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Getting Embarrassed

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

“You get embarrassed as a professional athlete.  There has to be accountability in our room.  That’s not acceptable.  Not even close.”

- Shane Doan


Last night I trekked out to the dilapidated Nassau Coliseum with a few colleagues to watch a National Hockey League game between the New York Islanders and the Phoenix Coyotes.  We worked to put a group together to buy the Coyotes and now own a piece of the team, so we had a bit of an emotional investment in the game.


The end result was a 6 – 1 trouncing of the Coyotes by the Islanders.   For those that play sports or are fans of sports teams, you will be, on some level, accustomed to losing.  It happens. It is part of the game.  But Coyotes’ Captain Shane Doan’s point from above is adroit  - if you lose you also have to be accountable.   No doubt old school Coyotes Coach Dave Tippet made sure of that in the locker room last night after the game.


Given the current dysfunction in Washington, the one thing that we can all smile about this morning is that the Founding Fathers actually built a high level of accountability into the system.  This is particularly true in the House of Representatives where elections occur every two years.  But how does this all end? Who gets held accountable? And when can we go back to focusing on research and not the soap opera of Washington D.C.?


In terms of the first question, this probably all ends with a whimper, rather than a bang, despite the manic intimations of the media or fear mongering politicians. Keith and I did a short clip on HedgeyeTV (yes, the crazy lads at Hedgeye built their own T.V. studio!) and if the credit default swaps of U.S. government debt are telling us anything, it is that there is no imminent risk of a credit default.


In the Chart of the Day, we highlight a more interesting trend related to U.S. creditworthiness, which is the long-term federal deficit-to-GDP chart.  The key takeaway from this chart is that the creditworthiness of the U.S. has actually been improving over the last three years based on this key metric.  (Incidentally, it shouldn’t surprise anyone that the lagging indicators called rating agencies downgraded U.S. debt basically at the bottom.)


Last week, we brought in former Speaker of the House Newt Gingrich to discuss how the government shutdown is likely to play out.  To summarize his view; it was that the Republicans push through some small reforms on the Affordable Care Act and likely come to some agreement on future tax reform or discretionary spending cuts with the White House.  Speaker Boehner’s rhetoric has shifted from focusing on Obamacare, to focusing on the idea of a negotiation, which certainly underscores this point.


Our Healthcare team is currently doing a poll that is asking people the simple question: “How will the government shutdown end?”  So far the results are as following:


- 2% - Shutdown ends, debt ceiling raised, Democrats make massive concessions

- 48% - Shutdown ends, debt ceiling raised, Republicans get very little in return

- 18% - Shutdown ends, debt ceiling raised, on concessions either side

- 18% - Shutdown continues, debt ceiling raised, on concessions either side

- 15% - Shutdown continues, debt ceiling raised, and the World Ends


So, there you have it.  Almost half of those polled agree that the likely outcome is that the shutdown is ended and debt ceiling is raised, but the Republicans get very little for their actions. 


The more interesting point is that almost 15% believe that the world could end (i.e. the U.S. has some form of a default).  So, if you are wondering why there is volatility in the markets currently, it is because of this not so small minority that are pricing in the end of the proverbial world trade.  In all likelihood, though, there is some form of resolution before the Oct. 17th deadline.


Incidentally, if you’d like to take the poll it can be found here: http://poll.fm/4ft5s


Shifting from policy makers to monetary policy, the writing appears to be on the wall this morning that President Obama intends to nominate Janet Yellen as the next chair of the Federal Reserve.  In the coming days, there will be many assessments of Yellen, but I thought this one from Justin Wolfers, an economist at the University of Maryland and friend of Yellen’s, was particularly interesting:


“If Yellen had been in charge of the Fed over the past few years, millions fewer would be jobless, and we would be less concerned about the danger of deflation. The point is that Yellen’s pragmatic reading of the macroeconomic tea leaves has led her to avoid the errors of her theory-bound colleagues who have seen the threat of inflation around every corner. Both hawks and doves should applaud this appointment.”


Translation: according to Wolfers, Yellen is a miracle worker.


The reality is that is not really her broad reputation among stock market operators.  Or those of us that operate in the real economy.  The great Julian Robertson of Tiger Management fame, and likely a proxy for what many astute money managers think, said on CNBC earlier this week that Yellen is, “way too easy money.” 


The broader implication of more easy money is a weaker dollar and a deceleration of economic growth.  Whether it be the yield spread compressing, short term treasuries nearing the zero bound, or oil breaking out to the upside, the implications of more, and perhaps accelerated easy money, is ultimately slower growth.  If that is the path our policy makers go down, it will be more embarrassing than just losing some hockey game.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.60-2.67%

SPX 1651-1663

VIX 18.98-20.64

USD 79.74-80.61

Brent 109.02-110.46

Gold 1291-1333


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Getting Embarrassed  - Deficit COD


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Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Breaking Bad

“Someone has to protect this family from the man who protects his family.”

-Skyler White


Who is Bernanke’s family? Who is Ben Bernanke? Who is John Galt? The People getting jammed with a trashed currency and 0% rate of return on their savings accounts want to know, “yo.” And they want to know now.


Yesterday’s all-time highs in the US stock market put a bloody pit in my stomach. I will not mince words about that and why this morning. Standing up to the tyranny of an un-elected-anti-dog-eat-dog-government-man is my Canadian-American patriotic duty.


Ben, seriously. If you aren’t going to taper, ever, why? Who do you represent? Is it the people in the business of being long bonds? Or is it the government that appointed you to lead this ongoing fear-mongering campaign? Both of our leading indicators on US #GrowthAccelerating (#StrongDollar + #RatesRising) are breaking bad, again. This one is all on you.


Back to the Global Macro Grind


“You clearly don’t know who you are talking to, so let me clue you in. I am not in danger, Skyler. I am the danger. A guy opens his door and gets shot, and you think that of me? No! I am the one who knocks!” –Walter White


That’s right Bernanke, I’m the one knocking. And it’s going to get louder if you keep this up. You can cart out everyone from PIMCO to Zervos at Jefferies to parrot whatever you think you are accomplishing here. I don’t buy it. You’re suspect.


I respect David Zervos’ penmanship and market views, so let’s break down why I think this could break bad versus what he thinks. We are two of the only consistent US stock market bulls of 2013 who have been bullish for completely different reasons:

  1. ZERVOS  - he thinks US stocks up in 2013 is all about QE and that we cannot afford to taper as that would end it all
  2. MUCKER – I think the most important part of the 2013 rally was on expectations of ending QE; not tapering is a disaster

Bernanke and the entire levered long bond bull lobby agree with Zervos. And I actually have no idea who agrees with me, which is probably why our call on US #GrowthAccelerating from 0.38% in Q412 to 2.5% now was the only one of its ilk. Our growth model called US #GrowthSlowing in October 2007 too. US Dollar Devaluation back then was my leading indicator.


So which one is it?


Oh, by the way, all of US economic and market history agrees with my view that:


1.       Strengthening currency + Rising Interest Rates = Pro-Growth Signals

2.       Devalued currency + Falling Interest Rates = #GrowthSlowing signals


In buckets of time, you only have to look past your nose and go beyond the #EOW (end of the world) stuff (2008) and look at the last 40 years of US economic history to understand my point. Both Reagan and Clinton understood this. Nixon/Carter (1970s) and Bush/Obama (last decade) did not. Markets can go up when growth slows; especially slow-growth styles like Gold and Bonds.


For those of you who think “the stock market going up reflects the economy, so Bernanke is nailing it”, I’ll remind you that’s a crock. Venezuela devalued its currency by 32% this year; its stock market is +312%; and its economy sucks – a Policy to Inflate via currency debauchery is not growth. It’s called inflation.


From Nero (50 AD) to 1920s Germany to whatever Chavez left in Venezuela, do not get me wrong, Zervos is quite right that keeping your government stimulated with a meth market can take you for quite a ride, yo! But, again, do not confuse the kind of move we saw yesterday with the one we saw before Bernanke decided not to taper on September 18th.


Rewinding the tapes, here’s what happened yesterday:

  1. US monthly payroll number missed by enough to validate Bernanke’s bs storytelling that we don’t need to taper
  2. US Dollar got smoked to a fresh YTD low
  3. US Treasury Yields snapped my 2.58% TREND line on the 10yr
  4. Gold ripped
  5. Slow growth sectors like Utilities (XLU) had triple the intraday move of the SP500

Is that what you want, yo? Another epic 2007 style US stock market bubble? If you do, we can go right back to reflating the Housing, Gold, Bond, Utility, Foreign Currency, etc. Bubbles. Kinder Morgan can trade at 85x earnings on that too. Rock on, yo.


So what do you want? As my man Walter White would say, “you all know exactly who I am. Say my name.” That’s right. I’m the guy who believes in fiscal conservatism, monetary tapering, a strong currency, and rising interest rates. “Now say my name.”


I’m the guy who went to net short yesterday (6 LONGS, 9 SHORTS in #RealTimeAlerts) and 54% Cash. Timestamped, yo. He’s Heisenberg. I’m going to roll with him, book gains, and protect my family and firm’s hard earned savings.


UST 10yr Yield 2.47-2.58%


VIX 11.55-14.96

USD 79.02-80.12

Euro 1.36-1.38

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Breaking Bad - Chart of the Day


Breaking Bad - Virtual Portfolio






Hollywood Roosevelt from Los Angeles is making Macau its Asian debut with an investment of two billion patacas to build a 373-room 1950s Hollywood-themed hotel next to the Macau Jockey Club in Taipa.  The hotel is slated to be operational between the middle and the end of 2015.  The CEO of the hotel’s management company GCP Hospitality, Christophe Vielle, said that the developer, Yoho Group would like to have a casino in the hotel.  The Gaming Inspection and Coordination Bureau has received no application to run a casino there.



The construction for “Paradise City,’’ which will be a 15-minute walk away from Incheon Airport, will begin in April 2014, according to Choi Jong-hwan, CEO of Paradise Sega Sammy.  “We expect the main customers of the casino to be from China.  The hotel at Paradise City will accommodate 700 rooms and will be equipped with state-of-the-art business facilities and large-scale convention venues. The resort will also cater to leisure travelers, with theaters, shopping centers, spas and other facilities.


In preparation for TRIP's FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "This summer so far it's been bumpier than I had forecast. So our traffic is holding but not as strong as we had expected given the comp over the Olympics of last year. Pricing, as I said, has actually been down a little bit, and that wasn't what we expected. And we have told everyone, 'hey, the big meta headwind for us is in Q3, because our biggest points of sale are a 100%' and that remains absolutely true. But I don't generally provide updates in the quarter, but if I have to update this quarter it's like I am not seeing a lot of positive stuff."
  • "The third quarter...is going to take the hardest hit, because this is three months of being in the transition even though we're making iterative improvement, but compared to last quarter there was only one full month." 


  • "For full year 2013, we are reiterating our click-based revenue growth guidance of high-teens to low-20s."
  • "As it relates to display, based on our strong first half results, we now expect mid-to-high teens growth for the full year with Q4 being our strongest quarter for this product."
  • "For subscription, transaction and other business lines, we believe continued sales productivity in Business Listings, Vacation Rentals traction a nice contribution from our recent acquisition will now yield high 50s growth for the full year. Remember, that traction of our Vacation Rentals free-to-list product and flash sales will contribute similar seasonality to click-based revenue, where Q3 is seasonally strong and Q4 is seasonally weak."
  • "We are reiterating our total revenue growth expectations of low 20s for the full year."
  • "On the expense side, our investment and hiring plans remain unchanged giving our growth initiative and large market opportunities ahead of us. From a forecasting standpoint, we have considered our strong results in the first half of the year offset by our ongoing meta transition, offline ad spend, and our recent acquisition. Net, net, we are reiterating our expectations of mid-single digit EBITDA growth for the full year of 2013, which assumes negative Q3 and Q4 year-over-year EBITDA growth due to the timing of our offline ad spend."
  • "We're on that path to revenue neutrality, which means the increase in CPCs will equal the decrease in clicks that we're sending off to our partners and we believe that will occur at the end of this year." 


  • "Hotel shoppers continued to grow rapidly throughout the globe with notable continued strength in core U.S. and European markets. Some of our newer markets aren't growing at quite the rate that they were last year. Sort of the UK in particular, for the first couple of weeks in July haven't been as robust a growth as we had seen in the course of Q2."
  • "If you look at the top of funnel opportunity, which we call hotel shoppers, so hotel shoppers are travelers coming to the site, looking at a hotel geo page or a hotel detail page, not the restaurants, not the attractions. So those are the ones that we say are top of funnel, because they have a chance of monetizing for us. We don't currently monetize restaurants and attractions." 


  • "On smartphone, our hotel shopper growth continues at a triple-digit rate, but monetization remains at less than 20% of desktop.  Desktop and tablet are pretty much on parity (volume/price mix)."


  • "We have two properties, two companies in China, daodao.com and...Kuxun. This is an area that we have been investing in for several years. We run these...at a loss. But they're meaningful assets. We kind of look at it more as an option on the future because the Chinese market is important. And we want to be there when they're looking to travel outbound. As that market continues to develop, we believe we're building a very strong asset there."  


  • "We authorized a $250 million share repurchase plan and we did that about a year after we spun out of Expedia once we had built up those cash balances because we can only use U.S. cash to repurchase shares. The primary reason for the share repurchase is to offset employee equity dilution, so that's what we've been doing over the last several quarters."


  • "When I ask, hey who is the competition that kind of worries me the most in the two-year to five-year timeframe, Google still tops the list mostly at this point from a mind share perspective. When I talk to travelers, hey you're thinking about going on vacation, where do you start? The answer more often than I'd like to hear is Google. And so as Google learns how to build the travel product and I'd still say they're learning, they've launched a bunch of stuff, but it's in progress. Google can do a lot. They've shown a lot of appetite to invest heavily in this area."


  • "We have received very positive initial feedback from our announcement, and we expect that many of the largest companies that provide Internet booking engines to independent hotels will be working with us soon. Later this year, we intend to launch the second part of the TripAdvisor Connect platform, namely, a self-service bidding interface that will allow hoteliers to bid directly for our traffic."


  • "In our fast-growing subscription, transaction and other line, we've seen a nice uptick in Business Listings sales productivity as we add more fully-trained sales reps in more parts of the world."
  • "In our Vacation Rental business, early results from free-to-list remain positive as overall listings are up, as well as mailable users, traffic and inquiries. On the consumer side, we've increased the percentage of our listings that are online-bookable properties from zero last year to over 20% this year, and we shortened the booking flow to improve conversion. We've integrated the majority of FlipKey and Holiday Lettings properties onto the main TripAdvisor site and we're working on integrating Niumba's inventory to give vacation renters more choice in Spain."


  • "So again, we only spent a couple of million dollars so far, but we have no reason at this point to be pulling back on our expectations to spend kind of the full budgeted amount going forward." 
  • "Direct marketing costs increased slightly versus last quarter, as we started testing our new TV campaigns in six U.S. markets in an effort to promote TripAdvisor brand awareness and diversify traffic. We expect to increase TV spend materially in the second half of the year, as we broaden our testing domestically and internationally."


  • "Our Q2 GAAP effective tax rate was 26%, which is consistent with our ongoing mid-to-high 20s expectation for the year."