Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook

Investment Recommendations:  short EUR/USD (FXE) and Eurozone equities (EZU);   Long GBP/USD (FXB)


As is customary, Jackson Hole affords central bankers the stage to make a “splash”, and the ECB’s Mario Draghi did just that, on Friday (8/22) solidifying the title of “über” dove, even beyond our expectations. 


What are the tea leaves indicating?  Accelerated QE expectations!   Draghi said “we stand ready to adjust our policy stance further.”  An acceleration in the “adjustment” towards QE is what we foresee out of the meeting and given the backdrop of deteriorating Eurozone fundamentals and in our estimation little prospect for medium term inflections from the TLTROs and QE-lite (ABS buying) programs. What initial indicators may begin to turn the tide?

  • We expect in aggregate that Eurozone Confidence figures for August (out this Thursday) to show sequential decline
  • We foresee the Bank to be unable to arrest the decline in inflation. CPI stands at 0.4% and the preliminary August reading (out this Friday) should show further contraction, likely by 10bps. Draghi is both way off base from the 2.0% LT target and showing a material inflection over the medium term
  • Sticky and high unemployment currently at 11.5% (the July reading comes out this Friday) should persist over the medium term
  • We expect the ECB’s staff projections  for growth and inflation to be revise down in its next meeting on September 4th

Taken together, we’re not calling for the announcement of QE next month, however we do think QE expectations will heighten as fundamentals continue to go against the Bank’s price stability mandate.



What cards has Draghi already seen that may influence his use of policy “tools”?

Eurozone Manufacturing PMI 50.8 AUG Prelim. (51.3 est.) vs. 51.8 prior

Eurozone Services PMI 53.5 AUG Prelim. (53.7 est.) vs. 54.2 prior

Eurozone Composite PMI 52.8 AUG Prelim. (53.8 est.) vs. 53.8 prior

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. pmis

  • German data remains lousy. Today’s release of the German IFO Business survey showed a material slide, and is in-line with German Q2 GDP that slid to negative (for the first time in two years at -0.2% Q/Q); as well as weakness from Factory Orders, Industrial Production, and Economic expectations seen over recent weeks.  For more see: Germany Under Pressure: ZEW Tanks

Germany IFO Business Climate 106.3 AUG (107.0 est.) vs. 108.0 prior

Germany  IFO Current Assessment 111.1 AUG (112.0 est.) vs. 112.9 prior

Germany IFO Expectations 101.7 AUG (102.1 est.) vs. 103.4 prior

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. ifo

  • Bond yields are front-running the slowdown in economic growth, with the German 10YR bund yield trading below 1%!

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - xx. yields




We’re sticking with the Hedgeye investment playbook we had going into the meeting, which includes:


-- Short EUR/USD (FXE). Net short position in the EUR/USD (CFTC futures + options) hits a big year-to-date high of -142,758 contracts.

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x eurusd

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. cftc


--Short European equities (EZU) which, despite the recent bounce, remain below our TREND levels of resistance. If the equities overcome their TREND levels, we’ll change our positioning:


Equity TREND lines remain broken:

Europe’s Stoxx50 = 3,158

Germany’s DAX = 9,643

Italy’s MIB = 21,311

France’s CAC = 4,364

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. dax


-- Long GBP/USD (FXB) - BOE Minutes released last week showed for the first time in more than three years that there were 2 votes to increase interest rates (by 25bps). Taken together with the dovish policy from the Fed’s Yellen and ECB’s Draghi, and relatively stronger economic data from the UK, we expect the GBP/USD to appreciate in value.  

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. pound


Matthew Hedrick


Takeaway: New Home sales declined for a 2nd month in July. Rising inventory, middling demand & decelerating prices are not a bullish factor cocktail

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 





Today's Focus: July New Home Sales 

New Home Sales declined for a second straight month in July as the new Home market continues to spin its wheels, averaging ~425K +/- 25K each month for the last year.  The sales data continues to accord with the middling SF starts and permits figures while remaining at odds with the optimism fueled rise in builder confidence.   



Key Takeaways: 


* Total:  On the heels of the largest sequential decline of the year in June, New Home Sales dropped -10K ( -2.4%) sequentially in July to 412K SAAR.  New Home sales represented just 7.4% of total home sales in the latest month, the lowest share percentage since September of last year (see 1st chart below).   Existing Home Sales, while lackluster in its own right, continues to dominate the sales recovery as New Home Sales share of total remains depressed vs historic averages. 


* Regional:  With the exception of the South, all regions saw a sequential decline in sales with growth continuing to run negative on a YoY basis.  Notably, the Northeast and South saw a stark divergence in sales trends with MoM and YoY sales growth declining -31% and -44%, respectively in the Northeast and +8% and +33%, respectively, in the South.   


* Inventory:  The total inventory of new homes breached the 200K level for the first time since September 2010, rising +4.6% MoM to 205K.  Supply continues to trend higher on both a 1Y and 2Y basis. 


* Sales vs Sentiment:  Rising builder confidence reported in the August NAHB HMI catalyzed the strength in housing stocks to start last week.  We’ve highlighted the decoupling of builder confidence, fueled in large part by rising “optimism, from the reality of actual new construction sales  the last few months.   Absent an inflection in sales trends, it remains more likely than not that builder confidence corrects in favor of the data in the coming month(s).  



Bottom Line:

Rising inventory, middling demand and decelerating prices is not a bullish factor cocktail.  Comps get easier from here on the demand side of housing but price comps get progressively steeper.  We’re considering the stock price implications of an (largely optical) increase in reported volume against easy compares but, as it stands, we’re inclined to maintain our bearish bias until we see the next inflection in the second derivative price trends. 

















About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



Joshua Steiner, CFA


Christian B. Drake


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Monday Mashup: BKW, BWLD and More

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are watching closely.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: BKW, BWLD and More - 8 25 2014 11 15 32 AM


We are bumping up SBUX and EAT to our Short List.  More details to follow.

Recent Notes

08/20/14 Expert Call: Coffee Prices May Move Much Higher From Here

Events This Week

Tuesday, August 26th

  • COSI Annual General Meeting

Wednesday, August 27th

  • BOBE Earnings Call 10am EST

Thursday, August 28th

  • ZOES Earnings Call 5pm EST

Chart of the Day

Coffee prices are up 55.5% YTD and 46% YoY.

Monday Mashup: BKW, BWLD and More - chart2

Recent News Flow


  • BKW is in talks to acquire THI for tax inversion purposes.  The merged companies would be headquartered in Canada.
  • TXRH was upgraded to overweight at Stephens with a $32 PT.
  • BWLD takes a majority stake in Rusty Taco, a taco chain that currently has nine locations across Dallas, Denver and Minnesota.

Monday, August 18th

  • DIN Applebee's introduced crosscut ribs in 3 different sauces: Sweet Asian Chile, Smoky Chipotle and Classic BBQ.
  • BWLD is offering Fantasy Football draft parties, which include an exclusive Pepsi Fantasy Football Draft Party Kit that provides guests with a draft board, player stickers, a brag flag and other items.
  • RRGB appointed Jeff Melnick as Senior VP of Operations.  Melnick has served as regional VP of Operations for Red Robin since 2006 and will now oversee the operations of over 380 domestic company owned restaurants.

Tuesday, August 19th

  • EAT was upgraded to buy at Wunderlich Securities with a $55 PT.
  • THI announced the return of "Pumpkin Pie Goodness."  Tim Hortons' restaurants are now offering the Pumpkin Pie Iced Capp and Pumpkin Pie Latte in all U.S. restaurants.

Wednesday, August 20th

  • IRG appointed Shauna King to its board of directors.  Ms. King currently serves as VP, Finance and Business Operations for Yale University, where she has worked since 2006.  Ms. King has already held various leadership roles at PepsiCo and Frito-Lay.
  • BOBE Activist Sandell Asset Management announced it had won at least five seats on the Board of Bob Evans.
  • BOBE declared a $0.31 quarterly dividend and increased its current share repurchase authorization to $150 million.

Thursday, August 21st

  • CAKE was downgraded to underperform at Bank of America Merrill Lynch with a $42 PT.
  • PLKI named William Matt its new CFO.  Mr. Matt most recently served as COO of La Senza Global and has held prior positions at Victoria Secret Direct and PepsiCo/KFC.
  • BWLD announced the opening of its second PizzaRev franchise restaurant in Edina, MN.
  • WEN announced its latest premium offering, the new Smoked Gouda Chicken on Brioche.
  • EAT increased its quarterly dividend $0.04 to $0.28 and its board authorized another $350 million in share repurchases.

Friday, August 22nd

  • TXRH announced a $0.15 quarterly dividend which will be paid on October 3, 2014.
  • TAST Carrols Restaurant Group agreed to purchase 64 Burger King restaurants from Heartland Food LLC for approximately $18.0 million.

Sector Performance

The XLY (+2.3%) outperformed the SPX (+1.7%).  In aggregate, both casual dining and quick service stocks underperformed the narrower XLY Index.


Monday Mashup: BKW, BWLD and More - chart3

Monday Mashup: BKW, BWLD and More - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector is bullish on an intermediate-term TREND duration.


Monday Mashup: BKW, BWLD and More - chart5

Casual Dining Restaurants

Monday Mashup: BKW, BWLD and More - chart6

Monday Mashup: BKW, BWLD and More - chart7

Quick Service Restaurants

Monday Mashup: BKW, BWLD and More - chart8

Monday Mashup: BKW, BWLD and More - chart9


Howard Penney

Managing Director


Fred Masotta


Keith's Macro Notebook 8/25: Euro France UST 10YR

LEISURE LETTER (08/25/2014)

Tickers:  BYD, MAR, CCL, RCL


  • Aug 26:  Horseshoe Baltimore Opening
  • Aug 27: 
    • ISLE FQ1 2015, 11 am
    • BYI 2Q earnings
  • Aug 28:  Hollywood Dayton Raceway Opening
  • Sept 1/2:  Revel closes



BYD – announced the Boyd Bonus Tourney a slot dollar promotion running from Aug 24-31 at the following seven properties: The Orleans, Gold Coast, Suncoast, Sam’s Town, Main Street Station, California and Fremont. Awarded prizes will be in the form of Boyd Slot Dollars.

Takeaway:  Promotions continue in LV Locals


HDRAU – Hydra Industries Acquisition Corp. (a "blank check" company) filed for an initial public offering. The offering is 10 million units, which are valued at $100 million U.S. The company plans on listing on the Nasdaq as HDRAU. The price for each of the securities is $10 U.S. and it consists of one share and one warrant, which is usually what you see with securities offerings in the world of blank check companies and special purpose acquisition vehicles. Each warrant allows for the purchase of one half of a share at $5.75 U.S.  The management team is comprised of the chairman and chief executive officer, A. Lorne Weil, who built Scientific Games and has experience in the worldwide gaming and lottery markets.  The sole book-running manager for the IPO is UBS Investment Bank, and the co-manager is EarlyBirdCapital Inc.

Takeaway:  More gaming acquisitions coming?


1680:HK & 6889:HK (GGRAsia) Dynam Japan Holdings Co Ltd extended a further six months the deadline for concluding talks with Macau casino services firm Macau Legend Development Ltd about possible collaboration on gaming operations. The Japanese company first agreed a non-binding memorandum of understanding with Macau Legend – led by former Macau legislator David Chow Kam Fai and running several casino and hotel operations in the territory – on August 23, 2013. That was extended in February this year for six months, and has now been rolled on to a new deadline of February 23, 2015. Dynam Japan invested approximately US$85 million in Macau Legend, including an initial purchase of US$35-million worth of shares following the latter’s global public offering in Hong Kong in July last year. In August last year, Dynam Japan announced that it hoped to operate a pachinko hall at Macau Legend’s waterside venue Macau Fisherman’s Wharf currently undergoing redevelopment on Macau peninsula.

Takeaway:  Talks continue ahead of Japan debate in a couple of months


959:HK – Amax International Holdings Ltd said its chairman Ng Man Sun intended to sell 6.4 million of his shares in the firm to “not less than six” independent third parties. There will then be a top-up subscription of new shares under a general mandate, so that Mr Ng’s holding will be slightly diluted from 17.03% prior to this transaction to 16.57% afterwards. The transaction is expected to raise HKD7.56 million (US$975,500) net. Amax Holdings said the money raised would be used for “general working capital and potential investment.”


MAR – Opening in September, The Metropolitan at The 9 is affiliated with Marriott International's Autograph Collection.  The hotel has 156 boldly designed rooms and suites. Additionally, residents of The 9 have the opportunity to choose from 104 spacious Concierge Living apartments

Takeaway: Another Autograph Collection asset.


CCL/RCL:  Tropical Storm Cristobal Affects Cruise Itineraries 

The following ships have had to alter their itineraries to avoid Cristobal:

Carnival Splendor, Carnival Liberty, Carnival Glory, Carnival Pride, Carnival Sensation, Oasis of the Seas, Freedom of the Seas, and Disney Fantasy

Takeaway:  At least there has not been any cancellations. 




RCL – EVP Maritime Harri U. Kulovaara acquired 35,948 shares of RCL via the exercise of five tranches of stock options awards and promptly sold 35,948 shares in a transaction that occurred on Thursday, August 21st at an average price of $63.8516. The five tranches of stock options would have expired in February 2015, 2016, 2017, 2019 and 2021.  Following this transaction, Mr. Kulovaara now owns 32,905 shares in the company,


DRH – EVP & CFO Sean M. Mahoney sold 20,000 shares of stock via a 10b5-1 transaction on Tuesday, August 19th, at an average price of $13.25 and now owns 316,354 shares.


Smoking rules not to impact revenue classification: DICJ (GGR Asia)

The Macau gaming regulator says the new rules governing smoking inside the city’s casinos will have “no obvious impact” on the official breakdown of casino gross gaming revenue (GGR) into mass and VIP.  “Gaming gross revenue is always listed and published by game types. On the other hand, DICJ Instruction No. 1/2014 and other rules on smoking set the criteria for smoking areas. As such, no obvious impact is expected in our gaming gross revenue classification after the new rules are in force,” the spokesperson said.


“DICJ will consider a baccarat table as a VIP one when it is designated to [a] particular group of players, on which non-negotiable chips [are] used and the bet is comparatively high,” the spokesperson added. The person did not define what was meant by “comparatively high” or precisely what was meant by “bet”, i.e., table minimum bet, table maximum bet, or maximum payout per table.

Takeaway:  The regulator clarifies the reclassification rumors last week but there is still some vagueness distinguishing VIP from premium mass.


Dealer positions and wages (DSEC, GGR Asia)

The average monthly earnings for dealers at Macau casinos increased by 4.8% YoY to MOP17,530 (US$2,196) at the end of June this year, according to the latest Statistics and Census Service’s Survey on Manpower Needs and Wages of the Gaming Sector.  There were 25,727 dealers in the city’s casinos as of June 30, +7.1% YoY.  Dealers accounted for 45.4% of all employees in the gaming industry.


The growth in the average monthly dealer wage is however lagging monthly wage growth for the Macau gaming industry as a whole.  Average earnings of full-time casino employees in June, excluding bonuses and allowances, rose by 6.7% YoY to MOP20,160, with resident and non-resident employees earning an average of MOP20,140 and MOP20,500 respectively.  Full-time employees in the gaming industry totaled 56,700 at the end of 2Q 2014, an increase of 2,146 from a year earlier.

Takeaway:  Labor will continue to be a risk for Cotai 2015/2016.


Macau July visitation – (DSEC) Visitor arrivals increased by 7% YoY to 2,753,394.  Visitors from Mainland China increased by 13% YoY; Mainland visitors traveling under the Individual Visit Scheme rose by 19%, at 870,537. Visitors from Taiwan increased by 2% YoY, and those from the Republic of Korea and Indonesia soared by 24% and 55% respectively; however, visitors from Hong Kong decreased by 7%.  The average length of stay of visitors was 1.0 day.


LEISURE LETTER (08/25/2014) - 1


Takeaway:  A mild surprise given all the negative mass talk lately. 


Macau Gaming Concession (GGR Asia) On Saturday, Macau’s Chief Executive, Fernando Chui Sai On, pledged to carry out a public consultation on the casino concession renewal process ahead of making any decision on the matter. The Macau government has stated several times that between the years 2015 and 2016 it intends to start examining the renewal of the concessions. Macau’s six casino concessions expire between 2020 and 2022. Mr Chui’s political manifesto stated casino operators should “facilitate the provision” of accommodation and transportation to their migrant workers, know locally as ‘non-resident workers’ or ‘blue card holders’. He has yet to elaborate on what that could mean.

Takeaway:  Seemingly a less gaming operator friendly tone from the Chief Executive. 


SLS Las Vegas (Las Vegas Review Journal) opened at midnight Friday night/Saturday morning to a capacity crowd. The SLS Las Vegas features 1,600 hotel rooms and 800 slot machines and 74 table games.

Takeaway:  It will be interesting to see whether a low cost, non-gaming focused property can make it on the Strip. The success of the SLS boutique will hinge on marketing - can they achieve the cache of a hip and happening, boutique property. 


Potential Nevada Sports Book Tax Repeal – Nevada sports book operators pay 0.0025% in a federal handle tax on every sports wager placed in the Silver State. In 2013, based on the record $3.6 billion wagered on college and professional sports, the amount sent to the IRS was $9 million. Representative Dina Titus (D-Nev) introduced a bill last month to repeal the tax. CG Technology, which operates race and sports books at eight Las Vegas hotel-casinos, paid about 25% of the state’s total handle tax burden.

Takeaway: Not material to any public company.


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.

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%