Investigating Truth

This note was originally published at 8am on October 17, 2012 for Hedgeye subscribers.

“The first duty of a man is the seeking after and investigation of truth.”



Hail Mary end-zone finale to Packers/Seahawks? Last night’s end to the Presidential Debate was not, but Candy Crowley played the role of an NFL replacement ref, turning what I had scored as a tie into a late Obama win.


What is the truth in America? Was the moderator “fact-checking” Romney into the boards at the most critical point of the debate fair? Does it matter? Like many journalists in the manic media, Candy knows where her bread is buttered. Maintaining access to the party in power = priority #1. Sadly, for the country, that included her on-the-fly interpretation of Romney vs Obama truth.


Not surprisingly, the stock, currency, and commodity markets front-ran the momentum swing of the debate. It was a marginal win for Obama, but what happens on the margin in Macro matters most. What’s good (on the margin) for Obama, is bad for the US Dollar. It has been since he took office. Partisan Republicans may disagree with me on last night’s score; the market doesn’t.


Back to the Global Macro Grind


With the SP500 inverse correlation to the US Dollar of -0.95 right now, the truth is that if you get the immediate-term moves in the US Dollar right, you’ll get a lot of other things right. That’s the only reason why I feel compelled to score political momentum right now.


Perversely (even though I think Gold is in a long-term bubble) that’s why I bought Gold in front of last night’s debate. Obama up = Dollar down = Gold Up. Bubbles can remain bubbles for as long as causality (policies to debauch the Dollar) remains intact.


As I investigate other truths this morning, here are some big ones:


1.   #EarningsSlowing – this is our top Hedgeye Global Macro Theme for Q4 2012 (send an email if you want the slide-deck; I did meetings all day in Boston yesterday and we came away with plenty more long-cycle ideas to discuss on peak US Corporate margins). #EarningsSlowing remains very relevant this morning with both Intel (INTC) and IBM reiterating the same.


2.   Tech Stocks (XLK) – if you didn’t know global growth slowing would translate into +/- GDP businesses (semis, hardware, etc.) seeing top and bottom line slowdowns, now you know. Tech is down -2.4% for October.


3.   The sun rises in the East


While Obama, Geithner, and Bernanke continue to believe that they can “smooth” the economic cycle (Keynesian Economics 101), points #1 and #2 are now colliding with point #3 (gravity). The stock market hasn’t been the economy in 2012 but, eventually, they’ll collide.


What’s the market’s truth (last price) telling you this morning?

  1. Lower-highs in stocks (globally)
  2. Higher-lows in bonds (globally)
  3. EUR/USD testing its TAIL risk line of resistance

On that last point, I can’t overstate how important the next currency move is from here.


A)     IF the US Dollar snaps its TAIL line of support ($78.11)

B)      AND the Euro (vs USD) breaks out above its TAIL risk line of resistance ($1.31)

C)      THEN the market is probably telling you that Obama is going to win the Election


Four more years of the same (Big Government Interventions, Spending, and Regulation/Rule-Making on-the-fly) might actually be fantastic for the stock market – but it will continue to crush both real (inflation adjusted) economic growth, hiring, and confidence. I wonder what the 47% think about that?


Collectively, the American people aren’t as dumb as some of the media’s partisans. I highly doubt they’ll trust the stock market anymore today than they didn’t yesterday (stocks at 5yr highs = Equity Fund outflows and Financial Media ratings at YTD lows).


If you didn’t know Candy’s role in the debate was as politically rigged as Bernanke’s has been at the Fed, now you know that too. The truth about America 2.0: your un-elected and un-accountable pundits and politicians are running the gong-show.


My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1734-1766, $112.60-115.26, $79.08-80.07, $1.29-1.31, 1.64-1.76%, 813-842, and 1419-1469, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Investigating Truth - Chart of the Day


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Surviving Storms

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

-Charles Darwin


Suffice it to say, from a survival perspective, the last 48 hours have been humbling. As my generator teeters on running out of gas again this morning, I write this Early Look to you under a flickering light with a heavy heart.


We will move forward today. We will adapt and change. We will get through this together.


Yes We Will.


Back to the Global Macro Grind


Today is month-end for October (year-end for many mutual funds). Early morning futures are indicating we’ll get a lift into those month-end markups. Unfortunately, the broader risk management picture of Global Growth and #EarningsSlowing has not yet changed.


From The Bernanke Top (September 14, 2012), US stocks (SP500) and commodities (CRB Index) are down -4.3% and -8.1%, respectively. For October to-date, the SP500 is down -2% and the Tech Sector (XLK) is down -6%.


What will November bring?


I sincerely hope health and safety to the many of us who are in the dark here on the East Coast. But from a stock and commodity market perspective, hope is obviously not a risk management process.


On that score, because I’m really at a loss for words this morning – here are some risk management lines to consider that will be highly influential to US stocks and commodities in the coming weeks:

  1. US Dollar Index immediate-term TRADE breakout line of $79.57 (long-term TAIL support = $78.11)
  2. Euro (EUR/USD) long-term TAIL resistance = $1.31
  3. SP500 TRADE (1431) and TREND (1419) resistance
  4. Russell2000 TRADE (824) and TREND (846) resistance
  5. Tech Sector ETF (XLK) TRADE ($29.62) and TREND ($30.28) resistance
  6. Apple (AAPL) TRADE ($624) and TREND ($640) resistance
  7. US Equity Volatility (VIX) immediate-term TRADE support = 16.61; TAIL resistance = 19.05
  8. CRB Commodities Index TRADE (305) and TAIL (312) resistance
  9. Oil (WTIC) TRADE ($88.32) and TREND ($91.77) resistance
  10. Gold TRADE ($1735) resistance; TREND ($1699) support

At the same time, it will be important to monitor what the US Bond market thinks about risk. The 10-year US Treasury Yield has been as good a leading indicator as any on US growth in 2012 – here are the levels that matter most in our model:

  1. UST 10yr TRADE resistance = 1.81%
  2. UST 10yr TREND support = 1.72%
  3. UST 10yr TAIL resistance = 1.91%

In other words, if the 10yr yield can’t find a way to breakout > 1.91% in the coming weeks and months, the high probability situation in our model is that US growth will remain below 2% in Q4.


All the while, Chinese demand will be an open question. While our research and risk management views currently say that the “China has bottomed” crowd has no confirming data to support that claim, our views are always subject to real-time change.


Across risk management durations in our model, here are the lines that matter most on the Shanghai Composite:

  1. Immediate-term TRADE resistance = 2112
  2. Intermediate-term TREND resistance = 2151
  3. Long-term TAIL resistance = 2294

When an asset class is bearish across all 3 of our core risk management durations, we call that a Bearish Formation (when last price is above all 3 we call that a Bullish Formation). We don’t have to be bullish or bearish. We simply have to embrace uncertainty, change our minds, and adapt as the data does. That’s how we survive storms.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $106.21-109.97, $79.57-80.45, $1.28-1.30, 1.72-1.81%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Surviving Storms - DXY


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The Macau Metro Monitor, October 31, 2012




Caesars has finally pulled the plug on its failed China casino strategy.  Five years ago, CZR paid $578 million for a golf course in Macau, hoping to use the land for a casino in the industry's biggest growth market.  But Caesars still hasn't received permission to build the casino.  Last month, the company actively began trying to unload the money-losing golf course and leave Macau.  Steven Tight, the company's international executive, says Caesars doesn't have formal offers for the Macau property but there "has been a significant level of interest in the land from a number of potential buyers."


Even as Caesars backs out of Macau, executives say they aren't giving up on Asia.  Caesars is trying to win branding and management contracts for hotels without gambling in Asia—a strategy similar to that of rival MGM Resorts.  Caesars last year said it had a deal to manage a future hotel on China's Hainan island.  Tight says he expects to announce more deals soon.  A typical management contract for a large hotel could generate about $3 million to $5 million in revenue a year, he says.


Caesars also plans to apply for tentative government approval for a casino license in South Korea by early December.  



Galaxy Entertainment Group Ltd is planning to build a 10,000-seat area at Galaxy Macau in Cotai  The design plans are due to be submitted for government approval by late December.  The operator hopes to start construction next July.


This will be the third major indoor multi-use arena on Cotai, after the government’s 7,000-seat Macao Dome and the 15,000-seat CotaiArena at The Venetian Macao.  Melco Crown Entertainment Ltd is also planning to include a 5,000-seat multi-purpose entertainment studio in its Studio City casino resort.



The rules for the setting up of smoking areas in casinos were gazetted yesterday.  The casino tobacco ban starts on January 1.  Casinos were offered a part-exemption from the ban because there was a fear that full prohibition would have a drastic, negative economic effect.


According to the rules published yesterday, existing casinos can use one of four options to separate smoking and non-smoking areas: four-metre wide transition areas, air curtain systems, two-metre high walls or special ventilation systems.  Casinos under construction or that have received construction approval are considered existing casinos.  New casinos will have to divide their gaming floor physically and have independent ventilation systems for smoking and non-smoking areas.  If casinos have more than one floor, smoking areas should be located on the upper levels.  Gaming operators must submit a floor plan to the chief executive including all the details on the smoking areas for evaluation and approval.


Although the rules don’t set any ratio for gaming tables between smoking and non-smoking areas, that will be taken into account while reviewing requests, according to the government.



According to the Ministry of Manpower (MOM), Singapore's unemployment rate in 3Q stood at 1.9%, down from 2.0% in 2Q 2012 and 3Q 2011.  However, employment creation moderated in 3Q.  Preliminary estimates showed that total employment grew by 24,900, down from the increase of 31,900 in the same period last year, and 31,700 in 2Q 2012.


In preparation for CZR's 3Q earnings release Wednesday, we’ve put together the recent pertinent forward looking company commentary.




  • "The Atlantic City region, as you're well aware, has been challenged for a number of years and continues to be challenged. However, the growth decline in that region has started to mitigate and, as we move forward with the annualization of Aqueduct and the annualization of Revel, we would expect that to continue to improve."
  • [Octavius Tower]  "We have three additional ultra villas that will come online in November and that really targets the international play, very high end customer."
  • "We've partnered with Nobu and we expect that to open at the end of the year. We're currently taking reservations starting on February 4, but we would expect to move that up as the date gets firmed in terms of the opening timeline."
  • "Horseshoe Cincinnati is well under construction. That's going to open at the end of the first quarter or early into the second quarter."
  • "Thistledown was a race track that we purchased out of bankruptcy. We're allowed to have VLTs at that property and we closed the financing round on that last month. So, that's fully financed and that should be open a few months after Cincinnati so probably in the early parts of the second quarter." 
  • [Bill's Property renovation and The Linq] "All of these developments are scheduled to open in phases over the next two to three years. You can see that a number of them will be complete and operational by the end of 2014 and that's important because, as I mentioned from a capital structure standpoint, we have pushed out our maturities so that we don't have any material maturities before the 2015 period which will enable us to realize the benefits from these development prospects."
  • "The Playtika themselves generate about 6.5 million monthly active users. The Caesars Casino also does quite well, not as well as Slotomania because it was the first application that was launched and Caesars Casino is building along that, but it does around 500,000 daily active users. So it's still performing very well."
  • "We are going to renovate a large number of rooms next year in Las Vegas. If you were to ask, where we've cut back on maintenance capital for the last few years, it's really been in Las Vegas and it's primarily been in the room renovation category. So next year, we're planning to do a significant number of rooms, probably touching nearly all of the properties themselves. There will be a significant renovation at Caesars Palace of 550 rooms."



  • "We're optimistic about our prospects in Massachusetts and plan to submit our application to the Gaming Commission this fall."
  • "The State of Maryland's Video Lottery Facility Location Commission granted a license to our consortium, paving the way for us to begin building Harrah's Baltimore, which will feature 3,750 VLTs. The consortiums are beginning to seek necessary permit and construction is likely to begin in 2013 with an opening targeted for the second quarter of 2014.:
  • "We also announced that sale of Harrah's St. Louis, which we expect to close by the end of year."
  • "Our margins at Atlantic City are under tremendous pressure as revenues continue to decline. Many of the properties there operate unprofitably for reasons that are very hard to understand. And so, we continue to look at all manners of adjustment we can make to try to keep our operating expenses as low as possible."
  • [Baltimore] "The ownership breakout will be roughly 52% for Caesars and then the other percentages will be broken up by their, by the other three partners. As you know, it's going to be a $300 million plus project overall."
  • [Vegas trend]  "It's one of the challenges in this business, we're still facing the same number of guests, we're servicing the same number of visitors, putting them to bed, waking them up, parking their cars and alike, but the amount of revenue we enjoy is a bit diminished from that. And there is no reason that I can see in the immediate future that would suggest the general macroeconomic conditions that have led to that results are going to be much different."
  • [Group/convention business in Vegas] "I think the general trend remains favorable.... I doubt that much of that is going to change
    in the remainder of this year, but I think as we look forward to 2013, I think it's likely to be a little bit more encouraging."
  • "Broadly VIP weakness has been felt across many different categories...the trips from that VIP category in the second
    quarter of Las Vegas were up 3.2% and it was really the spend-per-trip that impacted it and it's a function of when
    customers come to Las Vegas they just elect to spend less than they did in prior year periods."
  • [Project Renewal cost program] "Yes, in the quarter we experienced about approximately $42 million worth of savings and we'd expect to have about $147 million left on the program."


In preparation for BYD's 3Q 2012 earnings release on Thursday, we’ve put together the recent pertinent forward looking company commentary.




  • "In Atlantic City, Borgata is contending with heightened competition, but we expect to see solid results during the busy summer season."
  • "In our Midwest and South region, the results were more encouraging. We maintained or grew market share in every market where we operate. This has been the strongest region of the country for the domestic gaming industry for some time now and it is also our most robust business segment."
  • [Peninsula acquisition] "Based on our progress to date, we anticipate this transaction will close as intended sometime in the second half of the fourth quarter."
  • "The first of these new agreements is with Wilton Rancheria, a federally-recognized tribe located about 30 miles southeast of Sacramento, California. This project will provide us our first entry into California, further diversifying our geographic footprint and extending our brand to an attractive new market. We are early in the process of this development and anticipate it will take approximately 24 months to receive all the required approvals to proceed."
  • "We are contending with an aggressive promotional environment in the Locals business but, importantly, this competition has had no impact on our top tier business. In fact, the tremendous relationships we've built with our top tier customers has been a real bright spot in our Locals business this year, as business volumes among our core customers have continued to grow. The promotional environment has, however, had a significant impact on play of customers in our lower tiers, customers we consider to be casual gamers."
  • [Downtown] "We experienced an EBITDA decline in this business segment as well but are confident that the causes are temporary....expect business to stabilize in the third quarter and resume growing in the fourth."
  • "We recently began introducing our nationwide player loyalty program B Connected and it should begin to have an impact in the third quarter. This will allow us to make more strategic marketing investments which will drive more profitable business to the property [IP]."
  • "We are also seeing the positive effects of efficiency measures at the IP where we are saving money without compromising the IP's reputation for strong customer service and outstanding amenities. The IP is running ahead of our expectations and is demonstrating our ability to unlock significant value with acquisitions."
  • "We are assuming a 35% tax rate for 2012. Our capital expenditures in the quarter were approximately $25 million and $13 million at Borgata."
  • "You should note that in the third quarter last year there was a $4.6-million favorable property tax adjustment that benefited Lucia; hence, the $44.5 million dollars in EBITDA that was reported last year for the Midwest and South segment was $40 million on a comparable basis. Also, interest expense in the third quarter will be higher as a result of the $350 million of bonds that we issued in the second quarter at 9%. So, I expect that number to be $67 million to $68 million for the quarter."
  • "We expect wholly-owned EBITDA after deduction for corporate expense to be in the range of $77 million to $82 million. We expect Borgata to generate EBITDA of $47 million to $49 million compared to $50 million last year in the third quarter. With this range of EBITDA guidance, adjusted EPS for the quarter is expected to range from a loss of $0.05 to breakeven."
  • [Atlantic City] "The property tax rate is up about 11% year-over-year as a result of many of the properties in Atlantic City, filing appeals and being successful in their appeals, so the rate continues to move will continue at an elevated rate into the future. We have an appeal pending ourselves. We would expect that appeal to come to a conclusion sometime towards the end of the year or at the end of the year."
  • "We've really seen limited impact from our customers from Revel. They've had an impact on our food and beverage side of things, maybe some of the lower-end customers, but certainly not the core components of our business. And so, our thesis continues to remain intact; that is that we don't really expect to see the most significant impact from Revel until the fourth quarter just given the seasonality of the business."
  • [Borgata] "One of the things you have to keep in mind is that last summer season we ended up closed for a few days as a result of a hurricane. So there is a weather-related issue that is buried in last year's Q3 numbers....I think the estimation at that point was $5 million or $6 million for that weekend because it was a significant weekend as I recall and there was a lot of marketing and programs planned for that that were not able to take place as a result of it."
  • [Peninsula deal] "I think we plan to receive a management fee."
  • "When you look at the promotional spend in the numbers that come out of Atlantic City, you will see that some operators are down and other operators have really increased the level of promotional expenditures that they are spending. And so there's really a wide variety happening in the city right now. But Revel clearly is increasing the overall spend."
  • "As it relates to the rest of the Midwest and South operation, [promotional] spend is, I would say, stable on a year-overyear comparable basis in all markets relative to ourselves. We are also stable except for in Biloxi where we have made, obviously, a calculated decision to actually reduce marketing expense and drive profitability versus the prior owners."
  • "The secured leverage ratio is really not a pressure point for the company going forward. In fact, I think we've got plenty of cushion under there."
  • [FCF] "I think we want to have $150 million to $200 million of availability around the company (exclusive of cage cash)....Cage cash is generally around $100-105 million."

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