Gold's Silver Lining

“The silver of Potosi helped to destroy Spain.”

-Jack Weatherford


I bought Gold for the first time in over a year on Friday. Gold’s perverse, but modern, silver lining is what it’s always been – an un-elected body of central planners (the US Federal Reserve) having the unlimited and un-checked power to interrupt this thing called gravity (also known as the economic cycle) via A) currency devaluation and B) rate repression.


Down Dollar, Down Rates = Gold Up. And the precise opposite of that has been occurring for the better part of a year now (so we were shorting Gold on all bounces because expectations of getting the Fed out of the way (tapering) was perpetuating the always progressive two-stroke engine of US #GrowthAccelerating: #StrongDollar + #Rates Rising.


Like the fall of the hoped-to-be “New Spanish World Empire” of the 16th century, most government expectations tend to fall on Shakespeare’s sword of un-planned heartache. “Spain, the greatest beneficiary of the Potosi silver soon bankrupted itself. By 1700, Spain was reduced to a minor power of neither economic nor political importance.” (Indian Givers, pg 25)


Back to the Global Macro Grind


“Potosi was the first city of capitalism, for it supplied the primary ingredient of capitalism – money.” –Jack Weatherford


You won’t read that every day. And you won’t see me take my asset allocation off of 0% to both Commodities and Fixed Income every day either:

  1. COMMODITIES: 0% asset allocation for 165 days
  2. FIXED INCOME: 0% asset allocation for 100 days

Many did and did not agree with my risk managed decision to not lose money in each of those major investing styles. That’s why there are many different YTD performance numbers for Global Macro hedge funds in 2013. Not losing money in Gold was a choice.


Today, drum roll, I’m going to get all wild and crazy and take up my asset allocations to COMMODITIES and FIXED to 6% each:

  1. Cash = 34%
  2. Foreign Currency = 26% (or 79% of my max to an asset class)
  3. International Equities = 21% (2/3 of my max)
  4. US Equities = 6% (21% of my max)
  5. Commodities = 6% (21% of my max)
  6. Fixed Income = 6% (21% of my max)

“Of my max” means % of the max allocation I’d ever make to any asset class as a % of my total capital (which is 33%)


Why 33%? Why 60/40 equity/fixed %’s? Why have a rules based system that locks you into losing money for the sake of being “diversified” in a nice little pie chart that got blasted in June of 2013 when Gold and Fixed Income allocations were going haywire?


My Mom taught me to think for myself. My Dad taught me to not eat yellow snow. And when I wrote my senior thesis at Yale about Buffett, he taught me Rule #1 about investing – “don’t lose money.”


Despite all my faults as an investor, that’s the one thing I have somehow figured out since going to the buy-side at a hedge fund at the end of the internet bubble in the year 2000  - don’t lose money.


The other thing we’re better than bad at here @Hedgeye is risk managing the direction of the US Dollar (35 for 39 all-time on long/short USD position timestamps = +89.7% batting avg). And to get Gold right, you need to get the US Dollar right.


Currently, on our immediate-term TRADE duration, the US Dollar has an inverse correlation to Gold of -0.78. In other words:

  1. If US Dollar Index fails at intermediate-term TREND resistance of $80.98
  2. And Gold can hang in here and make another higher-low of 2013

Then I think I’ll have made the right move from an immediate-term TRADE perspective.


Another lesson I have learned the hard way in this business is to keep a TRADE a trade. That said, all great investments start somewhere and buying Gold on the first signal is what it is. For being long Gold to be an investment TREND, I need two things:

  1. Gold to breakout of this bombed out base > $1342/oz (it’s still crashing at -22.1% YTD)
  2. US 10yr Bond Yield to remain below this newly established TREND line of 2.63% resistance

I still think the odds of Bernanke and Yellen having my back on this at the December meeting are high (no tapering). Therefore I think the odds of this mini-cycle high of 2.5% US GDP being an intermediate-term top are heightening as well.


Again, to review what our GIP (Growth, Inflation, Policy) model is currently signaling:

  1. #StrongDollar + #RatesRising = US GDP accelerating to 2.5-3%
  2. Devalued Dollar + #RatesFalling = US GDP #GrowthSlowing back to 2%, then 1-1.5%

So, if you want the USA to become like Spain in 1700, beg for more Bernanke, Down Dollar, and Rate Repression. It’s a really cool and coy thing to do, provided that you don’t explain it to anyone that this is really why you want to be long Gold’s Silver Lining.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.55-2.63%


USD 80.13-80.98

Euro 1.34-1.36

Pound 1.58-1.60

Gold 1311-1341


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gold's Silver Lining - Chart of the Day


Gold's Silver Lining - Virtual Portfolio

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SJM Holdings Ltd extended its lead in the gaming market last month.  SJM Holdings had 26% GGR share and Galaxy had 21% share.  Sands China fell to third place after its share shrank by two % points to 20%.



Kazuo Okada’s Universal Entertainment Corp has signed a deal with a Philippine developer that appears to be meant to calm a legal storm over a US$2-billion (MOP16 billion) gaming project in Manila.

Century Properties Group Inc signed a deal to develop 5 hectares of a 44-hectare site earmarked for an entertainment and gaming project. It also acquired a 26% interest in the Universal subsidiary that controls the Manila land.  Universal’s move appears to be meant to undermine allegations that it broke Philippine law by setting up dummy companies to get around a rule that limits foreign ownership of land to 40%.

In a separate deal, Universal sold another parcel of shares in its Philippine subsidiary to First Paramount Holdings 888 Inc.
The combined effect of both deals means 60% of the project is in Filipino hands, Universal said.

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TODAY’S S&P 500 SET-UP – November 4, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.38% downside to 1755 and 0.53% upside to 1771.                                        










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.30 from 2.31
  • VIX closed at 13.28 1 day percent change of -3.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York, Oct. (prior 53.6)
  • 10am: Aug., Sept. factory orders data issued in single report following govt shutdown
  • 11am: Fed buys $3b-$4b in 2019-2020 sector
  • 11:30am: U.S. to sell $33b 3M bills, $29b 6M bills
  • 11:40am: Fed’s Powell speaks in San Francisco
  • 4pm: Fed’s Rosengren speaks in Boston
  • 4pm: USDA Crop condition/progress reports


    • Senate in session, House not in session
    • Crist’s Fla. Gov. race may be most expensive ever in state


  • SAC Capital to plead guilty to securities fraud, NYT says
  • House cmte. interviewed Obamacare webmaster for >9 hours
  • BlackBerry bidder said to be short funding as deadline looms
  • LightSquared suing GPS makers, trade goups over promises
  • Roche to pay up to $548m for antibiotic against superbug
  • China leaders to start reform summit w/ eco. in recovery
  • Google’s Schmidt says China censorship has gotten worse
  • Anadarko may sell Chinese oil, gas assets, Reuters says
  • Tri Pointe said near $2.7b bid for Weyerhaeuser co.: Reuters
  • AMR in settlement talks w/ Fla. to resolve merger lawsuit
  • U.S. seeking broad divestitures from both cos., WSJ says
  • Muddy Waters seen right on NQ mobile payments, wrong on cash
  • Biofuel makers mount last effort to save renewables mandate
  • Food supply faces risks from climate change: NYT, citing panel
  • Investors concerned with Blackstone rental-home bond: Reuters


    • CME Group (CME) 7am, $0.73
    • Halcon Resources (HK) 7:30am, $0.07
    • Kellogg (K) 8am, $0.89 - Preview
    • Realogy (RLGY) 7am, $0.87 - Preview
    • Spectra Energy (SE) 6:30am, $0.33
    • Spectra Energy Partners (SEP) 6:34am, $0.38
    • Sysco (SYY) 8am, $0.47 - Preview
    • Targa Resources (TRGP) 7am, $0.45
    • Targa Resources Partners (NGLS) 7am, $0.30
    • Tenet Healthcare (THC) 7:30am, $0.45
    • Vulcan Materials (VMC) 8am, $0.26


    • American Equity Investment Life (AEL) 4pm, $0.45
    • Anadarko Petroleum (APC) 4:02pm, $1.16
    • BRE Properties (BRE) 4:45pm, $0.64
    • Carrizo Oil & Gas (CRZO) Aft-mkt, $0.72
    • Century Aluminum (CENX) 4pm, $(0.33)
    • CF Industries (CF) 4:05pm, $3.92
    • DDR (DDR) 5pm, $0.28
    • DryShips (DRYS) 4:05pm, $(0.06)
    • Dun & Bradstreet (DNB) 4:15pm, $1.88
    • Forest Oil (FST) 4:22pm, $0.09
    • Goodrich Petroleum (GDP) 4:15pm, $(0.72)
    • GT Advanced Technologies (GTAT) 4:15pm, $(0.01)
    • Hertz Global (HTZ) 4:13pm, $0.71
    • MannKind (MNKD) 4pm, $(0.15)
    • Marathon Oil (MRO) 5:26pm, $0.77
    • McDermott Intl (MDR) 4:10pm, $(0.02)
    • Mindray Medical Intl (MR) 5pm, $0.48
    • Pioneer Natural Resources (PXD) 4:01pm, $1.35
    • Plains All American (PAA) 4:05pm, $0.48
    • Prospect Capital (PSEC) 4:02pm, $0.33
    • Retail Properties of America (RPAI) 4:01pm, $0.24
    • Rock Tenn (RKT) 5:05pm, $2.47
    • SBA Communications (SBAC) 4:01pm, $(0.12)
    • Unum (UNM) 4pm, $0.82
    • Vornado Realty (VNO) 4:56pm, $1.10
    • Weatherford (WFT) 4:38pm, $0.21


  • Gold Bug Schiff Counters Goldman Sachs on First Drop Since 2000
  • Cheaper Chickens Seen in Record Corn Cutting Costs: Commodities
  • Corn Nears Three-Year Low on Expectations for Bigger U.S. Supply
  • Copper Falls a Third Session on Speculation Fed to Slow Stimulus
  • WTI Trades Near Four-Month Low on U.S. Crude Supply; Brent Gains
  • Gold Extends Gain in London, Rises 0.2% to $1,318.71 an Ounce
  • Robusta Coffee Gains on Vietnam Storm Speculation; Cocoa Drops
  • China Steel Prices Rising as Iron Ore Advances to Two-Month High
  • Coconut Crisis Looms as Postwar Palm Trees Age: Southeast Asia
  • Spot Silver Extends Decline to Lowest in More Than Two Weeks
  • Iran Burning Gas Worth Billions to Lead Exporters Amid Sanctions
  • South Africa Union Starts Strike Over Pay at Northam Platinum
  • Fuel-From-Soy Makers Mount Last-Ditch Lobby Push on EPA Rule
  • Canada Rail-Car Shortage Slowing Grain Exports Amid Record Crop


























The Hedgeye Macro Team














The Scarcest Commodity

This note was originally published at 8am on October 21, 2013 for Hedgeye subscribers.

“Ideas are incapable of confinement or exclusive appropriation.”

-Thomas Jefferson


One of the biggest push-backs I’ve been getting from both US stock market bulls and bears throughout the 2nd half of 2013 is one and the same – “I can’t buy that up here – I missed the move.” And my response continues to be that Mr. Market doesn’t care about what you did or did not miss. The market’s price is both dynamic and non-linear. As Jesse Pinkman would say, ‘it’s evolution, yo.’


Pinkman is not Jefferson. The aforementioned quote comes from a great book on the evolution of entropy economics that I’m still reviewing: George Gilder’s Knowledge And Power. If you are a growth investor (and/or you just want to be long growth as a Style Factor right now), read Chapter 10: “Romer’s Recipes and Their Limits” (Paul, not that raging Keynesian, Christina Romer).


“Still, change keeps coming, fueled by technology, as Romer’s 1990 paper reminded the economics fraternity. As productivity grows, technology keeps freeing people. And this … really is, in some sense, the scarcest commodity: the power of the human intellect.” (Knowledge and Power, page 96)


Back to the Global Macro Grind


BREAKING: the Global Macro call of 2013 is basically baked into the cake. You were either long growth, or you were not. With the Russell 2000 closing at another all-time high on Friday (1114 = +31.2% YTD), long virtually anything growth has absolutely pulverized the #EOW (end of the world) “new normal” thing (Gold, Bonds, Utilities, etc.).  


In terms of 2013 US Equity Market Style Factors, here’s how awesome growth, as a style, looks at the all-time highs:

  1. LOW YIELD (i.e. growthier stocks) = +35.2% YTD (vs High Yield Div stocks +14.9%)
  2. TOP 25% EPS GROWTH (Top Quartile of SP500) = +34.1% YTD (vs Bottom 25% = +20.8%)
  3. TOP 25% SALES GROWTH (Top Quartile) = +31.4% YTD
  4. HIGH BETA = +30.5% YTD



To be clear, growth (as an investing style) can be very frustrating to A) embrace and B) capitalize upon. I think the reasons for that are bountiful (it’s called a cycle), but here are three big ones:

  1. STYLE: Growth Investing hasn’t worked like this since the 1990s – and few were positioned for an early 1990s style US recovery
  2. CYA: many equity investors are still fighting the last war of getting smoked in 2008 – consensus is long yielding income, not growth
  3. MULTIPLE EXPANSION: expensive gets more expensive on the way up

That last one is really tough for people to swallow, primarily because there are just so many people managing money these days. How many people do you know short stocks because they’re “expensive”?


I’d argue that part of Carl Icahn’s resurgence as an activist has a lot to do with being mucho long Style Factors 4 and 5 (HIGH BETA + HIGH SHORT INTEREST). With what was working locked into his sights, all he needed was Bill Ackman pumping those factors live @CNBC.


How many investors break the market down by Style Factors?


I’d say a lot fewer than you might think. And, to a degree, this makes Institutional Investing a lot like Moneyball was before Billy Beane did Moneyball. In the end, a chubby 1st baseman with a high on base % beats a pretty boy “highly concentrated” activist long ball hitter.


So what if my writing this note top-ticks growth vs. slow growth for 2013?

  1. That could very well happen – the performance divergences between growth and slow growth styles is at its YTD high
  2. That could very well not happen – if you started short selling growth in 1995 or 1996, let me know how that went by 1999

This is why the 1994 Global Macro Market metaphor (bond market blew up) really matters to me. As you can see in the Chart of The Day:

  1. Utilities (XLU) = -17.4% in 1994, 0.2% in 1996, -12.8% in 1999
  2. Tech (XLK) = +19.1% in 1994, +43.3% in 1996, +78.4% in 1999

How many investors are positioned for 2013 being 1993? How about 1995?


I don’t know if this is the top of growth investing. If it is, it ends with the Twitter IPO. But I do know that The Scarcest Commodity out there right now is being a raging growth bull. And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.58-2.69%

DAX 8736-8968

SPX 1701-1760

VIX 11.55-15.19
USD 79.21-80.28

Gold 1267-1333


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Scarcest Commodity - Chart of the Day


The Scarcest Commodity - Virtual Portfolio


Solid and in-line quarter but should've been better. VIP volumes were huge but were offset by lower Mass/Slot (not surprising) and higher fixed costs (surprising) which had been trending lower.




  • VIP RC:  thinks that the growth in volume will continue
  • Reason for the loss on impairment trade receivables:  In line with the roll and the revenues. The company decided to be prudent.
  • VIP RC:  hold was just marginally above the theoretical.  Q3 was up 58% YoY and 15% QoQ volume wise
  • Looking at opportunities in gaming and "leisure" (theme parks/attractions) "very seriously".  Hope that something materializes within the next 12 months.
  • ROI on USS?  Too complicated to calculate within their structure.  Hurdle rate is 12% IRR.
  • Tokyo vs Osaka as sights: Both cities are great. Osaka is the 2nd largest city in Japan. Tokyo has a large population.  Osaka has an emergent base population/trading city. They like both locations.
  • Is the full cost of the water park reflected in the margins? There is still a little more to go in terms of improvement since they have not reached steady state visitation.  The parks are mostly fixed costs so margins are highly dependant on volumes.  Thinks that the margins are getting better.  In the early part of 2013 they were still trying to organize the place better.
  • Japan:  the bi-partisan committee met last month. There is another meeting in 2 weeks, where hopefully they can get the approval of the various parties and something can be send to the cabinet this session. They do not believe that the bill will be passed in this Diet session but will be passed in the next Diet session early next year.  They believe that there will be some entry levy for locals.  Clarification: doesn't think that that there will be enough time to debate the bill since the session closes on December 6th.  But do believe that it will be introduced. Believe that from January-April in the next Diet session, the bill will pass.  Hope that the bill will pass around March 2014.
  • VIP RC volume share (& revenue share): 54% and non RC share: 44%
  • Growth (RC) is coming from all over the place not just China
  • They are more positive on their outlook this Q than last Q
  • Why was admin expense up so much? Increase was mainly due to additional expenses from property tax
  • $210MM investment securities? Ponte 16: that $210MM is a net total - amount purchased vs. disposed.  $570MM and $930MM.  The amount disclosed on Ponte 16 is just the pure nominal amount on what they have spend? All of their investments and financials instruments are included in their available for sale securities.
  • What % of total net revenues was VIP:  45% and 60% of gross
  • Should see the steady state margins by 1Q14.  Win %'s will really sway margins.  For a normal theo win, they should have about a 45-46% EBITDA margin
  • Thinks that 20-30% VIP growth for 2014 is overly optimistic
  • They should know about other development opportunities in Asia within the next few months.
  • View of the Olympics in Tokyo - does this help or hurt prospects of a resort hotel? Believe that it will help assist in the vibrancy of Tokyo
  • Mass win was lower by 10% on a QoQ and YoY basis and slots were about 5% lower YoY or 9% QoQ. The declines are volume related.
  • Hold for VIP was around 2.9-3.0%
  • No change in commission structure this Q
  • Growth out of SE Asia - is there any junket (IMA) benefit? No real benefit from IMA.
  • They sold their London High Street property - have no more of those
  • USS: 9,900 daily; 8,800 for MLP. Average spend: $84/ and $28 for MLP
  • $84MM gain from the sale of the UK property


  • Resorts World Sentosa (“RWS”)  revenue  and Adjusted EBITDA for the third quarter of 2013 increased by 17% and 15% year-on-year to S$776.4 million and S$348.3 million respectively
  • The gaming business segment continued to report higher volume in the premium player business. 
  • The non-gaming segments registered healthy growth with strong visitation. 
  • Attractions enjoyed a daily average visitation exceeding 18,000, while the hotels achieved an occupancy rate of 94% with average room rate at S$405.
  • Our gaming business recorded 15% year-on-year growth, driven by increased visitation and new VIP
    customers’ interest.
  • At ACW, we officially launched the Dolphin Island interaction programmes.
  • The construction of our new hotel in the Jurong Lake District is progressing  on schedule. Piling works are scheduled to complete soon, followed by super-structure work before year-end.
  • The current global economic environment is still relatively unpredictable. The continued weakening of regional currencies versus the Singapore Dollar continues to make Singapore a more expensive destination for our regional customers. Like many Singapore companies, we also face a tight labour market. To address these challenges, we continue with our efforts to improve productivity yet not sacrificing customer service and re-engineer our processes.
  • At Genting Singapore PLC, we are seriously pursuing opportunities in the gaming, leisure/entertainment and hospitality sectors in the region. Such projects are appealing where the development complements our existing competencies and the projected returns are significant to our corporate objectives. We continue to monitor with great interest the legislative passage of the Integrated Resort Execution Law in Japan.

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