CHART OF THE DAY: Lest Occasion Be Given


CHART OF THE DAY: Lest Occasion Be Given - Chart of the Day

Lest Occasion Be Given

“Idleness is the enemy of the soul.”

-Saint Benedict


There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.


Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)


Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.


Back to the Global Macro Grind


From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.


Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).


So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!


Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.


Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.


Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.


For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.


Our immediate-term Risk Ranges are now:


UST 10yr 2.55-2.74%


VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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What an ugly start to the week in Asia. Asian Equities were led lower by Indonesia which fell -3.2%. Meanwhile, China was down -2.4% and Hang Seng down -1.3%. Get this: the Shanghai Compositie is down -11.7% year-to-date. No, that's not pretty. With the exception of Japan, every single Asian country is bearish TREND right now. (Nikkei TREND = 13,668)


Yes, European stocks are having an aggressive bounce. However, this is happening on A) no volume and B) not one of these markets is above any of my TREND lines of resistance. The most important TREND line to watch is DAX 8062. That is key. Meanwhile, EUR/USD couldn’t care less about the Troika “news.”


What's the biggest threat to the US Consumption investment theme? That would be Brent Oil closing and holding above the long-term TAIL risk line of $108.36. We're backing off -0.6% this morning toward $107. That is a good thing. We are watching this one very closely.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Biggest thing consensus has missed in 2013 is #StrongDollar driving Commodities Down, and US Stocks up



"People who lose money always need someone to blame."
- Jim Chanos


On this day (July 8) in 1932 – The Dow Jones Industrial Average reaches its lowest level of the Great Depression, closing at 41.22.

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The city’s gaming industry is safe from the mainland’s economic slowdown, SJM CEO Ambrose So said.  So believes gaming revenue can maintain “at least double-digit growth” in 2H 2013.



SJM CEO Ambrose So said that the company has found potential locations for relocating their slot parlors (Yat Yuen Canidrome Slot Lounge and Treasure Hunt Slot Lounge), and expected to relocate the parlors to the new location before November this year.  He added that SJM focuses more on traditional gaming models, slot business only take up 5% of its overall business, therefore, the relocation will not have much impact on the overall business.  Jai Alai casino is expected to be re-opened to public in the first quarter of 2014.



China’s Ministry of Finance recently issued an announcement requiring all departments in the central government to cut general expenditure for 2013 by 5%.  Some local scholars said that the central government’s move indicates that China may see a slowdown of economic growth in 2H 2013, and it may have a slight effect on Macau’s gaming industry.



Crown Group and Rank Holdings, Sri Lanka's biggest gaming corporation, will build a $350 million, 36-story entertainment complex, including a casino and a 400-bed hotel, on prime real estate in downtown Colombo. The casino is slated to open in 2016.


The complex will be exempt from paying corporate income tax for 10 years and will receive a hugely discounted rate for 12 years after that.  A spokesman for Crown said: “Negotiations on a proposed resort project in Colombo are still ongoing.”



The Economic Data calendar for the week of the 8th of July through the 12th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Right On Jobs

Takeaway: We've been saying for months that the jobs picture in the US is better than most on Old Wall and Legacy Media thought. We were right.

“Better than expected.”  “Robust.” “A healthy sign.”  Comments on Friday’s jobs report are not quite so effervescent as reviews of a new musical, but in the normally staid language of economists and the reporters who cover them, you might say this is positively euphoric. 


Here’s how the numbers break out in this week’s statistics, and what Hedgeye has to say about them:


Jobs – At 195,000, new jobs created for the month of June ran ahead of most analysts’ projections.  Hedgeye Financials sector head Josh Steiner was looking for a report in this range, so the modest superlatives being tossed around in the financial press don’t apply here.  In fact, Steiner says this is a near-ideal number, falling in the growth sweet spot of between 150,000 – 200,000 new jobs, which he considers enough to show that our growth thesis is well on track, but not so much as to spark inflationary fears.


The government also revised upwards the jobs numbers for April and May, which media commentators say bodes well for a stronger economy in the second half of 2013.  In other words, the rest of the financial media are slowly coming around to the conclusion Hedgeye reached in the fourth quarter of last year – that a recovery in US growth was on track.  The recovery has been slow – as we foresaw – but seems to be winning converts with each new economic datapoint.


Unemployment – Steiner continues to favor Non Seasonally Adjusted (NSA) jobless claims over the Seasonally Adjusted (SA) numbers relied on by both policy makers, and the majority of analysts and economists.  Rolling NSA claims improved by 9.6% over last year, bringing what Steiner calls “another week of solid labor market improvement.” 


SA claims were basically flat on a rolling 12-month basis – pointing up the discrepancy between what’s going on in the economy, and the way the government chooses to report it.  We suspect the policy motivation for this is that using SA statistics tends to dampen the impact of large events, creating the appearance of smooth or gradual changes.  If you’re Ben Bernanke, and if you understand this (we think he does, but you never know…) you use statistics to maintain calm in the populace while working up your next policy move. 


Remember that, for all we have been critical of his “Helicopter Ben” approach of continuing to print dollars, Bernanke has to balance multiple constituencies.  To get anything done at all, he has to keep a lid on Congress, the President, the press, Wall Street, and Main Street.  How do you keep so many antagonists at bay at the same time?  Well for one thing, it helps to manipulate the data.


This time around, the media were forced to concede that unemployment looked better, even using the flat SA number.  Flat unemployment of 7.6% was attributed to more people coming into the workforce – a clear indicator of economic optimism.  And the Labor Department reports that pay levels rose “sharply” in June, which means pay rates have outpaced inflation over the last twelve months.

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