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Playing The ECB’s QE Games

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


ECB head Mario Draghi has opened the gates for QE, but we think market expectations are over the skis on timing going into the September 4th meeting.


Quantitatively, major European equities remain broken TREND and we’re sticking to our playbook (we shorted France this week in Real-Time Alerts) as we see growth decelerating and inflation weak in the 2H. As Keith noted this morning, “we believe European Equity bulls traverse the thesis drift plains (begging for more QE), remember that Japan’s didn’t work.” And we reiterate, inflation is not growth, even if Draghi showers us with QE!


So the river cards market participants were talking about this week are now out:

  • Eurozone CPI fell to 0.3% Y/Y (4-yr low), a 10bps move lower – in line with our view and that of consensus (released today)
  • European Confidence figures (Economic, Consumer, Industrial, Services, Business) turned lower in AUG versus the previous month and have weakened since ~ MAY 2014 – in line with our view and missing consensus (released yesterday)

Playing The ECB’s QE Games - zzz. Mario CPI


As we made clear in notes this week (see Shorting France (EWQ); Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook) we expected the decline in both CPI and confidence - it's clear and present in the recent data!


What’s our outlook?  Conditions are not desperate enough to warrant QE in September, but expectations will rise. 


Come September 4th we expect updated ECB staff projections to show downward revisions to growth and inflation outlooks, in line with the spate of weak Eurozone data over recent weeks and months. We expect that Draghi will “push” the growth and inflation prospects from TLTROs and QE-lite (ABS buying) programs in his public commentary (although we are not buying it to move the needle), and that the downward move in inflation for the August period is not enough (it’s not negative, yet) to accelerate a QE announcement to September.

Consider further, the TLTROs won’t be issued until September and December and he hasn’t experimented with QE-lite beyond a soft announcement. As the ECB has shown time and time again, it can flirt with “aid” packages for EXTENDED periods, to test expectations and further assess economic conditions (think of all the programs with 3 and 4 letter acronyms since the “crisis” got under way with Greece). 


While we expect Draghi to leave QE in his back pocket through the September meeting, what we’re managing against is recent news that some sell-side economists, including JPMorgan, Deutsche Bank, Nomura, and Credit Suisse are now pricing in policy easing next week, according to the WSJ. 


As the saying goes, expectations will always be the root of all heartache, and we’re sticking to our guns. For now our investment recommendations remain short France (EWQ), EUR/USD (FXE) and Eurozone equities (EZU); Long GBP/USD (FXB). 


Enjoy the long holiday weekend!


Playing The ECB’s QE Games - w. econ and consum senti

Playing The ECB’s QE Games - w. manu and ser conf

Playing The ECB’s QE Games - w. business conf


Matthew Hedrick



Takeaway: Still soft - projecting down mid single digit August (YoY). Margin pressure may be escalating.

Last week's numbers finally in



We just obtained last week’s numbers (Augusts 18-24) and still nothing to be positive about. Daily table revenues averaged HK$819 million, down 8% from the same week in August of 2013.  Month to date, ADTR is tracking down 5%.  Indeed, full month gross gaming revenues (includes slots) should come in down mid-single digits or maybe worse.




Softness in VIP volumes, compounded by a lower hold % particularly at the larger Cotai casinos, weighed on last week's results. Volumes could end the month lower than that seen in July.  


Mass growth appears to be decelerating through the month and our low 20s% growth projection could prove aggressive.  Remember that Mass grew only 17% in July.  We're hearing entry requirements for high commission rebates may have been relaxed which could further pressure margins. We know labor has been running meaningfully higher but it now appears that Mass reinvestment rates are escalating as well.


LVS continues to outperform here in August and although its market share moderated somewhat this past week, it remains well above trend.  LVS’s gain was SJM’s loss as all other concessionaires are tracking close to recent trend.



Keith's Macro Notebook 8/29: Japan | Russell 2000 | UST 10YR

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Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, +

Takeaway: SIGMA review for companies reporting this week. Definitely worse on the margin, with very few exceptions.




Here's a SIGMA review of every retailer that reported earnings this week. As a reminder, the analysis triangulates sales, inventories and margins. The vertical axis is the spread between sales and inventories -- the higher on the scale, the better.  The horizontal axis is the y/y change in EBIT margin. In effect, you want to be either in the upper right hand quadrant, or headed there. The opposite holds true for the lower left.


We've done this summary over the past few weeks, and the trends have been overwhelmingly positive -- with most companies improving inventories relative to sales and/or margins significantly. But this week, we're definitely looking at a different picture. The only companies that showed any material improvement were WSM and ANF -- and both of those names clearly had issues of their own that took the stocks down.  Interesting to see that the companies reporting so late in the season (i.e. taking longer to close their books) are the ones that are putting up the worst directional trends.


WSM - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart1



GES  - 2Q15 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart2



ANF - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart3



DG - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart4



CHS - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - chart5 8 29



PSUN - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - chart6 8 29



BWS - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - chart7 8 29



WTSL - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - chart8 8 28



TLYS - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - chart9 8 29



BBY - 2Q15 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart10



TIF - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart11



DSW - 2Q14 Earnings


Retail Callouts (8/29): SIGMAs - WSM, GES, ANF, DG, TIF, BBY, DSW, + - 8 29 chart12





WMT - Wal-Mart Looks Online for Chinese Growth



  • "As Alibaba Group Holding Ltd. courts investors for a highly anticipated public offering next month in the U.S., Wal-Mart Stores Inc. is busy trying to win over online shoppers in the Chinese e-commerce company's backyard."
  • "Wal-Mart's online arm in China—called Yihaodian, meaning No. 1 Store—has recently increased the number of products sold on its site, built up its supply chain and streamlined its mobile site in a push to boost sales. Wal-Mart owns a 54% stake in Yihaodian."


TGT - How Target Aims To Turn Instagram Into Shopping Spree



  • "Target on Wednesday adopted Curalate's software Like2Buy for its Target and Target Style Instagram feeds, in the hopes that users will turn a casual scroll into a shopping spree."
  • "Target has 319,000 Instagram followers and Target Style has 375,000, which means nearly 700,000 potential online customers."


APP - Robert Mintz appointed to American Apparel B.O.D.



  • "On August 26, 2014, Lion/Hollywood designated Robert Mintz to be a director of the Issuer pursuant to its rights under the Investment Agreement, as amended to date."


GPS - Gap Files Report on Myanmar Factories



  • "Through the U.S. Responsible Investment Reporting Requirements, U.S. companies making significant investments in Myanmar must be fully transparent about payments made to the government and about how they respect human rights in their business operations. Gap Inc., the first U.S. retailer to reenter Myanmar since sanctions were eased, submitted a report to the U.S. State Department this week on conditions it found at the first two factories it engaged to produce clothing for its Old Navy and Banana Republic factory stores."


GPS - Gap returning to television with ‘Dress Normal’ campaign



  • "Gap is returning to television. The brand debuted four commercials that will air on TV, in cinema, in stores and online. Created by Academy Award-nominated director David Fincher, the films were created with Wieden+Kennedy New York as part of Gap's new marketing campaign, Dress Normal. The TV campaign launches in the United States and United Kingdom in the week of Sept. 1."


JWN - SNEAK PEEK: Inside Canada’s first Nordstrom store



  • "It’s just three weeks until American retailer Nordstrom opens their first store in Canada, but there’s still lots of work to be done."
  • "Shelves in the 140,000 square foot retail space at Chinook Centre remain bare, as hundreds of newly hired employees work to assemble racks and get familiar with the high-end merchandise they’ll soon be selling."


Analysis: Holt Renfrew to Close its Smaller Stores Amid Increased Competition



  • "Holt Renfrew has announced that it will close its small Ottawa and Quebec City locations early next year, and we think that more Holt Renfrew store closures could follow. The company will instead concentrate on operating larger locations in just five Canadian cities. This strategy could be in response to expected competition from Saks Fifth Avenue and Nordstrom, both opening Canadian locations over the next several years. "

LEISURE LETTER (08/29/2014)

Tickers: SGMS, WYN, MTN


  • Sept 1/2:  Revel closes


SGMS (Leveraged Finance News) A banker’s meeting is scheduled for Sept. 3 for the launch of a $2.085 billion loan facility for Scientific Games Corp., which is using the proceeds to partially fund its announced $5.1 billion acquisition of Bally Technologies.

Takeaway: Financing shouldn't be a problem.


WYN – announced it renewed its securitized timeshare receivables conduit facility for an additional year, extending it through August 26, 2016. The facility bears interest based on variable commercial paper rates plus a spread or the LIBOR rate plus a spread and has a capacity of $650 million. The renewal involved execution of a Fifth Amendment, dated as of August 28, 2014, to the Amended and Restated Indenture and Servicing Agreement, dated as of October 1, 2010, by and among Sierra Timeshare Conduit Receivables Funding II, LLC, as Issuer, Wyndham Consumer Finance, Inc., as Servicer, Wells Fargo Bank, National Association, as Trustee and U.S. Bank National Association, as Collateral Agent.

Takeaway: The renewal was widely anticipated given the continued appetite for fixed income risk assets.


MTN – District Court Judge Ryan Harris delayed his decision on how much Park City Mountain Resort will have to pay if it wants to have a ski season this winter until September 3.  During the hearing, PCMR said it was willing to post between $1 and 6 million in a bond. Talisker, on the other hand, suggested they should post as much as $124 million.

Takeaway: The battle for champagne powder continues.


Macau Package Tours and Hotel Occupancy Rate for July 2014

Visitor arrivals in package tour increased by 35% YoY to 1,158,000 in July 2014, attributable to a 39% surge in visitors from Mainland China (946,000), with 367,000 coming from Guangdong Province. Visitors from Taiwan (75,000) and Japan (12,000) increased by 28% and 23% respectively, and those from the Republic of Korea (27,000) also registered a slight growth.

Takeaway:  Good visitation numbers


Changi – Singapore's Changi Airport passenger traffic grew 1% YoY in July to 4.582 million.


LEISURE LETTER (08/29/2014) - CHH


Takeaway:  Flattish visitation continues at Changi 


Native American Ruling (Indian Country Today) Tribal advocates anxiously await a meeting of an en banc panel of federal judges who will soon decide whether a legal opinion that could have a negative impact on millions of acres of tribal lands should be overturned. The judges of the 11-member panel will scrutinize a January 21 opinion of a three-judge panel of the Ninth Circuit Court of Appeals in Big Lagoon Rancheria v. California. In that 2 -1 opinion, the judges ruled that the state of California was not required under the Indian Gaming Regulatory Act (IGRA) to negotiate in good faith with Big Lagoon on a new gaming compact. The en banc panel will hear oral arguments by the tribe and state on September 17, according to an order announced on August 22 by the U.S. Court of Appeals for the Ninth Circuit.


Why was this ruling important?

In coming to the original decision, the court ruled that the tribe was not under federal jurisdiction in 1934, so 11 of the acres it proposed for gaming could not be considered Indian lands under IGRA as a result of the 2009 Carcieri v Salazar U.S. Supreme Court decision. The acres were placed into trust by the Department of the Interior in 1994. Carcieri limited Interior’s ability to take lands into trust for tribes recognized by the federal government after the Indian Reorganization Act (IRA) of 1934. The decision has been widely controversial in Indian country, and U.S. Congress members and the Obama administration have been vowing since 2009 to remedy it through legislation, but that has not happened to date. A major concern for tribal advocates is that the Big Lagoon precedent could be applied to all tribes formally recognized after 1934 if it holds, thus limiting Indian lands, sovereignty and gaming. According to a list referred to in the original decision, 258 of the 566 tribes that are currently federally recognized were recognized after 1934. 


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.

Begging For More QE?

Client Talking Points


Japan released a horrendous Household Spending report of -5.9% year-over-year in JUL (vs -3% JUN) and Housing Starts in Japan tanked -14.1% in JUL too – this is what happens when you print inflation but don’t get real consumption. But anyone who has studied monetary policy history already knows that. 


It’s been a tight race between the Nikkei (-4.4%) and U.S. growth expectations (Russell 2000) all year, and now the Russell is right back to breakeven at 1165. After the no-volume ramp into month-end, what’s next in SEP? We say sell, but you already know that too!


UST 10YR Yield of 2.34% drives our Best Macro Idea (TLT) to +17.2% for 2014 (that’s pre dividends) and we still can’t understand why consensus doesn’t get the rate of return on slow-growth vs Russell 2000. Watching too much TV, perhaps.

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


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


RUSSIA: Ruble on its knees and the Russian Trading System is down -0.6% to -12.8% YTD



I prefer to be true to myself, even at the hazard of incurring the ridicule of others, rather than to be false, and to incur my own abhorrence.

-Frederick Douglass


Cattle and Coffee prices both up over +1% yesterday to +15% and +76% year-to-date, respectively.

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 80.51%
  • SHORT SIGNALS 78.32%