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Takeaway: Recent commentary out of Federal Reserve policymakers solidifies our expectations that the Fed will surprise investors to the dovish side.

This note was originally published August 13, 2014 at 23:43 in Macro by Hedgeye Macro analyst Darius Dale. For more information on our services click here.

When I started as a junior analyst in this business, I had the fortunate experience from learning from one of the best Retail & Apparel analysts in the world, Hedgeye Sector Head Brian McGough. One of my primary responsibilities on Brian’s team was to update models during earnings season and take notes on conference calls. 


It didn’t take long for me to realize that “management” knew little more about the future than even I did. In fact, listening to how bearish many of those executives sounded during what was a generational opportunity to buy domestic consumer discretionary stocks (i.e. mid-2009) sounded increasingly at odds with the Hedgeye Macro Team’s almost-giddy bullish view on the US consumer.




I learned three valuable lessons from that experience that have shaped, if not defined my analytical career:


  1. No one knows anything about the future. We’re all getting paid handsomely to bet on what we view as the most probable outcome (i.e. “guess”).
  2. While relative levels of compensation would indicate otherwise, corporate executives are not any better than you or I at predicting the future state of their own operating performance – let alone the broader economy. The best they can do for you in a 1x1 meeting is provide you with details that may border on material nonpublic information – something we vehemently shun at Hedgeye. 
  3. There is no “management” to call in macro.


Regarding that last point, we often joke in meetings with prospective customers that “God called us” whenever we’re asked to describe the research process that has allowed us to stay on the opposite side of both buy-side and sell-side consensus on the direction of interest rates in both 2013 and 2014 (i.e. accurate).


In reality, our process is a combination of rigorous quantitative methods, meticulous study of economic history and a willingness to incorporate relatively newer disciplines such as behavioral finance and complexity theory into our analysis. We’re certainly not always right, but over the years we’ve found that combination to be the most successful at generating a high probability of accuracy on a consistent basis.


If, however, there was a management team to call in macro, it would most likely be the Federal Reserve. Their incessant and growing interference with financial markets has certainly amplified their role in both the price discovery process and the pace of economic activity. 


While we don’t have Janet Yellen’s phone number, or the numbers of any of her minions among the Federal Reserve Board of Governors, or their minions at CNBC or the WSJ, we can at least pretend to engage in a 1x1 dialogue with them by asking and responding to commentary from their recent statements.  We do this below with a satirical interview that incorporates sound bites from Federal Reserve Vice Chairman Stanley Fischer’s 8/11 speech at the Swedish Ministry of Finance:


  • Q: Hedgeye: Tell us about the Fed’s track record on growth.
  • A: Fischer: “Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average... These disappointments in output performance have not only led to repeated downward revisions of forecasts for short-term growth, but also to a general reassessment of longer-run growth. From the perspective of the FOMC, even in the heart of the crisis, in January 2009, the central tendency of the Committee members' projections for longer-run U.S. growth was between 2-1/2and 3 percent. At our June meeting this year, these projections had fallen to between roughly 2 and 2-1/4 percent.”


  • Q: Hedgeye: Interesting. Why do you think growth has been so slow in the post-crisis era?
  • A: Fischer: “As Cerra and Saxena and Reinhart and Rogoff, among others, have documented, it takes a long time for output in the wake of banking and financial crises to return to pre-crisis levels. Possibly we are simply seeing a prolonged Reinhart-Rogoff cyclical episode, typical of the aftermath of deep financial crises, and compounded by other temporary headwinds. But it is also possible that the underperformance reflects a more structural, longer-term, shift in the global economy, with less growth in underlying supply factors… In the United States, three major aggregate demand headwinds appear to have kept a more vigorous recovery from taking hold. The unusual weakness of the housing sector during the recovery period, the significant drag--now waning--from fiscal policy, and the negative impact from the growth slowdown abroad--particularly in Europe--are all prominent factors that have constrained the pace of economic activity.”


  • Q: Hedgeye: So, to be clear, you do not think your Policies To Inflate have had anything to do with the fits and starts in growth we’ve seen over the past several years?
  • A: Fischer: [no comment]


  • Q: Hedgeye: Moving along, what do you make of claims that ZIRP and quantitative easing after quantitative easing are effectively holding back the recovery by depressing the “animal spirits” needed for a true economic cycle?
  • A: Fischer: “… turning to the aggregate supply side, we are also seeing important signs of a slowdown of growth in the productive capacity of the economy--in the growth in labor supply, capital investment, and productivity. This may well reflect factors related to or predating the recession that are also holding down growth. How much of this weakness on the supply side will turn out to be structural--perhaps contributing to a secular slowdown--and how much is temporary but longer-than-usual-lasting remains a crucial and open question.”


  • Q: Hedgeye: Interesting that you mention labor supply. Can you talk a little bit about “slack”, which has been a hot topic amongst monetary policymakers in recent weeks?
  • A: Fischer: “There has been a steady decrease in the labor force participation rate since 2000. Although this reduction in labor supply largely reflects demographic factors--such as the aging of the population--participation has fallen more than many observers expected and the interpretation of these movements remains subject to considerable uncertainty. For instance, there are good reasons to believe that some of the surprising weakness in labor force participation reflects still poor cyclical conditions. Many of those who dropped out of the labor force may be discouraged workers.”


  • Q: Hedgeye: Lastly, can you share with us any insights you guys may have that we may not yet be aware of as it relates to your “data dependent” guidance on policy normalization?
  • A: Fischer: “At the end of the day, it remains difficult to disentangle the cyclical from the structural slowdowns in labor force, investment, and productivity. Adding to this uncertainty, as research done at the Fed and elsewhere highlights, the distinction between cyclical and structural is not always clear cut and there are real risks that cyclical slumps can become structural; it may also be possible to reverse or prevent declines from becoming permanent through expansive macroeconomic policies.”


  • Q: Hedgeye: So basically what you’re saying is, “We really have no clue what we’re doing or where we’re headed, but we’re going to attack every problem as if it were a nail and we’re the hammer.” Is that more-or-less accurate?
  • A: Fischer: [no comment]


Moving along, if you aren’t yet familiar with the debate surrounding the outlook for US monetary policy we’ve been attempting to prepare investors for since JAN, we highly encourage you to review the following Reuters article: "Yellen Resolved to Avoid Raising Rates Too Soon; Fearing Downturn" (7/12).


All told, we remain the bears on US interest rates/bulls on long-term Treasuries as growth is likely to slow throughout 2H14.




Meanwhile, Consensus Macro remains out to lunch with their expectations of perpetually compounding +3% QoQ SAAR GDP growth – expectations that don’t even align with their full year view of +1.7%. Specifically, if GDP compounds at +3.1% in Q3 and Q4, full year GDP will equate to +2.1%, not the +1.7% currently expected by Bloomberg Consensus. I know it’s August, but c’mon, that’s just analytically lazy. Update those forecasts!




For those of you who are still grinding away with us, we wish you a restful night’s sleep and a very productive morning.




Darius Dale

Associate: Macro Team

LEISURE LETTER (08/14/2014)



  • Aug 14:
    • Revel Auction Proceedings
  • Aug 19-21:
    • Hedgeye Cruise Pricing Update
  • Aug 19:
    • Galaxy Entertainment Group 2Q results 5 am


BYI – Foxwoods Resort Casino announced it will implement Bally Technologies award-winning mobile concierge platform to offer its patrons a feature-rich mobile app.

Takeaway: a small but important mobile platform win for BYI.


IGT – IGT and Macau-based casino multi-game manufacturer LT Game Ltd announced a three-year distribution agreement for North America and Macau whereby IGT will distribute LT Game’s live and electronic table game systems in the U.S. and Canada, while LT Game will serve as distributor for IGT’s slot machines in the Macau market, Paradise Entertainment Ltd, the parent company of LT Game, said.

Takeaway: IGT has under performed in Macau and Asia


MGM – announced plans to spend "HKD800 million each year for the next two or three years to renovate MGM Macau".  The renovations involve a total of 27 separate projects over the next three years, including the creation of a new smaller an more intimate upper level gaming space, expand the retail space as well as the food and beverage section, while 600 rooms in MGM will also be refurbished.

Takeaway: Looks like maintenance capex to us in the face of the new Cotai supply. 


SGMS – announced an extension of its contract with the Minnesota Lottery to continue as a provider of instant lottery games. Under the agreement, the Company will continue as the secondary instant game provider to the Minnesota Lottery for two additional years beginning July 1, 2014.

Takeaway: a positive contract extension for SGMS.


FCH – filed an indeterminate amount mixed shelf offering for common, preferred stock. depository shares and warrants.

Takeaway: Seems like a standard operating procedure and not a precursor to an offering given the company's plan to sell assets and pay down debt.


PCLN – announced a proposed private offering up to $1 billion principal amount of Convertible Senior Notes due 2021 to qualified institutional buyers pursuant to Rule 144A. The Company plans to use the net proceeds from the offering of the notes to repurchase up to $375 million of its outstanding common stock in privately negotiated, off-market transactions, and remaining net proceeds will be used for general corporate purposes, which may include repaying outstanding debt, repurchasing additional shares of the Company's common stock and corporate acquisitions.

Takeaway: At the end of Q2 2014, PCLN had $3.5 billion of cash on its balance sheet, but subsequent to quarter end on July 24th PCLN completed the acquisition of OpenTable for $2.5 billion and borrowed $995.0 million under the revolving credit facility. As of June 30, 2014, PCLN had $654.5 million remaining on its currently share purchase authorization.


Macau Non-Gaming Development (Macau Business Daily) Paramount Hotels and Resorts is considering Macau for a new hotel and resort development. On May 7th, Paramount Hotels and Resorts began the brand and logo registration process in Macau. Paramount Hotels and Resorts was founded in April 2012 after company chairman Ghassan El Aridi acquired the rights to create it from the Viacom group, parent of Paramount Studios, in March 2012. Currently, the company is involved in four resorts: in Hainan (China), Dubai (United Arab Emirates), Langkawi (Malaysia) and Riyadh (Saudi Arabia). The company, however, is planning to expand its operations further in the near future.

Takeaway: We found it interesting the Paramount Hotels and Resorts web-site includes many subtle references to Asian culture.


Japan Gaming Expansion – Genting Singapore categorically denied ever talking with USJ regarding a partnership to develop and integrated resort in Japan and namely Osaka.

Takeaway: A very loud denial from a very quiet company and CEO.


Manila Junkets – Recent market commentary indicated a number of the Manila casinos are offering junkets 50% versus 40% or 42.5% revenue share in Macau.

Takeaway: Such arrangements do however carry more risk for junkets than traditional rolling chip commission if the players have sustained wins, and both sides to the deal must also cover expenses including any taxes and player reinvestment costs


Singapore - Genting Singapore sounded cautious in its forward looking commentary on the earnings conference call.  Excluding a large impairment charge, Genting's EBITDA was better than expected.  However, the outlook was not rosy and writing off VIP bad debts should always cause some concern.

Takeaway: Marina Bay Sands (LVS) is much more conservative on VIP credit so not much of a read through there.  However, Genting's outlook suggests difficult market conditions will continue.


Atlantic City Summit – New Jersey Governor Chris Christie will convene a bipartisan summit of state and local leaders on September 8th to address the future of Atlantic City. The summit is expected to bring together a group representing a mix of state and local policymakers and stakeholders and officials, including state legislative and Christie administration officials, county and local government officials, Atlantic City’s casino industry and labor representatives, and nonprofit organizations dedicated to the city’s revitalization. Individuals with experience and expertise of New Jersey’s gaming, sports and entertainment issues will also be part of the summit, a news release stated.

Takeaway: Too little too late.


Nevada Foreclosures – During July 2014, mortgage lenders filed 1,037 notices of default to begin foreclosure proceedings, an increase of 128% year-over-year.  This compares to foreclosure starts of 284 to 708, during the first six months of 2014. Anecdotally, Southern Nevada's negative equity rate has dropped from 70% in 2012 to 35% in July 2014 as median home prices have appreciated. 

Takeaway: A headwind to the locals recovery and in line with our July 16th note, "LV LOCALS: THE MIRAGE OF A RECOVERY", which covered the potentially deteriorating Las Vegas housing situation.


Venice Bans Cruise Ships – Italian officials have again ordered a halt to large cruise ship traffic in Saint Mark's basin and the Giudecca Canal in Venice. According to regulations passed in 2013, no cruise ships over 96,000 tons will be permitted to sail in the Venetian lagoon, and the number of cruise ships weighing 40,000 tons or more must be reduced by 20% of the current volume.  About 650 cruise ships call on Venice annually.

Takeaway: A negative for Mediterranean itineraries due to ship reroutings. Officials reversed the March 2014 ruling which suspended restrictions banning large ships.


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


This is the first time both USA and Europe have slowed (in rate of change terms) at the same time since 2011. German GDP has now fallen to the annualized rate of change the USA had in 1H of 2014 (+0.8-0.9%). The DAX, CAC, and MIB index = all remain bearish TREND signals @Hedgeye.


When U.S. rates fall, you buy Gold and usually win. Question now is whether or not Gold can breakout above our long-term TAIL signal line of $1323. For now, it’s doing its job for you in your portfolio on down USA/European Equity days = Gold +9.4% vs Russell (IWM) -2% year-to-date.


India is still our favorite Equity market in the world as Eastern Equities continue to diverge (positively) vs Western ones – this happened in 2011 as well don’t forget. India’s wholesale inflation ticked down to 5.2% vs 5.4% last. Raising rates, Dr Raj is crushing it with BSE Sensex +25.1% year-to-date.

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.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


The biggest apparel retailer in the US (sans $WMT and $TGT) misses on the same day US Gov't Retail Sales disappoint. Not a good combo. $M



Growth is never by mere chance; it is the result of forces working together.

-James Cash Penney


Headline retail sales were disappointing – rising 0.0% month-over-month (missing estimates & worst since January) and decelerating on both a 1-year and 2-year basis.

Early Look

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CHART OF THE DAY: Is Long High-Yield a Strong Hand?

CHART OF THE DAY: Is Long High-Yield a Strong Hand? - 08.14.14 COD


In today's Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is literally at its widest of the year. 

The Strong Hand

“The odds are six to five that the light in the end of the tunnel is the headlight of an oncoming train.”

-Paul Dickson


Whether it be hockey (which no doubt many of you are tired of us writing about!), card games, or chess, it's critical to put yourself in the best position possible to win.  In effect, you want to play the strong hand.   Most games involve some level of probability in which playing the odds can improve your chance of success meaningfully.


For example, in chess there are few basic rules of thumb that even the novice chess player should know and follow, such as:


  1. Use the center pawns to gain space on the opening
  2. Control the center of the board
  3. Secure your king early
  4. When ahead in material, force exchanges
  5. And perhaps the most important . . . never fight a land war in Asia.


Obviously, the last rule of thumb is not for chess, but was reputedly advice given by General MacCarthur to President Kennedy and then popularized in the 1987 movie, “The Princess Bride”.   As rules of thumb go, given America's lack of success in the four Asian land wars post World War II, Korea, Vietnam, Afghanistan, and Iraq, the last point may be the most accurate rule of thumb.


The Strong Hand - mac


As it relates to global macro investing and asset allocation, a couple of rules of thumb we have recently been reminded of are: 1) be on the right side of liquidity (It’s all about the flows, bro!) and 2) it’s the fundamental changes on the margin that matter.


Back to the Global Macro Grind...


In the Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is at its widest of the year.


Some strategists have been flagging this as an opportunity to wade back into the high yield market, an entry point if you will.  One point that gives us pause on this line of thinking is the risk of illiquidity in the high yield market.  In some ways, this time IS different on the liquidity front.


According to Lipper, fund flows in high yield bond funds have experienced outflows of some $13 billion over the past four weeks.  Rightfully, you might push back and say that is a smidgen of the size of the entire high yield market, which according to recent data from Barclay’s is north of $1.2 trillion in the U.S. alone.  So based on those rough numbers, we are looking at only about 1% of the entire market in outflows, but the kicker, again, is liquidity.


Since April 2013, the New York Fed has started to break out dealer inventories of high yield bonds and they currently stand at about $8.2 billion.  So even as the high yield market has ballooned from $660 billion in 2007 to almost double that now, liquidity, as facilitated by the dealers, has been shrinking.   This then is the unintended consequence of government regulation and tighter capital rules: dealers have a more limited ability to facilitate an orderly rush for the exit.


The other rule of thumb we noted above is that fundamental changes on the margin matter.   Europe is on the sell side in our current macro themes deck and that position is seeing the benefit of more slowing economic data from Europe this morning.  A few points to highlight from this morning’s data:


  • Eurozone GDP slows to +0.7% year-over-year in Q2 2014;
  • German GDP contracted sequentially by -0.2%; and
  • France cut their GDP forecast in half again to +0.5% for 2014.


For Germany, this is the first sequential contraction since 2012.  Given this, it no surprise then that the German Bund hit a record low of 1.0% this morning and has also been front running this slow down.  Clearly, low reported inflation is leaving the door open (some might say wide open!) for incremental easing in Europe (a point the German bund market is front running).


Incidentally for those that have been watching, the U.S. 10-year yield is ticking lower again this morning.  The contrarian Hedgeye call that 10-year yields may touch 2.3%/2.2% may happen sooner than even we anticipate!


And conversely in a sign today that this time truly isn’t different, Reuters is reporting that mortgage lenders are again offering stated income mortgages in an attempt to facilitate mortgage activity.  When combined with excesses in the auto loan market and a spike in subprime credit card issuances, perhaps there is more than just liquidity that is making the credit markets shake.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.39-2.48%

RUT 1109-1148


VIX 11.84-15.55

WTIC Oil 96.60-98.26

Gold 1

Copper 3.09-3.15 


Keep your head up and pawns in the middle,


Daryl G. Jones

Director of Research


The Strong Hand - 08.14.14 COD

Short HAIN Call Today @1PM

We recently added short HAIN to the Hedgeye Best Ideas list.



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The organic food industry is the only place in the consumer staples sector that investors can find real growth.  That being said, the last five years have been great for organic stocks – especially HAIN.  The past 12-months, however, have been more challenging with evidence mounting that industry headwinds will keep some stocks within the organic segment under intense pressure.  With HAIN being the 700 pound gorilla in the room, it has the potential to feel the most pain.


We’ve recently seen early signs of maturation in the organic segment of the food space.  This is despite several companies seeing above-average organic volume growth. 


Our call on HAIN will focus on the following issues:

  • Acquisition fatigue – the “roll up” story is looking tired
  • Brand management and lack of disclosure
  • Slowing top line trends
  • Margin pressure
  • Signs of financial stress
  • Positive sentiment
  • Frothy valuation

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