Vain Hope

“I wouldn’t give much for a man who warms himself with the comfort of vain hopes.”



Hope is a lot of things, but it’s not a risk management process. The higher commodity and stock market inflations go, the less likely it is that the global economy recovers.


With a 0% asset allocation to commodities and a time stamped short position in the SP500 (SPY), I obviously lost last week’s battle with Ben Bernanke. That doesn’t make this war with Keynesian Academics over. It means it has just begun.


If Bernanke thinks that compressing the next 3 years of Equity returns into the last 3 months before a US Election is “price stability”, that probably means things are just about to get volatile, again.


Back to the Global Macro Grind


I get things wrong. But when I do, I don’t put the country’s long standing liberties and structural employment at risk. Bernanke does. If I have one sincere hope for this country, it’s that this un-elected man thinks about that before he goes to bed at night.


To obfuscate the truth about currency debasement and real-time inflation expectations is one thing. To not be held accountable to these economic realities by the President of the United States is entirely another. Both Bush and Obama own this legacy of Bernanke’s economic storytelling.


Immediate and intermediate-term facts about Inflation Expectations:

  1. 10-yr breakevens (Inflation Expectations) moved right back to record highs last week (not YTD highs, record highs)
  2. CRB Commodities Index Inflation just crashed to the upside, +2.9% wk-over-wk, and +20% since June
  3. Oil price inflation (Brent) was up over +2.7% last week, +33% since June; US gas prices are now pushing back to $4

Sure, US and Russian stocks were up +1.9% and +7.4%, respectively, last week on that – but that’s nothing compared to the +153% YTD move in Venezuelan stocks post a Chavez currency devaluation! What did that do for the economic health of the Venezuelan people again?


With Bernanke Burning The Buck (see Chart of The Day), the US Dollar Index was down for the 5th consecutive week. In the face of its -1.7% wk-over-wk inverse “to infinity and beyond” money printing move, here’s what other things priced in Dollars did:

  1. Coffee +11.1%
  2. Natural Gas +10.4%
  3. Rubber +6.7%

I know, I know. Instead of picking Copper, Gold, and Oil that inflated +2-6% last week, I’m cherry-picking some stuff you might need as you take tax-payer funded car service to your office in Washington D.C. every day.


Heck, maybe there’s going to be what Keynesian students of economic theories-failed call “substitution” and “multiplier” effects… and you’re going to start drinking Red Bull instead of coffee in the morning – right pumped to chase the market even higher!


Another way to look at Inflation Expectations Rising is, of course, the futures and options markets (CFTC data):

  1. Last week’s CFTC options contracts were up another +0.3% at all-time highs (1.33 million contracts outstanding)
  2. Gold contracts = up another +14% wk-over-wk (after being up +35% and +10% in the 2 wks prior) to their February highs
  3. Oil contracts shot north of 203,000, their highest level since Oil topped in February-March 7% higher than Friday’s close

People who trade market expectations, run long-term money, and/or do math obviously get this. That’s why the biggest macro call I missed in the last 6 months was probably issued during a super special deflationary dinner in Jackson Hole in August.


Do you think Bernanke and his boys told anyone he was going to do this? That’s just a question, not an answer – and one, looking back, that you should have asked yourself during the Hank Paulson TARP. Does it help people trust our markets more or less?


Sadly, this is how the Old Wall still works - but where it counts for The People (cost of living, jobs, etc.), it’s not working. If this man thinks his Vain Hope of a +2.5-3% US GDP recovery in 2013 is kidding this accurate GDP Growth forecasting firm, he’s going to be in for a long battle with some fact-based Tweet-heat. If anything, the probability of a US Recession in 2013 just went up.


*2007-2012 Federal Reserve Money Printing Fact: Policies To Inflate via currency devaluation slow real-inflation adjusted economic global growth. China’s stock market fell -2.1% last night (down -15.5% since May) after Singapore reported a nasty -10.6% export growth report for August as commodity price margin pressures continued to rise, dampening demand.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $114.83-116.94, $78.57-80.31, $1.28-1.31, 1.70-1.87%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Vain Hope - Chart of the Day


Vain Hope - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 17, 2012

As we look at today’s set up for the S&P 500, the range is 40 points or -2.24% downside to 1433 and 0.49% upside to 1473. 











  • ADVANCE/DECLINE LINE: on 09/14 NYSE 1130
    • Decrease versus the prior day’s trading of 1701
  • VOLUME: on 09/14 NYSE 899.79
    • Increase versus prior day’s trading of 12.15%
  • VIX:  as of 09/14 was at 14.51
    • Increase versus most recent day’s trading of 3.27%
    • Year-to-date decrease of -37.99%
  • SPX PUT/CALL RATIO: as of 09/14 closed at 1.06
    • Down  from the day prior at 1.11 


  • TED SPREAD: as of this morning 28.86
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.87%
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.63
    • Up from prior day’s trading at 1.62 

MACRO DATA POINTS (Bloomberg Estimates)

  • Rates Weekly Agenda
  • 8:30am: Empire State Manuf., Sept. est. -2 (prior -5.85)
  • 11am: Fed to buy $4.5b-$5.5b notes due 11/15/2020-8/15/2022
  • 1am: Fed to sell $7b-$8b in notes 12/31/2014-5/31/2015
  • 11:30am: U.S. to sell 3-mo, 6-mo bills
  • 4pm: USDA crop-condition reports 


    • House, Senate in session
    • U.S. Defense Secretary Leon Panetta begins China visit


  • Homebuilding probably climbed with sales: U.S. eco preview
  • China home sales fall 4.7% in week ended Sept. 14: CEBM
  • Obama administration to announce trade complaints against China in Ohio
  • Ford picked by Canadian auto union as target in labor talks; current labor contact expires at 11:59pm tonight
  • Finance industry warns of “cliff effect” in ECB bond plan
  • Russian central bank starts $5b sale of Sberbank shares
  • India’s central bank unexpectedly cuts cash reserve ratio to 4.5%; holds key interest rate at 8%
  • BAE/EADS merger may flush out other suitors, Moody’s says
  • U.S. junk-bond yields fall below 7% for fist time: index data
  • Shell won’t drill for oil in Alaska this year after dome damaged
  • Emanuel promises suit to end Chicago strike as teacher balk on contract
  • Rosh Hashanah/Jewish New Year begins



COPPER – China down, Copper down almost 1% here this morning, after taking a vertical 3wk leap at its Feb/Mar highs; lower-long term highs remain intact.

  • Bullish Wagers at 16-Month High as Citi Sees Gains: Commodities
  • Hedge Funds Boost Bets as QE3 Pushes Oil to $100: Energy Markets
  • U.S. Hooked on Russian Crude Amid Shale Boom: Chart of the Day
  • Copper Falls on Speculation Rally to 4-Month High Was Overdone
  • Oil Trades Near Four-Month High on Signs of Improving Economy
  • Gold Seen Gaining in London as Stimulus Boosts Investor Demand
  • Wheat Drops as Rains Improve Crop Prospects in U.S., Australia
  • Coffee Rises in New York on Brazil Quality Concerns; Cocoa Falls
  • Ex-Touradji Trader Crone Starts Citrine Commodity Hedge Fund
  • Low Prices May Keep Aluminum Surplus Manageable in Near Term
  • Fed’s QE3 Signals Gold Rise to $2,000 by March: Chart of the Day
  • Rebar in Shanghai Declines on China Economic Slowdown Concern
  • Blackouts Spur $18 Billion Power Grid Upgrade: Corporate India
  • Piracy Fight Goes Awry as Nations Fail to Stop Killing Fishermen
  • Myanmar Gets Record Investment After Years of Isolation: Energy
  • Producer Destocking Balances Higher Exchange Aluminum Inventory













CHINA – Chinese stocks got smoked for a -2.1% drop, snapping my immediate-term TRADE line of 2107 support on the Shanghai Comp again overnight after China refuses to deliver on stimulus expectations (Food/Oil and Hong Kong property bubble up is not what they want more of via Qe3). Japan vs China heating up the headlines too.


SINGAPORE – We may have had the 3wk central planning rip in asset inflation wrong, but that’s making us more right on #GrowthSlowing, globally. Singapore just printed a bomb of a non-oil Export report at -10.6% y/y for AUG. That’s an important Global Macro leading indicator as we head into a very low growth rev/eps season.










The Hedgeye Macro Team

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Anna is back from Macau and Singapore and we’ve got some takeaways exclusively for you



Relative to sentiment, we are more positive on Macau following Anna’s trip there and our Singapore view remains unchanged.  We still think September will be up potentially in the mid teens but there are a few more catalysts than previously expected.  We also expect LVS and the market to get a nice boost from the opening of Phase 2 at Sands Cotai Central which even the competition seemed to acknowledge.  On the margin, the VIP outlook is probably a little better and we’re getting closer to some real infrastructure improvements that could boost Mass.  While Singapore still appears to be a slow growth market over the next year or so, investor sentiment is already there.


LVS and MPEL continue to be our favorite names with Macau exposure.  Here’s a summary of our updated thoughts on Asia gaming:




  • Although there are several theories surrounding the slowdown in Macau’s VIP market, we believe it’s a combination of several factors:
    • Europe is the top destination for Chinese exports, and economic trouble in Europe and the US are impacting the Chinese economy and hence VIP demand
    • Given what’s going on in the economy, many junkets, especially smaller ones have been more prudent in extending credit
    • Given the change over in the government that is about to occur, there is likely heightened uncertainty and sensitivity to being flashy so some players are likely waiting on the sidelines
  • Most market participants believe that the change in government in early 2013 will be a catalyst for improvement in the VIP volumes
    • New governments like to look good during their first year in power and tend to pump stimulus into the economy
    • New governments will likely announce new infrastructure projects
  • Existing infrastructure projects opening soon will help stimulate growth
    • Guangzhou Zhuhai intercity mass rapid transit:  Trial runs of the trains on the Zhuhai section could begin as soon as October.  The railway is expected to be fully operational by the end of 2012, connecting Gongbei to Guangzhou.  This should help boost tourist numbers to Macau.
    • Gongbei port expansion opening at the end of 2012
    • Bottom line is that the combination of the light rail and the border expansion are expected to shave off 4 hours round trip for visitors to Macau.  This could increase length of play by 30% for many day trippers.




While the rooms at Conrad and Holiday Inn are quite nice, after visiting “Site 5,” it’s hard not to notice that what’s currently open lacks the “wow factor.”  Put less nicely, Site 5 lacks a draw factor.  That said, the property is only partially open at the moment and “Site 6” is a lot more impressive than what’s currently open.  Moreover, the opening of Site 6 will also be followed by opening of the covered bridge connecting SCC to Four Seasons/Venetian which should greatly increase traffic between LVS’s Cotai Corridor.


Will the vanilla offering at SCC cause it to be a flop? We don’t think so.  Why?

  • The opening of Site 5 didn’t really do much to boost LVS’s market share and expectations are fairly low
  • Macau is still massively under-supplied on the room front
  • Holiday Inn brand offers compelling value since the rooms are a lot nicer than the moniker suggests and Chinese tend to like a good deal.  So worst case scenario, SCC can serve as a dormitory for Venetian which should drive Mass revenues.
  • LVS has finally begun advertising the amenities of SCC this week



  • Seems to be stable
  • While junket commissions have increased, this seems more of a function of junket consolidation and large players reaching higher volumes and therefore, getting a larger revenue share percentage. 
  • The other reason for an uptick in commissions is that for a while now, more and more junkets are moving to a revenue share compensation plan from a RC compensation plan.  Given that market hold in Macau averages around 2.95%, revenue sharing agreements with volume targets allow junkets to achieve higher compensation thresholds then just getting paid 1.25%


  • While many casinos operators have gotten more savvy on their Mass rewards program, we saw no evidence that anyone aside from SJM was providing rebates on Mass (SJM has been providing rebates for several years now).  Operators are getting to know their premium mass players and in an effort to retain their loyalty, they offer free rooms, F&B comps and transportation.  



  • Mass hold percentages can vary significantly between those properties that include chip redemption at the cage as drop and those that only include markers
  • Recent higher Mass hold percentages look sustainable (CoD, Galaxy Macau)



  • Noticeably more popular than a few years ago.  Hybrid Stadium seating games where there is a live dealer and four different games played are quite popular at many casinos (Galaxy, LVS, MGM, MPEL).  Other electronic table games were also popular.



  • The government’s desire to drive tourism vs. gaming is abundantly clear.  While RWS and MBS couldn’t be more different, they are both similar in the respect that the casinos are discretely placed amongst a vast array of non-gaming attractions.  It’s entirely possibly to stay at RWS and not even see the casino.  The same is true of MBS – there was a massive high end mall, and lots of other attractions at this cavernous complex to keep non-gaming visitors intrigued.
  • The government is keen on protecting the countries’ residents from evils of gaming.  They have recently passed legislation including invention programs for patrons perceived to be gambling “too” much and have a fairly long list of factors that put Singaporean residents on the exclusion list.  There are also extension restrictions on casinos being able to promote gaming in Singapore, as evidenced by the recent fine on RWS. Given that about 50% of slot play and likely about 1/3 of mass play come from the local population, the 2 IRs will have a tough time growing this mature market. Any material growth of Singaporeans gambling will also likely bring further operational restrictions
  • International mass growth is constrained by the lack of hotel inventory in Singapore, and there likely won’t be much relief on that front for a few years
  • VIP play seems to be dominated by a small group of super high rollers. We believe that growth on this front will be dominated by the economic health of Asia and likely correlated to resumption of growth in Macau.  Bottom line, no one really knows what the growth profile of this market will look like.
  • The good news is that both IRs are generating a lot of cash, expectations for growth are low to non-existent from US investors, and the probability of additional gaming licenses seems extremely unlikely.

GIL: Why We Can’t Support Shorting It Here

Takeaway: There are too many factors helping out $GIL revs and margins to get bearish…at least not yet. But watch the CEO’s stock sales…he’s good.


Conclusion: There are too many factors helping out the top line and margins to get bearish…at least not yet. But watch the CEO’s stock sales…he’s good.


Keith pinged us yesterday on GIL, as it started to look like a short based on his models. True to our process, we re-evaluated the fundamental case to see where it stands vis/vis price (they’re often two very different things).  This is one of those times where we told him to focus short efforts elsewhere, as it is likely another two quarters before the fundamentals will likely line up with a  bearish stock call.

Here’s a quick review of the primary financial drivers – Revenue, Margins, and Cash Flow.


Revenue:  The setup is getting easier near term. Just as GoldToe anniversaries, Anvil revs layer on and will manufacture double-digit revenue growth alone. After the upcoming quarter, the setup is very favorable with GIL up against devaluation discounts of last year. Post FQ1, organic revenue growth will be more challenging to manufacture with the company now representing over 71% of the U.S. Distributor market forcing them to rely more heavily on building Branded Apparel, which is uncharted territory and away from management’s core expertise. Barring another acquisition (which we wouldn’t put past them) following FQ2, revenue growth should slow meaningfully as the benefit of recent deals will have passed, and the share gain from Hanesbrands jettisoning its screenprinting business will have ebbed.


GIL: Why We Can’t Support Shorting It Here - GIL Revs


GIL: Why We Can’t Support Shorting It Here - GIL Org Revs


Margins: This setup is also very favorable near-term as GIL starts to lap cotton prices as well as manufacturing downtime and inventory devaluation that will add 300-400bps of margin alone. GIL also posted a positive Sales/inventory spread in 3Q for first time in six quarters, which is gross margin bullish near term.


GIL: Why We Can’t Support Shorting It Here - GIL Margins

Cash Flow: Favorable. CapEx coming down after two years of higher spending to grow retail, open a new DC, another manufacturing facility, and revamp several existing manufacturing facilities to lower operating costs. Increased spending over the last two years at 9%-10% of sales should ease CapEx requirements for the next 2-3 years


GIL: Why We Can’t Support Shorting It Here - GIL Inv


GIL: Why We Can’t Support Shorting It Here - GIl S

Sentiment: Definitely mixed signals here, with short interest down to 3% of float (it’s been as low as 2%) and the sell-side generally positive as well. But on the flip side, CEO Glen Charmandy recently filed a 10b5-1 plan to sell up to 2.75mm of his 9.8mm shares of GIL stock.  While these 10b5-1 plans are ‘at arm’s length’ and are executed by a third party, it’s usually a wise move to pay attention when the CEO of a company registers an intent to sell 28% of his stock – especially when it’s a CEO that has had such a great track record in capital preservation on stock sales.


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