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Client Talking Points


The UK is seeing the same 2-stroke pro-growth economic engine that both the US and Europe was seeing before central planners intervened and banned gravity (#StrongPound + Gilt #RatesRising = falling unemployment and rising consumption growth). BOE Governor Mark Carney says he likes that. Good! He's raising his GDP forecast for the UK for 2014 to 2.8%. Buy The Pound (see note below).


The USD Index took another run at Hedgeye TREND resistance of $81.38 yesterday. It failed (again). This makes sense because Janet Yellen will likely remind Washington and the rest of the world who she is in her testimony tomorrow in DC. That ought to be dovish (hence Bearish for The Buck). It is also bullish for Gold. Yes, I bought it back on the oversold signal again yesterday.


The Shanghai Composite is getting smoked. It's back into its down -5.2% year-to-date hole again as Western short-termers don’t like the longer-term duration of Chinese policy plans. Overall, Asia is weakening again with Hong Kong down -1.9%, Indonesia -1.8%, and Korea breaking its Hedgeye TREND line overnight at -1.6%.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper. 


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.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


Looks like Bill Gross is trying to sell some MBS - that's going to take a long long time @PIMCO @KeithMcCullough


If you are going through hell, keep going. -Winston Churchill


A painting by artist Francis Bacon sold for $142,405,000 on Tuesday, breaking the record as the most expensive piece of art ever auctioned. "Three Studies of Lucian Freud" was sold after six minutes of bidding in the room and on the phone at Christie's in New York City.

November 13, 2013

November 13, 2013 - Slide1



November 13, 2013 - Slide2

November 13, 2013 - Slide3

November 13, 2013 - Slide5

November 13, 2013 - Slide6



November 13, 2013 - Slide7

November 13, 2013 - Slide8

November 13, 2013 - Slide9

November 13, 2013 - Slide10

November 13, 2013 - Slide11

November 13, 2013 - Slide12


Popping Bubbles

This note was originally published at 8am on October 30, 2013 for Hedgeye subscribers.

“It’s imperative that the Fed begins to taper.”

-Larry Fink


Not to be confused with what the CEO of Blackrock (and PIMCO) and anyone who was running levered long Bernanke’s Bond Bubble  was saying from June to August (when they weren’t positioned for bonds getting smoked), this is new.


We should have been tapering now for a few months so, on the margin this is progress, I guess. Don’t forget that guys like Fink and Bill Gross get paid to “advise” our un-elected Fed Chairman on timing. There’s no conflict of interest there vs The Rest of Us, of course.


Fink went on to say in Chicago yesterday that “we’ve see real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.” Ya think? Bubbles, bubbles, and more bubbles. Now our central planning overlords are going to time both how we inflate and pop them. #cool


Back to the Global Macro Grind


I’ll be seeing some of our top clients in NYC today, and it’s always interesting to see the whites of people’s eyes on USA central-market-planning days. When Bernanke shocked anyone who wasn’t on the inside of it all that he wasn’t going to taper on September 18th, I was seeing clients in Chicago. The look on people’s faces as they checked their iPhones and crackberries was flabbergasting.


I highly doubt Bernanke is going to signal a taper today. But I highly doubted he was going to cancel his entire “communication process” and not taper last time! So what do I know. I’m just a man in a room trying to let Mr. Market tell me who has inside information.


What I do know, and to a degree this is Fink’s blazingly obvious point, is that into both month-end (and Mutual Fund year-end) tomorrow we have a US stock market that is bubbling up to all-time highs.


Check this puppy out:

  1. Yield Chasing is Back! Slow-growth Consumer Staples stocks (XLP) = +7.9% for the month!
  2. SP500 at an all-time high (on no volume) = +5.4% for the month and +24.4% for the YTD
  3. Russell2000 at an all-time high = +32.0% YTD!

Now if you’ve been A) bullish on US stocks and B) bearish on Gold, Commodities, and Bonds for most of 2013 like we have, you’re pseudo cool with all of this. Commodities (CRB Index, 19 Commodities) are actually -5.1% YTD, so being completely out of some big asset classes has been as important as being long US growth when it was actually accelerating.


Now, not ironically, US #GrowthSlowing is what’s starting to marinate, sequentially (month-over-month) in SEP-OCT:

  1. US Pending Home Sales (SEP) reported earlier this week slowed -5.6%
  2. US Retail Sales #GrowthSlowing was reported yesterday at -0.1% vs +0.3% in AUG
  3. US Consumer Confidence for OCT dropped -11% month-over-month to 71.2 from 80.2 SEP

Isn’t this whole Bernanke Down Dollar, Rate Repression thing awesome?


To review our playbook, when they are happening at the same time:

  1. Down Dollar, Down Rates = #GrowthSlowing signal
  2. #StrongDollar, #RatesRising = #GrowthAccelerating signal

In other words, Fink finally has his policy lobby to Bernanke right. There is no US Growth Policy other than letting economic gravity occur. The only hope for 3-4% US growth (and a 4% 10yr Yield, $65 Oil, etc.) is via a consistent #StrongDollar Tapering Policy.


#StrongCurrency is cool guys. India is doing it. The British are doing it. So now all we need are all of our wonderfully and politically connected men and women of the United States of Centrally Planned America to do it.


Fink just did it. My boys tell me that back in the day he was a big Jimmy Carter Democrat. Today, he’s plugged into Obama’s ear too. So he can do this! Warren, you can do it too. Yes You Can!


If the US doesn’t do this, Europe will be the better place to allocate your capital in 2014. If the USA’s said free-market leadership signs off on Burning The Buck and Japanese Rate Repression, the Euro, Pound, and Swiss Franc are going up. If that continues to happen, you’ll basically have the exact same call we made on US growth almost a year ago occur in Europe:

  1. #StrongEuro, #StrongPound, etc. = deflates European inflation
  2. Inflation slowing = real/inflation-adjusted economic growth stabilizing, then accelerating

At the beginning of Q413 we called this Top Global Macro Theme #EuroBulls. And with Spanish consumer prices (CPI) dropping to NEGATIVE year-over-year in the most recent month (-0.1% y/y OCT vs +0.9% in SEP), we’ll reiterate that call again this morning.


As for the popping of the bubbles, to paraphrase my pal Hemingway, at first it happens slowly (#GrowthSlowing), then like in November of 2007, it happens all at once. After locking in its YTD low on September 2nd (when we were long growth), our Bull/Bear Sentiment Spread just ripped to a fresh YTD high this morning – that’s a +60% move to the bullish side in 2 months. #bubbly


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.40-2.60%

SPX 1752-1774

DAX 8920-9063

Spain’s IBEX 9588-10,097

Euro 1.36-1.39

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Popping Bubbles - Chart of the Day


Popping Bubbles - Virtual Portfolio

Denbury Says, "Upstream MLP? No Thanks"

Funding dividends out of free cash flow ...  what a novel concept!


If any US E&P has an asset base potentially suitable for an upstream MLP, it would be Denbury Resources (DNR), the $7B enhanced oil recovery specialist.  For months DNR has contemplated new strategic initiatives, including forming an MLP.  But on Monday 11/11, DNR officially put the kibosh on that idea, and we couldn’t help but smile as CEO Phil Rykhoek gave the reasons why there is “no clear long-term benefit for Denbury shareholders” (Slide 16) in forming an MLP.


We have been, and remain, highly critical of and negative on upstream MLPs for many of the reasons that Rykhoek cited at the  DNR Analyst Day.  In our view, DNR’s decision to not go the upstream MLP route is a blow to the viability and sustainability of the structure and current E&P MLPs.  While the market is punishing DNR in the short-term for not “playing the game” (down 8.5% this week), we think that Rykhoek will eventually look smart for this decision.  And after listening to that Analyst Day call, we are interested in doing work on DNR … biased long side.

Below we list some quotes from DNR's CEO Phil Rykhoek on Upstream MLPs (our emphasis):


“If you look at the way the MLPs operate, most of them spend more than they make every year.  So how do they handle that?  Well, they continually raise equity, they continually buy things, and that is how they keep it going.


"But on a day-to-day operating philosophy, many of them, if you look at it, spend more than they make.  Now they argue what maintenance capital is versus growth capital, et cetera.  As I will show you on another slide, we would like to operate a bit differently and a bit more conservatively, and so we would expect to fund dividends out of operating cash flow.  So if you have $100, that $100 would be used for CapEx and dividends, and for the most part, we would be self-funded."

"We weren't sure how it would translate into the marketplace if we ran MLP kind of differently, so that is kind of what that comment means.  So long story short, we felt like it was better to not do an upstream MLP. And I think most of our shareholders would agree with that one, in fact, a very high percentage.”




“We expect to fund our dividends with cash flow. So hopefully we don't get into any debate or discussion on what is maintenance capital. We hope to make it very transparent.  Going back to the $100 example, you have $100, you might spend $80 on CapEx and $20 on dividends, but it would all generally be funded with cash flow.”

“If we have extra [cash flow], then we have the option of typical things that you can do at an E&P company. You can increase your CapEx; you can reduce your debt. But the other thing that we want to have in our portfolio is that we can repurchase shares.”




 The biggest positive I think for an MLP is that they usually trade at a higher multiple. Therefore, if you are using the currency to buy things, it's a good currency for acquisitions. If you trade at an 8 multiple versus a 6, if you're going to use equity to buy things, obviously we'd prefer that.  Of course, when you look at our situation, we very seldom use equity to buy things.”




“MLPs have IDRs; that is true. That is a potential value. And, of course, it raises capital. So to the extent you take it public, you raise money. Now there's a trade-off to that one, in the sense that if you look at everything as a whole, if you issue equity, you've also increased dilution. So it's not a free lunch, so to speak. And so we felt like we could manage it basically without having to raise capital.




“We basically felt like the negatives were stronger than the positives.”




“I think it was at the Citi conference where someone asked if we would consider an MLP, and it took a life of its own.  For those of you that I’ve talked to, which is most of you, we have worn this out, I think.  So hopefully we will do this about one more week, and then we won't talk about this again.”



“Question – Audience: Over the long-term, do have a long-term dividend yield target? You show the next couple of years, but as you looked out to the seven years, did you have a target there?


Answer – Phil Rykhoek, CEO: Well, I hope it goes down to about 1%, because I hope the stock price goes up. How's that?



Kevin Kaiser

Managing Director



“Despite the soft revenue environment, Station Casinos reported revenue increases across all major departments and generated double-digit growth in Adjusted EBITDAM. This is our tenth consecutive quarter of gains in Adjusted EBITDAM. Our continued focus on efficiently managing our business has clearly improved our operating results."


-Marc Falcone, Executive Vice President, Chief Financial Officer and Treasurer. 




  • Disappointed in LV Locals revenue
    • Higher healthcare costs, federal govt issues impacted revenue environment
  • Graton Resort & Casino:  30% Asian target population in San Francisco; 13 restaurants, 9 casual dining choices
    • Pleased with inital opening of property and consumer response; smoothest of new Stations Casino openings
    • Fees: will now receive 24% of pre-tax income (year 1-4) and 27% of pre-tax income (year 5-7)
  • 10th consectuive growth of EBITDA growth
  • Overall, core LV market remain strong; housing market has shown improvements; construction on Strip is promising
  • Nevada: Ultimate Poker continues to be the leader.  Will release new features in next few months
  • Full-launch NJ i-gaming:  Nov 26
  • North Fork Rancheria: referendum will be on Nov 2014 ballot; Oct 22 compact was published in federal register; timing has become less certain
  • Adjusted EBITDAM leverage of 5.9x will improve as Graton opens
  • 3Q Capex:  $15.6MM; $66.8MM YTD;  $20-25MM addtional capex for balance of 2013

Q & A

  • Graton:  property opened for 1 week; will provide more financial details next quarter
    • Customers:  getting decent response from Asian community
  • Simliar trends within portfolio but more softness at lower-end properties 
  • Continue to delever the company
  • LV Locals:  will not comment on Oct trends; July/August was strong, September was weak; similar comments made by other operators
    • Promotional environment:  STN remains disciplined.  Periodic episodes of promotional activity by different operators.
  • $62MM Loan (rate 11 5/8%)
  • 2014 LV Locals:  group bookings are solid, visibility is limited 
  • i-gaming NV:  CZR launched 45 days ago; impact has been within range or slightly better than what they expected; CZR grew the market a little bit; industry still remain challenged with use of credit cards; still market leader
  • i-gaming NJ: $300MM to $1.2 BN - estimate of market size; will be dependent on ACH and wire payment options - will create limitations on market size; there will be an option to provide free play for players
  • North Fork:  waiting for validation of 500k signatures; no clarity until they get those
  • Will launch with full scale of games offerings in NJ
  • i-gaming NJ:  Exclusive contract agreement with Trump

[video] McGough: Why I Like $JCP, But Not $KSS

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