As we warned everyone last week, we knew the week 2 faced a challenging comparison, but week 2 results were even lower than we expected.  Week 2 yielded an ADTR of HKD $801M representing a YoY decline of 27% and a WoW decline of just over 15%.  Based on Week 2 results and ADTR of the past two weeks, we expect full month June GGR to be flattish. 


Anecdotally, the mass activity continues to show strong numbers and that volumes in the VIP have continued to soften.  Week 2 market share movement dominated by Galaxy due to the possibility of soft VIP volumes being compounded by a low win percentage.  MGM has had a good start to June. 





Fund Flows: 'Painfully Lackluster'

Takeaway: Taxable bonds have just put up their 17 consecutive week of inflow assisted by tax-free inflows at 21 consecutive weeks.

This research note was originally published June 12, 2014 at 09:43 in Financials. For more information on how you can subscribe to Hedgeye click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, fund flow in both asset classes was painfully lackluster with both fixed income and equity flow below the year-to-date averages. However the quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds.


Total equity mutual funds put up a modest inflow in the most recent 5 day period ending on June 4th with $2.1 billion coming into the all stock category as reported by the Investment Company Institute. The composition of the $2.1 billion subscription continued to be weighted towards international equity funds with $3.2 billion coming into international stock funds which was offset by a $1.1 billion outflow in domestic products. This outflow within domestic equity funds has become an intermediate term trend with now the sixth consecutive week of outflow in the category. The aggregate subscription of $2.1 billion for the recent five day period was below the year-to-date average for equity funds of a $2.6 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows also had a lackluster week of production ending June 4th, with just $1.1 billion flowing into all fixed income funds. This interest level was a deceleration from the $2.0 billion that came into bond products the week prior, however the inflow into taxable products was the 17th consecutive week of positive flow and the inflow into municipal or tax-free products was the 21st consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.0 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETFs had a stronger showing than mutual funds last week with both equity and bond products experiencing inflows above the 2014 year-to-date average. Equity ETFs experienced a decent $4.5 billion inflow, while fixed income ETFs put up a $1.3 billion subscription. The 2014 weekly averages are now a $765 million weekly inflow for equity ETFs and a $1.2 billion weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Fund Flows: 'Painfully Lackluster' - cast1



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


Fund Flows: 'Painfully Lackluster' - ICI chart 2


Fund Flows: 'Painfully Lackluster' - ICI chart 3


Fund Flows: 'Painfully Lackluster' - ICI chart 4


Fund Flows: 'Painfully Lackluster' - ICI chart 5


Fund Flows: 'Painfully Lackluster' - ICI chart 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


Fund Flows: 'Painfully Lackluster' - ICI chart 7


Fund Flows: 'Painfully Lackluster' - ICI chart 8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.1 billion spread for the week ($6.6 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Fund Flows: 'Painfully Lackluster' - ICI chart 9 



Quarter-to-date trends for 2Q14 greatly favor fixed income with $20.0 billion flowing into the total bond category thus far in the quarter versus just $6.8 billion that has flowed in all equity funds. This is highlighted by 17 consecutive weeks of inflow into taxable bonds assisted by 21 consecutive weeks of inflow into tax-free fixed income funds. These trends continue to support our favorite long amongst the traditional asset managers, Legg Mason (see Hedgeye LM research here).


Fund Flows: 'Painfully Lackluster' - ICI chart 10



Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA


Monday Mashup: Long BOBE, Short DFRG

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: Long BOBE, Short DFRG - 111

Recent Notes

06/09/14  Monday Mashup: DFRG, CAKE, PNRA

06/09/14  MCD: Time For A Change

06/12/14  New Best Idea: Short DFRG (Replay)

06/13/14  BOBE: Reiterating Best Idea Long

Events This Week

06/17/14  KKD Annual General Meeting

06/17/14  Deutsche Bank Global Consumer Conference: BAGL

06/17/14  Jefferies Global Consumer Conference: CHUY

06/17/14  BOBE earnings release 4:00pm EST

06/18/14  Jefferies Global Consumer Conference: BBRG, DNKN, FRGI, FRSH, JACK, NDLS, RUTH, ZOES

06/18/14  BOBE earnings call 10:00am EST

06/20/14  DRI earnings release BMO, earnings call 8:30am EST

Chart of the Day

Monday Mashup: Long BOBE, Short DFRG - 222

Recent News Flow

Monday, June 9th

  • EAT Chili’s announced the completion of its nationwide rollout of tabletop tablets in the U.S., which included the installation of 45,000+ Ziosk tablets in 823 company-owned restaurants.

Tuesday, June 10th

  • DPZ initiated buy at Jefferies with an $85 PT.
  • BJRI officially launched a mobile ordering/payment app for its restaurants.  The new app allows customers to use their mobile devices to order ahead for dine-in and takeout, move ahead in line for a table and pay at their own convenience.
  • WEN was downgraded to hold from buy at Argus Research based on “uncertainty” around the company’s remodeling initiatives.
  • GMCR announced an initiative to expand its presence at SUBWAY, by bringing Keurig single serve brewers to thousands of restaurants.
  • DNKN announced the locations of its first traditional restaurants in CA.  They are currently planned for Downey, Long Beach, Modesto, Santa Monica and Whittier.  Construction is planned to begin later in June, earlier than expected.
  • PZZA Papa John’s announced the appointment of former AIG Executive Chairman, Laurette Koellner, to its Board of Directors.

Wednesday, June 11th

  • No major news.

Thursday, June 12th

  • PNRA closed on a $100 million term loan from BoA, Wells Fargo and TD Bank. Proceeds from the loan will primarily be used for general corporate purposes.

Friday, June 13th

  • No major news.

Sector Performance

The XLY (-1.7%) underperformed the SPX (-0.7%) last week.  Casual dining stocks underperformed the narrower XLY index, while quick service stocks outperformed.

Monday Mashup: Long BOBE, Short DFRG - 33

Monday Mashup: Long BOBE, Short DFRG - 44

U.S. Macro Consumption

The Hedgeye U.S. Consumption Model continues to signal bearish, flashing red on 7 out of 12 metrics.

Monday Mashup: Long BOBE, Short DFRG - chart5

XLY Quantitative Setup


From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

Monday Mashup: Long BOBE, Short DFRG - 66

Casual Dining Restaurants

Monday Mashup: Long BOBE, Short DFRG - 77

Monday Mashup: Long BOBE, Short DFRG - 88

Quick Service Restaurants

Monday Mashup: Long BOBE, Short DFRG - 99

Monday Mashup: Long BOBE, Short DFRG - 1010


Howard Penney

Managing Director


Fred Masotta


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

LEISURE LETTER (06/16/2014)

Tickers: IGT


  • Tues-Thur June 17-19: Todd in Singapore & Macau for meetings
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released


IGT –two interesting press releases early this morning...

  1. IGT regularly considers, and on occasion explores, a broad range of strategic alternatives, including but not limited to business combinations, changes to our capital structure and adjustments to our portfolio of businesses, with the goal of maximizing shareholder value. The IGT Board of Directors and senior management are currently engaged in such an exploration, but no decisions have been made by the Board regarding any particular alternative available to the Company and there can be no assurances that any transaction or other strategic change will be entered into as a result of the current exploration of alternatives.  IGT does not intend to discuss or disclose developments with respect to this general subject unless and until the Board has approved a definitive course of action.
  2. GTECH (GGTK.IM) announced that it is engaged in preliminary, exploratory discussions as part of a process regarding a potential transaction with IGT. GTECH noted the transaction could potentially involve the use of a mix of cash and equity as consideration. However, the Company does not anticipate that a capital increase for cash will be required.

Takeaway: Let the bidding begin...we believe IGT is worth $18-$22/share per our conference call last week. 


Summit Ascent – approved the acquisition of an additional interest in a casino resort in Vladivostok Russia. Summit Ascent will pay US$20.2 million to Elegant City Group Ltd, an entity controlled by Russian businessman Oleg Drozdov, in order to acquire a 14% equity stake in the project. Elegant City will keep a 15% interest in the casino resort.  Summit Ascent now owns 60% in the casino resort.

Takeaway:  The initial development agreement called for Summit Ascent to receive a management fee of 3% of GGR on Phase 1 which included a casino with 25 VIP tables, 40 mass tables, and 800 slots, as well as a 199 room hotel located on Lot 9 of the development. 


SINO.PM – Philippine-listed Sinophil Corp is changing its name to Premium Leisure Corp. On June 6, Belle Corp announced it would reorganize its gaming assets under Sinophil, including its ownership of Premium Leisure and Amusement Inc, and its shares representing 34.5% of online lottery system provider Pacific Online Systems Corp.

Takeaway: We wondered when SInophil would change its name to a moniker more reflective of gaming or leisure. 


UnionPay (LUSA) citing Macau police sources, the new agency reported the value of transactions using unregistered China UnionPay Ltd terminals in Macau amounted to MOP180 million (US$22.5 million) between January and mid-May 2014. 

Takeaway: If accurate, the $22.5 million represents a mere 36 basis points of total mass GGR and 12 basis points of overall total revenue.


Iowa Gaming Expansion – following the issuance of the 19th commercial gaming license by the Iowa Racing & Gaming Commission last week, IRGC Chairman Lamberti indicated the Commission may consider a moratorium on additional gaming licenses at the July 31 commission meeting. 

Takeaway: The moratorium seems like a reasonable decision given the saturation of gaming within Iowa.


Germans' appetite for short trips lifts European cruise industry (CLIA) – Europe's cruise lines passenger growth rose in 2013 due to the popularity of the Mediterranean as a destination and Germans' appetite for short trips in northern Europe.  Germany saw a 9.2% rise in passengers, drawing level with Britain as Europe's largest markets, with each accounting for around 27%.

Takeaway: While there are probably too many short itineraries in the Caribbean, there may still be opportunities to expand in Europe


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.


Client Talking Points


CRB Commodities Index (19 Commodities) was up another +1.5% last week to +10.6% year-to-date. WTI Crude Oil led the inflation melt-up at +4.2% on the week to +10.8% year-to-date. Natural Gas and Coffee prices were up another +1% last week to +14.8% and +50.6% year-to-date, respectively.


While Total U.S. Equity Market Volume was down -34% (vs. the 3 month average) on Friday’s +0.3% SPX negative breadth up-day, we finally got some real equity and commodity market volatility last week; oil volatility (Oil VIX) was +34.3% last week to 19.47 and U.S. Equity volatility (VIX) was +11.8% last week to 12.18.


Bank of England getting two big thumbs up from us on discussing why rate hikes are good.  As the Bank of England builds currency credibility the British Pound continues to power forward. Strong currency, strong policy equates to stronger policy and stronger consumption. 

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


TREASURIES: 10yr back down to 2.58% as inflation continues to slow real U.S. Growth expectations @KeithMcCullough


“Either you run the day or the day runs you.”

-Jim Rohn


China overtakes the U.S. in company debt issued, with non-financial corporate debt in China reaching $14.2 trillion. (Financial Times)

Force Rapid Learning

This note was originally published at 8am on June 02, 2014 for Hedgeye subscribers.

“There is nothing quite like ignorance combined with a driving need to succeed to force rapid learning.”

-Ed Catmull


With three kids, I’d say that quote pretty much sums up my life right now. It’s also the opening line to chapter 3 of the book I have my nose in these days – Creativity Inc., by one of the founders and leaders at Pixar Animation Studios, Ed Catmull.


When it comes to the market side of my life, it isn’t what it used to be. I have the dubious task of running both my mouth and a company. On the latter, I can assure you that there is no driving force greater than owning it. If Hedgeye isn’t constantly evolving, we’re failing. And that’s not an option.


We’ve built both the risk management process and firm on the same principles. We wake up every morning with our eyes wide open to the reality that we do not know what is going to happen next. Embracing uncertainty forces rapid learning. And we like that.


Back to the Global Macro Grind


If all you did at the start of last week was get rid of the most consensus short position on the planet (short SPX Index + E-minis),  and focused on expressing slow-growth #YieldChasing where at least 66% of hedge funds out there haven’t yet, you’d have liked that too.


With the net SHORT position (CFTC non-commercial futures and options contracts) in the SP500 dropping week-over-week from -114,248 contracts (1yr high) to a net SHORT position of -57,737 this morning, I still wouldn’t be using that consensus “hedge.” Use the Russell.


What is the Russell?


  1. The Russell 2000 is a much purer read-through on US domestic growth than the multinational Dow or SP500
  2. The Russell 2000 (IWM) was down -0.5% in an “up tape” on Friday (SPX closed +0.18% at an all-time bubble high)
  3. The Russell 2000 is down -6.1% from its March 2014 high and -2.5% YTD


The alternative to being levered long US growth and/or social bubble stocks (i.e. the alternative to being down YTD) is:


  1. Being long #InflationAccelerating (CRB Commodities and Food Indexes are +9% and +22% YTD, respectively)
  2. Being long slow-growth via the long bond (10yr yield down another -6bps last wk and -55bps YTD at 2.48%)
  3. Being long anything US Equity #YieldChasing that looks like a bond (Utilities up another +2.3% last wk = +12.6% YTD)


“So” why bang your head against the #OldWall shorting spooos and trying to pick no-volume-v-bottoms in bubble stocks that blew up in March-April, when you can just keep doing more of what’s been a relatively low volatility position to keep?


A: it’s not consensus (yet)


No worries though, as time, price, and economic data change, consensus futures/options positioning changes:


  1. SPX Index + E-mini net SHORT position of -57,737 contracts today (vs. -19,488 net SHORT 3 month avg)
  2. 10YR US Treasury bond net LONG position of +22,876 contracts (vs. -59,080 net SHORT 3 month avg)
  3. Gold net LONG position of 68,393 contracts (vs. +103,404 net LONG 3 months ago)


In other words, 3 months ago (on March 1st):


  1. Hedge funds started getting short the consensus SPX hedge  (after the JAN-FEB drawdown in the SP500)
  2. Consensus still didn’t think bond yields could go down in 2014 (so the 10yr yield crashed)
  3. And consensus momentum players chased being long Gold at $1350




Nothing forces rapid learning faster than doing precisely the same thing (at the same time) as thousands of other money managers and getting plugged.


But please don’t confuse consensus getting whipped around in an oversupplied asset management industry with the US or global economy. They are nowhere in the area code of the same thing.


And I suspect there will be nothing normal about the next three months in global macro risk management either. So have another coffee. It’s Monday June 2nd (Happy Birthday Dad!). Prepare to embrace the uncertainty of what tomorrow will inevitably bring.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.51%

SPX 1888-1932

RUT 1090-1154

EUR/USD 1.35-1.37

WTIC Oil 102.19-104.95

Gold 1240-1294


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Force Rapid Learning - Chart of the Day

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