Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

Treasury yields mark new two-year highs (via MarketWatch)

Egyptian police killed in Sinai ambush at Rafah (via BBC)

Deadline looms for creditors to object to Detroit bankruptcy (via Reuters)

Scottish Independence Case Clouded by Oil Industry Growth Drag (via Bloomberg)

PGA’s Dustin Johnson engaged to Gretzky (via ESPN)


Morning Reads on Our Radar Screen - earth1


Daryl Jones – Macro

Repo Market Decline Raises Alarm as Regulation Strains Debt (via Bloomberg)

Caroline Baum's View on Money (via Bloomberg)


Howard Penney – Restaurants

Restaurants ready for football preseason (via Nation’s Restaurant News)

A Record Number Of Millennials Are Living at Home, But It’s Not What It Looks Like (via PolicyMic)


Jonathan Casteleyn – Financials

Obama Focuses on Risk of New Bubble Undermining Broad Recovery (JC note: Trouble in the U.S. bond market is the next big trade via Bloomberg)

Last Bernanke Years Shows No Sign of Buyer’s Remorse (JC note: Bernanke needs to present a plan to unwind the Fed's balance sheet - it started at $900 BB and now is at $3.6 TT via Bloomberg)


Matt Hedrick - Macro

Nestle’s Sales Slowdown Seen Leading to Fewer Brands (via Bloomberg)


Tom Tobin – Healthcare

Reform Update: GOP-led states raise security concerns over insurance exchanges (via


Macau posted another blockbuster week despite the typhoon that hit on Wednesday.  Although we think some operators played lucky this past week, volumes were still strong.  We are raising our full month projection for August to YoY growth of 16-20%, up from 14-18%.  Daily table revenue averaged HK$996 million which was actually flat with last year but up 13% over July’s strong performance.


In terms of market share, LVS, MGM, and MPEL remain above trend so far in August.  We like all three of those stocks.





European Banking Monitor: Taking A Short-Term Breather

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - British, Italian and German banks all widened last week. Sberbank of Russia widened another 6 bps last week to 239 bps. 


European Banking Monitor: Taking A Short-Term Breather - w. banks


Sovereign CDS – Italy and Spain tightened last week by 6 and 7 bps, respectively, while France and Japan both widened by 2 bps. The rest of the world's major markets were unchanged. 


European Banking Monitor: Taking A Short-Term Breather - w. sov1


European Banking Monitor: Taking A Short-Term Breather - w.sov2


European Banking Monitor: Taking A Short-Term Breather - w.sov3


Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Taking A Short-Term Breather - w.euribor


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 80.43%
  • SHORT SIGNALS 78.34%


Client Talking Points


Game on. After a big +25 basis point week-over-week move to 2.83% last week, the 10-year yield is punching another new high this August morning now up at 2.85%. It's finally within a beep of an immediate-term TRADE overbought signal. Apparently, at +36 basis points month-over-month, the US Jobless Claims data is now evidently too good! 


Yen (vs USD) is still a touch weaker this morning after dropping -1.3% last week. This is a good thing, but it needs to continue in order to keep the positive Japanese and US Equity correlation TRENDs in play. The USD/YEN risk range is 97.22 - 98.16. That is relatively tight and trade-able, so it’s not an all-or-nothing trade like many think everything macro still has to be.


Yup. India continues to get crushed. Why? A) Growth Slowing and B) Inflation Accelerating (driven by the weakening Rupee). The Sensex was down another -2.1% this morning to -5.1% year-to-date. Folks, this is why we call it #AsianContagion. Pervasive Asian currency weakness is not good for countries who catch that cold.

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


Top Global Equity Market YTD (b/c they burned their currency) = Venezuela +173% - Worst Global Equity Market YTD (b/c of mining exposure) = Peru -20% @KeithMcCullough


"There are no shortcuts to any place worth going" - Helen Keller


The S&P 500 was down -2.1% last week (still up +16.1% year-to-date); Russell was down -2.3% (still up +20.6% year-to-date).

Market Generals

This note was originally published at 8am on August 05, 2013 for Hedgeye subscribers.

“In general, our Generals were out generalled.”

-John Adams


While that’s what John Adams wrote to his wife, Abigail, in October of 1776, it wasn’t an entirely accurate summary of what happened. The planned escape of American forces in October was based on a British battle lost, but it also helped them win the war.


Per Joseph Ellis in Revolutionary Summer, on September 5th, 1776, American General, Nathanael Greene, advised George Washington that a “retreat is absolutely necessary, and that the honor and interest of America require it.” (Ellis, page 135)


Although it wasn’t Washington’s style to retreat, Greene was right in advising the Continental Army to do what the Continental Congress probably wouldn’t understand. Out generalling the conventional wisdom of politicians requires flexible leadership.


Back to the Global Macro Grind


With the US stock market closing at yet another all-time high on Friday (SP500 +19.9% YTD), I’m advising the US Government to retreat from Quantitative Easing and let free-market prices start to clear.


While Bernanke has the Congress right freaked-out about the idea of interest #RatesRising, it’s the only way out of the long-term slow-growth problem they have perpetuated under both Bush and Obama economic policy making regimes.


Let the US Dollar strengthen and let US interest rates rise and you’ll get two big things:


1.       Continued #CommodityDeflation

2.       #Debt Deflation


Deflation isn’t a bad word inasmuch as retreat isn’t – so don’t let your local Keynesian of the Princetonian Econ 101 Regimen sucker you into thinking so. Inflations have caused more depressions in the last 180 years than deflations have (*Atkeson/Kehoe study).


What’s better, filling up your gas tank 10x for $100/pop, or filling it up 10x for $50? Send that brain teaser to someone on team Bernanke that takes a tax payer funded car service to work.


Tapering expectations have already:

  1. Raised the value of American Purchasing Power (US Dollar) by +3% YTD
  2. Deflated the value of Commodities (CRB Index, 19 commodities) by -4% YTD
  3. Crushed the net long futures and options spec positions in everything but Crude Oil contracts

If and when the debate moves from tapering to tightening, I think that we’ll finally get after some deflation at the pump. But we’re nowhere near having an economic General in the Obama Administration stand up for the little guy on this front (yet).


Looking at last week’s CFTC futures and options activity, a #StrongDollar #RatesRising week had the following impact:

  1. Total CFTC net long commodities position dropped -15% wk-over-wk
  2. Gold’s net long position fell for the 1st week in 5, down -7% wk-over-wk to +65,517 contracts
  3. Crude Oil’s net long position fell for the 1st week since late June, -5% wk-over-wk, to +318,819

To put that +318,819 net long position in Crude Oil in context, that’s 1-week removed from its all-time high. If you’re telling me Obama and Bernanke couldn’t smoke the oil price via monetary policy, I’ll buy you dinner (on them) for life.


#CommodityDeflation has helped drive the core of US Consumption Growth for the last 2 quarters, but that’s going to be less of a tailwind if Oil prices continue to trend higher. Last week, Brent Oil was up +1.7% - and it’s up another +0.3% this morning to $109.30/barrel. Our long-term TAIL risk line (to the upside) for Oil = $107.71/barrel.


Put another way, after getting smoked by Bernanke’s Policies To Inflate for the last 6 years, the US Consumer just got some purchasing power back and won a few quarterly battles. But if we don’t back off (taper) and eventually tighten, it’ll be your every day American who loses the inflation war.


Our immediate-term Risk Ranges are now:


UST 10yr 2.54-2.72%

SPX 1692-1712

VIX 11.72-13.85

USD 81.53-82.48

Brent Oil 107.99-109.67

Gold 1294-1326


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Market Generals - Chart of the Day


Market Generals - Virtual Portfolio






Aristocrat Leisure will fight hard to fend off new competition and maintain its powerful market share in Macau as up to 8,000 new gaming machines are installed in casinos in the booming Chinese gaming province over the next five years.

Aristocrat's regional general manager based in Macau, David Punter, said that the group's goal was to maintain its current market share of 50-60% of slot machines in Macau's casinos as the number of machines doubled between now and 2018.  "What you will see over the next five years on Cotai is a doubling in the number of electronic gaming machines for that area of Macau for both slot machines and e-table games. That means 6,000 to 8,000 new machines...Punter said.  Aristocrat's market share at the Wynn Macau is as high as 70%.


But competition for Aristocrat is increasing. Another Australian gaming company in Macau controlled by billionaire pokies king Len Ainsworth, of Ainsworth Gaming Technology, has snared 10% of the growing slot machine market with its Australian-built machines.  Ainsworth said, "We are selling steadily up there and we are gaining market share, which is satisfactory to us. Aristocrat has the majority of the business but we are biting into that here and there. We are gaining because of the quality of our equipment and we'll continue to gain."


Punter said that while slot machines made up only 5% of gaming revenues in Macau, they accounted for up to 20% of earnings. "The growth is coming because of the profitability of the slot machines. They are less labour-intensive and probably less maintenance," he said.



Total spending (excluding gaming expenses) of visitors amounted to MOP13.9 billion in the second quarter of 2013, a notable increase of 23% in comparison with MOP11.4 billion in the second quarter of 2012. 
In the second quarter of 2013, per-capita spending by visitors was MOP1,973, up by 15% year-on-year. Mainland visitors had the highest per-capita spending of MOP2,511, and spending of those travelling under the Individual Visit Scheme (IVS) reached MOP2,819; besides, per-capita spending of visitors from Singapore amounted to MOP1,719. 
Analysed by consumption structure, visitors spent mostly on Shopping (49%), Accommodation (24%) and Food & Beverage (19%). 


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