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Ugly Beautiful

“Some are ugly and some are beautiful.”

-Ray Dalio


That’s what Bridgewater’s Ray Dalio wrote recently about Deleveragings. Spell (and box) checkers take note: the plural of deleveraging doesn’t yet register on Wikipedia as a word. By the time this Sovereign Debt Cycle is over with, it will.


I was flying back to New York from Toronto last night and Dalio bubbled up to the top of my Research Pile alongside another one of the most credible Global Macro Risk Management sources to emerge from 2007’s top, Eclectica’s Hugh Hendry.


Not surprisingly, both Dalio and Hendry are talking about the same risk to asset prices (stocks, bonds, commodities, etc. ) that have been supported by Policies To Inflate – deflation. But both have different views on the pace and timing of what asset price inflations and deflations could look like.


Back to the Global Macro Grind


If your risk management process doesn’t embrace the uncertainties associated with a Globally Interconnected Marketplace of colliding factors, it’s more difficult to apply the principles of Chaos (or Complexity) Theory to what it is that you do every day.


People get whipped around by questioning what is “causality versus correlation” all of the time. Our process embraces the idea that both can occur at the same time.


In Chaos Theory you have Emergent Properties and Phase Transitions. The Correlation Risk born out of an emergent property like the World’s Reserve Currency (USD) and asset prices is very real. So are the phase transitions (crashes) born out of that Correlation Risk.


The US Dollar Index is up for the 5thconsecutive day to $79.58 this morning. Look at the immediate-term TRADE correlations that our model is spitting up versus the USD:

  1. WTIC Oil = -0.72
  2. Brent Oil = -0.64
  3. Gold = -0.77
  4. Copper = -0.76
  5. Wheat = -0.71
  6. Soybeans = -0.81

In other words, that’s how I can show you, in real-time, the answer to both Dalio and Hendry’s question on timing asset price inflations and deflations. US Dollar driven Correlation Risk doesn’t matter all of the time. Neither is it perpetual. But some of the time, it matters big time. And that’s when you get paid to be long or short beta.


If you believe (like I do), in the causal relationship between Monetary Policy and Currency moves, you’ll absolutely love learning about this. It forces us to Re-Think and Re-Learn, every day. If you believe, like a dogmatic Keynesian (Bernanke) does, that monetary policy doesn’t infect currency prices which then, in turn, affect inflations/deflations, this will drive you right batty.


Chaos Theory is not part of the current Western Academic Curriculum in Economics. By the time I am dead, it will be. It’s math. And the math will ultimately trump the social science of studying the 1930’s depression in a vacuum.


Don’t take my word for it on this. Read economic history. Overlay Reinhart & Rogoff teachings about the relationships between deficits, debts, and inflation/deflation with what modern day practitioners are writing about. It’s all out there. Educate yourself.


Dalio’s February 2012 research note is titled “An In-Depth Look at Deleveragings” and in it he does exactly what Professor Robert Shiller taught me to do here at Yale – study the long-term cycles, across countries, so that you can begin to understand the scenarios, probabilities, and mean reversion risks.


Dalio considers both the “Ugly” (1920’s Germany) and the “Beautiful” Deleveragings. The most relevant scenarios I thought he nailed down to the risk management board were:

  1. UK Deleveraging 1
  2. Japan Deleveraging 1990-Present
  3. US Delevergaing 2008-Present

Not one of these deleveragings were the same in terms of numbers of years and/or asset price % moves, but the monetary policies that were engaged in by central planners during all 3 certainly rhyme.


Dalio calls the UK and US Deleveragings of 1 and 2008-Present “beautiful.” I’ll call what happened in the UK thereafter (1970s) and what is about to happen in the US (if we abuse the US Dollar through debt monetization further), his version of “ugly.”


Hendry said he was long asset price inflation (Equities and Agricultural Commodities) in February. That’s was a good call until the end of February and early March when Global Equity and Commodity price inflations stopped.


Now what you see is what we call Deflating The Inflation. It’s not what Hendry calls “hyper-deflation”, yet. Neither is it the “ugly deflationary deflation” that Dalio warns of. Unless you are long of anything Spanish, Italian, or Greek Equities, that is…


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $112.42-113.87, $79.36-79.68, $1.30-1.32, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ugly Beautiful - Chart of the Day


Ugly Beautiful - Virtual Portfolio

President Obama's Reelection Chances Hold Steady at 60.6% -- Hedgeye Election Indicator


If the US Presidential election were held today, President Obama would stand a 60.6% chance of winning reelection, according to the Hedgeye Election Indicator (HEI). That level is unchanged from last week, and marks the seventh time in the past eight weeks that President Obama's reelection chances have stood above 60%, according to the HEI. Two factors that can contribute to a decline in the President's reelection chances, a stronger US dollar and a weaker performance in US stocks, were offset by other factors in the HEI model to keep the likelihood of the President's reelection chances the same as last week. 



President Obama's Reelection Chances Hold Steady at 60.6% -- Hedgeye Election Indicator  - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


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.


TODAY’S S&P 500 SET-UP – May 8, 2012

As we look at today’s set up for the S&P 500, the range is 24 points or -0.41% downside to 1364 and 1.34% upside to 1388. 











    • Up from the prior day’s trading of -1545
  • VOLUME: on 5/07 NYSE 754.30
    • Decrease versus prior day’s trading of -8.60%
  • VIX:  as of 5/07 was at 18.94
    • Decrease versus most recent day’s trading of -1.15%
    • Year-to-date decrease of -19.06%
  • SPX PUT/CALL RATIO: as of 05/07 closed at 1.31
    • Down from the day prior at 1.42 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.83
    • Decrease from prior day’s trading at 1.87
  • YIELD CURVE: as of this morning 1.58
    • Down from prior day’s trading of 1.62 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism, April: est. 92.3, prev. 92.5
  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 8:30am: ECB’s Draghi, Praet speak in Frankfurt
  • 9:45am: Fed’s Lacker meet with students at Greensboro Community College, North Carolina
  • 10am: IBD/TIPP Economic Optimism, May: est. 48, prev. 49.3
  • 10am: JOLTs Job Openings, March: prev. 3498
  • 11:30am: U.S. to sell $30b 4-wk bills
  • 12pm: DoE short-term energy outlook
  • 12:45pm: Fed’s Fisher speaks on panel in Dallas
  • 1:00pm: U.S. to sell $32b 3-yr notes
  • 4:30pm: API inventories


    • House Financial Svcs panel, led by Rep. Ron Paul, holds hearing on changing mission, structure of Federal Reserve, 10am
    • House, Senate negotiators meet to discuss $109b highway bill, first multi-year transportation plan since 2005 3pm
    • Indiana, North Carolina, West Virginia hold primary elections
    • Voters in Wisconsin pick Democrat to challenge Republican Gov. Scott Walker in June recall vote
    • FEC holds closed meeting on compliance matters, 10am
    • HHS Secretary Kathleen Sebelius, Transportation Secretary Ray LaHood, Homeland Security Secretary Janet Napolitano;, GSA Acting Administrator Dan Tangherlini speak at Partnership for Public Service event on shrinking federal budget, 8:30am
    • Senate holds test vote to see whether support exists to debate bill to prevent student-loan interest rates from doubling
    • House Speaker John Boehner, R-Ohio, U.S. Trade Representative Ron Kirk speak at Council of the Americas conference, 10:30am
    • Senate Armed Services panel holds hearing on Pentagon aviation programs, 3pm
    • NRC advisory committee meets on reactor safeguards, 8:30am
    • FERC meets on environmental impact of facilities by Columbia Gas Transmission LLC in Maryland, 7pm    


  • America Movil offers to buy stake in KPN for $3.4b
  • Ally Finl. gets Treasury Dept. approval for ResCap bankruptcy
  • Yahoo! board members have met to discuss CEO Thompson
  • Morgan Stanley raised estimates for collateral and termination payments to $9.6b
  • FDA to release staff reports for May 10 advisory panels on Arena/Eisai’s weight-loss pill lorcaserin and Gilead’s Truvada to prevent HIV infection
  • Marubeni said close to buying U.S. grain trader Gavilon for $5b
  • SEC planning to hire investigator to review complaints about the agency’s internal watchdog unit
  • AMR’s local TWU leaders encourage workers against final contract offer
  • Movie-chain owner AMC Entertainment said to be in sale talks with Wanda Group, NYT says
  • HSBC Holdings 1Q pretax profit rose 26%, beating est.
  • Pershing Square’s Bill Ackman among speakers at Bloomberg Link “Canada Economic Summit” 


    • Patriot Coal (PCX) 6am, $(0.34)
    • Keyera (KEY CN) 6:19am, C$0.25
    • Starwood Property Trust (STWD) 6:30am, $0.51
    • Quicksilver (KWK) 6:44am, $(0.04)
    • Fossil (FOSL) 7am, $0.92
    • International Flavors & Fragrances (IFF) 7am, $1.00
    • Scotts Miracle-Gro (SMG) 7am, $2.06
    • Discovery Communications (DISCA) 7am, $0.60
    • NV Energy (NVE) 7am, $0.04
    • TransDigm Group (TDG) 7am, $1.45
    • Henry Schein (HSIC) 7am, $0.92
    • Apollo Global Management LLC (APO) 7am, $0.77
    • OfficeMax (OMX) 7am, $0.16
    • DIRECTV (DTV) 7:30am, $1.05
    • Tenet Healthcare (THC) 7:30am, $0.09
    • Health Care REIT (HCN) 7:30am, $0.88
    • Molson Coors Brewing Co (TAP) 7:30am, $0.43
    • Perrigo Co (PRGO) 7:47am, $1.21
    • Hecla Mining Co (HL) 8am, $0.08
    • Charter Communications (CHTR) 8am, $(0.32)
    • Wendy’s Co/The (WEN) 8am, $0.03
    • George Weston Ltd (WN CN) 8am, C$0.80
    • Liberty Interactive (LINTA) 8:30am, $0.16
    • Liberty Media - Liberty Capital (LMCA) 8:30am, $0.70
    • CI Financial (CIX CN) 11:17am, C$0.33
    • Invesco Mortgage Capital (IVR) 4pm, $0.65
    • XL Group (XL) 4:01pm, $0.40
    • Solera Holdings (SLH) 4:05pm, $0.68
    • Walt Disney (DIS) 4:15pm, $0.55
    • Kinross Gold (K CN) 4:15pm, $0.21
    • Chesapeake Midstream Partners (CHKM) 4:15pm, $0.36
    • Energy Transfer Partners (ETP) 4:25pm, $0.44
    • Energy Transfer Equity (ETE) 4:27pm, $0.38
    • Franco-Nevada (FNV CN) 5:15pm, $0.32 



OIL – now some good news – Brent Oil has now snapped my long-term TAIL line of $113.87 support and is moving into a Bearish Formation. With the US Dollar up for 5 consecutive days, we’re seeing exactly what we should – Deflating The Inflation (this will be the new perma-bull chant) = good for Consumers, globally, on the margin. 

  • Soybean-Crop Bust Spurs China to Drain U.S. Supply: Commodities
  • Oil Declines for a Fifth Day After Al-Naimi Says Prices Too High
  • LME Says It Received ‘A Number’ of Proposals After Deadline
  • Copper Declines on Concern European Austerity Will Be Derailed
  • Gold Falls a Second Day as Stronger Dollar Cuts Investor Demand
  • Wheat Advances for Second Day as Demand Gains for U.S. Supplies
  • Palm-Oil Companies Boost Refining Capacity in Indonesia on Taxes
  • Marubeni Said to Be Close to Buying U.S. Grain Trader Gavilon
  • El Nino May Develop This Year, Australian Forecaster Says
  • China’s Gold Imports Jump as Country May Become Biggest User
  • Oil Supplies Expand for Seventh Week in Survey: Energy Markets
  • Miners Tap Junk Bonds to Rescue Stranded Projects: Canada Credit
  • Copper May Rise 11% on Fibonacci Retracement: Technical Analysis
  • Cocoa Rises in London After New York Climb; Robusta Coffee Gains
  • Record U.S. Chemical Exports Show Kirby Barges Now Full: Freight 









ITALY – total gong show across European Equities again this morning as hedge funds who covered on the “news” yesterday gave Italian and French stocks a no-volume bounce to lower-highs. We shorted Italy on that yesterday as the MIB remains in a Bearish Formation (see our intraday note), down -18% since March #GrowthSlowing.






INDIA – so they tried the Keynesian thing and now the Rupee is in free-fall; deficit also climbing as they import inflation; India down -0.9% overnight (down -9% from its Feb 2012 top) looks very different than China right now. We like China long (+11.3% YTD) as Deflating The Inflation (Commodities) helps countries with strengthening FX more.










The Hedgeye Macro Team



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:  WORSE - Not only did Wynn miss in Las Vegas and Macau but poor hold played a smaller role than we previously thought, collections were worse, and the LV convention business disappointed.

    • WORSE:  1Q bad debt expense rose $8 million YoY (all in Macau) as a few large accounts went past 150 collection days.  Collections in 2Q are 'very stable and normal.'  Last quarter Wynn said bad debt reserve as a % of receivables would be flat and there was nothing alarming in terms of receivables.
    • WORSE:  WYNN spoke previously that they see 1Q convention channel revenue being flat.  1Q REVPAR actually came in 4% lower YoY as it was hurt by lower occupancy and two fewer conventions.
  • OKADA 
    • SAME:  No new news


Wynn misses at both properties. Low VIP hold in Macau was known, high Mass hold was not.




  • Business in Macau was fine.  They haven't felt any impact from competition. If they normalized hold they would have had an extra $15-18MM of EBITDA
  • They had a very difficult hold comparison in Vegas 
  • They expect to break ground in Cotai in a few weeks.  He is in final negotiations with contractors
  • No new Okada legal issues



  • Timetable for Cotai: 36-42 months until the opening of Cotai. Spent 28 months designing the property
    • Going down 90+ meters for pilings. It's going to take a few months to pile and lay foundation.  After that things will move quickly
    • There is also a lot going on in China and the Department of Public Works.  So labor is an issue.  However, once the government gives you the land concession they are helpful in getting you off the ground
  • March Junket RC volumes increased over Jan/Feb?
    • Nothing changed. Volumes are simply up YoY and customers may be coming back to "mama" now that they have sampled the competition
  • Special dividends are special. They do have very strong cash flow and a long lead time until construction spend gets expensive
  • Mass revs barely up - they transitioned a lot of their tables from Mass to VIP - they're just yielding their floor.
  • Increase in expenses in Macau: bad debt expense was up $8MM - all due to Macau. Had a few large account that went past 150 days due. They are 55% reserved right now
  • Cost pressures at Wynn Macau? 
    • Gave their employees a cost of living raise
    • Also approaching their 6th year of operations so they are doing some upgrading
  • Occupancy in Vegas is a bit low.  They are trying to hold the line on price/push price. They had non-gaming revenues grow despite have 24,000 less room nights. Had 2 conventions fall out that hurt them
    • Learned to live with a little less occupancy to get their right people their rooms
  • Their competition in Macau has raised the bar. They have taken that into their design of their project in Cotai. Will have pictures on their next call most likely. Prefers not to tip their hand to MGM and SJM but it's likely that they will get a peak at Wynn's design before getting their concessions announced or see what they have in mind
  • Galaxy has already started construction of Ph2. The other guys will do something sooner or later. Doesn't know when they will get their concessions.  It took 7 months from the time that Wynn entered into a contract and paid a deposit to the time they got gazetted. Doesn't mean it will take that long for everyone though. That's just the way it worked for them
  • 25-40% of the project will be equity financed.  They will get the rest of the package in place later this year.
  • Think that their competitor's free bees and giveaways attract more of the lower end of the market that they are interested in. Their Cotai property will have a convention component that is more sizable than what they can currently accommodate. They will also have a lot more rooms
  • Okada: Has no idea about Mr. Okada's desires on process. Mr. Okada's counter-suit is frivolous in his opinion. They have also instituted their own lawsuit based on his behavior while on the Board. They will prosecute their case of breaches in fiduciary duty and conflict of interest until its settled.  Their actions taken were really not optional according to their legal counsel. So they did what they had to do knowing that there would be a counter-suite. 
  • No updates on Japan. Progress on legalization has been stuccado at best
  • They are looking for a maximum price guarantee on the Cotai project
  • Their customers in China are sanguine. They seem to be enjoying their disposable income with the same gusto as before. Did over $1BN of sales in 50k SQFT of retail space and yields. LVMH just doubled their retail space. They did $150MM of sales last year
  • What you are seeing in China is people experiencing wealth for the first generation and they want to enjoy it - see the "good life"
  • They also wouldn't do a project for less than a 20% cash on cash ROI.  They would do 2 projects at once. Back when Singapore was in play he couldn't only had LV and a ton of debt


  • Wynn continues to work on the final Cotai project scope, timeline and budget. The land concession granted on May 2, was for 25 years.
  • Macau VIP win was low at 2.59% but mass held high at 30.3% vs. a normal range of 26-28%
    • Wynn Macau's historical hold rate has been 2.96%, excluding this quarter.  If we use their historical rate then hold impacted net revenue and EBITDA by approx. $87MM and $22MM, respectively
    • Using 27.5% as a normal hold rate for mass, we estimate Wynn Macau's revenue would have been $20MM lower and EBITDA would have been $12MM lower
    • On the net, low hold hurt Wynn Macau by $10MM - by our math
  • Las Vegas table hold was 22.8% (normal) but faced a difficult 30.4% comp in 1Q11
  • $0.50 cash dividend was approved today, payable on June 4th to holders of record on May 21
  • "Wynn Las Vegas, LLC issued $900 million in 5⅜% first mortgage notes due 2022, repaid all amounts outstanding under the term loan facilities totaling $370.9 million, reduced its revolving commitments to $100 million and Wynn Resorts issued a $1.94 billion, 2% promissory note associated with the redemption of the Aruze USA shares."
  • "Total cash balance at March 31, 2012 was $1.9 billion. Total debt outstanding at the end of the quarter was $5.5 billion, including $3.1 billion of Wynn Las Vegas debt, $440 million of Wynn Macau debt and a $1.94 billion promissory note at the parent company."
  • "Corporate expense was up approximately $12 million during the quarter, primarily resulting from expenses associated with the redemption of the Aruze USA shares."

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