of the futility of the Keynesian experiment.  In late March, I wrote a note on the consumer and Bernanke’s Sisyphean fight to centrally plan the American recovery, titled, “BERNANKE – PEEING INTO THE WIND”.  Despite the unfortunate title, last Friday’s jobs report corroborated with the thesis I laid out in that otherwise apropos piece.  Confidence is not being lifted by QG and without it we can’t expect the jobs picture to improve materially.


Data released by the BLS pertaining to employment through the month of May shows that the percentage of the unemployed that have been jobless for more than 27 weeks is now at 45.1%.  As the debt ceiling debate heats up and cuts to the budget are inevitably made, it will be more and more difficult to offer support to the consumer from the federal coffers.


While it is valuable to have people like Professor Diamond taking part in the debate, it is my humble opinion that the data is refuting his stance and will likely continue to do so.  Confidence is far too fragile to support growth and inflation is only further undermining what little confidence exists among small business owners and consumers.  While the unverifiable argument will be made, time and again, that “the alternative would have been far, far worse”, I’m not sure the 45% of unemployed people in the U.S. that are facing an increasingly desperate situation are seeing any benefit from the Keynesian Experiment.


PROBLEMS THAT QG CAN NOT FIX  - long term unemployment


Howard Penney

Managing Director


Volumes were the driver as VIP hold was only a little above normal.


Total gaming revenues grew 43% YoY and 18% sequentially to HK$23.6 billion, including the first ever HK$1 billion slot month.  The growth in May was also impressive in light of facing a difficult growth comp of 93% in May 2010.  Galaxy Macau opened on May 15th and drove a lot of the sequential growth.  We estimate VIP hold percentage was 3.10%, largely in-line with 3.05% hold in May 2010 and above April’s 2.92% (2.85% is considered normal).  If hold was 2.85% in May of 2010 and 2011, the market would have grown 41%.


Encouragingly, Mass Market table revenue increased 36% YoY while VIP revenue increased 44% YoY.  This was the best Mass month relative to VIP that we’ve seen since September.  No doubt the opening of Galaxy Macau on Cotai was a major contributor to the Mass growth. 


Galaxy Macau looks like it had a decent opening, recording about US$116 million in gaming revenues, putting it on pace to generate US$2.4 billion annualized after normalizing VIP hold, which was high.  Junket volumes were a little disappointing given how much liquidity the property pumped out to junkets.  Still, even after assuming a post honeymoon slowdown, Galaxy should generate an ROI greater than 20%.  Overall, a ½ month of Galaxy Macau pushed Galaxy’s market share 340bps above its 3 month average.


Wynn was the market share loser for the month, dropping 360bps from April and down 220bps from its 3 month average share.  However, the lost share was mostly due to low VIP hold.  Wynn’s junket volume share actually increased slightly versus its 3 month average and its Mass share declined only 70bps.  SJM, LVS, and MPEL (in that order) lost the most Mass share while MPEL and LVS were the only companies to lose significant junket volume share to Galaxy.  It’s probably no coincidence that MPEL and LVS have sizable operations on Cotai.  Sequentially, Wynn and MPEL were the only properties to report lower May revenues than April.



Y-o-Y Table Revenue Observations:


Total table revenues grew 42% YoY this month despite a difficult comp of 97% YoY growth in May 2010, with Mass growth of 36% and VIP growth of 44%.  Junket RC also grew 43% in May.


LVS table revenues grew 14% - the slowest of the concessionaires for the third month in a row

  • Sands was down 10%, driven by a 17% decrease in VIP and offset somewhat by a 6% increase in Mass
    • Sands was impacted by slightly below normal hold, a difficult hold comparison and share loss in RC play.  Adjusted for 10% direct play (in-line with 1Q11), hold was about 2.7%, compared to 3.1% hold in May 2010, assuming a 14% direct play estimate (in-line with 2Q10). 
    • Junket RC was down 2%.
  • Venetian was up 34%, driven by a 18% increase in Mass and 44% increase in VIP
    • Junket VIP RC increased 45%.
    • Hold was high in May but the prior year hold comparison was also high.  Assuming 18.5% direct play, (compared with 18.7% in 1Q11) we estimate that hold was 3.8%, compared to 3.5% hold in May 2010 (assuming 24.0% direct play).
  • Four Seasons was down 2% driven by a 13% decline in VIP which was mostly offset by 57% Mass growth
    • Junket VIP RC decreased 30%.
    • Assuming 40% direct play, hold was 3.3%, compared to an estimated hold of 2.2% in May 2010 assuming direct play levels were in-line with 2Q10 at 50%.

Wynn table revenues were up 16%

  • Mass was up 46% and VIP increased 11%
  • Junket RC increased 38%
  • A combination of low hold and difficult hold comparisons negatively impacted Wynn this month. Assuming 10% of total VIP play was direct, we estimate that hold was 2.5% compared to 3.2% last year (assuming 11% direct play)

MPEL table revenues grew 44.5%, driven by Mass growth of 77% and VIP growth of 38.5%

  • Altira was up 13% with Mass continuing its tear, up 84% while VIP grew 9%
    • VIP RC was up 30%
    • We estimate that hold was 2.9% compared to 3.5% last year.
  • CoD table revenue was up 71%, driven by 75% growth in Mass and 70% growth in VIP
    • Junket VIP RC grew 53%
    • VIP growth was assisted by an easy hold comparison and slightly above normal hold.  Assuming 14% direct play, hold was 3.0% compared to 2.5% in May 2010, assuming 18% direct play (in-line with 2Q2010)

SJM revs grew 43%

  • Mass was up 26% and VIP was up 50%
  • Junket RC was up 41%

Galaxy table revenue was up 64%, driven by 120% growth in Mass and VIP growth of 58%

  • Starworld table revenues grew 20%
    • Mass grew 24% and VIP grew 20%
    • Junket RC grew 8%
  • Galaxy Macau total gaming revenues for the first 16 days were around US$116MM ($112MM of which was table revenue)
    • Mass table revenue of $19MM
    • VIP table revenue of $93MM with RC volume of $2,314MM. Assuming no direct play hold at Galaxy Macau was 4%

MGM table revenue was up the most in May - growing 132% (MGM has been the fastest growing concessionaire for the 6th straight month now)

  • Mass revenue growth was 39%, while VIP grew 169%
  • Junket rolling chip growth also grew the fastest at 150% - MGM has had the fastest growing junket RC volume growth out of all the concessionaires for the last 9 months now
  • Assuming direct play levels of 7%, we estimate that hold was 3.10% this month vs. 3.05% in May 2010.


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


LVS share fell 1.3% in May to 15.6% from 16.9% in April. This compares to 6 month trailing market share (excluding May) of 16.7% and 2010 average share of 19.5%

  • Sands' share decreased 1.7% to 4.0% - hitting an all-time low share for the property across VIP, RC, and Mass market share
    • The decrease was driven by a 1.9% decrease in VIP market share to 3.1%. RC share was 3.3%, down 50bps sequentially.
    • Mass market share fell 90bps sequentially to 7.0%
  • Venetian’s share ticked up 10bps to 9.3% share
    • VIP share increased 20bps to 8.1%
    • Junket RC decreased 1.3% to 5.4%, which compares to an average of 6.3% share in 2010.
    • Mass share ticked down 10bps to 13.7% hitting an all-time low for the property. 2010 average share was 15.9% and 6 month trailing share is 14.8% for the property
  • FS share increased 50bps to 1.8%
    • VIP share increased 70bps to 1.8%
    • Mass share decreased 40bps to 2.1%
    • Junket RC share ticked up 10bps to 1%

WYNN was the biggest share loser in May, with share down 3.6% to 13.2%, driven by a combination of low VIP hold and difficult sequential hold comps.  May’s share is below Wynn’s 6 month trailing average share of 15.8% and 2010 average share of 14.9%.

  • Mass market share decreased 30bps to 10.7%, compared to an average of 10.1% in 2010
  • VIP market share dropped 5.1% to 13.3% sequentially, well below above its 2010 average of 16.0%
  • Junket RC share increased 40bps to 15.7%, above Wynn’s 2010 average of 15.2% and 6 month trailing average of 15%

MPEL decreased to 14.2% compared to an average 6 month trailing share of 15.1% and 2010 share of 14.6%.

  • Altira’s share dropped 1.1% to 4.9%, compared to 5.6% average share in 2010
  • CoD’s share fell 2.0% sequentially to 9.0%
    • Mass market share increased 40bps to 10.1%, the properties’ second best share after February's all-time high of 10.3%
    • VIP market share decreased 2.7% to 8.7% while Junket RC share decreased 1.6% sequentially to 8.7% (compared with 5.4% share for Venetian).

SJM was the second biggest share gainer in May after Galaxy.  SJM’s share grew 2.8% to 32.4%.  May share compares with an average share of 31.3% in 2010 and a 6 month trailing average of 31.1%.

  • Mass market share decreased 2.1% to 38.0% while VIP share grew by 4.6% to 32.0%
  • Junket RC share increased to 33.4% from 32.8% in April

In a reversal of last month’s trend, Galaxy was the largest share gainer in May, with share increasing to 13.2% from 9.0% in April. May obviously benefited from the opening of Galaxy Macau on May 15th . Galaxy Macau benefited from high hold during its first 17 days of operation.  May share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 10.1%.

  • Galaxy Macau garnered 3.9% market share during a partial month of operations
    • Mass market share of 2.9%, VIP share of 4.1% and RC share of 3.4%
  • Starworld's market declined 40bps to 7.8%
    • Mass market share fell 60bps to 2.2% while VIP share fell 40bps to 9.4% but would have fallen more if not for the high hold this month of 3.14% vs 2.64% in April. Junket RC share dropped 1.7bps to 8.4%.

MGM's share increased 90bps to 11.4%, from 10.5% in April. May share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 11.1%.

  • Mass share decreased 20bps to 8.7% - the 3rd highest property share after Venetian and CoD
  • VIP share increased 4.6% to 12.0% - the 2nd highest property share (that we track) after Wynn/Encore
  • Junket RC increased 1.6% to 11.5%, materially above the property’s 2010 average of 8.4% and its 6 month trailing average of 10.6%


Slot Revenue:


Slot revenue grew 49% YoY in May to $133MM – surpassing the $120MM record set in February

  • Galaxy slot revenues grew the most at 241%, reaching $8MM
  • At 89% YoY growth, Wynn had the second best growth, impressive given the large base. Slot revenues were $32MM - setting an all-time high for the property.
  • MGM grew 72% to $19MM - setting an all-time high for the property
  • MPEL’s slot revenue grew 36%, setting an all-time high of $25MM
  • SJM’s slot revenues grew 26.5% to $15MM
  • LVS grew the slowest at 17% but also set a company high of $34MM in slot revenues.







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