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Making Moves

Client Talking Points

The 10-Year Fight

Treasuries are widely held and people put on massive positions in the 10-year as a flight to safety or whatever you feel like calling it. The point  is that at 1.75% yield, more people are hooked on being safe then on getting out there and buying growth directly via XLY or XLP. We'll see what happens with the 10-year this week.

Burning The Yen

Tough cookies for the Japanese Yen yet again. The country's currency will continue to be debauched. 99.36 vs the USD after we saw the USD/YEN cross test and fail at our 1st line of 97.11 TRADE support; no legitimate resistance (or policy shift to stop it) for that cross to 110 according to KM. Better watch out and you better not complain about FXY holdings. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


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. 

Three for the Road


"Don't whine about the market you want; risk manage the one you have" -@KeithMcCullough


"People who like this sort of thing will find this the sort of thing they like." -Abraham Lincoln


S&P 500 is up +13.3% year-to-date - how higher can the market go?

Inflation Trepidation

This note was originally published at 8am on April 22, 2013 for Hedgeye subscribers.

“Our trepidation about Volcker’s appointment was later justified.”

-Jimmy Carter


That’s what the outgoing President of the United States had to say about Paul Volcker because, “on Thursday, September 25, 1980, the Federal Reserve Board had approved by unanimous vote a one percentage-point increase in the discount rate to 11 percent.”


“Former Fed Chairman, William McChesney Martin led the counter attack. He termed Carter’s comments “deplorable”… a “serious and unfortunate thing”, and added … partisan politics ought not to be around the Dollar.” (Volcker: The Triumph of Persistance, pg 190)


Of course, by the time Carter was losing the election markets were already front-running the US shift in monetary policy. After hitting an all-time high in January of 1980 ($850/oz), Gold didn’t see those highs again for 3 decades. For Gold Bulls, that was a long-time to average down.


Back to the Global Macro Grind


To be balanced, according to the Gold Bulls of 2013, this time is different. Rather than acknowledging that the market has already discounted the greatest combination of deficit spending and money printing in US history, they’re digging in.


Gold isn’t trading on what they think it should trade on – it’s trading on both absolute and relative expectations vs the US Dollar:


1.   ABSOLUTE: On the monetary policy side, no iQe5 upgrade of Gold is coming out of Jackson Hole this year (Bernanke isn’t even going to be there). And on the fiscal side, sequestration combined with US Consumption #GrowthAccelerating, is USD bullish.


2.   RELATIVE: Japan is going to print to infinity and beyond and the probability of the Europeans cutting to 0% is rising. Both are bullish for the US Dollar relative to the Yen and the Euro. What’s bullish for the USD remains bearish for Gold.


Last week was another reminder of that:

  1. US DOLLAR = +0.9% on the week (up for the 7th week in the last 10 and +4% for 2013 YTD)
  2. CRB Commodities Index = -1.4% on the week (down for the 8th week in the last 10 and -4% for 2013 YTD)
  3. GOLD and SILVER = down -7% and -13% last week, respectively (taking Gold’s YTD decline to -16.9%)

All the while, the Gold Bulls continue to say almost the opposite of what we have been ranting about for 6 months. Paulson & Co. wrote to their investors that central bank “stimulus will eventually lead to inflation.” But that’s my point, eventually already happened.


We already had the greatest commodity inflation in world history. If the most asymmetric long-term move in all of Global Macro continues higher from here (#StrongDollar), this will continue to be an epic #CommodityDeflation, not inflation.


Don’t take my word for it – ask Mr Market, what was priced in when Bernanke said he’d go to infinity and beyond (6 months ago)?

  1. Silver is down -29% in the last 6 months
  2. Rubber is down -25% in the last 6 months
  3. Japanese Yen is down -25% in the last 6 months 

Again, if you get the US Dollar right, you’ll get a lot of other big things right. There are plenty of other ways to make money on this other than being short Gold and Copper Miners (we remain short Freeport, FCX, btw):

  1. Emerging Markets (EEM)
  2. Russian Stocks (RSX)
  3. Peruvian Stocks (EPU)

Peruvian stocks? You have to be kidding me Mucker. Who the heck do you think you are making calls on Peru – what’s next, Peruvian Par Bonds? Ha! Actually Peru just dipped inside of Russia for the world’s 2nd worse performing stock market YTD (Cyprus is the worst at -15%).


The reason why you shouldn’t have your 401k choking on Peru is the same as why you shouldn’t have it stuffed with Gold, Silver, or Corn. Peru a commodity economy (85% of exports) and its stock market is 37% indexed to Basic Material and Energy stocks.


As a point of reference, only 13% of the SP500 is in Basic Materials and Energy.  And we don’t want you to be long those S&P Sectors (XLB and XLE) either. Energy (XLE) led USA’s losers last week at -4.4%, only to be outpaced by Russian stocks (on the downside) at -4.9%!


How important is it for a Global Macro investor to get the world’s reserve currency right? Is it all interconnected? If you invest in Global Macro, do you have to get growth and inflation right too? We think the answers to these basic questions are self evident. That’s why we built our proprietary Growth/Inflation/Policy (GIP) Model.


That’s also why our views on growth and inflation have been different from consensus for a long time now. We get the #GrowthSlowing via US Dollar Debauchery inflation call (it’s a call we made consistently from 2007-2012). And when you see this week’s US preliminary GDP Growth print (Friday), sequentially in Q113 you’ll see #GrowthAccelerating as #CommodityDeflation takes hold too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1284-1454, $96.02-101.62, $82.41-83.14, 97.12-101.06, $1.29-1.31, 1.68-1.76%, 14.05-18.69, and 1532-1568, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Inflation Trepidation - Chart of the Day


Inflation Trepidation - Virtual Portfolio

The Simplest Things

“Everything in war is simple, but the simplest thing is difficult.”

-Carl von Clausewitz


In hindsight, the perma Bull/Bear War in markets gets scored that way too. After the big moves, reasons for victory and defeat become simpler to understand.


Being a market strategist isn’t simple. You need to get to simple conclusions before the market does. And the deep simplicity of it all is born out of the complex. That’s why process matters. I’ve been highlighting the thought process of American Foreign Policy strategist George F. Kennan for the past few weeks. On #process, Chapter 11 (“A Grand Strategic Education”) of Gaddis’ Kennan biography, is a beauty.


“Kennan was struck by Clausewitz’s emphasis on psychologically disarming and adversary; finding the point at which the enemy realizes that victory is either too unlikely or too costly… the assailant weakens himself as he advances.” (George F. Kennan, pg 235)


Back to the Global Macro Grind


Relative to our current strategy on the US stock market, the enemy is the bear. Having been bearish plenty of times myself, I respect the physiological disarming process, big time. There is nothing worse than being squeezed.


With the SP500 tacking on another +2% last week to a fresh all-time daily (and weekly) closing high of 1614, the enemy is starting to give up on some core positions. You can see that by analyzing the Top 3 performing Style Factors on a 1-month duration:

  1. High Short Interest Stocks – 1-month price performance = +6.2%
  2. Consumer Discretionary Stocks (XLY) – the top performing Sector Style on a 1-month basis = +5.6%
  3. Technology Stocks (XLK) – 2nd best to Consumer on a 1-month duration = +5.0%

In other words, with employment, housing, and consumption #GrowthAccelerating in April (versus the 1-month head-fake of data slowing in March), what’s leading this market’s bullish charge are the simplest things associated with a growth. Gold doesn’t like growth.


Looking back at late March and early April, what was fascinating to us was how quickly consensus bulls got bearish. Since we consider ourselves Non-Consensus Bulls, this is a self-serving (and convenient) way to look at the market, in hindsight!


One way to look at consensus is via the net long positioning in non-commercial futures and options contracts. Going into last week’s melt-up in US Stocks, here’s how consensus was positioned:

  1. Uber long Treasuries at greater than +196,000 net long contracts (one of the highest positions of 2013)
  2. Way low in SP500 net exposure at less than +2,000 net long contracts (lowest position of 2013)

Consensus positioning wasn’t new – it was trending that way as Treasuries trended (higher) and SP500 (lower) throughout the middle of April. Many got sucked into the “March data is weak” narrative. Makes sense. Consensus sprints toward the last data point, whereas macro context wins the race.


Now what? The April economic data is undeniably better vs March – and that’s more in line with the intermediate-term TREND of the data that we have been signaling since late November, early December:

  1. NSA Jobless Claims hit a 5yr low last week at 324,000
  2. Commodities (CRB Index) and Oil (Brent) prices are -4% and -6% year-over-year, respectively
  3. Bloomberg’s Weekly Consumer Confidence Reading hit a 5yr high at 28.9

Confidence? Who in God’s good name in this country is actually confident? Aren’t we all supposed to be calling for the next crisis that most missed calling in early 2008? If people were as confident as I am right now, they wouldn’t be buying Treasuries as they make another lower-high versus their all-time bubble peak (November 2012).


What drives confidence? Does employment, housing, and consumption growth matter? How about the price of your home and stock market portfolio going up double digit year-over-year for the 1st time since 2006? If you want to broaden market trends beyond 3-6 months to year-over-year (y/y):

  1. SP500 = +16.1% y/y
  2. US Home Prices (Core Logic) = +10.3% y/y
  3. Gold = -10.9% y/y

How are end of the world ads for Cyprus, BitCoin, etc. doing this morning? That’s a confidence factor too. Some market it as “social mood.” Others sell fear in more ways than one. As George Kennan wrote in the late 1940s (when people in America were right petrified of anything they couldn’t see):


“We are in a peculiar position of having to defend ourselves against mortal attack, but yet not wishing to inflict mortal defeat on our attacker… We must be like the porcupine who only gradually convinces the carnivorous beast of prey that he is not a fit object of attack.” (George F. Kennan, pg 235)


So be the porcupine. Eventually these beastly bears will stop trying to scare the hell out of you; the perma bid for Treasuries will recede; and fear (VIX) might be priced at 10, 11, or 12 by then too. Then, the simplest of things will be to sell high, smile, and go away.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX and the SP500 are now $1, $98.81-105.24, $81.74-83.12, 97.59-100.13, 1.71-1.82%, 12.36-14.39, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Simplest Things - Chart of the Day


The Simplest Things - Virtual Portfolio






  • 40 of their Mass tables were reclassified as VIP tables during the quarter due to the high payout.  If not for the reclassification, then both Mass and VIP win would have grown about 10% YoY
  • Grand Lisboa:  also has 25 premium mass tables reclassified as VIP.  Without the reclassification, VIP would have grown 23.8% and Mass would have grown ~11%.
  • Working at full speed on the design of their Cotai project.  Expect the gazetting of the project to come soon.  Also expect that later this year they will be able to make an announcement for most of the details of their project.
  • Working on the redesign of the mezzanine floor to accommodate more mass tables at Grand Lisboa



  • Hold adjusted EBITDA:  The 3.3% hold rate was due to the reclassification of tables by the government. If they consider the tables as normal VIP tables, their hold would have been 3.08%. 
  • Reclassification:  When they report their operating tables to the DICJ, if the max payout is equal to or more than HK$300,000, then they treat it as a VIP table vs. a mass tabls.  Can't really comment on why this has or hasn't impacted their competitors. 
    • This likely explains why certain properties have much higher reported VIP hold rates,although we don't know for sure. 
  • Thinks that Galaxy's acquisition of Grand Waldo was quite logical.  They aren't considering a similar move
  • Operating margin on both the Old Lisboa and Oceanus improved their margins due to a greater mix of mass margins
  • # of tables at Grand Lisbao: 203 VIP tables (189 by their classification) and 219 Mass tables (28 premium mass considered VIP)
  • 1714 total non-vip revenues; 6489 total VIP revenues, 300xx of VIP revenue is being reclassified as VIP. The reclassification only happened 50% through the Q, so the impact will be larger going forward but they will break it out. 
  • Why not convert more of their satellite to owned casinos?  The casinos aren't structurally up to par. Think it's better to focus their energies on making their existing casino structures better.
  • The reclassification happened last year but it only impacted 3 tables, but mass has gotten more material.
  • Mgmt accounting hold was 3.12% last Q.
  • They have had a recent impact because they have recently increased their premium mass table base.
  • VIP margin is only 7.7% and premium mass margins are over 40%. 
  • VIP hold rate from other self-promoted casino:  (Just old Lisboa since they don't have VIP at Oceanus) Don't have it at their finger-tips but it did go up



  • Group Adjusted EBITDA: HK$2,129 million with margins of 9.7% (US GAAP: 17.2%)
  • If the Group’s revenue is further adjusted to include the net revenue of self-promoted casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s Satellite Casinos, the Group’s Adjusted EBITDA Margin would be 28.8%.
  • Group Gaming revenue: HK$21,734 million
    • VIP gaming revenue: HK$15,137 million, an increase of 13.4%
      • Total VIP chips sales: HK$459.2 billion and the VIP gaming hold percentage 3.30% 
    • Mass market gaming revenue: HK$6,220 million an increase of 4.7%
    • Slot machine (and Tombola) revenue: HK$377 million, a decrease of 4.2% 
  • The Group’s total revenue of HK$21,892 million included hotel, catering and related services revenue of HK$158 million 
  • During Q1 2013 the Group operated an average of 653 VIP gaming tables (Q1 2012: 603),
    1,118 mass market gaming tables (Q1 2012: 1,165) and 3,531 slot machines (Q1 2012: 3,877)
    (average of three month-end counts).
  • Casino Grand Lisboa gaming revenue: HK$8,327 million and Adjusted EBITDA: HK$1,217 million
    • Hotel occupancy: 93.9% and ADR: HK$2,236 
  • Other Self Promoted casinos gaming revenue of HK$3,340 million and Adjusted EBITDA of HK$386MM
  • Satellite Casino revenue of HK$10,067 million and Adjusted EBITDA of HK$420 million
  • On 28 February 2013 gaming operations at Casino Jai Alai, which consisted of 14 mass market
    gaming tables and 84 slot machines, were suspended due to the renovation of the Jai Alai Palace.
  • Cash: HK$27,661 million and debt: HK$1,672 million 
  • Capital expenditure of the Group during Q1 2013 was HK$131 million, which was primarily for
    furniture, fixtures and equipment, and leasehold improvements


The Macau Metro Monitor, May 6, 2013




More than 15,600 were issued third-party exclusion orders for the 10 months leading to March, taking the total to 43,519, about 1.5x the 27,882 at the end of May last year.


The increase came largely as a result of some 15,000 people being banned by the Government because they were receiving financial aid from the Ministry of Social and Family Development's (MSF) ComCare, or had defaulted on the Housing Board's rental payments.



Galaxy Entertainment will buy the Grand Waldo hotel complex in Macau for HK$3.25 billion.  Selling the Cotai Strip hotel complex to Galaxy will be units of Get Nice Holdings.  Grand Waldo hotel has 316 guest rooms, 23 gaming tables and 15 VIP gaming tables. 


Get Nice has agreed to stop hotel and casino operations in Macau in order to avoid competition.  The firm said it will use HK$890 million of the net proceeds for development of new investment opportunities and the remainder will be used for expanding existing financial businesses.


Galaxy Entertainment said the acquisition “is a strategic investment and is expected to have synergistic effect” on the group’s development in Cotai.  Grand Waldo is located across the road from Galaxy Macau, in Cotai.



The date and the venue for the ring return of Philippine boxing hero Manny Pacquiao have been confirmed. Pacquiao’s adviser Michael Koncz told the Manila Standard that the fight would be at The Venetian Macao, on November 24.

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