Fed Conversations

This note was originally published at 8am on July 10, 2013 for Hedgeye subscribers.

“The one who engages in conversation should not debar others from participating in it.”



That’s one of the many quotes from Stephen Greenblatt’s The Swerve (page 70) that gets the juices flowing. Whether you’re tapping into the minds of the early Greeks (Epicurus = 341-270 BCE) or the arena of debate in the Roman Republic (Cicero = 106-43 BCE), it’s all there.


If you work within an investment culture that demands both constant questioning and collaboration, it’s all there too. Is there any other way to find the truth? Those who put their political pride over the market’s truths have never made good Portfolio Managers, fyi.


Sadly, politicians have provided the Fed, ECB, and BOJ closed forums where un-elected bureaucrats call the shots. While that may have been normal in Stalin’s Russia, it’s not in the area code of what America’s Founding Fathers envisioned. Who really cares about today’s Fed “minutes”? Until the Fed opens itself up to the Dalios and Druckenmillers of the world, they’re not even having a conversation.


Back to the Global Macro Grind


China’s economic data was horrendous overnight. So let’s not talk about the implications of Asian #GrowthSlowing, copper demand collapsing, mining capex bubbles, etc. Let’s start begging for a Bernanke-style bailout for the Chinese economy!


Yeah baby, that’ll do it – look at how well things turned out for every other Asian government that levered itself up since the Ming dynasty. I am hearing the Chinese are really into the whole Krugmanomics idea of turning China’s balance sheet into Japan’s too. Shhh.


To be crystal clear on this, we do not think China will “stimulate” you. Here are Darius Dale’s Top 3 reasons why:


1.   Property Bubble – they are trying to pop it before they get popped like we did (imagine that, learning from US history); property price growth continues to accelerate (+7.4% YoY in JUN; 13 consecutive months of sequential gains)


2.   Rebalancing, Not Levered Growth - Politburo's economic rebalancing agenda (quality of growth now more important than quantity of growth), which they've supported with recent rhetoric and (in)action during the recent credit crunch


3.   Psychology – despite the intermediate-term TREND slowing Chinese growth is still trending in-line to above long-term targets; if growth doesn’t fall off a cliff, new leaders will be reluctant to appear weak in the context of their long-term plan


Unlike team Obama, Geithner, and Bernanke (or Abe, Aso, and Kuroda in Japan), Xi and Li will be in charge for another 10 years. Why on earth would they implement short-term Western-style “stimulation”, when their ultimate goal is for history to respect them long-time?


I know, I know – whatever you do, do not engage in rational discussions about this when you can always defer to trading on the latest Chinese, Eurocrat, of Fed horse whispering rumor. That’s where the vig is at, bros.


The vig?


Yeah, you know – “also known as the juice, the cut or the take…” (Wikipedia definition). Or the amount a Washington “consultant” gets paid for his super secret inside info on what the Fed Minutes are actually going to say today (or what Bernanke is going to whisper next).


Just like Jefferson envisioned, for sure.


In other #StrongDollar, Strong America news, US stocks closed up for the 4th day in a row yesterday, taking the Russell 2000 to yet another all-time closing high of 1,018. For those of you who are still into keeping score for the 2013 bears, that’s +20% YTD.


All-time is also a very long-time, so why not sell some up here? You know, lather yourself up with some booked gains. As our Financials guru (and birthday boy), Josh Steiner, always reminds me, ‘no one ever went broke booking a profit.’


From our process’ perspective, making some sales up here in US Equities is your short-term, high probability, bet because:

  1. PRICE – SP500 is immediate-term TRADE overbought in the 1650-1658 range
  2. VOLATILITY – front-month VIX is immediate-term TRADE oversold around 14.02
  3. VOLUME – has been nowhere to be found on this no-volume meltup (down -13-27% versus our TREND avg)

What goes up on no-volume can come down on no-volume. So, as consensus is forced to chase price again, and again, and again in 2013, just take a deep breath and focus on proactively managing the risk of a very trade-able range (SPY range = 1592-1658, for now).


Despite the “rumors” of being “stimulated” by some Chinese dudes, both the Shanghai Composite and the Hang Seng closed well below their bearish TREND lines of 2,190 and 21,991, respectively overnight.


Oh, and Oil is testing a breakout above our long-term TAIL risk line of $108.36/barrel this morning too. So, Bernanke, before you think about devaluing the Dollar again with a closed network “communication tool”, think about the rest of us who are engaged in open discussions about you while we’re taking your Policy To Inflate in the pump.  


Our immediate-term Risk Ranges are now (we have 12 Macro Ranges in our new Daily Trading Range product too, fyi):


UST 10yr 2.56-2.73%

SPX 1621-1658

Hang Seng 20,124-20,991

VIX 14.02-16.21

USD 83.89-85.09

Oil 105.06-109.39


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Conversations - Chart of the Day


Fed Conversations - Virtual Portfolio

A Thousand Pebbles

“Fragility is the quality of things that are vulnerable to volatility.”

-Nassim Taleb


We have quoted Nassim Taleb a number of times at the start of the Early Look and, admittedly, I didn’t check to see if this was a recycled quoted. Nonetheless, it is a very apropos quote for the topic of today’s Early Look and for contemplating risks in markets generally.


 The title for today’s note comes from a story, which is referenced in Taleb’s most recent book “Antifragile”, that emanates from rabbinical literature (Midrash Tehillim) and is about a king that is angry at his son.  In fact, the king is so angry at his mischievous son that he explodes one day and tells his son he will crush him with a large stone. 


Herein lies the dilemma according to the story: a king who breaks his oath is considered unfit to rule.  The king is now faced with the decision to either crush his son, or to give up his throne.  Luckily before the poor prince was crushed, an advisor (the Hedgeye of the era perhaps?) came up with a solution.  The king should cut the stone into very small pebbles and pelt his son with these pieces.


Taleb’s point in this analogy is to explain how fragility stems from non-linear effects.  That is, if you double the dose, you get more than twice the effect.   By way of a practical illustration, if you have five shots of Jack Daniels, you have a buzz.  But if you have ten shots of Jack Daniels, your wife (or husband) makes the couch up for you to sleep on that night.


Back to the global macro grind . . .


As it relates to non-linear impacts on the global markets as of late, interest rates have certainly had the most critical impact.  In the Chart of the Day, we highlight a slide from our most recent Q3 Theme Presentation that looks at quarter-over-quarter moves in interest rates.  As the slide shows, the move in interest rates in the last quarter was the largest percentage increase in fifty years.  (Yes, the last time this happened Sandy Koufax was pitching for the L.A. Dodgers.)


We were on the road in Europe talking to clients last week and not surprisingly interest rates were a key topic of discussion.  Many of the more astute investors actually narrowed in on this precise point of interest rate volatility.  Our view is that volatility of rate increases will be more benign moving forward, which, as we’ve been stating, should be positive for the U.S. dollar, domestic economic activity and U.S. stocks.


To the extent that volatility picks up, the effects of interest rate increases will be non-linear.  In reality, a move from 1.63% on the 10-year treasury to 2.63%, or an increase of 100 basis points, shouldn’t have a meaningful impact on asset classes or the economy.  The markets become fragile, though, when this 63% back up in rates occurs in a very compressed time period, as it did in May – June.   In pushing the interest rate ball under water, the global central banks have created a set up in which interest rates are very fragile (to use Taleb’s definition).


In addition to the risk of rates increasing at a rate that is highly volatile, the other key focus area of investors in Europe on our visit related to the impact of #RatesRising to housing.  This is certainly a legitimate question as the wealth impact from home price increases is a key reason we are bullish on U.S. consumption.  Specifically, as a consumer’s balance sheet improves via an increasing home price, so too does their confidence, ability to borrow and subsequently spend.


Based on our long run analysis of housing, the recent accelerated move in rates has not altered the fact that the affordability of purchasing a home remains at historic lows.  On the basis of median mortgage payment as a % of median income, the housing market is at 22% and well below the twenty-five year median of 28%.  On the basis of median mortgage payment to median rent, the housing market is at 99%, which is also well below the long run average of 131%.


This is not to say, of course, that housing won’t be impacted by a volatile move in rates, but the housing market is still so depressed based on historical levels it should have the ability to manage through #RatesRising.  June data from the NAR seems to support this as existing home sales were up 15.2% year-over-year and the national median home price in June was up 13.5%.  So yes, housing can do well if rates continue to rise.


Switching to infomercial mode for second, I want to highlight that we will be expanding our U.S. financials research coverage and are launching on U.S. asset management stocks on Monday July 29th at 11am.  Jonathan Castelyn has joined Josh Steiner’s team in a senior role and will be initiating on these names.   As always, we will be actionable and Jonathan will have 2 short ideas and 2 long ideas.  Please email  for access.


Our immediate-term Risk Ranges are now:


UST 10yr 2.47-2.71%


VIX 11.59-13.54

USD 82.01-82.89

Brent 107.21-109.14

Gold 1


Keep your head up and head on the ice,


Daryl G. Jones

Director of Research


A Thousand Pebbles - Treasury L vs NL


A Thousand Pebbles - Virtual Portfolio

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 80.46%
  • SHORT SIGNALS 78.35%


We maintain our bullish stance on Wendy’s.


WEN reported 2Q13 EPS results that were $0.02 better than consensus.  More importantly, 2Q13 adjusted EBITDA was $102.1 million versus the Consensus Metrix estimate of $95.1 million.  Same-store sales were +0.4% for company-owned stores and +0.3 for franchised stores versus Consensus Metrix estimates of +1.1% and +0.9%, respectively.  Due to the successful July launch of the Pretzel Bacon Cheeseburger and the recent announcement of strategic operational initiatives, we believe the company is well positioned for the balance of 2H13 and 2014.


Below are some of our thoughts on WEN’s 2Q13 results.



The Big Story

The company announced a plan to sell about 425 restaurants as part of its ongoing brand transformation in order to help optimize its restaurant portfolio.  The company also laid out the anticipated benefits of this initiative:

  • Improved company-operated restaurant margin of 50bps or more
  • Reduced annualized G&A of about $30 million by the end of 1H14
  • Lower annualized depreciation expense of about $30 million by the end of 1H14
  • Higher cash flow due to an increase in rent and royalty revenue, lower ongoing capex, and proceeds from the sale of these restaurants
  • NPC will be a meaningful buyer of the stores, if not all of them 


What We Liked

  • New focus on an asset-light model
  • The company has recognized its operational deficiencies and created a feasible plan to address these issues
  • WEN is trending toward the high end of its full-year outlook for adjusted EBITDA ($350-$360mm) and adjusted EPS ($0.20-$0.22)
  • Strong focus on brand transformation – reimaging, including new restaurants, products and packaging along with a new logo
  • Expect stronger same-store sales in 2H13 and remain on track to achieve full-year same-stores sales growth of 2-3% in North American company-operated restaurants
  • The company raised its annual EPS growth rate target from the high single-digits/low double-digits up to the mid-teens beginning in 2014
  • Wendy’s intends to begin repurchasing shares in 3Q13


Red Flags

  • Although same-store sales numbers improved year-over-year, they fell short of expectations
  • Lost market share in the QSR value landscape, but the outlook is better for 2H13
  • 4Q adjusted EBITDA could be down over 10% year-over-year due to the company’s Image Activation franchisee incentive program
  • 2013 full-year D&A could be up about 15-20%








Howard Penney

Managing Director







Guangzhou is set to become the third mainland city to offer 72-hour transit visas to travelers from dozens of countries.  The city's inclusion in the short-term visa scheme was announced by provincial authorities who described it as a boon for tourism in the Pearl River Delta.  Beijing and Shanghai introduced the visas last year.


Cheong Chi Man, Vice-president of Macau Travel Agency Association, said the measure will not be a driver to boost the number of package tour visitors to Macau, but it is expected to bring more individual visitors.



The number of passengers moving through Changi Airport increased 6.1% YoY to 4,669,334 in June 2013.





Macau visitor arrivals increased by 10.4% YoY to 2,324,935 in June 2013.  In June 2013, visitors from Mainland China increased by 20.0% YoY to 1,464,665, mainly coming from Guangdong Province (629,648) and Fujian Province (64,466). Mainland visitors traveling under the Individual Visit Scheme (IVS) totaled 603,704.  Moreover, visitors from the Republic of Korea (33,570) and India (21,724) also increased by 12.7% and 14.2% respectively, while those from Hong Kong (558,326) and Taiwan (75,889) decreased by 0.1% and 12.8%.  

The average length of stay of visitors held stable from a year earlier, at 1.0 day in June 2013.




In preparation for LVS's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



POST CONFERENCE CALL FORWARD COMMENTARY (Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference)



  • "Right now about 51% of the people that come in to Macau don't stay. They go home. I think that's very encouraging, frankly, because that means 49% of the people are staying. And basically, although Guangdong is the closest province with 100 million people, the infrastructure from the bridge, Henqin Island development and other things that are happening with the trains, et cetera, the airports, all create from the distant areas – Beijing, Shanghai, all that– a very, very significant amount of traffic over the next number of years."
  • "We're yielding at the Venetian $12,000-plus a table last quarter. Obviously, we need more tables going forward. Even if we're doing 400 tables, we probably could use another 50 or 100. The junket yields are just down across the market because no matter who you are, you're not getting the yield per table. But we just simply follow the trends. It's hard to predict, but the good news is the government's very helpful, allowing you to move tables around."
  • "We are investing $100 million in the theater and in Site 5, which is in the Holiday Inn, Conrad area to produce 80 more tables at the premium mass level, which will open sometime in the third quarter of 2014."


  • "Our VIP business remains okay. I mean, we did have a great quarter, $18 billion, but we always tell people it's a very concentrated segment that you can't predict quarter-to-quarter. It's $1,000 – $2,000 accounts that really matter in that segment. So, it's highly concentrated."
  • "We'd like to target to get that mass market business back up to about $4.6MM or more a day."
  • "The mall continues to get better and better, and we leased that during a rather difficult time. And as we keep changing out tenants, that gets better by the day and that's a wild asset. The upside of that mall, I think, is yet to be seen."
  • "We're already going to start major room rehabilitation in 2014."


  • [Bethlehem] "We're happy with the results, and unless we're able to get what we want for the property, we have no big rush to sell it and may not sell it."





  • "Based on our current construction schedule and subject to timely government approvals, we're still targeting the opening of The Parisian for late 2015."
  • [SCC] "We're putting in another 80-some odd tables, pushing 100 tables...Our competitors, I'm sure, are doing the same thing. They're putting their underperforming tables to better use and increased revenue. We've got the CapEx approval from our Board of Directors meeting yesterday, and we're moving forward on that. That is going to take about 10 months or so, maybe a little more, 10 or 12 months. It will be ready, I think, next April."
  • [Competition]  "I think it's competitive. Obviously, you have three segments there. Our strength resides in the pure mass. Because our table size and capacity, I think we dominate that segment. The premium mass and super premium mass are obviously very competitive."
  • [Mass table]  "Our goal is to re-segment the Four Seasons, getting more. We did $14,200 per table in the Four Seasons. We want to re-segment that, get a lot more aggressive in that mass table market, or I should say premium mass table market. We want to grow our business, especially at the SCC."


  • "Slot segment continued to show weakness. And that's because Slots is primarily driven by the local market, which has not recovered."
  • "We'll continue to see table growth. We're hoping to see more growth from the slot side as well. But we were back in a positive place in Singapore in the most important segment, the non-rolling and Slot ETG segment.:


  • "There's a lot of noise about Japan, about 100 people in the legislature wanting to get legislation as early as November."

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.