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Changing With The Times

This note was originally published at 8am on July 03, 2014 for Hedgeye subscribers.

"Show me a hero and I'll write you a tragedy."   

- F. Scott Fitzgerald


Along with the likes of T.S. Elliott and Ernest Hemingway, F. Scott Fitzgerald is widely regarded as one of the most recognized young American writers of the “Lost Generation” of young Americans who fought in and emerged disillusioned out of WWI.


Changing With The Times - fscx


With the time-tested truths of human nature, we are forced to accept the unconscious anchoring biases and contextual frame of references shaped by our experiences. We then observe and perceive through this ever-changing lens. 


Consequently, Fitzgerald’s frame of reference stems out of some epic undulations in popularity and wealth:

  • Two world wars
  • Jazz Age (a term he coined)
  • Currency and Wealth Destruction:
    • Great Depression
    • Weimer Republic Collapse; followed by
    • Ascension and destruction of Hitler’s rule


Without searching for self-proclaimed similarities between the two of us, I can say without a doubt Fitzgerald and I have one thing in common:


We spent a large part of our early years in a cold climate. 


Walking across Notre Dame's campus during my junior year for a morning Econometrics class (the subject matter of the class reserved for a future "Early Look"), making a stop for breakfast and coffee was a ritual. Unfortunately, in the dead of winter in South Bend, Indiana, this stop required a small detour, and it was cold! 


Now I've heard it was even colder this winter. Even so, convincing me I would not have taken a detour this past winter for a little breakfast and coffee given the colder weather is highly unlikely.


Back to the Global Macro Grind


Here we are at the midpoint of 2014, a year that has been full of surprises relative to consensus expectations moving into the year.


  • Growth (miss): -2.9% Q1 final GDP revision (miss and seventh consecutive year of downward revision from the Fed)
  • Inflation (surprise): Headline CPI +0.4% vs. +0.2% expected for May
  • Yield Spread: -50 bps (Net Short contracts in the ten-year down to 2.4K from 175K in the first week of January)
  • Commodities: CRB (+9.6%); CRB Food (+23.3%)
  • VIX: 10-handle; Hovering at all-time lows  


So where do we go from here?


The Financial Times published an article yesterday on Hedge Fund beta tracking at all-time highs. Hedge Funds are levered long and yield chasing. Our team consumes and analyzes high-frequency data points across the globe to generate alpha. Alluding to the risks inherent in the market does not mean we are preparing for an epic crash. Sure it could happen, but front-running the sector variances that manifest as growth slows and inflation accelerates is the goal.


  • XLU (+13%); CRB (+9%); GLD (+10%) YTD
  • XLY (+1.08%); IWM (+3.2%) YTD
  • SPX (+7%)


Rather than predicting third and fourth quarter consequences, we absorb the ever-changing landscape and re-adjust the inherent risk across durations in real-time. As 2H growth comps indicate a consensus miss to the downside, we believe the following sequence of events is a probable in today’s centrally-planned environment:


  • A Fed revision for 2014 full-year GDP from 3.0% to 2.1 - 2.3% at the last FOMC meeting will likely face a further downward revision after a -2.9% Final Q1 print last week (hint: not weather-related)
  • The Fed gets more dovish with the data
  • The bond market adjusts for growth expectations and the prospect for future dollar devaluation perpetuates the yield spread compression
  • Commodities as a complex, which are priced in U.S. dollars globally, face continued pressure to the upside net of unpredictable external factors


As the outlook changes, we will contextualize the data and be forced to change. After all, we are paid to be right on both sides of the tape.


With growth DECELERATING and inflation ACCELERATING central planners will try to convince you there’s no inflation in our everyday consumption habits. That coffee and breakfast would have been more expensive this year, but we all have to eat (bad weather or not). Just last year, the central bank adjusted its model for allowing a longer grace period for wage growth to catch up with commodity inflation. Now this seems like a rather convenient way to keep the accommodative power at the expense of the middle class.


F. Scott Fitzgerald could probably pencil quite a symbolic ending to this story. Give Janet Yellen a break for her nervousness. She is new to the scene. However, as you can see in today’s Chart of the Day below, the ECB's Mario Draghi has mastered that red carpet stoicism.  


Our immediate-term Global Macro Risk Ranges are now:


SPX 1948-1977

RUT 1170-1208

VIX 10.61-12.81

USD 79.71-80.27

WTI Oil 104.01-107.12

Gold 1310-1330



Good luck out there today and Happy 4th!


Ben Ryan



Changing With The Times - Dradhi VIX Chart

July 17, 2014

July 17, 2014 - Slide1



July 17, 2014 - Slide2

July 17, 2014 - Slide3

July 17, 2014 - Slide4

July 17, 2014 - Slide5

July 17, 2014 - Slide6

July 17, 2014 - Slide7 



July 17, 2014 - Slide8

July 17, 2014 - Slide9

July 17, 2014 - Slide10

July 17, 2014 - Slide11


TODAY’S S&P 500 SET-UP – July 17, 2014

As we look at today's setup for the S&P 500, the range is 26 points or 1.14% downside to 1959 and 0.17% upside to 1985.                                  













  • YIELD CURVE: 2.03 from 2.04
  • VIX closed at 11 1 day percent change of -8.03%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Housing Starts, June, est. 1.020m (prior 1.001m)
  • 8:30am: Init Jobless Claims, wk 7/12, est. 310k (pr 304k)
  • Continuing Claims, week of July 5, est. 2.580m (prior 2.584m)
  • 8:30am: Building Permits, June, est. 1.03m (prior 991k)
  • 9:45am: Bloomberg Consumer Comfort, July 13, (prior 37.6)
  • 9:45am: Bloomberg Economic Expectations, July (prior 48.5)
  • 10am: Philadelphia Fed, July, est. 16 (prior 17.8)
  • 1:35pm: Fed’s Bullard speaks in Owensboro, Ky.



    • 6am: Quinnipiac poll results incl. Obama’s approval rating, 2016 presidential race
    • 10am: House Budget Cmte hearing Obama Overseas Contingency Ops. funding request
    • 10am: GM CEO Mary Barra before Senate Commerce panel on consumer protection, product safety and insurance
    • 10am: Justice Dept. officials at Sen. Foreign Relations Cmte on minors at the border
    • 10:30am: Senate Appros. Cmte marks up defense spending bil
    • 11:30am: House Speaker John Boehner holds news conference
    • U.S. ELECTION WRAP: Polls in Iowa, N.C., Mich., Colo.; 2Q Money



  • U.S. expands Russia sanctions to banks, energy, weapons cos.
  • Western cos. examine Russia businesses as sanctions spread
  • Putin says U.S. sanctions leading relations to “dead end”
  • Liberty Global buys ITV stake from BSkyB for $824m
  • Largest-ever Microsoft firings expected today: NYT
  • Starbucks sees more Apple-like shops; planning new flagship
  • Ford to debut 25 new models in Africa, Middle East by 2016
  • GM CEO Barra to face congressional questions for fourth time
  • >2m GM cars with same ignition switches safe: Reuters
  • VW planning task force to tackle technology updates in cars
  • S&P gain has investors worrying about bubble: Bloomberg poll
  • U.S. foreclosures drop to level preceding mortgage bust
  • LinkedIn reaches settlement with hackers over fake profiles
  • Microsoft says Xbox sales double in June after price cut



    • Alliance Data Systems (ADS) 7:30am, $2.73
    • AutoNation (AN) 6:15am, $0.87
    • Baker Hughes (BHI) 6am, $0.90 - Preview
    • Baxter Intl (BAX) 7am, $1.22 - Preview
    • Blackstone (BX) 7am, $0.72
    • Canadian Pacific Railway (CP CN) 7:30am, C$2.09 - Preview
    • Cypress Semiconductor (CY) 8am, $0.12
    • Danaher (DHR) 6am, $0.94
    • Dover (DOV) 7am, $1.28
    • Fairchild Semiconductor (FCS) 7:30am, $0.11
    • Fifth Third Bancorp (FITB) 6:30am, $0.43
    • KeyCorp (KEY) 6:30am, $0.26
    • M&T Bank (MTB) 8:01am, $1.90
    • Mattel (MAT) 6am, $0.18 - Preview
    • Morgan Stanley (MS) 7:15am, $0.56 - Preview
    • Philip Morris Intl (PM) 6:59am, $1.24 - Preview
    • PPG Industries (PPG) 8:11am, $2.78
    • Sherwin-Williams (SHW) 7am, $2.93
    • Snap-on (SNA) 7am, $1.68
    • Sonoco Products (SON) 7:30am, $0.65
    • UnitedHealth (UNH) 6am, $1.26 - Preview
    • Webster Financial (WBS) 7:55am, $0.51
    • WW Grainger (GWW) 7:30am, $3.10



    • Advanced Micro Devices (AMD) 4:15pm, $0.03
    • Athenahealth (ATHN) 4:01pm, $0.22
    • Capital One Financial (COF) 4:05pm, $1.82
    • Celanese (CE) 5pm, $1.24
    • Google (GOOG) 4:02pm, $6.25 - Preview
    • Intl Business Machines (IBM) 4:07pm, $4.31 - Preview
    • People’s United Financial (PBCT) 4:03pm, $0.20
    • Resources Connection (RECN) 4pm, $0.18
    • Schlumberger (SLB) Aft-Mkt, $1.36 - Preview
    • Seagate Technology (STX) 4:01pm, $1.10
    • Skyworks Solutions (SWKS) 4:15pm, $0.80
    • Stryker (SYK) 4pm, $1.08 - Preview



  • Gold Gains on Russia Sanctions as Palladium Reaches 13-Year High
  • Thai Sugar Output Seen Climbing to Record as Farmers Shun Rice
  • LNG Cargoes to U.K. Drive Biggest Price Drop Since ’09: Freight
  • Palm Reserves in Indonesia Drop to Two-Month Low as Output Falls
  • WTI Crude Rises to Four-Day High on Stockpile Drop; Brent Gains
  • China Three Years Late on Installing Offshore Wind Farms: Energy
  • Rio CEO Sees Iron Ore Trading Around $100 as Profit Gains
  • Rubber Rises Most in Three Weeks as China Demand Concerns Ease
  • Most Industrial Metals Drop for Second Day on Rising Supplies
  • Corn Drops as U.S. Crop Outlook Boosts Global Supply Prospects
  • India June Coal Imports Rise 4% Y/Y to 16.1 Mln Mt: Interocean
  • China June Copper Output Rises 1.4% M/M to 623,000 Tons
  • China Grid-Related Copper Demand Seen Near 15% of Total: Goldman
  • California Almonds Saved by Using Water for Veggies: Commodities


























The Hedgeye Macro Team
















Early Look

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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.


Not one of LVS's finest. Even on a hold adjusted basis, Macau EBITDA was disappointing. Singapore estimates look like they are heading lower - the macro isn't good.




  • Pleased with quarter
  • "Includes the impact of the initiation of a "14th month" special bonus accrual for non-management employees in Macao. Absent this accrual, Adjusted Property EBITDA would have been approximately $29 million higher both in Macao and on a consolidated basis, and Adjusted Earnings per Diluted Share would have been $0.03 higher."


  • VIP experiencing a slowdown
  • 3 VIP headwinds mentioned by Adelson:  
    • Tightening liquidity conditions in Chinese economy and junket system
    • Real estate market slowdown 
    • General uncertainty and caution in economy
    • We also think disappearance of Huang Shan who owed ~$1.3 billion had an impact.
  • LVS gaming revenue mix:  44% VIP/ 56% non-VIP
  • Market gaming revenue mix:  60% VIP/ 40% non-VIP
  • World Cup 'clearly' had an impact on June GGR
  • June Macau Revenues were -20% relative to May similar to 2010
  • Continue to invest in premium direct 
    • Experienced lower VIP decline than junket volume
  • Reduced VIP capacity by 28%; increased mass table capacity by 14%
  • Impacted by low hold in premium mass segment
  • Competitors lag behind on the integrated resort model
  • Four Seasons mall:  highest grossing mall per sq ft in the world ($5,500); Bal Harbour Miami second place at $3,500
  • Confident LVS will continue to grow


  • Invest in premium mass 


  • Interest in Japan/Korea 
  • Bought back $320m of stock in Q2


Q & A

  • VIP only 17% of EBITDA 
  • Macau VIP:  back end consumer demand is soft
  • Have seen more VIP Chinese customers into Vegas
  • Macau:  Pulling back on VIP credit but not concerned from a risk perspective 
  • Have enough money for current stock repurchase program 
  • World Cup impacted mass business, especially in June; poor mass mix -  premium mass (higher mass mix %)  did fine but margins a little lower than pure mass
  • Q3 will be better
  • Premium mass demographics has some overlap with VIP demographics but ultimately, is a different audience
  • Premium mass has 38% margins
  • Want to increase more room comps
  • Singapore relationship: the bigger the hold, the lower the rolling chip volume
    • What about Q1 2012 where hold was 3.6% and volume grew 25%?
    • What about Singapore macro? It's deteriorating. 
  • Singapore:  cautious on lending credit
  • Dragons Palace:  will take 3 months to fully ramp
  • Macau competitors can't focus on mass because they don't have enough tables
  • Macau:  no margin erosion
  • Parisian: construction has stopped, pending govt approvals to be received shortly.  Planned opening date unchanged at end of 2015.
  • Smoking ban:  'VIP' definition still unclear.  All VIP rooms will be allowed smoking.  Believe public estimates 2-3% impact on revenues.
  • St. Regis:  will open in Summer 2015
  • Four Seasons condo titles:  licensing process with Macau govt
  • Board approved construction to spend $33m to put smoking facilities in
  • Four Seasons mall:  Dont' need the money from selling Four Seasons right now.  More focused on Parisian. No restrictions from government.
  • Would love to build another hotel in Singapore
  • CFO search:  no external hire

Poll of the Day Recap: 59% voted that the VIX will stay asleep through Labor Day

“Global asset markets continue to be in deep REM sleep,” Daryl Jones, Hedgeye Director of Research wrote in today’s Morning Newsletter. “U.S. equity volatility is literally at an all-time low and well below the 20-year mean of 20.05.”.


As we recently highlighted in our Q3 Macro Themes presentation, volatility has been at generational lows across asset allocations and continues to tick lower. U.S. equity volatility is literally at an all-time low and well below the 20-year mean of 20.05. Fixed income volatility is also literally at an all-time low and the current reading is 54.03, which is in the 1.5% percentile versus the long run mean of 99. And JPM Global foreign exchange volatility index is at 5.45 versus the long run mean of 10.6. We see the risk increasing the more you push the ball under water.


Poll of the Day Recap: 59% voted that the VIX will stay asleep through Labor Day - Lion sleeping

In today’s poll we asked: Is volatility ($VIX) going to wake up or stay asleep through Labor Day?


At the time of this post, 59% voted that the VIX will stay asleep through Labor Day, 41% believe it will wake up.



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