Takeaway: Growth, $USD Strength & incremental Fed hawkishness are bearish for Gold. ETF Flows & CFTC Data are collapsing & USD correlations tightening

On the other side of our #GrowthStabilzing theme and our bullish TREND view on the Dollar and consumption oriented equities has been a bearish view on Treasuries, Commodities, and Gold. 


We’re not self-proclaimed gold experts but we’d argue the fiat currency devaluation hedge underpinning the parabolic gold trade over the last five years has been fairly discrete.   In short form, the Gold bug thesis can be adequately described as:


Economic growth stagnates/decelerates further --> Expectations for further QE initiatives rise --> $USD Depreciates --> Gold rises as investors discount erosion in the currency value and prospective future inflation and seek hard asset stores of value.    


Within this framework, both the dollar and Gold become a function of the interplay between reported/expected economic conditions and expectations around monetary policy.  When it plays out on a global level, as it has in the wake of the Great Recession, the variable mapping gets more complex and the price action exaggerated but the idea framework is still the same. 


Its also important to note strength of the growth-policy-USD/Gold connection is stage or cycle dependent.  For example, in the throes of economic or market distress the correlation between the USD & Gold tends to be positive as the safe haven trade plays itself out.  However, outside of crisis conditions,  fundamentals (growth, interest rates, policy, etc) become the prevailing drivers and moderate-to-strong inverse correlations between Gold and the Dollar have predominated, empirically.     


So, as straightforward as we think the bullish case for gold has been is as simple as we think the bearish case that has been playing out currently in gold is.   If you buy into the idea that weak growth, unconventionally easy monetary policy initiatives, and investor expectations around forward policy have been the principle drivers of gold price appreciation since 2008, then a reversal in these factors – stable/accelerating growth, a cessation & eventual unwinding of easing initiatives, a strong dollar, & rising interest rates  - should serve to drive a correction in Gold prices.   


What does the anatomy of that correction look like?


Summarily, it looks like more of what we’ve been seeing in Gold Prices, Dollar-Gold correlations, CFTC data, and gold ETF flows over the last four months – trends we’ve seen accelerate over the last five weeks as the economic data has flashed some upside and the dollar has begun to break out.  


Consider the chart below which shows physical gold outflows from the GLD (SPDR Gold Trust) vs. the dollar.  




Looking across a host of relevant factors, all of the charts (unsurprisingly) reflect a similar dynamic:


Gold vs Fed Balance Sheet:  The correlation between Gold and the Fed’s Balance Sheet is strong across durations with an R^2 = 0.92 over the last 14 years.  If you think this relationship makes common and economic sense (we do), a deceleration and unwind of policy intitiatives (or the expectation for) on the back of an improving growth outlook is a decidedly bearish catalyst for gold.


Gold vs. Dollar:  Gold’s Inverse correlation to the dollar has been moderate-to-strong across durations.  Gold is levered to the USD directly given that gold generally settles in dollars, and indirectly via expected inflation & policy impacts on fiat currency value.   Correlations aren’t perpetual – they build and decay - but when they start to tighten alongside other relevant/corroborating factors, it’s generally worth paying attention.  Gold’s 30D correlation to the dollar is currently -0.90. 


Gold - CFTC Data:  Bullish Speculative positioning looks like its capitulating as net length in combined non-commercial futures & options contracts has collapsed since November.  It hasn’t paid to speculate on the end of the world (again) as extremes in bullish positioning (>1STDEV) have been followed by negative subsequent price performance in gold 100% of the time over the last year.  Net length is currently down ~62% from the late 2012 highs. 


Gold ETF Flows:  Gold flows to the GLD and ETF’s in aggregate, have rolled over since the beginning of the year and  have accelerated to the downside over the last month.  For example, total Gold Holdings in the SPDR Gold Trust (GLD) are down ~114 Tonnes (-8%) from peak 2012 levels according to bloomberg data.   


This weekend, my brother, a sharp guy and passive retail investor, made the following rhetorical comment (paraphrased) “that jobs number was pretty good….who will be the marginal buyer of gold?”.   Good Question. 


The bull case for Gold was straightforward and price was reflexive on the way up.  Reflexivity, by definition, works both ways and big crowds and small doorways still don't make great bedfellows.       


If the growth data can continue to confirm, the USD remains in bullish formation and policy makers (Congress & the Fed) can stay out of the way, we think gold continues to hold some further downside.  


In the more immediate term, equities are overbought and Gold/Treasuries oversold. From a quantitative perspective, Trade Resistance for Gold sits ~1.3% higher at $1612 with TAIL resistance up at $1681.  If gold fails to recapture those lines on the bounce, and domestic housing and labor market trends remain positive, we’d be interested in playing any strength from the short side.  We currently hold no position in gold in our Real-time alerts.  




GOLD:  ANATOMY OF A BREAKDOWN - Gold Price vs Fed Balance Sheet








Christian B. Drake

Senior Analyst 



Takeaway: Sorry folks but Vegas is not in recovery. MGM numbers at risk

This note was originally published March 08, 2013 at 10:25 in Gaming


January LV Strip gaming revenues fell 19%, worse than our projection of -8-12%.  If we adjust table and slot hold to historical norm this and last January, gaming revenues fell 20%.  Baccarat was a major contributor of the decline as volumes fell 49%. More troubling was that slot volumes fell 2.4%, reversing two straight months of YoY growth.  We believe February slot volumes will also decline.  Not exactly the start to the year the bulls were expecting.


Strip Details:

  • Slot handle fell 2.4% (+1% on a rolling 3-month average).  
  • Slot win was flat as hold was 8.9% compared with 8.7% in January 2012 - both well above average
  • Table volume excluding baccarat dropped 5% YoY (+3% on a rolling 3-month average).  Table hold excluding baccarat was 11.6%, compared with 12.0% on a trailing twelve month average.
    • Baccarat volume tumbled 49% (compared with +163% growth in January 2012)
    • Baccarat win dropped 51% on hold of 12.0% (TTM: 11.9%, 12.5% in January 2012)

China and MKC

Last night, YUM reported Q1 (February) China comps of down 20%, with improvement in February versus the overall quarter.  The stock is getting a well-deserved bounce today, and we mention it only because one of the names in our staples coverage has some leverage to restaurants in China - MKC.  The big difference between YUM and MKC is that MKC has been bouncing hard for about a month now, on no news and with utter disregard for the direction of earnings estimates or the company's multiple.


MKC’s commentary relative to continued Q1 weakness (1/24):


“While the Asia Pacific region had a strong sales result for the Consumer business, demand from industrial customers, primarily quick service restaurants, was weak. This was largely an outcome of less new product and promotional activity versus the year-ago period. We expect this decline to extend into the first quarter of 2013, which has a tough year-ago comparison. If you recall, we grew base business industrial sales in the Asia Pacific region 22% in local currency in the first quarter of 2012.”

We get it – shorting mid-cap staples names is tough – the companies tend to have sticky shareholder bases, multiples tend to be elevated versus the large cap peer group (and seem to matter less) and the opportunity exists for relatively small deals to move the needle on EPS pretty dramatically.  However, it isn't often that you see such a dramatic divergence between the direction of EPS estimates and the direction of the multiple in a non-cyclical name.  Full-year 2013 consensus estimates have gone from $3.36 to $3.22 since the company reported back in January, and the multiple has expanded from 18.9x (immediately post EPS) to 21.7x.


China and MKC - MKC PE1


Perhaps you can make the case the company sandbagged 2013 EPS guidance, but even an earnings base closer to $3.50 puts this name at 20.0x '13, and we are having a difficult time coming to either that earnings base or that multiple.  It is our strong preference to deal in what is likely, and we think a more likely scenario is an EPS result for the full-year at or below current consensus.


Valuation is never a catalyst, but the combination of significant multiple expansion in the face of a declining EPS base confounds us, and we don't like being confounded.  MKC is fast moving up our list of names whose current price we can't justify or explain, but are inclined to short.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

PODCAST: What Keeps Keith Awake at Night?

Keith answers questions from clients from this morning’s investment call. 


DKS: Value Trap -- Even After Getting Lanced

Takeaway: DKS is entering a period where margins will tread water while asset turns back-peddle. That's not a recipe for the stock to go up.

This note was originally published March 11, 2013 at 15:40 in Retail


A few people have asked us today as to whether we think that the DKS stock price reaction is overblown. If anything, we think it’s underblown (if that’s not a real word, now it is).


This has nothing to do with missing the flow of cold weather patterns or getting ‘Lanced’ by its stagnant inventory of Livestrong treadmills. But rather, it is a company in a mediocre business that is running at peak margins at a time when the outlook for comps (low single digits) is below the rate needed to leverage occupancy, deferred investments on the P&L are eating up an incremental 5% of earnings this year, and capex is trending up an incremental 20%.


Furthermore, let’s not forget that DKS falls into the bucket of names that has high risk of share loss to competitors and brands’ direct growth initiatives, and at the same time we see the company openly admit that it has underinvested in the infrastructure needed to take its ecommerce platform to the next level.


We get the whole point about DKS being a ‘best in breed’ retailer. But this is not necessarily a breed that needs to be owned.


We think that the crux of where DKS is in its cycle can be summed up in the Profitability Roadmap below, which shows the progression of margins vs. asset turns. Retailers, as we all know, can improve either one of those at any given point in time, but it’s when they improve simultaneously that real value is created and the stocks outperform materially (0.92 performance correlation). This is exactly what DKS did from 2009 through 2011, and it accounted for a 4-bagger in the stock.


But today, we think that we’re stuck at a point where margins will tread water, and it will be on an incrementally larger operating asset base. That is the ultimate recipe for a value trap.  


DKS: Value Trap -- Even After Getting Lanced - dksprrdmp

Beautiful Rage

Client Talking Points

Watch the Dollar

There are a lot of folks out there who simply hate this market, but the reality is that if you are raging against this market, you’re missing one of the most impressive four-month changes in Asian and US growth prospects that we’ve seen in nearly a decade. A strong currency, if sustained, is a pro-growth signal. So the key here is to watch whether or not the dollar remains strong.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“The question is (in my prime) who looked better in cutoff jean shorts – me or @KimKardashian?” -- @KeithMcCullough


“…fraught with arbitrary and capricious consequences.” – Manhattan Supreme Court Justice Milton Tingling on striking down New York city’s soda ban


$6 million, the salary the Baltimore Ravens wouldn’t pay receiver Anquan Boldin, who they traded to San Francisco

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.