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The Week Ahead

The Economic Data calendar for the week of the 3rd of October through the 7th 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 - 1. lec

The Week Ahead - 2. lec

The Week Ahead - 3. lec


Apparently, there was a report published by a Macau firm stating that the disruption from Typhoon Nesat which just passed through Macau was so severe that YoY growth in September would only hit 30% or $19.3BN vs. our $20-22BN estimate.  After completing our channel checks, we are fairly confident that Typhoon Nesat had little impact on Macau gaming volumes. While it’s true that for 18 hours there were no ferries to and from HK and Macau, many bridges were closed, and taxis were not running, there were also many people stuck at the casinos with no way of getting home.  Therefore, many of the gaming floors – Wynn, GM, Sands, Venetian, and CoD – were all nicely crowded Wednesday afternoon.  Macau has been used to typhoons and are built to withstand flooding.  This shouldn't be a problem unless another one hits. However, Macau's Meteorological and Geophysical Bureau (SMG) said there may be no more typhoons for this year.  Typhoon Nesat should not have an impact on Golden Week.  


As a reminder, September 29th will mark the close of the month for Macau revenues in September (revenues on the 29th are counted and recorded on the 30th before books are closed).  In order for the numbers to come in at just +30% YoY, table revenues during the last 4 days would have to have shrunk to just HK$144MM/day from a run rate of HK$689MM the week prior and a monthly run rate of HK$686MM.  We think that this is highly unlikely even if hold was terrible.

Not Good: SP500 Levels, Refreshed

POSITION: Short Consumer Staples (XLP)


On every duration that matters in my risk management model, this stock market does not look good: 

  1. TAIL (1266), broken
  2. TREND (1247), broken
  3. TRADE (1181), broken 

And it may be becoming “consensus”…


But consensus can remain right, longer than some can remain solvent.


I do not think this is 2008. I think some refuse to learn the Globally Interconnected lessons of 2008.


This is 2011, and my most immediate-term TRADE line of support is now 1117.



Keith R. McCullough
Chief Executive Officer


Not Good: SP500 Levels, Refreshed - SPX

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Shorting Italy (EWI)

Position in Europe: Short Italy (EWI)

Into the close of yesterday’s session Keith shorted Italy via the etf EWI in the Hedgeye Virtual Portfolio.  Italy is a country we’ve come back to numerous times on the short side over the last eighteen months. This time around we got a bounce in the etf to opportunistically trade the security over the immediate term TRADE; however over the intermediate term TREND the country will be hostage to its bond auctions, ECB bond purchasing support, and political instability within the larger context of the country’s and Europe’s sovereign debt and bank contagion crisis.


The country’s outsized debt of 120% of GDP remains a persistent worry, yet pressing is that nearly one-third of its €226 Billion planned bond issuance for 2011 is outstanding. This compares to remaining bond issuance in Germany at 23%, France 17%, Belgium 4%, and Finland 4%, for example, according to Bloomberg.


With the Standard & Poor’s downgrading Italy’s credit rating one notch to A with a negative outlook on 9/19, S&P’s first downgrade of Italy since 2006, demand of  Italian government paper, including the yield it will be priced at, will be increasingly dependent on buying from the ECB under its Securities Market Program [SMP] in the weeks ahead.


We’ve noted in previous work that the 6% yield on 10 year government bonds has been a historically significant level for the PIIGS, meaning that a violation of the line to the upside resulted in an expeditious upward run (see chart below).  Italy, like Spain, has maintained a level below 6% since the ECB restarted the SMP on August 8th, and currently trades at 5.55%.  Last week the SMP bought a total of €3.95 Billion of secondary bonds across the Eurozone (without stating which countries specifically), the smallest amount since the program’s restart that saw €22 Billion in purchases in the first week.


Shorting Italy (EWI) - 1. yie


Investment and political risk remain hot topics in Italy. Investors are still questioning the extent to which Italy’s €54.5 Billion austerity package, which was heavily watered down when it was finally approved last month, will cut enough fat to move the dial on its debt and deficit figures. Much of this indecision is enhanced by the lack of credibility in leadership at the top. And if Berlusconi’s previous scandals weren’t enough to tarnish his reputation, allegedly he has a personal feud with his Economy Minister Guilio Tremonti, perhaps the one man that the market is turning to for a credible answer to the country’s fiscal state.


With the help of our financials team we’ve been able to quantify the exposures of European banks to the PIIGS. As the chart below demonstrates, 4 of the 5 listed Italian banks have over 300% of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans, with the remaining bank at 287%! While this data is stale, as of the 2010 Stress Test results, it nevertheless paints an ugly picture.


Shorting Italy (EWI) - 1. stein


Italy extended its short-selling ban on Wednesday until November 11th.  The Italian etf EWI is composed of 28.4% Financials, followed by 28.0% Energy, and 21.0% Utilities.


Italy FTSE MIB is down -27% quarter-to-date and over the same period 5YR Italian CDS has risen 300bps to 477bps. As the chart below shows, we don’t see downside support until 12,800, or roughly -13.5% from here.


Shorting Italy (EWI) - 1. ftse mib


Matthew Hedrick

Senior Analyst




Notable MACRO data points, news items, and price action pertaining to the restaurant space.




U.S. Consumer spending rose 0.2% in August while incomes declined 0.1%.  The personal savings rate declined to 4.5%, the lowest level since 2009.




The downward trajectory of corn prices is leading the food processor stocks higher.






YUM’s stock is getting a shellacking on growth concerns in China.  Some of the entry points on the long side of YUM have come at similar times in the past. 


The coffee category is getting crushed, declining 8 of the last 10 days.  At the time of writing the DNKN Black Book, we believed that the coffee stocks were in a bubble and we still believe most stocks within that universe are overvalued – particularly DNKN.


DNKN was initiated “New Hold” at Argus Research.


PZZA saw a big franchisee go bankrupt this week.  Essential Pizza, which operates 72 Papa John's in Minnesota and Colorado, went bankrupt this week after its secured creditor, GE Capital, appointed a receiver who quickly froze the company's funds.  The franchisee has laid the blame at the franchisor’s door, claiming that the company sold defective dough to the Essential Pizza.


PNRA’s third “pay-what-you-wish” café in Portland, Oregon has not gone as well as the two prior social experiment/PR projects in St. Louis and Detroit.  The west-coast iteration, not surprisingly, has attracted homeless and impoverished customers that have taken advantage of the company’s generosity and hospitality.


SBUX CEO "No summer slowdown"




DRI, BJRI, and KONA all declined sharply on strong volume studies.


RT was the standout on the upside yesterday for casual dining.





Howard Penney

Managing Director



Rory Green



The Macau Metro Monitor, September 30, 2011




Grand Korea Leisure (GKL), a junket operator based in Seoul and runs Seven Luck casino, has stopped extending credit to mainland Chinese high rollers.  GKL, which has a small Macao operation, said the move was temporary and a repeat of a “credit clearing” exercise that saw it halting VIP credit for two months last year.  It did not give a specific reason for the latest move.


A junket operator in Macao said he was not aware of rivals experiencing a credit crunch. However, he had heard of mainland Chinese investors pulling capital from their investments because of monetary tightening at home.  “There are many wealthy factory owners from the east coast of China who have been making good returns from Macao simply by lending money to junket operators in return for 1-1.5 per cent in monthly interest. They have seen Macao as a profitable sideshow to their real business, which is experiencing a slowdown. However, some of them are in need of cash at home and have trouble borrowing from banks. So they are cashing out from Macao,” he said. So far, this only had a limited impact on the junket operators, he added, as they were still seeing strong growth in business.

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