Client Talking Points


BSE Sensex +1.4% to +20.9% year-to-date led gainers in Asia overnight; India is doing all the right things (on the margin) from a Hedgeye Macro Playbook perspective – we continue to like it on the long side.


#Crashed, in June. Dubai stock market down another -7-8% this morning puts it -22% for June and while there is no subtle news flow on the why, we think what’s happening there is pretty obvious. Putin’s petrodollars (and his stock market +2.3% this morning) are strengthening as U.S. weakens geopolitically.


There was barely a correction after last week’s breakout above @Hedgeye immediate-term TRADE line of $1285/oz and this morning we are seeing what we like to see: follow through. Closing > $1336, Gold can easily re-test its year-to-date highs of $1381ish. The Macro setup is almost perfect for that.

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


RUSSIA: Putin powers a +2.3% move in the Russian stock market today



“The real test is how you behave when the crowd is roaring the other way.”

-George Goodman


Energy (XLE) is up +14.4% year-to-date vs Consumer Discretionary (XLY) down -1% year-to-date, inflation slowing consumption growth.

Living the Dream

“The very substance of the ambitious is merely the shadow of a dream.”



I’m in the throes of the Nevada desert with some colleagues and friends of Hedgeye. Later today, we will be attending the 2014 NHL Awards at the Wynn Casino.   For the hockey players receiving awards, this is the epitome of their success and acknowledgment of their ability to fulfill their lifelong dreams.  They have reached the pinnacle of their chosen profession. In hockey speak, they are #LivingTheDream.


Incidentally, Las Vegas, as much as any city in America, also epitomizes a dream - the American dream.   From 1940 to the last census in 2012, the self-proclaimed “entertainment capital of the world” grew its population from some 8,000 inhabitants to almost 2 million, for a CAGR of north of 8%.  This growth rate well outpaced the overall population growth rate in the United States, which increased by only about 1.5x during the same period.


Living the Dream - wl5


As a function of this massive growth, 18 of the world’s largest 25 hotels are now in Las Vegas, the strip is the brightest place on earth that can be seen from space, and almost 40 million people annually visit Clark County (the home of Las Vegas).  Despite these staggering statistics, on many metrics Vegas actually peaked in 2007.  In that year, according to the Las Vegas Visitors and Convention Bureau, total gaming revenue in Clark County was $10.9 billion versus $9.7 billion in 2013.


Admittedly, gaming revenue in Clark County has recovered a fair bit off the recent bottom when it troughed at $8.8 million in 2009.  Regardless, the fact remains that Las Vegas gaming revenue is still well off the peak and hasn’t grown since 2005.  So, is this Las Vegas dream dead? Is the American dream dead?


On both questions, the answer is likely no. But whether we use the term the “new normal,” or some other cutesy name to describe the prospect for American domestic economic growth, the next five plus years will likely continue to be a normalizing of the excesses of the early 2000s.  In many ways, Las Vegas remains the poster child for the boom and subsequent bust of that period.


Of course, as investors, we can always dream of a rampant reacceleration of economic growth, but as Shakespeare also wrote:


“And this weak and ideal theme, no more yielding than a dream.”




Back to the Global Macro Grind...


In the category of “more nightmare than dream” is the under-allocation of corporate pension funds and university endowments to the U.S. equity allocation rally that began in 2009.  According a report out late yesterday, the average college endowment had a 16% allocation to equities in June 2013, versus 23% in 2008 and 32% a decade ago. Meanwhile, corporate pension funds on average had 43% of their portfolios allocated to equities versus 61% in 2003.   Given the outperformance of U.S. equities over that time, it is likely that many of these institutions have been notable laggards in performance.


One clear threat to the equity bears is the potential that these large institutions begin to chase performance in unison.  For a broad based allocation to equities to occur, these institutions would generally have to be of the view that GDP growth is set to accelerate and likely meaningfully so. If history is any indication, this is unlikely to occur. 


In the Chart of the Day below, we’ve looked at annual GDP growth in the United States going back to 1950 charted against the 10 year rolling average of growth. The takeaway from the chart is simply that U.S. GDP growth has been steadily coming down over time, and has had a sharp step down following the last recession. The U.S. economy seems to have now entered a phase of lower growth.  Absent any evidence of acceleration of this trend, it will be difficult to compel large asset allocators to over allocate to the growth asset class of equities.


Speaking of not normal, according to Xinhua yesterday, noted Chinese economist Li Yining, “refuted the notion the Chinese economy is in decline saying that the previous high growth rates were not normal”.  According to Yining’s analysis, China’s GDP should be higher than the released figure based on the fact that housing construction in rural areas is not included in the Chinese GDP calculation while it usually is in other regions.


Perhaps the Chinese government will take a page out of the U.S. government’s playbook and change the calculation as the economic statistics becomes less suitable to its needs.  This is, of course, a page right out of the U.S. government’s playbook as the U.S. government has changed how the Consumer Price Index is calculated several times over the last few decades. (Ironically, this was also a period when the U.S. government had increasing obligations that were tied to inflation / CPI.)


To her credit, this ever changing methodology of changing inflation may in fact be the reason that Federal Reserve Chair Janet Yellen said last week, “recent readings on, for example, the CPI index have been a bit on the high side but the data are noisy.” 


“Noisy” is an interesting characterization as the government’s own measure, CPI, actually jumped above 2.0% last month.  Meanwhile, what is not noisy to those of us who eat, fuel our vehicles, or consume goods that have commodity inputs (read: most goods) is that the CRB Index is now up almost 12% year-to-date.  We tend to agree with Yellein, that is noisy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.64%


VIX 10.11-13.12

USD 80.16-80.43

Brent 113.11-116.67

Gold 1



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Living the Dream - Chart of the Day


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LEISURE LETTER (06/24/2014)

Tickers:  IHG, CCL


  • Today - 10 am CCL F2Q Conf Call


Four Seasons – Four Seasons has launched a luxury vacation rental site that offers private villas, residences and holiday homes in response to the growing popularity of Airbnb, FlipKey, VRBO and other short term rental booking sites. The web-site address is:  and includes upscale properties, urban residences, and resort villas around the world with fully equipped kitchens, and large indoor and outdoor spaces. Currently, the site has 13 properties in the Americas and the Caribbean, Africa and Asia

Takeaway: Cutting out the middle man while also preserving the brand integrity and offering. 


IHG – while the Board of Directors rejected an earlier take-over bid, rumors of a revised offer are circulating through media outlets.

Takeaway: Let the bidding begin, could a potential IHG buy-out be this cycle's Blackstone/Hilton transaction?


CCL – The sailing vessel, Queen Elizabeth, completed a recent 20-day refit of the 2068-passenger ship also involved laying more than 25,000sq m of carpeting, replacing more than 3000 mattresses, installing 1200 flat screen TVs, adding new awnings on the sun decks, re-modelling the Lido restaurant and Royal Arcade shopping area, replacing a 65-tonne alternator as well as the addition of nine single staterooms.

Takeaway: At a mere four years of age, CCL is making sure its UK super vessel stays hip and current. 


Macau & Union Pay – Jewelery shops inside casinos will have to remove all UnionPay China terminals and cancel means of withdrawing cash from there by Tuesday, July 1. 

Takeaway: During our trip last week to Macau it was apparent that operators were expecting this. 


Singapore- Singapore launches tourism campaign in China after hit by MH370 mystery and Thai crisis. The five million yuan (HK$6.3 million) marketing campaign that will last until October will encourage Chinese travelers to visit Singapore alone.  It is jointly organised by Singapore airport operator Changi Airport Group (CAG), the Singapore Tourism Board and Chinese and Singaporean travel agencies.  Edward Chew, regional director for the Greater China region at the Singapore Tourism Board, said the city-state is already “seeing more Chinese visitors travelling to Singapore as a mono-destination. They also stay longer than those on multi-destination package tours so as to enjoy Singapore at a more in-depth level.

Takeaway:  A needed stimulus to stem a declining trend in visitation


Florida Day Boat Gambling – Victory Casino Cruises begins offering a gambling-focused day cruise out of Mayport (Jacksonville) today.  The 600-passengers, high-speed catamaran will sail twice daily at 11 a.m. and 7 p.m. and features more than 300 slots, along with roulette, craps, blackjack, baccarat, poker, bingo and sports betting all for a mere $10 boarding fee, slightly more if dining is desired. 

Takeaway: Much easier and more affordable than a day trip to South Florida for Seminole sponsored gaming. 

New Jersey Sports Betting – The US Supreme Court opted not to review the State of New Jersey's appeal of lower court rulings that maintain the federal ban on sports betting. 

Takeaway:  A long road to legalizing sports betting 


Cambodia Gaming – The Cambodian government is in the process of amending its gaming laws in a bid to draw a major casino operator. The new draft of the national casino law could be finalized as early as this year.  Additionally, regulators are also considering legalizing online gambling in the country. However, NagaWorld, has a 70-year license for land-based, foreigners-only casino gaming, valid until 2065, and a 41-year gaming monopoly, ending in 2035, for activities within a 200-kilometre (124-mile) radius of the capital. 

Takeaway: Any new foreigners-only gambling would likely be targeted for northeast Cambodia near the Vietnam-Laos border or northwest Cambodia, near Krong Paoy-Paet, on the border of Thailand.


LEISURE LETTER (06/24/2014) - cambodia1


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.

The Last 1%?

This note was originally published at 8am on June 10, 2014 for Hedgeye subscribers.

“The distribution of wealth is one of today’s most widely discussed controversial issues.”

-Thomas Piketty


Roger that Tommy. And thanks for giving the world’s big central planning bureaucrats some Marxist 2.0. They needed a French Keynesian economist to inspire them.


Who is Karl Marx? According to Picketty, “In 1848… he published the Communist Manifesto, a short, hard hitting text…” (Capital In The Twenty First Century, pg 8). “Hard hitting?” #cool


The Last 1%? - Karl Marx 007


Instead of calling this NY Times fan fav book “Capital”, it should have been titled “Class Warfare.” This is going to be a painful read for me, but I will endure. The last 1% of economists who think socialism is the best path to prosperity still need to be studied.


Back to the Global Macro Grind


What is the last 1%?


  1. The last 1% rally in the Russell 2000 (IWM) on no-volume to lower-highs?
  2. The last 1% rally in US Consumer Discretionary (XLY)  stocks to lower-highs?
  3. The last 1% of McDonald’s (MCD) customers slowing in May due to the February “weather”?


That last one was a beauty of a headline that the US government dudes perpetuating American Inequality via their Policy To Inflate had a tough time explaining yesterday. McDonald’s same-store US Sales for May were down -1% year-over-year with some of the best weather we’ve had in years.


After spending on primitive things like food and shelter (Food prices +21% YTD; US Rents at all-time highs), evidently America’s Median Consumer can’t afford to fill her car up with gas to go buy the new “family pack” (for $14.99) at Mickey D’s!


I was in Chicago seeing Institutional Investors all day yesterday and today I’ll be in Kansas City. The core of the bear case for US consumption growth is what is hitting the heart of America right now – it’s called #InflationAccellerating USA’s cost of living to all-time highs.


As you can see in today’s Chart of the Day, US Consumption Growth (1960-2014) is in what we call a long-term secular decline. That’s mainly because the 50yr chart overlaying that called cost of living (inflation) is in a secular bull market.


The Last 1%? - Consumption Growth


But whatever you do when debating people like Piketty on inequality, don’t talk about central planning policies that A) devalue the purchasing power of the people and B) inflate the cost of living.


In case you want to run against Hillary for President of the United States, just ask her the questions we answer in slides 12-15 in our current Hedgeye Macro Slide deck:


  1. Who Is The Median Consumer in this country?
  2. How Does the Consumer Make Money?
  3. Where Do They Spend it?


The answer for the Median Consumer in America on the spending side is this:


  1. Housing (34% of the country rents) = 29.2% of spending
  2. Transportation = 17.8% of spending
  3. Food = 12.5% of spending


“So”, if you tax that spending basket with an un-elected and un-legislated Policy To Inflate (read: print money), you get the answer to the inequality equation Krugmanites have been longing for:




Yep. The top quintile of Americans (read: us) gets paid 66.4% of the benefits of money printing (interest, dividends, property related income, etc.). The median quintile gets 1.4%.


Inequality is only a “controversial issue” because, like in the 1970s, both the Democrat and Republican parties (Nixon/Carter then Bush/Obama) have supported Policies to Inflate, without calling them that.


Our immediate-term risk ranges (with bullish or bearish intermediate-term TREND signals in brackets) are as follows:


UST 10yr Yield 2.41-2.64% (bearish)

SPX 1930-1956 (bullish)

RUT 1133-1177 (bearish)

Nikkei 14662-15301 (bearish)

VIX 10.77-13.35 (bearish)

USD 80.23-80.89 (bearish)

EUR/USD 1.35-1.37 (bullish)

Pound 1.67-1.69 (bullish)

WTIC Oil 102.62-105.27 (bullish)

NatGas 4.53-4.76 (bullish)

Gold 1239-1273 (bullish)

Copper 3.01-3.11 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

June 24, 2014

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June 24, 2014 - Slide9

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June 24, 2014 - Slide11

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