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The Monster

This note was originally published at 8am on April 29, 2014 for Hedgeye subscribers.

“The monster is trying to kill me, but I will kill it.”

-Andrew Jackson


That sounds pretty hard core; especially coming from the President of the United States!


“The Monster, formally known as the Second Bank of The United States (and more commonly as the Bank), originated as the brain child of Alexander Hamilton… Jackson saw himself in arms against the dragon, an infernal, demonic entity that must be destroyed.” (The First Tycoon, pg 93)


The Monster - jackson bank monster


And you thought I was bearish on the un-elected and un-accountable US Federal Reserve. As I was flying from Indianapolis, IN to Minneapolis, MN last night reading this, I pulled the Delta Airlines polyester red blanket up to my chin and asked the flight attendant for cookies and milk.


Back to the Global Macro Grind


#ScaryMonster, this US Policy To Inflate has become. The more I travel and talk this through with investors, the less convinced most are that this ends well. There’s no irony in that. Unless it’s “different this time”, burning the credibility of a country’s currency has never worked, for any country.


If I’m right and 2014 US GDP growth (real, not nominal) is closer to 1-2% than the 3-4% consensus economists and perma bulls alike are expecting, I think the societal side to this risk starts to kick in. That’s because what gets us to 1-2% is #InflationAccelerating. And nothing kills The People’s confidence more than a government that they think is lying to them.


In 1832… so began the Bank War; the result of not merely Jackson’s obsessions, but the cultural crisis of the times. It broke out because two great waves now crashed into one another: the individualistic, anti-aristocratic, competitive impulse fostered by the Revolution, and the instinct to organize, amalgamate, develop, and bring order to the chaos of the marketplace.”


Sound familiar?


Indeed, out of this conflict would emerge a new American economic outlook; a culture that embraced equality of opportunity and fierce competition, as well as sophisticated business institutions.” (The First Tycoon, pg 95)


Sophisticated about applying chaos theory and non-linear risk analytics to their linear models, the Fed and Old Wall Street are not. I think they might be getting dumber (see Bank of America (BAC) yesterday, who had to report that they miscounted the moneys, again!).


That’s one of the reasons why the Financials (XLF) got tagged for a -0.6% loss yesterday (with the SP500 +0.3% on the day). What’s happening out there at both the sector and style factoring levels of the market is crystal clear – it’s called variance:

  1. Variance rises during market phase transitions (i.e. from US #GrowthAccelerating in 2013 to inflation slowing growth in 2014)
  2. Variance plummets when you can literally buy anything (because everything goes up)

For the US stock market, the so-easy-a-monkey-can-do-it (low-variance) environment ended on December 31, 2013. Here’s what I mean by that if you look at the variance in yesterday’s US stock market move:

  1. Financials (XLF) -0.6%
  2. Biotech (IBB) -0.4%
  3. Russell2000 (IWM) -0.4%


  1. #YieldChasing Consumer Staples (XLP) +1.1%
  2. Slow-growth-yield chasing Utilities (XLU) +0.5%
  3. Energy #InflationAccelerating (XLE) +0.2%

That’s why I said it in my investor meetings yesterday in Indy and I’ll say it again in Minneapolis to long-only risk managers today – if you want to be invested alongside our 2014 Macro Themes, you:

  1. Buy Inflation (XLE, DBA, COW, CAFÉ, TIP, etc.)
  2. Buy Slow-Growth Yield Chasing (XLU, TLT, BND, etc.)
  3. Buy late cycle companies that can jam customers with pricing (VNQ, XLI, etc.)

If you are a Global Investor, this gets a lot easier – mainly because you can not only be long US #InflationAccelerating but you can buy countries who are doing the right thing from a protecting-the-purchasing-power-of-the-people (read: #StrongCurrency) perspective.


At the top of that list is the UK:

  1. The British Pound continues to pound the pig that is the US Dollar (GBP +10% vs USD in the last 6 months)
  2. UK GDP Growth for Q114 was reported +3.1% y/y this morning – a fresh new #GrowthAccelerating high

The Monster - Chart of the Day


Newsflash: the UK had the “weather” too. They just don’t have to blame the weather in order to CTA (substitute T for Y) on why almost every one of them (consensus economists from Old Wall and Washington) had their Q114 US growth forecast dead wrong.


Sadly, tomorrow the United States of America will report a GDP growth rate for the 1st quarter that is maybe 1/2 of what the United Kingdom just did. Sure, you’ll have month-end markups in the US stock market … and the Fed will release their 2nd or 3rd coming of Christ…


But once that storytelling is done with, Americans will go back to eating it – the Policy to Inflate, that is. And if we don’t have the courage to kill this broken and un-elected US economic policy, The Monster  of a devalued currency might just eat us too.


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


Nasdaq 4006-4143

USD 79.21-79.99

Pound 1.67-1.69

Natural Gas 4.55-4.81

Gold 1280-1310

Corn 5.05-5.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Looney Tune Tape

“Mister Wabbit, before you die, you can have one wast wish.”

-Elmer Fudd


Was the wast wish to buy in May and pray? They dressed ole Elmer up in a Canadian Mountie uniform for that episode. When the US stock market won’t die, blame a Canadian. Must abandon risk management process and chase the performance wabbit, right?


Uh, no. Stay with what’s been working all year – #InflationAccelerating and slow-growth #YieldChasing assets (like commodities, bonds, and any stock that looks like a bond with low-beta and high-dividend-yield).


And on the short side, take your time and “be vewwy, vewwy quiet…” I’m hunting high-muwtipoh-momentum-bubbo wabbits that have popped back up out of their bombed out holes.


Looney Tune Tape - PeLooney8002


Back to the Global Macro Grind


“Wisten to the wippling wythm of the woodwinds…” and you’ll hear volume cwickets.


Yesterday’s total US Equity Volume reading was:


  1. -10% versus the 1 month average
  2. -31% versus the 3 month average


In other words, other than emotional hedge funds that shorted last week’s lows in almost every oversold momentum short (we sent out cover signals in IWM, ITB, YELP, last week #timestamped) there was no legitimate volume (read: conviction) behind yesterday’s rip.


In fact, going into the open yesterday:


  1. The net short position in SPX (Index + E-mini) was at a 6 month high of -54,587 contracts
  2. Three months ago (when you could have bought #MoBro top), the net short position was -30,429 contracts


“So”, many hedge funds were getting squeezed yesterday and those that still believe US GDP growth is going to be +3-4% in 2014 just kept averaging down into growth stocks, I guess.


While CNBC was nailing it with the Dow “at all-time-highs” yesterday, we sent out a short DIA (Dow ETF) signal in #RealTimeAlerts. But that’s not the best short idea we have – it’s waiting on the stocks that have been smoked to pop back up to our signal lines (YELP, TWTR, etc).


Don’t forget that the Nasdaq and Russell 2000 are still -4.9% and -6.2%, respectively, from where your broker could have plugged you buying the all-time-bubble-stock-high in early March. Most of these momentum, social, and housing stocks are still broken.


“Dwat that wabbit”


Yep, both the bond and currency market agree this morning:


  1. US Dollar Index is nowhere near overcoming its long-term TAIL risk line of $81.17 resistance
  2. US 10 year Treasury Yield of 2.65% couldn’t care less about people chasing performance wabbits in equities


“So”, if you have to buy something this morning, what do you buy?


  1. Utilities (XLU +10.3% YTD) have pulled back and are registering another buy signal
  2. Gold (GLD +7.3% YTD) has pulled back small and is a buy closer to TREND line support of $1271


And, what do you sell?


  1. Consumer Discretionary (XLY -3.3% YTD) has rallied on no volume to lower highs, so keep selling that
  2. US Dollar (UUP -0.2% YTD) has rallied sharply off its YTD lows, and remains bearish TREND


Yep, it’s really a macro call. Get the US Dollar and Rates right, and you’ll keep getting your Sector & Style Factors right. If you disagree with our view, you should be buying Dollars and growth stocks and shorting Bonds (like we did at this time last year) in size.


If you ask most consensus economists if they had the process to have you in the opposite this year as you were in last year (from an asset allocation perspective), they might go all-American-excuse-making Elmer on you too… “Yes! I mean NO, that is… I…. er… um…”


Looney Tune Tape, this has become. Chasing performance is not a repeatable risk management process. No worries though, I am sure the cartoon that this has all become will end willy willy well.


UST 10yr yield 2.57-2.67%


RUT 1094-1144

VIX 12.14-14.52

USD 79.11-80.01

EUR/USD 1.37-1.39

Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looney Tune Tape - Chart of the Day

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

May 13, 2014

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May 13, 2014 - Slide2

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May 13, 2014 - Slide6



May 13, 2014 - Slide7

May 13, 2014 - Slide8

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May 13, 2014 - Slide11


 TODAY’S S&P 500 SET-UP – May 13, 2014

As we look at today's setup for the S&P 500, the range is 28 points or 1.35% downside to 1871 and 0.12% upside to 1899.                                              













  • YIELD CURVE: 2.25 from 2.27
  • VIX closed at 12.23 1 day percent change of -5.34%


MACRO DATA POINTS (Bloomberg Estimates):

  • 12:30am: Fed’s Lockhart speaks in Riyadh, Saudi Arabia
  • 7:30am: NFIB Small Business, April, est. 94.5 (prior 93.4)
  • 7:45am: ICSC weekly sales
  • 8:30am: Retail Sales, April, est. 0.4% (prior 1.1%, rev. 1.2%)
  • 8:30am: Import Price Index, April, est. 0.3% (prior 0.6%)
  • 8:55am: Redbook weekly sales
  • 10am: Business Inventories, March, est. 0.4% (prior 0.4%)
  • 10:30am: Fed’s Lacker speaks in Charlotte, North Carolina
  • 4:30pm: API weekly oil inventories


    • House out of session, Senate in
    • 9:30am: Brookings holds discussion on “The Future of Fannie Mae and Freddie Mac” with FHFA Director Mel Watt
    • 10am: Senate Agriculture Cmte hearing on high-frequency;  witnesses incl. CFTC head of mkt oversight Vince McGonagle, CME’s Terrence Duffy
    • 10am: United States Energy Assn holds discussion on North American LNG exports
    • 10am: Commerce Sec. Penny Pritzker on Natl Export Initiative at Atlantic Media HQ
    • 12pm  Alliance for American Manufacturing on steel import report w/Sens. Sherrod Brown, D-Ohio, Jeff Sessions, R-Ala.
    • 12:45pm: Resources for the Future holds discussion with Exelon CEO Chris Crane
    • U.S. ELECTION WRAP: Cong. Dist. Income Inequality; Crisco Dies


  • Pfizer said to plan raising AstraZeneca bid for second time
  • Pfizer CEO to make AstraZeneca case to U.K. parliament
  • FHFA Director Mel Watt speaks on GSEs at Brookings
  • AT&T is said in advanced talks to buy DirecTV for ~$50b
  • China industrial production, investment show slowdown deepening
  • Ukraine rebels ask to join Russia as Gazprom threatens a cutoff
  • KKR eyes Spanish banks, may seek role managing bad bank assets
  • Lockhart says Fed weighs role of funds rate amid stimulus exit
  • Facebook said to take steps to open a sales office in China
  • 2 former Qualcomm sales directors charged with insider trading
  • German investor confidence drops for 5th month on growth risks
  • Airbus earnings beat estimates as costs on A380 come down
  • RBS’s U.S. unit Citizens files for $100m IPO in New York
  • Bloomberg Canada Economic Summit
  • Neb., W.Va. hold primaries


    • Convergys (CVG) 8:30am, $0.29
    • CST Brands (CST) 7am, $0.19
    • Encana (ECA CN) 6am, $0.53 - Preview
    • First Majestic Silver (FR CN) 7am, $0.10
    • Insys Therapeutics (INSY) 7am, $0.27
    • Resolute Energy (REN) 6am, ($0.01)
    • RioCan Real Estate Investment (REI-U CN) 7am, C$0.42


    • Element Financial (EFN CN) 5:06pm, C$0.10
    • Finning International (FTT CN) 4:32pm, C$0.41
    • Fossil Group (FOSL) 4:01pm, $1.17
    • Legacy Oil (LEG CN) Aft-Mkt, C$0.09
    • Renren (RENN) 6pm, $0.05
    • Take-Two Interactive (TTWO) 4:05pm, $0.09
    • URS (URS) 4:05pm, $0.69
    • Wix.com (WIX) Aft-Mkt, ($0.36)



  • Nickel Nears Resistance That May Spur Drop Before Further Rally
  • WTI Crude Reaches Two-Week High on Supply Forecast; Brent Climbs
  • Tire Rubber Plunging as Vietnam Tappers Expand Glut: Commodities
  • Copper Trades Below Two-Month High as China Factories Slow Down
  • Wheat Heads for Longest Decline This Year on Ample Global Supply
  • Gold Declines as Improving U.S. Economy to Dollar Cuts Demand
  • Sugar Advances as Rainfall Forecast for Brazil; Cocoa Also Rises
  • Rebar in Shanghai Falls to Record Low on Steel Output Increase
  • Soybean Imports by China Seen Recovering as Fish Farms Buy Feed
  • Libya Oil Output May Double as Protests in Western Region End
  • Ukraine Boosts Russian Gas Imports as Gazprom Deadline Looms
  • Russian Pork Imports Fell 34% This Year Through May 5 After Ban
  • LNG May be Europe’s Future Fuel If Shale Fails: Outlook
  • Mexico Oil Opening May Be Foreigners’ Gusher as Pemex Struggles

























The Hedgeye Macro Team















So far so good on our 20% growth forecast for May in Macau. Here is some of the math behind it.




Macau stocks may rebound as May GGR continues to display acceleration from recent months.  The 20% YoY growth forecast is based on our quantitative model with a little special sauce context thrown in, but it’s mostly the math.  We believe that level of growth exceeds most sell side projections and investor sentiment.  WYNN remains our favorite.



We’ve been consistent with our belief that May growth will accelerate from March/April and allay the doom and gloom VIP fears.  Not to say there aren’t some liquidity issues in the junket system.  We’re probably seeing that with MPEL – rolling chip volume fell 20%+ in April and market share is down again here in May.  However, the flow through of some side betting into the legitimate system has probably and certainly could provide the VIP cushion to stem some of the pressure.  Mass growth, on the other hand, needs no push – volumes are terrific.


So how do we handicap May?  If we assume year to date volumes continue and seasonally adjust May along with an extra Saturday, growth should approximate 20% assuming a normal hold percentage.  Looking at it another way, May faces one of the easiest comps of the year as can be seen below.  Moreover, May’s 2 year and average comp (average of 1 and 2 yr) are the easiest of the year.  Given the inherent volatility of this business, looking at last year’s comp is not enough analysis.




We expect the tenor and investor sentiment around the Macau gaming operators to improve as senior management teams, sell-side analysts and investors converge on Macau for G2E Asia at Venetian Macao on May 20-22.


Month to date, average daily table revenues are 16% above the comparable period of last year.  Going forward, the comps appear to ease as can be seen below.  While this week’s comp looks tough at 22%, that number comped off of a -6% base.  Week 4 is easy on a 1 year basis and moderate on a 2 yr basis.  Based on these numbers, it appears that growth should accelerate in the back half of May.


MAY ON TRACK FOR CLOSE TO 20% GROWTH IN MACAU - Chart 2 5 12 2014 6 09 04 PM



The Macau gaming stocks have bounced off the recent lows achieved on 4/29 (see our note “WE’VE BEEN PLACEHOLDERED”) but they remain well off their highs.  If we’re right on May, all the Macau stocks should do well.  We’re partial to WYNN because we think they have a unique ability to garner more share, particularly on the VIP side if they are willing to improve their junket offering – specifically in the credit area where Wynn Macau advances commissions only on a 15-30 day basis versus the competition at 2-4 months.

Early Look

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