Morning Reads From Our Research Team

Takeaway: A quick look at some articles on the Hedgeye radar screen.

Josh Steiner – Financials

HSBC Sued by New York Over Alleged Foreclosure Violations (via Bloomberg)

AIG argues against $8.5 billion settlement with BofA (via Reuters)


Keith McCullough – CEO

Japan's Abe targets income gains in growth strategy (via Reuters)

Asian Stocks Fall as Japan Reverses Gain After Abe Speech (via Bloomberg)

Turkey protests resume in Istanbul after apology (via BBC)


Howard Penney – Restaurants

Domino's Uses a Drone to Deliver a Pizza (via Mashable)


Jonathan Casteleyn - Financials

Top 100 Most Valuable Global Brands 2013 (via


Matt Hedrick – Macro

Latvia’s Euro Path Shows Allure of Crisis-Hit Currency, for Some (via Bloomberg)


Morning Reads From Our Research Team - reading


As you already know, May was a strong month in Macau with GGR up 13.5% YoY.  What you may not know is that hold was actually 8bps below normal (including Direct VIP) accounting for a 3.0% drag on growth.  MPEL, LVS, and MGM were the standouts.  Here are some market and concessionaire observations:



  • YoY growth would’ve been 16.5% assuming trailing 12-month VIP hold of 3.0%
  • VIP volume posted a 3rd straight above trend (trailing 3 month avg) performance
  • Mass grew 33% YoY, its best performance in over a year


  • Overall looks better than the market share print
  • GGR growth led the market despite well below normal VIP hold
  • VIP volume share was well above trend
  • Mass grew above trend, pushing market share to within 10bps of April’s all-time high


  • Very low hold impacted results yet market share of 14% was above recent trend and YoY GGR growth of 30% trailed only LVS
  • Mass revenue increased a whopping (yes I like that word) 63% YoY and pushed Mass market share to an all-time record
  •  VIP volume share was in-line with recent trend


  • This property continues to impress us
  • VIP hold was above normal and MGM generated its 2nd highest level of growth since Feb 2012 and 3rd highest in the market
  • Mass share grew sequentially and was above trend


  • Was one of 2 concessionaires to hold above normal in May
  • Mass growth was below recent trend
  • VIP volume barely grew in May but was the first month of YoY growth since November 2012


  • VIP hold was normal
  • Pretty much an in-line month across the board for Galaxy 


  • VIP hold was well below normal contributing to a 12% YoY drop in GGR
  • Mass market was only flat YoY and VIP volume actually declined
  • Market share fell to its lowest level ever






ECB on Hold Tomorrow

Takeaway: Draghi will monitor last month's cut and further assess non-standard measures to spur growth.

This note was originally published June 04, 2013 at 11:32 in Macro

Continuing with our call, we believe that Mario Draghi and the ECB will keep rates unchanged this Thursday after making a big splash cutting the main interest rate by 25bps (to +0.50%) last month.


ECB on Hold Tomorrow - ECB


Here’s how we’re sizing up our positioning:

  • Draghi has signaled that he expects a gradual recovery in growth in the back half of 2013, and therefore is monitoring the impact of the May 2nd interest rate cut and the current high-frequency data
  • Manufacturing PMIs were better in MAY vs APR (48.3 vs 46.7)
  • May Eurozone Confidence figures (Economic, Consumer, Business, Services, Industrial) all improved month-over-month
  • Sovereign yields remain largely anchored and the majority of European equity markets are positive YTD
  • The ECB needs more time to consider non-standard measures to encourage growth, including initial hints at 1.) Increased lending to small and medium-sized enterprises (SMEs) and 2.) Cutting the deposit rate to negative
  • On SME funding, it’s not clear the channel by which the funding would be carried out, ie from top-down coordination (Brussels/ECB) or bottom-up (at the individual CB/State Government level)
  • On a negative deposit rate, there is mixed discussion about the merits and benefits of such a move. Denmark provides one example of this and its government has claimed that it had no impact in boosting lending, and could negatively distort the property market. The jury is still clearly out on this option
  • Consensus is baking in no change to rates: 41 of 42 economists polled by Bloomberg agree

ECB on Hold Tomorrow - yy. rates large


Our critical TAIL line of resistance on the EUR/USD at $1.31 has not changed over recent months. We’ll be monitoring this level closely into and out of Thursday’s ECB meeting. Our immediate term TRADE range is outlined in the chart below. (The cross can be traded via the etf FXE).


ECB on Hold Tomorrow - yy. eur usd


Matthew Hedrick

Senior Analyst

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Strong price action in the casual dining stocks is being confirmed by sequentially stronger Blackbox Intelligence Data. Blackbox Intelligence Data for May is giving us added confidence in our casual dining longs. 

  • Casual dining stock have outperformed the S&P 500 by 16% YTD
  • Casual dining sales continue to recover in May.  Blackbox reported May same-store sales trends of 0.8%, an improvement of 40bps sequentially. 
  • Traffic declined 1.6% in May versus 1.7% in June
  • 2Q sales appear to be on track to meet consensus expectation.  Consensus expectations are for the 15 publicly traded companies we track to report 2.8% same store sales in 2Q13 versus 0.8% in 1Q13.  The average spread between reported same-store sales SSS and the Blackbox reported numbers over the last 5 quarters has been 200 bps.  The current spread is 220bps, with one month left in the quarter.
  • Our favorite names in casual dining are EAT, DRI and CAKE






Howard Penney

Managing Director


Rory Green


Volatility Breeds Contempt

Client Talking Points


The implied volatility in both Japanese stocks and bonds is ripping now. Volatility breeds contempt. The Weimar Nikkei was hit hard overnight, down over -3% on what was supposed to be a burning currency speech by Prime Minister Shinzo Abe. Instead, the Yen (vs USD) holds it’s immediate-term TRADE overbought gains, despite 10yr JGBs holding above our TAIL risk line of 0.81% (0.85% last).


1.     Don’t blame me for highlighting more surprisingly bullish #GrowthAccelerating in another country’s economic data. The last week of data out of the British has been bullish. Following up on a solid Construction PMI print of 50.4 yesterday, UK Services PMI accelerated to 54.9 in May (vs 52.9 APR). On the other hand, France’s Services economy still stinks (44.3 in May vs the UK’s 54.9). Policy has consequences.


No, gold doesn’t like US Housing and Employment #GrowthAccelerating. We re-shorted the precious metal yesterday ahead of Friday's employment report where, not surprisingly, expectations remain relatively bearish. Gold is broken on all 3 of our core risk management durations after failing at immediate-term TRADE resistance of $1424/oz.


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


@KeithMcCullough been with you on real time alerts just now getting into twitter, you have made more money this year than any broker I had



"Wherever you see a successful business, someone once made a courageous decision." - Peter Drucker


A 12-piece bucket of KFC chicken bought for $11.50 in Egypt and smuggled into Gaza City costs $27.

Your Opinion

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

“Look, I want to hear your opinion.”

-George F. Kennan


One of the hardest things to do in this profession is to check your position at the door and listen to the other side of the trade. Some opinions matter; some don’t. The market’s opinion always matters – so don’t just hear Mr. Market; listen to him very closely.


Our all-star energy analyst, Kevin Kaiser, and I had the opportunity to debate one of our best short ideas with the top holder of the stock yesterday. This wasn’t this 70 year old hedge fund manager’s first rodeo. Herniated disc in his back and all, he took the meeting with us during the market open. He had plenty of other things going on, but he really listened to our opinion. #Respect


At one point in the meeting, the debate between Kaiser and the analyst in the room got so intense that the PM decided to call the CEO of the company in question. He got the exec on the phone within a minute, told him what the bear case was (right in front of us), and asked for his opinion. Watching him listen to the CEO’s answers made me smile. Questioning and listening like that is not easy.


Back to the Global Macro Grind


This game isn’t easy. Laden with our individual confirmation biases, we are all hostage to being human while we play it. There is a real-time score on every decision we make. Our opinion is marked to market every day. If you don’t love that; you don’t love the game.


I’m not always sure if I am getting dumber or smarter each day. From a Global Macro Strategy perspective, that’s why I find it useful to study history – and not just market history – but the history of decision making. What was the process? Were they making decisions within an open network of information? What dogmas, agendas, and conflicts of interests impacted those decisions?


I just finished reading George F. Kennan’s brick of a biography. It’s thick because the man lived 101 years and kept strategizing until the very end. He never retired because he never stopped questioning, listening, and thinking. He was one of the most introspective and self-effacing strategists I have ever studied. If you had a seat at the table in a meeting with him, your opinion mattered.


“The thing you were planning for took place the day before yesterday, and everyone who wants you to know why in the hell you didn’t foresee it a long time ago.”George F. Kennan (pg 277)


Which brings me to today…


Mr. Macro Market’s opinion (#StrongDollar, Down Gold, Up Stocks) into Ben Bernanke’s testimony to Congress today is now old news. Why in the hell didn’t people foresee that there would ultimately be an end to these ridiculous expectations of endless QEs?


Why isn’t my opinion on expecting no more incremental easing equally ridiculous?


This is what makes a market. This is also why I spend so much time on both the road (seeing clients) and on Twitter (reviewing credible criticism of my positions). It’s not personal. Everyone’s goal in this game is to be right for the right reasons.


The aforementioned Kennan quotes came out of the US State Department policy planning meetings of 1947-1949. At the big turns in US policy history (post WWII in this case), respecting the pattern of decision making is critical.


Is Bernanke at the turn?


If you use the economic data for an opinion, he definitely should be. He’s been effectively easing monetary policy now since the day he took his seat as the head of the Fed in 2006. It’s been a long death march for conservative US Savers that needs to end.


What major macro markets have already front-run him making the turn?

  1. US Dollar Index = Bullish Formation (anything tighter, on the margin, is bullish for a currency that’s been devalued)
  2. Gold = Bearish Formation (up for 12 straight years with the last 6 of them becoming Bernanke’s bff, ending)
  3. US Treasury Yields = Bullish Formation (provided that our long-term TAIL risk line of 1.82% on the 10yr holds)

But will 1.82% on the 10yr hold? Will Bernanke acknowledge economic gravity? I don’t know. But neither my opinion nor yours will matter come 10AM EST. Pencils down – your central planning overlord will issue his un-elected opinion.


I think I know how our CYA State of The Union in this country got to this point. But the more history I read, the less I know about how politically conflicted and compromised it really was all along.


There’s nothing I can do about that history now. Neither can you. The best we can do each and every risk management morning isn’t playing the game we’d all like to play. It’s to play the game that history has put in front of us.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1341-1409, $102.16-105.13, $3.26-3.39, $83.57-84.69, 101.49-104.62, 1.82-2.01%, 12.18-13.79, and 1651-1682, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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