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Got Baggage?

This note was originally published at 8am on June 09, 2014 for Hedgeye subscribers.

“For most of us, failure comes with baggage.”

-Ed Catmull


Got baggage? I do. Over the years, it just piles up.


The way I see it, athletically, professionally, and personally, if I wasn’t always failing somewhere, I wouldn’t learn a darn thing.


The guys at Pixar like to say things like “fail early and fail fast” and “be wrong as fast as you can” (Creativity Inc., pg 109). I like that attitude. In this business, there’s nothing worse than being wrong and staying wrong.  We just want to get on with getting it right.


Back to the Global Macro Grind


For most of 2014, being long the Russell 2000 has been as wrong as being bullish on US GDP growth and/or interest rates. Last week, that wasn’t the case. On no-volume (Friday’s Total US Equity volume was -32% vs. the 3 month avg), the Russell 2000 was +2.7%.


After getting smoked on the short side pretty much every way you can over the course of my career, I have learned to wait and watch for my signal. Thankfully, I waited until Friday to re-issue the sell signal on the Russell 2000. I did it in the morning, so it’s -0.22% against me.


As far as my score goes, being wrong by 1 basis point is still being wrong – so the #1 question on my mind this weekend was whether or not I am going to be wrong and stay wrong this week?


In order to answer the US growth question, here are the signals I care about most:


  1. Long-term Interest Rates
  2. US Consumption Growth
  3. US Dollar Rate of Change


If you ignored the first 4-5 months of the year, on that scorecard things looked better than bad last week:


  1. US Treasury 10yr Yield was +12 basis points on the week to +2.60%
  2. US Consumer Discretionary Stocks (XLY) were +1.9% on the week
  3. US Dollar Index was up a whopping +0.1%


Not to be confused with the year-to-date TREND:


  1. UST 10yr Yield is still -43 basis points after starting the year at 3.03%
  2. US Consumer Discretionary and the Russell 2000 are both only +0.1% YTD
  3. USD hit its YTD low in May then v-bottomed when Europe opted for negative interest rates


In other words, who needs to learn from failing with Currency Devaluation Policies To Inflate, when all America has to do is wait for Europe or Japan to take a turn failing faster?


This is all quite sad to watch as we’re sucking every last lemming into buying, well, anything at 10 VIX. As you can see from our Chart of The Day, if you want to fail really, really, fast in this business, get your clients levered-long the US stock market at 10 VIX (US Equity Volatility Index).


I know, I know – they (as in the dudes on the Old Wall who had you chase them to all-time bubble highs in the summer of 2007 when the VIX was at 10 last time) say it’s different this time.


Really? Last week the VIX officially crashed (-5.7% to -21.6% YTD). All the while, that crowded hedge fund short position we’ve been writing about in the SP500 got squeezed. After peaking at -114,248 net short futures and options contracts (SPX Index and E-mini) on May 27th, the Pain Trade was higher.


So here’s your 2nd chance to sell everything US consumer and housing growth that you could have sold in JAN-FEB of 2014. If we’re right, you don’t want to make the same mistake twice. The VIX has never held, sustainably, below 10. Even for those of us with a lot of baggage, never is a very long time.


Got Baggage? - VIX


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.41-2.61%

SPX 1925-1956

RUT 1130-1169

USD 80.02-80.73

EUR/USD 1.35-1.37


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Back from Singapore/Macau, we offer up our observations



“The use of traveling is to regulate imagination by reality, and instead of thinking how things may be, to see them as they are.”

- Samuel Johnson - 18th century literary titan, essayist, lexicographer, poet, editor, critic, and famous talker. 


In the spirit of Dr. Johnson, last week the Hedgeye Gaming, Lodging and Leisure team’s fearless leader traveled more than 19,300 miles over five days and conducted 15 meetings in Singapore and Macau for a firsthand understanding of what’s really happening.




Without a clear resolution on most of the current issues facing Macau, the stocks look like trading vehicles over the near-term, up and down. Volatility should reign, although for long-term investors, the outlook seems secure – Macau should continue to thrive.


June may have been impacted more than expected by low VIP hold and with Q2 expectations matching the stock prices (that is, low), earnings season may not be so bad.  However, the VIP slowdown is real and the junkets were noticeably more pessimistic.  The smoking ban may be enforced against the premium mass which is a concern. We’re not seeing it yet but could premium mass face margin pressure as competition thickens?  Remember, the spread between junket commissions and premium mass rebates/comp levels remains wide.


For active investors, the short term trade looks long to us as does the entry point for long-term investors.  The intermediate term move could be negative with the smoking ban and continued weakness in VIP volumes.  As always, we will continue to be active with our Macau calls.  Stay tuned.



We began the research trip with meetings in Singapore including the local gaming operator, the Singapore Tourism Board and a local market contact/long-time friend of the firm.  We begin with a few first-hand observations regarding the Singapore gaming market:

  • No real catalysts present to spark a resumption of GGR growth but the market looks stable.
  • The mass segment looks flattish as the government remains concerned over casinos stripping wealth from the locals.
  • Q2 strong for non-gaming in Singapore (due to school holiday) but typically not for VIP
  • No impact from China credit/liquidity issues – recall, Macau style junkets do not operate in Singapore.
  • No impact on inbound tourism/visitation from the disappearance of Malaysian Airline Flight 370.
  • Singapore government officials fear that the planned integrated resort in Bintan, Indonesia may eventually include casinos.  Even though the Muslim hurdle remains a large obstacle to legalized gaming in Indonesia, this situation warrants close monitoring.  While Bintan is not a heavily Muslim area, the area is a well-known tourist destination.  A description of the planned resort can be found at the following link:  http://news.omy.sg/News/Local-News/story2014045

Genting Singapore - unfortunately the positive catalysts appear to be outside of Singapore (Korea and Japan), both of which now appear to be delayed.

  • Singapore – Genting’s Mass share could get back to the 47-48% range.  The property made some customer loyalty program missteps but marketing executive is no longer with the company and changes have been made.  The problems began in 2013 and continued throughout most of the year.  Took away benefits from non-premium players.  Readjusted in Q1 2014 and gaining back some customers.
  • Despite persistent stock weakness, buyback not likely
  • Dividend raise is a possibility
  • Japan – Cabinet committee will decide if a gaming bill will be introduced in the fall
  • Genting Singapore has a good shot at Japan and unfortunately this seems to be the only catalyst for share appreciation
  • Jeju, South Korea – Subsequent to our meeting it was announced that groundbreaking has been delayed to 3Q 2014. Genting will not discuss the gaming aspect of its project until the company applies for and obtains a gaming license.  
  • Hedgeye is actually optimistic on the project but South Korea is likely not a catalyst until a gaming license is secured and the company can speak more freely about the casino contribution.
  • A CIMB analyst report suggesting Genting’s Jeju land will not be secured is patently false per the company.  Genting anticipates no land issues despite the analyst’s contention that it has been designated for other use

Following a mere 18 hours on the ground in Singapore, we went wheels-up for Macau, where we held meetings on Wednesday and Thursday.


Prior to putting two feet on terra firma in Macau, we hoped to hear more clarity and resolution from management and in our meetings on the topics of UnionPay, smoking ban, junkets liquidity, junket credit, a stabilizing outlook for the VIP segment, and Chinese macro issues.  While we feel better about the UnionPay issue, we walked away more dispirited and less optimistic for an imminent upturn in VIP.  Nevertheless, hold may have played a bigger role in June’s VIP demise and near term earnings expectations have reset lower – both could provide a scenario for near term upside in the stocks.  The next test of VIP resiliency will be October’s Golden Week.  As always, there are pushes and pulls and while we feel better about the long and intermediate duration, the stocks look like trading vehicles up and down over the next several months.


The Good

  • UnionPay just not an issue going forward.  Punters using the illegal terminals will simply migrate to the traditional and legal UnionPay outlets to withdraw money.  While the government could force UnionPay retail outlets off the casino floor, the only impact would be a 20ft longer walk for the patron or stopping into a UnionPay retail outlet on the way to the gaming floor.  It’s certainly in the government’s power to force more meaningful restrictions on UnionPay but we struggle to see any motivation for such action.
  • Junkets are understandably in a more foul mood than there optimistic concessionaire brethren.  Despite disappointment with the stock price action, non-junket players and industry observers were remarkably upbeat.
  • We believe Q2 estimates are fine for most of the operators and at a time where buy-side expectations are low for a change, earnings announcements could be a positive catalyst.
  • Hold in the 1st half of June may have been lower than we anticipated. We expect hold adjusted YoY June growth to be nicely in positive territory.  The release of the June monthly detail in early July could be another positive catalyst, on the margin.
  • Galaxy Macau is nailing it in the VIP segment, despite the slowdown.  Two new junkets and a new VIP area are providing the boost.
  • Sands China seems to be making a VIP push – without sacrificing mass.  New management has considerably more skill and experience in this notoriously elusive segment for the company.  I think this time is different and so will market share growth.  Across the largest room portfolio in Macau, Sands China comps only 35-40% of rooms to gaming customers.  There appears to be a lot of underutilized room inventory that could be yielded up to junket players.  Stay tuned.


Metza Metza

  • It is still uncertain whether premium mass areas will be excluded from the smoking ban.  We believe premium mass is more likely than not to be impacted from the inconvenience of a full smoking ban but it is no way settled.  In fact, senior management of all the concessionaires met while we were in market formulating a coordinate strategy to lobby the government for a smoking ban exclusion.  Despite the dismissive front face to investors, there is consternation among the operators lest why even bother with the lobbying?
  • VIP business definitely took a turn for the worse and while it may not improve meaningfully, the last shoe to drop may have dropped.
  • The shift of low end VIP to premium mass seems to be continuing, at least in the view of most operators although there was some dissent on this kind of migration.
  • Whether it’s after the fact justification or reality, the operators seem to present the World Cup more as an excuse for weak numbers than our previous conversations.
  • Premium mass continues to attract the focus of most operators.  SCC opened the Dragon Palace in May with 50 premium mass tables and even SJM is making the push.


The Bad…

  • Our thesis regarding difficult Mass comps looks intact.  As we pointed out in our recent note, most of the casinos yielded up the tables (by raising table minimum bets) last year from July-November.  Deceleration in Mass growth could provide a hurdle for further share appreciation over the intermediate term.  Recall, most of the sell-side continues to recommend Macau gaming on the thesis of ‘robust’ or ‘strong’ mass segment growth exceeding 30% year-over-year. 
  • Most agree that a full smoking ban – even in VIP rooms – is inevitable. It’s all about how much time they can buy.
  • Wynn Macau appears to be more conservative to their junket approach given the environment.  Our hopes of more commission advancement to fuel junket liquidity and thus growth have likely been dashed.
  • Some of my contacts are concerned that the government could delay some Cotai openings to spread them out.  This was the theory a couple of years ago and now it’s resurfacing.  Permit delays would be the likely stalling tactic.
  • More than one of my sources is concerned with margin pressure in premium mass.  As long as the spread between junket commissions and premium mass rebates/comps remains as large as it is, there is potential for someone to spark a war, even before Galaxy Macau opens Phase 2. We haven’t heard that there is any movement and we certainly haven’t seen it in the margins.

June 23, 2014

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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 80.48%
  • SHORT SIGNALS 78.35%


Takeaway: Gold holds @Hedgeye $1285 support like a champ.

The CRB Index (19 commodities) and CRB Food index powered fresh year-to-date highs last week of +11.8% and +22.8%, respectively. Gold holds @Hedgeye $1285 support like a champ.


In the video below Hedgeye CEO Keith McCullough talks key catalysts for continued momentum in Gold and what breakout line will be important for further upside.



TODAY’S S&P 500 SET-UP – June 23, 2014

As we look at today's setup for the S&P 500, the range is 42 points or 1.88% downside to 1926 and 0.26% upside to 1968.                                          














  • YIELD CURVE: 2.14 from 2.15
  • VIX closed at 10.85 1 day percent change of 2.17%


MACRO DATA POINTS (Bloomberg Estimates):               

  • 8:30am: Chicago Fed Nat Activity, May, est. 0.2 (prior -0.32)
  • 9:45am: Markit US Mfg PMI, June prelim, est. 56.0 (prior 56.4)
  • 10am: Existing Home Sales, May, est. 4.74m (prior 4.65m)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $25b 3M bills, $23b 6M bills



    • President Obama, first lady Michelle Obama, VP Joe Biden participate in White House Summit on Working Families
    • Senate returns at 2pm; House holds votes at 6:30pm
    • House Veterans Affairs Cmte holds hearing on patient care
    • House Oversight Cmte hears from IRS Commissioner John Koskinen on missing Lois Lerner e-mails
    • Washington Week Ahead
    • U.S. ELECTION WRAP: Cochran Runoff Strategy; Senate Predictions



  • GE wins Alstom board’s backing for energy-assets deal
  • France reaches deal with Bouygues for up to 20% of Alstom
  • ISIL advances to Iraq-Jordan border; Obama warns of spillover
  • Putin supports Ukraine cease-fire, holding military drills
  • BlackRock said attending Russia forum
  • China PMI climbs to 7-month high, beats est.
  • Lululemon reassures investors after founder steps up pressure
  • American Apparel key investor won’t support founder Charney
  • BNP said close to $9b accord in U.S. sanctions case
  • GE Capital sells Scandinavian consumer finance unit for ~$953m
  • Nissan, Honda add >2m cars to air bag recall
  • Sterne Agee ousted CEO Holbrook said to face U.S. probe
  • InterContinental Hotels rebuffed Wyndham offer this yr: Sky
  • Euro-region PMI shows weakening as French woes intensify
  • AbbVie may raise Shire bid as high as GBP55/Shr: Jefferies
  • Oracle’s $5b deal to buy Micros could be announced today: WSJ
  • ‘Think Like a Man Too’ tops N.A. weekend box office
  • Aereo decision may be announced by Supreme Court
  • Barron’s Roundup: Amgen, Apache, National Oilwell, Pier One
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • U.S. GDP, Housing Data, Nike, Wimbledon: Wk Ahead June 21-28



    • Micron Technology (MU) 4:02pm, $0.72
    • Sonic Corp (SONC) 4:05pm, $0.29



  • Traders Barking Orders in London’s Last Open Outcry Get Reprieve
  • Gold Trades Below 2-Month High as Fed to Physical Demand Weighed
  • Hedge Funds Bet on Sugar as Dryness Threatens Crops: Commodities
  • China Palm Oil Imports Seen Falling as Economic Growth Slows
  • Copper Extends Longest Rally This Year After China Manufacturing
  • Bullish Oil Wagers Reach Record as Fighting Engulfs Iraq: Energy
  • Steel Rebar Rises on Iron Ore, China Manufacturing Expansion
  • LME Getting Interest From New Companies to Join Floor Trading
  • China Buying More Indian, Australian Bauxite After Indonesia Ban
  • EnBW Starts German Coal-Fired Plant With Solar Power Near Record
  • Glencore’s Singapore Crude Oil Trading Manager McBain Retiring
  • Corn Extends Weekly Rally as Investors Weigh Rain on Record Crop
  • Platinum Union Says Workers May Report June 25 If Deal Accepted
  • Gazprom Boosting Gas Transit via Ukraine Before Nord Stream Halt
  • China’s Corn Shipments From U.S. Rise in May, Customs Says


























The Hedgeye Macro Team















The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


Chris Whalen, Senior Managing Director and Head of Research at Kroll Bond Rating Agency, explains why he's bearish on housing, how Washington is failing America, and opportunities he sees with Hedgeye Financials Sector Head Josh Steiner in Real Conversations


Restaurant Analyst Howard Penney details the three key reasons why he’s short the stock of Del Frisco’s, a high-end casual dining steak chain.


Click here to subscribe to Cartoon of the Day. 

The Best of This Week From Hedgeye - Fed cartoon 6.19.2014

The Best of This Week From Hedgeye - Inflation cartoons 06.17.2014


 The Best of This Week From Hedgeye - chart of the week




On Monday morning, the WSJ printed that “a raft of unsettling events have shattered the relative calm of the U.S. stock market and put investors on edge.” Concerns over Iraq and rising oil prices, Fed Policy jitters and other worries helped trigger a 12% jump in the VIX fear gauge and sent the S&P 500 down 0.7% last week, its worst performance in two months.


We wanted to know what you thought: Are we entering a new phase of market turbulence?


Click Here to see our readers' reactions.

The Best of This Week From Hedgeye - turbulence





From Associate Analyst Christian Drake:  "Our 1Q14 Macro Investment theme #InflationAccelerating called for ~100 bps increase in reported CPI into the easiest inflation comps in 3Q14.  With inflation running just above 1% into 2013 year-end, a +100 bps increase was effectively a call for a doubling in the rate of price growth." Read more here.

The Best of This Week From Hedgeye - inflation 1811026b




Retail Sector Head Brian McGough dives into $TGT's apology to Canadian consumers, and still thinks its Canada stores have a rough road ahead of them. Read more here. 

The Best of This Week From Hedgeye - Target Canada Stores


Early Look

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