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Romney Risk

“Risk means more things can happen than will happen.”

-Elroy Dimson (quote from “The Most Important Thing”)


I received a tremendous amount of feedback on my Yale Economics Department note from yesterday. Your diverse and critical thoughts have provided my team a tremendous opportunity to see plenty of perspectives. For that, we thank you.


Yale didn’t write me back, yet.


Maybe tonight in Las Vegas the dogma that is academia’s Keynesian Economics will hear some louder drums. I am probably the least connected person in American and European politics (and I’d like to keep it that way), but there is heightening probability that Mitt Romney talks more explicitly about firing Ben Bernanke at tonight’s Republican debate. That would be very bullish for the US Dollar.


Strong Dollar = Strong America. Period.


That’s my long-term call and I’m sticking to it. Like you saw yesterday, when the US Dollar strengthens, we Deflate The Inflation. That’s good for the American Consumer. This happened in September, and the Michigan Consumer Confidence reading rose.


With the US Dollar down for the 1stweek in the last 5 last week, inflation expectations at the pump rose, and that same American Consumer Confidence reading fell (57.5 OCT vs 59.4 SEP).


This may sound like a perverse relationship (stocks and commodities down make the country more confident), but the US stock market isn’t the electorate anymore. You can only plunder your people so many times.


I’m not a Republican, but this is what the Republicans are going to say about this for the next year:


Bernanke has overinflated the amount of currency that he’s created… QE2 did not work… it did not get Americans back to work.” –Mitt Romney


Whether the Keynesians want to admit this or not, monetary and fiscal policy drive the value of a country’s currency. If I’m too “young” to be “trusted” on that, ask the biggest hedge fund manager in the world who has made money for his clients during both the 2008 and 2011 Growth Slowing draw-downs. That was not Steve Cohen – it was Ray Dalio.


If you don’t want to ask any of us who have had this right what is going wrong, fine. But don’t expect The People to trust you. They aren’t as willfully blind to the academic dogma that has driven both Bush and Obama to devalue the currency in exchange for short-term asset price inflations. They may not be able to communicate it concisely yet – but I would not bet against them.


Back to the Global Macro Grind


China doesn’t trust Japanese, American, or European monetary policy. They seem keen on proving that they have better ideas to lead the next generation of global capitalists. Can communists be capitalists? If “capitalists” leading America can behave like socialists, why not? It’s all name calling anyway.


At the same time that our markets are begging the Europeans for bazookas to socialize bank losses, I hear a lot of whining in this country. It’s not the kind of whining that the Chinese in particular are used to seeing from us. It’s time to stop. Reset. And Reload. It’s time to start winning again.


Despite a lot of people in the hedge fund community fear-mongering about China falling off a cliff like Europe has, here’s how China’s Q3 GDP report looked last night:

  • Real GDP growth slowed in 3Q: 9.1% y/y vs. 9.5% prior;
  • YTD Real GDP growth slowed in 3Q: 9.4% y/y vs. 9.6% prior;
  • Industrial Production growth accelerated in September: 13.8% y/y vs. 13.5% prior;
  • Retail Sales growth accelerated in September: 17.7% y/y vs. 17% prior; consistent with our call for a shift on the margin towards consumption-led growth; and
  • YTD Fixed Assets Investment growth slowed in September: 24.9% y/y vs. 25% prior.

Not great. But not bad.


On the margin, these are still sequential decelerations so we are waiting on the sidelines to buy Chinese stocks again. Everything that really matters in Global Macro happens on the margin.


If you look at the data coming out of the rest of Asia in the last 24 hours, it’s actually quite bad:

  1. Singapore Exports for SEP down -4.5% y/y vs +3.9% AUG
  2. Australian Vehicle Sales for SEP down -1.3% y/y vs +4.6% AUG
  3. Japanese Department Store Sales for SEP -2.4% y/y vs -1.7% AUG

So, with Global Growth Slowing and the US Dollar strengthening (two of our key Macro Themes), there is a generational amount of Correlation Risk that remains in Global Macro markets.


While our American-made definition of Real-time Risk Management most certainly considers many more things that can happen than will happen, we are not trying to be alarmist. Neither are we holing up on campus with dogmas. We are standing here on the front lines of the fight trying to get to the right answers for this country before the wrong assumptions driving policy make that too late.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $84.11-89.12, and 1187-1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Romney Risk - Chart of the Day


Romney Risk - Virtual Portfolio


In the realm of Macau gaming, WYNN’s Q3 should be lackluster.  Time for a special dividend.



We estimate that Wynn will report $1,317MM of revenue and $388MM of EBITDA when they report 3Q Wednesday after close – a little ahead of Street estimates.  Market share declines, China macro concerns, and “lackluster” Q3 results may not be enough to get investors juiced.  The announcement of a special dividend would help but even that is pretty much expected by the Street.  While WYNN is the high quality gaming play, we struggle to find a catalyst for near-term stock appreciation.





Wynn Macau


We project Q3 Wynn Macau revenues of $947MM and $307MM of EBITDA, 2% and 3% higher than consensus, respectively

  • $890MM of net casino revenue – down 4% sequentially, but up 42% YoY.  It is not unusual for Wynn to have a seasonally weaker quarter in 3Q vs. 2Q in Macau.
    • Gross VIP win of $907MM and net VIP win of $630.5MM
      • Assuming 8% direct play, we estimate $30.7BN of direct play and 2.96% hold
      • Rebate rate of 90bps or 30.5% of the win rate
    • Mass win of $196MM
    • Slot win of $63MM – a pretty large fall off from $75MM last quarter
  • Non-gaming net of promotional expenses of $58MM compared to $53MM in 2Q
    • $40MM of promotional expenditures in line with the last 3 quarters
    • $97MM of non-gaming revenues
      • $27MM of room revenue
      • $25MM of F&B
      • $46MM of retail, entertainment and other revenue
  • Variable expenses of $518MM
    • $455MM of taxes
    • $57MM of junket commissions (above the rebate rate), or a 41.2% RevShare – in-line with last quarter
  • $26MM of non-gaming expense
  • $95MM of fixed expenses compared to $99MM in 2Q and $85MM in 3Q10


Wynn Las Vegas


We expect another quarter of outperformance vs. expectations at Wynn’s Las Vegas properties.  We expect Wynn Las Vegas to report $370MM of revenue and $99MM of EBITDA, 3% and 6% ahead of consensus, respectively.

  • $140MM of net casino revenue
    • Table win of $124MM assuming a 5% YoY decline in drop and 24% hold
    • $176MM of slot win assuming 5% YoY growth in handle and 5.8% win rate
    • $26MM of discounts or 15.8% of gross casino win – compared to 15.9% in 2Q and 15.1% in 3Q10
  • $88MM in room revenue
    • $230 ADR and 88% occupancy – equating to a 9.5% YoY RevPAR increase
  • $125MM of F&B revenue and $57MM of revenue from entertainment, retail and other
  • $41MM of promotional allowances or 29% of net gaming revenue – compared to $43MM in 2Q11 and $43MM in 3Q10.
  • Total operating expenses of $271MM compared to $258MM in 2Q11 and 3Q10. Expenses are typically higher in the 3Q compared to the 2Q for Wynn Las Vegas – at least over the last 3 years .
    • We expect casino expenses to increase 3% YoY to $73MM compared to $70MM and a 2% YoY in 2Q11
    • $33MM in room operating expenses (5% YoY increase) or a CostPAR of $87 

Early Look

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TODAY’S S&P 500 SET-UP - October 18, 2011


It’s easier to say that markets aren’t moving on “fundamentals” until they do.  Singapore said it yesterday, and both the Koreans and Aussis said it again last night (dept store sales in Korea went negative y/y for SEP at -6.5% while vehicle sales in Australia dropped to -1.3% y/y in SEP vs +4.6% AUG); Our Big Macro call for 2011 remains Growth Slowing – and, like in 2008, some US centric investors are still missing this when staring at the Dow.  Earnings matter and the 3Q11 earnings season is not off to a good start. The financials (JPM, WFC, and C) have led us lower so far and I don’t expect things to improve as we get into lower quality EPS from BAC and MS.


As we look at today’s set up for the S&P 500, the range is 42 points or -1.15% downside to 1187 and 2.34% upside to 1229




In Chaos Theory, time and patterns dominate.  With time, history has proven that a Strong Dollar equates to a Strong America (lower unemployment and higher consumption). Today, with the US Dollar up for the 4thweek in the last 5, the Sector Studies continued to heal. Bottoms are processes, not points.


With time, 3 of 9 Sectors have now gone bullish TRADE and TREND: Utilities (XLU), Tech (XLK), and Consumer Discretionary (XLK). That’s the good news. The bad news is that 6 of 9 Sectors (and the SP500 itself) are bearish TREND – and TRENDs override TRADEs.









  • ADVANCE/DECLINE LINE: -1887 (-3923) 
  • VOLUME: NYSE 905.53 (+6.89%)
  • VIX:  33.39 +18.24% YTD PERFORMANCE: +88.11%
  • SPX PUT/CALL RATIO: 1.40 from 1.70 (-17.69%)




FIXED INCOME: massive 1 day move in 10s (UST), down -17bps day-over-day and yield curve compresses the same

  • TED SPREAD: 38.55
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.18 from 2.26     
  • YIELD CURVE: 2.05 from 1.71


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:15 a.m.: Fed’s Rosengren gives welcome remarks at Boston Fed conference
  • 8:30 a.m.: Producer Price Index, est. 0.2%, prior 0.0%
  • 9 a.m.: Net long-term TIC flows, est. (-$20b), prior $9.5b
  • 10 a.m.: NAHB Housing Market, est. 15, prior 14
  • 11:30 a.m.: U.S. to sell $30b 4-wk, $25b 52-wk bills
  • 1:15 p.m.: Fed’s Bernanke speaks in Boston
  • 4:30 p.m.: API inventories
  • 6:30 p.m.: Fed’s Lockhart speaks in Tenn.


  • Citigroup closing proprietary-trading unit that incurred losses in 3Q as regulators prepare to restrict banks from making bets with shareholder cash.
  • France’s Aaa rating under pressure as debt crisis has led to “deterioration” of govt. finances, Moody’s said last night
  • Bank of America said to move derivatives from its Merrill Lynch unit to subsidiary flush with insured deposits; move said to divide FDIC, Fed
  • President Obama continues on day two of bus tour through North Carolina, Virginia to promote $447b jobs proposal
  • Republican candidates, minus former Utah Governor Jon Huntsman, debate in Nevada tonight, 8 p.m.


COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES: like Hang Seng and Europe all fail at TREND levels; Oil and Gold failing at $89.12 and $1686 is explicitly bearish for both





  • Tallow Replaces Crude Oil as Biofuels Head to War: Commodities
  • Energy Bonds Offer Haven From Europe on Oil Bet: Credit Markets
  • Gold Declines With Equities on Europe Crisis, China Concerns
  • Gas Beating Oil in Shipping as Users Expand Stockpiles: Freight
  • Crude Oil Supply Climbs a Second Week in Survey: Energy Markets
  • Commodity Speculators May Face New Limits After CFTC Vote Today
  • China Copper Output Drops From Record as Economy Slows
  • Copper Declines as China Grows at Slowest Pace in Two Years
  • Wal-Mart Asia Chief Takes Over China Stores Amid Pork Probe
  • Australian Wheat Reserves May Near Record on Rail Shortage
  • Shell Oil Purchase Sparks OGX Outperformance: Brazil Credit
  • China’s Corn Imports May Jump to 20 Million Tons, Olam Says
  • China’s September Steel Output Falls to Lowest in 7 Months
  • Shipping Jumps as Iron-Ore Rout Spurs Demand: Chart of the Day
  • Soybeans, Corn Drop as China Grows at Slowest Pace in Two Years
  • Gold Falls From Three-Week High on Dollar’s Rally; Silver Drops
  • Oil Drops for a Second Day on China Growth, U.S. Supply Forecast
  • Freeport’s Grasberg Output at 50% of Capacity, Saleh Says








EUROPE: could be worse; basically DAX and CAC both failed at their TREND levels 24hrs ago and are correcting to TRADE line support






CHINA: GDP has been slowing for 3 quarters so this isn't new, but Chinese stocks drop another -2.3%, Hang Seng down -4.3%, India -2%


ASIA: plain ugly move in the Hang Seng on the heals of the China data w/ HK snapping what was a very brief stint > TRADE support








The Hedgeye Macro Team

Howard Penney

Managing Director


EAT was bought this afternoon in the Hedgeye Virtual Portfolio.


Keith bought Brinker in the Hedgeye Virtual Portfolio.  Hedgeye’s Macro Team has been ahead of the strengthening dollar and the “deflating of the inflation”.  This has been bullish for American consumers as gasoline prices have come down, thereby taking up a smaller share of their expenditures and allowing for more discretionary spending. 


This morning, we posted a note on the Knapp Track casual dining trends for September improving sequentially from August and expressed our view that this was bullish for EAT.  We believe that the quarter finished strongly for Brinker and that the benefits of the remodeling program are continuing to help drive profitability. 


As the chart below shows, by Keith’s quantitative model the TRADE and TREND lines are at 20.61 and 22.61, respectively.


EAT: TRADE UPDATE - eat levels



Howard Penney

Managing Director


Rory Green



Weekly Latin America Risk Monitor: Monetary Easing Cometh

Conclusion: Central banks are positioning themselves for monetary easing alongside a regional deterioration in capital markets activity, which should support continued weakness in Latin American currencies especially vis-à-vis the U.S. dollar.


Prices Rule 

Latin American equity markets had a particularly strong week, closing up +6.3% wk/wk on a median basis. Gains were headed by the high-beta Argentine equity market, which closed up +16.8% wk/wk. Despite the region’s benchmark equity markets being down -19% YTD, we are choosing to ignore the allure of perceived valuation and remain bearish here over the intermediate-term TREND. Our expectations of a pending Correlation Crash should eventually take prices lower and provide much more attractive entry points on the long side of LatAm equities.


Regional currencies also had a particularly strong week, closing up +1.9% wk/wk on a median basis vs. the USD. Gains here were capped by the Chilean peso, which advanced nearly 4% on the week. The Mexican peso, a currency we have had a negative fundamental view on since Q2, is down -11.5% vs. the USD over the past three months alone. We think there is more downside to come, as expectations of central bank easing continue to feed upon themselves (1yr interest rate swaps fell another -3bps wk/wk and are now pricing in a mere +8bps of tightening over the NTM – down from +63bps at the start of the year. This was reinforced across Mexico’s sovereign debt maturity curve, with 2yr, 10yr, and 30yr yields falling -5bps, -30bps, and -32bps wk/wk, respectively.


Regional CDS (5yr) broadly declined last week, narrowing -16.3% wk/wk on a median basis from a percentage perspective. Individual declines were led by Colombia, which tightened -35bps wk/wk for a percentage decline of -18.3%. We’ve been vocal in our call that the trend in LatAm credit risk is up as global growth slows and commodity prices deflate and prices are in confirmation of that – regional 5yr CDS have widened +52.4% on a median basis over the last six months, headlined by Chile’s +120.5% widening (likely related to its exposure to China/copper prices).


***price tables can be found at the bottom of this note***


The Least You Need to Know


  • The Senate budget committee sees what we saw: higher government expenditures in 2012 (by +R$25.6 billion to be exact), with lower growth (they lowered their 2012 GDP estimate to +4.5% vs. a previous forecast of +5%). Interestingly, they increased their inflation projection to +6%, which is confirming of the central bank’s private economist survey that showed a seventh straight weekly increase in their 2012 inflation projection (now at +5.61%). We’re bearish enough on commodities over the intermediate term to take a variant view on the CPI front.
  • External corporate debt sales by Brazilian companies have fallen below last year’s record pace for the first time ($32.3 billion YTD, down -1.2% YoY), as LatAm capital markets continue to dry up, on the margin. Given the headwinds of securing equity financing (Bovespa finished the week down -20.6% YTD), a closure of Brazil’s (and other regional) corporate bond markets would be an incremental negative as it relates to financing economic growth across the region.
  • Brazil’s securities and exchange commission (CVM) is stepping up investigations into and efforts towards combatting insider trading surrounding earnings releases, as well as central bank front-running in the interest rate futures market. According to Brazilian newspaper O Globlo, “two or three banks” completely and abruptly changed their interest rate exposure immediately before August’s “surprise” rate cut. We use quotations around the word “surprise” because neither the markets nor our research would’ve suggested to expect anything other than monetary easing out of Banco Sentral do Brasil at the time of the actual cut – which is now expected by the market to be added to at Wednesday’s monetary policy meeting.


  • As alluded to earlier, Mexican capital markets are indeed pricing in some form of monetary easing out Banxico over the short-to-intermediate-term. Last week, they kept their benchmark policy rate on hold at 4.5%, but opened the door to the possibility of a rate cut by saying: “[We] will remain alert to global economic growth perspectives and the possible implications for Mexico’s economy, which in the context of extensive monetary easing in the largest industrialized countries, subsequently could make it appropriate to relax monetary policy [in Mexico].” Having not raised rates once since the global economic recovery began nearly two years ago, we do not think IMF-trained central bank governor Augustin Carstens will be able to resist the Keynesian urge to ease policy in the coming months. As such, we remain bearish on Mexico’s currency, the peso, vs. the USD from a TREND perspective.


  • Chile also kept its benchmark policy rate on hold, at a respectable 5.25% (after having hiked +250bps in the LTM). Like Mexico, Chile’s central bankers opened the door for monetary easing later in the year, by acknowledging that growth is slowing more than expected due to waning global demand. Chile’s currency, the peso (CLP), remains at risk vs. the USD over the intermediate term due to the confluence of potential monetary easing (-77bps of rate cuts priced into the 1yr swaps market) and waning demand for Chilean exports (copper failed to overtake any of our key quantitative levels of resistance amid the global V-bottom rally we’ve just witnessed).


  • A poll published Oct 9 by Poliarquia Consultores showed that incumbent president Cristina Fernandez has the support of 52-55% of voters heading into the Oct 23 presidential election.  The closest challenger, Hermes Binner, garnered only 14-16% of the vote. A first-round win by the current leader continues to be the expectations of both the market and voters – many of whom she has bought off by increasing social spending and publically-negotiated wages in recent months.
  • Speculation surrounding a likely Fernandez victory and the likelihood that she will continue her late husband’s policy of systematically underreporting of CPI is handing investors in Argentina’s inflation-linked bonds the worst relative performance to the region since 2008 (-28.5% YTD vs. a regional average of -14.5% YTD).
  • As capital flight ensues (largely driven by speculation that Fernandez will seek to devalue the Argentine peso in coming months), the country’s benchmark deposit rate, the badlar (rate on 30-day deposits > 1 million pesos), has increased to the highest level since Jan ’09, closing the week at 15.7% and 11.4% on a 30-day M.A. basis (highest since Nov ’09). As a comparison, the yield on 30-day Brazilian certificates of deposit has declined -35bps in the past month to 11.45%.
  • In what is arguably a particularly ominous sign for the global economic cycle and capital markets activity, Argentine companies are selling the most asset-backed debt in 11yrs (+4.5 billion), while increasing the proportion of asset-backed debt to total issuance to the highest ratio since 2008 (67%). The growing inability for Argentine borrowers to economically price unsecured debt has contributed an -8% YoY decline in dollar-bond issuance YTD. A key risk to flag here is that banks and retailers are leading the issuance YTD (58% of the total) and are accelerating consumer lending heading into an economic downturn (revolving consumer credit increased +37.2% in Sept), likely in order to grow assets to back their debt issuance with – vaguely reminiscent of the U.S. subprime mortgage crisis. This isn’t the kind of data point you want to see if you are among the many who think they bought the bottom when we made our Short Covering Opportunity call on 10/4. 

Darius Dale



Weekly Latin America Risk Monitor: Monetary Easing Cometh - 1


Weekly Latin America Risk Monitor: Monetary Easing Cometh - 2


Weekly Latin America Risk Monitor: Monetary Easing Cometh - 3


Weekly Latin America Risk Monitor: Monetary Easing Cometh - 4


Weekly Latin America Risk Monitor: Monetary Easing Cometh - 5


Weekly Latin America Risk Monitor: Monetary Easing Cometh - 6

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