Harmonious Submission?

“Confucius preached a philosophy of harmonious submission.”

-Julia Lovell


The Chinese world, he believed, would prosper not through violence, but through careful maintenance of hierarchy” (The Opium War, pg 84). Putin is not Chinese. And most American patriots don’t harmoniously submit to class hierarchy or what the government tells them about inflation either.


If you believe that a country’s monetary policy is not causal to both the value of its currency and the domestic inflation that is priced in that currency, you are submitting to one of the great academic frauds of the 21st century. 

Harmonious Submission? - poot

If Putin didn’t believe that the only way to stop the Russian Ruble from crashing further was to raise interest rates, why has he done that, twice, since March? Ruble down = inflation up = social unrest up. If you want someone to preach that, Chavez is dead.


Back to the Global Macro Grind


I know, what a cheery note to wake up to. After watching the social and biotech bubble stocks close down on the day yesterday, I’m all beared up and grumpy. Inclusive of the iSplit ugrade from AAPL yesterday, don’t forget the Nasdaq is still -4.8% from its 2014 bubble high.


To review what every population since the beginning of, well, time has been beared up about:

  1. DOWN currency
  2. UP inflation
  3. DOWN real, inflation adjusted, economic growth

Now, to be fair, if you are long of either cost of living (inflation) and/or the output of Americans getting paid nominal (slow growth), you are absolutely crushing it for 2014 YTD. Here’s the Global Macro asset allocation that is putting a smile on that grumpy Mucker face:

  1. Long Inflation via inflation (commodities and/or companies, like Energy (XLE +6% YTD), who benefit from inflation)
  2. Long inflation via inflation protection (TIPs)
  3. Long inflation slowing growth via Gold, Bonds – or anything that looks like a bond (Utilities, REITS, etc.)

But, if you are long growth (real, not nominal) in countries like:

  1. Japan
  2. USA
  3. Russia

You are not smiling. Countries attempting to have their people submit to the broken promise of currency devaluation via debt monetization being the best long term path to income disparity… not good.

  1. Japanese Equities -10.9% YTD
  2. US Consumer Discretionary Equities (XLY) -3.5% YTD
  3. Russian Equities crashing -22% YTD

Putin’s issues are much more visible than Japan’s right now (BREAKING: “Tokyo Inflation Quickens To Fastest Since 1992” –Bloomberg), because most humans (not you!) are too economically illiterate to know the difference between nominal and real growth, until it’s too late. So you just need to front-run them.


For a market based economy, when is it too late?

  1. When your currency is crashing and local inflation starts to rip your people a new one
  2. Then your stock market starts to crash…
  3. And finally, your bond market starts to care about the causal currency and inflation risk factors, all at once

Right now, that’s Russia. Putin’s 10yr $10B bond auction effectively failed earlier this week, so this morning (after raising rates from 5.5% to 7% last month) he had his boys raise rates from 7% to 7.5% in order to “protect the people from inflation.”

Harmonious Submission? - poot1

I‘m hearing he bought Russia’s largest social media company (and probably had a few fingers lopped off a few Ruskies who weren’t cooperating harmoniously with his narrative too), but that’s just a rumor!


Putin gets paid in Petro Dollars. So I wouldn’t be surprised if he tries to solve for the aforementioned trifecta of sovereign risk (Russian CDS up to 282 bps wide now – a 2 yr high) by firing up the geopolitical risk news flow. That, and team Krugman/Japan/USA printing more moneys than god could, tends to be bullish for oil.


It’s too bad US Consumers can’t get an iSplit at the pump. Submitting to ideas like that would require Michael Lewis and Janet Yellen to team up on 60 Minutes Sunday night, and announce that US monetary policy is broken, and we need to raise interest rates to protect the purchasing power of the “little guy.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.71%

USD 79.34-80.03

Brent Oil 109.12-110.86

Natural Gas 4.55-4.81

Gold 1

Corn 4.95-5.12


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Harmonious Submission? - Chart of the Day


Starwood management:  meet a real shareholder friendly management team. Here is what we liked and didn’t like about LVS’s Q1.




  • Capital Return - Who would’ve thought 2-3 years ago that LVS would become one of the consumer sector’s most shareholder friendly management teams?  $810 million of stock repurchased and $409 million in dividends were paid in the quarter.  And this is a growth company!  We’re not ones to kiss up to management but kudos Sheldon and the gang.
  • Massive Mass Macau growth – LVS only beat us by $9m in EBITDA in Macau but the Mass volume beat was bigger.  Macau Mass volumes were 11% higher than we expected.  LVS dominates this most attractive and fastest growing segment in Macau and we’re happy to see a beat here.
  • Singapore held high – Most investors do not give stocks credit for good luck.  In this case, Marina Bay Sands has recorded an unusual string of bad hold quarters (but still passing per statistical rigor) prompting some investors to question the structure of Singapore’s Baccarat business.  For one, I’m just glad I won’t have to field another call for a while on this topic. 
  • Non-gaming growth in Macau, particularly at Sands Cotai Central
    • SCC RevPAR grew 45% on a base of almost 6K rooms.  F&B was also up 45%.  Hey Galaxy management, remind us again why non-gaming won’t work in Macau?
    • Venetian non-gaming revenues increased 24% including a 19% increase in RevPAR
    • Four Seasons ADR hit $429 in 1Q 2014, a new record


  • Singapore volumes – Q1 VIP volumes fell 29% YoY.  With luck clearly on the side of the casino in Q1, it’s not surprising that volumes would be a little soft, but -29%?  In Q4, volumes were also down (-17% YoY) but hold was low.  As can be seen from the following chart, the trailing 4Q trend is clearly negative.



Mass volumes also declined, down 3%, and the trend there is only flat.  This is a real concern for us and outside of easy hold comparisons, there is risk of declining Singapore EBITDA.  The economic and visitation data are not great.  Moreover, we remain concerned with the impact of the missing Malaysian aircraft (carrying mostly Chinese passengers) will have on Chinese visitation to Singapore.  Anecdotal evidence so far is not good.  With new casino competition South Korea and Japan likely, investors need to accept the huge Singapore cash flow stream as flattish at best, with some roller coaster quarters.

  • Sale of Macau retail assets – Management appeared to back off on the timing of any Mall sales.  On the Q4 conference call, Sheldon threw out a $10-12 billion in potential value (seems a little high) and indicated that they were commencing the sales process.  It now looks like we’re a couple of years out as management prefers to wait until growth has stabilized.  This may be the right strategy.
  • Expectations are high – A victim of their own success.  However, we do not believe investors are expecting 20% growth in GGR for the Macau market in May.  We are.

Here are the Q1 results:



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April 25, 2014

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TODAY’S S&P 500 SET-UP – April 25, 2014

As we look at today's setup for the S&P 500, the range is 53 points or 2.21% downside to 1837 and 0.61% upside to 1890.                                         













  • YIELD CURVE: 2.23 from 2.24
  • VIX closed at 13.32 1 day percent change of 0.38%

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Markit US Composite PMI, April (prior 55.7)
  • Markit US Services PMI, April, est. 55.5 (prior 55.3)
  • 9:55am: UofMich Confidence, April final, est. 83 (prior 82.6)
  • 1pm: Baker Hughes rig count


    • House, Senate on recess
    • 9am: Day 2 of Ex-Im Bank conf. in Washington speakers incl.:
    • Tesla CEO Elon Musk
    • Frmer Treasury Sec. Larry Summers
    • Commerce Sec. Penny Pritzker
    • Agriculture Sec. Tom Vilsack
    • Energy Sec. Ernest Moniz,
    • John Podesta, counselor to President Obama
    • Ex-Im Chairman Fred Hochberg
    • 11am BofAML’s Anne Finucane, global strategy and marketing officer, speaks at Brookings Institution
    • WASHINGTON RECESS: Sec. Hagel, Forest Whitaker, New Coffee
    • US ELECTION WRAP: Paul Beats Clinton in Poll; Democrats’ Funds


  • Kerry warns Putin on Ukraine as Russia begins troop drills
  • Russia debt rating cut to step above junk at S&P on Ukraine
  • Gazprombank said to ready for U.S. sanctions on Ukraine
  • Alstom board said to plan meeting today to discuss GE deal
  • BofA said to face more than $13b demand in U.S. RMBS case
  • Backbone of U.S. equities trading said to be closer to upgrade
  • Relational Investors amasses 9.08% stake in Clean Harbors
  • China tells Nike shoemaker to fix striker benefits by today
  • Apple, Google, Intel, Adobe said to reach $324m accord
  • Glaxo, Novartis may receive EMA decisions
  • Navient, Under Armour to Replace SLM, Beam in S&P 500
  • Obama visits South Korea as North shows nuclear test signs
  • Cabinet members, Elon Musk speak at Ex-Im Bank conference
  • Oregon may close $303m health site to join U.S. exchange
  • U.K. retail sales unexpectedly rise; sign of growing momentum
  • U.S. Jobs, Fed Meeting, BOJ, U.K. GDP: Wk Ahead April 26-May 3


    • Aaron’s (AAN) 7:30am, $0.53
    • AbbVie (ABBV) 7:47am, $0.68 - Preview
    • Alaska Air Group (ALK) 6:01am, $1.24
    • American Electric Power (AEP) 6:57am, $0.93
    • Aon PLC (AON) 6:30am, $1.18
    • Autoliv (ALV) 6am, $1.43
    • Brookfield Office Properties (BPO CN) 7am, est. n/a
    • Burger King Worldwide (BKW) 7am, $0.19
    • Canadian Utilities (CU CN) 7:40am, C$0.75
    • Colgate-Palmolive Co (CL) 7am, $0.68 - Preview
    • Covidien (COV) 6am, $0.95 - Preview
    • Dana Holding (DAN) 7am, $0.38
    • DTE Energy Co (DTE) 7:15am, $1.47
    • FLIR Systems (FLIR) 7:30am, $0.27
    • Ford Motor Co (F) 7am, $0.31 - Preview
    • IDEXX Laboratories (IDXX) 7am, $0.87
    • ImmunoGen (IMGN) 6:30am, ($0.26)
    • Laboratory of America (LH) 6:34am, $1.58
    • Lear (LEA) 7am, $1.69
    • LifePoint Hospitals (LPNT) 6:30am, $0.65
    • Moody’s (MCO) 7am, $0.91
    • State Street (STT) 7:30am, $1.00
    • Tyco Int’l (TYC) 6am, $0.41
    • Ventas (VTR) 7:10am, $1.07
    • VF (VFC) 7am, $0.63 - Preview
    • WABCO Holdings (WBC) 6:30am, $1.23
    • Whirlpool (WHR) 6am, $2.31


  • Eating Less Beef Seen Way for Farming to Reduce Carbon Emissions
  • WTI Set for Weekly Loss on Stockpiles, Widens Discount to Brent
  • Sunken Gold Off U.S. Coast Lures Treasure Hunters: Commodities
  • Copper Declines as Equities Slump Amid Tensions Over Ukraine
  • Wheat Climbs Fourth Day as Ukraine Tension Raises Supply Concern
  • Gold Rises a Third Day as Ukraine Keeps Traders Wary About Sales
  • Rebar in Shanghai Pares Weekly Advance on China Output Gain
  • Rubber in Tokyo Falls for Sixth Week on China Demand Concerns
  • World Cup Power Cut Fears Spur Record Brazil LNG Buying: Energy
  • China Shale Boom Seen by Honghua as Pollution Cuts Coal Use
  • FCA Said to Observe London Gold Fixing as Scrutiny Increases
  • Anglo Plans Move Away From Labor-Intensive Platinum Mining
  • Gold Remains a Currency Central Bankers Don’t Control
  • Palm Heads for Second Week of Advance as Demand Seen Rebounding

























The Hedgeye Macro Team















Takeaway: Here are three key questions we’d ask WWW’s CEO that are all central to the debate as we see it.

As we’ve done with a host of other companies recently, here’s our ‘3 Key Questions’ that we’d ask WWW’s CEO if we had a 5-minute one-on-one. The company is reporting its 1Q14 earnings on Tuesday, April 29th, so timing is key here.


Here goes…


1. Revenue? Please justify your 4-6% top line guidance this year and explain why this is not the ‘year of revenue growth’. If the following narrative is wrong, please tell us why.

  • 2012 was the year of the PLG deal. It was big, and painful initially – no EBIT, just interest from $1.2bn in debt.
  • 2013 was the year of integration. In 1H people moved around, brands were repositioned, and management realigned. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
  • Then comes 2014 – which should be all about revenue growth. Your global salesforce, which is the most efficient footwear distribution operation on the planet, has four new major tools (brands) in its toolbox. You’ve been lining up international distribution arrangements over the past 18 months. And while you strike new ones every day (we know it takes time), each of them is cumulative (i.e. signing three per month means that by now there should now be over 40). Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.

So, with Merrell reaccelerating under Gene McCarthy’s leadership (the guy is money), Keds on its way to becoming one of the top 5 brands in the portfolio ($110mm today on its way to $400mm), Sperry not pulling a face-plant this Spring like so many seem to be hoping for, and international finally being a driver for the new brands – at a time when Europe is undeniably strengthening for most Consumer companies, how can this year NOT be a year of significant revenue growth? Your guidance of 4-6% revenue growth seems ridiculous (see point below on your inability to give good guidance).


2. Why do you give guidance? You stink at it. Sorry to sound harsh, but the reality is that you guide down nearly every quarter, and then come back 13 weeks later and print earnings above where the consensus was in the first place. In theory, earnings growth will ultimately drive the stock price, but all too often your ‘earnings beat’ is never appreciated by the market because you’re simultaneously trying to set a low hurdle for the next quarterly report. Even your long-term guidance is flawed. You gave 5-year revenue and profit projections that suggest $3.70 in EPS.  But your EPS figure is $2.90. And what about that $1bn in free cash flow you should generate over that time period? That alone should pay down nearly all your debt, and save $0.30 per share in interest expense (that’s 21% EPS accretion). Add all that up and we get to EPS that’s 45% above your guidance.  So the question is why not either a) give guidance in the ballpark of what you know you can really hit or b) get out of the guidance game – one that you so rarely win.  


WWW – 3 KEY QUESTIONS - WWW guidance424


3. Why do you allow the conversation around the WWW story to revolve around Sperry? You have a $2.7bn revenue base, and less than $500mm of that is Sperry. Yet it is impossible to find a Wall Street research note (except ours) where Sperry is not discussed in the first bullet point. We know Wall Street can be short-sighted and myopic, but seriously, you have to control the conversation. Our math suggests that there’s $80mm at risk if the boat-shoe trend in the US rolls over (which is not happening this Spring as some feared), but another $300mm opportunity outside the US as the brand finally taps markets it’s been absent from pretty much forever. Anything wrong with our logic? If not, please take ownership of this debate, because certain parties on Wall Street that love to hate you are having a field day with it.




This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.20, which is 45% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 3-4 years to double. But in the meantime you're paying less than 12x next year’s earnings for a 22% EPS grower -- and this company has one of the best track records of anything in consumer.



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