This note was originally published at 8am on July 18, 2014 for Hedgeye subscribers.

“A remarkable aspect of your mental life is that you are rarely stumped.”

-Dan Kahneman


Lightning struck over 3,000 times in less than 2 hours in the UK last night. Thank God I got out of London in the morning! As I landed in New York, US stock market fear was crashing to the upside (VIX +41% < 2 weeks). Perma stock market bulls on my contra-stream (Twitter) were stumped.


The aforementioned quote comes from one of the forefathers of #behavioral finance (Kahneman wrote Thinking Fast, And Slow) and it’s cited in a book I was reading on the plane by Chip & Dan Heath called Decisive. It’s all about #process and how you make risk managed decisions.


Did you buy Gold Bond before your recent overseas flight? Did you sell the momentum stocks on the June bounce like you should have at the beginning of the year? Everything we do in both business and in life is a decision. It’s a lot easier to read about fighting your emotions and confirmation biases than it is to implement it in your risk management process. But neither life, nor this profession, is easy.


Stumped? - Gold Bond cartoon 07.10.2014


Back to the Global Macro Grind


Decisive is a relatively new book, but the risk management concepts in it don’t deviate much from how we roll here at Hedgeye. In Chapter 3, the Heath’s introduce the strategy of “multi-tracking.”


“When you consider multiple options simultaneously, you learn the shape of the problem.” (pg 67)


In other words, widen your scope. As I was reading this I realized this is the number one thing that has improved my #process since starting the firm. The more macro I’ve gone, and the more research analysts we hire, the more options I have. There are always bull and bear markets somewhere.


From a risk management perspective, I call our #process multi-factor, multi-duration. This stops me from naval gazing at US equities on a simple moving average, 1-factor (price), chart. It also helps me get bullish when I’m right bearish on US growth – bullish on Gold and Bonds, that is…


In addition to the rip in the VIX yesterday (see our recent Q3 Macro Deck on Volatility’s Asymmetry):


  1. Gold and Silver ripped +1.5-1.7%, compounding their absolute and relative 2014 gains
  2. Long-term Treasuries (TLT) had a +1.1% day, hitting fresh YTD highs as bond yields re-tested YTD lows
  3. Inflation Protection (TIP) had another up-day, moving to +5.1% YTD


Beats being long the Russell growth index.


But the relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who is reading my rants. While it took 62 trading days to give the SP500 a -1% down day (longest streak since 1995), the Russell has already lost -6.2% since July 7th and is -2% YTD.


Consensus Macro can blame the weather, trains, planes, and automobiles at this point … but the reality is that it’s almost August now and excuse making is not where the performance is.


If the only reason why the US stock market was down yesterday was a Malaysian plane crashing in the Ukraine, why did both Chinese and Indian stocks close UP on the session overnight?


Other than the Down Bond Yields, Down Russell, Up Gold move, what else happened yesterday?


  1. Housing Stocks (ITB) -2.5% after a horrendous week of housing data (mortgage purchase applications continue to crash)
  2. Bank Stocks (KRE) -2.3% as the lead indicator for net interest margin (Yield Spread) collapsed to YTD lows
  3. Biotech Stocks (IBB) -2.2% after the entire edifice of the social-no-earnings thing made lower-bubble-highs vs FEB 2014 peaks


Put another way, what worked and didn’t work yesterday was pretty much the same thing that’s leading and lagging on the 2014 scorecard. If you are bearish on rates, the US consumer, US housing, and high-multiple-bubble stocks with no earnings, you’ve been rarely stumped.


Our immediate-term Global Macro Risk ranges are now:


UST 10yr Yield 2.46-2.55%

SPX 1949-1970

RUT 1123-1155

BSE Sensex 25201-26159

VIX 12.53-14.99

WTI Oil 102.01-104.83

Gold 1299-1345


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stumped? - Chart of the Day

CHART OF THE DAY: Hedgeye Reiterates Our #Q3Slowing Macro Theme


CHART OF THE DAY: Hedgeye Reiterates Our #Q3Slowing Macro Theme - Chart of the Day

Rates of Change

“The future is not a point – a single scenario that we must predict. It is a range.”

-Chip & Dan Heath


In Chapter 10 of Decisive, “Prepare To Be Wrong”, the Heath boys nail it with that risk management thought. Translating it into Hedgeye-speak: market tops and bottoms are processes, not points.


Price, volume, and volatility are all dynamic but measurable beasts. You don’t have to be a rocket scientist to be able to visualize their patterns. All you need is a process to score them. It’s rarely an absolute price level that matters – it’s almost always about its rate of change.


Measuring rate of change (slope of the line) won’t help you much unless you contextualize it across multiple durations. We strongly advise that you stand outside your western academic confirmation biases and consider rates of change across multiple factors as well.


Rates of Change - 78


Back to the Global Macro Grind


Multi-factor, multi-duration macro. Yep. That’s how we roll. And after a +64% rip in front-month US stock market volatility (since July 7th) we’re not only going to stick with that process this morning, but also remind you that it’s not Q2. It’s Q3.


They can blame Argentina or my cousin’s neighbor’s brother for yesterday’s levered-long-beta-belly-flop in US Equities (worst down day of the year), but they can’t change that the USA’s PMI print got powdered (rate of change) down to 52.6 in JULY vs 62.6 in JUNE.


They may very well have built inventories into the USA growth-hope narrative in Q2, but in Q3 the PMI (purchasing manager index) looks almost identical to the Industrial Stocks (XLI). Since US Equity volatility bottomed late June, early July:


  1. Industrials (XLI) are down -7.2%
  2. And the Russell 2000 (IWM) is down, well, -7.2%


Forget our #VolatilityAsymmetry Q3 Macro Theme. How symmetric is that?


More importantly, who gets what it’s been signaling? Who is writing about an early-cycle slowdown? These rates of change didn’t start yesterday. Depending on which factor in the US economy you have been measuring, they have been in motion now for 7 months!


What are the early-cycle slowdown sectors of the US stock market?


  1. Housing (ITB)
  2. Consumer Discretionary (XLY)
  3. Industrials (XLI)


All three of these early-cycle sectors are down now for 2014.


“So”, if god called you and said ‘hey, here’s my survey of the US economy’:


  1. Long-term Bond Yields are down -15% YTD (10yr UST Yield)
  2. The Russell 2000 is down -3.7% YTD… and
  3. Housing (ITB) is down -10.5% YTD


What would you say back if you were bullish on something like +3-4% US GDP growth? I think Bill Ackman would say, “my bad.”


I’m not trying to be snarky about this. I’m actually trying to drive my Scottish-Canadian flag right into the front-line of this ongoing culture war I’ve been fighting vs. #OldWall since we started the firm in 2008. You know, and wiggle the Braveheart kilt at them.


Let’s have some bull/bear battles already. At some point, someone out there in Consensus Macro land needs to man-up and just say ‘hey, I’ve missed calling every early-cycle slowdown since 1999, and I’m tired of this Canadian-mutt doing the rate of change thing.’


Now many would argue that consensus economists and strategists in Washington and on Wall Street would rather all be wrong together than wrong all on their own (#JobSecurity). But I think our profession is better than that.


I’m betting someone who is a lot smarter than me is going to change what they are doing and fight me, Red-White-And-Blue style! In every profession in America, there’s always been a progressive rate of change in that too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.59%


RUT 1111-1145


VIX 13.12-17.91

Brent Oil 105.54-108.79

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rates of Change - Chart of the Day

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 80.46%
  • SHORT SIGNALS 78.35%

August 1, 2014

August 1, 2014 - 1



August 1, 2014 - Slide2

August 1, 2014 - Slide3

August 1, 2014 - Slide4

August 1, 2014 - Slide5




August 1, 2014 - Slide6

August 1, 2014 - Slide7

August 1, 2014 - Slide8

August 1, 2014 - Slide9

August 1, 2014 - Slide10


TODAY’S S&P 500 SET-UP – August 1, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 0.35% downside to 1924 and 1.78% upside to 1965.













  • YIELD CURVE: 2.05 from 2.03
  • VIX  closed at 16.95 1 day percent change of 27.16%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, July, est. 230k (prior 288k)
  • Unemployment Rate, July, est. 6.1% (prior 6.1%)
  • 8:30am: Personal Income, June, est. 0.4% (prior 0.4%)
  • Personal Spending, June, est. 0.4% (prior 0.2%)
  • 9:45am: Markit US Manufacturing PMI, July, est. 56.5 (prior 56.3)
  • 9:55am: University of Michigan Confidence, July final, est. 81.7 (prior 81.3)
  • 10am: ISM Manufacturing, July, est. 56 (prior 55.3)
  • 10am: Construction Spending m/m, June, est. 0.5% (prior 0.1%)
  • 1pm: Baker Hughes rig count



    • Republic of Congo President Denis Sassou-Nguesso speaks about stability, security, oil investments in central Africa region
    • 9am: House Republicans meeting at 9am to discuss border plan
    • 2pm: DNC Chair Debbie Wasserman Schultz speaks at Natl Assn of Black Journalists conference in Boston
    • U.S. ELECTION WRAP: Farmers on Immigration; Koch-Funded Groups



  • U.S. employers may have added 230,000 workers last month
  • Ford, GM, others report U.S. auto sales; SAAR may be 16.7m
  • Argentina doesn’t oppose deal sought by JPMorgan, other banks
  • Argentina outlook revised to negative at Moody’s
  • ICE said to seek mortgage role through talks with data service
  • China HSBC PMI jumps to highest in 2 yrs
  • Societe Generale 2Q net rises 7.8% as loan-loss provisions fall
  • RBS trims lending ties with Russia
  • No-exit strategy may be Fed’s burden as record stimulus unwinds
  • Lions Gate to refile proxy after underreporting Feltheimer’s pay
  • Cisco localizes production in Russia amid tensions: Kommersant
  • Rosneft closes deal for Weatherford assets in Venezuela, Russia
  • ArcelorMittal increases European, U.S. steel demand forecast
  • Macau July casino rev. falls 3.6%, beats est.
  • Israel, Hamas stop Gaza fighting as 3-day truce begins
  • Flights over Iraq restricted by FAA due to armed conflict



    • Allete (ALE) 8:30am, $0.44
    • American Axle & Mfg (AXL) 8am, $0.72
    • Bell Aliant (BA CN) 6am, C$0.41
    • Burger King (BKW) 7am, $0.23
    • Calpine (CPN) 6am, $(0.02)
    • Catamaran (CCT CN) 6am, $0.50
    • CBOE (CBOE) 7:30am, $0.50
    • Chevron (CVX) 8:30am, $2.63 - Preview
    • Clorox (CLX) 8:30am, $1.35 - Preview
    • Enbridge (ENB CN) 7am, C$0.39 - Preview
    • Exelis (XLS) 6:30am, $0.35
    • Fortis (FTS CN) 7am, C$0.28
    • Genesee & Wyoming (GWR) 6am, $1.11
    • Hilton Worldwide (HLT) 6am, $0.19
    • ImmunoGen (IMGN) 6:30am, $(0.34)
    • PBF Energy (PBF) 7am, $0.65
    • Procter & Gamble (PG) 7am, $0.91 - Preview
    • Spirit AeroSystems (SPR) 7:30am, $0.68
    • Targa Resources (TRGP) 7:17am, $0.63
    • Telephone & Data Systems (TDS) 7:56am, $(0.05)
    • United States Cellular (USM) 7:57am, $(0.06)
    • WisdomTree (WETF) 7am, $0.07



  • WTI Heads for Biggest Weekly Decline in 7 Months; Brent Steady
  • Gold Trades Near Six-Week Low Before U.S. Employment Report
  • Copper Set for Weekly Drop on Speculation U.S. to Curb Stimulus
  • Twin Corn Ears Push U.S. Yields to Bin-Busting Crop: Commodities
  • Arabica Coffee Extends-Bull Market Run as White Sugar Declines
  • Sugar Seen Needing Further Drop to Attract Demand Amid Glut
  • Milling Wheat Slides to Four-Year Low in Paris on Rising Supply
  • AngloGold Sees More Mine Sales as Producers Chase Margin Gains
  • WTI Crude Seen Rising in Survey on U.S. Economic Growth
  • Rubber Sales From Vietnam Set for First Drop Since ’08 on China
  • U.K. Winter Power Prices Advance After SSE Fire in England
  • Shipping Rates Suffer as China Hydro Curbs Coal Imports: Freight
  • As One Kurdish Crude Tanker Waits, Another Heads to New Jersey
  • Europe Set for Hottest Summer Since 2006 as Warm August Seen
  • Steel Rebar Has First Weekly Advance in Three on China PMI


























The Hedgeye Macro Team


















Guidance again disappointing especially after factoring in the property tax benefit. And the real flow through on higher YoY Borgata revenues was actually not good




  • Clearly did not meet expectations.  Weak spending among casual customers.
  • Q2 results not acceptable
  • Revenue shortfall:  Regional properties weakness accounted for $23m of $25m shortfall
  • LV Locals:  top line trends similar to 1Q; excluding low hold and higher utility expenses, EBITDA would have been on par with prior year
  • Southern NV economy still recovering
  • Borgata continues to outperform competition.  For 3 out of last 4 quarters, Borgata has gained share in greater Atlantic market (DE, PA, NJ, NY)
  • Lowered FY 2014 EBITDA guidance:  assumes 3Q/4Q will be similar to 2013
  • Orleans and Gold Coast:  Higher rates and expanding audience
  • Updating room products at Orleans and IP.
  • Updating F&B products (new restaurants) at LV Locals properties
  • B-Connected:  opportunity to enhance topline results.  Near completion of rollout at 5 Peninsula properties.  Still early but results have shown progress.
  • Online gaming:  early results from NJ have fallen short of expectations.  75% of accounts created were not active customers at Borgata.  Seasonality accounted flatness in online gaming trends.  As colder weather returns, online gaming visitation will increase.
  • Online gaming business in 2Q:  $1.8m loss; in July, they broke even
  • Will launch a mobile sports gaming app in Nevada
  • Remain on track for $200m debt reduction in 2014
  • Continue to benefit from $1.1bn in tax carryforwards
  • LV Locals:  lower hold reduced EBITDA by $1m.  Absent low hold, revs would have been flat.  Two utility cost hikes resulted in $1m.  Orleans had rev and EBITDA growth.
  • Downtown:  May/June was slow but recovered in July.  Market share grew by 40bps.  Optimistic on long-term outlook.  
  • Room upgrade at SunCoast in coming months
  • Midwest/South:  Biloxi/Shreveport/Central Illinois (2/3 of EBITDA shortfall).  At other properties, performance was flat YoY.  Delta Downs set new EBITDA/revenue records.
  • Blue Chip:  grew 40bps in market share.  
  • Kansas Star EBITDA grew YoY.  Kansas Star hotel expansion on schedule...will double room count
  • Borgata:  market share grew by 240bps.  2Q share- highest in 2Q record history.  Lower property taxes will benefit EBITDA by $6m per quarter.
  • Borgata:  holds 10% share lead over nearest competitors
  • YTD, total debt reduction has been $100m
  • 2Q capex:  $35m ($8m Peninsula, $7m Borgata); YTD capex:  $54m;  for 2014, $120m capex btw Boyd and Peninsula, $25m Borgata 
  • 2H Guidance:  
    • LV Locals/Downtown:  will be even with 2H 2013
    • Midwest/South:  excluding Blue Chip benefit, EBITDA would be higher
    • Borgata:  EBITDA even or slightly better than 2H 2013
    • Corp expense:  $27m
    • Borgata:  2 tax appeals pending
      • One-time cash payment of $88m; no concerns here; timeline:  probably year-end
      • 2009/2010 tax refunds:  currently being appealed by City of Atlantic City

Q & A

  • Shareholder activism:  nothing to report
  • AC Online gaming:  over time, will see consolidation in online gaming business
  • Suncoast:  no impact from upcoming hotel renovations
  • Borgata:  land-based EBITDA increased by 17% YoY 
    • Yeah, but don't forget they had a $4.3m impairment in Q2 2013 so EBITDA was actually down YoY and flat after excluding the loss from online gaming. There was very little flow through on the YoY increase in land based revenues
  • Closure of competitor casino closures in AC:  capacity goes out in a overcapacity market.  Promotional market should settle down.  No pickup in business from Atlantic Club closing. 
  • Northern NJ possible casino:  not overly concerned in next year or two
  • Not much increase in 2015 capex to complete their many projects
  • 2014 EBITDA guidance includes $11.8m Borgata tax benefit and includes  the lower $6m in property taxes per quarter
  • Borgata promotional allowances: higher because of online gaming; ex online gaming, promotional allowances would have been lower YoY
  • LV:  bigger players have done well but casual players struggle
  • Prior EBITDA guidance did not include property tax credits
  • Increased capacity in Midwest/South: Margaritaville in Shreveport (Q3 will be an apples-to-apples comparison); Biloxi competition- significant casino expansion in Alabama (Native American);  Peoria- IL VGTs affecting performance
  • Continuation of 2Q trends would put them in lower end of FY guidance
  • Regional EBITDA in 2013:  - 20% in September and -25% in December
  • Core player trends:  frequency and spend per visit are flat YoY
  • Lower property taxes going forward at other properties are possible:  Kansas appeals in process (not in guidance this year)

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