No Fear

“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”

-Sun Tzu


Last week I took the pen on the Early Look from Keith and talked about complacency in global markets.  In that note, I highlighted both volatility (VIX) and the level of certain European peripheral yields on government debt, specifically in Spain and Italy.  The simple takeaway was that there was not a lot of fear baked into market prices.


No Fear - 88


Yesterday I was forwarded a chart from the always thoughtful research firm Nautilus Capital Research.  The chart looked at the trend and duration of rallies of SP500 from 1900 – Present without a 10% correction.  According to their analysis, the current rally from October 2011 is greater than 97% of prior rallies over the last 114 years in duration without a correction.  This is, of course, another way to say that investors are currently not very fearful.


The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants.  From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain.  Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.


This Friday at 10:30am EST.  we will once again be joined by Yale Professor Charles Hill for a briefing on foreign affairs.  Professor Hill is former Chief of Staff at the State Department, aid to U.S. Secretary of State George Schultz, and special consultant to U.N. Secretary Boutros Boutros-Ghali.  He currently teaches the renowned seminar Grand Strategies at Yale. 


In the briefing on Friday, Professor Hill will give us his view of the top three foreign policy risks facing both the United States and the World.  The dial-in instructions will be sent to all Hedgeye Macro institutional subscribers.  If you are not a subscriber, email for details.


Back to the Global Macro Grind . . .


We made a key move on the macro front on our Best Idea List as we removed the Brazilian Real (BRL) from our Best Ideas List.  Since making it a key research call, the BRL posted a total return of ~+4.7% versus the U.S. dollar, which compares to a mean return of +2.7%, and is good for the sixth largest gain amongst the 24 EM Currencies tracked by Bloomberg over that time frame.


As our Asia and Latin America Analyst Darius Dale wrote late yesterday:


“Brazilian growth data is flat-out awful; as you can see in the Chart of the Day, there is a hardly a meaningful economic indicator in Brazil that isn’t rapidly decelerating on both a sequential and trending basis. That this is coming amid accelerating headline inflation means Brazilian policymakers are now forced to choose between promoting growth or combating inflation – the latter of which we still view as the country’s key political issue.


Unfortunately for investors, the Rousseff administration is resorting to the tired Keynesian playbook of fiscal stimulus ahead of the election, choosing to ramp up deficit spending ahead of what is likely to be Brazil’s most contested presidential race since 1989. Recent policy initiatives include:


A +4.5% increase in income tax exemptions starting next year;


A +10% increase in Bolsa Familia cash transfers starting next year worth R$9B… this latest increase takes Bolsa Familia transfers – which benefit ~25% of the Brazilian population – up +64% in real term since the Rousseff administration took office on JAN 1st, 2011; and


Extending a $9.7B payroll tax cut for various manufacturing industries.

These promises of fiscal sweetness come amid heighted pressure to raise the minimum wage, which has increased +42.2% in real terms since 2007. Both Rousseff and her runner-up in the latest polls, Aecio Neves, are on board with another hike.”


The combination of flat out bad Brazilian economic data combined with murky policy outlook makes us cautious on Brazil, but not on all emerging markets.  In fact two that we like, in lieu of Brazil, are Taiwan and India.  Although we aren’t quite ready to pound the table and add them to our Best Ideas list, both countries screen positively on our Growth, Inflation and Policy model.


Stepping back from the emerging markets, the most interesting domestic data point that our internal research team picked up yesterday was related to Treasuries.   Specifically it was that J.P. Morgan’s institutional clients haven’t been this net short of Treasuries since 2006, which occurred shortly before a major crash in yields.


I’ve been emphasizing the risk of being complacent, but there is also another key risk to consider, which is the risk of being consensus.  In the Treasury market, the consensus view is that yields must go higher.   Unfortunately, markets normally don’t do what the crowds want them to do.


Certainly on a reversion to the mean basis the following trades make sense:

  • Long VIX;
  • Long Treasury Yields;
  • Short Utilities;
  • Long Interest rates broadly; and
  • Short European peripheral sovereign debt;

The list could go on to be sure, but if there is one truism in managing global macro risk it is simply that markets can stay irrational longer than investors can stay solvent.   So if you aren’t going to wait on the Hedgeye quantitative signal on these reversion to the mean plays, at least keep some fire power dry.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.61%

SPX 1 

RUT 1094-1152 

USD 80.03-80.77 

WTIC Oil 102.09-104.88 

Gold 1


Go Rangers!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


No Fear - Chart of the Day


Takeaway: Despite falling rates and solid labor market indicators the demand to buy homes keeps dropping.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.





Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended May 30. Mortgage purchase application volume slid further this week dropping another -3.6% w/w. This brings the streak of negative sequential prints to four in a row on the purchase side. And while 2Q14 is tracking higher vs 1Q14 by 2.9%, it remains down year-over-year by just over -17%.


Activity cooled off on the refi side as well. Despite falling rates, refi application volume has been negative in both of the last two weeks, falling -2.9% this week and -1.4% in the prior week.  


As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.


Trends in housing demand tend to lead price trends by 12-18 months and, as the first chart below shows, demand recently peaked in 2Q13 and has fallen significantly since. Admittedly, 2Q14 is tracking up vs 1Q14 by 2.9%, but relative to the -19% decline since mid-2013 (and the positive shift in weather) this bounce remains quite minor.


The prevailing weakness in demand suggests that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.










FOURTH WEEK OF CONSECUTIVE DECLINE IN DEMAND - Mortgage Apps Composite Index LT w Summary Stats



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.


Joshua Steiner, CFA


Christian B. Drake

LEISURE LETTER (06/04/2014)



  • Wed June 4 - Thurs June 5: REITWeek, New York, NY
  • Wed June 4 - Thurs June 5: Russian Gaming Week 2014
  • Thurs June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Thurs June 5 - 4:30 pm MTN earnings
  • Mon June 9 - HTZ earnings
  • Tues June 10 - HLT lock-up expiration
  • Tues June 10 - Thurs June 12: Bally Systems User Conference
    Mohegan Sun
  • Thurs June 12 - Blackstone Investor Day 8:00 am


IKGH - junket announced rolling chip volume of $1.59 billion, -4% YoY.  The hold rate was 2.32%.  The company blamed the results on severe rainstorms for nearly 10 days in mid-May in both Hong Kong and the Canton Province.

Takeaway:  At least one junket held low in May.  More weather excuses coming?


SJM - (Macau Daily Times) "Too early to tell" the impact of smoking ban

SJM CEO Ambrose So has revealed that SJM has completed the design of their mass area smoking rooms and the preparations will be finished in October.  The Macau government will enforce the smoking ban on casino mass areas on October 6.


So claims that there are no signs suggesting that the mass area smoking ban, and other government monitoring measures, will slow down the investment of gambling operators.  Conversely, he believes that operators will wish to hasten the completion of their projects, because the gaming concessions are going to end soon.  Moreover, he has rejected the suggestion to lower the minimum betting sum in the VIP area, so gamblers can smoke and gamble at the same time.  “The investment into the existing design of the VIP rooms is very high. There are also partitions inside the rooms,” Ambrose said, claiming that to implement that strategy would not be advisable in terms of business.

Takeaway:  Relatively speaking, SJM has been under more pressure to abide by Macau's smoking regulations.  


Aruze (GGRAsia) looking to increase its portfolio of products for Asian gaming markets, Aruze Gaming America is refocusing its research and development efforts on games and products with higher volatility for potentially larger jackpots - a key factor for Asian and VIP gaming participation.  Aruze is developing the new products and games in Japan for distribution into the Philippines, Macau and hopefully Japan.

Takeaway:  Everyone wants a piece of the action in Asia, where Aristocrat, Ainsworth, and Shuffle Master control the market. 


MPEL – provided an update on its Macau Studio City development, increased the total budget by $300 million to $2.3 billion, and reaffirmed a mid-2015 opening. 

Takeaway:  Rising development costs


SGMS – announced a ten-year contract with the Independent Gaming Corporation Limited of South Australia to supply the Company's latest central monitoring and control system, the SGVideoTM system which will monitor approximately 12,500 gaming machines in more than 550 locations throughout South Australia. 

Takeaway: Good system win for SGMS. 


Dynam Japan Holdings (6889:JP) (Macau Business Daily) The Japanese pachinko hall operator plans on placing 100 of its ‘next generation’ machines in a Macau hotel (Macau Legend Development's Fisherman's Wharf) scheduled to open in September.  

Takeaway:  We look forward to seeing how these games perform in a previously non-pachinko gaming market.


HLT – Blackstone and the Blackstone Real Estate Partners VI Fund announced the development of a new 418-unit vacation ownership tower at Hilton Hawaiian Village Waikiki Beach Resort slated for completion in early 2017.  Interval sales of The Grand Islander by Hilton Grand Vacations Club are anticipated to begin in fall 2014 and nightly rental reservations may be requested in early 2016 for stays in 2017. The Fund will provide $400 million in development capital to the project. Blackstone appointed Hilton Grand Vacations, the vacation ownership division of Hilton Worldwide, to provide vacation ownership sales and marketing services, resort operations, timeshare homeowners’ association management and loan servicing

Takeaway: The timeshare development was previously disclosed by HLT on their Q1 2014 earnings call, but it would seem this project could provide an upside to the HLT's timeshare business in 2H 2014.


Insider Transactions:

SHO – CEO Ken Cruse sold 153,553 shares on Friday, May 30th at an average price of $14.67, the chief executive officer now owns 667,430 shares of the company’s stock.


CCL – Micky Meir Arison sold 248,720 shares of stock on Monday, June 2nd at an average price of $40.11.


Dragon Boat Festival visitors increase 17.9 pct (Macau Business)
Macau had 419,120 visitors over the Dragon Boat Festival long weekend, +17.9% YoY. 

Takeaway:  Decent visitation numbers

Macau ETGs to be studied – (GGRAsia) Gaming industry participants are cautious on the future growth of the ETG segment in Macau, as they noted the Macau government is looking closely at the issue of the velocity and size of betting – even at low minimums – that is possible on ETG machines and on traditional slot machines, thanks to electronic betting.  The issue for the government, is the risk of low-income people losing a large amount of money in a short space of time via ETGs and slots.

Takeaway:  ETG machines haven't really played a signficant role in Macau yet.


Macau Border Crossing Incidents – During last week's Dragon Boat Festival, more visitors entered Macau through the Hengqin border than last year.  Additionally, mainland authorities found several travelers attempting to enter Macau with damaged or counterfeit identification documents. Authorities said that they also found some visitors who were using invalid IDs or had overstayed their visa, and will launch legal actions against those involved.

Takeaway: More immigration issues.


Macau Junket to be Sold(Macau Business Daily) Eternity Investment Ltd, a Hong Kong-listed real estate developer, is discontinuing its Macau gaming-related business by disposing of its entire equity interest in Rich Daily Group Ltd.
Rich Daily manages the services of Ocho, a gaming promoter (junket operators)  appointed by a casino here. According to a company filing with the Hong Kong Stock Exchange, the purchaser, Ng Cheuk Fai, is a ‘third party independent of the company.’ The shares will be sold for a total of HK$2 million, an amount which the company describes in the filing as ‘fair and reasonable.’ At the end of last year, Ocho adopted a tightening credit policy towards its mainland Chinese VIP customers in response to the slowdown in mainland China’s economy.

Takeaway: A sign of junket challenges. 


Macau Airlift – Civil aviation regulators from Macau and the Philippines have set air talks for June 17 and 18t to expand passenger traffic among between the countries.  The existing air service agreement between the Philippines and Macau was signed in 1997, with the last negotiation for increased passenger traffic held in June 2013, when both countries agreed to increase seat entitlement to 4,500 seats a week from 3,500.

Takeaway: A positive for the mass segment as well as the many Philippino workers who travel between Macau and their homeland/families. 


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.

June 4, 2014

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Republican Landslide?

This note was originally published at 8am on May 21, 2014 for Hedgeye subscribers.

“The people who cast the votes don’t decide an election, the people who count them do.”

-Joseph Stalin


A key upcoming market and economic catalyst on the horizon is the 2014 congressional midterm elections to be held on November 4th.  Historically, we’ve provided extensive election analysis into the election. The next six months will be no different.  Simply put, politics drive policy, which in turn drive markets.


The most famous national election surprise was probably the 1948 Dewey versus Truman presidential race.  It is widely considered the greatest election upset in American history.  Literally every prediction, both with and without associated polls, predicted that Dewey would defeat Truman.  In fact, in late September, Gallup had Dewey with an unbelievable 17 point-lead over Truman.


Republican Landslide? - truman


Given that most pundits believed he had no chance at winning the Presidency, Truman adopted a no holds barred approach to campaigning.  He attacked Dewey at every stop and “Give’em hell Harry” was consistently yelled by his supporters from the crowd.  With this gusto, Truman was able to narrow the deficit, but he still lost all of Gallup’s post convention polls, was endorsed by a mere 9% of the nation’s newspapers, and 50 of 50 “experts” in Newsweek selected Dewey to win.


Many members of the mainstream media were so confident of a victory that stories were written in advance of the election that discussed the “Next President Dewey” and “The Truman Failure.”  The most famous photo of the campaign was a copy of the Chicago Tribune held by President Truman that declared, “Dewey Defeats Truman,” after Truman had actually beat Dewey by a reasonable margin of 49.6% of the popular vote versus 45.1% for Dewey.


Back to the Global Macro Grind...


As of now, we certainly are not of the mind that there is going to be a massive surprise in the midterm elections, although we did get your attention with the title we’re sure!  In fact, with the advent of more advanced and real-time polling, a massive surprise is quite unlikely.  If there is a surprise, it may well be that the Republicans may actually do better than expected. But first let’s look at how the race stands today.


According to the RealClearPolitics 2014 Generic Congressional Vote aggregate, the race is fairly tight.  In fact, the Democrats currently have a slight edge over Republicans with the Democrats at 43.4 in the poll versus the Republicans at 42.8, for a positive edge to the Democrats of +0.6, but effectively is a near tie. Back in late October of 2013, this poll favored the Democrats by a spread of+6.6, so Republicans have certainly narrowed the margin.


Interestingly, if we go back to the 2010 midterm elections, this same set of polls also showed the election basically tied at this point in time (we show this in the Chart of the Day below).  Ultimately, that election turned into a Republican landslide and the Republican Party won more Congressional seats than almost any “expert” predicted.  Even the much avowed Nate Silver got the election wrong.


Republican Landslide? - Chart of the Day


In part, what many pundits missed in 2010 was the broad disdain for Congress.  That disapproval has continued to prevail and currently the RealClearPolitics Congressional Approval Poll Aggregate shows literally the lowest approval rating for Congress in the history of political polling.  Currently, the approval rating for Congress is 13.7%.  Needless to say, polls that ask about the Direction of the Country very much mirror this with only 28% of respondents saying the country is going in the right direction.


The other key point that many prognosticators missed in 2010 was the Republican motivation to vote.  Poll after poll showed that Republicans felt much stronger about the election in 2010.  As a result of this elevated enthusiasm, Republicans came out in droves.  Will that happen again this year again? It may be too early to tell, but President Obama’s low approval, which is currently at an abysmal +42, is likely to motivate Republicans and not get Democrats overly excited.


Perhaps the most interesting recent poll related to potential outcomes is a Politico poll from Monday that looked at States and races that are actually in contention.   In this poll the current edge for Republicans is somewhat staggering. 


According to the poll, 41% of respondents said they would vote for Republicans, 34% said they would vote for Democrats, and 25% were undecided.  When asked specifically about Senate races, the Republican edge increased to 43%.  Further, according to this poll, approval for Obama is just 40% and almost 50% favor an outright appeal of the Affordable Care Act.  Campaigning against an unpopular brand in Obama and unpopular policy in Obama Care may make this midterm strategically easier to execute on for the Republicans.


Speaking of elections, perhaps the most noteworthy one internationally is the upcoming election in the Ukraine.  Currently the front runner is Petro Poroshenko, or as he is better known for his candy empire, the Chocolate King. The Chocolate King was the lone Ukrainian oligarch to join in the popular protests that led to the ousting of President Yanukovych in February, which seems to be giving him an edge with the masses. 


Regardless of who is ultimately victorious in the Ukrainian election, the results will be watched very closely by the international community, especially as it relates to Russian acceptance of the outcome.  Let’s just hope a relative of Josef Stalin isn’t counting the votes.


Our immediate-term risk ranges are now as follows (we have 12 Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):


UST 10yr Yield 2.46-2.57%

RUT 1083-1112

Nikkei 13917-14212

VIX 12.13-14.18

USD 79.61-80.21

Gold 1282-1304 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research  

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