Asymmetric Downside?: TIP Trade Update

Conclusion: Treasury Inflation Protection looks overvalued here, especially given the asymmetry associated with the long side of the USD. In fact, TIPS appear to have asymmetric downside risk, absent further monetary easing out of the Federal Reserve.


Position: Short the iShares Barclays TIPS Bond Fund (TIP).


This morning, Keith shorted the iShares Barclays TIPS Bond Fund in our Virtual Portfolio on the expectation that the demand for Treasury Inflation Protected Securities will wane in the coming months as the leading indicators for the slope of inflation (input costs in the form of energy, food, and raw materials prices) continue to make lower highs, consistent with our 1Q12 theme of Deflating the Inflation II.


As you recall, we took a brief respite from that theme immediately following Bernanke’s JAN 25thpledge to extend ZIRP to 2014, which we viewed as a headwind to our bullish view on King Dollar – the most notable of many factors driving commodity prices, in our opinion. Following a few weeks of taking the Fed’s queue and being bullish on assets correlated to inflation, we are now view the topping process in the Inflation Trade as a leading indicator for disinflation and, thus, are inclined to short TIPS.


Already broken from a TRADE-duration perspective, the TIP etf is flirting with a TREND-duration breakdown per our quantitative risk management model:


Asymmetric Downside?: TIP Trade Update - 1


We’ve made this point in previous notes, but absent a commensurate pickup in employment growth and wage inflation, accelerating input costs do little more than slow growth on a lag. While it can be nice to watch “risky assets” (equities, commodities, HY credit) all trade higher in unison and tell stories about accelerating demand/economic growth,  the reality of the situation remains is that we have a central bank that remains committed to perpetuating inflation due to a classical economic theory that views that as a prerequisite for employment growth.


Looking forward, however, the chart of the U.S. Dollar Index is telling us that from an intermediate-term TREND (bullish) and long-term TAIL (bullish) perspective, the current state of monetary policy backing the U.S.’s currency will come under increasing scrutiny and relegate Bernanke and Co. into an increasingly smaller box or, potentially, out of their roles altogether. Either way, further USD strength will have a negative effect on global commodity prices and assets that are highly correlated with inflation. The CRB Index (a basket of 19 commodities including crude oil) is breaking down and its quantitative setup inversely mirrors that of the DXY’s:


Asymmetric Downside?: TIP Trade Update - 2


Asymmetric Downside?: TIP Trade Update - 3


All told, Treasury Inflation Protection looks overvalued here, especially given the asymmetry associated with the long side of the USD. In fact, TIPS appear to have asymmetric downside risk, absent further monetary easing out of the Federal Reserve – which, in our view, poses a dramatic risk to U.S. growth, given that we’re already in the midst of an oil price shock!


Darius Dale

Senior Analyst











THE HBM: DNKN, COSI, BWLD - subsector





DNKN: Dunkin’ Brands announced an upsizing and pricing of its secondary offering.  The secondary offering will be priced at $29.50.  We do not think it is any coincidence that the company made this announcement the day after announcing a partnership – the largest of its kind so far in 2012 – with Jerry Jones and Troy Aikman to open 50 Dallas/Fort Worth restaurants.  


COSI: Cosi reported a $0.04 EPS loss in 4Q along with same store sales of 2.6%.  With one week remaining in 1Q12, system-wide comparable sales increased by almost 5%.




PEET: Peet’s has been performing well over the last month but declined 4.8% on accelerating volume yesterday.





BWLD: Buffalo Wild Wings was initiated Neutral at Morgan Stanley.




DIN: DineEquity underperformed its peers yesterday.





Howard Penney

Managing Director


Rory Green




Not terrible but more evidence of a more competitive junket environment.



The data is in.  With the enhanced disclosure from MPEL, we can confirm that while the sky isn’t falling, junket commissions did tick up in the 2H11.  This is on top of a sharp increase in receivables – see our note this morning “MACAU: HIGHER RECEIVABLES”.  On a positive note, commissions barely budged on a YoY basis.  


The charts below show the composition by company of all-in commissions among the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  


Main takeaways: 

  • The gap between the lowest all-in commission rate and the highest commission narrowed considerably in 2011 to 4.3% from 6.7% in 2010 on a % of win basis and to 15bps from 18bps on a % of RC basis.  The compression was largely driven by junket commissions
  • Excluding comped non-gaming amenities (rooms/F&B), Wynn remains the least aggressive.  However, on a YoY basis Wynn’s rebate and junket commission (as a % win) increased 5% and 1%, respectively, from 1H to 2H2011.  
  • We were surprised to discover that MPEL actually had the lowest all-in commission rate on both a RC and % of win basis in 2H12.  Despite offering the largest junket commission, MPEL has consistently had the lowest comps on non-gaming amenities.  MPEL also offered one of the lower rebate rates, which is surprising given the relatively large direct premium play business at City of Dreams.

Other observations:

  • Rebate rates increased YoY and in the 2H of 2011 vs. the 1H
    • The average rebate rate for the year and 2H was 32.4% (as a % of win) or 95bps (2011)/96bps (2H11) (as a % of RC)  
    • Wynn had the lowest rebate rate in 2011 at 30.6%/90bps
    • MPEL had the lowest rebate rate in 2H11 at 30.0%/91bps
  • Junket commission increased YoY and in the 2H of 2011 vs. the 1H
    • The average junket commission increased 4% YoY (on a % win and RC basis) to 8.2%/24bps in 2011
    • In 2H11, the average junket commission was 8.4%/25bps
    • Wynn continued to offer the lowest commission rate in 2011 and 2H11
      • 2H11: 7.2%/22bps
      • 2011: 7.2%/20bps
    • MPEL continued to offer the highest commission rate in 2011 and 2H11
      • 2H11: 9.3%/29bps
      • 2011: 8.9%/26bps
  • Comped non-gaming amenities decreased YoY and but increased in the second half of 2011
    • The average non-gaming comps fell to 9% on a % of win basis to 4.2% in 2011 from 4.5% in 2010 and 5.5% in 2009
    • The YoY drop on a % of RC basis was 8% from 13bps in 2010 to 12bps in 2011 
    • In 2H11 the average non-gaming comps increased 8% and 11% on a % win and % RC basis, respectively, to 4.3%/13bps from 4.0%/12bps in 1H11
    • MPEL continued to offer the lowest comps in 2011 and 2H11
      • 2H11: 2.7%/8bps
      • 2011: 2.6%/8bps
    • LVS continued to offer the highest comps in 2011 and 2H11 which is not surprising given that they have the largest % of their revenue base coming from non-gaming amenities.  Comps as a % of win and RC have been steadily declining from 2008 to 2011.
      • 2H11: 6.3%/17bps
      • 2011: 5.8%/17bps
  • The all-in commission rate was flatish YoY but increased in the 2H of the year compared to the 1H to 46.5%/1.41bps
    • On a % of win basis, LVS paid the highest all-in rate at 49.4% in 2H11 and 46.9% in 2011.
    • On a % of RC basis, MGM was the biggest spender at an all-in rate of 1.41% in 2H11 and 1.4% in 2011.







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FINL: Committed


This is not your average ‘in-line quarter.’ In fact, we chalk this one up as a miss and will likely watch it from the sidelines through 1H before getting more constructive.


Yes, EPS of $0.81 came in-line with Street estimates of $0.81E, but the composition of earnings was significantly different. The key delta relative to our numbers was in the SG&A line, which came in up +23% yy on +19% sales growth accounting for $0.07 in EPS. We were looking for EPS of $0.86 on +15.5% SG&A growth. In addition to announcing a new partnership and $10mm capital infusion from Gart Capital to build out the company’s run specialty business, FINL’s commitment to investment spending (IT, personnel, etc.) over the intermediate-term is clearly more substantial than we had anticipated.


The call here is not that underlying fundamentals have changed – in fact they were good (comps up +10.8%, GMs +120bps, and sales/inv spread up +5%), but that variable spending is headed higher, much higher near-term. As a result, management is taking Q1 EPS expectations down by (-30%) vs. +20%E. That’s not good for any stock in this tape. The company is also guiding earnings growth of MSD this year and low-to-mid-teen next year. That implies earnings power of $2 over the next two-years, but with greater risk and volatility along the way which does not support multiple expansion - rather quite the opposite.


While March sales up +10% month-to-date suggests the industry demand remains strong, the strategic commitment to building out the FINL organization will significantly curb earnings growth over the intermediate-term. As such, we’ll watch this one from the sidelines through 1H before getting more constructive.


Casey Flavin



FINL: Committed - FINL S



The Joker

“I’m a joker

I’m a smoker

I’m midnight toker

I get my loving on the run.”


-The Steve Miller Band


Technically speaking today is the last business day before April Fool’s Day.  Last year, as some of you remember, I pulled off a decent prank as I removed Keith from his post as CEO of Hedgeye and we replaced him with the The Most Interesting Investor In The World. 


For those of you that missed last year’s joke, I’ve posted the mock video of The Most Interesting Investor In The World directly below.  Our readers that are in tune with popular culture will recognize that it is a spoof of Dos Equis Most Interesting Man In The World:


In my opinion, although perhaps it is because I wrote the script for the You Tube video above, the best line is:


“He shorts naked, with his clothes on.”


But to be even more fair, April Fool’s Day jokes can at times completely miss their mark, especially in times like this when global macro markets really need our utmost focus.  So, this year, we are putting April Fool’s to the sidelines.


Ironically, or perhaps not, Steve Miller is from Wisconsin, which, setting aside the Republican primary battle, is really the current battleground of U.S. politics.  As ABC News wrote this morning:


“While the national media attention has been focused on the upcoming GOP primary in Wisconsin, there’s another political battle gearing up in the Badger State, and it involves both Democrats and Republicans.


On Friday, the Government Accountability Board of Wisconsin is expected to certify the 1 million petitions turned in in January to recall Republican Gov. Scott Walker. With a special gubernatorial election pending, Democrats and Republicans in the state are bracing for a tight race ahead.


A special election is tentatively scheduled for June 5, with a Democratic primary to take place four weeks earlier, on May 8. (Those dates will be made official after the recall is certified.)  Three Democrats have declared their candidacies – former Dane County executive Kathleen Falk, Wisconsin secretary of state Doug LaFollette and state senator Kathleen Vinehout.”


On many levels, the June 5 election will be a critical leading indicator for President Obama’s re-election chances.


On that front, President Obama currently has a 60.4 probability of getting re-elected based on InTrade.  This correlates very closely with the Hedgeye Election Indicator (HEI), which currently shows a 62.3 chance of Obama getting re-elected.  Our proprietary index is based on rigorous back testing.  In effect, we’ve determined that there is a short list of real time market-based indicators that move ahead of President Obama’s position in conventional polls.


Setting all joking aside, in the Chart of the Day, I’ve flagged a note passed along yesterday by my colleague Darius Dale in which he wrote:


“Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:


CBOE SPX Volatility Index (VIX);

Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);

CBOE Oil ETF Volatility Index (OVX);

JPMorgan G7 FX Volatility Index; and

JPMorgan EM FX Volatility Index. 


On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.”


So The Chart of the Day, no joke, shows that volatility, per Darius’s point, is at a very complacent level.  In fact, this is a level that previous flagged both U.S. equity market and global equity tops.


The global macro action this morning is once again in Europe.  Eurozone Financial Ministers are meeting in Copenhagen today (beginning at 11:30am GMT) and tomorrow to discuss strengthening the region’s firewall via EFSF/ESM.  As well, Rajoy will present Spain’s 2012 budget this afternoon with a statement expected around 12pm GMT (deficit target 5.3% of GDP down from 8.5% last year).


If there is one key red flag this morning in Europe it is from Germany.  Specifically, German February retail sales came in weaker at -1.1% month-over-month versus the estimate of +1.1%.  Now, clearly, this is but one data point, but Germany is definitely the positive bell weather in Europe to focus on. Well, until Germany turns negative.


As it relates to our negative thesis on the Yen, this morning we had two supportive data points:


1. Japan Industrial production unexpectedly fell as strengthening yen hurt outlook for exporters earnings; and

2. Japan February consumer prices unexpectedly increased +0.1%  year-over-year versus -0.1% estimates.


But data points, as always, are only data points.  So, this morning I will leave you with one last quote from Steve Miller:


“The question to everyone’s answer is usually asked from within.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $122.25-124.67, and 1, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Joker - Chart of the Day


The Joker - Virtual Portfolio