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Fading Yellen

Client Talking Points


If you’re still staring at Q3/Q4 2013 US growth and inflation data and think everything in between was the “weather”, you’d be bullish on growth, USD, and rates here – we’re not – that was last year’s call.  Yes, USD ripped off its year-to-date lows. But, it remains well below TREND resistance of $81.14 on the US Dollar Index. Short it here.


The UST 10-year yield bounced off its oversold lows from last week, and it grabbed headlines, but I wouldn’t confuse this as a change in TREND. I’d have to see a breakout above 2.81% (our TREND line) on the 10 year to stop buying bonds on corrections. Fed Chair Janet Yellen wants inflation, and she’s getting it. It slows real growth, and her forecast should get dovish again, but on a lag.


After signaling immediate-term TRADE overbought at $1,385 on Friday and the biggest net long (futures/options contracts) position in a year, yes, Gold corrected. But it didn’t break any line of support that matters in my model. At up +10.4% year-to-date, buy it if you missed the move towards +15% YTD. This is going to be your chance.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


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.


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.

Three for the Road


TREASURIES: no follow through in the 10yr to yesterday's freakout on #RatesRising, 2.76% last @KeithMcCullough


"The greatest achievement is to outperform yourself." - Denis Waitley


If taxes were romantic, April 15 would make for the world's biggest singles mixer. That's because single people, including heads of household as well those who are widowed or divorced, account for the majority of federal tax filers in the United States. In 2011, they filed 61% of all returns, according to an analysis of IRS data by the Tax Foundation. Unmarried Americans who are 18 and older now comprise 44% of U.S. households, according to the latest Census data. And Americans who live alone accounted for 27% of all households in 2012, up from 17% in 1970. (CNN)

Rose Colored Bubbles

This note was originally published at 8am on March 06, 2014 for Hedgeye subscribers.

“What’s in a name? That which we call a rose by any other name would smell as sweet.”

-William Shakespeare


What’s in a bubble?


I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.


Rose Colored Bubbles - bub


At the all-time highs, they just look sweet.

Back to the Global Macro Grind

All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.


Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.


What’s in the cost of living?

  1. Shelter
  2. Food
  3. Transportation

Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…


What’s in the all-time high in American “inequality”?

  1. The Housing Bubble
  2. The Commodity Bubble
  3. The Bond Bubble

One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.


Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night.  He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”


As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.


So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.


In other news, inflation slowed US consumption growth again in February:

  1. USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
  2. The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
  3. US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB

No worries though, it’s all “weather.”


If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.


I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.


As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.75%

SPX 1848-1879

VIX 13.01-15.64

USD 79.86-80.43

Brent 107.31-110.02

Gold 1319-1351


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rose Colored Bubbles - San Fran HPI


Rose Colored Bubbles - rta7

CHART OF THE DAY: Fade The Fed's Forecast


CHART OF THE DAY: Fade The Fed's Forecast - Chart of the Day

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Fade The Fed's Forecast

“If you have to forecast, forecast often.”

-Edgar Fiedler


You probably don’t know who Fiedler was. Like many Keynesian “economists” of the Nixon/Carter and Bush/Obama eras, his growth and inflation forecasts were useless.


But I like his quote.


And I really like the opportunity the market gave us yesterday to add to things we’ve liked from lower prices all year. That list of big macro stuff includes Commodities (Gold, Food, etc.), Foreign Currencies (vs. the USD), and Bonds (long-term Treasuries in particular).


Back to the Global Macro Grind


But, but, she said that the economy wasn’t slowing and that rates could rise, eventually…


“I do want to emphasize this is a forecast”

-Janet Yellen (March 19, 2014)


Fade The Fed's Forecast - yell


I hear you on what the market did in reaction to her forecast (Dollar up, Rates up, Gold down). Nice day-trade. But do you hear Mr. Macro Market’s trending forecast? He updates his forecast often.


So, now there are 2 big conflicting forecasts to concern yourself with:

  1. Janet Yellen’s forecast (which is based on what happened in the US in Q3/Q4 of 2013 – inflation fell, growth accelerated)
  2. Mr. Macro Market’s updated forecast of #InflationAccelerating and real #GrowthSlowing in kind

And, since you have to pick one of the two, which one will it be?

  1. A Fed forecast that is wrong at least 2/3rds of the time and is based on lagging economic data
  2. A market based forecast that is right more than 2/3rds of the time based on real-time market data

To recap the Fed’s forecast:

  1. Most of the Q114 slow-down was due to the weather
  2. As growth recovers in the 2nd and 3rd quarter, you should expect the Fed to continue to taper
  3. There is no inflation (its below the “committee’s objective”), so don’t worry about it

And to update you on what Mr. Macro Market has to say about that this morning:

  1. US DOLLAR is showing no follow-through to yesterday’s bid and remains bearish TREND @Hedgeye
  2. US 10YR TREASURY yield is showing no follow-through to yesterday’s ramp and remains bearish TREND @Hedgeye
  3. GOLD sold off to immediate-term TRADE support of $1321, and remains a bullish intermediate-term TREND too

So, on the “what Janet meant to say” part, you might need Hilsenrath to spell it out for you circa 3PM on a market Friday. I get that. You should too. Most people don’t have a macro process, and they have to take the Fed’s word for it, literally.


From a risk management perspective, if the following three things happen:

  1. US Dollar Index breaks out > $81.14 TREND resistance
  2. US 10yr Yield breaks out > 2.81% TREND resistance
  3. Gold snaps $1278 TREND support

Well, then I forecast that I will change my forecast. In the meantime, I say you fade the Fed’s forecast because I forecast that Janet Yellen will get less bullish on US Growth after growth slows.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.61-2.81%


VIX 12.99-17.57

USD 79.29-80.41

EUR/USD 1.37-1.39

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fade The Fed's Forecast - Chart of the Day


Fade The Fed's Forecast - Virtual Portfolio

March 20, 2014

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Thursday, March 20

  • None       

Friday, March 21

  • None       

Monday, March 24

  • None       

Tuesday, March 25

  • CCL to report earnings pre-market, conf call at 10 a.m. EDT



PNK - The former Westinghouse site, located on Page Boulevard in Springfield Massachusetts which was almost an Ameristar Casino, could now be the North American hub for Changchun Railway Vehicles Company.  The Westinghouse site is now owned by Pinnacle Entertainment following PNK’s acquisition of Ameristar.  Ameristar purchased the 41 acre site for $16 million in January 2012.

TAKEAWAY:  Unlocking hidden value in the balance sheet of approx $0.25/share assuming Ameristar's $16 million basis. 


Universal Entertainment  -  Investigation efforts are focusing on a $25 million payment Universal Entertainment made to Rodolf Soriano, a casino consultant, who was linked to a former Philippines gaming regulator.  Subic Leisure, “the receptacle for $35 million of the $40 million in payments,” was controlled by Soriano. Subic Leisure is registered in the British Virgin Islands where there is no requirement to disclose the names of its shareholders or director

TAKEAWAY:  Based on this information, it appears WYNN was justified in cutting ties with Okada and Universal Entertainment.


HLT - announced the signing of a new management agreement with PT Putragaya Wahana to introduce the Waldorf Astoria Hotel & Resorts property in Jakarta, Indonesia. Scheduled to open in 2018, the 181-room Waldorf Astoria Jakarta will be the second property of the legendary luxury brand's portfolio in Indonesia.

TAKEAWAY:  Hilton continues to expand it's footprint globally via capital light. 


RCL - will not attend the London Cruise Show this weekend but announced it will instead make a special offer available to all UK trade partners to encourage new to cruise bookings.  Cruise holidaymakers no longer have to go to Olympia to get the best deal, instead RCL is offering a special offer of $400 onboard credit for all potential guests to enjoy, not just restricted to those who attend the show.  The $400 onboard credit applies when a guest books a stateroom on selected sailings of seven nights or more departing between April 1 and December 31, 2014.  The offer excludes sailings on Quantum of the Seas and is applicable for bookings made between March 20 and 24.

TAKEAWAY:  Despite Wave Season coming to a close, widespread discounting and promotions continues across the industry. 


RCL- Norwegian Cruise Line announced that Guy Harvey, widely recognized as the world's finest marine wildlife artist and champion of ocean conservation, has been named to design the signature hull artwork of the line's largest ship to date, Norwegian Escape, scheduled to debut in October 2015. Norwegian's newest ship is Harvey's largest canvas to date, at 1065 feet in length, with his artwork spanning from the hull to the aft featuring two undersea scenes that blend seamlessly

TAKEAWAY:  While interesting, we are unclear how such art projects increase shareholder value versus increasing onboard maintenance capex to maintain the hull painting. 




China’s Invisible Hand on Macau – China’s Central Commission for Discipline Inspection, the central government’s anti-corruption arm, announced it will keep watch on the central government’s liaison offices in Macau and Hong Kong.  Political analysts say the announcement may indicate that Beijing is serious about cracking down on corruption, but that it may also be just a gesture, meant to deter mainland officials from gambling in Macau.

TAKEAWAY:  This is yet another example of increased scrutiny over Macau and the gaming business. 


On Line Poker - California lawmakers introduced two separate bills to legalize online poker in the state.

TAKEAWAY:  California would be a key U.S. state in the legalization process. If the California legislature moves ahead with plans, then numerous other states might follow their lead.


Louisiana Gaming Revenues  - the Gaming Control Board reported statewide revenues increased 1.5% to $209.7m for February.  Same-store revenue (excluding Margaritaville) gaming revenues decreased 3.3%.  On an operator basis, BYD, decreased 5.4% to $45.4m, ISLE increased 12.4% to $12m, PENN decreased 11.8% to $6.7m, and PNK decreased 3.5% to 53.9m,

TAKEAWAY:  Not surprisingly, LA led the way in the regional markets given the cold, wintry weather elsewhere.  February would have been one of the better months for regional gaming in general if not for the weather.  We expect March to disappoint even with good weather.


Clark County Slot Parlors – Clark County imposed a moratorium on applications for “tavern” slot machine licenses. Under the 2011 regulations, taverns with the proper gaming license could have up to 15 slot machines, so long as the revenue from gambling was incidental to the primary business of serving food and alcohol.  However, “incidental” was never defined, meaning some taverns could generate up to 80 percent of their revenues through gaming.

TAKEAWAY:  Any reduction in slot parlor business would likely benefit Stations Casinos and Boyd Gaming's locals business.  We will examine this issue during our upcoming Las Vegas trip.


Atlantic City - United will begin serving Atlantic City International Airport on April 1 with daily flights from its Chicago and Houston hubs. Service will start modestly, with only one flight per day from each city using 50-passenger regional jets.  The Atlantic City Alliance has a $1 million annual subsidy program to entice conventions and meetings to town. Overall, the convention subsidy, the United flights and a promotions campaign for Atlantic City’s special events will be a catalyst for more business.

TAKEAWAY:  This is a good first step and we look forward to additional airlines introducing additional service to Atlantic City.  


Las Vegas Culinary Workers Union 226 - The union delayed its strike authorization vote to March 27 as negotiations continue with the 11 downtown Las Vegas casinos that are operating without labor agreements.  Casinos that still haven’t reached agreements with the union include Golden Gate, Golden Nugget, Binion’s, Main Street Station, Four Queens, the D Las Vegas and Margaritaville

TAKEAWAY:  It appears the Culinary Union is having success negotiating new contracts with the larger casino operators.  We would not be surprised to see the remaining casino operators fall in line. 


Atlantic City - The Tropicana Casino and Resort plans to carry out a $35 million renovation to its Atlantic City buildings, including the addition of a choreographed LED light show on its exterior.  The project also would re-do the 434 hotel rooms in the Tropicana's north tower.  The resort's parent company, Tropicana Entertainment Inc. is owned by billionaire Carl Icahn.

TAKEAWAY:  Is such capital reinvestment and redevelopment too little too late?


Foxwoods Casino - laying off 65 people, according to a recent filing with the state Department of Labor.   Foxwoods revenues dropped from $1.2 billion in 2011, to $1.14 billion in 2012, to $1.04 billion in fiscal 2013, which ended Sept. 30. Foxwoods and Mohegan Sun are competing with new and expanded gaming facilities in New York, Rhode Island and elsewhere in the Northeast.

TAKEAWAY:  Falling revenues unfortunately leads to operating margin pressures in this fixed cost business as operators attempt to maintain profitability. 




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.


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