Be The Mustache

This note was originally published at 8am on April 11, 2014 for Hedgeye subscribers.

“They complain that I’m robotic, abrupt, I’m not cheerful and smiley, and you know what? That’s not my problem,”

Arthur Chu


On the back end of a 14-hour work day yesterday, after dinner time, bath time, story time, bed time and the host of other daily, toddler parenting “times,” I swilled back some late night espresso and fired up the DVR to watch something I’ve been itching to review for a while now  - Jeopardy!. 


Jeopardy is still on?  The White House Petition to deport Justin Bieber only got 275K signatures? ….that fat guy is the kid from The Sixth Sense?  


The story is a bit stale now, but if you didn’t follow its procession last month, controversial Jeopardy contestant, Arthur Chu, emerged out of the arithmetic ether like some sort of sagely, evil game-show probabilist savant. 


Be The Mustache - chu


Using math and a game theory based playing strategy, he managed an 11-game win streak and ultimate winnings of $298K – good for 3rd all-time (Wikipedia). 


Alongside terseness and less than conventional congeniality, Chu’s most noteworthy exploit was his innovative use of the “Forrest Bounce” - whereby you jump quickly from category to category – across the bottom three rows of the board in an attempt to locate the “daily doubles”. 


The daily double sits as the singularly largest source of uncertainty in the early rounds of the game.  If that uncertainty can be systematically eliminated, the odds of winning increase provided one’s knowledge of the other trivia is marginally better than that of the other two contestants.


Here's the clip of Chu ferreting out a daily double, dismissively betting $5, answering “I dunno” after 1 second and summarily continuing on.


Chu’s challenge of conventional contestant etiquette inspired the ire of Jeopardy ‘purists’ nationally who took to social media en masse to voice their discontent and defend the game’s storied, 3-decade tradition from the emergent nihilist.   


Applied mathematical innovation challenging preconceived wisdoms and conventional orthodoxy…..sound familiar? 


Fortunately, in the end, #Evolution has a sneaking ability to overcome both antiquated conventionalism and institutional (ivory tower) obstructionism.   


Back to the Global Macro Grind….


When hearing economists discuss markets in terms of rational agents, benevolent dictators, and other nonsensical simplifying assumptions, the economy becomes something largely abstract and intangible. 


Certainly, the dynamic, complex system that is globally interconnected macro is difficult to comprehend (let alone forecast) in full, but a coherent understanding of the drivers of significant parts of the economy over defined periods isn’t inaccessible.  


Consider the largest part of the domestic economy  – consumption, in the short run. 


Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is a function of the growth in income, the marginal propensity to consume or save that income, and the net change in household credit. 


Asset appreciation and credit growth matter, but they are somewhat indirect drivers.  We discuss the wealth effect further below and leave the discussion and analysis of credit for another missive.  


So, what do income and savings trends tell us about the slope of consumption growth?


Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption (PCE) growth.  Indeed, over the last 30 years, the multiple regression between PCE growth vs. nominal Disposable Income growth and the change in the Savings Rate produces an R-squared of 0.99.  #tight


While that ultra-strong correlation doesn’t provide much insight into how to actually go about fostering significant, sustainable real income growth, it does provide a means of reasonably nowcasting the 68% of the economy that is consumption. 


For instance, under a baseline assumption that the 3 primary input variables (Disposable Income growth, the Savings Rate and PCE inflation) come in at their respective QTD averages in March, the regression model suggests year-over-year real consumption growth of 2.2% in 1Q14 – down 10bps sequentially from 4Q13, but +20bps ahead of the TTM average


Nothing revolutionary or proprietary there - just the gravity of a few numbers to which consumption growth remains inextricably hostage. 


What about the Wealth Effect?  


The wealth effect ‘theory’ posits that when real wealth increases, consumer spending permanently increases by some fraction of that wealth increase in every subsequent year.


Consumers, on balance, don’t immediately convert 100% of a wealth increase into current consumption.  Instead, in annuity like fashion, they tend to spread that ability for increased consumption out over their lifetime.


In general, studies examining the marginal propensity to consume show that consumer spending increases between 2 and 7 cents for each dollar of wealth increase.


It makes intuitive sense that an increase in real wealth, be it from housing or financial asset appreciation, lends itself to increased consumption. 


Again, when hearing analysts and pundits discuss it in the media, one is left feeling that the wealth effect occurs via some mystical monetary transubstantiation whereby higher net wealth is somehow cleanly and instantaneously transformed into higher consumption.


In reality, a number of key, very mechanical conditions must be satisfied for increased housing/financial asset wealth to translate into higher consumer spending on non-housing related goods and services


Practically,  increased real wealth needs to drive a behavior shift such that households decrease savings or other investments, increase home equity/other collateralized borrowing, or downsize to a cheaper residence (liquidity event freeing up cash for spending), for that wealth increase to be effective in driving higher consumption growth.


With the value of corporate equities and the aggregate housing stock up $3.52T and 2.0T, respectively, in 2013, the case for wealth effect spending has some residual legs.  However, with equities down YTD and housing in the midst of a discrete deceleration, we expect wealth effect support to consumption to continue to ebb. 


While consensus continues to make the pro-growth, pro-consumption call that should have been made last year, we think the consumer slows sequentially in 1H14.  We layed out ‘the why’ in our 2Q Macro themes call on Tuesday.  Ping if you’d like the replay/presentation. 


Like Alex Trebek’s facial hair, the forward slope of consumption growth remains the subject of ongoing conjecture and speculation.  Both continue to fascinate and confound consensus onlookers on a regular basis.  Understanding both will remain central to generating global macro alpha in 2014.    


Be the mustache, don’t be consensus…..or something like that.


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


VIX 14.72-16.67

Nasdaq 4007-4203

UST 10yr Yield 2.61-2.73%

SPX 1827-1859

Gold 1291-1331 


Enjoy the weekend.    


Christian B. Drake



Be The Mustache - Consumer

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

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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:



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














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