Dollar Ugly

Client Talking Points


Post the bond auction failing this week, risk is getting real in Russia – faster. The CDS is ticking up to +282 (greater than 300 is what we call the “Lehman Line”) as the Russian stock market continues to crash (down -1.5% to -22% year-to-date). We’re keeping a close eye on these developments.


It’s just plain ugly and, for American cost of living, this is getting worse. Faster too. The CRB Commodities Index is holding on to its year-to-date highs at +11.5%  as American rents rip and the Fed continues to print/devalue ($4.3 trillion Fed balance sheet, up another +$12.4 billion week-over-week).

UST 10yr

While US equity market centric investors might be confused by the no-volume bounce to lower highs into month end, the bond market gets that #InflationAccelerating is slowing real consumption growth. The 10-year is at 2.67% this morning and falling.

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


Another fantastic UK #GrowthAccelerating data pt w/ #StrongPound - Retail Sales for MAR +4.2% y/y @KeithMcCullough


“We can't change the course of events, but we can attempt to protect capital in the face of foreseeable risks.” – David Einhorn


Tokyo’s consumer prices rose 2.7 percent in April from a year earlier, the biggest jump since 1992, pumped up by a sales-tax increase and a year of unprecedented stimulus from the Bank of Japan. Inflation excluding fresh food accelerated from 1 percent in the previous month, while nationally the same price gauge rose 1.3 percent in March from a year earlier, statistics bureau data showed. (Bloomberg)

EHTH: Not Looking Good

Takeaway: We remain short given the fundamental setup. Our concern is the return of undue optimism on the longer-term story.


  1. ATTRITION APPEARS MORE LIKELY: The larger the increase in enrollment on the public exchanges, the greater the IFP attrition risk to EHTH.  The 8M enrollment estimate from President Obama suggests the risk is considerable.
  2. IFP MEMBERSHIP TO DECLINE 1Q14: The brunt of the cancellation risk will emerge in the 1Q print, while membership flow-through from Open Enrollment will be recognized over the 4Q13-2Q14 period.   
  3. GUIDANCE CUT?: We believe top-end cut to 2014 revenues is likely, but not a definite.  Management could choose to wait until it no longer can; in the interim preaching the long-term story.  


HHS hasn’t releases March enrollment numbers yet.  However, President Obama announced that 8M members have enrolled in private plans on the public exchanges (HIXs).  The size of the addressable uninsured population (ex Medicaid eligible) is ~27M according Census data.  So if every one of those 8M members were previously uninsured, the public HIXs penetrated ~30% of the uninsured market.  However, we believe much of that enrollment data comes from the previously insured.


For perspective, when CHIP was expanded in 2009, only 1/6 of eligible parents (16%) applied for coverage for their children (link).  So it’s hard to assume those 8M enrollees are purely organic (previously uninsured), especially since there isn’t much data to support that claim.  McKinsey had previously estimated that 89% of the public HIX applicants were previously insured (link), but that data is somewhat dated at this point. 


A more telling and current example is reported enrollment metrics from Highmark (link), which may be the only MCO that has disclosed both its enrollment mix between public and private HIXs, and the percentage of those enrollees that were previously insured by the company.  The data suggests that 45% of its enrollees were previously insured by Highmark.  


But more importantly, Highmark’s total enrollment into new private HIXs plans during Open Enrollment (~53K) is less than the number of its existing members that chose new plans (~81K).  In short, the private HIXs ceded existing Highmark members to the public exchanges.  That is attrition.


EHTH: Not Looking Good - EHTH   Highmark Enrollment 


A competitor published a note summarizing a meeting it had with EHTH CEO Gary Lauer in late March.  The glaring takeaway from the report was that EHTH knew the churn status on less than 50% of its individual book; however EHTH IR refuted that comment when we contacted them.  If it is true, that’s a scary statement this late into the year.  If not, we still believe that membership will decline in 1Q14 regardless.  


The main reason is that the brunt of EHTH's 2014 IFP cancellations will be recognized in 1Q14 because the company will be able to estimate the impact of forced plan terminations from ACA non-compliance (EHTH doesn't know until members stop paying). 


At the same time, the bulk of approved members from Open Enrollment applications were either recognized in 4Q13 or will be recognized in 2Q14 given the timing of demand for health insurance and the lag to approval.  We illustrate the latter point using EHTH's comScore web traffic and Google search traffic for Health Insurance in the charts below.


EHTH: Not Looking Good - EHTH   UVs vs. Goog 


In short, this is the reverse setup of 4Q13 when we didn't know the cancellation data, but saw some of the flow-through in new membership from ACA open enrollment.  Now the cancellation data will be exposed, and new membership will not be able to offset. 


EHTH: Not Looking Good - EHTH   est mem  


We believe top-end cut to revenues is likely, but not a definite.  Management could wait until 2Q after seeing membership data from March applications and the trend in application volumes thereafter (which we expect to decline y/y).  


At that point, 2014 may become less relevant as the "promise" of 2015 draws closer, especially since management will be doing everything they can do pump up the longer-term growth story.  There isn't a near-term catalyst to refute the 2015 growth narrative, so unbridled bullish sentiment could take hold again; the same way it did in 2H13 through its 2014 guidance release when reality set in.


We remain short given the fundamental setup in the intermediate term.  Our concern is the return of undue optimism on the longer-term story.  You can read more about our longer-term concerns here (EHTH: Déjà vu)




Hesham Shaaban, CFA


LEISURE LETTER (04/25/2014)



Friday, April 25

  • PEB Q1 earnings – 9:00 a.m.

Monday, April 28

  • CHH Q1 earnings – 10:00 a.m. , Passcode: 70683172

Tuesday, April 29

  • NCLH Q1 earnings – 10 a.m. , Passcode: 22334128
  • VAC Q1 earnings – 10:00 a.m. , Passcode: 4679876
  • MGM Q1 earnings – 11:00 a.m. , Passcode: 20455736
  • Las Vegas March revenues out

Wednesday, April 30

  • PNK Q1 earnings – 8 a.m. , Passcode: 27759612
  • GLPI Q1 earnings – 9 a.m.
  • MAR Q1 earnings – 10 a.m. , Passcode: 10575194
  • H Q1 earnings – 11:30 a.m. , Passcode:  11561402
  • BYD Q1 earnings – 5 p.m. , Passcode:  44440004

Thursday, May 1

  • HST Q1 earnings – 10 a.m.
  • OEH Q1 earnings – 10 a.m. , Passcode: 22074904
  • FCH Q1 earnings – 12 p.m. , Passcode: 28469900
  • BYI FQ3 earnings – 4:30 p.m.
  • EXPE Q1 earnings – 4:30 p.m.


MGM – announced an expansion of the Mandalay Bay Convention Center which will add 350,000 sq. ft. for exhibition area, a 70,000 sq. ft. ballroom and underground parking.  The estimated cost of the expansion is $66 million. The expo space will come online next year while the parking garage should complete in 2016.

Takeaway: Following the concert venue JV announcement earlier this week, we wonder how such redevelopments help to increase hotel ADRs?


WYNN – consummated a surrounding community agreement with the city of Medford and agreed to pay $1 million a year to mitigate the city’s expenses as a result of its planned casino in nearby Everett.

Takeaway: A positive step in the development plan but Boston remains a sticking point.


HOT – 10Q filing:

  • The company closed on the sale of one hotel during April 2014.  The asset was subject to a purchase and sale agreement during Q1 2014.
  • HOT is currently under audit by the Internal Revenue Service (IRS) for years 2007 through 2009.  During the year ended December 31, 2013, HOT received certain Notices of Proposed Adjustment from the IRS for such years; however, HOT disagree with the IRS on certain of these adjustments and intend to vigorously contest them, including pursuing all available remedies such as the IRS Appeals process and litigation, if necessary.  These unagreed adjustments, if upheld, would result in a significant cash tax and interest payment.

Takeaway: Several interesting pronouncements worthy of a follow-up conversation.


HLT – announced the return of one of its most popular promotions, Double Your HHonors.  Through Double Your HHonors, members choose between either earning Double HHonors Points or Double Airline Miles for qualified hotel stays completed between May 1 and July 31, 2014, at participating hotels

Takeaway: We look forward to a discussion of this promotion and how the promotion stimulates bookings on next week's earnings call.


NCLH – Norwegian Epic has added two sailings to and from Southampton, England in 2015, marking the 1st time that the ship has visited the port since the in


Takeaway:  Norwegian needs to get some ships out of the super congested Caribbean market.


Lorne Weil – resigned from Sportech's board of directors effective immediately (Thursday, April 24, 2014). Sportech confirmed Thursday that Weil had tendered his resignation from the board with immediate effect, although he will continue to be affiliated with the company as an advisor to the business.

Takeaway: A gaming executive looking for a new opportunity? 


New York Gaming Expansion – the next big gaming expansion for up to four upstate gaming licenses, drew 22 applications who each submitted a $1 million application fee prior to Wednesday's deadline. 

Takeaway: While an interesting near-term growth opportunity, how much cannibalization occurs to these facilities after the 7 year waiting period and commercial gaming is opened "down state" (Metropolitan New York City) with potential casinos located in Westchester, Bronx, Putnam, Nassau or Suffolk Counties - or a casino opens near the Meadowlands?



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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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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