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The Buffalo Jump

This note was originally published at 8am on February 11, 2014 for Hedgeye subscribers.

“If I had a mind to rent pigs, I’d be mighty upset.  A man that likes to rent pigs won’t be stopped.”

-Larry McMurtry, Lonesome Dove


Lately I’ve been watching the famed late 1980s mini-series, “Lonesome Dove”, on Netflix.  It is based off of the Pulitzer Prize winning novel by Larry McMurtry of the same name.  The novel tells the story of two former Texas Rangers, Captain Augustus “Gus” McCrae and Captain Woodrow F. Call, who run a livery called the Hat Creek Cattle Company in the desolate Texas border town of Lonesome Dove.


The bulk of the plot involves the decision by McCrae and Call to leave the relative complacency of Lonesome Dove and drive a massive herd of cattle north to the Montana Territory.   On the way north, they encounter a plethora of adventures, including proverbial dust ups with the army, bandits, and Indians.


By far, the savvy plains Indians (Native Americans) are the most formidable challenge McCrae and Call face on their journey.   In reality, this is no surprise since the Natives occupied the land for thousands of years before the European settlers arrived and developed many proprietary ways of surviving off the land without the benefit of modern technology.


One such proprietary method of hunting was the Buffalo Jump.  


The Buffalo Jump - buffjump


It was a simple, but very effective method of collecting a massive amount of buffalo meat.   On horses or foot, the Natives would chase buffalo herds towards, and eventually over, a sharp cliff.  Tribesmen waiting below would finish off the buffalo and butcher the meat.   The key of course was that buffalo had no idea they were running towards, and eventually over, a cliff.


Back to the global macro grind . . .


While it is an apt analogy, we are not yet ready to say that the global economy is going over the cliff, but the fact remains that much of the data we’ve been collecting and watching is getting incrementally more negative.   Yesterday in our morning meeting, Hedgeye’s Asian Analyst Darius Dale emphasized that he is getting a little more cautious on China.


They key reason for his shift is that money market rates continue to back up.  This is a point that is emphasized in the Chart of the Day.   Further, while the government could choose to intervene, the People’s Bank of China is instead opting to let the markets settle on their own.  According to a February 8th PBOC report:       


“When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that.  The market needs to tolerate reasonable rate changes so that rates can be effective in allocating resources and modifying the behavior of market players.”


In the long run, this is likely a positive for the Chinese economy.  In the short run, of course, higher money-market interest rate volatility is likely a headwind.   


The caveat on getting aggressively negative on China is that GDP comps are relative easy for China and seasonality should also be a positive in the reported numbers this quarter and next.  In part, this is likely why the Shanghai Composite is up +0.85% this morning and +3.5% this month – a move that may have some legs if the PBOC decides to cut the Reserve Rate Ratio (RRR) as is rumored this morning.


The novel Lonesome Dove is also somewhat apropos as newly minted Federal Reserve Chair Janet Yellen is scheduled for her debut in front of the House Financial Services Committee this morning, which will include Q&A.   Interestingly, there will be a second panel of witnesses that will react to Dr. Yellen’s testimony and will include:

  • Dr. John Taylor, Professor of Economics, Stanford University;
  • Dr. Mark Calabria, Cato Institute;
  • Abby McCloskey, American Enterprise Institute; and
  • Dr. Donald Kohn, Brookings Institution.

So, we will see soon enough if Dr. Yellen is a Lonesome Dove or as my colleague Keith McCullough called her in this video the "Mother of All Doves."   Either way, her commentary this morning is likely to have some impact on a stock and bond market that continues to be myopically focused on interest rates and Federal Reserve policy.


Speaking of headwinds, one of our Best Idea short positions Boardwalk Pipeline Partners (BWP) faced a few of them yesterday as the stock closed down -46%.  We obviously don’t get them all right, but our Energy Sector Head Kevin Kaiser nailed this one.  Interestingly, BWP didn’t miss its EBITDA estimate by all that much, but did cut its distribution by more than 80%.


A key tenet of our short call on MLPs in general is that their distributions are quite often an illusion as MLPs borrow money, issue equity and buy companies to maintain the distribution.   Investment bankers then “value” MLPs based on the yield, rather than the actual intrinsic value of the assets, and sell these financial products to unsuspecting retails investors.   This whole scheme works fine until the proverbial company goes over the Buffalo Jump and distributions get cut.


If you are invested in MLPs and / or looking for good shorts, I’d highlight recommend you subscribe to our Energy Sector research.  Anyone on our sales desk, sales@hedgeye.com, can help get you signed up.  The best risk management is to avoid blow ups like BWP and we seem more MLPs on the horizon that are headed for the cliff.


Our immediate-term Global Macro Risk Ranges are now: 


UST 10yr Yield 2.60-2.76%

SPX 1734-1814 

VIX 14.06-20.41 

USD 80.33-88.08 

Gold 1251-1287


Keep your head up and stock on the ice,


Daryl G. Jones

Director of Research


The Buffalo Jump - Chart of the Day


The Buffalo Jump - Virtual Portfolio


Macau blew it out again this past week with table revenues averaging HK$1,132 million, down only 5% from the prior week even though the CNY celebration was winding down.  With only 5 days left in the month, we now expect full month gross gaming revenues (GGR) to grow 31% YoY to HK$34.5 billion. 


Aggregating the disappointing January GGR of (7% YoY growth) with big February to mitigate the CNY calendar shift, we project GGR to grow 19% YoY for the 1st two months.  While we were too high on January and too low for February, the aggregate level of revenue was consistent with our projections before the year began.  Remember that January and February are the two easiest comparisons of the year.  March should look comparatively weak.


In terms of market share, LVS continues to dominate with share well above trend although down slightly from last week.  Galaxy is also having a good month.  On the minus side, MGM, MPEL and SJM are tracking below trend.


Here are the tables:





$GLD Loving Itself Some Inflation!

Takeaway: Gold loves inflation slowing growth.

Gold is shooting higher up over 11% year-to-date today as A) 10-year yields remain bearish TREND in our Hedgeye model and B) the US Dollar remains under pressure ahead of both new Fed chief Janet "Mother of All Doves" Yellen’s regime and President Obama’s 2015 "budget."


Yes ... Gold loves inflation slowing growth (and Team Canada Hockey). Sorry couldn't resist.


$GLD Loving Itself Some Inflation! - drake

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European Research & Policy Bullish; Quant Bullish

We remain bullish on European equities over U.S. equities on the margin.

In the charts below, we add our updated commentary.


Quantitative – European equities are flashing bullish TRADE and TREND signals, per the STOXX 50 and Euro STOXX 600. Our preferred equity markets remain Germany (EWG) and the UK (EWU).


YTD the equity markets have broadly rallied off a bottom in early February: Denmark (+13.5%), Portugal (+10.7%) and Ireland (+10.4%) are topping ytd returns while Russia remains the clear laggard (RTSI -8.6% and etf RSX -11.1%), reflecting the political uncertainty in Ukraine and challenged fundamentals.


European Research & Policy Bullish; Quant Bullish - vv. stoxx 50


European Research & Policy Bullish; Quant Bullish - vv. stoxx 600


Policy – We expect ECB President Mario Draghi and the Eurocrats to continue to grease the skids, which should propel equities higher. This includes not letting any member state “fail” (sovereign default or exit), managing the banking system, keeping rates “accommodative” or lower, pushing for schemes to unlock lending to the real economy (especially SMEs), and remaining concessionary on fiscal austerity targets.


Note: over the weekend Draghi said that the March 6th policy meeting will be critical in determining whether the ECB will provide additional stimulus. He said that by then it will have a full set of information needed to decide whether to act or not. Whether this means an interest rate cut to zero (currently the main refinancing rate stands at 0.25%) and/or some new loan package (to spur a stalled channel -- with room on the balance sheet given LTRO paybacks), or something else altogether, we believe the go-forward policy will continue to support the equity market and put a floor in the EUR/USD. Any indication that the Fed’s Yellen is taking her foot off the taper program (which we think is likely) should also boost the cross (see levels below).

European Research & Policy Bullish; Quant Bullish - vv. main interets rates


European Research & Policy Bullish; Quant Bullish - vv. ecb lending


European Research & Policy Bullish; Quant Bullish - vv. ecb balance sheet


European Research & Policy Bullish; Quant Bullish - vv. eur usd



Outlook Eurozone Q4 2013 Preliminary GDP surprised to the upside at +0.5% y/y vs consensus +0.4% and prior -0.3%. The ECB is still forecasting Eurozone 2014 GDP at a modest +1%. We expect inflation to be grounded under +2% for at least the next couple of years. Minimizing the consumption tax should continue to boost consumer and business confidence. Eurozone CPI in January stood at +0.8% versus an initial reading of +0.7%. We expect #GrowthAccelerating off low levels throughout Europe and investors to pile into the trade given such forces as EM headwinds and dovish policy out of the Fed.


European Research & Policy Bullish; Quant Bullish - vv. eurozone cpi



Political – While Italy’s political scene and structure remains anything but stable, we see the transition to Italy's new Prime Minister, Matteo Renzi, over the weekend as at least a stabilizing force over the near term. The ousting of Ukrainian President over the weekend should also minimize some of the geopolitical forces influencing the market over recent weeks.



Fundamentals & Sentiment Surveys – There’s been mixed data points over recent weeks. Preliminary PMIs for February for the major economies showed a slight dip for Manufacturing, while Services broadly grew (France the exception).  Survey work from IFO on German Business expectations showed broad improved in February, while the ZEW survey for forward-looking economic expectations dipped for both Germany and the Eurozone aggregate. Our trend bullish outlook, however, remains intact.


European Research & Policy Bullish; Quant Bullish - vv. pmis


European Research & Policy Bullish; Quant Bullish - vv. germany ifo


European Research & Policy Bullish; Quant Bullish - vv. germany zew


European Research & Policy Bullish; Quant Bullish - vv. uk confidence


European Research & Policy Bullish; Quant Bullish - vv. germany factory orders


  • The WSJ recently confirmed our outlook, reporting increased appetite from U.S. fund managers for European equity funds since the start of the year due to an improving economic outlook and low interest rates. It noted data from fund tracker EPFR, which indicated that $24.3B has flowed into European equity funds this year through 19-Feb, while U.S. stock funds have seen $5B in outflows.
  • Also, over the weekend George Soros said in the weekly Der Spiegel magazine that he wants to invest in Europe's financial sector. Soros said he believes in the euro and could pump money into banks which urgently need capital. He said his team is also considering investing in Greece and noted improved economic conditions there.

Below we show updated Trade Balance and Current Account data, both of which are supportive of an improving economic climate. 


European Research & Policy Bullish; Quant Bullish - vv. euroz trade balance


European Research & Policy Bullish; Quant Bullish - vv. current acct balance select


Not that we put much worth in the ratings agencies, but as a positive sign to investors, Moody's upgraded Spain's rating to Baa2 from Baa3 and assigned a positive and upgraded Spain's short-term rating to (P) Prime-2 from (P) Prime-3, citing the rebalancing of the Spanish economy towards a more sustainable growth model.


Finally, European Auto Sales remained strong in January, up +4.6%, another signal to us of strong confidence to make big-ticket purchases.


European Research & Policy Bullish; Quant Bullish - vv. eu cars



We're data dependent, but for now staying with our bullish call on European equities over U.S. equities, and our positive outlook on the EUR/USD (FXE) and GBP/USD (FXB).  


Matthew Hedrick



[video] Why Investors Should Channel Their Inner George Costanza Now

Sell: SP500 Levels, Refreshed

Takeaway: As for the fundamental reality of #InflationAccelerating’s impact on growth, I don’t think the market cares until it has to.



Why the ramp right back to the all-time SPY highs? Surprisingly, there was a net short position (futures and options contracts) of 93,465 (Index + E-mini) in SPX on Friday’s close. Unwinding some of that happens on green, not red.


As for fundamental reasons, evidently the machines still love the smell of Burning Bucks (Dollar Down again today) as the hyper-mo-mo SPX vs USD inverse correlation (15 days) has moved to -0.94.


As for the fundamental reality of #InflationAccelerating’s impact on growth, like in Q1 of 2011 (when we made the same bearish call on US consumption), I don’t think the market cares, until it has to (which can start from today’s overbought price inasmuch as any other).


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1859
  2. Immediate-term TRADE support = 1816
  3. Intermediate-term TREND support = 1791


In other words, TREND support is -3.7% versus the price on your screen right now (#RealTimeAlert to short SPY = $186.11 at 12:19PM EST) , and I don’t think it will take this market much (a down day will do) to re-test that level of 1791.


If the US government burns its currency like Venezuela did, the SP500 could be up another +450% from here. But don’t worry about that. I’m sure that would be great for someone  - just not for American GDP.



Keith R. McCullough
Chief Executive Officer


Sell: SP500 Levels, Refreshed - SPX


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