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Exotic Tails

“Patterns replicate through time and manifest on each level because it is a grand unified manner in which all things move.”

-Martin Armstrong


While I am certain that there are plenty Market Practitioners who have adapted to their ecosystem in the last 5 years, uncertainty in Global Macro markets continues to reign supreme.


This is actually a good thing – whoever thinks that they can be certain about a central planner’s ability to suspend economic gravity is probably feeling more uncertain about that by the day.


Chaos Theorists Embrace Uncertainty. It’s what drives our process. No matter what you think about Nassim Taleb, Martin Armstrong, and Ray Dalio, I’m fairly certain that they don’t particularly care. These gentleman have capitalized on proactively preparing for tail risks by simply not allowing themselves to be certain of anything until both Time and Patterns make whatever that is obvious.


Yesterday, it became fairly obvious that 56 exotic animals running down a man’s driveway in Zainesville, Ohio was a risk. There were 18 tigers, 17 lions, and 8 bears. The owner of the fancy pets had shot himself after his wife left him.


In response, a politician in Ohio stated, “this was an accident waiting to happen.”


Ya think?


Exotic Tails of “risk” in Global Macro markets? What we see on the screens today, they are not. Like this whacko with his “pets”, the risks are plainly obvious to anyone who isn’t paid to be willfully blind. They have been since mid-July and early August (see Chart of The Day – when Copper’s TAIL broke).


Up until that intermediate-term 2011 point, these TAIL risks had been becoming more obvious for years. Since October 2007, the SP500 has lost 22% of its value and would need to rally +28.2% “off the lows” to get back to the Perma Bull Breakeven.


Time and Patterns


They take time to manifest and you need to do a tremendous amount of cycle research, across risk management durations, in order to appreciate that at any given time things can blow up.


The US stock market is in the process of either bottoming or blowing up. I could go either way with this really (that’s why I’m hedged; 12 LONGS and 10 SHORTS in the Hedgeye Portfolio). There are no rules against changing your mind. There’s just time and space.


From a timing perspective, the situation in Europe could blow up any day. If it does, no one should be surprised. The monkeys you see swinging from their journalistic rumor trees throughout the trading day are compounding systemic risk for the sake of their short-term careers – and if it suddenly goes bad out there, as Jack Hanna said yesterday in Ohio, “you can’t tranquilize attack monkeys in the dark.”


Short-term vs Long-term


A Keynesian’s answer to accepting responsibility for policy recommendation is that “in the long-run, we are all dead.” Well, unfortunately, for those of us who have successfully managed 5 down US stock markets in the last 12 years (2000, 2001, 2002, 2008, 2011), and seen net US jobs added over the span of this past decade = ZERO, in the short-run, people die too.


What would have happened if these Bengal tigers found a way to survive the night and hit the Streets of Ohio? Ask the monkey who didn’t make it past the end of the driveway…


This is the point. We have all of this Global Macro risk all compartmentalized in cages now. Or at least we think we do. No one can get out. So no one gets hurt.


No one loses their political life. Everyone gets fed their “fair share.”


Until someone opens the cages…


And, then… since no one saw any of this coming – we’ll be on the precipice of another Great Depression again unless we all huddle back into captivity, take our commoner’s wage, and like it.


Yesterday I raised our US Equity position in the Hedgeye Asset Allocation Model to 6% from 3% (we’ve upped our beta by going long Consumer Discretionary, XLY, and selling Utilities, XLU).


I’m bullish on the US Dollar and, in the end, I believe that Americans are smart enough to realize that a Strong Dollar = Strong America.


In the long-term, Time and Patterns agree with me on this. Martin Armstrong says that it’s “the reason life perpetuates through what is called a system of self-referral.” George Soros calls it “reflexivity.” We call it Mr Macro Market.


No matter what you want to call it, it is all based on the most relevant mathematical discovery since relativity. So don’t let the Keynesians call what you see out there today, tomorrow, or the next day, an Exotic Tail.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Oil (bullish TRADE; bearish TREND), German DAX (bullish TRADE; bearish TREND), and the SP500 (bullish TRADE; bearish TREND) are now $1, $80.09-89.11, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Exotic Tails - Chart of the Day


Exotic Tails - Virtual Portfolio


A fairly in-line hold adjusted quarter but the lack of a special dividend is a disappointment.  



We’re not sure we’ve seen a special dividend more telegraphed than this one.  The problem is…there was none.  Not sure if the Board nixed it at the last minute and/or management decided to hoard some cash for the prospect of future development.  Either way, the lack of a special dividend will likely be a disappointment to the fast money in the stock for that very reason.


In any other sector, WYNN’s results would look fantastic.  However, the downside of operating in Macau is that investor expectations are usually at high altitude.  Relative to those expectations, Q3 results were a little lackluster.  Las Vegas was in-line after adjusting for hold but Macau missed our estimate because of the cost side. 


Management was bullish about current trends in Macau which told us essentially what we already knew:  Golden Week was terrific and October is tracking up 34-39% over last year.  While the US$73 million in EBITDA through the first 18 days of October (as disclosed on the call) sounds great, that would project out to $325 million in EBITDA for Q4, essentially in-line with our projection.  One cannot straight line the busiest part of the quarter over the full quarter.



Here are the details of the quarter:



Net revenue came in $4MM higher than our estimate but EBITDA was $11MM light due to higher junket commissions and higher fixed expenses.  Higher than theoretical hold on the VIP side of the business and strong hold on Mass benefited EBITDA by roughly $14MM. 

  • Net VIP table win was $4MM higher than we estimated
    • Direct play was 10% vs. our estimate of 8% but hold was only 1bps lower than we estimated, resulting in gross table win that was $19MM above our estimate.  However, that was offset by a rebate rate that was 3bps higher – 93bps or 31.5% of win.
    • We estimate that all junket commissions & rebates were 42.8% compared to our estimate of 41.2%.  However, we won’t know for sure until Wynn Macau reports.
    • If we used theoretical hold of 2.85%, then gross win would have been $31MM lower and EBITDA would have been $5.4MM lower
  • Mass table win was $1MM lower than we estimated
    • Drop was 10% less than we estimated but the win % was 2% better.  Wynn’s mass hold during the last 3 quarters has been trending at 27.8% - noticeably higher than 23.6% in 2010.  The last 4 quarters have averaged 27.4% hold, so this could be the new norm for their business.  However, if we use a 7 quarter average of 25.3%, revenues would have been $17MM lower and EBITDA would have been about $9MM lower.
  • Slot win was $1MM higher than we estimated
    • Slot handle was disappointing - flat YoY - but a 1% improvement in hold % made up the difference.  It’s probably not a stretch to say that at roughly a $700/win per device, we are seeing some saturation here.
  • Net non-gaming revenue was in-line with our estimate with higher gross revenues in room, retail and other, offset by higher promotional expenses
  • We estimate that fixed expenses, totaling $101MM, were $6MM higher than our estimate


Las Vegas


Revenues and EBITDA came in below our estimate by 6% and 14% respectively due to low hold, higher promotional spending, and lower F&B spend which was somewhat offset by better expense control

  • Net casino revenues were $13MM below our estimate
    • Table drop grew an impressive 15% YoY, much better than our estimate of flat table drop, but hold was only 18.3% vs. our estimate of 24%
      • If we use a normalized hold rate of 23.5% (the past 7 quarter average), revenues would have been $32MM better and EBITDA would have been about $16MM better.
  • Slot win was $1MM better than we estimated
    • Slot handle on the other hand wasn’t so impressive – decreasing 2.4% YoY vs. our estimate of 5.0% growth.  A better win % more than made up the difference though. Wynn’s win % has been increasing over the last few years largely due to the removal of the video poker machines which had payout ratios of about 99% and what looks like some recent yield management.
  • Total gaming discounts and promotions totaled 17.4% of gross casino win- higher than the 15.9% discount rate from 2010 and the 15.9% rate last quarter


Cheesecake Factory posted poor 3Q earnings as commodity costs hit the bottom line but – perhaps less transient – the top-line also missed.


CAKE posted a disappointing number after the market close, with EPS coming in at $0.36 versus expectations of $0.38.  Total same-store sales came in at 0.8% (including 40 basis points of negative impact from Hurricane Irene).  Cost of sales, restaurant margins, and operating margins were all the wrong side of expectations by 10 basis points in each case.  Dairy costs, which management claimed earlier in the year would be favorable in the fourth quarter, were a significant headwind in the third quarter and overall food costs are going to be more of a headwind than expected – by ~$1.00 – in the fourth quarter.


Here are our Top 10 Takeaways from the CAKE quarter:

  1. The concept’s top-line struggled through the quarter as price was taken and gas prices were elevated.  Consumer confidence is not, according to the company, improving quickly. 
  2. There was roughly 1.6% of pricing on the menu which implies, given the comp, -0.8% of negative mix shift in the quarter.  Management expects the mix drag on the top-line to continue until incidence of alcoholic and non-alcoholic beverages increase.
  3. On the brighter side, the company’s new units perform – from a sales perspective – above the average of the rest of the store base.  Additionally, the new store openings have been quite geographically diverse: California, Texas, Florida, and the Northeast.
  4. California, Texas, and Florida were highlighted for ongoing strength.  It came as a slight surprise to us given the decline in California Retail Sales and Use Tax Receipts in September. 
  5. Margins were a disappointment this quarter with commodity costs the most obvious culprit.  As management put it, “normalized for commodity cost, margins are healthy, as we effectively leverage costs across our P&L.
  6. Food costs remain a wild card for the fourth quarter.  Dairy prices have been extremely volatile and the company seems less confident on this line than they were prior.  Cheese prices will be worth watching in our weekly commodity monitor (chart below).
  7. From a top-line compare perspective, the fourth quarter is easy (versus a 0.9% rather than a 2.8% in 3Q). 
  8. The sentiment on the name is extremely bullish given the less-than-perfect fundaments and we believe that there is plenty of room – and reason – for downgrades to follow this poor quarter (second chart below).
  9. The company’s guidance won’t go far towards halting any downgrades in their tracks.  The company guided to $1.80-1.90 in EPS versus the Street at $1.87 and 1.5% to 2.5% comps versus the Street at 2.3%. 
  10. Strong Knapp figures didn’t seem to show in CAKE’s results.  While the stock has been beaten up recently, we remain negative on the name

CAKE: STILL A STRUGGLE - cake quadrant


CAKE: STILL A STRUGGLE - cake ss sentiment



Howard Penney

Managing Director


Rory Green


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TODAY’S S&P 500 SET-UP - October 20, 2011


Exotic TAILS notwithstanding (18 tigers and 8 bears on the loose in Ohio yesterday), we know this market’s long-term TAIL is broken (1266) – so, all we have to do now is continue to manage risk around the immediate (TRADE) to intermediate-term (TREND) range.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.73% downside to 1201 and 0.92% upside to 1221




From an immediate-term TRADE perspective, today’s selloff doesn’t change the fact that all 9 sectors (and the SP500 itself) remain bullish. This is healthy until it isn’t. A close below 1201 tomorrow would change this setup. Holding above it would be bullish.


Another improving TREND (intermediate-term) is that 4 of 9 Sectors are now bullish on that duration: Consumer Discretionary (XLY), Utilities (XLK), Tech (XLK), and Consumer Staples (XLP). We like those Sectors in that order. Consumer Discretionary will be the most direct beneficiary of a Strong Dollar as it will continue to “Deflate The Inflation.”









  • ADVANCE/DECLINE LINE: -1354 (-3428) 
  • VOLUME: NYSE 964.04 (-11.17%)
  • VIX:  34.44 +9.13% YTD PERFORMANCE: +94.03%
  • SPX PUT/CALL RATIO: 1.78 from 1.64 (+8.80%)




  • TED SPREAD: 39.13
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.18 from 2.19    
  • YIELD CURVE: 1.90 from 1.91


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 400k, prior 404k
  • 9:45 a.m.: Bloomberg Consumer Comfort, prior (-50.8)
  • 10 a.m.: Leading indicators, est. 0.2%, prior (-17.5)
  • 10 a.m.: Existing home sales, est. 4.91m, down 2.5%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:15 a.m.: Fed’s Bullard speaks in St. Louis
  • 10:30 a.m.: EIA Natural Gas storage
  • Noon: Fed’s Lockhart moderates panel on economy in Atlanta
  • 12:50 p.m.: Fed’s Pianalto speaks in Toledo, Ohio
  • 1 p.m.: U.S. to sell $7b 30-yr TIPS (reopen)
  • 2 p.m.: Treasury’s Brainard testifies to U.S. Senate committee
  • 6 p.m.: Fed’s Tarullo speaks at Columbia in NYC
  • 7:45 p.m.: Fed’s Kocherlakota speaks on economic education in Minneapolis


  • Yahoo! isn’t necessarily up for sale, co-founder Jerry Yang said; Alibaba CEO reiterates he’s interested in buying the company
  • Groupon said to be in talks to sell shares in IPO valuing co. at ~$12b
  • Sales of existing U.S. homes probably declined 2.5% to 4.91m annual rate in Sept., economists’ forecast ahead of today’s report
  • SEC said to be trying to determine if SAC Capital used insider information to profit from J&J’s 2009 takeover of Cougar Biotechnology, WSJ says

COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES – we’ve called for the Correlation Crash to continue and that’s plainly obvious now with Gold chasing Copper (albeit with a lower beta); both remain broken; Copper down -2.9% this morning is immediate-term TRADE oversold, but has moved back into the down -30% since July zone; not good – neither is Gold’s TREND resistance ($1685) fortifying itself





  • Pamela Anderson Champions Palladium as Gold Prices Soar: Retail
  • Iron’s Worst Rout in 15 Months May Deepen as China Slows
  • Silver Bear Market Seen Ending on Europe Crisis: Commodities
  • China Love of U.S. Cherries Fuels Cool-Cargo Boom: Freight
  • Gold Falls to Two-Week Low as Gains in the Dollar Curb Demand
  • EU Targets Commodities, High-Frequency Trading in Market Law
  • Coal Gridlock Heralds Two-Year High Asia Premium: Energy Markets
  • Zambia Investors Say Copper Boom to Extend as Sata No Castro
  • Copper Drops for a Fourth Day on European Debt-Crisis Concern
  • Chinese Aluminum Supply Jump 30% in 3 Weeks, Signaling Slump
  • Oil Drops a Second Day on Europe Outlook; Brent Premium Widens
  • Rio Tinto Makes $567 Million Offer for Hathor to Trump Cameco
  • Gold Prices May Extend Losses on Bear Flag: Technical Analysis
  • EU Seeks Curbs on Commodity Derivatives, High-Frequency Trading
  • Freeport Says Grasberg Mine Operating at Two-Thirds Capacity
  • Agnico Plunges After Halting Canadian Gold Mine on Flooding
  • Commodities trading suffers as French banks curb credit
  • Thailand, Indonesia ‘Closely Monitoring’ Rubber Decline
  • Oil Rebounds on Speculation EU Agreement Will Help Fight Crisis








RUSSIA – consistently flashing negative divergences vs the focus European markets (DAX, CAC, Greece, etc) this week; this tells me that A) I’m right on the USD TREND and B) right on Oil remaining a bearish TAIL/TREND; Petrodollars drive the RTSI and its crashing – down -34% since May.






ASIA – the Hang Seng was down -1.8% again last night (China down -1.9% testing new lows) and the move was consequential as the only remaining line of support (18215) was snapped again on the downside.  As the world focuses on 1 thing (Europe) you tend to get paid to focus on everything else that doesn’t cease to exist – Asian Growth Slowing is a big one.








The Hedgeye Macro Team

Howard Penney

Managing Director


In September, YoY CPI growth for Food at Home increased by 30 basis points versus August to 6.3%.  CPI for Food Away from Home fell to 2.6% in September from 2.7% the month prior.


Food costs are now the key line item in Americans’ P&L’s according to WMT’s commentary during its earnings call two months ago.  BLS data released this morning detailing the Consumer Price Index in September suggests that the spread between food at home inflation and food away from home inflation grew wider for a tenth consecutive month. 


As we have written before, as long as grocery inflation continues to outstrip price increases in restaurants, it should be a positive for comparable sales trends at restaurant chains.  Whether or not restaurant margins can withstand the pressure or not, however, remains to be seen. 


The Knapp Track data, as we wrote about on Monday morning, suggests that the third calendar quarter finished strongly for casual dining.  The CPI data released today provides another bullish data point for the restaurant space with respect to traffic; to the extent that the more severe inflation in the grocery aisle relative to the restaurant dissuades people from eating at home, it is a positive for restaurants’ guest counts.  However, it is important to note that effective food prices remain high for many restaurant companies.  Despite spot prices for most foodstuffs declining recently, contracts and inventories need to be worked through in order for companies’ margins to derive any benefit, or relief, as inflation subsides.




Howard Penney

Managing Director


Rory Green



An in-line quarter negatively impacted by mix




  • GEG Adjusted EBITDA of HK$1.793BN
  • Galaxy Macau Adjusted EBITDA of HK$973MM and revenue of $6,390MM
    • VIP RC: HK$163BN; win: $4.9BN
    • Mass drop: HK$5BN; win: HK$1BN
    • Slots handle: HK$4BN; win: $262MM
    • US GAAP Margin of 23%
    • 2,100 rooms open in 3Q, 91% occupancy
    • "All 2,200 rooms and Macau’s first mega 3D Cineplex to open in late Q4 2011"
  • Starworld Adjusted EBITDA of HK$779MM and HK$6.4BN of revenue
    • VIP RC: HK$180BN; win: HK$5.9MM
    • Mass drop: HK$2.3BN; win: HK$433MM
    • Slot handle: HK$917MM; win: HK$58MM 
    • US GAAP margin 21%
  • City Club Adjusted EBITDA of HK$32MM
  • Construction material Adjusted EBITDA of HK$117MM
  • Balance sheet: Cash of HK$7BN 



  • Galaxy Macau
    • Opened 3 new VIP rooms at Galaxy Macau in the quarter for a total of 10 now
    • Wave pool had 2,000 visits per day in August
    • Hold challenges impacted their results by HK$60MM (bad mix) - would have been $1,030MM
  • Starworld also had an unfavorable mix of RC vs RevShare business which also negatively impacted their business but didn't quantify it.
  • City Clubs's result decline was a result of hold challenges and YoY volume declines


  • 95% gaming and 5% non-gaming revenue split at both Starworld & GM
  • Will likely make an announcement sooner rather than later on PH2 of GM
  • GM's hold was fine but the mix was unfavorable 
  • Added a slot marketing team, new signage around the property at Starworld are some of their new changes that are driving mass
  • Mass business is growing at Galaxy Macau. Their brand awareness is growing. As their dealers gain experience, their Mass hold has increased.  Busing program is successful. 
    • Growing their database is important to grow the Mass business at GM - it just takes time to ramp. Shuttle bus and day tripper business are growing. 
  • The addition to fixed cost isn't as high as you would think as the additional hotel rooms come online; it's mostly just variable costs

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%