Takeaway: Don’t write-off outflows from EM funds as panic selling. In reality, the cycle has turned and most investors are just now figuring that out.

Editor's note: This unlocked research note was originally published January 30, 2014 at 11:55 in Macro. For more information on how you can subscribe to Hedgeye research click here.

If you didn’t know the global macro super-cycle has turned, now you know.


As most recently outlined in our latest EM strategy note titled: “NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE” (1/27/14):


“We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins.”


Contrast our view with that of Mark Mobius, chairman of the Templeton Emerging Markets Group (i.e. one of, if not the world’s largest EM fund umbrellas):


“People are enjoying what they see as a bull market in the U.S. As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”


We don’t write that to pick on Mr. Mobius, who has obviously had a very long and successful career managing EM assets. In fact, he probably forgets more about emerging markets on the way to lunch than I have ever learned as a quote/unquote “26-year-old-analyst” (ask @JimCramer for context).


Rather, we wrote that to juxtapose how our investment framework focuses on changes on the margin – particularly relative to expectations – versus the framework employed by many investors: i.e. a narrow focus on absolutes with a dash of consensus storytelling.


Another reason we wrote that was to show you where the quote/unquote “smart money” consensus likely still is with respect to EM assets. We know the quote/unquote “dumb money” has been pulling funds out of EM assets for 6-9M now and are doing so on an accelerated basis in the YTD. With respect to the current asset price cycle, you tell me who’s “smarter”?:


  • “The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with about $468 billion erased from stocks this year.” – Bloomberg (1/30/14)
  •  “More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  • “The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005.” – Bloomberg (1/30/14)
  • “The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals… About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.” – Bloomberg (1/30/14)
  • “Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  •  “ETFs accounted for almost half the $2.5 billion outflows from emerging equities last week. So far this year, a net $4.12 billion has flowed out, amounting to three quarters of the total $5.7 billion that has fled, the fund tracker said.” – Reuters (1/27/14)


In the context of the sheer amount of dough plowed into EM assets over the last ~10-12 years amid Federal Reserve-style financial repression, we could see EM assets underperform by much more and for much longer than many investors currently think. This is how people get blown up buying the [perceived] bottom. Don’t buy the [perceived] bottom in EM assets – at least not until you get the green light to do so from the Fed.


  • “Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds, the Institute for International Finance estimates.” – Reuters (1/27/14)
  • “JPMorgan estimates outstanding emerging market bonds at $10 trillion compared with just $422 billion in 1993.” – Reuters (1/27/14)
  • “Assets of funds benchmarked to emerging debt indices stand at $603 billion, more than double 2007 levels, it said, and over $1.3 trillion now follows MSCI's main emerging equity index.” – Reuters (1/27/14)
  • “Assets of emerging equity ETFs tracked by EPFR Global ballooned to a peak of almost $300 billion, tripling since 2008 and up from next to nothing in 2004.” – Reuters (1/27/14)
  •  “Mutual fund data from Lipper, a ThomsonReuters service, shows that in the past 10 years net inflows into debt and equity markets was in the region of $412 billion.” – Reuters (1/27/14)




If you recall the following slide (#74) from our 4/23/13 presentation titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”, this should all sound very familiar:




Net-net, investors have two choices when it comes to playing EM assets from here: 1) buckle up; or 2) pray to God that Janet Yellen backs away from the monetary tightening ledge. Moreover, the fact that so many institutional investors have to be invested” in EM assets only insulates our bearish bias if things really take a turn for the worse because we haven’t actually seen any “real” selling yet…


Please feel free to ping us with any feedback or questions.




Darius Dale

Associate: Macro Team

Stock Report: Las Vegas Sands Corp. (LVS)

Stock Report: Las Vegas Sands Corp. (LVS) - HE LVS table 1 31 14


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized.


Along with 15-20% same store growth in Macau, investors should be focused on the upcoming high ROI opportunities for LVS which include the opening of its newest mass-centric property on Cotai – The Parisian in 2015 and potential legalization in new markets such as Japan, Korea and Taiwan.  Japan, in particular, is gaining steam as the final passage of a gaming bill by the Diet could potentially happen by Summer 2014. LVS is regarded as a highly attractive candidate for building in integrated resort in Japan given its success with Marina Bay Sands in Singapore.


We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

Macau fundamentals are outstanding and we expect an acceleration of growth in February.  Within that favorable industry construct, LVS is nailing it operationally.  The LVS properties continue to yield up their Mass tables impressively which is  contributing to higher margins.  Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market. 


Share growth and near term strength in Macau are two near-term catalysts.  Others include potential legalization of casinos in Japan – LVS would be a leading contender to be awarded a license – and progress toward selling off the company’s significant retail mall assets.

LONG-TERM (TAIL) (the next 3 years or less)

Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13x?  Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA. 

Future high ROI projects in Macau (The Parisian), Japan, and South Korea are also not captured.  LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors.  



Stock Report: Las Vegas Sands Corp. (LVS) - HE LVS chart 1 31 14

Short Kinder Morgan Thesis Update - Slides and Dial-In



Short Kinder Morgan Energy Partners (KMP) remains a Hedgeye “Best Idea.”  Our conviction has increased since first making the call in September 2013.  Recent events, results, guidance, and new information continues to indicate that our analysis is correct.


“Cheap” is a LONG WAY DOWN.  We believe Fair Values are:

  • KMI: $13 - $17/share, ~57% Downside 
  • KMP: $31 - 47/unit, 51% Downside  (Preferred Short)
  • EPB: $16 - 24/unit, 39% Downside 
  • This puts Complex EV/2014 EBITDA at ~10-11x

CLICK FOR FULL SLIDE DECK: Short Kinder Morgan Thesis Update 1/31/14



  • Direct Dial Number:
  • Conference Code: 581275# 
  • Send questions to .


Kevin Kaiser

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

$XLF Breakdown Doesn’t Bode Well

Takeaway: As the Financials (XLF) go, so goes the market.

Editor's note: The post below is a complimentary excerpt from CEO Keith McCullough's pre-market morning research. For more information on how you can become a Hedgeye subscriber click here.

$XLF Breakdown Doesn’t Bode Well - yaya 

As the Financials (XLF) go, so goes the market.


In other words, if Financials break, that’s a very bearish signal for the market’s beta. Yes, beta matters.


The XLF snapped Hedgeye’s TREND line ($21.21) this week, and barely closed above it yesterday. This is the single most important sector signal for me today.

$XLF Breakdown Doesn’t Bode Well - Beta

Why are Financials broken?


Because bond yields are falling. When bond yields fall, the yield spread compresses. The 10-year yield remains below our TREND of 2.80%. This of course is a negative for Financials on the margin.


So, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning. In all likelihood, Mr. Market breaches 1,779 support on the S&P 500 if indeed the Financials are broken. 

Join the Revolution. 


Takeaway: Spending outpaced Income as the decline in Saving supported services and nondurables consumption. Gov't sourced income inflecting positively


SPENDING:  Spending grew at a premium to incomes for a third consecutive month as the savings rate fell -40bps sequentially to 3.9%, the lowest level in a year.  


With the savings rate now back to the low end of the historical range, the capacity for Incremental savings depletion to support further improvements in consumption growth appears largely constrained. 


Household expenditure growth on Services and NonDurables accelerated, while spending on Durables – the 2013 leader as sales on higher ticket items improved – decelerated 300bps and 120bps on a 1Y and 2Y basis, respectively.  Whether the nascent deceleration in Durables represents a pull-back in spending across the higher income brackets remains TBD.    


INCOME:  Personal income growth, Disposable Personal Income (DPI) Growth, and Real DPI per capita all decelerated on both a 1Y and 2Y basis. 


Note that the December comp dynamics were impacted by the conspicuous pull-forward in compensation that occurred at year-end last year ahead of the fiscal cliff resolution and impending tax law changes.  Given the comp distortion, the 2Y comp offers the cleanest read for December and on that basis growth decelerated a moderate 20bps sequentially from +3.8% to +3.6% (vs. the reported -0.8% on a YoY basis).


Salaries & Wages:  Private sector salaries & wages slowed modestly in December while the slope of the broader trend remains positive at ~5% YoY on a 2Y basis.   


The other notable dynamic is that government sourced salary and wage income is inflecting positive for the first time in years. 


State & local government employment was positive for the 5th consecutive month in December (after 4 years of negative growth) and the ebbing of the fiscal drag alongside the spending friendly budget deal has aggregate incomes for government workers - which represent ~17% of labor force and ~17% of aggregate wage/salary income – beginning to show some positive mojo.


INFLATION:  PCE and Core PCE inflation both a little firmer sequentially, but still well below target.   The longer we mark time sub-target the more worrying it becomes for policy makers.  Expect speculation around an “inflation floor” to pick up as the Yellen transition matures.







CONFIDENCE:  This morning’s final estimate of confidence from the Univ. of Michigan capped the January data on consumer sentiment.  Across the primary survey’s, the results were mixed on a Mom basis with the Conference Board estimate advancing 3.2 pts while the Univ. of Michigan and Bloomberg readings declined a modest 1.3 and 1.1 points, respectively. 


The middling confidence numbers make sense in the context of the quantitative setup for the $USD and the TTM relationship between sentiment and the currency.  The dollar is currently neutral on a TRADE basis from a quant perspective and searching for some direction as it flirts with a breakout above the 81.12 TREND line.







Christian B. Drake



[video] Keith's Macro Notebook 1/31: FINANCIALS JAPAN COPPER