The consensus sell-side call: buy the stocks of the Macau gaming operators on weakness due to strong mass growth.  What happens when mass decelerates?


While the sell-side has caught up to the VIP slowing thesis, the analysts remain mostly positive on the Macau gaming stocks due to “continued strength in the mass segment”.   Well friends, we again send up the warning flare – this time we call attention to the imminent deceleration in the mass segment.  It’s mostly the math and the lapping of a significant rise in table minimums but also, VIP and mass revenue have historically shared a correlation coefficient of 0.56.  Moreover, if recent reports are correct, premium mass may be susceptible to the upcoming smoking ban (VIP rooms will be exempt).  While certainly a contrarian call, could the on the margin strategy be to stay away from the Mass centric stocks (LVS, Sands China, SJM, MPEL)? 

the SET-UP

As early as March 10, we pivoted to the sidelines when we removed LVS from our Best Ideas list, see our note “LVS: REMOVING FROM INVESTING IDEAS” and shortly thereafter warned investors about junket issues, the Dept of State request to lower the threshold for reportable financial transactions, UnionPay, money laundering scrutiny, as well as the extreme sentiment indicator with the massive “buy” rating skew on MGM, LVS, WYNN, and MPEL.  (see chart below).




We were incorrect in thinking May GGR growth would be the last positive catalyst for the Macau stocks over the intermediate term.  Obviously, that catalyst failed to materialize and May growth disappointed.  But looking ahead, we still only see negative catalysts:  continued weak VIP driving monthly GGR growth into single digits, the smoking ban impact on premium mass, and potentially most important, decelerating Mass growth.


Long-term, exposure to the mass segment will be advantageous but relative to sentiment, it may be where the risk lies over the near/intermediate term.  The following table details mass revenue as a percentage of total GGR on a trailing twelve month basis as of the end of May 2014.  Sands China (LVS) is the most exposed to the mass segment with more than 44% of revenues, followed by SJM with 35%, MPEL with more than 31% and Galaxy with almost 26%.  The least exposed to mass is Wynn Macau (WYNN) with 22.1% and MGM China (MGM) at 23.1%.  Our point here is that with all the investor concern surrounding VIP, stocks may have adjusted already for those issues, but maybe not for the upcoming mass deceleration.




The sell-side continues to reaffirm their conviction in the Macau gaming stocks based on continued growth in the Mass segment.  Last week, one sell-side analyst wrote, “We believe mass market growth can continue to pace around 30% this year.”  Another firm wrote, “We maintain a positive outlook on the sector, as mass, which is the key driver for EBITDA growth, remains robust.”


We believe in bold, intellectual honesty and insightful research with a focus on timing.  As such we are compelled to enlighten our subscribers that growth in the Mass segment has probably peaked and the second derivative is about to go negative!  


During Q1 2014 earnings conference calls, we heard a lot of talk from gaming operators regarding “yielding up” the mass segment.  While visitation has increased, we believe the largest driver of the growth in the mass segment has been rising revenue per visitor.  The big increase in table minimum bets and the changing mix toward tables with higher than minimum bets helped push that metric upward. 


As an example, if a casino operated 500 mass tables but 400 tables had a HK$25 minimum bet while 100 tables had a HK$250 minimum bet, the effective yielded minimum was HK$70.  Fast forward, this casino now “yields up” (increases minimum bets) so that the casino floor is now 250 mass tables with a HK$300 minimum bet and 250 mass tables with a HK$500 minimum bet, the effective yielded minimum is now HK$400. 


So, while not increasing the number of visitors nor the speed of play, the casino has now effectively increased volume by 5.7x assuming the same number of hands played at the same speed.  Thus, the growth in the mass segment could in fact be driven entirely on “yielding up” rather than increased visitation.  Obviously, casinos cannot do this forever.  

When we review mass segment baccarat table minimums, we notice a significant increase (or yielding up) occurred during July and August of last year.  Said differently, the mass segment is about to anniversary more difficult average table minimums, thus making year-over-year growth more difficult.




When we put all our quantitative and qualitative analysis together, we forecast a slowing of the mass segment on a market basis – from >35% growth to 19-20% by the end of the year.  We don’t believe investors fully appreciate the impact of yielding up, more difficult comps, and the resulting slowing second derivative of the mass segment.  As a result, we see additional negative earnings revision and valuation risk to the Macau gaming operators – beyond what is currently expected in the market.




We remain very constructive regarding the long-term outlook for Macau operators, particularly those with a well defined mass strategy and mass exposure.  However, with all the focus - and rightly so - currently on the VIP issues and overwhelmingly bullish sentiment surrounding mass, we caution investors that mass deceleration is likely and could further pressure the stocks.

This Summer’s #ConsumerTax In Full Effect

Client Talking Points


Big rip in oil prices all but ensures a big U.S. #ConsumerTax this summer; at $106.90/barrel this morning WTI Crude is +9% for the year-to-date now and this very much augments our U.S. #ConsumerSlowing Macro Theme.


CRB Commodities Index (19 commodities) +1.6% for the week (vs Russell and Bond Yields down) and +10.3% year-to-date – it’s almost mathematically impossible to get to Consensus Macro GDP estimates for Q314 if the Deflator reflects #InflationAccelerating.


Down to 2.59% this morning with our TAIL risk line now = 2.64% and @Hedgeye TREND resistance above that at 2.81%; we still think the Fed is going to be more dovish than consensus has baked in at next week’s meeting; still bullish on bonds.

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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Q: Is inflation ok if it's expected? Volcker: "This kind of stuff that you're being taught at Princeton disturbs me."



“Without leaps of imagination or dreaming, we lose the excitement of possibilities. Dreaming, after all is a form of planning.”

-Gloria Steinem


Volatility (VIX) has risen over +17% from its bombed-out lows last Friday.


Throwing the Torch

This note was originally published at 8am on May 30, 2014 for Hedgeye subscribers.

“To you from failing hands we throw. The torch; be yours to hold it high.”

-Dr. John McCrae


On Tuesday night I had the pleasure of attending my first hockey game at the Molson Center in Montreal.  While I’m not necessarily a Habs fan, sitting in a seat on ice level next to the penalty box is definitely the right way to watch playoff hockey in Canada, especially in a 7 - 4 “Wild West” shoot out.


Last night, of course, was much different.  The New York Rangers and their all-world goalie Henrik Lundqvist bounced back and New York beat Montreal to advance on to a date with destiny and a chance to win Lord Stanley’s Cup.


Throwing the Torch - rangers canadiens


The last time the New York Rangers won the Stanley Cup was in 1994, exactly twenty years ago.  The last time a Canadian team won a Stanley Cup was actually twenty-one years ago in 1993 when Montreal won.  So if you do the math, in the last twenty years a Canadian team has won the Cup about 5% of the time. This comes despite the fact that 24% of the teams in the NHL are based in Canada.


Interestingly, statistician Nate Silver from ESPN actually ran the numbers on the probability of a Canadian winning the Cup over that period.  According to Silver:


“If a championship team was randomly chosen for each of the 19 seasons the league actually played, the odds of a Cup win for a Canadian team would have been 99.2 per cent. Taking teams’ actual competitiveness into account, Silver estimated the odds of a Canadian win during that time period were 97.5 per cent.”


So, clearly next year is Canada’s year and this unfortunate run is just bad luck. But in the meantime, let’s go Rangers!


Back to the Global Macro Grind . . .


Despite the fanfare for the Ranges in the Big Apple last night, shockingly enough, the global macro markets didn’t react.  The biggest laggard in terms of major equity markets overnight is actually Korea, which is down about 85 basis points. Even there, though, there is not much of a read through other than some profit taking ahead of the Dragon Boat Festival on Monday. (Is your dragon boat ready?)


The takeaway more broadly, of course, is that a general complacency is setting in on global markets.  Two import signals of complacency are the VIX, which measures volatility on U.S. equities, and yields on peripheral sovereign debt in Europe.  In both instances, they are literally at five year lows.


For those of you that are used to winning investing performance Stanley Cups, you get the joke.  Either things are that good and there is nothing to worry about, or they are not and it is time to throw some proverbial caution to the wind by getting shorter and/or selling exposure. 


On the risk front, a major concern we continue to have is that consensus is once again over estimating the potential for U.S. economic growth in the U.S.  For the U.S. to hit consensus GDP growth estimates for the rest of the year, economic growth will have to come in at 4% in aggregate for the next three quarters.  To state the obvious: that’s not happening folks.


My colleague Christian Drake view of Q1 GDP is as follows:


  • Bad But Not A Surprise:  The first revision to 1Q14 GDP came in at -1.0%, missing estimates of -0.5%.  The magnitude of the revision was larger than expected but the negative print and downward revisions to  inventories, exports, & Gov’t spending  was not a surprise as the actual march data came in worse than the BEA estimates embedded in the advance GDP report. 
  • Inventory Drag:  The negative revision to inventories was the biggest contributor to the total revision.  The inventory ramp, which comprised a big portion of reported nominal GDP growth in 2H13, is now reversing as end demand/income growth proved insufficient at expeditiously drawing down that burgeoning stock.  
  • Consumption:  Strength in consumption growth, particularly Services, was the conspicuous positive on the quarter.  Notably, Services consumption was supported by the significant acceleration in healthcare spending.   


Healthcare is indeed the juggernaut of GDP and something to focus on, at least in the reported numbers.  As Christian points on healthcare spending in the GDP report:


Healthcare Spending:  The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   


With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 


Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.   To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend.


Unfortunately, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact.”


So, even as the labor market is showing some tightening, in part aided by people dropping out of the work force, economic activity broadly speaking is far from robust and likely to miss consensus expectations for the remainder of the year, especially with the housing market headwind.  And at a VIX of sub 12, bad news will start to matter.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.51%

SPX 1895-1926

RUT 1089-1146

VIX 11.03-13.69

Gold 1249-1295 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Throwing the Torch - Complacent

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

June 13, 2014

June 13, 2014 - Slide1



June 13, 2014 - Slide2

June 13, 2014 - Slide3

June 13, 2014 - Slide4

June 13, 2014 - Slide5

June 13, 2014 - Slide6

June 13, 2014 - Slide7 


June 13, 2014 - Slide8

June 13, 2014 - Slide9

June 13, 2014 - Slide10

June 13, 2014 - Slide11
June 13, 2014 - Slide12

June 13, 2014 - Slide13

Giddy Up

"The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me."

-Paul Volcker, May 2014


It’s that time of year again!


Time to round up the buds, pony up the $2K cost of admission, saddle up and ride for downtown Baltimore.  Last week’s Triple Crown failure at Belmont was really just the warm-up for the real equine extravaganza - BronyCon 2014.   


BronyCon, if you are unaware,  is a now annual, multi-day conference in which thousands of grown men come to share in their passion for My Little Pony.   


Yep, while still in the throes of a working-class recession, thousands of men incur substantial real and opportunity costs to travel across the country with the explicit objective of hanging out with other men and basking in their collective love for the 1980’s toy designed for little girls.  


#BronyCon prep – if you didn’t know why there’s been fumes for market volume, now you know. 


Giddy Up - bronycon


Back to the Global Macro Grind, quickly……


In a research note yesterday we discussed the collective cognitive dissonance in the consensus outlook for accelerating consumption growth in the face of an emergent avalanche of disconfirming evidence (See: COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS)


To reprise the heart of that note:


After yesterday’s negative revision to 1Q14 GDP, this morning’s retail sales data should serve as another blow to forward growth expectations. 


While full year growth estimates continue to get clipped with regular frequency, the collective cognitive dissonance over the outlook for consumption - in the face of overtly middling data - remains very much entrenched.  


Indeed, looking across our Economic Summary table (Chart of the Day below), the amount of sequential Worseningcontinues to belie the “accelerating recovery” narrative and sticky, 4%’ish, consensus GDP estimates. 


We did see a modest, expected bounce across the breadth of manufacturing/confidence/labor data into 2Q and reported growth will accelerate sequentially but, essentially, we are what the numbers suggest. 


 Take the average of (soon to be revised lower) 1Q14 gdp and the (overly optimistic) 2Q14 estimate:    (-2.0%  + 3.5%) /2 = More Muddle


On balance, the 2Q numbers to-date have been ‘okay’ but do not reflect a material acceleration nor any significant rebound demand from deferred 1Q consumption. 


In their House of Debt blog yesterday, Professors Atif Mian and Amir Sufi echoed our interpretation of the May Retail Sales data in rightly highlighting the following:


Over the past two years, nominal spending growth has been about 3% on a year-over-year basis. But if we exclude auto sales, the numbers are much worse, especially for 2014. Spending excluding autos in the first four months of 2014 has been less then 1.5% nominal, which implies a decline in real terms. This includes March and April, so it is hard to argue that weather alone explains this weakness.


*Note:  Mian and Sufi are solid new school, econ researchers.  Their new book, House of Debt, should definitely be on your macro reading list.


In short, the current domestic macro reality is that with Inflation accelerating (food, shelter, energy), housing decelerating, the labor market middling, and tougher growth/inflation comps through 3Q14, the intermediate-term trend for consumption growth is one of deceleration.   


Further, with savings rates already near historical trough levels and the spread between spending growth and earnings growth having already re-expanded in the last two quarters, the upside for consumption growth remains quite constrained. 


How do you keep the rate of change in consumption growth increasing when spending is already growing at a positive spread to earnings… growth, baby!


One data point we’ve highlighted recently was the marked acceleration in revolving consumer credit in April.  


Revolving Consumer Credit:  The Fed G.19 data for April showed US revolving consumer credit balances rose at a month-over-month annualized rate of +12.3%, the fastest rate of growth since 2001.


The extent to which this data point is relevant depends on your broader view of credit:    


Does Credit Matter?  According to the latest Fed Flow of Funds data there is ~$57T in aggregate U.S. Credit Market Debt.  This compares with a monetary base of ~$3T and nominal GDP of ~$17T – equating to dollar leverage (ie. obligations to pay dollars) of ~19.3X and a total debt-to-income ratio of ~3.4X.  Obviously, credit matters and the slope of credit growth remains the marginal driver of spending growth in a modern, developed economy.   




Where are we in the credit cycle?  Household debt-to-GDP currently sits at 77.2%, down from the March 2009 peak of 95.6%.   At this point, we’ve roughly re-traced back to the debt level that existed in 2000 - before debt growth decoupled from consumption growth and went exponential - but we’re still significantly above the long-term average of ~55%.   Notably, Household debt-to-GDP ticked up in 1Q14 for the first time in 20 quarters. 


The Credit Edifice:  At a most basic level, household credit growth is largely a function of the rich lending to the non-rich.  An economic edifice built on lending growth at the middle and low end to drive incremental end demand faces an inherent challenge at the end of a long-term credit cycle and amidst growing inequality perpetuated by monetary policy aimed at financial asset inflation.   


If the lower 60%+ of households don’t own financials assets, remain over-encumbered, still haven’t recouped the wealth loss from the Great Recession, and are getting squeezed by rising commodity and shelter prices, are they really incentivized, or in a position to incur incremental debt?


Maybe, but it’s likely that incremental leverage is largely involuntary, non-productive in its deployment and /or hyper-transient.  The household sector certainly hasn’t delevered enough to start another ‘credit cycle’ and, critically, zero bound rates and demographic trends are antithetical to those prevailing at the start of the 30Y cycle that began in 1981.  


Further, the spike in credit card debt in April occurred alongside very weak consumer spending and housing data – weakness that extended into May.   Tapping credit to purchase everyday essentials because cost inflation is running at multiples of income growth is not reflective of a resurgent consumer driving an accelerating, sustainable consumption recovery. 


The thought train above is very “secular stagnation-y” and more of an early morning macro musing  than a refined conclusion ‘endorsed by Hedgeye’. But that’s okay – the early distillation of macro noise generally begins with an initial pass through a common sense filter, then more questions.  


On a less dismal note, as we head into daddy day, feel heartened that new, not-so-Ivory Tower voices like those of Mian and Sufi are finding traction and established voices like Volcker continue to stand unabashedly counter to crony conventionalist, economic thought. 


…..Although you may feel equally disheartened that the best seats at BronyCon are already sold out – try to enjoy the weekend anyway.  


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.64%


RUT 1140-1175

VIX 10.73-13.33

WTI Oil 103.88-106.99

Gold 1 


Christian B. Drake



Giddy Up - chartofday 

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.