Context Matters

This note was originally published at 8am on April 23, 2013 for Hedgeye subscribers.

“Content is often best judged in context.”

-Eric Chaisson


That’s one of my favorite thoughts from a book I have been citing as of late, Cosmic Evolution, by Eric Chaisson. In terms of how I apply it to my market model, research and risk factors are my content - time is my context.


Time and space - so valuable to contextualize, yet so susceptible to error. In this regard, risk managing markets isn’t unlike playing professional sports. As Vince Lombardi said, inches make champions. Timing matters, indeed.


This, of course, is not a unique thought process. It’s effectively the difference between Newton and Darwin. “Unlike events in classical Newtonian physics, which are time-independent, reversible, and ahistorical, in Darwinism the past history of a system contributes to its subsequent properties” (Chaison, pg31). In other words, context matters too.


Back to the Global Macro Grind


When I say that our Global Macro Risk Management process is multi-factor and multi-duration, this is what I mean. We are a content company that contextualizes risk.


That doesn’t mean we are always right – it just means we tend to be less wrong on big stuff than most others. That’s probably because we start with the timing signal, and reverse commute on the research from there.


One of our core focuses in risk management is what Warren Buffett and Charlie Munger used to champion as Rule #1 – “Don’t Lose Money” – and maybe that’s why they love the insurance business so much. Essentially, we sell insurance too.


Insurance questions: what assets are bullish or bearish on our (TRADE/TREND/TAIL) model?


1.   Bullish Formations (bullish on all 3 of our core durations - TRADE, TREND, and TAIL)

A)     US Dollar (UUP)

B)      SP500 (SPY)

C)      US Consumer Discretionary (XLY)

D)     US Consumer Staples (XLP)

E)      US Healthcare (XLV)

F)      Starbucks (SBUX) and Nike (NKE)


2.   Bearish Formations (bearish on all 3 core risk management durations)

A)     Commodities (CRB Index)

B)      Gold and Gold Miners (GLD and GDX)

C)      Silver and Copper (SLV and JJC)

D)     Japanese Yen (FXY)

E)      Basic Materials and Energy (XLB and XLE)

F)      Russia (RSX) and Brazil (EWZ)


As a result, I think our version of Global Macro Storytelling has been succinct for the last 5-6 months. On both the long and short side, there’s a little bit of everything for everyone here. That helps make it less confusing.


The big thing about big things in macro is that they can last. That’s why the questions I wrestle with throughout my day largely surround what could change what I think is currently both causal and correlated:


1.       What stops the US Dollar from going up?

2.       What stops the Euro and Yen (vs USD) from going down?

3.       What stops Bernanke’s Bubbles (Commodities) from popping?


Again, since I start with the signal and not the research noise, what I really need to do here is be patient. Just wait and watch for any and/or all of these three things from stopping on both my TRADE and TREND durations.


This morning’s signals marry up quite nicely to more of the same on the research content front:

  1. Chinese and German PMI growth data for April slowed sequentially versus March
  2. European #GrowthSlowing (Spain GDP -2% y/y and Swedish unemployment up to 8.4%)
  3. Oil, Copper, and Corn prices fall further on said “demand” slowing, as the USD rises

So, if you can’t put money in Emerging Markets like China (we’ll be hosting our #EmergingOutflows Macro Theme Conference Call at 11AM EST, ping for access), and you aren’t buying European Equities and/or Commodities because they are bearish on both our TRADE and TREND durations, what do you buy?


Markets chase price. Gravity (fund flows), like content and context, matters. The global macro flows continue into US Dollars, US Treasuries, and yes, US Consumption Equities. I’ve tried to fight gravity in markets – it rarely works.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, VIX, and SP500 are now $1284-1435, $96.04-101.08, $3.06-3.26, $82.42-83.19, $1.29-1.31, 1.65-1.76%, 14.07-18.76, and 1531-1603, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Context Matters - Chart of the Day


Context Matters - Virtual Portfolio


As reported last week, Gross Gaming Revenues (“GGR”) grew 13.2% YoY in April to HK$27.5MM, a little better than our last forecast.  While this month benefited from higher than normal hold, the hold percentage was comparable to last April’s so there was minimal impact on YoY growth.  We estimate that including direct play, VIP hold was 3.02% versus a normalized 2.96% and 3.03% in April of 2012. Had VIP hold been normal this April, YoY growth in GGR would’ve grown 11.7%.  With normal VIP hold in both periods, GGR growth would have been 13.4% (similar to what was reported).  We expect GGR growth to pick up in the month of May and are currently projecting high teens growth.


Here’s the detail behind the print:





Total table revenue grew 14% YoY.  Mass market growth continued to chug along at its fast pace, up 29% YoY, consistent with the last 11 months.  VIP volume growth was solid at 8% and VIP win grew 8%.



LVS took the top spot for table revenue growth at 41% for the 3rd consecutive month.  The company had the highest mass revenue growth at 55% and the highest RC VIP growth at 32%.  We estimate that LVS held high across its portfolio at 3.2% compared to 3.0% last April, assuming direct play of 15% vs. 20% last year.  Venetian and FS played lucky.  SCC and Sands Macau played unlucky.

  • Sands grew 7% YoY, the property's best growth in 7 months  
    • Mass grew 4%
    • VIP increased 9%.  
    • Sands held low but had a very easy comp.  We estimate that Sands held at 2.8% compared to 2.2% in the same period last year.  We assume 11% direct play in April vs 9% in April 2012.
    • Junket RC fell 14%
  • Venetian grew 32% YoY, the property's best growth in 15 months
    • Mass increased 35%
    • VIP grew 29%
    • Junket VIP RC fell 5%, its 14th decline in the past 15 months
    • Assuming 27% direct play, hold was 3.7% compared to 2.8% in April 2012, assuming 28% direct play 
  • Four Seasons dropped 13% YoY, marking the 4th consecutive month of declines
    • Mass revenues increased 42%
    • VIP tumbled 18% but Junket VIP RC eked out 1% growth on the back of a very difficult hold comp. April hold (assuming 11% direct play) was 3.5% vs 4.1% in April 2012 when direct play was 16%.
  • Sands Cotai Central produced $204MM in table revenues 
    • Mass a hit new monthly record of $79MM 
    • VIP revenues were $126MM
    • Junket RC volume of $4.1BN, down 13% MoM but the 2nd best month on record for the property
    • If we assume that direct play was 11%, hold would have been 2.7% 


MPEL had a solid month, lobbing in the 2nd best table growth of 38%.  Mass grew 21% while VIP growth took the top market spot with 44% growth.  We estimate that MPEL held well at 3.37% vs. 3.05% last April.  Estimated direct play was 12.9% vs. 10.5% last year.

  • Altira revenues grew 30%, the property's best growth rate in 19 months.  Mass fell 2% while VIP saw a 34% YoY increase.
    • VIP RC grew 28%
    • We estimate that hold was 2.9%, compared to 2.7% in the prior year
  • CoD table revenues grew 41% YoY
    • Mass increased 24%, continuing its impressive streak of strong YoY double-digit gains since the property opened
    • VIP win grew 48% and RC grew 29%
    • Assuming a 17.5% direct play level, hold was 3.6% in April compared to 3.2% last year (assuming 14.7% direct play)


Wynn had a rough month in April with table revenues falling 18% (worst of 6 concessionaires).

  • VIP revenues fell 25% - also taking the spot for worst performance, while VIP RC declined of 9.3% (2nd worst performer)
  • Wynn suffered from low hold of 2.4% vs 3.0% last year 
  • Mass revenues increased 13%


MGM had anemic table revenue growth of 4% in April on the back of another month of low hold, although not quite as miserable as the hold they experienced in March

  • We estimate that hold was 2.6% adjusted for direct play of 6% vs hold of 3.2% last year assuming 9% direct play
  • VIP RC growth was strong at 23%
  • Mass growth was above average at 36%


Aside from WYNN, Galaxy was the only other concessionaire who experienced a decline in table revenue this month.  VIP RC had the worst market performance, falling 10%.  On the bright spot, Mass growth was very strong at 54%.  Hold was normal across the portfolio but down YoY; 3.03% in April 2013 vs. 3.27% last year.

  • StarWorld table revenues fell 23%
    • Mass soared 80%
    • VIP fell 33%.  VIP revenues have seen YoY declines in 9 of the last 10 months.
    • Junket RC fell 14%, marking the 11th month of consecutive declines
    • Hold was low at 2.4% vs 3.1% last year
  • Galaxy Macau's table revenues grew 11%
    • Mass had a great month with 55% growth
    • VIP saw a small decline – the first since opening and RC fell 3%.  RC volume growth has been hovering around -1% for the last 9 months.
    • Hold was high at 3.6% vs. 3.5% last year


Total table revenue grew 16%, with the worst mass market share growth at just 3% and VIP revenue growth of RC 22% and RC growth of just 5%.  SJM held well at 3.15%.






Market share grew 90bps to 21.9%, the company’s best since January 2010.  April’s share is above LVS’s 6-month average of 21.1% and better than its 2012 average share of 19.0%. 

  • Sands' share fell 60bps to 3.0%.  For comparison purposes, 2012 share was 3.9% and 6M trailing average share was 3.4%.
    • Mass share fell 90bps to 4.6%, an all-time property low
    • VIP rev share fell 60bps to 2.3%
    • RC share was 2.3%, flat MoM and in-line with the all-time low for the property set in March
  • Venetian’s share increased 120bps to 8.6%.  2012 share was 7.9% and 6 month trailing share was 8.3%.
    • Mass share increased 2.2% to 15.9%- the property's best share since October 2010
    • VIP share improved 50bps to 5.5%
    • Junket RC share was flat at 3.5%, only 30bps above the property's all-time low
  • FS gained 130bps to 3.9%.  This compares to 2012 share of 3.7% and 6M trailing average share of 3.2%.
    • VIP gained 2% to 4.8%
    • Mass share fell 50bps to 1.7%
    • Junket RC gained 20bps to 4.0%
  • Sands Cotai Central's table market share fell 90bps to 6.0%, which compares to the 6M trailing average share of 5.8%.
    • Mass share improved 40bps to 7.8%.
    • VIP share fell 1.4% to 5.3%
    • Junket RC share fell 30bps to 5.6%


MPEL took the top spot for market share growth, with a whopping 16.3%- the company’s best share in 2 years and above their 6 month trailing share of 14.0% and their 2012 share of 13.5%.  

  • Altira’s share rose 30bps to 4.0%, above its 6M and 12M trailing share of 3.9%
    • Mass share increased 20bps to 1.3%
    • VIP gained 50bps to 5.2%
    • VIP RC share rose 30bps to 5.6%
  • CoD’s share gained 2.6% to 12.3%- a record high for the property and above the property’s 2012 and 6M trailing share of 9.4% and 10.0%, respectively.
    • Mass market share fell to 11.0%
    • VIP share soared 4.1% to 12.8%, the property's highest share since September 2009
    • Junket share ticked up 20bps to 9.5%


Wynn was the largest share donor in April, losing 170bps and dropping to 9.4%, an all-time low in share.  2012 average share was 11.9% and their 6M trailing average share has been 11.0%.

  • Mass share was fell 60bps to 7.8%
  • VIP share plunged 2.3% to 9.8%, an all-time low for WYNN
  • Junket RC share increased 90bps to 11.7%


MGM’s market share was flat at 8.9%; below their 6M average of 9.6% and above their 2012 share of 9.9%

  • Mass share fell 80bps to 7.4%
  • VIP share improved 20bps to 9.2%
  • Junket RC fell 90bps to 10.8%


Galaxy's share fell 80bps to 17.6%, below their 2012 average share of 19.0% and their 6-month average of 17.9%

  • Galaxy Macau share improved 0.5% to 10.8%
    • Mass share gained 1.1% to 10.8%, an all-time property high
    • VIP share improved 30bps to 10.8%
    • RC share lost 10bps to 9.8%
  • Starworld share lost 150bps to 5.8%, the property's worst share since May 2008
    • Mass share was flat at 3.8%
    • VIP share fell 2% to 6.6%
    • RC share fell 50bps higher to 8.8%


SJM was the 2nd largest share donor, losing 110bps MoM to 25.9%, which is below their 2012 average of 26.7% and their 6M trailing average of 26.4%.

  • Mass market share improved 40bps to 25.4%, an all-time company low
  • VIP share fell 150bps to 27.1%
  • Junket RC share increased 50bps to 27.8%


Slot Revenue


Slot revenue grew only 3% YoY to $146MM in April.

  • Galaxy had the best growth at 38% to $20MM
  • LVS grew of 12% to $44MM
  • WYNN lost 2% YoY to $22MM
  • SJM also fell 2% to $14MM
  • MPEL dropped 6% to $25MM
  • MGM had the worst YoY slot performance, losing 18% to $21MM






Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%

C'est L'Asymmetry!

“C’est la dissymetrie, qui cree le phenomene.”

-Pierre Curie


Translated, what French Physicist (1) Pierre Curie meant by that was asymmetry creates evolutionary change. He and his wife, Marie Sklodowska-Curie, won the Nobel Prize in Physics in 1903. Their lesson needs to be re-learned by market participants, every day.


I’ve always been trying to re-learn. While you cannot tell by my last name, I’m French too. I’m at least half-francophone (French Canadian). My Mom’s side of the family is French as a first language (Les Thiboutots). I didn’t learn how to properly read, write, and do math in English until the 6th grade. That explains partly why I am slow to grasp British concepts like Keynesian economics.


Markets don’t care about what you or I know. They are going to do what they do, irrespective of our respective market positions. That, alongside the non-linearity of it all, humbles me, daily. C’est L’Asymmetry, mes amis. That’s de stuff we want to be looking for, eh.


Back to the Global Macro Grind


Professional Top Callers (#PTCs) have been calling for the top in stocks for a good 3-6 months now. To be fair, maybe when they said sell in May, they meant to tell you it was going to be from the all-time closing high of 1617 in the SP500 (yesterday). They nailed it. I’ll piggy back on their call and tell you to sell some too this morning (SP500 is immediate-term TRADE overbought at 1621).


Maybe they meant sell Treasuries in May? That would’ve been a more asymmetric call. Given that long-term US Treasuries just made another lower-high (vs her all-time closing high of November 2012), at least there’s a case to be made for the final Bernanke Bubble to start popping now; especially if we’re right on US employment, housing, and consumption #GrowthAccelerating.


Now that many of the well bandied about bearish “catalysts” of 2013 haven’t panned out (sequestration, Cyprus, etc.), our channel checks are revealing more creative ones like Cicadas (locusts). Hedgeye Senior Jedi Analyst, Christian Drake, reminded me yesterday that 2013 is year 17 in their seventeen year hibernation cycle. The cicada cacophony is set to potentially engulf the East Coast.


In other news, 2013 is also the 100 year anniversary of the Fed (US Federal Reserve Act of 1913). In order to celebrate:

  1. The US Dollar has finally had it with being devalued to a 40 year low (2011)
  2. The price of Gold has finally had it with going up (every year since 2001)
  3. The Japanese, Europeans, and now Australians are opting to devalue

I’ve written this many times before, but it’s worth mentioning again – if the US Dollar were to continue to breakout from her 40 year low, this will be the most asymmetric move you have seen in Global Macro since the 1990s.


So, you don’t want to miss that.


Markets certainly aren’t missing what was long considered the improbable (#StrongDollar) becoming increasingly probable. There are two causal factors driving this (absolute and relative) - both have had big news in the last 3 trading days:

  1. ABSOLUTE - #StrongDollar gets stronger as US employment growth surprises on the upside
  2. RELATIVE – the Australians joined the Europeans, cutting rates overnight to a record low (2.75%)

Hindsight is now becoming crystal clear and consensus is actually going to where the puck is going this morning:

  1. Australians cut rates
  2. AUS/USD breaks TREND support on the news (only 8 of 29 “economists” expected the cut)
  3. Gold falls -0.7% to the lows of the day ($1459/oz)

Makes sense. Or does it? And to who?


I see a lot of #AngryBugs (Gold Bulls) trying to justify their long gold position (which is -13% YTD) with the same thesis – “everyone is printing money.” Got it. But that’s not what really matters to Gold right now. What the market is saying matters is that if the Japanese, Europeans, and Australians devalue, that’s bullish for the US Dollar, and bearish for Gold.


If you disagree, that’s fine – that’s what makes a market. This is what the market is telling us on the USA vs Gold relationship:

  1. On a 6 month duration, the inverse correlation between USD and Gold is -0.72
  2. On a 6 month duration, as US Treasury Yields (10yr) have made higher-lows, Gold has made lower-highs
  3. On a 6 month duration, US employment, housing, and consumption growth have been inversely correlated to Gold too

Is it interconnected? What kind of asymmetry do you think you get if Hedgeye is right (and Bernanke wrong) on the US unemployment rate? Remember, the biggest risk to Bernanke’s policies has always been his forecast. He still hasn’t signaled to the market that the US economy could see a 6% handle on the unemployment rate in 2013-2014 (he’s forecasting 2016-2017).


I know. No one thinks anything about Fed policy will change until he leaks it to his boys. While that may be true, also remember that A) markets front-run the Fed and B) no one has an edge on delaying economic gravity. The US Dollar, Gold, Stocks (and maybe even Treasuries now that it’s May) are signaling it might be time for Bernanke’s policies to change. C’est L’Evolution!


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $99.04-105.95, $81.56-83.11, 97.61-100.43, 1.71-1.82%, 12.43-14.07, 942-963, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


C'est L'Asymmetry! - Chart of the Day


C'est L'Asymmetry! - Virtual Portfolio


Today we bought Mednax (MD) at $87.74 at 9:47 AM EDT in our Real-Time Alerts. We're buying back on our non-consensus bullish view on baby making via MD. Hedgeye Healthcare Sector Head Tom Tobin remains The Bull on our intermediate-term TREND duration.




In May 2012, we suggested that there was 60% of upside in JACK over the long-term TAIL. Since then, the price has risen by 64%. What now?


We think the run Jack in the Box has had merits caution on the near-term duration. Over the long-term TAIL, there remains plenty of upside.





Jack in the Box has been one of our favorite longs since February 2012.  The stock has performed well since we first turned positive in February of 2012 but, while our conviction remains firm in the long-term upside in the stock price, we want to remain disciplined. With respect to many of the tenets of our long thesis (valuation, fundamentals, sentiment), we believe that the investment community consensus has caught up with reality.


We believe that the longer-term potential of the company remains underappreciated, particularly with respect to Qdoba’s future growth, and that is reflected in our Sum-of-the-Parts analysis, below. Our original SOTP analysis, published on 5/8/12, described Qdoba as the “JACK Option” and suggested 60% of upside. A significant part of what has gotten the stock higher has been a revaluing of the stock by investors. The refranchising story, along with improved same-restaurant sales performance, transpired as we expected. The outsourcing of the company’s distribution model, announced (exactly) three months after our original call for 60% upside, expedited the upward move as the market recognized the sale of non-core assets as positive for returns and margins.


Below is a refreshed SOTP analysis:





Why We Would Stay Away (For Now)

  • Valuation: The stock’s multiple has appreciated 1.5 EV/EBITDA turns since we turned bullish
  • Sentiment: Bearishness that emerged in November ’12 has evaporated
  • Qdoba: The story seems to be taking time to materialize

Why We Would Get On Board

  • Valuation: The stock remains cheap using our forward estimates
  • Sentiment: Skepticism on Qdoba remains high
  • Qdoba: Growth potential with a highly-credible mgmt team to execute on it


Charts of Note:




We do not anchor on valuation for “buy” or “sell” signals, but it seems that the stock could be expensive here. Our earnings estimates deviate further from consensus in FY14 and FY15 than over the next twelve months. On that basis, our view of the stock is that it is fairly- or slightly-over-valued on a near-term basis and under-valued on a longer-term basis.


JACK: DURATION MATTERS - jack valuation ebitda earnings





As our charts, below, illustrate, the investment community’s disposition towards the stock has improved considerably over the last year-to-eighteen months. We do not see improving sentiment as an immediate-term catalyst for the stock price to move higher.







We believe the most significant opportunity for JACK at this point is to prove to Wall Street that Qdoba can achieve the unit economics we are expecting as the system matures.


JACK: DURATION MATTERS - Qdoba unit econ



Quantitative Levels


Here are Hedgeye CEO Keith McCullough’s quantitative levels for JACK.





Howard Penney

Managing Director


Rory Green

Senior Analyst