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Exporting Dogma

“Currency devaluation as a path to increased exports is not a simple matter.”
-Jim Rickards, Currency Wars


My week of family vacation would not have been complete without thinking about Keynesians. Sadly, from the gas pumps in Fort Myers, Florida to those in New Haven, CT, centrally planned Policies To Inflate are now part of the cost of everyday American life.


If you didn’t know that the world’s markets are globally interconnected, you might actually believe the Academic Dogma that a “cheap currency” is going to provide you the yellow brick road to Export prosperity. If you’ve analyzed the last 5 years of US Export versus US Consumption growth data, you probably think otherwise. America is a Consumption economy. Period.


Debauching the US Dollar to all-time lows into the Spring of both 2008 and 2011 inspired bouts of global food and energy inflation like the world has never seen. With sovereign debt levels having crossed the Rubicon (structurally impairing long-term growth), Ben Bernanke had no business imposing another inflation policy on January 25th, 2012. Growth started slowing in February.


Back to the Global Macro Grind


Growth Slowing in February? Yes, most major Asian and European stock markets stopped going up in February (Hong Kong, India, Spain, etc). This morning’s abruptly bearish reaction in global equity markets is simply a function of consensus catching up to where we’ve been. This isn’t our first rodeo calling for a sequential slowdown in growth. It won’t be our last.


What would change my view? I’ll give a free tank of natural gas to the first best guess.


Strong Dollar is the only way out. The best way to achieve that is to get these un-elected Keynesian policy makers out of the way.


A Strong Dollar will: 


A)     Deflate The Inflation

B)     Strengthen (inflation adjusted) Consumption Growth


That’s the 71% of the US Economy that matters, not Exports.


Not seeing US Exports work drives the Keynesians right batty. It should - look at the US Export contribution to US GDP for the last 3 quarters:

  1. Q2 2011 = 0.48%
  2. Q3 2011 = 0.64%
  3. Q4 2011 = 0.37%

Oh, and by the way, you have to net out Imports from Exports to get to US GDP (calculating GDP = C + I + G + (EX-IM)), so Exports aren’t doing anything for US Growth where it matters most, on the margin.


The biggest concern that Keynesian politicians from Nixon/Carter to Bush/Obama have had is seeing the stock market go down. During periods of economic stagflation, stock markets get addicted to inflation inasmuch as the politicians do. If you Deflate The Inflation, stocks and commodities fall. So, in the short-term, they’re right.


But what’s right for the long-term prosperity of a country’s economy, attempting to centrally plan stock and commodity prices, or maintain price “stability” and “full” employment?


This is why The People are so upset. This is why US Equities in particular have zero inflows. The People don’t trust this game of gaming policy anymore – and they shouldn’t.


This morning’s Global Macro “news” is laden with stagflation – unless we see WTIC Oil prices snap and stay below $96/barrel, that’s just the way it’s going to be. Global Growth has never NOT slowed with Oil prices at these levels. Never is a long time.


Rather than have some Keynesian Economist who takes car service or a NYC cab to work tell you to put some natty gas in your truck and like it, look at what the rest of the world is reporting this morning:

  1. French Services PMI slows, big time, to 46.4 in April versus 50.1 in March
  2. Italian Consumer Confidence hits an all-time lows (all-time is a long time)
  3. Singapore Consumer Price Inflation for March accelerated to 5.2% versus 4.6% in February

That last data point is stale news now (March), and should start to ease in April/May if we see a continued Deflation of The Inflation. That’s the best news I can tell you this morning. But, like it was during the Q1 to Q3 stock market draw-downs of 2008, 2010, and 2011, this will be a process, not a point. Global Consumption doesn’t turn on a futures broker’s dime.


In the meantime, we’ll be using the same research and risk management process to monitor changes on the margin. While it’s alarming that Old Wall Street has not changed what it is that they do in the last 5 years, we don’t want to interrupt them as they continue to make the same mistakes, confusing short-term stock and commodity market inflations with real growth.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $116.95-119.41, $79.11-79.54, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Exporting Dogma - Chart of the Day


Exporting Dogma - Virtual Portfolio


The Economic Data calendar for the week of the 23rd of April through the 27th 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.



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Weekly European Monitor: Sarkophobia!

European Positions Update: Long German Bunds (BUNL); Covered France (EWQ) on 4/18


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.7% week-over-week vs -2.2% last week. Top performers:  Switzerland +2.7%; Sweden +2.7%; Denmark +2.6%; Germany +2.5%; UK +2.1%; Russia (RTSI) +2.0%.  Bottom performers: Cyprus -7.4%; Spain -2.9%; Luxembourg -1.3%; Poland -1.3%; Greece -1.3%.
  • FX:  The EUR/USD is up +1.03% week-over-week.  W/W Divergences: GBP/EUR +0.72%, SEK/EUR +0.46%; RUB/EUR -0.46%, CZK/EUR -0.70%, TRY/EUR -0.71%.
  • Fixed Income:  After a relatively flat week last week, Italian 10YR yields shot up +23bps to 5.65% week-over-week. This just trailed Greece's gain of 31bps to 21.37%.  French yields also bounced ahead of the presidential election and talks of Fitch making a decision on its AAA credit status in May, via a +20bps rise to 3.10%. Portugal saw the only notable inflection to the downside, with yields falling -64bps to 11.91%.  

Weekly European Monitor: Sarkophobia! - 11. yields



In Review:

The title of this note could have also been “Europe: The Best of Times, The Worst of Times.”  For yet another week, we saw substantial European capital market swings. As our Director of Research Daryl Jones succinctly said this week: One day bad news matters, the next day good news matters more. 


In particular, this week saw significant equity swings around two Spanish bond auctions, short term paper on Tuesday and 2YR and 10YR maturities on Thursday, both of which met demand but saw higher average yields versus previous auctions. Both were digested favorably by the market, yet once again the PIIGS were laggards w/w on the score of equity performance and high sovereign yields. We continue to warn of the larger risks associated with Spain’s banking leverage to housing and property prices, in particular because we think Spanish house prices could fall another 30% from here. (For more, see our web portal at www.hedgeye.com for recent notes on the subject).


Further, we continue to signal that despite all the positives from such programs as the EFSF, ESM, LTRO, SMP, and increased funding to the IMF (see Call Outs below), programs designed to help firewall and provide liquidity to Europe’s fiscal and banking risks, they do little to bind Europe under a growth strategy.  A positive growth profile is critical for investor confidence to buy equities, countries to pay down their debt and deficits through tax receipts, and more broadly for the market to clearly diagnose that Europe is out from under its dark cloud. In short, we think there’s more downside not priced in.


Switching gears, this Sunday marks the first of two French presidential election votes. While the leading two candidates, the incumbent Nicolas Sarkozy and Socialist Francois Hollande, will advance to the second round vote on May 6th, recent polls suggest Hollande will beat Sarkozy 29% to 24% in Round 1 and 58% to 42% in Round 2, according to CSA.  Interestingly, Hollande may gain a significant share not on his merits alone, but due to Sarkophobia, or a repulsion of Sarkozy’s right-wing policy and social stance (which may sound nonsensical to an American audience) in a historically (post WWII) very left-leaning state. 


That said, sociology professor Michel Maffesoli at Sorbonne University makes the case that despite the French media being very much against Sarkozy (nit-picking every social gaff and his lack of intelligence), Sarkozy has far more of a “rapport than is ever acknowledged”. He argues, "Post-modernity, which is the condition our societies are moving into, is far more anchored around the emotional than the rational or intellectual…and he is far more in phase with ordinary people than are the intellectuals who govern public life.”  He adds, “in the voting-booth it is different. The booth is like a womb where people reconnect with the purely emotional. It means going with their gut rather than their brains…that's why I think Sarkozy can still do it."


Time will tell who captures the vote but what’s broadly clear is that both candidates plan to increase taxes and impose fees on financial transactions.  Both have declared to reduce the country’s deficit to 0% (as a % of GDP), Hollande by 2017 and Sarkozy by 2016.  Both guide to reduce the deficit to 3% by 2013 versus 5.3% in 2011. Taken together, we think these policy moves will disadvantage the broader economy versus its European peers.


Hollande specifically has signaled an even more socialist agenda, which we think should result in the inability of the state to meet its deficit and debt reduction targets. Hollande wants to increase spending by €20 MM over five years (by repealing €29 MM of tax breaks and generating revenue by separating retail and investment bank operations and raising the income tax on earners over €1 MM to 75%) and reduce the retirement age to 60 from 62.  With the country’s debt rising to the 90% level, we expect growth to be compressed, as proven by the work of Reinhart and Rogoff. Finally, Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries and promised to increase France's minimum wage.


Taking a step back, the implications of a change of guard in France and recent statements by Sarkozy that the ECB should have “massively” bought Greek bonds at the outset to prevent the Eurozone debt crisis, may spell the end of Merkozy, namely Sarkozy’s strong working relationship with German Chancellor Merkel.  Should France move further left and not find agreement with its German neighbor, the nation that we believe is carrying the big stick in Europe, it suggests the likelihood of further political instability, or at the very least a heightened improbability of attaining a united Eurocrat mind on the go-forward sovereign and banking policy decisions for Europe.


Call Outs:


Volkswagen: Europe’s largest carmaker, yesterday predicted a “very demanding” 2012 as the debt crisis threatens economic stability. European car sales dropped 6.6% to a 14-year low last month as deliveries in France and Italy tumbled by more than 20%.


IMF: Japan promises to provide $60B; Denmark, Norway, and Sweden added $26B; Poland lent $8B; and Switzerland pledged a "substantial amount" this week. The IMF continues to haggle over funding and influence from member counties in a Spring Meeting spilling into this weekend.  China and Brazil indicated that they are not ready to set a figure on IMF contributions and Reuters suggests they want to be assured they will play a bigger role before chipping in. 


John Paulson: the billionaire hedge fund manager who has said the euro may eventually unravel, told investors he is shorting European sovereign bonds, according to a person familiar with the matter.


Outgoing World Bank President Zoellick Suggests in FT Op-ed:   “Instead of quarrelling over firewalls, Europeans should add just a fraction – say €10B – to the capital of the European Investment Bank. Under current conditions, the EIB may actually have to reduce lending. Instead, the EIB could use more capital to borrow and then invest to support structural reforms, showing Spaniards and Italians that their sacrifices will draw productive investments.” 


France:  Fitch rumored to not make decision on downgrading France’s sovereign credit rating until after French elections (May 6th).


Holland: Fitch official says may cut Dutch AAA rating if the Netherlands does not cut the deficit.


Sweden: cuts growth forecasts to +0.4% in 2012 (vs a prior estimate of +1.3%) and +3.3% in 2013 (vs +3.5%).


CDS Risk Monitor:


Week-over-week CDS was up across the main countries we track.  Italy saw the largest gains in CDS w/w, +50bps to 476bps, followed by Ireland +21bps to 590bps; France +18bps to 199bps; Spain +17bps to 504bps; Germany +13bps to 84bps; Portugal +4bps to 1102bps; and the US +1bp to 30bps. The UK fell -1bp to 63bps.  


Weekly European Monitor: Sarkophobia! - 11  cds   a


Weekly European Monitor: Sarkophobia! - 11. cds   b


Data Dump:

Eurozone ZEW Economic Sentiment 13.1 APR vs 11 MAR

Eurozone Current Account -5.9B EUR FEB vs -10.1B EUR JAN

Eurozone Construction Output -12.9% FEB Y/Y vs -2.7% JAN   [-7.1% FEB M/M vs -0.5% JAN]

EU 25 NEW Car Registrations -7% MAR Y/Y vs -9.7% FEB

Eurozone CPI 2.7% MAR Y/Y (exp. 2.6%)

Eurozone Trade Balance 3.7B EUR FEB (exp. 5B EUR) vs 5.3B EUR


Germany ZEW Current Situation 40.7 APR (exp. 35) vs 37.6 MAR

Germany ZEW Economic Sentiment 23.4 APR (exp. 19) vs 22.3 MAR

Germany IFO Business Climate 109.9 APR (exp. 109.5) vs 109.8 MAR

Germany IFO Current Assessment 117.5 APR (exp. 117) vs 117.4 MAR

Germany IFO Expectations 102.7 APR (exp. 102.3) vs 102.7 MAR

Germany Producer Prices 3.3% MAR Y/Y (exp. 3.1%) vs 3.2% FEB   [0.6% MAR M/M (exp. 0.4%) vs 0.4% FEB]


UK CPI 3.5% MAR Y/Y (exp. 3.4%) vs 3.4% FEB   [0.3% MAR M/M vs 0.6% FEB]

UK RPI 3.6% MAR Y/Y (exp. 3.6%) vs 3.7% FEB    [0.4% MAR M/M vs 0.8% FEB]

UK Retail Sale w/ Auto Fuel 3.3% MAR Y/Y (exp. 1.5%) vs 1% FEB  [1.8% MAR M/M (exp. 0.5%) vs -0.8% ]

UK ILO Unemployment Rate 8.3% FEB vs 8.4% JAN

UK Jobless Claims Chg 3.6K MAR vs 4.5K FEB


Spain House Price Index -7.2% in Q1 Y/Y vs -6.8% in Q4  [-3.0% in Q1 Q/Q vs -1.8% in Q4]

Italy Industrial Orders -13.2% FEB Y/Y (exp. -6.2%) vs -5.6% JAN  [-2.5% FEB M/M (exp. -1.1%) vs -7.7% JAN]

Italy Industrial Sales -1.5% FEB Y/Y vs -4.4% JAN   [2.3% FEB M/M vs -4.9% JAN]


Switzerland Credit Suisse ZEW economic expectations 2.1 APR vs 0.0 MAR

Switzerland Producer and Import Prices -2% MAR Y/Y (exp. -1.8%) vs -1.9% FEB   [0.3% MAR M/M (exp. 0.5%) vs 0.8% FEB]


Netherlands Unemployment Rate 5.9% MAR vs 5.9% FEB

Portugal Producer Prices 3.5% MAR Y/Y vs 4.2% FEB


Bulgaria Unemployment Rate 11.5% MAR vs 11.5% FEB

Slovakia Unemployment Rate 13.7% MAR vs 13.8% FEB

Hungary Avg Gross Wages 6.9% FEB Y/Y vs 4.3% JAN

Slovenia Unemployment Rate 12.4% FEB vs 12.5% JAN

Czech Republic Export Price Index 4.2% FEB Y/Y vs 5.4% JAN

Czech Republic Import Price Index 5.8% FEB Y/Y vs 7.0% JAN


Turkey Consumer Confidence 93.9 MAR vs 93.2 FEB

Turkey Unemployment Rate 10.2% JAN vs 9.8% DEC


Interest Rate Decisions:

(4/18) Sweden Riksbank Interest Rate UNCH at 1.50% (as expected).

(4/18) Bank of England Minutes from 4/5 session:  votes 9-0 votes for no rate hike and 8-1 for No Asset Purchase increase.



The European Week Ahead

Sunday: First round of the French Presidential Election


Monday: Apr. Eurozone PMI Composite, Manufacturing, and Services - Advance; 2011 Eurozone Eurostat Govt Debt as a % of GDP; Apr. Germany PMI Manufacturing and Services – Advance; Mar. UK Consumer Confidence Index (Apr 23-27); Apr. France PMI Manufacturing and Services – Preliminary, Production Outlook Indicator, Business Confidence Indicator, and Own-Company Production Outlook; Apr. Italy Consumer Confidence Indicator


Tuesday: Eurozone Eurostat Discontinues the Release of Industrial Orders; Mar. Germany Import Price Index (Apr 24-30); Mar. UK Public Finances and Public Sector Net Borrowing; Apr. France Consumer Confidence Indicator and Business Survey Overall Demand; Mar. Spain Budget Balance YtD; Feb. Spain Mortgages-capital Loaned and Mortgages on Houses; Mar. Italy Hourly Wages


Wednesday: 1Q UK GDP - Advance; Apr. UK CBI Trends Total Orders, Trends Selling Prices, and Business Optimism; Feb. UK Index Services; Mar. Spain Producer Prices


Thursday: Apr. Eurozone Consumer Confidence – Final, Business Climate Indicator; Economic, Industrial, and Services Confidence; Apr. Germany CPI; Apr. UK GfK Consumer Confidence Survey, Nationwide House Prices, and CBI Reported Sales; Mar. UK BBA Loans for House Purchase; Mar. France Jobseekers; Apr. Italy Business Confidence


Friday: May Germany GfK Consumer Confidence Survey; Mar. France Producer Prices and Consumer Spending; 1Q Spain Unemployment Rate; Apr. Spain Consumer Price Index - Preliminary; Mar. Spain Retail Sales; Feb. Italy Retail Sales



Extended Calendar Call-Outs:

22 April:  French Elections (Round 1).


6 May:  Round 2 (Final) French Presidential Elections. Greek Presidential Elections.


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.



Matthew Hedrick

Senior Analyst


An earnings beat is expected but we’re way above the Street.  



MPEL should beat even the recently rising consensus EBITDA estimates by a nice margin.  MPEL has been on a recent tear but could continue to run into the print as estimates keep going higher.  Of course, all bets are off once the numbers are out, since there was high hold once again.   


We estimate high hold contributed approximately $25MM to the quarter’s EBITDA.  Analysts with sell or neutral ratings will surely use the high hold to downplay the quarter’s results.  Overall, we are projecting $239MM of EBITDA for Q1, which is 14% above consensus of $210MM.  Some of the estimates comprising consensus no doubt have factored in the high hold but our estimate is still above consensus on a hold adjusted basis - $214MM vs. $210MM.


While most investors have been focused on the potential slowdown in the Macau VIP market, we would point out that MPEL’s Mass business has continued its momentum with over 60% YoY growth in Q1 and as well as for FY11.  MPEL remains the cheapest concessionaire with operations on Cotai Strip and a big project in the pipeline, trading below 9x 2013 estimates.



1Q Detail


We estimate that City of Dreams will report $715MM of net revenues and $194MM in EBITDA

  • Our net casino win projection is $691MM
    • VIP net win of $405MM
      • Assuming 15.5% direct play we estimate $19.1BN of RC volume (a 2% YoY increase) and a hold rate of 3.02%
      • Using CoD’s historical hold rate of 2.86%, EBITDA would be $12MM lower and net revenues would be $31MM lower
    • $249MM of mass win, up 71% YoY
    • $37MM of slot win
  • $24MM of net non-gaming revenue
    • $22MM of room revenue
    • $13MM of F&B revenue
    • $18MM of retail, entertainment and other revenue
    • $29MMM of promotional allowances or 55% of gross non-gaming revenue
  • $411MM of variable operating expenses
    • $337MM of taxes
    • $62MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.22% or 40.5% on a rev share basis)
  • $24MM of non-gaming expenses
  • $86MM of fixed operating expenses compared to $85MM in 4Q

We project $260MM of net revenues and $53MM in EBITDA for Altira

  • We estimate net casino win $253MM
    • VIP net win of $227MM
      • $10.75BN of RC volume (a 15% YoY decrease) and a hold rate of 3.07%
      • Using Altira’s historical hold rate of 2.80%, we estimate that EBITDA would be $13MM lower and that net revenues would be $29MM lower
    • $26MM of mass win, up 33% YoY
  • $7MM of net non-gaming revenue
  • $173MM of variable operating expenses
    • $139MM of taxes
    • $30MM of gaming promoter commissions in addition to the rebate rate of 96bps (we assume an all-in commission rate of 1.24% or 40.3% on a rev share basis
  • $3MM of non-gaming expenses
  • $31MM of fixed operating expenses, in-line with 4Q

Other stuff:

  • Mocha slots revenue and EBITDA of $36MM and $11MM, respectively
  • D&A: $95MM (guidance of $90-95MM)
  • Interest expense: $27MM (guidance of $25-30MM)
  • Corporate expense: $19MM (guidance of $18-20MM)


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.



Overall, RCL was in-line with our expectations even though guidance was lowered.  This should've been expected.  Here is the report card evaluating actual results against management's assertions. 

    • WORSE – 1Q came in at the high end of guidance.  Midpoint FY 2012 EPS guidance was lowered by 15 cents.  FY 2012 constant currency yield guidance was lowered by 1% on the high end to 1-4


    • SAME – slow and steady improvement from Costa Concordia incident.   Cumulative bookings since early February are down mid-single digits.  During the 4Q call, RCL mentioned new reservations dropped in the low-to-mid teens.  North America bookings are improving at a faster pace than European bookings.


    • BETTER – More normal revenue management environment than 3 months ago


    • SAME – European summer itineraries continue to cloud the outlook but consistent with expectations


    • BETTER – Expect Caribbean yields to surpass 2008 level


    • SAME  –  Cruise sales and pricing remain very weak. Good performance from the Pullmantur tour groups lessens the blow a bit


    • SAME–  Australia and Brazil continue to be robust markets. Voyager of the Seas is generating some interest out of Asia


    • WORSE–  Even though FY2012 fuel expenses were only $2MM higher than previous guidance higher drydock, maintance, and tour-related expenses drove up NCC ex fuel guidance by 1% point.


    • SAME –  Still wary of booking

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 80.46%
  • SHORT SIGNALS 78.35%