Poking the Bear

Client Talking Points


Even the Chinese can’t make up numbers that are less than awful at this point. The Shanghai Composite went down -2.9% overnight to -5.5% for 2014 year-to-date. But look on the bright side: that beats Japan’s Nikkei which is down -7.1% YTD.


Simply said, Vladimir Putin’s currency and stock markets are crashing. Just look at the Russian Trading System which is down another -0.5% this morning. All told, it’s been down -24% since October and down -19.7% YTD. The writing is on the wall.


The 10-year yield of 2.79% this morning has failed to confirm a bond yield breakout above Hedgeye’s TREND (3 months or more) resistance of 2.81%. The payroll print was fun, but the 3 month TREND in payrolls is bearish and, more importantly, the forward looking NSA Jobless Claims series (rolling year-over-year) has now been on a negative slope for 8 consecutive weeks.

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


CRB Commodities Index +9.6% YTD vs Dow -0.7% as inflation slows US consumption growth @KeithMcCullough


"The most beautiful thing we can experience is the mysterious.” -Albert Einstein


The amount of global debt has soared over 40% to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates. The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements and data compiled by Bloomberg. (Bloomberg)





  • CZR 4Q 2013 conference call:  5 pm
  • STN 4Q 2013 conference call:  4:30 pm  

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Tuesday, March 12

  • MTN FY2Q 2014 conference call:  4:30 pm

Friday, March 14

  • Hyatt Investor Day


CZR – a Las Vegas Review Journal story over the weekend was skeptical of CZR’s recently announced strategic asset sales to Caesars Growth Partners and called attention to Caesars Entertainment Corp’s $3.06 billion of maturing debt in 2015 and 2016


Takeaway:  We too were perplexed by the recent announcement...seems like a three card monte car


HOT – announced Sheraton will open 35 hotels during next 12 months with a focus on China and Southwest Asia.

Takeaway:  A little better than we thought. Hopefully, China doesn't blow up.



Number of cruise passengers in Spain +41% YoY in Jan Hosteltur 

According to the monthly report of state ports, Spanish ports in January received a total of 454,040 cruise passengers, representing +41% YoY.  The number of cruise ships that passed were 208, an increase of 21.6% YoY. 


Takeaway:  Positive data point in a market that has struggled the past several years

Massachusetts Update – The Commission will take up the decision of MGM by May 30 if the sole remaining applicant in Western Mass. — MGM Grand — is worthy of a license in Springfield.   The commission will then decide whether the Greater Boston casino license will be issued for Everett or Revere – pitting Steve Wynn against Suffolk Downs.  A decision is expected by June 30.


Takeaway:  Winner's Curse? PENN looks like the highest ROI in MA



Chinese February data

  • Chinese new yuan loans CNY 644.5 bn vs Reuters estimate CNY716 bn
  • Total social financing CNY 958 bn vs CNY 2.58 tn in January

Takeaway:  Macro data from China remains disappointing.  The stock market is at the its lowest point since 2009.


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.


Golden Defense

This note was originally published at 8am on February 24, 2014 for Hedgeye subscribers.

“All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”

-Sun Tzu


That’s most likely a familiar quote to any winner in this world – and it should be. Author John Hamm uses it effectively in his intro to chapter 5 of Unusually Excellent (pg 103) in order to link leadership to processes and plans.


As we like to say here @Hedgeye in terms of positioning for new Global Macro Themes, the plan is that the plan is going to change. That’s because real-time prices and market signals do. Our risk management process doesn’t change so much.


Neither did Team Canada’s in this weekend’s Gold medal hockey win at the Olympics. Sure, offense might win shootouts, but defense wins championships. En route to their second consecutive Olympic win, Team Canada shut out both USA and Sweden. It’s really hard to lose if you don’t get scored on (Canada allowed only 3 goals in 6 tournament games). #GoldenDefense


Golden Defense - 44


Back to the Global Macro Grind


Backcheck, Forecheck, Paycheck. That’s another saying meat-head hockey players like me use when we think about grinding out wins. Note that back-checking comes first. Defense always does.


There are obvious ways to apply this mentality to your risk management strategy. In a US stock market that literally went straight up last year, if all you did was not lose money on the short side, you probably won the season for your investors.


Sure, doing crazy stuff (like trading) may look like “short-term” tactics (primarily because they are) but don’t confuse my tactical back-checking  with a lack of a longer-term strategy to win championships.


What is your long-term strategy?


Mine is don’t lose money. That’s why how you did in 2000, 2001, 2002, 2008 and 2011 matters.  That’s also why most of our Global Macro Themes incorporate what to stay clear of (on both the long and short side) if a big macro theme starts to trend.



  1. During #GrowthAccelerating – don’t short high-short interest, high beta, growth stocks that can beat expectations
  2. During #InflationAccelerating – don’t short commodities, breakevens, etc.
  3. During #InflationAccelerating + #GrowthSlowing – don’t short bonds, utilities, or Gold

If you aren’t in the business of shorting things, substitute the word “short” with SELL! Obviously, the other side of “don’t sell” is buy or hold. And I think anyone who has bought and held commodities for the last 3 months is winning YTD too.


Update on our non-consensus 2014 call for #InflationAccelerating:

  1. US Dollar Index is down again this morning and -1.4% in the last 3 months
  2. CRB Commodities Index was up another +2.8% last week and up again this morning to +7.8% YTD
  3. US Consumer Prices (CPI) hit a 4-month headline high of +1.6% year-over-year last week (JAN report)

I know. I know. The government says there’s no inflation, and since they’ve neutered the inflation report so that the headline number can rarely remain above 4% (or below 1%) for long, academics can argue amongst themselves on that.


Reality is that market expectations trade on the rate of change for both GROWTH and INFLATION expectations. And currently the rate of change on both makes our macro call a very easy one to make:

  1. INFLATION: up from its 3yr low of +0.9% y/y CPI in OCT 2013, CPI is going towards 2%, fast, in February
  2. GROWTH: down from its Q313 sequential peak of +4.12% GDP, you’ll probably see a 2% handle in Friday’s GDP report

So, irrespective of your views on how to play Macro Defense, what if?

  1. Inflation doubles (from 1% to 2%)
  2. Growth gets cut in half (from 4% to 2%)

Market #history fans will recall that when inflation slows growth, stock markets get MULTIPLE COMPRESSION. In other words, with the SP500 trading at 16x this year’s #OldWall projection for “earnings”, all you need is 2 points of multiple compression to get you 1638 (14x) at some point this summer. If the “earnings” (and multiple on them) start to fall, it’ll get gnarly out there, faster.


And while I am sure that the “weather will turn” and that some American consumers are dumb enough to go lever themselves up with a few more houses to flip, that doesn’t change the fact that inflation will A) slow real-consumption-growth and B) have a big impact on reported US GDP via a rising “deflator” (note: the deflator, which is subtracted from GDP, hit a 50yr low last yr and is rising).


With Natural Gas (+17.7% last wk to +46.3% YTD) and Coffee price (+19.1% last wk to +50.1% YTD) #InflationAccelerating to 52-week highs last wk, #GrowthSlowing has both Utilities (XLU) and Gold +7% and +11% YTD, respectively. So don’t be short those. Buying and holding them for the last 3 months has been a #GoldenDefense. Being long the American consumer, not so much.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.66-2.78%
SPX 1803-1848

VIX 13.44-16.69
USD 79.81-80.41

Brent Oil 108.54-110.69  

Gold 1306-1340


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Punishing Her Currency

“The punishment process is as important as the reward system.”

-John Allison


As I quote one of my favorite post-2008-crash books, The Financial Crisis and The Free Market Cure (pg 177), I’m thinking more about the full body ache I have from our old-man hockey semi-final yesterday than what’s going on in the market. That’s not good.


Neither was the US stock market’s reaction to Friday’s US jobs report that “beat” expectations (must have been the weather). Stocks raged to all-time highs on the open, then got pancaked by midday. Newsflash: the monthly jobs report is a lagging indicator.


I didn’t have a good week, but it could have been worse. With the CRB Commodities Index +9.6% YTD (vs. the Dow -0.7%), this year’s Burning Buck rally in some asset prices has a lot more to do with #InflationAccelerating than anything else.


Back to the Global Macro Grind


While I am certain that if they had @CNBC Kiev, Ukraine would look just fine (Ukrainian currency crash has its stock market +29.8% YTD in Burning Currency terms); it’s not. Especially when a country’s currency is in free fall, her stock market is not the economy.


In Russian terms, Putin’s Ruble is crashing (-10% YTD) and so is his stock market (-24% since OCT and -19.7% YTD). Meanwhile the Chinese just printed a -18.1% year-over-year export disaster for FEB. The Shanghai Composite dropped -2.9% on that to -5.5% YTD.


Argentina’s Burning Currency is -17.1% YTD, but there’s probably nothing to worry about there either. Unless you are an Argentine, that is… Oh, and after trying the whole debt-levered-currency-devaluation thing, Venezuela is about to default on its debt.


In other news last week…


  1. US Dollar Index remained on its YTD lows (below @Hedgeye TAIL risk line of $81.14)
  2. US 10yr Yield popped +14bps to 2.80%, but failed to overcome @Hedgeye TREND resistance of 2.81%
  3. Coffee Prices ripped another +9.2% on the week to +74.3% YTD


No that’s not a typo – up +74.3% is the number, so whatever you do – don’t call that #InflationAccelerating.


With the CRB Foodstuffs Index +14.9% YTD, it’s not just coffee prices that are inflating:


  1. Corn was up another +5.5% last week to +13.7% YTD
  2. Soy was up another +3.1% last week to +14.2% YTD
  3. Lean Hogs were up another +5.8% last week to +24.6% YTD


Yes, basically you’re going to have to back everything out of your breakfast and call eating anything with pig in it “non-core” as the Fed tells you to consume a gluten-free Whatsapp for a buck a day instead.


Have you ever asked yourself why neither the Fed nor Bush/Obama ever talk about America’s currency?


As John Allison points out plainly on page 187 of the aforementioned book, “The fundamental issue underlying the boom-and-bust cycle in the financial industry is the lack of sound money. Unfortunately, the Fed is constantly manipulating the value of the dollar.”


And our profession gets that – or at least the machines do. It’s called Correlation Risk – and this is how it works:


  1. Down Dollar starts to trend as the Fed abandons anything that remotely resembles a two-way policy
  2. “Bad” economic news becomes good for asset price inflation, as the market front-runs the Fed easing
  3. Correlation Risk (asset price inflation trading inversely with US Dollars) starts to dominate


On that last point, here are the 30-day inverse correlations between US Dollar and the big stuff:


  1. Gold -0.88
  2. SPX -0.87
  3. CRB Index -0.75


In other words, the market calls what the Fed is signaling a Policy To Inflate (humans call it a tax). And yes, #InflationAccelerating will slow growth. That’s why you saw me buy bonds on Friday (and anything that looked like a bond, including Utilities, XLU).


Punishing The People with food, energy, rent, etc. inflation can only last for so long. Unless you think America has it in her to become Argentina, she has a tendency to rise up against these types of un-constitutional taxes. So stay tuned on that. History repeats.


The Unites States has already had two failed central banks. Between 1870 and 1913, the US experienced the greatest economic boom in history without a central bank.” –John Allison, pg 187


UST 10yr Yield 2.59-2.81%


Shanghai Comp 1

VIX 12.95-15.64

USD 79.46-80.16

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Punishing Her Currency - Chart of the Day

Punishing Her Currency - Virtual Portfolio

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