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Client Talking Points


No more mo-mo for those expecting the Bank of Japan to get looser than the 60-70 TRILLION Yen per year (“We are not considering any kind of additional easing now” – Kuroda). So, not surprisingly, the Yen is up and Nikkei is down another -1.4% (-3.1% in 2 days to -9.7% year-to-date). Needless to say, we remain bearish on both Japanese growth and equities.


Buy every Bernanke Bubble that imploded in 2013 (Gold, Bonds, Emerging Markets). Brazil is up another +2.1% in a nasty US equity tape yesterday – you gotta love that divergence – and Turkey is up +1% to +9.3% year-to-date. Consensus macro bets are not in the area code of being positioned for this.


Nasdaq is down -6.4% since March 5th. What did the CRB Index (19 Commodities) do on that yesterday? #Nothing. It was flat on the day at 305 as #InflationAccelerating continues to get paid. Gold? It is up +1.2% this morning too, which is cool. Our Q2 Macro Themes call is today at 11 a.m. EST.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


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.

Three for the Road


#StrongPound $1.67 vs USD - I'll take Carney vs Yellen on protecting the currency all day long @KeithMcCullough


"Don't be afraid to be unique or speak your mind, because that's what makes you different from everyone else." - Dave Thomas


The hunt for missing Malaysian Airlines Flight MH370 is on track to cost hundreds of millions of dollars, becoming the most expensive search in aviation history with 26 countries contributing planes, ships, submarines and satellites. A month into the search for the jet, estimates compiled by Reuters show that at least $44 million has already been spent on the deployment of military ships and aircraft in the Indian Ocean and South China Sea. (NBC News)

LEISURE LETTER (04/08/2014)

TICKERS:  6889.HK, MPEL, 27.HK, 880.HK, WYNN, HLT, CCL


Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day



Dynam - Pachinko operator in talks to build Japan casino with Asian partner Reuters

Dynam has already held talks with MPEL, SJM, Galaxy as well as South Korea's Paradise Group and NagaCorp Ltd.  Proponents of the bill expect debate to start next month, and aim to pass it before parliament session ends in June.  Paradise said it has looked at opportunities in Japan but for now has decided not to pursue them.


Dynam CEO Sato said he wanted to target regional markets outside big cities, such as potential sites in Hokkaido to the north and the southern Kyushu area.  That would match Dynam's strategy for the pachinko market.   "I think the local area is better. There you can run a stable operation targeting the mass market, with high-rollers accounting for about 10-20% of your business," Sato said. 

TAKEAWAY:  Japan interest heating up ahead of pivotal debate in May


WYNN - recognized as one of the most trustworthy companies in the United States by Forbes Magazine's "2014 - 100 Most Trustworthy Companies" list.  

TAKEAWAY:  An appropriate recognition for a premier gaming and lodging operator. 


HLT – announced a new strategic supplier agreement with DIRECTV for a new in-room entertainment experience.

TAKEAWAY:  The company continue to improve the in-room guest experience.

CCL - Carnival to sail 11-day cruises from Galveston Travel Weekly

Carnival Cruise Lines said that it will offer the Texas market longer cruises for the first time, with four 10- and 11-day sailings between Galveston and San Juan.  Carnival said a desire for longer, more varied itineraries was one of the themes that emerged from its series of Carnival Conversations meetings with travel agents.

TAKEAWAY:  Whatever you gotta do to tackle the challenges in the Western Caribbean market.

INDUSTRY NEWS           

UK Slots - PM David Cameron called for further crackdown on fixed odds betting terminals. He proposed stricter regulations on the machines and limiting clustering of bookmaking shops.

TAKEAWAY:  Incremental negative for SGMS


Korea bets on casinos to boost economy Korea Times

Officials from at least 5 local governments - Incheon, Busan, North Jeolla Province, South Jeolla Province and Jeju Province - said they already plan or are considering IRs.  Jeju Province runs 8 of the 16 casinos nationwide.  It said it plans to build up to 4 additional ones, considering that the resort island has been popular among Chinese visitors for years.

TAKEAWAY:  Until local play is allowed, these casinos will be insignificant and pose no threat to Singapore or Macau.


Horse-racing:  The amount wagered on horse racing fell 1.92% in March to $964.459 million, despite the addition of one more race day to 388. 

TAKEAWAY:  Pari-mutuel wagering not immune to sluggish domestic trends


Atlantic City - the 12 casinos that operated in 2013 (the Atlantic Club shut down in January of 2014) posted a collective gross operating profit of $235 million, down from $360 million in 2012.  The casinos saw their gross operating profits decline by nearly 35 percent last year.

TAKEAWAY:  Despite the current efforts to reinvigorate Atlantic City, surrounding jurisdictions continue to cannibalize Atlantic City. 



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. 


CHART OF THE DAY: 'Prospect Theory' #Winning


CHART OF THE DAY: 'Prospect Theory' #Winning  - Chart of the Day

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Prospect Theory Wins

“One of the main tenets of prospect theory is that people don’t evaluate things in absolute terms.”

-Jonah Berger


Prospect Theory was originally developed by Dan Kahneman and Amos Tversky in 1979 (i.e. after all the Keynesian economic policy makers who worked for Nixon and Carter failed). But Kahneman didn’t win his Nobel Prize for #behavioral economics until 2002. And one of the most important books you’ll ever read, Thinking, Fast and Slow, wasn’t published until 2011.


All the while, this thing called the US economic and policy crisis happened. And linear (Keynesian) economic theorists working for Bush and Obama didn’t change a damn thing. There is no #behavioral or non-linear chaos theory embedded in what they do. Almost every lick of what comes out of the US Treasury and/or Federal Reserve deals in absolutes, on a lag – not forward looking rate of change.


While that is a national embarrassment for a country that hangs its entitled hat on meritocratic evolution and technological change, it remains your opportunity. Whether it’s Jonah Berger teaching social influence (marketing) at Wharton, or me ranting about macro every morning – it’s what happens on the margin that matters most. Prospect Theory is winning.


Back to the Global Macro Grind


Rate of change, or the accelerations/decelerations in the slope of a line measuring momentum, is easy to understand; especially when you show it in pictures. This is why a lot of people in our profession look at charts.


Prospect Theory Wins - Its not where you look that matters its what you see


But, as Henry David Thoreau wrote, “it’s not what you look at that matters, it’s what you see.” And, in a general sense, that is the Hedgeye Risk Management process when I talk about considering multiple factors and multiple durations, all at the same time.


In other words, it’s easier to see what’s going on in this globally interconnected macro marketplace of colliding factors, policies, and prices if you take a step back and look at the big picture. So let’s do that this morning, and take a look at 3 big places:

  1. JAPAN – on both our immediate-term TRADE and intermediate-term TREND durations the Japanese stock market remains bearish. From a GIP (Growth, Inflation, Policy) modeling perspective, Japanese #GrowthSlowing continues to be our call.
  2. EUROPE – mostly every major European stock market is still bullish on both our TRADE and TREND durations - in sharp contrast to the Dow (-2% YTD), the Italian stock market is +17% YTD (they don’t have social media or biotech bubble stocks). From a GIP modeling perspective, the Eurozone growth recovery is lagging what was the US one in 2013 by 6-18 months.
  3. USA – both the Nasdaq and the Russell 2000 have recently broken both @Hedgeye TRADE and TREND support levels. The SP500 is bearish on our immediate-term TRADE duration (1869 resistance) and barely bullish TREND (1830 support). In our GIP model, US #InflationAccelerating still sets up to slow US growth until at least the end of the 3rd quarter.

Accelerate and decelerate, fast and slow. That’s what centrally planned economies do. Get used to it.


Considering macro markets across multiple-factors also helps. I still can’t for the life of me understand how you’d have an informed opinion on multiple expansion or compression in stocks, if you don’t have a repeatable process considering:

  1. Currencies
  2. Commodities
  3. Interest Rates

But that’s just me. And to be crystal clear on this, I didn’t get that I needed to develop a process to consider all of the non-linear factors within the dynamic ecosystem that I invested in until I got run-over in my “best stock ideas.” Macro phase transitions can crush alpha, fast.


What is a phase transition?

  1. It’s a term used to explain thermodynamic systems
  2. “the transformation from one phase to another by heat transfer” (Wikipedia)

I realize that the alternative to considering market risk this way is using a 50-day moving monkey average. I also get that the guys who taught me about this business used to hold up pieces of paper to their trading screens trying to delineate higher-lows and higher-highs.


But guess what, without considering multi-factor, multi-duration global macro, they were still right in considering rate of change:

  1. Higher-lows + higher-highs = bullish momentum
  2. Lower-highs + lower-lows = bearish momentum

That said, that’s only considering 1-factor (price). And while it’s a good one to start with if only considering price momentum, you don’t have to stretch too far to start adding other factors, like volume and volatility, in order to front-run #OldWall’s behavior.


I’m not saying I have all the answers. I’ve made more mistakes with live ammo than almost anyone my age in this business. I have seen people lie, cheat, and lose. I have seen others evolve, learn, and win.


So I wanted to thank you for the opportunity to learn from all my mistakes out loud. Sometimes I learn fast; sometimes it’s slow. Building Hedgeye in an open, transparent, and accountable environment has helped us improve our process. I’m grateful for that.


We’ll be hosting our Q2 Global Macro Themes conference call this morning at 11AM EST. If you have time, we’re looking forward to your questions about what our risk management process is signaling next.



Nasdaq 4051-4166

Nikkei 143

VIX 14.11-16.52

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prospect Theory Wins - Chart of the Day


Prospect Theory Wins - Virtual Portfolio

Becoming King

This note was originally published at 8am on March 25, 2014 for Hedgeye subscribers.

"Kings are not born, they are made by general hallucination."

-George Bernard Shaw


On this day more than 700 years ago, Robert the Bruce became the King of Scotland.  Robert was one of the most well known warriors of his generation and led the Scots in their wars of independence against Britain. 


Prior to successfully defeating the British, according to legend, Bruce was hiding in a cave on Rathlin Island off the north coast of Ireland. While in the cave Bruce purportedly watched a spider spinning a web in an attempt to connect one area of the cave's roof to another area.  (Clearly, Robert the Bruce had some spare time on his hands.)


 Becoming King - Battle of Bannockburn   Bruce addresses troops


The spider repeatedly failed but after each failed attempt kept turning back to the task at hand. Eventually the spider succeeded.  According to legend, Bruce is said to have used this as inspiration to continue his war against Britain where he eventually inflicted on them a number of critical defeats on the path to Scottish independence.


This story also supposedly inspired the maxim: "If at first you don't succeed, try try try again." 


Back to the Global Macro Grind ...


As the story of Robert the Bruce teaches us, becoming king is not an easy task.  As it relates to asset class performance this year, there aren't a lot of kings in the year-to-date. On a country basis, the top three decliners are as follows:

  • Russia -19.5%
  • Venezuela -14.8%
  • Czech Republic -12.6%

Japan is a close runner up to the top three and comes in fourth with a -11.5% decline on the Nikkei in the year-to-date. Incidentally, the Japanese Mothers Index (more small cap focused) is down a staggering -5.7% today. 


As the reigning King of Russia, Vladimir Putin is certainly learning the pain of trying to broaden his kingdom. On the back of Russia's literal annexation of Crimea, Russian equities are getting clobbered as noted above.


This morning the West is implementing more actions to further alienate Russia. The big symbolic one is that the G-8 summit, which was originally scheduled for Sochi this summer, has now been moved to Brussels and Russia has been uninvited.


In part, this and the myriad of sanctions that have been implemented against Russia are largely symbolic.  No doubt the most significant sanction is the one that has been implemented by the markets themselves as noted above by the almost -20% decline for Russian equities in the year-to-date. To the extent Russian equities continue to decline and Russian companies are challenged to tap the public markets to raise capital, Putin will certainly be wondering whether it is all worth it to become king.


The King of Fed watching, Jon Hilsenrath from the Wall Street Journal, wrote an interesting article yesterday highlighting the odd (for lack of a better word) nature of economic target setting by the Federal Reserve.  According to Hilsenrath, even though the Fed expects a 5.4% jobless rate in 2016, a normalized level, they are still likely to keep interest rates at a level that is well below normal (typically considered 4%-ish on the Fed funds rate).


To the extent this turns out to be accurate, it is likely that we continue to see inflationary assets (Gold) continue to front run this long term dovish policy.  The broader concern, of course, is the arbitrary nature of employment targets such as the jobless rate.  In the Chart of the Day, we highlight a chart we have shown many times in the past which is the labor force participation rate. 


As the chart shows, the U.S. is literally at generational lows in terms of participation in the labor market.   In fact, labor force participation peaked at just under 67.5% in 2000 and has been in relatively steady decline ever since.  Currently, the labor force participation rate is just over 62.5% and at an almost 35-year low.


This emphasizes the oddity of the Federal Reserve using an arbitrary data point such as the jobless rate to highlight the health, or lack of health of the economy, since the jobless rate doesn’t take in to account the people simply dropping out of the labor force.  For today, we’ll leave a discussion of whether the Fed’s extreme dovishness has helped the economy to the side, but certainly the arbitrariness of their targets has and continues to confuse the markets. This is likely why the 10-year treasury rates are down almost 10% on the year and down again this morning. Simply put: investors don’t believe what the Fed is saying.


To add to the confusion, this morning Philadelphia Fed chief Charles Plosser is indicating he believes that Fed Fund rates will hit “2-something” by the end of 2015 and 3% by the end of 2016.  This is more than a 300 basis point move in the next couple of years.  Plosser also indicated he finds the market’s reaction to Yellen’s press conference last week confusing.  Well, Mr. Plosser, confusion breeds contempt, as they say.


Conversely, the United Kingdom, despite losing Scotland to Robert the Bruce many years ago, appears to have a central bank that is at a minimum providing some confidence to the markets and allocators of capital.   The U.K. reported CPI this morning at +1.7%, which suggests an inflationary environment in the U.K. that is relatively benign. 


Certainly, we’d be somewhat hypocritical if we assumed the CPI was the best gauge of inflation in the U.K. (it is a government constructed number after all), but nonetheless the key economic indicators in the U.K. continue to trend the right way as evidenced by CPI coming in lower versus the +1.9% reading in January. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.81%

SPX 1840-1878

VIX 13.34-17.42

USD 79.11-80.39

Gold 1301-1351 


Best of luck out there today and long live the king!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Becoming King - Chart of the Day


Becoming King - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 8, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 0.82% downside to 1830 and 1.19% upside to 1867.                                                                                                                              









THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.30 from 2.31
  • VIX closed at 15.57 1 day percent change of 11.53%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, March, est. 92.5 (prior 91.4)
  • 7:45am ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9am: IMF releases biannual world economic outlook
  • 10am: JOLTs Job Openings, Feb., est. 4.020m (prior 3.974m)
  • 1:30pm: Fed’s Kocherlakota speaks in Rochester, Minn.
  • 2:45pm: Fed’s Plosser speaks in Philadelphia
  • 4pm: Fed holds open board mtg in Washington on leverage ratios
  • 4pm: Fed’s Evans speaks in Washington
  • 4:30pm: API weekly oil inventories


    • 10am: House Ways & Means hearing on supporting economic growth through “a Fairer Tax Code”
    • 10am: House Armed Services Cmte hearing on Russia’s military developments, implications
    • 10am: Atty Gen. Holder testifies on Justice Dept. at House Judiciary Cmte
    • 10am: PPP hearing at House Transp. and Infrastructure Cmte
    • Senate leaders hold news conferences after party luncheons
    • FY15 budget panels/hearings:
    • 9:30am: NASA Admin. Charles Bolden, House Appropriations
    • 9:30am: Gen. Raymond Odierno, National Guard Bureau Chief Gen. Frank Grass, Army Reserve Chief Gen. Jeffrey Talley, Senate Armed Services Cmte
    • 10am: Secretary of State John Kerry, Senate Foreign Relations
    • 10:30am:Education Sec. Arne Duncan, House Appropriations
    • 2pm: GSA Admin Dan Tangherlini, House Appropriations
    • 2:30pm: Senate Judiciary marks up patent troll bill  S. 1720


  • Takeda, Lilly jury awards $9b over hiding Actos risks
  • Citigroup agrees to $1.13b settlement over mortgage bonds
  • Koch said to near deal for CVC’s Flint Group with Goldman Sachs
  • Fed holds open board meeting in Washington on leverage ratios
  • GM SUVs get top marks in insurance-industry front crash test
  • U.S. Court of Appeals hears Apple/Google patent arguments
  • Long-term jobless benefits stalled even with Senate passage
  • China approves Microsoft, Nokia deal with conditions
  • Express Scripts threatens to blackball Gilead’s Sovaldi
  • Barclays settles U.K. Libor case weeks before trial to start
  • BOJ refrains from boosting stimulus as recovery seen
  • U.K. industrial output rises more than forecast on factories
  • Weekly release of FDA warning letters
  • IMAX to sell 20% stake in China business for $80m: WSJ


    • Alcoa (AA) 4:03pm, $0.05 - Preview
    • International Speedway (ISCA) 7:30am, $0.34
    • Science Applications Intl (SAIC) 4:01pm, $0.65
    • WD-40 Co (WDFC) 4pm, $0.68


  • Gold Climbs to Two-Week High as Dollar to Ukraine Spur Demand
  • EU Pig Farmers Miss Out on Boom as Russian Ban Spurs WTO Case
  • WTI Rebounds as Gasoline Stockpiles Seen Shrinking; Brent Gains
  • China Corn Glut No Barrier to Farmers as State Buys: Commodities
  • Copper Falls 0.4% to $6,648 a Ton in London; Nickel, Tin Drop
  • Coffee Extends Gains in London as Arabica Climbs for 4th Day
  • Soybeans Snap Two-Day Drop as USDA May Report Reduced Stockpiles
  • Rebar in Shanghai Climbs to One-Month High as Stockpiles Decline
  • U.S. Beef to Japan May Decline on Australia Deal, Ministry Says
  • Age of Gas Seen as Sideshow to U.S. Producers Preoccupied by Oil
  • Copper Producers Keep Faith in China as Rout Belies Demand
  • Gold’s Open-Interest Drop Signals Rally Ending: Chart of the Day
  • Ending Iran Oil Ban May Cut Refiners’ Supply Cost: Bull Case
  • Turkey’s Fracking Push Won’t Be Stalled by Bribery Probe: Energy

























The Hedgeye Macro Team















Early Look

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