#RatesRising: Rinse and Repeat

In case you were at the beach last week and missed it, we'll fill you in on the earth-shattering news: The 10-year US Treasury yield? It corrected a whopping 4 basis points.




For the record, the 10-year is making yet another higher-low today trading back to 2.85%. There's no resistance up to 2.93%. Our Hedgeye immediate-term risk range is 2.71-2.93%.


Yes. We are still bearish on bonds. Emphatically. It's Hedgeye's #1 Q3 Macro Theme for good reason.


#RatesRising: Rinse and Repeat - 10Y


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Takeaway: We believe MCD's decision to sell its Mighty Wings this fall could potentially be disastrous for the company.

This note was originally published August 27, 2013 at 15:40 in Restaurants

We’re bearish on MCD, so one could argue we have a bearish bias, but we remain present and well-grounded in reality.  Make no mistake, MCD has a top line issue and not a cyclical one.  That said, we don’t believe management is willing to acknowledge the secular issues the company faces and new products like Mighty Wings seem like a desperate attempt to hide from reality.


We think MCD’s decision to sell its Mighty Wings this fall could potentially be disastrous for the company.  We have three main issues with the current MCD menu strategy:

  1. Mighty Wings will not enhance the McDonald’s brand (Premium Wraps have not helped either)!
  2. Both new products (Mighty Wings and Premium Wraps) have slow service times.
  3. Adding new products to an already complex menu is the wrong direction for the company to go.

Selling chicken wings may temporarily boost sales during the LTO, but it could end up doing more harm than good.  Asking the currently disgruntled franchisee community to prepare yet another new product, with a slower than normal preparation time, will only add to the service issues the company is already experiencing.  In our view, this is likely to lead to the further deterioration of the MCD brand.


McDonald’s franchisees that sold wings in the test markets have suggested that the above average cooking time for the new menu item was an impediment to their service times.  If this is indeed true, we expect drive through times to slow significantly.  What it ultimately comes down to is the margin on Mighty Wings relative to other products on the menu.  If wings generate a lower margin than a core sandwich and slow service time, then MCD could be headed for a 4Q13 disaster.


This is all too reminiscent of the period from 1998-2002, when we witnessed the sad decline of a mismanaged McDonald’s brand.  During that time, the company was focused on unit growth and cost reduction rather than driving high margin, top line sales.  As the image of the brand began deteriorating, management failed to invest in the brand and customer experience.  Rather, they turned to monthly promotional tactics to in order to drive short-term sales at the expense of brand equity and margins.  This strategy did not end well for either the company or investors and we’d be surprised if this time was any different.







Howard Penney

Managing Director



Mass up huge, low hold on VIP



Here are some observations for August.  We will follow up with a more detailed analysis.




  • GGR increased 18% YoY
  • Market hold (including direct play) was actually a little low:  2.89% vs trailing 24-mth avg of 2.98%
  • August GGR growth hold-adjusted in both periods:  +23.1%
  • Mass revenue grew a whopping 44%, the highest rate since January 2012
  • Lower hold drove VIP revenue growth of only 8% but junket volume increased 16% 


  • VIP hold was in-line with last year and near normal
  • GGR and Mass YoY growth of 41% and 72%, respectively, led the market
  • VIP and slot revenue growth also led the market
  • Market share of 22.3% almost met July’s big jump to 22.5% - increase from June was all volume driven


  • Hold was meaningfully higher than normal but below last August
  • Mass revenue grew only 3% but Junket volume growth was strong at +16%
  • Market share jumped sequentially due to VIP volume and high hold
  • Mass share fell to 6.3%, tying its lowest ever


  • MPEL held high on VIP and well above last year's
  • GGR and Mass growth of 30% and 69%, respectively - trailed only LVS in the market
  • VIP revenue growth was also the 2nd highest due to high hold
  • Junket volume only grew 2% and remains a concern for us – Junket share fell nearly to a 6 year low
  • Meanwhile, Mass share hit an all-time high at 14.1%


  • Hold was normal but well below August 2012's
  • Still, GGR grew 17%, in-line with the market
  • Mass growth trailed the market but Junket volume led the market


  • Held well below last year which caused a drop of 1% in GGR
  • Mass grew exactly in-line with market but VIP revenue fell 13%
  • Junket volume growth of only 11% also trailed the market
  • GGR market share fell to its lowest level in 9 months
  • Mass revenue share also fell below trend


  • Hold was below normal and last August's
  • Mass revenue growth of 24% was SJM’s highest in a year and a half but still trailed the market
  • GGR market share fell to its 2nd lowest level ever at 23.9%


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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

Dollar hits over one-month highs (via Reuters)

Manufacturing ISM Rises To 55.7, Beats Expectations, Highest Since April 2011 (via Zero Hedge)

Hangar Haggling With Ballmer Girds Twitter’s CFO for IPO (via Bloomberg)

Syria crisis: UN says more than 2m have fled (via BBC)


Morning Reads on Our Radar Screen - doll999


Daryl Jones – Macro

Nobody Watches Business TV Anymore (via New York)


Josh Steiner – Financials

August Home Prices rose +12.3% Y/Y  (via CoreLogic)

Inventory crunch easing up for home buyers (via Sun Sentinel)


Jonathan Casteleyn – Financials

PIMCO highlights its stock funds: Expect continued weakness in bonds  (via Twitter)


Matt Hedrick – Macro

SNB Franc Shield Reaps Reward of Growth Defying Euro Area (via Bloomberg)


Kevin Kaiser – Energy

Decades of Ruptures From Defect Show Perils of Old Pipe (via Bloomberg)

Brent Crude Climbs On Missile Test Report (via WSJ)


Howard Penney – Restaurants

Starbucks Pastor-to-Be Shows Shift in U.S. Part-Time Job Market (via BusinessWeek)

Bullish Growth: SP500 Levels, Refreshed

Takeaway: Does US #GrowthAccelerating data support a stock market holding its TREND line? Today, the market’s answer to that is yes.



I finally caught a post-summer beach wave to the upside here – and for the right reasons; summer is over, and US growth expectations continue to make a comeback.


Post the best NSA rolling Jobless Claims print we have seen all year (last Thursday = -10.6% y/y), and a solid PMI Friday, we just got a barn burner of a New Orders print out of the ISM (63.2! for AUG). Good looking end to the world there.


Additionally, across our core risk management durations here are the lines that matter to me most right now:


  1. Immediate-term TRADE resistance = 1661
  2. Intermediate-term TREND support = 1630


So, does US #GrowthAccelerating data support a stock market holding its TREND line? Today, the market’s answer to that is yes. And if you look at the growthier components of the stock market (QQQ), the answer is a resounding yes.


The new bear case is going to be that they were so wrong on growth’s slope change in 2013 that its really bearish now (from a much higher price).


Meanwhile, the real bear case to be made in 2013 was in bonds. #RatesRising for the right reasons.



Keith R. McCullough
Chief Executive Officer


Bullish Growth: SP500 Levels, Refreshed - SPX

European Banking Monitor: Calm Seas

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 - European financial swaps were wider almost across the board last week, though only by a small amount. The average and median widening was 3 and 5 bps, respectively. Tighteners included Sberbank and Greek banks.


European Banking Monitor: Calm Seas - zz. banks


Sovereign CDS – Italy, Spain and Portugal all widened on the week, by 6, 7 and 41 bps, respectively. Ireland and Japan were also wider by 6 and 2 bps, respectively. The US, Germany and France were all unchanged.


European Banking Monitor: Calm Seas - zz. sov1


European Banking Monitor: Calm Seas - zz. sov2


European Banking Monitor: Calm Seas - zz. sov3


Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week 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: Calm Seas - zz. euribor


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