Breaking Bad Rates

“If personality is an unbroken series of successful gestures, then there was something gorgeous about him, some heightened sensitivity to the promise of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.”

- F. Scott Fitzgerald, “The Great Gatsby”


Sunday is the day that many of us spend the evening relaxing in front of the T.V. and, if the advertisers are lucky, watching live sports.  If the advertisers are not so lucky, we are likely catching up on TIVOed or Netflixed T.V. shows (that lack live and targeted commercials).  A fan favorite around the Hedgeye office is Breaking Bad, which coincidentally was awarded the Emmy for Best Drama last night.


For those that haven’t watched this Emmy award winning T.V. show, it is about a high school science teacher who, after discovering he has cancer, turns to cooking methamphetamine to pay for his cancer treatments and provide a level of comfort for his family.  No surprise, the protagonist Walter White begins to struggle with returning back to the somewhat simple life of being a high school teacher and ultimately decides to create his own methamphetamine empire.


As Walt pursues broadening his drug empire, he becomes increasingly morally corrupt and as the title insinuates, truly begins to “break” bad and make decisions that benefit his short-term gain at the expense of almost all else.  While it would be a stretch to compare the FOMC to drug dealers, even if much of the country is addicted to low interest rates, in the Chart of the Day we’ve taken a look at the 10-year yield over the last three weeks and titled it, “Breaking Bad Rates.”


To be fair, lower interest rates aren’t all bad.  For those of us who want to refinance our mortgage or buy a new home, it is actually quite a good thing.  From a more macro perspective though, loose monetary policy leads to a weak dollar, which sustains high commodity costs.  Low interest rates also incentive more speculative type investing, which create amplified business cycles.


As the market showed us last week, even if Chairman Bernanke is not suffering from the same internal conflicts as Walter White, the world is definitely addicted to the cheap American dollars that his policy has propagated.   As Bernanke said in his press conference last week:


“We want to be sure that the economy has adequate support until we can be comfortable that it is, in fact, growing the way we want it to be growing.”


Rationally, if the Chairman of the Federal Reserve comes out and questions the underlying strength of the economy, one would expect more economically sensitive asset classes to sell off, or at least be weak.  That, though, is not the reality in our current centrally planned world in which addiction to low interest rates is spreading faster than Walter White’s blue meth across New Mexico.


Back to the global macro grind . . .


Speaking of breaking economic data, the news out of China this weekend is largely breaking to the positive.  Septembers HSBC flash purchasing managers index came in at a better than expected and expansionary 51.2.  This was also a sequential improvement from August of 50.1 and the highest reading since March.  As a result, the Shanghai Composite is up more than 1.3% this morning leading most of the major Asian indices.  Imagine that a stock market that actually trades on the underlying growth prospects of its economy!


Our quantitative model, actually front ran this positive data point, which my colleague Darius Dale published in a note on September 6th titled, “China Goes Bullish Trend the Only Positive Data Point That Actually Matters.”  At the time, we were struggling with the myriad of data points out of China, which were still more negative than positive, but the equity market, being the sneaking leading indicator it is, ultimately signaled to us more good news was to come.  And so it has.


The set up for China gets increasingly interesting if the HSBC survey is correct and Chinese GDP is set to accelerate sequentially and exceed current consensus estimates.  While we are not quite ready to get aggressive on the long side of China just yet, we do like those economies with accelerating growth and benign inflation.   In fact, we’d call that breaking good and at a minimum we would not short China.


To be fair, none of the structural headwinds that we’ve been researching and writing about have gone away, but on the margin things do appear to be getting less bad at a time when the majority remains overly cautious on China.  According to a Bloomberg poll from last week, which surveys Bloomberg Professional users, more than 32% cited a slowing China as the #1 risk to the global economy and only 17% indicated they believe that China’s economic outlook is improving.   Didn’t know the consensus view on China? Now you know.


Speaking of breaking good, the economic data out of Europe this morning is also largely positive.   While the Eurozone flash manufacturing PMI edged down to 51.1 in September from 51.4 in August, both the Services and Composite PMI hit 27-month highs.  Now this is just one data series, but the potential for a sustained European recovery is a theme that you will likely see us highlight more and more often heading into year-end.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr 2.58-2.81%



USD 80.16-81.11

Euro 1.33-1.35

Gold 1


Good luck out there this week.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Breaking Bad Rates - Chart of the Day


Breaking Bad Rates - Virtual Portfolio

Congress, Save Us!

This note was originally published at 8am on September 09, 2013 for Hedgeye subscribers.

“For God’s sake declare the colonies independent at once, and save us from ruin.”

-John Page


That’s what Page said to Thomas Jefferson in the Spring of 1776. By September (on this day in fact), the Continental Congress officially named its union of independent states, the Unites States.


And the rest is history (sort of). We’re a long way from Patrick Henry’s “give me liberty, or give me death” speech from Virginia (March of 1775).  At this point, Congress is the butt of most jokes. But in these Unites States, anything can happen – there’s always a chance!


Imagine Congress saves us from seeing $6 at the pump? My simpleton read-through of Obama’s QA from St Petersburg last week is that he’ll respect Congress’ wishes if he can’t sell action in Syria. A no-action vote could save the American Consumer from ruin.


Back to the Global Macro Grind


There is no greater threat to this country than empowering both the almighty petro-dollar and/or the conflicted and compromised overlords who get paid by it. One of the most misunderstood realities of the 2008 crisis was $150 oil. Never forget that.


Since they are now front-running Obama with weapons of manic media, do you think Putin or Assad (or any of these whack jobs in Latin America or the Middle East) would stand a chance if the President of the United States started pulverizing them with a Weapon of Mass Currency Appreciation?


Both Reagan and Clinton seemed a lot stronger versus the Ruskies than Bush or Obama have been. Have you ever thought to yourself whether or not $20 oil had anything to do with that? How about the +4% US GDP growth rips of 1983-89 and 1993-99? Both were #StrongDollar, Strong America periods for both our Presidents and people.


“Our” – I keep saying our – and I am Canadian! For God’s sake Americans, stand up to this.


While both the US Dollar and US stock market seem to be sniffing out a no-action vote on Syria, they haven’t gone after the price of oil, yet. Check out last week’s most speculative lines on Middle Eastern conflict (commodities):

  1. Crude Oil’s net long position (futures and options contracts) just off its all-time high to +386,982 contracts
  2. Gold’s net long position was up another +3.6% w/w to +101,396 contracts = highest since January

That’s right Sons of Washington, when Wall Street wants to roll the bones on geo-political risk, they opt for the asset class with the highest beta, and then lever up those bets with options contracts. That’s why they’re great contra-indicators as they peak.


Gold peaked when speculation peaked that the USA would use the only other weapon of mass currency destruction that’s more dangerous than the Taliban – The Federal Reserve’s Dollar Debauchery campaign.  That was 2011-2012.


So when will oil peak? (*hint, it already did in 2008)


If we don’t do Syria, oil prices have plenty of intermediate-term downside – and, as a result, the US Consumer has plenty of intermediate-term upside.


Across our core risk management durations, here are the lines of support for WTI and Brent Oil that matter to me most:

  1. BRENT: immediate-term TRADE resistance = $117.98; intermediate-term TREND support = $108.35
  2. WTI: immediate-term TRADE resistance = $110.86; intermediate-term TREND support = $102.89

In other words, the opportunity for Obama here is to back off Syria and give Americans a 7-8% back-to-school tax cut (to TREND support) at the pump.


God forbid he drives a #StrongDollar move above and beyond a no-action call on Syria (i.e. hires Summers to taper and tighten). Oil prices could crash.


That’s what I’m talking about! Oh yeah – a little more red, white, and blue pin action for the only community of investors who are killing it in 2013 YTD – Growth Investors.


Last week’s Hedgeye Risk Management Style Factors were screaming growth:

  1. Top 25% (SP500 Quartile data) EPS Growers = +24% YTD (vs +15.5% YTD for the bottom 25% quartile)
  2. Low Yield (i.e. higher growth) Stocks = +26.4% YTD (vs +11.0% for High Dividend Yielding stocks)
  3. Consumer Discretionary (XLY) = +1.7% SEP and +23.6% YTD vs Utilities (XLU) -0.9% SEP and +5.9% YTD

“Screaming” – yes, Patrick Henry style - keep screaming at the government to strengthen the Dollar. That includes cutting defense spending from the all-time USA high Obama established in 2011.


Never, ever, forget that the government of these United States works for you – not the other way around.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.83-3.01%

SPX 1643-1665

VIX 15.07-17.49

USD 82.02-82.91

Brent 114.66-117.89

Gold 1366-1401


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Congress, Save Us! - Chart of the Day


Congress, Save Us! - Virtual Portfolio

September 23, 2013

September 23, 2013 - dtr



September 23, 2013 - 10yr

September 23, 2013 - spx

September 23, 2013 - dax

September 23, 2013 - nik

September 23, 2013 - euro

September 23, 2013 - oil

September 23, 2013 - natgas



September 23, 2013 - VIX

September 23, 2013 - dxy

September 23, 2013 - yen
September 23, 2013 - gold

September 23, 2013 - copper

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Typhoon Usagi has caused at least 33 deaths, forced hundreds of flight cancellations and shut down shipping and train lines before weakening to a tropical depression over the southern Chinese province of Guangdong on Monday.



Macau visitor arrivals increased by 7.1% YoY to 2,871,088.  Mainland visitors totaled 1,881,588, with 47.5% travelling to Macau under the Individual Visit Scheme.  The average length of stay of visitors stood at 1.0 day.





In August, passenger traffic at Changi airport increased 9.4% to 4,678,005.





TODAY’S S&P 500 SET-UP – September 23, 2013

As we look at today's setup for the S&P 500, the range is 30 points or 0.58% downside to 1700 and 1.17% upside to 1730.                                













  • YIELD CURVE: 2.40 from 2.40
  • VIX  closed at 13.12 1 day percent change of -0.30%

MACRO DATA POINTS (Bloomberg Estimates): 

  • 6am: ECB’s Draghi speaks in Brussels
  • 8:30am: Chicago Fed Natl Act. Index, Aug, est. -0.05
  • 8:58am: Markit US PMI Preliminary, Sept, est. 54.0
  • 9:20am: Fed’s Lockhart speaks in New York
  • 9:30am: Fed’s Dudley speaks in New York
  • 11am: Fed to purchase $3b-$4b in 2019-2020 sector
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 1:30pm: Fed’s Fisher speaks in San Antonio


    • President Obama travels to N.Y. for UN General Assembly
    • House meets in pro forma session, no votes expected
    • ITC Judge Pender releases findings in Nokia’s patent-infringement claims against HTC over smartphones
    • China’s Bo Xilai gets life in jail as party completes purge


  • IPhone weekend sales split analysts as supply may be constraint
  • Oracle to offer faster databases to revive revenue growth
  • Ex-CEO Lazaridis in talks over possible BlackBerry buyout: WSJ
  • Citigroup seen reporting >10% revenue decline: FT
  • Merkel gets biggest German victory since Kohl’s 1990 win
  • China manufacturing gauge rises to highest in 6 mos.
  • Google seeks ruling copying books without permission is fair
  • EBay’s PayPal said near deal to buy Braintree Payments: WSJ
  • U.S. gasoline tumbles to 8-mo. low in Lundberg survey
  • Sept. Euro-area services, manufacturing growth strengthened
  • Warner Bros.’ “Prisoners” is top U.S./Canada film in wknd
  • Holiday retail sales may rise 4.5% as home prices, jobs gain
  • Goldman restructures bond trading platform, FT says
  • Hong Kong delayed stock mkt opening today on Typhoon Usagi


    • Red Hat (RHT) 4:05pm, $0.33


  • Gold Seen Dropping by Citigroup, Morgan Stanley on Fed Taper
  • Hedge Funds Reduced Bullish Gold Bets Before Rally: Commodities
  • WTI Fluctuates as China Expansion Counters Syria Strike Impasse
  • Copper Falls a Second Day on Concern About U.S. Economic Outlook
  • Gold Falls as Investors Weigh Outlook for Reduced U.S. Stimulus
  • Soybeans Trade Near One-Month Low as U.S. Crop Prospects Improve
  • Rebar Rises Most in Two Weeks as Manufacturing Gauge Advances
  • Shipping Lenders Toughen Oversight After Worst Rout in 23 Years
  • Palm Oil Gains as Prices at Five-Week Low Spur Buying Interest
  • Gas Bulls Add Bets a Fifth Week as Surplus Drops: Energy Markets
  • Commodities to Extend Loss on Moving Average: Technical Analysis
  • Asia Fuel Oil in Backwardation for a Second Day: Oil Products
  • Thai Farmers Hooked on Subsidies Test Yingluck: Southeast Asia
  • China Refined Copper Demand Hit Record High in July: BI Chart


























The Hedgeye Macro Team














After unplugging for 3 months, I’m back and headed to G2E as I have for the last decade. To prepare for my trip, I reread my notes from last year and spoke to a number of vendor contacts.  Below is a summary of my thoughts heading into the show.


– Anna Massion


Industry commentary

  • Based on data we’ve collected, replacements have been stagnant the last 12 months excluding the RFP units shipped to Canada.  The larger venders we’ve spoken to have confirmed that they have seen no pick in replacement demand from their customers.
  • The competitive environment remains fierce, with smaller players getting some of the pie that used to go to the big 5.  The promotional environment around G2E remains heavy but no different than in past years based on our conversations.  BYI remains one of the more disciplined players and WMS claims it is as aggressive as in the recent past.  Their Blade cabinet is still new and capturing about half of their domestic demand.
  • Manufacturers and operators alike continue to struggle to attract new slot players and the existing customer base continues to age
  • WMS’s new poker concept has yet to make any real dent into IGT’s dominance of the video poker market
  • Everyone is still focused on how to monetize on i-gaming but there is nothing new to report in the real money space.
  • On the systems front, BYI is still the leader and seems to be making slow and steady headway with DM applications.  IGT is still giving it away as a tool to garner more floor share.  Hearing the same thing to a lesser extent with ALL (Aristocrat).  Konami has an robust system but has yet to turn operator interest into big contracts.


  • As much as BYI wants to keep the focus on their games, systems and interactive, we have no doubt that there will be many questions surrounding their pending acquisition of SHFL.  Here is what we will be focused on:
    • How BYI can leverage SHFL’s success in Australia? While BYI has a small presence in Australia they haven’t been able to garner much traction in that market. Moreover, we know that SHFL has started trying to see if their Australian success can be transported to the NA video slot market.  Can BYI help push more of SHFL’s Australian product into other Asian markets? This is one of the bigger revenue “synergy” opportunities of the deal in our opinion.
    • If and when real money online wagering materializes in the US, BYI should be able to leverage SHFL’s proprietary table content
  • Bally’s products have been performing well this past year, especially on the video side, which has been a historic weak spot for them.  Some of their competitors attribute part of this success to their new relationships with 3rd party developers (i.e. High-Five).
  • Bally will be showcasing two new cabinets (part of the Bally’s Pro Series cabinet family) that support almost all of their content
    • Wave:  40-inch concave LCD touchscreen.  March 2014 release
    • Pro V55 Jumbo: A nine-foot cabinet with a 55-inch vertical touchscreen display (supports all V32 content).  December 2013 release
  • 5 new licensed themes:
    • New WAPS:  Titanic (March 2014 release) and Magic of David Copperfield (June 2014 release)
    • Followup WAPS:  MJ and Grease follow-ups
    • Premium Lease:  ZZ Top Live from Texas
  • 10 new game mechanics will be showcased
  • 100 new titles;  including games from their new Reno studio (run by former IGT executive), content from Australia and 3rd party developer content
  • Systems:  More emphasis on the Elite Bonusing Suite and the competitive advantage it creates for casinos from a marketing standpoint.  Will also demonstrate DM wagering features – allowing patrons to enter into tournaments when they want to, not when the casino prompts them too
    • Super Slot Line: Wireless solution to a serial floor. Doesn’t require you to ramp up your floor to high speed to enable your floor.  Much cheaper solution.  Opens the door for older casinos to upgrade their floors and start using DM and Bonusing Suite.
    • Chip Recognition
  • I-gaming:  Nothing new per se but will showcase how they can present operators with a single view of the player across online, mobile, and traditional brick-and-mortar gaming platforms and provide complete cross-platform gaming experience for both free play and wagering.


  • While we don’t have specifics, we’ve heard that IGT continues to be aggressive in its pricing strategy; no doubt using its product breadth to achieve scale orders
  • New MegaJackpot titles:
    • Avatar:  Center Stage Platform
    • Avatar Treasures of Pandora:  New Crystal Core Cabinet
    • Bridesmaids
    • Jurassic Park:  IGT Duo 103” and 70” Center Stage
    • Wheel of Fortune Ultra 5 and 3 Reels:  will introduce 3D reels
      • New game mechanics
    • Card Up! Dragon & Phoenix:  allows players to choose volatility of bets based on color, suit or individual features in a table-games style bonus format.
    • San Xing:  rewards players with progressive awards during bonus rounds when selected lanterns are matched up during gameplay.
    • Seaside Park:  awards players with credits and the opportunity to win multiple progressives through interactive bonus rounds.
  • For sale games:
    • Atari Centipede:  Video Reel Edge
    • Winner’s Choice:  New multi-game 4-1 experience
    • Sweet Three:  Based on proven classics allows a trio-slot game that creates progressives with frequent jackpots
  • New Video Poker themes and more playlines
  • Systems:  Features that encourage social play


  • Has experienced declining YoY sales to NA over the last 9 months and the September quarter is likely to see more of the same.  Konami is suffering from their lack of new products, the stagnant state of the replacement market, and no Canadian exposure.
  • Expanding their manufacturing capacity in Nevada and are building a world class development facility that will double their manufacturing and R&D capacity.  The project should be completed in Summer 2015.
  • Promotions:  offering volume-based incentives in-line with prior years’ offers based on orders of 8 or more machines.  Post promotion pricing in the range of $14.5k
  • New & Newly Released Products
    • New Multi-Game (Selection):  Multi-game that has instant load time. Getting great feedback during the company’s pre-G2E meetings.
    • Titan 360:  Multi-player slot machine released in Harrah’s AC this July.  Doing 3x house average. They only have 5 units out in the field at this point but expect to have strong demand if the number keep coming in the way initial results have.
    • Podium Goliath: 93" tall, includes dual 32" high-definition LCD displays, 360 degree attract lighting, an ergonomic button panel, and an enhanced sound system. It supports KONAMI's K2V and KP3 library, including stand-alone progressives.
      • Timing: Beta testing currently, should be ready to commence shipping December 2013
    • Game with 6 huge reels on top (unnamed):  release scheduled for June/July 2014
    • Dungeons & Dragons (Leased product):  will not be on the floor planning to showcase it at NIGA 2014
  • In Development
    • Developing a new box which is currently still in “concept” stage which they believe will set the industry on “edge” when released.


  • Steady as she goes:  WMS will continue to focus on their Blade & Gamefield cabinets and content  - will showcase 45 new Blade titles to add tp the current 14
  • Working on a Blade Stepper, which will be the first new stepper introduced to the market in a while, meant to appeal to the traditional gaming player that likes the traditional three wheel experience.  They are apparently receiving great reviews of the product during their pre-G2E meetings.
  • On the participation side
    • New Monopoly game on the Blade
    • Iron Man just released on Gamefield and is killing it so far but it’s still very early
    • Clue and Beetle Juice for Gamefield
    • Introducing Wizard of Oz in the motion chair this winter
    • Willy Wonka was released in June 13 and is doing very well
    • Superman was released in March 13 and is doing “ok”
    • Kiss Game has run its course – they have a few hundred out on the field but aren’t placing any more
  • Displaying 100 new games (same as last year) including some targeted for the Asian market, although they are getting positive feedback from their US customers on the Asian content as well
  • Video Poker: Coming out with a new version. Have sold over a 1,000 in FY13. Games are doing on par with the competition. They expect to sell about 1,000 in FY14.
  • They are done with their Canadian fulfillments but there may be some follow up orders
  • September Q:  Always a tough Q for WMS, especially with the early G2E show.  They aren’t discounting as much as the competition since the Blade cabinet is new.  ASPs may be depressed though since the September Q has more of an international focus (which like lower priced products).