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This note was originally published at 8am on July 06, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

Guilo - A term for a Person of white ethnicity used by Cantonese speaking Asians.


I thought about this term when watching Steve Leisman on CNBC yesterday morning.  CNBC’s senior economics reporter (oxymoron, I know) was incredulous that Feng Shui could have anything to do with the PBOC’s number choice for the lending rate cut.  Yes Steve, the Chinese are a superstitious bunch and they do believe that numbers matter.


Now I’m not the China expert at Hedgeye.  That role belongs to Darius “da gezi” Dale.  However, I did just get back from a 3 week trip to China and some other Asian countries (of course, I went to Macau) so I feel like an expert. 


A few general observations from my trip are in order before I get to the sector analysis:

  • More than one Mainlander commented to me that there are a lot of people being paid to do worthless things like digging ditches, filling them in and then re-digging
  • A lot of construction – hope there is demand
  • Government development contracts are done on a big scale – instead of building one hotel, they want you to build 10 for instance – again, hope there is demand
  • Flying domestically sucks but the trains are great
  • Saw a lot of buildings outside the main cities but not a lot of people
  • The best jokes in China are the ones ridiculing the central government – quietly of course – maybe playing to the audience

And now on to the subject that’s near and dear to my heart and the main reason for my trip to Asia:  the leisure sector.  First, the hotels in Beijing and Shanghai are great – all new and all very well-staffed.  I couldn’t pick my nose without a Chinese finger there to help.  Loved the service.  I visited quite a few and they were all overstaffed.  Chalk one up for the Americans who manage but do not own any of these hotels.  Margins, shmargins.  Many of the hotels were also part of mixed use development, so it’s difficult for the owners to determine ROI on the hotel piece.  This might explain the extravagance of the hotels and the favorable management contracts for Starwood and Marriott. 


On to the gambling world and its capital – China.  As most of you know, China plays a major role in the world of gaming.  Las Vegas has become almost an afterthought.  Macau is the largest gaming market in the world with the vast majority of the business originating from mainland China.  In June, Macau gaming revenues grew 13% MoM on top of 7% growth YoY.  Investors would be cheering most markets with that kind of growth, but not here.  Macau gaming stocks traded in the US (LVS, MPEL, WYNN) are down 25-30% since their YTD highs in April.  The concern lies in the sharp VIP slowdown.  VIP comprises about 70% of gaming revenues in Macau and although margins are lower than in the Mass business, VIP volumes really haven’t grown sequentially since June of last year.  In fact, VIP YoY growth went negative in June 2012 for the first time in 3 years.


For the purpose of this Early Look, we will update the rather timely analysis we did on 5/22/11 in a note entitled “VIP SLOWDOWN IN THE CARDS”.  Yes, we’re pimping our research a little here (somebody’s gotta do it – this is a business after all), but there is also an interesting macro angle to the analysis that’s appropriate for this forum and once again timely.  At that time, we found that Macau VIP volumes were highly negatively correlated to changes in the China Reserve Requirement (peaked at a lag of 9 months at -0.85) and the China 1-Yr Lending Rate (peaked at a lag of 11 months at -0.75).


The timeliness comes in because China began loosening on June 7th followed by another rate cut yesterday.  If history is a guide, we’re still 3 quarters away from material improvement in VIP but at least there is a light at the end of the tunnel.  From a near-term perspective, the rate cut is probably indicative of a weaker economy than many thought.  If weak VIP volume growth continues to drag these stocks down, there will be a tremendous buying opportunity – a la 2009, the last time VIP cracked.  As long as growth in the Mass segment continues its strength – up 30% in June – further estimate reductions, while likely, shouldn’t be devastating. 


While it may not be time to back up the truck just yet or even start it, the keys should be in the ignition because these stocks are cheap and help is on the way.  Stay thirsty my friends.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1586-1622, $97.21-102.74, $82.30-83.21, $1.22-1.25, 6359-6563, and 1359-1376, respectively.


Todd Jordan

Guilo and Managing Director – Gaming/Lodging/Leisure








TODAY’S S&P 500 SET-UP – July 20, 2012

As we look at today’s set up for the S&P 500, the range is 27 points or -1.64% downside to 1354 and 0.33% upside to 1381. 











    • Down versus the prior day’s trading of 742
  • VOLUME: on 07/19 NYSE 756.55
    • Increase versus prior day’s trading of 4.00%
  • VIX:  as of 07/19 was at 15.45
    • Decrease versus most recent day’s trading of -4.39%
    • Year-to-date decrease of -33.97%
  • SPX PUT/CALL RATIO: as of 07/19 closed at 1.24
    • Down from the day prior at 1.32 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.48%
    • Decrease from prior day’s trading at 1.51%
  • YIELD CURVE: as of this morning 1.27
    • Down from prior day’s trading at 1.29 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 11am: Fed to sell $7b to $8b notes maturing Sept. 15, 2014- April 30, 2015
  • 1pm: Baker Hughes rig count


    • House, Senate in session
    • House Financial Services panel holds hearing on impact of Dodd-Frank Act on municipal finance, 9:30am
    • House Armed Services panel meets on shipbuilding, defense industrial base amid fiscal uncertainty, 11am
    • House Natural Resources panel holds hearing on helium shortages, impact on defense, economy, 9:30am
    • House Energy and Commerce panel holds hearing Energy Dept.’s “Nuclear Weapons Complex,” 9:30am
    • House Armed Services panel meets on shipbuilding, defense industrial base amid fiscal uncertainty, 11am
    • Super-PACs, presidential campaigns required to report monthly fundraising, spending to Federal Election Commission by midnight
    • Effective date for final Fed rule on implementing section 618 of Dodd-Frank, Treasury’s assessment of fees on bank holding companies and non-bank financial firms supervised by Fed to cover costs of Financial Research Fund
    • Commerce Dept.’s Bureau of Industry and Security meets on export controls
    • FCC Open Internet Advisory Committee holds first meeting


  • Google revenue surges on Motorola deal, growth in ad clicks
  • Microsoft unearned revenue tops estimates on upgrades
  • Yahoo discloses compensation for new CEO Mayer in filings
  • Heineken bids as much as $6b for Asia Pacific Breweries
  • Palo Alto, Kayak raise more than planned in IPOs
  • Citigroup sees significant charge after Smith Barney valuation
  • Vodafone sales trail ests as Spain, Italy spending sinks
  • Euro-area finance ministers hold conference call on Spain’s bailout; Spain insists $15b aid for regions won’t swell debt
  • Japan seeks to criminalize underwriters on insider breaches
  • U.S. GDP, Facebook Earnings, Olympics: Week Ahead July 21-28


    • SunTrust Banks (STI) 6am, $0.44
    • Baker Hughes (BHI) 6am, $0.77; Preview
    • Schlumberger (SLB) 6am, $1.00; Preview
    • General Electric (GE) 6:30am, $0.37; Preview
    • American Electric Power (AEP) 6:57am, $0.72
    • Ingersoll Rand (IR) 7am, $0.91
    • First Horizon National (FHN) 7am, $(0.49)
    • IDEXX Laboratories (IDXX) 7am, $0.90
    • Xerox (XRX) 7:15am, $0.26
    • Manpower (MAN) 7:30am, $0.71
    • Sensient Technologies (SXT) 7:57am, $0.71 



OIL – we shorted Oil yesterday because it ran right back up to my intermediate-term TREND line ($108.79 Brent) and failed. We’re getting longer of USD and Treasury Flattener here. We know it’s the hardest thing to do at 15 VIX, and we like it.










ITALY – after all the rumoring, the MIB Index is leading losers in Europe this morning and back in crash mode (-21% from March); a General Strike is finally pending and there is no functional bailout mechanism for the Italians until the Germans ratify whatever the bailout is supposed to look like on September 12th.






JAPAN – the Nikkei (and Shanghai Comp) have been flashing the most glaring bearish divergences vs this no-volume squeeze in US equities all week. Post the US green close, Japanese stocks opened up, then closed down hard -1.4% as this Global Industrial slowdown accelerates on the downside (Nikkei draw-down = -15.4% since March, 5x that of the SPY here).











The Hedgeye Macro Team

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Other Side

“If one side of every transaction is wrong, we have to ponder why we should think it’s not us.”

-Howard Marks


Yesterday afternoon, as I was flying back to New York from California, I was watching the market go against me by -0.12% (I’m short the SP500 at 1375). It’s never easy taking The Other Side of a market up move. Being a successful short seller in this business is the ultimate game of survival. Your skin needs to be thick, and you need to be able to take a punch.


I’ve made thousands of short sales in my career. Each time feels different. Feeling in this profession is what you’re not supposed to do. But you do. You’re going to feel the love when you are right. You’re going to feel shame when you are wrong. No matter what you are feeling, the best advice I can give is to keep searching – keep asking yourself what you’re missing.


Mr Macro Market is usually pretty good at reminding you when and where you could be wrong. That makes our search easier. Embracing the uncertainty that each and every dynamic risk management factor throughout each day brings is at the core of what I do. As Howard Marks wrote in his recent June letter: “Active management has to be seen as the search for mistakes.”


Back to the Global Macro Grind


The Other Side of the bear case for the SP500 is the current bull case – bailouts. Yesterday’s US economic data was awful. US Leading Indicators (LEI) slowed -0.3% in June versus +0.4% in May. Existing Home Sales for June dropped -5.4% and weekly US jobless claims shot straight back up to their YTD highs of 386,000.


So, on the “news” the market sold off and went red for an hour or so, but quickly recovered and went green as more #BailoutBull calls for Qe5 re-surfaced. In conjunction with the Bernanke Begging, the US Dollar went down, Oil went straight up, and all was well in the land of another no-volume stock market rally to lower long-term highs (-12% from the 2007 peak).


So what’s on The Other Side of the other side? What happens if the Global Macro and US Economic data goes bullish? Would that make me more wrong being short the SP500 (and Oil, we shorted that at yesterday’s highs too)? Or would that just make me wrong on my research view which, in turn, takes out the #BailoutBull and makes me more right for the wrong reasons?


Who knows…


Regardless, this is starting to sound all too complex for we commoners being centrally planned by the 112th to simplify.


The Other Side of the bull case for this SP500 rally to continue has 3 core factors:

  1. PRICE – SP500 immediate-term TRADE overbought anywhere > 1375
  2. VOLATILITY – VIX immediate-term TRADE oversold anywhere < 16
  3. VOLUME – continuing to register the nastiest volume signals ever in my model

That last factor was easily the most controversial topic I debated with clients in CA this week. Since US Equities continue to see outflows, where is the stock market’s bid coming from? I say short covering. And the ultimate question we need to answer this morning is how much of that do we have left?


The good news is that short interest data is trivial. Darius Dale highlights one way to look at long-term short-interest as today’s Chart of The Day. What you’ll note in this chart is that short interest as a % of the NYSE shares outstanding has been oscillating between 3-5% since this whole gong show of free money bailouts started in late 2007.


What you’ll also notice is that short interest spiked back up to 3.86% in June 2012, but that it came from a relatively low place (on a 5 year basis) for the 4-6 months prior to that. Yes, Beta Hedgies short low and cover high.


Are the consensus hedge fund short sellers covering high when the VIX goes low, again? I can literally see it in each security I am bear hunting in. Where I could be wrong is if I am hunting in the wrong neck of the woods. If I am right, eviscerated short interest looks like it’s turning into a huge market liability. Markets fall fastest after the consensus shorts have covered.


Where else could I be wrong on this? All over the place. What if short interest is absolutely ripping to the upside (4-5% of total shares outstanding) here in July? What if no one has covered any of their shorts this week? What if it really is different this time and 15 VIX is a cover all your shorts signal?


Only time will tell. But, in the meantime, I can assure you of this – very few PMs understood this in Q4 of 2008. Remember when every fundamental #GrowthSlowing short seller was being dared to cover their shorts in fear of the next central plan? Remember “shock & awe” rate cuts and Hank Paulson’s “bazooka” daily whip around in the market?


I do. And so does Santayana: “Those who cannot remember the past are condemned to repeat it.”


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Italy’s MIB Index, and the SP500 are now $1, $102.28-108.79, $82.75-83.94, $1.21-1.23, 13,468-13,703, and 1, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


The Other Side - Chart of the Day


The Other Side - Virtual Portfolio


If this company is talking about a sluggish macro environment, it does not bode well for the rest of earnings season.


Chipotle Mexican Grill’s stock is down after hours following the company missing top line expectations in 2Q.  Earnings per share came in at $2.56, which was  11.6% above expectations of $2.29 . Same-restaurant sales grew 8% versus 2Q10, well below the 10% that consensus expected.  Despite restaurant operating margins of 29.2% and cost of sales coming down 80bps, versus 2Q11, as a percentage of sales, the revenue miss was front-and-center for investors. 


During the earnings call, management repeatedly mentioned the slowing economy as a drag on what was a disappointing quarter from a sales perspective:  “In fact we believe that our throughput performance would have been even better had we not seen some fall- off in transactions during the quarter, which we believe is due to the sluggishness in the overall economy and a slowing in consumer spending.” 


The stock was down 7-8% on the print but, following the conference call, is currently trading down 11%.









Howard Penney

Managing Director


Rory Green



Pay Attention to JJB

This JJB update that sales and margins continue to slide tells us a number of things… (FYI, JJB is like The Sports Authority of the UK).

1) Things ain’t gettin’ any better in European retail

2) Confirmation that The European Championship was a bust.  Here’s a good theory from Moshe Silver, Hedgeye’s ever-watchful head of compliance. In his words “Further to your mention of weak Championship sales: the semi-finalists in the Euro Cup were Germany, Portugal, Italy and Spain – with Spain winning the Cup.  50% unemployment in Spain ages 30 and under, and not much better in Italy or Portugal.  Only the Germans can afford much in the way of discretionary spending, and they obviously weren’t jamming the barricades to buy Spanish jerseys.  Maybe it’s simply the fact that the folks who would love to buy championship gear just can’t afford to?  Except for the odd American (like me) who was in Madrid for the championship celebration, who would buy Team Spain?”

3) Dick’s Sporting Goods threw JJB a $31.8mm lifeline in April, buying a call option to become the controlling shareholder in 1Q13. With JJB on the ropes, our sense is that DKS will both protect and accelerate its investment, and potentially buy the entire entity in 2H.

4) Other creditors, including Adidas, have also flexed to get JJB in order. Interestingly, Nike has not been mentioned in the general press as one of those parties.

5) A wrinkle here is that Sports Direct – which is one of the thorns in JJB’s side – might have to deal with a far superior competitor in Dick’s Sporting Goods. But DKS holds the exclusive for Umbro in the US – a brand that Sports Direct has a vested interest in buying now that Nike has announced its planned divestiture. The primary shareholder of Sports Direct – Mike Ashley – has been extremely non-valuation-sensitive (and dare we say ego centric) with purchases in the past. He’ll want to own Umbro to use as a competitive weapon against DKS. The Punchline? The winner here might be Nike’s valuation for Umbro. 

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