Commentary from CEO Keith McCullough


Most Read this morn = #1 Apple, #2 Asian Stocks Drop, and #3 Romney Wins:

  1. ASIA – generally weak session in Asian Equities after the Hang Seng snapped my line yesterday; Asian Growth Slowing is a reality right now; the perma-bulls refused to accept it in Q1 of 2011 and are at their own risk doing so now.
  2. YEN – easily the ugliest chart in all of Global Macro right now – also something consensus has not moved towards addressing/understanding yet; we’ll be in Boston all day explaining why we think the Yen’s -9.2% drop since FEB is similar to the initial steep decline of the Euro in April/May of 2011. #SovDebtRisk
  3. SENTIMENT – I’ve been on the road in Canada and Minnesota for the last 3 days and the feedback loop was frothy; allegedly, markets can’t go down because they haven’t yet – with Growth Slowing and seasonality playing negative like it did in Q1 of 08, 2010, and 2011, we look ripe for a counter consensus move (II Bullish/Bearish Survey = 2500 bps wide to the Bull side this morn)

Oil prices > $100 have never not slowed real (inflation adj) growth, globally – ever.








THE HBM: SBUX, DPZ, MCD, CMG, EAT, RT - subsector





SBUX: Starbucks is hosting its AGM today.  The company, along with Green Mountain, announced an expansion of their strategic relationship for “the manufacturing, marketing, distribution and sale of Starbucks-branded Vue packs for use in GMCR’s recently introduced Keurig Vue Brewer.


DPZ: Domino’s Pizza CFO, Michael Lawton, spoke at the J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Conference yesterday.  The company spoke about international strength, particularly in India, and the recent warm weather in the U.S. as being unfavorable for its business.  The company guided to 1-3% comparable restaurant sales in the U.S.


MCD: McDonald’s is seeking a 50% rent reduction at its location on Dublin, Ireland’s main retail thoroughfare, Grafton Street.  The company is currently paying a rent of 1.15 million euros per annum.  The landlord, as the date for MCD to sign the new lease approaches, is hoping for a 20% reduction. 


CMG: Chipotle Mexican Grill is opening a new restaurant at 71 Spring Street, in Manhattan.




COSI: Cosi continues to outperform, gaining 6.1% on accelerating volume yesterday.


YUM: Yum gained yesterday on accelerating volume despite China weakness.


DPZ: Domino’s declined almost 3% on accelerating volume yesterday.





EAT: Brinker International saw its price target increased from $31 to $33 at J.P. Morgan today.  The firm is maintaining an Overweight rating on EAT.


RT: Ruby Tuesday was raised to Outperform at Raymond James.





Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, March 21, 2012



Bloomberry Resorts topped out Phase 1 of its integrated resort complex in PAGCOR Entertainment City in Pasay City. Bloomberry chairman Enrique K. Razon Jr. said, "We are doubly proud because Solaire Manila will be the first resort to be built and operational here in Entertainment City." 


Phase 1 of Solaire Manila which cost an estimated $650MM will include 180,000 square meters of floor area, comprising of a hotel tower, three levels of podium that has ballroom/convention facilities, gaming areas, restaurants, retail shops, and health and wellness facilities. The project's total cost is expected to reach $1.2BN.

Old Habits

This note was originally published at 8am on March 07, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He was a man of habits.”

-Benjamin Wallace


Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.


Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.


Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.


Back to the Global Macro Grind


I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.


Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.


Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.


On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:

  1. Cash = 46% (down from 58% on Friday)
  2. Fixed Income = 24% (no change)
  3. US Equities = 18% (up from 12% on Friday)
  4. Commodities = 9% (sold Corn, bought Oil)
  5. International Equities = 3% (bought Canada)
  6. International FX = 0%

I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.


Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.


Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:

  1. SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
  2. Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
  3. US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
  4. S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
  5. S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
  6. 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
  7. Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
  8. US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio

That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?


Strong Dollar = Strong America. Period.


That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).


To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1983-1989 or 1993-1999, these were the most bountiful decades or US job creation and economic prosperity, ever.


Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1658-1694, $120.83-123.89, $79.32-79.91, and 1336-1359, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Plenty of errors, omissions, and questionable valuations in the recent analyst reports.



With the expiration of the quite period, many analysts have published research on Caesar’s Entertainment.  Most of the reports will provide a thoughtful and detailed overview of CZR's current markets and future growth opportunities. However, even some of the reports with less than positive ratings contained some questionable modeling and valuation assumptions.  


Here are just a few:

  • Ignoring CZR’s material CODI obligations.  Page 14 of CZR’s 10k says it best:
    • “In connection with the debt that we reacquired in 2009 and 2010, we have deferred related CODI of $3.6 billion for tax purposes (net of Original Issue Discount (“OID”) interest expense, some of which must also be deferred to 2014 through 2018 under the ARRA). We are required to include one-fifth of the deferred CODI, net of deferred and regularly scheduled OID, in taxable income each year from 2014 through 2018. To the extent that our federal taxable income exceeds our available federal net operating loss carry forwards in those years, we will have a cash tax obligation. Our tax obligations related to CODI could be substantial and could materially and adversely affect our cash flows as a result of tax payments.”
  • Using the book value of debt vs. face value of debt will get analysts an incremental $2.86BN of “value” – more than enough to get to a lofty stock price target
    • Most of the discount to face comes from the Second-Priority Sr. Secured notes
    • From a purely academic stance, if you believe that CZR’s debt is impaired, it’s unlikely that there would be any equity value –since equity is a residual value by definition
    • If CZR experiences a V-shaped recovery, their debt will rally back to PAR and can also trade at a premium to PAR
  • Over-valuing the US online gaming option
    • Analyst don't like to highlight the fact that near term Federal legislation is looking less likely these days.  That said, most analysts would agree that under a State by State legalization structure, the potential market size is smaller and would take longer to materialize.  
    • To be clear, we agree that a legal US online poker market would present a huge opportunity for Caesar's. We also agree that given the strength of their WSOP brand and nationwide recognition they would likely garner a decent piece of the online pie. While their online operations in Europe are currently immaterial and are unlikely to become material in the intermediate future, the experience of operating legal online gaming does provide them an advantage over other US land based operators. That said with the probability of Federal legislation looking more cloudy than a few months ago we think that a deeper haircut to this option is appropriate.  
  • Bad assumptions surrounding Playtika
    • One analyst attributed all of Corporate and Other revenue reported in the 4th quarter to Playtika.  Roughly $20-22MM of that revenue had nothing to do with Playtika and reflected the run rate of revenues in that line item before Playtika was consolidated.  The other $46-48MM reported in the 4Q represents Playtika revenues.  However, that amount represents catch up accounting for 2 quarters, not just one.  We estimate that 4Q Playtika revenues were roughly $28-31MM.


TODAY’S S&P 500 SET-UP – March 21, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -1.03% downside to 1391 and 0.39% upside to 1411. 












SENTIMENT – KM has been on the road in Canada and Minnesota for the last 3 days and the feedback loop was frothy; allegedly, markets can’t go down because they haven’t yet – with Growth Slowing and seasonality playing negative like it did in Q1 of 08, 2010, and 2011, we look ripe for a counter consensus move (II Bullish/Bearish Survey = 2500 bps wide to the Bull side this morn). 

  • ADVANCE/DECLINE LINE: -1018 (-1784) 
  • VOLUME: NYSE 711.14 (-1.42%)
  • VIX:  15.58 3.59% YTD PERFORMANCE: -33.42%
  • SPX PUT/CALL RATIO: 2.22 from 1.28 (73.44%)


  • TED SPREAD: 37.76
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 2.37 from 2.36
  • YIELD CURVE: 1.98 from 1.97 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of Mar. 16 (prior - 2.4%)
  • 9:30am: Fed Chairman Bernanke, Treasury Secretary Geithner testify on Europe debt crisis
  • 10am: Existing Home Sales, Feb., est. 4.61m (prior 4.57m)
  • 10am: Existing Home Sales (M/m), Feb., est. 0.9% (prior 4.3%)
  • 10:30am: DoE inventories 


  • President Obama travels to New Mexico, Nevada to tout energy strategy
  • Public Company Accounting Oversight Board meets on ways to enhance auditor independence, with remarks by Paul Volcker,
  • Harvey Pitt, Arthur Levitt. 8:45am
  • House, Senate in session:
    • House Homeland Security Committee holds hearing on Iran, Hezbollah and threats to the U.S. 9:30am
    • House Oversight Committee hears from Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke on Europe’s sovereign debt crisis. 9:30am
    • Senate Banking subcommittee holds hearing on crowdfunding. 9:30am
    • House Appropriations subcommittee hears from Internal Revenue Service Commissioner Douglas Shulman on the agency’s budget request. 10am
    • House Appropriations subcommittee hears from Housing Secretary Shaun Donovan on the agency’s budget request. 10am
    • House Natural Resources holds hearing on gasoline prices. 10am
    • Senate Homeland Security holds hearing on President Barack Obama’s government reorganization plan. 10am
    • House Budget Committee marks up Chairman Paul Ryan’s 2013 budget proposal. 10:30am
    • Senate Judiciary subcommittee holds hearing on the Verizon-cable deals. 2pm
    • House Financial Services Committee meets to consider issuing a subpoena to MF Global Holdings employee Edith O’Brien. 2pm
    • Senate Homeland Security Committee hears from Homeland Security Secretary Janet Napolitano on the agency’s budget request. 2:30pm
    • Senate Appropriations subcommittee hears from Commodity Futures Trading Commission Chairman Gary Gensler on the agency’s budget. 2:30pm 


  • Fed Chairman Bernanke says Europe must aid banks even as strains have eased; testifies before House committee today
  • Mitt Romney wins Illinois GOP primary with 47% to Rick Santorum’s 35%
  • Vantiv, payment processor that started as a unit of Fifth Third, seeks to raise as much as $529m in IPO
  • Previously owned U.S. home sales may have risen 0.9% to 4.61m annual rate in Feb., fastest since May 2010, economists est.
  • CMS Medcac meets on anti-VEGF treatment for diabetic macular edema; watch Valeant, Regeron, Roche
  • GlaxoSmithKline, Johnson & Johnson are forming a $200m fund with Index Ventures to invest in early-stage biotechnology cos.
  • Transocean holders’ suits over rig explosion dismissed by judge
  • Geithner agrees to written testimony in Lehman’s JPMorgan suit
  • Ziggo raised ~EU804m ($1.1b) in IPO selling at top end of range
  • Thomson Reuters nears sale of health-care business: WSJ
  • Microsoft pledges to drive price down to bid to become top seller in China smartphone market 


    • General Mills (GIS) 6:57am, $0.56
    • Actuant (ATU) 7:30am, $0.38
    • Fred’s (FRED) 7:45am, $0.24
    • Alacer Gold (ASR CN) Pre-Mkt, $0.16
    • Sonic (SONC) 4pm, $0.02
    • Shoe Carnival (SCVL) 4:01pm, $0.21
    • Clarcor (CLC) 4:02pm, $0.47
    • Discover Financial Services (DFS) 4:15pm, $0.94
    • Franco-Nevada (FNV CN) 5:15pm, $0.32


  • Appalachian Coal Fights for Survival on Shale Boom: Commodities
  • Copper Advances on Indications of Recovering Economy in U.S.
  • Oil Rebounds From Biggest Drop in Three Months as Supplies Fall
  • Gold May Advance as a Weaker Dollar Prompts Investment Demand
  • Sugar Falls in London on Increased Supplies; Coffee Also Drops
  • Soybeans May Gain on Speculation U.S. Planting Didn’t Increase
  • U.S. Warns Iran Oil Buyers of Sanctions, Japan and EU Exempt
  • Indian Jewelers to Reopen Stores After Five-Day Shutdown
  • Iron Ore to Drop as China Growth Slows, Biggest Shipper Says
  • Saudi Arabia Can Raise Oil Output 25% If Needed, Naimi Says
  • Single-Cup Coffee Cuts ‘Waste,’ Lowering Bean Demand, Illy Says
  • Copper-Oil Ratio Signals Drop in U.S. Stocks: Chart of the Day
  • Japan Adds Research Ship to Find Rare Earths, Reduce Imports
  • Oil Rebounds From Biggest Drop in 3 Months
  • Glencore Finds Viterra After BHP Billiton Miss: Corporate Canada
  • Gold May Decline Below $1,600 on Fibonacci: Technical Analysis
  • Gold Seen Recapturing Precious-Metal Crown: Chart of the Day 














ASIA – generally weak session in Asian Equities after the Hang Seng snapped our line yesterday; Asian Growth Slowing is a reality right now; the perma-bulls refused to accept it in Q1 of 2011 and are at their own risk doing so now.


YEN – easily the ugliest chart in all of Global Macro right now – also something consensus has not moved towards addressing/understanding yet; we’ll be in Boston all day explaining why we think the Yen’s -9.2% drop since FEB is similar to the initial steep decline of the Euro in April/May of 2011. #SovDebtRisk










The Hedgeye Macro Team


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.