Picture Day

This note was originally published at 8am on August 02, 2013 for Hedgeye subscribers.

“Think of me like Yoda, but instead of being little and green, I wear suits and I’m awesome. I’m your bro — I’m Broda!”

-Keith McCullough


I’m not going to try to weave that recent #Tweetshow gem from Keith above into some sort of missive theme.  It just makes me laugh.


Let’s start somewhere else.


Back in school the bullies used to wait until Picture Day to punch a kid in the face.  Risk Management in Central CT starts early. 


Yesterday could probably be considered an investor picture day and the market delivered a bevy of black eyes to the perma #EOW contingent.


In related End of World and Recency Bias news, it’s now August and for the better part of the last 5 months, the ‘Sell in May’ mantra has been iteratively thesis drifting towards an un-convicted call to ‘Sell in September’ alongside another crescendo in congressional budgetary and debt ceiling discord. 


September, incidentally, also happens to be when the seasonal distortion present in the reported econ data flips from a headwind to a tailwind - serving to (optically) amplify any positive underlying economic trend. 


Hearing implied volatility in ‘sell in December & go away’ calls is ripping!


Back to the Global Macro Grind……

For much of 1H13, our pro-domestic growth call was buttressed by some positive redundancy.   That is, with our model signaling for the slope of U.S. growth to accelerate out of 4Q12, we had a bullish absolute call for domestic, consumer-centric equities. 


With most of Europe Bearish TRADE & TREND, an expectation for slowing EM growth, and upside to troughed out expectations for U.S. growth, we also had a relative call supporting a long bias to domestic exposure. 


In essence, even if U.S. growth turned out to be “okay” instead of very good, we were still taking a high probability swing at positive absolute performance.  


As it happened, our conviction in the strength of the relative call was tested more acutely as we transitioned out of 1Q.  A quick review of the last few months will be helpful in understanding how our view has evolved to where it is today. 


As we moved through 2Q, it become apparent that consumption growth, while remaining healthily positive, would not accelerate sequentially.  In part, this was not unexpected. 


Fiscal policy impacts generally hit on some short lag and the 1Q13 comparison was artificially difficult as consumer spending in 1Q benefited from the special dividend deluge and compensation pull-forward that occurred in December 2012 ahead of impending fiscal cliff related tax law changes. 


With the savings rate rising in 2Q and disposable personal income growth largely flat, divining the slope of sequential consumption growth just became simple math. 


Further, with federal employment growth running at approx -2% YoY and furloughs for ~700K+ federal employees beginning in July – which, in tandem, equates to ~7% reduction in income for ~2% of the workforce – upside to disposable income growth would likely be constrained in 3Q13 as well. 


Would a modest deceleration in consumption matter from a market perspective? – becomes the simple, but nontrivial investment question. 


As we highlighted yesterday, when re-evaluating positioning, it’s often helpful to start by detaching yourself from the myopia of trying to contextualize every market tick and, from a broader perspective, remember how this whole reflexive economic thing works.  Archetypically,


Rising spending drives income and employment higher which, in turn, drives consumption and confidence higher in a virtuous, self-reinforcing cycle.  Credit serves to amplify the cycle with credit expansion following pro-cyclically as loan demand and creditworthiness both increase alongside rising incomes and higher household net wealth. 


In short, if the TREND slope of improvement across the balance of key macro drivers (employment, consumption, credit, confidence) remains positive, and if the forward research view and risk management signals are still aligned, the path of least market resistance and the highest probability call is to stick with the TREND  - particularly if you don’t have a discrete catalyst for a reversal. 


So, how are the aforementioned macro metrics #TRENDing?


Labor market trends remain positive with Initial Claims continuing to register accelerating improvement while employment growth as measured by the BLS’s Establishment and Household Survey’s both remain positive. 


Confidence readings across the primary surveys continue to make new 5Y highs and are finally beginning to break out of their post recession channel.


Business and Residential Investment growth has accelerated in each of the last two quarters. 


On the credit side, banks are finally beginning to report positive loan growth, Commercial & Residential Real Estate loan demand continues to improve and credit standards across commercial and consumer loan categories continues to ease.


Consumption has shown a discrete acceleration, but faces some well advertised, nearer-term headwinds.  If labor market trends remain positive, does the market look past middling consumer spending growth over the next few months with an eye towards a diminishing fiscal drag and easy compares as we annualize the sequestration and the tax law changes in early 2014?  That’s an increasingly probable risk for the consensus #EOW bear crowd to manage.


Now, Is Congress a discrete negative catalyst?  As our Healthcare Sector Head, Tom Tobin would say; you can never underestimate congress’s ability to create a crisis so they can subsequently save us from it.  Congressional risk may rise, on the margin, but this iteration is likely to be mostly noise so long as the fundamental trends remain positive.


Is #RatesRising a catalyst?   We have a hundred page slide deck and a 60 min presentation on why we don’t think a return to interest rate normalcy is a threat to growth or market performance.  (ping if you’d like a copy)


Is today’s Employment Report a discrete catalyst?  Yes, but not really.  We don’t have any particular edge on the NFP number, but given the ongoing strength in the jobless claims data it’s more likely than not we print something close to consensus at 185K.


So, now that I’ve peppered you with bullish jabs for the last 800 words, I’ll remind you that we’re not bullish on everything at every price.   In fact, we moved to net neutral into yesterday’s close  (5 longs, 5 shorts) as almost everything pro-growth, domestic consumption (XLY, XLF, $USD) signaled immediate term overbought.  


But we’ll take our long exposure higher again on the signal so long as the TREND slope of improvement in the Macro data remains positive.  At present,….


“Your Friend, the Trend Remains”  - Broda


Our immediate-term Risk Ranges are now as follows:


UST 10yr 2.60-2.78%

SPX 1690-1712

Nikkei 14101-15095

VIX 11.96-13.74

USD 81.62-82.87

Gold 1251-1326


80o and sunny on tap for the weekend.  Enjoy. 


Christian B. Drake

Senior Analyst 


Picture Day - 10Y vs GDP  PCE  SPX


Picture Day - virtual portfolio 8 2


TODAY’S S&P 500 SET-UP – August 16, 2013

As we look at today's setup for the S&P 500, the range is 37 points or 0.44% downside to 1654 and 1.79% upside to 1691.                                       











  • YIELD CURVE: 2.43 from 2.42
  • VIX closed at 14.73 1 day percent change of 12.96%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Non-farm Productivity, 2Q prelim est 0.6%
  • 8:30am: Housing Starts, July, est. 900k (prior 836k)
  • 9:55am: UMich Consumer Sentiment, Aug. prelim., est. 85.2
  • 11am: Fed to purchase $2.75b-$3.5b debt in 2020-2023 sector
  • 1pm: Baker Hughes rig count


    • 8:30am: FDA’s Tobacco Products Scientific Advisory Cmte mtg to discuss risks, benefits of proposed modified risk tobacco products
    • 3pm: Energy Sec. Ernest Moniz meets with Brazilian counterparts Marco Antonio Raupp and Edson Lobão, Petrobras CEO Maria Das Gracas Foster in Brasilia


  • SAC said to refuse client push to return money before year-end
  • Chinese stocks roiled as Shanghai Composite trading surges
  • AMR seeks plan approval in shadow of US Airways merger lawsuit
  • Exxon, Talisman said to bid for Hess, Newfield’s Asian assets
  • Dell’s results underscore challenges facing plan for turnaround
  • Bard loses $2m verdict in vaginal-mesh implant trial
  • Sony said to win rights to Viacom for TV streaming service
  • Altria Group tentatively wins trial over false advertising suit
  • Forstmann Little seeking bids for IMG Worldwide: WSJ
  • Yahoo! Finance to be overhauled next by Mayer: N.Y. Post
  • Jackson Hole, FOMC, U.S. Home Sales, Ifo: Wk Ahead Aug. 17-24


    • No earnings



  • Copper Reaches 10-Week High on Buying to Close Out Bearish Bets
  • Gold Bulls Return After Slump Forces Paulson Cut: Commodities
  • Gold Trades Near Two-Month High as Investors Weigh Demand, Fed
  • Palm Oil Exports From Indonesia Seen Holding Near Two-Month Low
  • Crop Prices Pare Weekly Gains Amid Outlook for Rising Production
  • WTI Oil Trades Near Two-Week High as Egypt Unrest Fans Concern
  • Copper Premiums Near Record in China on Postponed Shipments
  • Palm Oil Gains as Much as 1.3% to 2,347 Ringgit/Metric Ton
  • Aluminum Producers Zero in on 3.2 Million MT of Capacity Cuts
  • Rubber Makes Second Weekly Gain on Weak Yen, Thai Farmer Support
  • Verdi Says Aug. 21 Strike to Block Rivers in Northwest Germany
  • Crude May Drop on Concern Fed Will Taper Stimulus, Survey Shows
  • SHFE Copper Stockpiles Climb From 11-Month Low as Aluminum Drops
  • Rebar Pares Third Weekly Gain on Concern Fed May Taper Stimulus



























The Hedgeye Macro Team













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Static Fear

“Fear is static that prevents me from hearing myself.”

-Samuel Butler


Scared yet? For parts of yesterday, I certainly was. I was buying into some really red stuff. And I felt alone. But I wasn’t.


It took me a lot longer (10-15 years) to not live in complete terror of my investment process than it did putting on a pair of skates. Imagine suiting up for every game in complete distrust of everything you have prepared for; imagine every time you were down by a few goals and were getting yelled at, you just left the game altogether (or Twitter)…


I am far too human to explain how and why I make all the mistakes that I make throughout my business building and market timing day. All I can tell you is that when I can’t hear myself – and I mean my process and my principles – I have no business leading anyone into making game time decisions.


Back to the Global Macro Grind


In yesterday’s Hedgeye Poll I asked whether the SP500’s correction from its all-time closing high (1709) would be:


A)     1%

B)      2%

C)      4%


I chose B. #Wrong again. (No one chose 4% this time, just fyi).


The correction is marked to market now at -2.8%. So now it’s probably time to freak right out.


Since the most differentiated call Hedgeye has had on the US side of growth in 2013 is employment #GrowthAccelerating, I also ended yesterday’s rant by emphasizing the importance of yesterday’s US weekly jobless claims report (pre-open).


If you would have personally handed me the report (that’s illegal) 3 hours before game time, I would have chose option A) and, having perfect “fundamental” economic data in hand, I would have been dead wrong on the market outcome.


In an intraday jobs note, our Senior USA Macro Analyst, Christian Drake, dissected the difference between NSA (yes, we are watching you) and SA:


1.    NSA:  Non-seasonally adjusted claims, our preferred read on the underlying labor market trend, made a new absolute low for the cycle at 280K -  marking its third consecutive sub-300K reading in a row and the lowest since September 2007.  On a YoY basis, initial claims accelerated to -11.7% from -9.9% the week prior with the 4-week rolling average improving 50bps to -8% from -7.5% the week prior.


2.    SA:  The seasonally adjusted, headline claims number printed its best number of the year, and best number since October 2007, at 320K.  This week’s data represents an accelerating YoY rate of improvement of  -12.8% YoY (vs -9% the week prior) with 4-wk rolling average down 4K WoW.   

In other words, the latest bear market crash call has now been edited to “the US employment data is too good.” Alrighty then.


Obviously, if you’ve had this right for the last 9 months, the legitimate “market top” call (that approximately 116 pundits have now tried to make on the US stock market YTD) was to call the all-time top in bonds in November of 2012.


Top calling is not a risk management process. Markets that eventually top:

  1. Start putting in a series of lower-all-time highs
  2. Then snap their immediate-term TRADE lines of support
  3. And finally crash through their long-term TAIL lines of support on accelerating volume

If you haven’t read that in a book – that’s because I made that up myself. Cool, eh!


What isn’t cool is trying to sell advertising or “thoughtfulness” based on one-way fear. With Twitter, this bearish style is basically the upside down version of what has becomes formally known as perma-bull. Zero Hedge minces no words on this. Sharp guy. Dead wrong on the market this year because perma-bear on US stocks doesn’t work any better than the bullish version does.


Perma-uncertainty? I’ll roll with that instead.


This way we can buy red and sell green; fade fear and book hope. It’s not for everyone. I know. But being everyone’s everything is no way to live anyway.


What to do from here? I’ve already made my move. I put up an intraday note titled “Buyem” yesterday at 1104AM EST. I think the actions (#timestamps) alongside the word were straightforward. The most important new Macro moves I made were:

  1. Buying the Nasdaq (QQQ)
  2. Buying British Equities (EWU)
  3. Shorting Fear (VXX)

For better or worse, I’m one of those players in this game who is maybe dense enough to just make calls. But, make no mistake, there is a tested and tried process behind every move I make. And I didn’t learn how to shoot on the #OldWall either – a long time ago, Gretzky taught me that you’ll miss 100% of the shots you don’t take.


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


UST 10yr 2.66-2.79%



VIX 12.95-15.22

USD 80.89-82.06

Gold 1


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Static Fear - COD


Static Fear - V. VP 816






Filipino tycoon Enrique Razon says he means to use his Manila venture - Solaire casino - as a springboard for expansion overseas.  Razon says he is interested in markets with established rules for gaming, such as Macau.  He expects the government to allow new companies into the gaming market in 2020, when gaming licences begin expiring.



DSEC indicated that visitor arrivals in package tours increased by 19.5% YoY to 790,996 in June 2013.  Visitors arrivals in package tours mainly came from Mainland China (622,977), with 216,690 coming from Guangdong Province, followed by those from Taiwan (44,918); Hong Kong (32,202) and the Republic of Korea (25,886). 
There were 99 hotels and guesthouses operating at the end of June 2013, providing 28,082 rooms, up by 15.7% YoY.  Guest rooms of 5-star hotels accounted for 66.5% of the total.
The average length of stay of guests held stable from a year earlier, at 1.3 nights. 


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • BYI beat the quarter ever so slightly but the quality was there.  Systems, BYI's highest valued cash flow stream, drove the beat.



  • BETTER:  Systems segment had an outstanding quarter with $72.9MM in revenues and a 79.1% gross margin.  BYI believes this will be the fastest growing segment in FY 2014.  BYI reiterated 70-75% margins and expects software and services % of mix to revert back to mid-30s. 
    • PREVIOUSLY:  "We are heading towards fiscal 2013 being a record Systems revenue year for us, beating the previous record of $218 million established in fiscal 2010 by a fair amount. We have every reason to believe fiscal 2014 will be even better."
    • [Software/hardware split] "I believe it was somewhere around 36% hardware, so not too dramatically different from the prior quarter and from the year-ago quarter. Looking into Q4, hardware might be a lower, slightly lower percentage of the overall total revenue; software might be a little bit higher...And that is reflected in the normal expectation of gross margin that we say, in the 70%s is the range our gross margin will normally be, give or take a couple of percentage points here and there."


  • SAME: 2Q gaming operations margins came in at 69.1% - within BYI's expected range.
  • PREVIOUSLY:  "The margin on Gaming Operations was 71%, within our expected range of 68% to 73%."


  • SAME:  38% growth in the installed base of WAP games.  BYI expects WAP install base to grow in FY 2014 but not at the pace of FY 2013.
  • PREVIOUSLY:  "All things considered, we expect to see the rate of WAP unit increases to pick up during the upcoming quarters...We expect the flow of WAP and premium game titles to continue in a steady well-planned and controlled fashion."


  • SAME:  Will be completed in 1Q 2014. BYI received $2.4MM in common shares.  This share count will not increase significantly due to the recent increase in weighted-average share price.
  • PREVIOUSLY:  "Just the subject alone that since November 2007, including the ASR we're doing now, we bought back $1 billion. No change in our capital allocation strategy. We think that using an ASR to basically pull in about 7.5% of our total market cap is a pretty efficient means to do that. We do have some additional powder available even during the period of the ASR, should we choose to put that to work." 


  • WORSE:  BYI thinks they might have lost a couple of % points in ship share due to disciplined pricing.
  • PREVIOUSLY:  "When I think about average order size, it's gone up a touch. I would say that's more a result of some corporate buying."


  • BETTER:  BYI  sold 1,179 international unit in F4Q, flat YoY but easily its best quarter of the year.  Buying activity picked up.  The company expects international unit sales to pick up reasonably significantly in FY 2014 from the 3,500 level in FY 2013.
    • "Because regardless of whether their replacement numbers increase or not, one thing is certain, we are very under-represented in those floors. So we have a lot of market share growth opportunities there, even if the overall replacement trends don't pick up. So we have a long way to go before we are worried about the overall macro (international) trends."
    • "Some of the new game content we've been working on for the past year specifically targeted towards various international regions will be released soon and should help grow this portion of our business during fiscal 2014 and beyond."


  • SAME:  BYI is live on 17 different sites in Europe
  • PREVIOUSLY:  "We also made very good progress on the remote gaming server front, going live with eight Bally titles on multiple European portals this past week. We expect over a dozen such portals to launch Bally's world-class game content by the end of this fiscal year."


  • WORSE:  NASCAR has not had the mass market appeal that Michael Jackson did.
  • PREVIOUSLY:  "And in terms of our expectations of NASCAR, yes, it is along the lines of Michael Jackson and GREASE, if not better."


  • SAME:  ASPs of new gaming devices decreased 6% to $16,224 per unit from $17,182 a year ago, primarily as a result of a higher mix of lower-ASP VLT and VGT units sold in the quarter.  Ex Illinois/Canada, ASPs was flat QoQ.  Net net, BYI expects ASPs in FY2014 to be up a little bit. 
  • PREVIOUSLY:  "If you remove the VGTs and the VLTs our pricing is along the same lines as it has been for the last couple of quarters. In fact, pretty close to the highest levels it's been. We remain very disciplined with pricing."


  • SAME:  BYI shipped 200 VLT units to Canada in FQ4.
  • PREVIOUSLY:  "Canada and South Africa, I mean, it's a 2014 story. It's a 2015 story. It could even beyond 2015 be a story. There's still more to come on Canada, more jurisdictions that I think ultimately will come to market."

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