Not the End of the World

Client Talking Points

Still Bearish on Commodities

Despite the fact that the end of the world crowd stayed vocal the past 24 hours, we, amazingly enough, pulled through and the end of the world isn’t here. What we do see is the same bearish trend in commodities that we have seen when the dollar remains strong. Gold, copper and oil all are weakening as the dollar strengthens for the seventh week in the last eight.

Korea’s KOSPI As a Leading Indicator?

We have looked to Korea’s KOSPI as a leading indicator of global economic growth. However, thanks to the global currency war, and specifically the ongoing depreciation of the Japanese yen, the KOSPI hasn’t performed as well as we might have expected. We think that’s a function of the competition faced by Korean manufacturers because of that weaker yen, and is not suggestive of a weakening global economy.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.


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


“Shorting European markets, selectively, on bounces is making money; shorting US stocks on that hasn’t” -- @KeithMcCullough


“Wall Street people learn nothing and forget everything.” – Benjamin Graham


$30 million, the price Yahoo! Reportedly paid to buy Summly, a mobile news app, from a 17 year-old British entrepreneur

Sturdy Horses

“Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.”

-Prime Minister Winston Churchill


Winston Churchill smoked cigars effusively, ate almost whatever was put in front of him, came under fire in armed conflicts more than 50 times, and engaged in many political battles over the course of his life.  Despite these potential health risks, Churchill lived to the ripe old age of 91.  He was, by almost any estimation, a sturdy horse.


As it relates to his health, many observers often commented on the generous amounts of alcohol that Churchill drank.  In fact, Sir Alexander Cadogan, head of the Foreign Office, noted at the Yalta conference in 1945 that the Prime Minister was “drinking buckets of Caucasian champagne which would undermine the health of any ordinary man.”


Churchill himself was not shy about acknowledging aggressive consumption of spirits and once said:


“Always remember that I have taken more out of alcohol than alcohol has taken out of me.”


For those of you that have been over served, and I will include myself in that camp, you know full well that to gain the upper hand on alcohol, and in particular hangovers, indeed requires that one have the constitution of a sturdy horse.


But the purpose of this note is not to delve into the fine details of Churchill’s bad habits, but rather to delve into the realm for which he is most well known – foreign policy.  Based on traditional measures of risk, like volatility, many markets are signaling a future without any major foreign policy blow ups.  In particular, U.S. equities, as highlighted in the Chart of the Day are making new lows in terms of volatility.


This, of course, is not to say risk has gone away, but currently equity markets are certainly discounting lower global risk in the future. As a result, it is probably a sign to be even more diligent when searching for TAIL risks.  In the realm of international security, we see a number of red lights on the horizon that are worth monitoring closely, specifically: 


1. North Korea – Even if Dennis Rodman has improving relations with this Communist nation, the rest of the world’s relations are deteriorating on the back of a nuclear test that coincided with President Obama’s February State of the Union address.  This followed a long range missile test in December.  In combination these two tests are an attempt by Kim Jong-un to show to the world that North Korea has, or is developing, the ability to launch long range nuclear missiles.


In recent history, North Korea has been more of rhetorical threat than a tangible one, but both the United Nations and United States are taking the most recent actions increasingly serious.  As well, Defense Secretary Chuck Hagel indicated he intends to re-allocate $1BN+ to build a missile shield in Alaska to bolster defenses focused on North Korean threats.  This morning the North Koreas upped the ante once more in announcing that they have placed military units tasked with targeting U.S. bases under combat ready status.

2. Iran –Iran has remained largely out of the headlines in the last few months, but this will likely change with the upcoming Presidential election in June 2013.  Current Iranian President Mahmoud Ahmadinejad is barred for running after being President for two terms and has taken to saying “long live Spring” at recent events, a cryptic phrase that is being interpreted as a call for change in the face of the Ayatollah’s attempts to manage the outcome of the election.


We emphasize the election because the last Iranian election is generally perceived to be the most tumultuous period of mass protests in Iran since the Iranian revolution.  Since that election in 2009, international sanctions on Iran have had their intended impact with oil subsidies falling and prices of basic foodstuffs accelerating.   So, even as the Ayatollah attempts to manage this election proactively, primarily by jailing potential reformist candidates, he can’t jail every citizen and the citizenry is much worse off now than in 2009.

3. Syria – Since the start of the Arab Spring more than two years ago, Syria has been a hot spot on the political map.  Unlike some of its neighbors in which a change in leadership was relatively swift, Syria continues to be ruled by President Assad, with the ongoing goal of the rebel forces to overthrow Assad by any means.  In fact, as recently as in the last couple of days there have been rumors that Assad had been assassinated. 


The reality is that Assad remains in power and the rebels remain disorganized with leadership largely in disarray since the resignation of Syrian National Coalition chief Mouaz al-Khatib. The other reality is that military activity appears to be accelerating with the worst bombing in Damascus since 2011 over the weekend.  Further, there were rumors this weekend that there was a gas attack near Aleppo.  Although even here confusion reigns as no one is sure whether it was the rebels or Syrian government that used the gas.


Churchill was well known for his interventionist leanings and once said about Russia that:


“Bolshevism must be strangled in its cradle.”


In contrast, the current leader of the free world, United States President Obama, has been decidedly non-interventionist. Over his first term, this has certainly not impacted the United States in the short term as the most prominent threat when Obama was first elected, Al-Queda, has been largely contained and there have not been other imminent threats to the United States or global peace.  That said, any acceleration of events in North Korea, Syria, or Iran may be cause for increased U.S. intervention abroad.


As we think about managing risk prospectively, especially at lower levels of implied volatility, keeping key areas of potential international conflict front and center will remain critical.  As it relates to our investment themes, accelerating international conflict is actually positive for the sturdy horse of international currencies – the U.S. dollar.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1, $106.76-108.64, $3.36-3.47, $82.69-83.34, 94.01-96.72, 1.89-1.97%, 10.79-14.96, and 1, respectively.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Sturdy Horses  - Dollar is a sturdy Horse EL


Sturdy Horses  - Virtual Portfolio


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Beautiful Rage

This note was originally published at 8am on March 12, 2013 for Hedgeye subscribers.

“How with this rage shall beauty hold a plea?”



As our Director of Research, Daryl Jones, said on CNBC last week, “this is the most hated rally we’ve ever seen.” Hating the truth isn’t cool. But, as the late Andre Gide noted, “it’s better to be hated for who you are, than to be loved for someone you are not.”


Reality is that if you hate this market, you are raging against one of the more impressive 4-month changes in Asian and US growth prospects that we have seen in a decade. Cheering for the end of the world isn’t cool either.


A strong US currency, at the big turns (for both Reagan in the early 1980s and Clinton in the early 1990s), can be a Beautiful Rage. If sustained, it’s a pro-growth signal. So, from here, to have or not to have a #StrongDollar, remains the question.


Back to the Global Macro Grind


One of the most obvious places we’ve been monitoring Bear-Rage is in the term-structure of US Equity Volatility (VIX). At every lower-high (and lower-low) we’ve seen in the front-month VIX, many have still held onto their future fear expectations. That’s not working.


Looking at the Front-end of Fear (where front-month VIX is trading):

  1. VIX was down another -8.2% yesterday to close at a fresh 5yr low of 11.56
  2. VIX just crashed (and quickly), down -40% from its FEB25, 2013 “Italian Election” day lower-high
  3. VIX has been crashing, down -49%, from its DEC28, 2012 Congress New Year’s Eve lower-high

When I say lower-highs, I mean long-term lower-highs. And this has really been our point throughout the last 2-3 months. What was long-term support for the Front-end of Fear (14-15 VIX), is now solidifying itself as intermediate-term TREND resistance.


Just to put some risk management levels around that – across our core risk management durations:

  1. VIX immediate-term TRADE resistance = 13.98
  2. VIX intermediate-term TREND resistance = 16.21
  3. VIX long-term TAIL resistance = 17.18

So, the Front-end of Fear is being pulverized into what we call a Bearish Formation (bearish across all 3 of our core risk management durations – TRADE, TREND, and TAIL).


And, all the while, all you’ll hear from the hedge fund community is how the “term structure” of VIX doesn’t agree. In other words, consensus doesn’t agree with higher-highs in US stocks (perpetuated by lower-lows in volatility). That’s why it keeps working.


Bridgewater’s Ray Dalio outlines what an oversupply in consensus hedge funds has meant for returns. The correlation of hedge fund returns to US stock market beta = +0.9. If you want to be freaking out about something, freak-out about that.


Why is the asset management business changing? Well that’s pretty simple. It’s called evolution. Plenty of our pension fund, mutual fund, and RIA clients are changing what it is that they do as this globally interconnected game of global macro risk changes.


That has big implications. Don’t forget that the RIA (Registered Investment Advisor) community is as large (in terms of assets under management) as the hedge fund community.


Country, Currency, Commodity, etc. ETFs and the like are allowing lower-fee structures and strategies to compete, head-to-head, with Global Macro Hedge funds. Don’t fear that – competition is a beautiful thing too.


Some other tactical points to consider (in the immediate-term) as the VIX is crashing:

  1. Things that are crashing tend to bounce, fast – so watch what US stocks do once VIX tests our 11.21 oversold level
  2. SP500’s immediate-term Risk Range of 1534-1565 is finally signaling more downside than upside in US stocks
  3. Immediate-term Risk Ranges change as fast as price, volume, and volatility factors do – so keep moving

We’re not suggesting that we are smarter than anyone else. We have a broad spectrum of clients we are collaborating with. We are using quantitative signals and research to highlight what we think are becoming more probable non-consensus market moves.


In order to convince you that our risk management process is both flexible and dynamic, we have to Embrace Uncertainty. Selling certainty is like selling fear; over long periods of time, you’ll get run over by being anchored to either one or the other.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1556-1593, $109.51-110.98, $82.21-82.93, 93.56-96.81, 1.95-2.09%, 11.21-13.98, 928-951, and 1534-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Beautiful Rage - Chart of the Day


Beautiful Rage - Virtual Portfolio


IL approvals ring in their second best month



The Illinois Gaming Board (“IGB”) released a list of all licensees, which included 1,554 licensed establishments, implying the approval of 275 incremental establishments, marking the 2nd biggest month of approvals behind December.  


To date, there have been no establishment licenses revoked and 100 establishments have been denied licensure. There has been one terminal operator who had its license revoked along and 24 terminal operators and 2 manufacturer that have been denied licensure.  Currently, there are 2,420 establishments pending approval, a 7% decrease from February.


Each location can have a maximum of 5 machines so 1,554 approved locations imply a current maximum market size of 7,770.  There were 4,353 machines online in February, up from 3,394 in January.   VGT revenue in January rose to $13.6 million February from $9.78 in January.   It looks like average win per day in February was around $111/day.


We stand by our prior estimate of a 10,000 unit market by the end of 2013. We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but the vast majority will be accounted for as for-sale units.


Our understanding is that ASPs should be around the $12k range. We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.



Distributor:  2

Manufacturer:  2 (Speilo and Konami)

Supplier:  2

Technicians:  21

Terminal handlers:  133

Terminal operators:  10

Establishments:  2,420 pending


The Macau Metro Monitor, March 26, 2013




Real-time information on border traffic at the Border Gate, Outer Ferry Terminal in NAPE and the Cotai borders can now be accessed online.  The websites are and  The information platform will also describe the traffic status in four categories according to the required time for transit: “fast”, which takes about 15 minutes, “busy”, “crowded” and “traffic to be diverted”.


FEBRUARY PASSENGER MOVEMENT Changi Airport Group, Channel News Asia

Changi Airport handled 4.12 million passenger movements in February 2013, an increase of 9.2% YoY.  Changi Airport Group (CAG) said travel demand was boosted by the Lunar New Year holidays which this year fell in February compared to January last year.




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