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It was inevitable so what do we do now?



As we speculated in our Macau note yesterday, a sell side firm would likely make a negative call based on the China credit situation.  Indeed, the Deutsche Bank analyst pulled the plug on a number of Macau stocks today.  We don’t disagree with the call from a Trend (intermediate) perspective, but we think the downgrade could push the stocks into buy territory over the Trade duration.


Our call yesterday was to wait for the inevitable downgrade and look to buy on that weakness.  The fact that the downgrade came from an influential analyst creates an even better opportunity. 


We like the short-term Trade here and are still bullish on the long-term Tail.  We share DB’s concerns over the Trend intermediate term.  As we wrote about in our 05/22/11 note “A VIP SLOWDOWN IN THE CARDS?”, we’ve found that China central bank moves impact the Macau junket market on a 2-3 quarter lag.  VIP is likely to be under pressure later this year.


However, over the near-term, we think the setup is positive as July could be a 20%+ growth month in Macau to go along with June’s high teens growth.  We like MPEL and MGM on today’s likely weakness.  MPEL looks to post another beat for Q2.  MGM Macau’s performance has been surprisingly strong and MGM could also benefit from terrific May Strip revenues which we expect to be reported in two weeks (see our note yesterday “MONSTER MAY”).   

Talk Is Cheap

Client Talking Points


Down hard, then rumor, then bounce ... It looks like a "Bernanke/Draghi" type playbook in Beijing as the entire world attempts to watch what we cannot see. The Shanghai Composite closes down -0.2% overnight. #Oversold, but still crashing. Looks like hell down -19.5% since Feb 5. Bouncing on rhetoric doesn’t solve the long-term issue.


Doing the dead cat bounce thing within a developing bearish TREND across all of European Equities. I learn the most during the bounces. This bounce in European Equities hasn’t seen one - not one-  major index recapture any of my intermediate-term TREND lines. The FTSE gained +0.8% to 6075, but it's still well below 6398 TREND resistance. DAX TREND line = 8014.


A bear market "bounce" in gold of just +0.14%. Guess what? That is not going to get anyone excited about Gold. Nor will a 10-yr UST Yield of 2.5%. Nor will a US Dollar recapturing $81.21 TREND support. Gold is turning into a good proxy for deflation – deflating Bernanke Bubbles, that is...

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


We've had a 0% asset allocation to Fixed Income recommended to clients for almost 6 months



"I am a man of fixed and unbending principles, the first of which is to be flexible at all times."

- Everett Dirksen


Looking for a mortgage? Bankrate US Home Mortgage 30-Year Fixed National Average pops up to 4.51%. That's up another 15 basis points overnight. (Bloomberg)


TODAY’S S&P 500 SET-UP – June 25, 2013

As we look at today's setup for the S&P 500, the range is 26 points or 0.45% downside to 1566 and 1.20% upside to 1592.          










  • YIELD CURVE: 2.13 from 2.15
  • VIX closed at 20.11 1 day percent change of 6.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Dur Goods Orders, May, est. 3.0% (prior rev to 3.5%)
  • 8:30am: Durables Ex Transportation, May, est. 0.0%
  • 8:30am: Cap Goods Orders Non-Def, Ex-Aircraft, May, est. 0.5%
  • 8:55am: Johnson/Redbook weekly sales
  • 9am: S&P/Case Shiller 20 City M/m, April, est. 1.2%
  • 9am: S&P/CS Home Price Index, April (prior 148.65)
  • 9am: FHFA House Price Index, April, est. 1.1% (prior 1.3%)
  • 10am: Richmond Fed Manufacturing, June, est. 1 (prior -2)
  • 10am: Conference Bd Cons Conf, June, est. 75 (prior 76.2)
  • 10am: New Home Sales, May, est. 460k (prior 454k)
  • 10am: New Home Sales M/m, May, est. 1.3% (prior 2.3%)
  • 11am: Fed to buy $1.25b-$1.75b debt in 2036-2043 sector
  • 11:30am: U.S. to sell $25b 52W bills, 4W bills
  • 1pm: U.S. to sell $35b 2Y notes
  • 4:30pm: API weekly inventory data


    • President Obama unveils his plan to address climate change
    • Supreme court may rule at 10am on cases including:
    • Calif. initiative banning same-sex marriage, law denying federal benefits to legally married gay couples
    • Whether Voting Rights Act can require some states to get “preclearance” from federal government before changing voting rules
    • Markey takes on Gomez in Mass. special election for U.S. Senate
    • Sperling, Krueger, Biden speak on federal minimum wage
    • Senate Appropriations Cmte panel marks up FY2014 Energy and Water Development Appropriations Bill, 10am
    • Senate Energy and Natural Resources Cmte holds hearing on management of forests on federal lands, 10am
    • Senate Appropriations Cmte Financial Svcs and General Government panel hears from CFTC Chairman Gary Gensler, SEC Chairman Mary Jo White on FY2014 budget, 3pm
    • Senate Banking, Housing and Urban Affairs Cmte holds hearing on regulation of private student loans, 10am


  • Google may get win in case over privacy data on other websites
  • U.S. senators to introduce bill to end Fannie Mae, Freddie Mac
  • China money-market rate increase temporary, PBOC official says
  • Benchmark rate alternatives to be studied by regulators: Carney
  • U.S. said to explore possible Chinese role in Snowden leaks
  • Men’s Wearhouse founder Zimmer said studying options: Reuters
  • S&P mortgage ratings trial sought for Feb. 2015 by U.S.
  • Ford F-150 tops Toyota Camry as No. 1 in American-made ranking
  • Cerberus plan to boost Seibu control rejected by investors
  • Spain sells EU3.07b bills vs EU3b maximum target


    • Lennar (LEN) 6am, $0.33, preview
    • Walgreen (WAG) 7:30am, $0.91
    • Barnes & Noble (BKS) 8:30am, ($0.90)
    • Carnival (CCL) 9:15am, $0.07
    • Synnex (SNX) 4pm, $0.81
    • Apollo Group (APOL) 4:01pm, $0.86
    • Smith & Wesson (SWHC) 4:05pm, $0.43


  • HKEx’s Li Targets Chinese Growth After $2.2 Billion LME Purchase
  • Palm Reserves Rising Most Since 1999 After Oil Rout: Commodities
  • Morgan Stanley to Goldman Cut Gold Forecasts on Fed Outlook
  • Copper Advances in New York After China Comments on Money Rates
  • EU Officials Said to Agree to 30% Cap on Some Farm Subsidy Cuts
  • Corzine May Soon Face CFTC Lawsuit Over MF Global, NYT Reports
  • Morgan Stanley Maintains 3Q, 4Q Iron Ore Price Estimates
  • Iron-Ore Cargoes Double Ship Rates as China Seen Buying: Freight
  • WTI Rises a Second Day on Supply Data; Goldman Sees Demand Gain
  • Crude Supply Drops in Survey Amid Driving Season: Energy Markets
  • Yingluck Risks Farmer Ire to Curb Fiscal Burden: Southeast Asia
  • Corn Belt ’Good or Excellent’ Corn Hits Seven-year High, Week 25
  • Gold’s Price Slide Seen by Credit Suisse ‘Shattering’ Confidence
  • Russia, Kazakhstan Join Turkey in Raising Gold Holdings in May






















The Hedgeye Macro Team












The HK$775M placeholder - we don’t believe in coincidences and we haven’t believed in this one.



As we wrote about yesterday, average daily table revenues for Macau came in at HK$775 million for last week.  Hmmm, where have we seen that number before?  Oh yeah, 14 times over the past 105 weeks.  If you’re saying to yourself, “that’s next to impossible”, well, it gets even more unlikely.  The weekly revenues released each of those 14x divides to a daily number of exactly HK$775,000,000 when carried out to the full decimals. 


So what is happening?  Clearly, HK$775 million is a placeholder, probably because not all the data came in to the government in time.  Statistically, that means that the following week’s data is likely to be volatile since it will be a catch up.  We calculate a standard deviation that is 40% higher for the week following a HK$775 million week than for the average week over the same period.


As if Macau stocks need another dose of volatility.

Beach Time?

This note was originally published at 8am on June 11, 2013 for Hedgeye subscribers.

“I’m going to lie on the sand and watch the world go to hell.”

-William Bullitt Jr.


That’s not a very nice thing to say now is it? Young Yale men can get pretty emotional when they go out into the real world and get told they are wrong. In 1913, William Bullitt was voted the “most brilliant” man at Yale. I am not sure what that means, but trying to do a deal with Lenin probably changed his classmates’ minds on that, eventually.


Brilliant is as brilliant does. Yesterday may have been one of the best days to sell everything and go to the beach for the rest of the summer. I doubt it, but we’ll see. Every morning we reserve the right to change our mind. That’s the upside to not working for the government. Poor Bullitt (he was a rich kid from Philadelphia actually) didn’t share our self-deterministic luxury.


In 1919, “Bullitt and Steffens spent a wonderful week in Moscow: accommodation in a confiscated palace, piles of caviar, nights at the opera…” etc. Life was indeed #brilliant, until he came back to Paris and Wilson bagged his idea to appease the Bolsheviks. Lenin later recalled that the young American diplomats were “useful idiots” (pages 78-81, Paris 1919 by Margaret Macmillan).


Back to the Global Macro Grind


I don’t do beach. At least not now. I have work to do, a family to feed, and a firm to build. It’s mid-June and its really only the 2nd day in the last 6 months where I woke up thinking, wow – the world might actually start going to hell again.


When I say I “think”, I mean the Global Macro market’s interconnected signals are making me think. When I was Bullitt’s age (28 years old at the Paris Peace Conference) I wasn’t yet married and I thought in very different ways!


I was a lot more bullish on US Consumption oriented Equities < 1601 in the SP500 last week than I was 50 handles higher yesterday. At 11:02 AM EST I wrote a note titled “Sell Some: SP500 Levels, Refreshed.” The research view didn’t change; my risk signals did.


To review the what on that (which is usually more important than the why):

  1. SP500 signaled it’s 1st lower-high in my model in months (1662 resistance vs YTD closing high of 1669)
  2. US Equity Volatility (front month VIX) signaled a higher-low at 13.77
  3. US Dollar signaled immediate-term TRADE overbought on the open versus the Japanese Yen

Get the Dollar right, and you’ll get other things right. You don’t have to be brilliant to embrace the uncertainties associated with that. When I make big moves in either Real-Time Alerts or the Hedgeye Asset Allocation Model, it almost always starts with a USD signal.


Since we’ve already beached our asset allocations to both Fixed Income and Commodities (0% on both), our only risk management exercise this summer is deciding how big we get (and when) on this US Consumption LONG versus Commodities SHORT position.


For now, the intermediate-term TREND ranges for US Equities and volatility are as follows:

  1. SP500 = 1583-1662
  2. VIX = 13.77-18.98

Again, you’ll note that what’s new in that 2 factor model is:


A)     Lower-highs for US stocks

B)      Higher-lows for US equity volatility


Plenty will quibble with how my models work, and that’s perfectly fine with me. I don’t have time to do anything other than what we are already doing here at the firm. So my own risk is going to be doing more of that.


The beauty of operating from the opposite perspective as brilliant central planners who promise you certainty (Obama just called his freshly minted Keynesian, 42 year old Harvard boy, Jason Furman, “one of the most brilliant minds of his generation”) is Embracing Uncertainty. We have no idea what tomorrow is going to tell our model.


Here’s all I am certain about as of this morning (this could change by tomorrow, but probably not):

  1. Japan’s Weimar Nikkei is now bearish TREND (resistance = 13,849)
  2. Japanese Yen (vs USD) remains bearish TREND (resistance = 96.05)
  3. US Dollar Index remains bullish TREND ($81.21 = support)
  4. South Korea’s KOSPI is back to bearish TREND (resistance = 1968)
  5. Hong Kong’s Hang Seng is bearish TREND (resistance = 22,438)
  6. India’s BSE Sensex is bearish TREND (resistance = 19,692)
  7. Germany’s DAX is bullish TREND (support = 8112)
  8. UK’s FTSE is bullish TREND (support = 6281)
  9. Spain’s IBEX is bearish TREND (resistance = 8361)
  10. Russia’s RTSI is bearish TREND (resistance = 1472)
  11. Brazil’s Bovespa is bearish TREND (resistance = 56,191)
  12. Commodities (CRB Index) remain bearish TREND (resistance = 296)
  13. Gold remains bearish TREND (resistance = 1581)
  14. Old (Brent) remains bearish TREND (resistance = 108.31)
  15. Copper remains bearish TREND (resistance = 3.51)
  16. Japanese Government Bond yield (10yr) is bullish TREND (0.79% support)
  17. US Treasury Bond yield (10yr) remain bullish TREND (1.83% support)

And it goes on and on and on …


Multi-factor, multi-duration. That’s how we roll. And as you’ll quickly note, there are plenty of places to be bearish in this world. The problem with consensus US stock market bears in 2013 is that they weren’t bearish enough on many of these things – primarily because they weren’t bullish enough on US #GrowthAccelerating.


Gold and Sovereign Credits (Japan and USA) loathe growth. And while the Japanese won’t get real (inflation adjusted) economic growth in the end anyway, at least their Keynesian duo of Abe/Aso will get plenty of beach time. We can only pray that they lose their jobs fast. Never mind the beach, dealing with their and Furman’s “brilliance” every morning might just drive me to the bottle.


Our immediate-term Risk Ranges Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1354-1413, $100.21-105.04, $81.21-82.42, 96.05-99.55, 2.14-2.26%, 14.07-17.69, 12440-13849, and 1624-1662, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Beach Time? - Chart of the Day


Beach Time? - Virtual Portfolio

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