FX War: Game On

Client Talking Points


That's right. Janet Yellen just loves that passive Burning Buck policy. The US Dollar continued lower as she spoke yesterday, reminding America and the world that she now has completely qualitative commentary of prices/employment and really just wants to price fix rates. Not good. Longer term #inflationary. The inverse correlation between the USD and S&P 500 is now -0.75 (USD vs Gold = -0.95). In other words, pay attention.


No... the Nikkei no likey the Burning Buck. Why? Simple. Because Japan is supposed to be burning yen. Check out the Yen which is up another +0.3% versus the US Dollar and the Nikkei is down for the third straight day to -8.8% year-to-date. The global currency war is on.


So all I did yesterday was buy Euros, Pounds, and German stocks. Those who understand #StrongCurrency will have less inflation (and more consumption growth). EUR/USD is ripping a new year-to-date high this morning at $1.38.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 


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


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Dollar Down, Rates Down is the best path to economic misery @KeithMcCullough


"I don’t see evidence at this point in major sectors of asset-price misalignment, at least at the level that would threaten financial stability."

- Janet Yellen


Freddie Mac just reported a record annual profit of $48.7 billion for 2013 powered by a strong rebound in U.S. home prices and a series of legal and accounting benefits that reversed earlier losses. Freddie will pay $10.4 billion to the U.S. Treasury after it posted an $8.6 billion Q4 profit, the ninth-straight quarter in which the company has been profitable. The bulk of those gains were due to either one-time benefits or to home-price gains that are likely to moderate.

Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok

Takeaway: GPS’ ugly beat. DECK forecast accuracy is horrendous. PIR shows perils of no presence. JOSB scaring off MW could cost 1/3 of mkt cap



GPS - 4Q Earnings


Takeaway: Let's put this GPS 'beat' in context. They levered SG&A on a 3% revenue decline. On one hand, give 'em credit for controlling costs. But on the other, that hardly bolsters our confidence that the company is investing in driving the top line going forward.  Gross margin was down -277bps. Ugly. Operating margin -133bps. EPS -7%. Oh, and by the way, inventories were up 10% on a 3% revenue decline. #terrible. That brings us to the SIGMA chart below. The massive move to the lower right is absolutely uncharacteristic of a stock at a 10-year high.


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart1 2 28


DECK - 4Q Earnings


Takeaway: This one is puzzling. By the look of the quarter, and the SIGMA chart below, you'd think that DECK was sitting pretty. But the stock is down double digits on the print, which is largely the result of a weak 1Q guide. But the thing with DECK is that the company ALWAYS guides down. It's what they do. We don't condone it, but it's a reality. Either a) the company is simply uber-conservative, or b) it's internal forecasting accuracy is horrendous. We'd like to think it's conservatism, but our sense is that DECK has a problem with forecast accuracy. The trouble with this stock now is that we just passed the seasonal period where its core product, UGG, does best. Now people have to wait another nine months for anything to get excited about.


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart2 2 28


PIR - Pier 1 Imports, Inc. Updates Fourth Quarter and Full Year Fiscal 2014 Sales and Earnings Per Share Guidance



  • “'Since our holiday sales update on January 9th we have continued to experience significant disruption from adverse weather in many of our major markets. This has resulted in considerably softer store traffic, as well as some temporary store closings, which further pressured fourth quarter sales and merchandise margin...We saw another sequential increase in e-Commerce sales, which reached 5% of total sales in the quarter, while traffic to the site increased to 1.9 million visitors per week. For the full year, e-Commerce will contribute approximately 4% to fiscal 2014 total sales – putting us readily on track to reach our targeted contribution of 10% of total sales by the end of fiscal 2016.'”


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart4 2 28


Takeaway: PIR is no stranger to disappointing. One of the problems it faces is that e-commerce is only 6% of total sales. Stack that up against someone line Restoration Hardware at 47%, or Williams-Sonoma at 46%, and it puts considerable risk on the business when store traffic is under pressure due to factors like weather.


JOSB , MW - Jos. A. Bank Board Rejects $63.50 Per Share Tender Offer; Agrees to Meet With The Men's Wearhouse-Willing to Consider a Higher Price



  • "The letter...states that its Board of Directors, after careful consideration and discussions with its financial and legal advisors, has unanimously rejected The Men's Wearhouse Inc.'s $63.50 per share unsolicited offer as inadequate, after giving effect to the Eddie Bauer acquisition and related issuer tender offer, and not in the best interests of Jos. A. Bank stockholders. The Board recommends that the Company's stockholders reject the Offer and not tender their shares into the Offer."
  • "The Jos. A. Bank Board continues to believe that significant value will be created for shareholders in its proposed acquisition of Eddie Bauer and the related issuer tender offer...It further stated that the financing for the Jos. A. Bank acquisition of Everest is proceeding on track, and that the Company expects to market and place the high yield bonds promptly. The bridge loan committed to by Goldman Sachs remains fully committed and, subject to its terms and conditions, will be available to Jos. A. Bank to finance the Everest transaction."


Takeaway:  JOSB's biggest risk here is that it succeeds in its effort to thwart MW's proposed acquisition. If MW walks, which is entirely possible, then JOSB loses a third of its market cap overnight.


ADDYY - Media Bank: Reebok Teams With Miranda Kerr... Rocky's New Champ



  • "Reebok launched a campaign with supermodel Miranda Kerr on Tuesday to promote Skyscape, its new active-and-casual women’s shoe."
  • "The Skyscape collection is available beginning April 1 at Shoe Carnival, Rack Room, Kohl’s, Shoe Show and on Reebok’s website."


Retail Callouts (2/28): GPS, DECK, PIR, JOSB/MW, AdiBok - chart3 2 28



Leading the headlines:  hotel earnings, gaming in MA, and as always, developments in Asia and on line gaming.




  • Nevada Gaming Revenue Report for Jan 2014 
  • OEH – 4Q13 earnings, 10 am call

Tuesday, March 4

  • CONEXPO-CON/AGG – Las Vegas thru Friday           

Wednesday, March 5

  • BYD – 4Q13 earnings, after market close, 5pm conf call


PENN - received prelim approval for MA's 1st slots parlor license. PENN proposed to renovate and expand the Plainridge Racecourse as part of a $225m project in Plainville.  The site would feature 1,250 slots, a Doug Flutie-themed sports pub, an upscale restaurant and four different food court options. The site will also have 1,620 parking spaces.  The slots license will cost $25m, and the slot parlor will pay a 49% state tax on gambling revenue.  

Takeaway:   The Massachusetts Gaming Commission will meet today at 9:30 a.m. and is expected to award the PENN the Slot License at that time.  PENN's stock popped 5% on yesterday's news.  We calculate a NPV for the project of $0.65-$0.95 per share or 5-7% of Wednesday's close. 


LVS - Sands Casino Bethlehem President Robert DeSalvio resigned late Wednesday.  DeSalvio was President since the casino opened in 2009.  LVS spokesman Ron Reese said DeSalvio’s resignation was not related to an apparent internet hacking of the casino’s local web-page which shut down the parent company’s websites for six days and also compromising the Bethlehem casino employees personal information.

Takeaway:  Bethlehem has become mostly irrelevant to the LVS story and we continue to expect management to pursue a sale of this property.


1680.HK Macau Legend - The chairman and controlling shareholder of casino operator Macau Legend Development Ltd, David Chow Kam Fai, increased his stake in the company by nearly US$6.5 million to 30.22% this week.  

Takeaway:  While we don't follow the company, we find it noteworthy when an insider with sizable holdings acquires additional shares.  Stay tuned.


FOXWOODS - Proposed $750MM casino in Fall Rivers, MA. Next step would be a community referendum.  Also seeking that southeastern Mass license is KG Urban in New Bedford and the Mashpee Wampanoag in Taunton. Regulators plan to issue the license in November.

Takeaway:  New markets could be an emerging theme for slot suppliers like IGT, BYI, and SGMS but we're still 3 years away at best.


HST – Fitch raised the credit credit rating to BBB- from BB+, now investment grade rated.

Takeaway:  HST senior management did a good job at communicating the delivering strategy with investors – it is good to see the tacit acknowledgement and confirmation from Fitch.


OEH - announced better than expected 4Q13 results lead by European RevPAR +11%, North America +6% and Rest of the World +10%.  Adjusted EBITDA increased 12% in 4Q and 17% for the year.

Takeaway:  Worldwide Luxury continues to enjoy a strong tailwind.  Europe still improving.


RCL - Will transfer the Rhapsody of the Seas in the summer of 2015 from Alaska to Europe to offer its first Black Sea itineraries.  Replacing Rhapsody in Alaska for the 2015 season will be the slightly larger Jewel of the Seas, which will join Radiance of the Seas in that market.

Takeaway:  RCL continues to increase presence into the European market




Package Tour/Hotel Data DSEC 

Visitor arrivals in package tour totaled 745,000 in January 2014, -2% YoY, attributable to the decrease in visitors from the Republic of Korea and Mainland China.  Visitors from Taiwan (57,000); Hong Kong (39,000) and Thailand (13,000) registered YoY increase, whereas those from Mainland China (560,000), the Republic of Korea (33,000) and Japan (11,000) recorded decrease.  The average length of stay of guests held stable as January 2013, at 1.4 nights.  5-star hotel occu at 83%.

Takeaway:  Decline not a concern since these are not big gamblers. January GGR was disappointing, however, but made up for by a 30%+ February.


Illinois Senate exploring internet gaming -  The Illinois Executive Senate Committee held a hearing Wednesday to discuss the pros and cons of online gambling.  Recall, Illinois was the first state in the US to offer the sale of lottery tickets over the internet after it received a favorable response from its request of the US Department of Justice to clarify its stance on the Wire Act.

Takeaway:  Illinois legislators continue to eye gambling expansion in the state.  A bill has yet to be introduced in this session that includes internet gaming.  The expansion of gaming will likely become a platform issue for the Gubernatorial election in November.  As such, the outcome of any gaming expansion in Illinois is also dependent on who gets elected Governor.  If a pro-gaming candidate gets elected, we could very well see an expansion of gaming to include new licenses, slots at race tracks, and slots machines at airports.


Las Vegas – named one of Elite Eight city finalist to host the 1026 Republican National Convention.  

Takeaway:   We give the early handicap to Las Vegas as 3:2 favorite.


Sanya, Hainan, China –  Rosewood Hotels & Resorts announced the company will open a property in Sanya in 2017.  Sanya will be the company’s third property in China following Rosewood Beijing (opening Spring 2014) and Rosewood Chongqing (opening 2015). 

Takeaway:  We were never a believer in gaming's imminent expansion to Sanya given the development prospects now coming out of the ground in Cotai.  However, we find development of business and commerce via the International Finance Forum noteworthy.  


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Chinese banks raise mortgage rates on funding squeeze:  According to Reuters, a private survey by CRIC, showed banks have raised mortgage rates for first-time homebuyers as a result of tighter liquidity. The survey said nearly 90% of 69 bank branches in 22 Chinese cities have stopped offering preferential mortgage rates to first-home buyers, with some increasing the rates 5-10% above the benchmark rate. That compared to 21% of bank branches that offered discount mortgage rates in the survey conducted in December.

Takeaway:  If true, this could be a headwind for the Mass gaming segment in Macau. 

Early Look

daily macro intelligence

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.

Funny Fed

“To me being a gangster was better than being President of The United States.”

-Henry Hill


While I’m not sure if one of New York City’s most infamous mobsters (1) said it that way, Ray Liotta did in Goodfellas. So that’s good enough for me. Great flick. Just like the Bernanke and Yellen Fed... really funny.


Henry: “You’re a pistol! You’re really funny. You’re really funny!”

Tommy: “What do you mean I’m funny?”

Henry: “It’s funny, you know. It’s a good story; it’s funny, you’re a funny guy!”

Tommy: “What do you mean? The way I talk? What?” (everyone becomes quiet)

Henry: “It’s just, you know, you’re just funny – the way you tell the story and everything.”


Funny Fed - good


Janet "Mother of All Doves" Yellen is funny too.


She had us all right cracked up on the @Hedgeye HQ floor yesterday. The best part about her is that she actually believes what she said. On CNBC, Anthony, The Mooch, Scaramucci (not a character in the movie) called her an “intellectual stud.”




Back to the Global Macro Grind


But Janet, seriously, just get the heck out of here already. While it was fun buying everything other than US Dollars as you were outlining your qualitative policy to passively inflate, we have to go out there on the Street today and live in the real world.


Here’s what happened in the market yesterday as the Fed’s price fixing policy (“rate guidance”) took hold:

  1. Dollar Down
  2. Rates Down
  3. Stocks Up (sort of  - consumer and financial stocks still weak and down YTD)

This is very Q1 2011. The Dollar Down part isn’t funny because it’s an explicit #InflationAccelerating signal:

  1. Inverse correlation between USD and SPX (6 weeks) is now -0.85
  2. Inverse correlation between USD and CRB Commodities Index (6 weeks) is now -0.83
  3. Inverse correlation between USD and WTIC and Brent Oil (6 weeks) are now -0.85 and -0.90!
  4. Inverse correlation between USD and Gasoline (6 weeks) is now -0.92!
  5. Inverse correlation between USD and Gold (6 weeks) is now -0.93!

In other words, while she might look and sound like a crazy lady on TV, she actually has more power than the President of the United States at this point on the cost of living for Americans. This is plainly a Policy To Inflate. And it’s very dangerous, on many levels.


But don’t worry about the Dollar DOWN = Food, Gas, and Gold UP thing, because the “US stock market is up.” Yep, a whole +0.3% for 2014 to-date vs. the CRB Commodities Index and Gold +7.9% and +10.6% YTD, respectively.


After being “up” (in Burning Peso terms) +460% last year, Venezuela’s stock market was up +1.9% yesterday too. But Chavez was funny. Tommy: “Funny how? I mean, what’s funny about it?” (Goodfellas).


As John Allison states plainly in The Financial Crisis and The Free Market Cure, “countries do not go bankrupt the way businesses do. They typically hyperinflate – that is, print valueless money – and move to some form of authoritarian government.” (pg 8)


Authoritarian government? Think that’s funny? Or should we just take this un-elected lady’s word for it?


While the 80% of America who can’t invest in inflation gets jacked with it, we can make money (not funny for the “inequality” pitch). So protect yourself against US Currency Devaluation (new YTD lows this morning) and buy other countries’ currencies!


As you can see in the Hedgeye Asset Allocation Model:

  1. At 21%, Foreign Currency is back to my biggest weight (we’re long Euros and Pounds vs Burning Bucks)
  2. Commodities are 2nd at 18% (buy more Gold, Natural Gas, Oil, and Food Inflation on all pullbacks)
  3. Fixed Income and International Equities would be my 3rd favorite option

In other words, while the funny lady was cracking us all up yesterday, we didn’t jump into the market and buy things exposed to ~71% of the US economy (CONSUMPTION). We just ramped the #InflationAcccelerating position.


While it’s both comical and counter-intuitive to the Keynesian economist contingent that you buy bonds when inflation starts to breakout, the fact is that’s precisely what you do when the entire world knows the Fed has 0% credibility in fighting real-world inflation.


You buy commodities to own inflation. You buy bonds because you know that inflation slows growth. #InflationAccelerating to all-time bubble highs in 2011-2012 drove bond yields (growth expectations) to all-time lows (bonds to all-time highs) in late 2012 too.


Anthony: “Tommy, no, you got it all wrong”

Tommy: “You mean, let me understand this… ‘cause, ya know maybe its just me, I’m a little f’d up maybe, but I’m funny how?”

Henry: “Just… you know, how you tell the story”


Ben, Janet, and Tommy are Gangsta though – ask Cramer and The Mooch.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.64-2.79%

USD 79.77-80.31

EUR/USD 1.36-1.38

Pound 1.66-1.68

Brent Oil 108.05-110.71

Natural Gas 4.23-5.14

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Funny Fed - Chart of the Day


Funny Fed - Virtual Portfolio


Takeaway: We are removing Wolverine World Wide (WWW) from Investing Ideas.

With the stock market hovering near all-time highs, we have decided to lock in our gains on Wolverine World Wide. Retail sector head Brian McGough still likes the stock and thinks estimates are too low for 2014. His bullish long-term fundamental outlook for the company has not changed.



get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.