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Our hold calculation has historically differed meaningfully from management’s.  Here is why.



Let’s face it, gambling is a volatile business.  While the odds normalize over the long-term, even a big casino company can be significantly impacted by luck over a quarter.  Gaming management teams have done a terrific job focusing on the hold impact on quarterly conference calls when hold is low but less so when hold is high.  Go figure.  And statistically speaking, as LVS and WYNN grow, hold volatility will be less important.  Not in terms of absolute dollars as an analyst on the call seemed to believe, but in terms of percent impact.


So we certainly appreciate the company’s additional disclosure.  The issue we have is not with the transparency, although management failed to comment on the positive EBITDA impact in the Q1 earnings release/conference call.  Rather, it’s the methodology.  As can be seen from the following chart, we calculate significantly smaller quarterly impacts from low hold than the company, especially in the most recent quarter.




Issues with LVS’s methodology:

  • The company only calculates the hold impact on VIP business when the hold percentage at a property is outside the range of 2.70-3.00% and then calculates the differential to the midpoint (2.85%).  So EBITDA from a property holding at 2.99% will not be adjusted at all but one that holds at 2.69% will be.  A swing from 2.70% to 3.00% is material.  For instance, that represents about $25-35 million in EBITDA for MBS alone.  Our calculation just adjusts each property to its historical average.
  • LVS does not adjust for abnormal Mass hold; but we do, using the 6 quarter trailing average.
  • Since it’s impossible to calculate, neither LVS nor Hedgeye factors in that patrons play more when they win and less when they lose.  Thus, volumes are not static across different hold percentages.  This has the impact of dulling volatility so generally both methodologies will overstate the impact of hold variations.
  • LVS doesn’t use the “range” methodology for LV operations like it does for Macau/Singapore.  This doesn’t seem consistent.
  • Mass hold in Macau/Singapore and table hold in Las Vegas is measured by the amount of chips bought.  Thus, if the velocity of play changes, so will hold percentage, theoretically.  For example, in down economic times, players may exchange dollars for the same amount of chips they always do but they may not gamble as much.  The denominator (volumes) will be the same but the numerator (gaming win for the casino) will likely be less, resulting in a lower hold percentage than normal.

Q2 was certainly impacted by low hold percentage and that needs to be discussed.  However, we calculate the impact was roughly half of what LVS estimated and almost all of the impact was concentrated at MBS as can be seen below.



We've Got A Situation







By now it should be obvious that the Eurozone is a amalgamation of bailouts. Greece will soon need another and week-by-week it has become clear that Spain is in need of more money Spain just reported a record unemployment rate of 24.6%. That’s one-in-four people out of work. More QE leads to rising food and gas prices, which does not bode well for the 24.6%.


Please keep in mind that growth IS slowing and will continue to slow as we head into August. At this stage in the game, we can only wait and see what happens to Italy down the road. Spanish stocks lead the losers this morning, down -1.7% (down -30% since March) and we remain bearish on all 3 of our risk management durations: TRADE, TREND and TAIL.


As recording artist Notorious B.I.G. once quipped: “Mo’ Money, Mo’ Problems.”



Starbucks (SBUX) missed their Q3FY12 earnings yesterday after the close. The company is enjoy the effects of higher costs courtesy of the Bernanke QE and trying to run five different concepts at once (La Boulange, Evolution Fresh, etc.). We still advise remaining on the sidelines for SBUX, however, as we’re not bearish enough on the brand to make a call yet. We’ve been long Starbucks in the Hedgeye Virtual Portfolio since 2009. We timed it right and got it at the right price. This simply isn’t a good entry point for Starbucks and we’ll continue to hold it in our Virtual Portfolio as Schultz & Co. try to work things out over time.



Coined by Keith, this term summarizes yesterday’s rally in US equities quite well. We rip 20 handles in the S&P 500 to the upside and next thing you know, we’re in a bull market. Never mind that growth continues to slow on a global level. All it takes is a wave of the wand from a central planner to make people believe that there is hope in this market. And as we always say: hope is not a risk management process. A day of dollar down and US equities + gold up means everything is back to normal, right? We’ll see how long this farce keeps up for.


Really, we must wait patiently and see what Ben Bernanke does/says next week. We don’t think that QE3 is a reality and that includes some nonsense where the Fed goes buying mortgage-backed securities. Should our prediction prove correct, we’ll go looking to short the S&P 500 or Russell 2000 at the right time and price.




Cash:  Down                   U.S. Equities: Flat


Int'l Equities: Flat            Commodities: Flat


Fixed Income: Up            Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.




TAIL: LONG            



SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.

                                                                                                                                                                        TRADE: NEUTRAL






Tweet of the Day: “I'm not sure what a SIPC-like insurance fund capped at $500K would do for the futures industry. I'm not sure what [it] does for securities.” -@johnpneedham


Quote of the Day: “Democracy is a process by which the people are free to choose the man who will get the blame.” – Laurence J. Peter


Stat of the Day: Facebook posted first quarter 2012 revenues of $1.058 billion, up 45 percent year over year from $731 million. The company reported $1.18 billion in revenue. Earnings per share also came in right at 12 cents per share. 955 million active monthly readers.

Crumble Cake Europe

This note was originally published at 8am on July 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I get no respect. The way my luck is running, if I was a politician I would be honest.”

-Rodney Dangerfield


I’ve been handed the Early Look pen this morning and thought starting with Dangerfield’s humor was in order.  After all, I cover Europe for the macro team and there’s nothing funny about what’s going on in the region.  Frankly stated, we don’t see a “bazooka” in Europe over the intermediate term as Eurocrats remain politically divided and in a slow and reactive mode to address sovereign and banking imbalances, slapping band-aids on peripheral woes at every corner, but failing to craft a real “path” forward.


Unfortunately, now the stakes are much higher as Italy is Too Big to Bail.  For reference, Italy’s total sovereign debt alone is €1.9 Trillion with €372 Billion in debt coming due in the next 12 months versus the combined EFSF and ESM bailout facilities worth around €700-800 Billion. To boot, markets continued to shake this week on statements from Italian PM and technocrat-in-Chief Mario Monti that Italy may want to tap the Eurozone bailout mechanism to help lower its borrowing costs (the 10YR is currently at 5.99%); that he has no plans to seek another term when elections are called next spring; and on Moody’s downgrade of the Italian sovereign yesterday to Baa2 from A3.  And if the political state wasn’t fractured enough, rumors also flew of a Berlusconi comeback. Can you say Bunga Bunga increased risk premium Party!


Interestingly enough, much hangs on the Eurozone’s ability to craft a fiscal union (compact) alongside its monetary union. It is firmer ground on this step that we think is critical before real action can be delivered on such proposed plans as:  a banking authority; pan-European deposit insurance; European Redemption Fund; European Financial Transaction Tax; and Eurobonds.


That said, we see the passage of a fiscal compact many months to years out, if ever, as countries will be slow to give up their sovereignty to Brussels/Frankfurt. Further, we’d expect the aforementioned facilities to receive approval after much foot-dragging and politicking as the ECB is likely to be wary of extending its balance sheet as a backstop for the programs while strong fiscal nations like Germany will likely balk at signing off on lower creditworthiness in exchange for the region’s risk (Eurobonds).


However, as these programs stew, the most pressing issue right now is that the European Stability Mechanism (ESM), originally targeted to be operational by July 1 with firepower of €600 Billion, is in limbo given that Germany’s Constitutional Court passed on making a decision on it this week; already German Finance Minister Wolfgang Schaeuble warned that a ruling (in conjunction with the fiscal compact) could be pushed to this Fall!


We mention this indecision on the ESM and fiscal compact from the Germans for a number of reasons:

  1. A lack of decision on Germany’s commitment will broadly breed further indecision across capital markets until the court makes a decision.
  2. Spain’s €100 Billion bailout is dependent on the loans from the EFSF and ESM, and further clarity on the firepower of both facilities is essential because A.) they were not originally crafted with a specific mandate for bank bailouts; and B.) lending first through the sovereign (at least as they were originally intended), before sovereigns can then loan to banks, will simply pile on more sovereign debt and perpetuate the cycle of more sovereign and banking imbalances across the weaker states.
  3. We believe Germany is still carrying the biggest policy stick in Europe (despite a stronger “socialist” French-Italian handshake developing) and how Merkel and her courts rule will have great impact on how Germany may or may not choose to underpin a future fiscal union.


In the Balance


If the political landscape and potential direction of the Eurozone sounds convoluted, it is! We return to our fundamental  view that neither bailouts nor encouraging more borrowing through cheaper money is the solution to Europe's problem of over-indebtedness. That said, we fully realize that when assessing Europe one must recognize that what Eurocrats “should” do (from an economic policy perspective) may be very different from what they “will” do.   


Given the runway on a ruling from the German Court and the fact that there are no planned Summits (i.e. catalysts) around which markets could rally over the intermediate term, we expect Crumble Cake Europe to continue to trade on headline risk, and the EUR/USD cross to remain a relative loser until more decisive action is taken from Eurocrats. As we show in the chart below, the cross broke our intermediate term TREND Line of $1.22 this week and is nearing 2010 lows, back when Greece received its first bailout in May. 


Should Europe play out as we expect – continued slower growth beyond consensus and Eurocrats socializing weaker members and changing the goalposts along the way– we fear that the next two years across the Eurozone could look a lot like the last two years – short of a default from Italy or more expedient action on such measures as Eurobonds.


I suppose I misspoke at the beginning of this missive when I said there was nothing humorous in Europe. Yesterday, Italy's national statistics office threatened to stop issuing data on the economy, saying that it has been crippled by government spending cuts aimed at reducing national debt.


Whether or not Italy has an agency to report its economic data reminds me of the old philosophical question: “If a tree falls in a forest and no one is around to hear it, does it make a sound?”  Unfortunately for the Eurozone, the whole is only as strong as its weakest parts and everyone is forced to listen!


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1559-1589, $96.76-103.01, $82.81-84.06, $1.20-1.23, and 1329-1354, respectively.


Have a great weekend!


Matthew Hedrick

Senior Analyst


Crumble Cake Europe - el   EUR


Crumble Cake Europe - vp 7 13

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Battling Ideology

“His own men wanted more of the same, the enemy less.”

-Victor Davis Hanson


I am grinding through two books about leadership and war right now – and that probably puts me in a mood to fight. When it comes to going to battle with Fed and ECB ideologies that are perpetuating global #GrowthSlowing, someone has to do it.


In his epic classic “The Soul of Battle”, Victor Davis Hanson tells the story of the great Greek General of Thebes, Epaminondas, and his fight for democracy versus the Spartans. “Thebes now battled for neither money nor power, but for the idea of allowing all Greek states to be autonomous.” (page 87)


Theban farmers taking up arms for their economic freedom was ultimately instigated by the central planning Spartans themselves. “The Spartan takeover of the sacred Theban Cadmen (382BC) – the city’s spiritual and political center – was the most foolhardy foreign enterprise in the entire history of Spartan foreign policy.” (page 28)


It’s different now, but it’s the same.


Our Keynesian overlords are taking over the most pure temple of free market capitalism that remains – our public markets. And while I may get my short-term market calls right and wrong, I will not confuse that risk management duration with my principles. After listening to Draghi’s drivel yesterday, I will not provide him the cowardice of standing idle.


I am here on the front lines of this ideological debate. And I too will do whatever it takes.


Back to the Global Macro Grind


Undoubtedly, the toughest balance beam to traverse in my head is my absolute disgust for what I hear these people say every day and what it is I need to do in order to not violate Rule #1 (don’t lose money).


We need to keep getting our economic forecasts and risk managed positions right in order to crack these Keynesians right up the middle of their phalanx. Ideologies die on the vine of mediocrity and broken promises.


Whether they are coming at us from the ECB or Fed flanks, their ultimate impact can be measured. As you can see in Darius Dale’s Chart of the Day, this is their 2nd major centrally planned attack since June:

  1. Dollar Down
  2. Gold Up
  3. Stocks Up

If you’re going to step on the field with me and my boys, you better realize that winning a few battles doesn’t win you the war. Yesterday, the S&P Futures rallied 27 handles (2 full percentage points) at the stroke of Draghi’s “whatever” shot hitting the tape. Spanish and Italian stocks moved 6-7 full percentage points in less than 3 hours of trading.


That’s normal, right? Bull market.


If I have reminded you of this 100x in the last 5 years, it’s been 1000x. Get the US Dollar right, and you’ll get a lot of other things right. With the US Dollar Index down a full percentage point on the day yesterday, the #BailoutBulls of the 112th Correlation ran wild.


Here’s how our most immediate-term TRADE correlation scored on yesterday’s close (correlation to the USD):

  1. EuroStoxx 600 Index = -0.82
  2. SP500 Index = -0.75
  3. SPX Volatility Index (VIX) = +0.77

In other words, more central planning fire in your Purchasing Power hole continues to do the 2 very things we stand against for The People (24.6% unemployment in Spain this morning) who don’t get paid by food/energy/stock market inflations:

  1. Shortening Economic Cycles
  2. Amplifying Market Volatility

They know it. You know it. The People watching this market know it. No matter which side of this battle of ideologies you stand on, the short-term correlation (price action) is being drive by causality (short-term policy reactions).


Their world is built on broken promises. Their bailout policies are designed to inflate asset prices by debauching your hard earned dollars. And now these said leaders of Western Academia’s tallest ivory towers have shot arrows towards the heart of “whatever” they think will have us stand down. Ironically, this is precisely what will make us rise up.


Our men and women want more of the same, the enemy less – and that’s the free-market’s trust.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $101.91-107.86, $82.52-83.39, $1.20-1.23, 5, and 1, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Battling Ideology - Chart of the Day


Battling Ideology - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 27, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.81% downside to 1349 and 0.44% upside to 1366. 











  • ADVANCE/DECLINE LINE: on 07/26 NYSE 1406
    • Up versus the prior day’s trading of 226
  • VOLUME: on 07/26 NYSE 897.88
    • Increase versus prior day’s trading of 14.60%
  • VIX:  as of 07/26 was at 17.53
    • Decrease versus most recent day’s trading of -9.36%
    • Year-to-date decrease of -25.09%
  • SPX PUT/CALL RATIO: as of 07/26 closed at 1.62
    • Up from the day prior at 1.23 


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.46%
    • Increase from prior day’s trading at 1.44%
  • YIELD CURVE: as of this morning 1.23
    • Up from prior day’s trading at 1.21 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP (Q/q), 2Q A, est. 1.4% (prior 1.9%)
  • 8:30am: Personal Consumption, 2Q A, est. 1.3% (prior 2.5%)
  • 8:30am: GDP Price Index, 2Q A, est. 1.5% (prior 2%)
  • 8:30am: Core PCE (Q/q), 2Q A, est. 1.8% (prior 2.3%)
  • 9:55am: U. Michigan Confidence, July final, est. 72.0 (prior 72)
  • 11am: Fed to sell $7.0b-$8.0b notes due 5/15/15-9/30/15
  • 1pm: Baker Hughes rig count 


    • House Minority Leader Nancy Pelosi speaks to intl AIDS conference at 3:35pm; former President Bill Clinton at 4:25pm
    • Commerce Department announces preliminary anti-dumping duties on Chinese and Vietnamese-made wind towers 


  • U.S. GDP probably rose at 1.4% annual rate in 2Q, slowest pace in a year
  • Samsung increases lead over Apple in global smartphone mkt
  • Facebook shrs fall amid concerns about pace of growth
  • Universal in talks to sell most of Parlophone to BMG
  • Whole Foods Market reviewing health claims about DHA
  • Cnooc hires U.S. lobbyists to avoid Unocal-style problems with Nexen acquisition
  • Federal Reserve Bank of NY urged federal judge to dismiss Starr International’s lawsuit over govt. bailout of AIG
  • Ecuadorian judge ruled Chevron must pay $19b in environmental damages from ops in the country, higher than $18.2b original ruling: DJ
  • Amarin won FDA approval for first drug, Vascepa, to combat high levels of blood fat that lead to stroke, heart attack
  • Booz Allen Hamilton said to have cut size, rate on term loan B it’s seeking to pay dividend
  • Prologis may sell ~$800m of U.S. properties by end of 2012, co-CEO Hamid Moghadam told Bloomberg News
  • Spanish unemployment rises to highest in democratic history
  • Italy borrowing costs fall at 6-month bill auction
  • U.S. Congress probably will delay action on legislation to ease trade relations with Russia until after country joins WTO next month
  • Burberry to buy out license rights of Inter Parfums for $220m
  • Fed, ECB Meet; U.S. Jobs; Olympics: Week Ahead


    • Calpine (CPN) 6am, $0.01
    • Colfax (CFX) 6am, $0.36
    • Helmerich & Payne (HP) 6am, $1.15
    • TMX Group (X CN) 6am, C$0.73
    • LyondellBasell (LYB) 6am, $1.40
    • Prosperity Bancshares (PB) 6:02am, $0.77
    • Magellan Health Services (MGLN) 6:30am, $0.91
    • WABCO Holdings (WBC) 6:30am, $1.17
    • Coventry Health Care (CVH) 6:30am, $0.64
    • Newell Rubbermaid (NWL) 6:30am, $0.45; Preview
    • Barnes Group (B) 6:30am, $0.48
    • Aon (AON) 6:30am, $1.02
    • DTE Energy Co (DTE) 7am, $0.70
    • LifePoint Hospitals (LPNT) 7am, $0.81
    • Merck (MRK) 7am, $1.01; Preview
    • Eldorado Gold (ELD CN) 7am, $0.12
    • DR Horton (DHI) 7am, $0.19; Preview
    • Pilgrim’s Pride (PPC) 7am, $0.23
    • Legg Mason (LM) 7am, $0.03
    • OneBeacon Insurance Group Ltd (OB) 7am, $0.26
    •  Alliance Resource Partners (ARLP) 7am, $1.64
    • Alliance Holdings GP (AHGP) 7am, $0.84
    • NV Energy (NVE) 7am, $0.18
    • Celestica (CLS CN) 7am, $0.24
    • HMS Holdings (HMSY) 7:30am, $0.21
    • First Niagara Financial Group (FNFG) 7:30am, $0.18
    • American Axle (AXL) 7:30am, $0.50
    • TransForce (TFI CN) 7:30am, C$0.37
    • Arch Coal (ACI) 7:45am, $(0.18)
    • Cameco (CCO CN) 8am, $0.21
    • KKR (KKR) 8am, $0.16
    • Moog (MOG/A) 8am, $0.85
    • Atco Ltd/Canada (ACO/X CN) 8:07am, C$1.36
    • Canadian Utilities Ltd (CU CN) 8:16am, C$0.86
    • Chevron (CVX) 8:30am, $3.23
    • TransCanada (TRP CN) 8:45am, C$0.48
    • NuStar Energy (NS) 8:45am, $0.25
    • NuStar GP Holdings LLC (NSH) 8:45am, $0.35
    • Forum Energy Technologies (FET) Pre-Mkt, $0.47
    • Highwoods Properties (HIW) Post-Mkt, $0.69 








USD will Bernanke drive home the 1-2 #BailoutBull punch next week? I don’t know; neither does the Dollar or Gold, yet – need more times/prices; both are trading right at the lines where we could go either way. We'll let the market tell me what to do on this as usual.







SPAIN – reports another record unemployment rate (24.6%), so it looks like Draghi is going to need one heck of a whatever to get that colossal failure of Keynesian sense under control; Spanish stocks lead losers this morning, down -1.7% (down -30% since March), bearish on all 3 of our risk mgt durations.





CHINA – Chinese and Singaporean stocks couldn’t care less about Draghi’s drivel; if not going up on the “news” tells you anything, it’s a reminder that Qe and anything that looks like it jacks up what is perpetuating #GrowthSlowing to begin with, rising food/oil prices.











The Hedgeye Macro Team

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 80.51%
  • SHORT SIGNALS 78.32%