Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

Crude oil prices reach 18-month high (via WashPost)
China Sets November for Key Economic Meeting for Communist Party (via Bloomberg)
Baghdad hit by new wave of deadly bomb attacks (via BBC)


Morning Reads on Our Radar Screen - oil11


Todd Jordan – Gaming

Trump Taj Mahal To Open Strip Club (via AP)

Howard Penney – Restaurants


Starbucks Won't Cut Worker Hours, Benefits Ahead Of Obamacare (via HuffPost)

Kevin Kaiser – Energy

Syria sends oil to 2-year high, $150 spike feared (via RT)
No Particular Place to Go? What Will Happen to the Tsunami of Marcellus/Utica Ethane Production? (via RBN Energy)

Jonathan Casteleyn – Financials

SEC’s White to Meet With Exchanges on Nasdaq Trading Halt (via Bloomberg)
Putin Filmmaker Says Lonely Leader Scared to Loosen Grip (via Bloomberg)

Brian McGough – Retail

REI Close to Naming Key Coach Executive Stritzke As New CEO (via WSJ)

Jay Van Sciver – Industrials

Joy Global warns on revenue as coal glut hits orders (via Reuters)

Freak Out?

Client Talking Points


If you really feel the need to freak-out about something, freak out about rip roaring oil prices. That's your Huckleberry. Higher oil prices would obviously slow what’s been a sequential doubling of US Consumption Growth (2H12 to 1H13). Oil had already been signaling bullish above our TAIL risk (breakout) line of $108.11. So it was in motion, but up at $115.42 this morning this is a real bell ringer. We're watching this very closely.


Our call on #RatesRising is all about levels. The immediate-term TRADE line of support is 2.69%. Then there's a ton of TREND support below that at 2.44%. I re-shorted the long bond yesterday. If you’re going to do that, higher-lows in bond yields is where I start. US growth stocks trade with a positive correlation to rates.


So how does that -1.6% drop look within the context of the Top-3 drops since April? It ranks as #3 (June 20th was -2.5% and April 15th was -2.3%). You haven’t had many opportunities to buy US growth stocks in 2013. This one is a shallower correction (on less volume) and S&P 500 TREND support is literally right where it closed yesterday. It's time to make some decisions.

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


II Bull/Bear Spread just tanked to a 6mth low - uber bullish signal. Only 38.1% in the survey admit to being bullish; that's a fresh YTD low. @KeithMcCullough


I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold. -Ray Dalio


The six biggest U.S. banks, led by JPMorgan and Bank of America, have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years. That’s the amount allotted to lawyers and litigation, as well as for settling claims about shoddy mortgages and foreclosures. The sum tops the banks’ combined profit last year. (Bloomberg)

August 28, 2013

August 28, 2013 - dtr



August 28, 2013 - 10yr

August 28, 2013 - spx

August 28, 2013 - dax

August 28, 2013 - dxy

August 28, 2013 - euro

August 28, 2013 - oil



August 28, 2013 - eem

August 28, 2013 - vix

August 28, 2013 - yen

August 28, 2013 - natgas
August 28, 2013 - gold

August 28, 2013 - copper

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Volatility Lives!

This note was originally published at 8am on August 14, 2013 for Hedgeye subscribers.

“Does man live from inside out or from outside in?”

-Erich Maria Remarque


I just got back from Thunder Bay and have that quote underlined in a post WWI German inflation novel that one of our clients in London gave me – The Black Obelisk. When I read it, I immediately thought of Global Macro investing legend, Ray Dalio.


Dalio’s signature quote about risk management is also a question: “What is the truth?” And whether it’s his, pardon the pun, All-Weather Fund’s issues, or performance problems most of us have faced over the course of our careers, there’s one thing that tends to answer all the questions we never knew we should have asked – it’s called volatility.


The number one thing that has created draw-down risk in every major hedge fund strategy since the beginning of time has been, and will continue to be, volatility. If your strategy assumes the wrong volatility parameters, you are assuming risks that you do not understand. On a percentage basis, did the biggest q/q change in 50 years in Treasury yields matter? Big time.


Back to the Global Macro Grind


Slides 15, 16 and 17 of our current #RatesRising Global Macro Theme deck outlined how massive outflows from Fixed Income related securities plays out:


1.   Quantitative Signal (Slide 15) – we show what we coined “The Waterfall” of rate risk as 10yr US Treasury Yields broke out across all three of our core risk management durations (TRADE, TREND, and TAIL – with the TAIL risk line = 1.92%)


2.   Causal Factor (Slide 16) – we show how unconventional Fed policy exacerbated a bond bubble (Fed Balance Sheet vs 10yr Yield over the last 10 years = R-square of 0.795)


3.   Correlation Factor (Slide 17) – we show that on a % basis, the most recent rate of change in the 10 year US Treasury Yield (quarter-over-quarter) was the largest in the last 50 years


Call us lucky or call us right. The truth is that we cut our asset allocation to Fixed Income to 0% for the aforementioned reasons alongside many more that were driving a regime change in terms of how our model values growth versus slow growth allocations.


When we were bearish on growth (until November of 2012) we were long US Treasuries; when our views on the slope of growth changed from slowing to stabilizing, we started to move to the dark side (in bonds).


#Process review:

  1. We get the market signal
  2. We do the long-cycle research to find asymmetric (phase change) risks
  3. We wait for the market to tell us when causal factors (expectations changes) drive correlation risk

This is no victory lap. I just feel that it’s important to show people what it is that we do in a transparent, open, and accountable forum of debate. The only all-weather protection against volatility ripping is getting out, before it rips.


Throughout the last 9 months (as US growth went from slowing to stabilizing to accelerating) markets have provided us plenty of opportunity to get into growth related asset classes and out of slow growth ones. August to-date is no different:


1.   Utilities (XLU) are the most overvalued slice of the slow-growth equity pie (with hyper-overvalued securities like MLPs within this Sector Style Risk). XLU is down -1.38% for August to-date (versus SPY +0.5%)


2.   Tech (XLK) and Basic Materials (XLB) are up the most for August to-date at +2.11% and +2.45% respectively. Both are traditionally considered “growth” sectors but for very different reasons. AAPL is not CAT.


There’s a lot of risk in assuming that long-cycle cyclicals (like mining related stocks) are in the right spot from a “growth” investor’s perspective. Then there’s GARP (“growth at a reasonable price”) where mining stocks might look “cheap” too. Just don’t forget that the Mining Capex Cycle was a decade long bubble. The risk here is grounded in the volatility of the underlying commodities.


Where could we be wrong? Our research on something like Caterpillar (CAT) has been bearish, but now the market signal is stress testing our conviction in maintaining that position. If CAT were to close above my long-term TAIL risk line of $88.67 and hold that level on some real volume, my risk management process stops me out of the position.


Do I live my market life from looking inside our portfolio of ideas or from the outside looking in? The truth is that I do both. It’s a learning process. Whenever I ignore the outside, top-down, macro market signals, I will be reminded that volatility lives on the other side of my position’s underlying assumptions. And not in a good way.


Our immediate-term Risk Ranges are now:


UST 10yr 2.64-2.75%

SPX 1682-1714

VIX 11.61-13.68

USD 80.92-82.18  

Gold 1276-1339

Copper 3.23-3.39


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Volatility Lives! - Utilities Yield Spread


Volatility Lives! - z. vp






LVS has agreed to pay $47.4 million after failing to flag millions of dollars in money transfers made by a gambler linked to drug trafficking.  In return, the U.S. Attorney's Office in Los Angeles will not seek an indictment against LVS.  The deal, finalized late Monday, also brings the government's criminal investigation to a close, but requires LVS to boost its efforts to monitor suspicious financial transactions for the next two years.


The investigation centered on Chinese-Mexican businessman Zhenli Ye Gon, which prosecutors describe as a high-stakes player who gambled at several major casinos, including the Venetian between 2004 and 2007.  In that period, Ye Gon lost more than $125 million at multiple casinos, including $84 million at the Venetian, according to the settlement agreement filed by prosecutors.  Ye Gon's Venetian losses also included $36.5 million in credit that the casino advanced to him and that was later written off as bad debt.


Investigators concluded that LVS failed to comply with a federal law requiring casinos report suspicious financial transactions involving customers.



SJM Holdings executive director Angela Leong said that the group has always abided by the government policy and their slot machines parlors in residential areas will be removed gradually.  Leong said that the slot parlor in Canidrome will be moved in November.  She stressed that the company will relocate gaming facilities affecting citizens, but the evacuation cannot be accomplished in one go as the company needs time to make changes on the operations side, such as human resources issues.



Gongbei immigration recorded a historical high at 320,000 border crossings on a single day yesterday with summer holiday coming to an end soon, and Hengqin port also recorded a daily high of over 220,000 border crossing.  Gongbei checkpoint said that since last month, it has eight consecutive weekends that break the single-day traffic 300,000 record.



In a surprise twist, Vietnam’s top leadership has given the green light for locals to enter one of the country’s casinos for a trial period.  The Communist Party’s decision-making Politburo has allowed Vietnamese meeting certain criteria to gamble in a casino to be built in the Van Don Economic Zone in Quang Ninh Province bordering China, deputy speaker of the National Assembly, Nguyen Thi Kim Ngan, said at a meeting of the house Standing Committee held August 15 to debate a bill on betting and gambling.  But since last year the government has been saying that this issue is off the table, even enacting a law last month to slap fines of up to VND200 million ($9,500) on casinos who let locals in.


Minister of Finance Dinh Tien Dung maintained that position at the August 15 meeting, saying the ban needs to be in place to limit the impact of gambling on social safety and stability. But, given the entrenched gambling culture in the country, the ban on entering casinos at home sends droves of Vietnamese across the border into Cambodia to gamble in casinos there.


It is not clear, however, when the full house will debate the bill on betting and gambling and approve it.  Of the licensed casinos, four are in the north – one each in Lao Cai and Quang Ninh provinces bordering China – enabling Vietnam to pull in increasingly affluent Chinese gamblers, experts say.  But they otherwise remain skeptical about the locations of the northern casinos, which they say are not convenient for international visitors.


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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