Faustian Investing

This note was originally published at 8am on August 23, 2012 for Hedgeye subscribers.

“In the end, you are exactly—what you are. Put on wig with a million curls,

Out the highest heeled boots on your feet, Yet in the end you remain just what you are.”



Today is August 23rd.  To many of you stock market operators, it is just another day of finding compelling investments and tweaking those market exposures.  But for those of you who didn’t know, it is also National Compliance Officer Day.  So take a few minutes and go see that guy or gal who runs your compliance department, who you typically like to avoid, and give them a big thank you.


One of the first hires at Hedgeye was our compliance officer, Rabbi Moshe Silver.  Not only would I put his knowledge of the compliance up against anyone’s, but he is also kind of funny.  By kind of I mean he tells jokes, even if they aren’t all funny.  In all seriousness, Moshe, on behalf of all of us, thank you for your fine work as our compliance officer and teammate.


Now that I officially have my compliance officer off my back for a few months, let’s get back to the global macro grind.  A topic I want to start with today is China.  Maybe you’ve heard of it? It’s the country that has taken a massive amount of economic market share over the last two decades.  I just wanted to flag a few interesting nuggets from China over the last couple of days.  They are as follows:

  • Chinese iron ore prices are at their lowest levels since 2009 and mills are beginning to default on supply contracts;
  • Zhang Honxia, chairman of China’s largest cotton-textile maker, said: “The Chinese economy is only at the beginning of a harsh winter.  We are in worse shape now then compared with 2008-2009.”;
  • Iron ore output in China is down 8.1% in July;
  • The Shanghai Composite hit a three-year low yesterday;
  • Japanese exports to China in July were -11% year-over-year; and
  • The IMF has estimated that China’s capacity utilization has fallen to just 60% versus 80% in the pre-crisis era.

To be clear, I didn’t hand pick those data points to paint some bearish mosaic.  They are actually just what I wrote down in my notebook and, candidly, they are a little depressing as it relates to Chinese growth.


Last night’s PMI readings were of similar nature, if not worse, for China.  In aggregate, the PMI for August fell to 43.0 from 45.1 in July.  The specifics were even more dreary, new orders fell to 46.6 from 48.7, new export orders slumped to 44.7 (the lowest reading since the financial crisis), and inventories rose to 53.6.  Inventory up and orders down are a toxic mix for any company, let alone the world’s second largest economy.


Despite this plethora of negative data points, the equity markets keeps grinding higher.  Perversely, bad news is good news because bad news means more central bank easing.  The only term I can really think of for this type of investing (and no offense to those of you that are profiting from it) is Faustian Investing.


As many of you know, Faust is a protagonist in a classic German legend.  He is a very successful scholar, but like many successful people, he wants more.  As a result, Faust makes a deal with the devil and exchanges his soul for unlimited knowledge and worldly pleasures.  To me, buying equities at a VIX of 15.1 on hopes of further easing from central bankers feels like a deal with the devil.  Incidentally, there is a gentleman named Jon W. Faust who is a special advisor to the FOMC Board of Governors.  And I couldn’t make that up even if I wanted to …


Speaking of easing, many have asked our view of whether some incremental news on the monetary policy front could come out of Jackson Hole next week.  I will touch on that in a second, but let me just start with this, it is likely priced in.  The SP500 is up 11% in almost a straight line from the lows of the summer into Jackson Hole.  And from interacting with our many subscribers and even more followers on social media, this is the “catalyst” people are talking about.


Now, as to whether the Fed will actually do anything next week is a different question.  The key economic takeaway yesterday from the release of the FOMC’s minutes was that, “economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”  So as a result:


“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” 


There you have it: the Fed is poised to ease!  I’m just not sure it will be at Jackson Hole next week.  The last time Bernanke announced action at Jackson Hole was QE2 in 2010.  At that point, equity markets had undergone a serious two month sell off, the government had just lowered its reading Q2 2010 GDP growth to 1.6%, and broad economic indicators were more anemic than they are now (we will have a detailed post on this later today). 


So in summary, we think any potential action at Jackson Hole is both unlikely and also priced into equities.  To express this from a non-Faustian investing perspective, yesterday in the virtual portfolio we bought the U.S. dollar and shorted gold.


The greater question, though, is whether incremental easing will have any impact on economic activity. In the Chart of the Day below, we show both major recent Fed policy announcements in Q3 2007 and Q3 2010 and subsequent global economic activity.  In both instances, growth slowed and inflation accelerated.  Be careful what you wish for from those devilish central bankers.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1621-1679, 113.71-116.12, 81.41-82.11, 1.23-1.25 (TREND resistance = 1.26), 1.66-1.75% and 1410-1419, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Faustian Investing - Chart of the Day


Faustian Investing - Virtual Portfolio

Gambling #Unlimited

“Rather than a gambler, he was a speculator with an eye for good risks.”

-Carl Sandburg


That’s a quote from one of the better opening chapters I have read in 2012, “God’s Chosen Instrument”, in Jay Cooke’s Gamble – “The Northern Pacific Railroad, The Sioux, and The Panic of 1873.” (by M. John Lubetkin)


Few in this profession want to admit that there is a degree of gambling in what they do. But what, per se, would you call what we have all been forced to do in the last 6 months? Even if you have perfect inside information on what Draghi is going to do this morning, the market could do the exact opposite of what you think it should do on that.


Inside information? If you don’t think someone always knows something, you need “more time” on the job too. That’s as old as Jay Cooke’s legend in becoming the “financier of the Civil War.” One of the market’s richest men (before it all crashed in 1873), “Cooke bought members of Congress, bribed 2 Vice Presidents, built churches…” (page 1) etc., but still blew up his unlimited capital bet, in the end.


Back to the Global Macro Grind


#Unlimited – that’s what she said. As in the woman who wrote this morning’s manic media headline on why the US stock market futures were up 8 handles. “Stocks rise on possibility of unlimited ECB bond buying.”


Imagine that for 3 more minutes. Never mind the most money ever printed into a central planning event… ever… by 9AM EST, “unlimited” moneys will fall from the heavens, Gold will go to $3000 and Oil will go to $200?


The storytelling out there is just getting awesome.


I’m short Gold here. On balance, until turning bearish on Gold in Q1 of 2012, I have been a Gold bull since 2003. I have #timestamped 35 long/short positions in the GLD since founding the firm in 2008 (been right 30x).  


The more wrong I am on Gold (from here), the more right I’ll be on #GrowthSlowing.



  1. Inflation is not growth
  2. Inflation slows growth

So, if you are still hoping for economic growth, but at the same time want the Italian Eurocrat to go “unlimited”, Weimar-style, on the printing presses this morning, just be careful what you are cheering for.


Rather than roll the bones on what rumor is going to hit my tweet-stream next, this is what I am going to do on green this morning.


Drum-roll: sell.


That’s not my perma position (7 of my last 10 booked gains have been on the long side, and we’ve bought almost 50 tickers since the May-June 2012 lows). That’s just what I do (on green) at the high end of what we call our Risk Management Range.


When I give you my Risk Ranges at the bottom of the Early Look every morning, those are the immediate-term ranges of price risk that I am using to make my buy and sell decisions. Rather than a gambler, I’m just good at being disciplined, not swinging at outside pitches.


Since I wasn’t a good baseball player (I am Canadian), what other choice do I have? It’s hard enough to hit the big fat fastball of perfect information in this market when you feel like you see your pitch.


If markets haven’t humbled you yet, they will. If central planners think they have markets nailed now, they are about to get nailed.


With those long-term risk management realities vs. short-term rumors in mind, here are your risk ranges, across asset classes this morning:

  1. US Dollar Index = 81.11-81.89
  2. EUR/USD = 1.24-1.26
  3. US Treasury 10yr Yield = 1.54-1.63%
  4. CRB Commodities Index = 303-309
  5. SP500 = 1
  6. VIX = 16.91-18.92
  7. Russell2000 =  812-825
  8. Shanghai Composite = 2016-2089
  9. Nikkei (Japan) = 8
  10. EuroStoxx50 = 2
  11. DAX (Germany) = 6
  12. IBEX (Spain) = 7
  13. Oil (Brent) = $111.96-115.36
  14. Gold = $1
  15. Copper = $3.47-3.52

People can call me a gambler. They can call you a lover. They can call us “perma” whatever they want if the storytelling makes them feel certain about something that’s uncertain. The only thing I am certain about this morning is what my process is telling me to do next.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gambling #Unlimited - Chart of the Day


Gambling #Unlimited - Virtual Portfolio

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Gaming Investor Trip Schedule



Hedgeye Gaming, Lodging, and Leisure is hosting three upcoming investor trips.  If you are interested in joining us for any or all of the trips, please contact Hedgeye Sales or the GLL research team and we can send you further details.


  • September 11-14th  (MACAU-SINGAPORE):  Anna Massion will be hosting meetings with the operators, junkets, and other contacts in Macau and Singapore.  Our meetings in Macau will take place between September 11-13th and meetings in Singapore will take place on September 14th.
  • September 26-27th (LAS VEGAS):  Todd Jordan will be hosting management meetings with the Vegas-based operators as well as with IGT and BYI.  We want to get the scoop on G2E when many investors will be out in Las Vegas meeting with the same companies.
  • October 1-3rd (G2E LAS VEGAS):  Anna will be hosting meetings with suppliers, slot floor managers and other select contacts during G2E.


Takeaway: Strong Mass once again offsets weak VIP volumes

Mixed feelings about August 



As we already knew, August GGR grew 6.1% (in US$), in-line with our expectations and above the 1.9% growth in July. After looking through the data, it appears that August was softer than the headline as VIP volumes were worse than we expected but VIP hold was higher.  We continue to think that September growth will be better than August, likely to grow in the low double-digits YoY.  Indeed, we are already hearing that the first weekend in September was very strong.


We estimate that total direct play this month accounted for 6.6% of the market, compared with 6.8% in August 2011.  The total VIP market held at 3.10% vs. 2.91% in August 2011.  Adjusting for direct play and theoretical hold of 2.85% in both months, August revenues would have only increased 1.7% YoY.


The good news is that Mass and slot revenues continue to come in strong, posting 27% and 16% YoY growth, respectively.  The bad news, which should come as no surprise, is that VIP volume was down 6.6% YoY, marking the 3rd consecutive month of YoY declines.  LVS was the only concessionaire to produce YoY growth in Junket RC volume and VIP revenue.


Company-specific Takeaways:



  • LVS led the market in GGR growth, up 42% due in part to the April opening of SCC and the VIP push at Four Seasons
  • LVS held a little below its 12-month average but its VIP volume share of 14.7% was the company’s best share since January 2010
  • LVS posted its second highest Mass share (behind July) since SCC opened
  • Overall, a better month than the headline 19.0% market share would suggest

 Wynn Macau

  • Wynn’s share accelerated in August but that was entirely due to high VIP hold
  • Mass share is holding its own since SCC opened but Junket RC share fell 10bps to 12.2%, the property’s second lowest share since October 2007
  • Despite the high hold, Wynn recorded its 5th straight GGR decline due to slot revs falling 20%


  • MPEL’s GGR fell for the 4th time of the last 5 months.  However, all the losses have been driven by Altira.  CoD has yet to see a month of YoY declines.
  • However, Mass had another strong quarter, up 27%


  • MGM’s strong market share gains this month were driven mainly by VIP volumes
  • Hold was just a bit above its 12-month average
  • GGR was up 1% YoY


  • Galaxy generated the 2nd highest growth of any concessionaire, up 7%
  • YoY growth was once again driven by Mass – up 77%
  • VIP hold percentage was well above normal.  VIP volume dropped 17% YoY – the first decline since February 2009.
  • We think it’s interesting to note that Galaxy Macau’s VIP market share is equivalent to WYNN’s, higher than MPEL’s and not far behind LVS’s portfolio share of 15.9%



Total table revenue growth accelerated from just 1% in July to 6% in August.  Mass revenue growth was healthy at 27%, but lower than the 38% growth rate we’ve seen over the trailing twelve months.  VIP revenues fell 1%, while Junket RC declined 7%, marking the 3rd consecutive month of declines.  As a point of reference, there were 7 consecutive months of decline in VIP RC volume from December 2008 through June 2009; although the dip was more severe than the single digit declines we’ve witnessed to-date.  We expect growth to resume with the opening of Ph2 of Sands Cotai Central.



Table revenues grew 43% YoY, garnering the best growth in the market by a mile.  Sands China’s strong performance in the month of August was aided by an easy hold comparison in 2011.  We estimate that the Sands portfolio of properties held at 2.94%, vs 2.62% last August, adjusted for direct play.  Sands was the only concessionaire to produce YoY growth in Junket RC volume and VIP revenue.

  • Sands table revenues fell 24% YoY, marking the 5th consecutive month of declines.  The good news is that almost the entire YoY decline came out of the lower yielding VIP segment.
    • Mass fell 1% YoY, the propertys’ first decline since Jan 2011
    • VIP declined 35% YoY.  Hold was low and the comparison was difficult.  We estimate that Sands held at 2.61% in August compared to 3.51% in the same period last year.  We assume 9% direct play in August vs. 15% in August 2011 (in-line with what we saw in 2Q12 and 3Q11).
    • Junket RC was down 10%.  This was the 9th consecutive month of YoY declines in VIP RC at the property.
  • Venetian table grew 30% YoY.  Strong August performance was driven by strong Mass win, high hold and a very easy comp on the VIP side.
    • Mass increased 21%
    • VIP grew 39%
    • Junket VIP RC fell 21%, marking the 7th consecutive month of declines at Venetian.  In the 12 month period spanning from September 2008-2009, Venetian saw 10 months where junket RC volumes fell.
    • Assuming 28% direct play, hold was 3.87% compared to 2.22% in August 2011, assuming 24% direct play (in-line with 3Q11)
  • Four Seasons continued to perform well, growing 87% YoY
    • Mass revenues dropped 33%
    • VIP soared 135% and Junket VIP RC rose 139% YoY
    • If we assume direct play of 16%, in-line with 1Q12 and 2Q12, hold in August was 2.81% vs. 2.21% in August 2011 when direct play was 38% (in-line with 3Q11)
  • Sands Cotai Central produced $106MM in August, compared with $135MM in July, $117MM in June, and May's $135MM.  The drop MoM drop off is a result of bad luck in August.
    • Mass revenue expanded to $40MM, $3MM higher MoM
    • VIP revenue of $66MM was the lowest VIP output, post opening
    • Junket RC volume of $2,682MM, increased 2.3% MoM, setting a record for the property
    • If we assume that direct play was 12%, hold would have been just 2.17% - the lowest since the property opened in April


Wynn table revenues eked out 0.4% growth in August, breaking a 4 month streak of YoY declines.  The slight growth produced in August was aided by high hold.

  • Mass growth grew 12%
  • VIP revenues fell 2%
  • Junket RC declined 12%, marking the 4th consecutive month of declines
  • Assuming 8% of total VIP play was direct (in-line with 2Q12), we estimate that hold was 3.39% compared to 3.07% last year (assuming 10% direct play – in-line with 3Q11)


MPEL table revenue fell 5%, winning the prize of worst concessionaire performance.  Although hold across MPEL’s 2 properties was normal at 2.86%, last year's comparison was tougher at 3.00%.

  • Altira revenues fell 41%, due to a 45% decrease in VIP.  Mass fell 1%.  Results were negatively impacted by low hold and a difficult comparison.
    • VIP RC decreased 17%, marking the 9th consecutive month of declines which have averaged -19%
    • We estimate that hold was just 2.06%, compared to 3.15% in the prior year
  • CoD table revenue grew 16%, aided by high hold
    • Mass revenue grew an impressive 32%, while VIP revenue grew 10%
    • RC declined 3%
    • Assuming a 15% direct play level, hold was 3.30% in August compared to 2.91% last year (assuming 15.7% direct play levels in-line with 3Q11)


Table revenue fell 3%, the 4rd consecutive month of declines

  • Mass revs was up 8% offset by a 8% drop-off in VIP revs
  • Junket RC was down 13%.  This was the 7th month of consecutive declines for VIP volume across SJM’s portfolio.
  • Hold was 2.83%, compared with 2.65% last August


Galaxy’s table revenue grew just 7%, but that was enough to win the spot of 2nd best growth amongst the 6 concessionaires.  Mass growth still led the market with growth of 77% which was offset by a 4% decline in VIP growth. Galaxy's hold was 3.51% vs. 3.05% in August 2011.

  • StarWorld table revenues fell 28%
    • Mass grew 35%, offset by a 33% drop in VIP
    • Junket RC fell 28%, marking the 3rd month of consecutive declines
    • Hold was 2.87%, compared with last August’s hold of 3.12%
  • Galaxy Macau's table revenues grew 21%.
    • Mass grew 84%
    • VIP grew 7%, while RC increased 34%
    • Hold was very high at 4.04% vs. 2.98% last year


MGM’s table revenue fell 1% in August.

  • Mass revenue grew 46%
  • VIP revenue fell 9% and VIP RC declined 3%.
  • If direct play was 9%, then August hold was 3.12% compared to 3.32% in August 2011





Despite producing the best YoY growth, LVS was the biggest share loser in August, closing the month at 19.0%, -2.5% MoM.  Despite the MoM drop-off, August's share was still better than its 6 month trailing market share of 18.3% and 2011 average share of 15.7%.

  • Sands' share was 3.6%, down 30bps MoM.  For comparison purposes, 2011 share was 4.6% and 6M trailing average share was 3.8%.
    • Mass share was 5.6%
    • VIP rev share was 2.8%, flat with July
    • RC share was 3.1%, 40bps better than its 6M average
  • Venetian’s share fell 40bps to 8.5%.  2011 share was 8.4% and 6 month trailing share was 7.6%.
    • Mass share fell 40bps to 14.3%
    • VIP share decreased 30bps to 6.3%
    • Junket RC share increased 10bps to 3.9%
  • FS decreased 70bps to 3.1%.  This compares to 2011 share of 2.2% and 6M trailing average share of 4.1%.
    • VIP share decreased 70bps to 3.8%.  
    • Mass declined 60bps to 1.1%, the lowest share since opening
    • Junket RC fell 20bps to 3.7%
  • Sands Cotai Central's table market share fell to 3.4% in August from 4.6% in July.
    • Mass share of 4.6%, marking a property record
    • VIP share of 2.9%
    • Junket RC share of 3.9%, flat with July, and tied with Venetian’s share


Wynn gained 100bps of market share in August, rising to 12.3% due to high hold.  While its August share was far below Wynn’s 2011 average of 14.1%, it was better than their 6-month trailing average of 12.0%.  We expect Wynn’s share to struggle in the face of a ramping Sands Cotai Central.

  • Mass market share was 8.7%, up 80bps MoM
  • VIP market share rose 1.2% to 13.7%
  • Junket RC share fell 10bps to 12.2%, the property’s second lowest share since October 2007


MPEL’s fell 20bps in August to 13.1%, below their 6 month trailing share of 13.4% and 2011 share of 14.8%.  The good news is that the entire share drop was due to losses at Altira, which were primarily hold driven.  CoD’s share expanded in August.

  • Altira’s share grew 90bps to 2.8%, the property's lowest share since July 2007 and well below its 6M trailing share of 3.9% and 2011 share of 5.3%.  Much of the share drop can be attributed to low hold in August.
    • Mass share was flat at 1.5%
    • VIP fell 1.4% to 3.3%, the property's lowest share since July 2007
    • VIP RC share decreased 30bps to 5.2%
  • CoD’s share grew 70bps to 10.1% aided by strong hold.  August’s share was the property's best share since September 2011 and well above its 2011 and 6M trailing share of 9.3% and 9.4%, respectively.
    • Mass market share increased 70bps to 10.4%
    • VIP share grew 80bps to 10.0%
    • Junket RC grew 60bps to 7.8%


SJM was the second largest share loser in August.  SJM’s share fell 1.1% to 25.0% in August.  August’s share compares to their 2011 average of 29.2% and its 6M trailing average of 26.8%.

  • Mass market share fell 1.1% to 30.6%, setting a new record low
  • VIP share fell 1.4% to 23.6%
  • Junket RC share increased 60bps to 27.6%


Galaxy gained 1.3% share in August, rising to 20.2%, above its 6M trailing share average of 19.7%

  • Galaxy Macau share gained 2.8% to 12.6%, aided by record hold of 4%
    • Mass share was 9.7%, relatively unchanged MoM
    • VIP share gained back July’s loss, growing 3.9% to 13.7%- the properties’ second best market share month since opening
    • GM’s VIP market share is equivalent to Wynn’s, higher than MPEL’s and not far behind LVS’s portfolio share of 15.9%
    • RC share fell 30bps to 11.2%
  • Starworld share fell 160bps to 6.6%, the property's lowest share since September 2008
    • Mass share declined 20bps to 3.0%
    • VIP share fell 2.3% to 8.0%
    • RC share fell 1.2% to 9.1%, the property's lowest share since June 2009


MGM was the biggest share gainer in August due to a 60bps increase in MoM hold.  Their share increased 1.5% to 10.4%, close to its 2011 share of 10.5% and above its 6M average of 9.8%.

  • Mass share increased 90bps to 7.5%
  • VIP share grew 2% to 11.1%
  • Junket RC grew 70bps to 10.8%


Slot Revenue


Slot revenue grew 16% YoY to $135MM in August

  • MGM took the top prize for YoY growth of 48% to $22MM.  Interestingly, this is the 3rd consecutive month when MGM had the best slot growth.
  • SJM had the second best growth YoY at 28% to $18MM
  • LVS grew 27% YoY to $38MM
  • Galaxy grew 14% YoY to $17MM, just behind the record they set in January 2012
  • MPEL’s slot revenue grew 8% to $23MM
  • WYNN had the worst YoY performance in slots with a 20% YoY decline to $20MM: 47% below their record of $32MM set in May 2011.  Part of the decrease is likely due to capacity constraints and yield management efforts that have reduced slot counts at the property by approx 7% YoY.







Lower Highs: SP500 Levels, Refreshed

POSITIONS: Short Small Caps (IWM)


The storytelling out there on why the market isn’t going straight down is fascinating. It was in mid-March too. Growth is slowing, globally, at an accelerating rate (inflation policies do that) and the only big part of the bull case that’s left is bailouts.


All the while, like it did in March-April, the broader market continues to make lower-highs on lower and lower volumes. Imagine they took APPL out of the SP500; then the storytelling would get really good.



Lower Highs: SP500 Levels, Refreshed  - spx levels



Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1407
  2. Immediate-term TRADE support = 1401
  3. Intermediate-term TREND support = 1367


In other words, provided that 1401 holds, the market’s range can easily remain tight (1401-1418). That 17 point range is less probable on a close below 1407; and a close below 1401 puts 1367 in play, faster.


Central planning is so exciting!


Keith McCullough

Chief Executive Officer

Early Look

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