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TODAY’S S&P 500 SET-UP – October 3, 2014

As we look at today's setup for the S&P 500, the range is 25 points or 0.42% downside to 1938 and 0.86% upside to 1963.                                                               













  • YIELD CURVE: 1.91 from 1.90
  • VIX closed at 16.16 1 day percent change of -3.29%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Trade Balance, Aug., est. -$40.8b (prior -$40.5b)
  • 8:30am: Change in Nonfarm Payrolls, Sept., est. 215k (pr 142K)
  • Unemployment Rate, Sept., est. 6.1% (prior 6.1%)
  • Avg Weekly Hours All Employees, Sept., est. 34.5 (prior 34.5)
  • 9:45am: Markit U.S. Services PMI, Sept. final, est. 58.5 (pr 58.5)
  • 10am: ISM Non-Mfg Composite, Sept., est. 58.5 (pr 59.6)



  • Senate, House out of session
  • 9am: U.S. Chamber of Commerce holds annual Supreme Court Pre-Term briefing focusing on business cases
  • U.S. chief negotiator Dan Mullaney for Transatlantic Trade and Investment Partnership, EU’s chief negotiator Ignacio Garcia Bercero, hold media briefing on 7th round of talks
  • U.S. ELECTION WRAP: Alaska’s Fish Debate; Gun Control Ad Wars



    • Jobs-Day Guide: U.S. Payrolls, Participation, Wages and Hours
    • JPMorgan Password Said to Lead Hackers to 76m Households
    • Salix Pharmaceuticals, Cosmo Agree to End Merger Agreement
    • Salix Said in Sale Talks With Actavis as Allergan Deal Fades
    • BP Seeks Revised Negligence Judgment or New Trial Over Spill
    • RadioShack Said to Reach Refinancing Deal With Standard General
    • Fed Lawyer Says AIG Got Billions Without 2008 Bailout Paperwork
    • American Cameraman for NBC News Diagnosed With Ebola in Liberia
    • Apple Encryption Will Slow Not Stop Snooping by Cops, Spies
    • Tobacco CEOs Urge FDA to Move More Quickly With E-Cig Standards
    • Disney Extends Iger’s Term, Keeping Staggs-Rasulo Race Alive
    • UBS Drops on Report of Potential $6.2b Fine in France
    • Iliad Said to Prepare Offer for Bigger Stake in T-Mobile
    • U.K. Services Growth Cools in Sign Recovery Is Losing Momentum
    • Eurozone Aug. Retail Sales Up 1.2% M/m; Est. Up 0.1% M/m
    • Hong Kong Protesters Besiege Government Building Before Talks
    • Trump Entertainment Judge Set to Rule on Dropping Union Pension
    • Goldman Losing Faith in $100 Brent While WTI Discount Seen Wider
    • Cameron Says U.K. Won’t Send Combat Troops Back to Afghanistan
    • American Airlines Asks U.S. for Tokyo Flight Slot Held by Delta
    • Takeda Accused of Putting Actos Profit Ahead of Patient Safety
    • Goldman Considering Setting Up New Infrastructure Fund: Reuters
    • Facebook Explores Plan to Connect Users With Ailments: Reuters
    • IMF, G-20, Fed Minutes, BOE, Brazil, Swaps: Wk Ahead Oct. 4-11



  • Brent Crude on Brink of Bear Market Amid Swelling Global Supply
  • Gold Drops Close to Erasing This Year’s Gains on Rising Rates
  • Diamond Hunters Giving Up on Gems Too Hard to Find: Commodities
  • Port Hedland Iron Ore Shipments to China Decline From Record
  • Nickel Advances Before U.S. Payroll Data as Copper Also Gains
  • West Texas Intermediate Crude Seen Falling in Analyst Survey
  • Soybean Meal Poised to Rise 11% After Testing ‘Key Support’
  • Palm Rebounds From Biggest Drop Since August on Demand Outlook
  • Ebola Serious Threat to West African Miners, Deutsche Bank Says
  • Zambia Said to Mull Replacing Mine Tax With Higher Royalties
  • Americas Dominate New Copper Supply as Africa, Asia Trail
  • Rail Jams Snarl Canada Grain Sales Even as Crop Shrinks: Freight
  • Orphaned Russian Oil Heads to U.S. West on Asia Overflow: Energy
  • Nickel Leads Metals Higher Before U.S. Payroll Data: LME Preview

























The Hedgeye Macro Team


















LEISURE LETTER (10/03/2014)

Tickers: H, IGT, CCL


  • October 8: HT Investor Day


H -  announced it sold the Park Hyatt Washington for $100 million to Westmont Hospitality Group and Thomas Tan, a member of the Bestford Hospitality Group. The sale price also equates to ~$463,000 per key and 15.0x on last 12-month EBITDA.

TAKEAWAY: We view this as a very favorable pricing on an asset sale for Hyatt.                                    


GENT:MK – has filed suit against Phil Ivey in London’s High Court alleging Mr. Ivey “edge-sorted” cards in August 2012 while playing a form of baccarat called Punto Banco at Genting’s Crockfords casino in London. Genting refused to pay up, saying the practice is unfair. Ivey, who sued Genting last year, says edge sorting isn’t dishonest and he should be paid the money. Both sides agree that Ivey was in the casino in August 2012 and that he won the money. “The issue is whether it amounted to cheating,” Christopher Pymont, Genting’s lawyer, said in documents filed at London’s High Court.

TAKEAWAY: Another legitimate suit or simply “piling on” given the similar edge sorting lawsuit by the Borgata Casino.


IGT -- has reached an agreement after an in-depth RFP process with Mille Lacs Corporate Ventures, which has elected to continue with IGT and upgrade IGT Advantage systems solutions at Grand Casino Mille Lacs and Grand Casino Hinckley, located in Minnesota.

TAKEAWAY: A good systems win/renewal for IGT covering two Minnesota Native American casinos.


CCL – Carnival Miracle will be the first cruise ship to call at Cabo San Lucas since Hurricane Odile hit the Mexican state on September 15th. Loaded with relief supplies provided by Carnival, the ship will depart from Long Beach, California, on October 4th , arrive in Cabo San Lucas on October 6th. During her visit, the crew will off-load several pallets of bottled water, canned food, cereal, sanitary supplies, paper products, personal items and other supplies for local resident

TAKEAWAY: Carnival leading the way back to Cabo San Lucas with an aide sailing.


Golden Week Visitation – Visitation to Macau on October 2, 2014 totaled 151,667 an increase of 9.1% year-over-year while Mainland China arrivals totaled 122,925 an increase of +6.2% year-over-year.  The total visitation thus far during Golden Week, Oct 1 and Oct 2, total 288,575 for 9.5% rise year-over-year while Mainland China visitation was 227,494 for an increase of 4.3% year-over-year.

TAKEAWAY: Mainland visitation is particularly disappointing and overall visitation not posting the strong double-digit results forecasted by some sell-side analysts.


Macau Labor Protests(GGRAsia) Some dealers of MGM China Holdings Ltd and SJM Holdings Ltd in Macau are striking and/or protesting against the casino operators over salaries and benefits. The action started at noon on Friday and will continue on Saturday. The plan includes some staff working to rule, some reporting late and some calling in sick, according to secretary general of labor, Cloee Chao, activist group Forefront of the Macao Gaming. Reuters earlier reported that up to 300 dealers at MGM Macau based on information provided by Ieong Man Teng, head of Forefront of the Macao Gaming.

TAKEAWAY: Labor discord reaching a peak just prior to the busiest visitation periods Saturday afternoon and Sunday morning.


Neptune Limited Reports Results(GGRAsia) an investor in casino VIP promoters in Macau, reported net profit of HKD148.8 million (US$19.2 million) for the year ended June 30, 2014, down 93.8% from a year earlier, according to a filing with the HKSE.  The firm said the significant decline was due to an “impairment loss of available-for-sale investments of HKD111.1 million” caused by the recent slowdown in Macau’s gaming market. That led to a drop in value of an investment made in October 2013 in the profit stream of a junket operator in Galaxy Macau casino. The same reasons required the company to write down HKD88.6 million from an investment made in February 2014 in the profit stream of a junket operator in City of Dreams casino, it added. The firm recorded a 23% increase year-over-year in turnover to HKD710.4 million, but it saw its earnings before interest, taxation, depreciation and amortization (EBITDA) slide 8.7% to HKD517.6 million.

TAKEAWAY: The VIP slowdown negatively impacting the financial results of the junkets.


Steve Wynn to So Cal – Variety.com is reporting Steve Wynn has allegedly gone into escrow to purchase the lower East Gate Bel Air acres Lionsgate Estate compassing approximately 24,000 square foot, 11 bedroom, 17 bathroom (and all furnishings). Mister Wynn’s children, not to mention his ex-wife, Elaine, live in Los Angeles

TAKEAWAY: Mr. Wynn continues to build his personal real estate empire.


CMBS Delinquencies - during September improved (declined) by seven basis points to 6.03%. The September late-pay rate is 211 bps lower than a year ago, and thus far in 2014 delinquencies have fallen 140 bps. September saw nearly $1.4 billion in newly delinquent loans, putting 26 bps of upward pressure on the delinquency rate. Loans that cured totaled over $600 million in September, which helped push the delinquency rate down by additional 13 bps. There are currently $31.8 billion in delinquent loans, which is down from $32.5 billion in the previous month, according to Trepp. The figure includes loans that are past their balloon date but are current on their interest payments. During September, the lodging delinquency rate dipped 31 bps and is now 5.06%. Lodging remains the best performing major property type, although a year ago that distinction was held by retail.

TAKEAWAY: Good news and positive developments for the real estate finance sector.


China Macro Readings –  September official services PMI 54.0 vs 54.4 in August (weakest official result in 8 months) while New Orders 49.5 vs 50 prior and weakest since December 2008, and Employment 49.5 vs 49.6 prior

TAKEAWAY: Mainland macro-economic data remains anemic. 


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.

KATE – Adding To Best Ideas List as a Long

Takeaway: The value destruction since the print has far overshot any change in the trajectory of the business – which otherwise is excellent.

Conclusion: We’re adding Kate Spade (KATE) to our Best Ideas list as a long. We’ve actually been very positive on KATE since the stock was struggling to break the $5 barrier when the Street thought that (the former) Liz Claiborne was going bankrupt. However, with sentiment turning overwhelmingly bullish, the stock recently flirting with $40 on a non-existent earnings base, and virtually no contention around the story, it was tough to remain as vocal. But all of that has changed dramatically on August 12 when the company printed an outstanding quarter, but botched its messaging around long-term margin targets. Since then, the stock simply can’t seem to catch a bid, and is down 33%.  The amount of controversy around this name today (down $1.8bn in equity value) absolutely dwarfs the diminimous change we’ve seen to the economic reality of its growth trajectory and cash flow. The reality is that the core value drivers are in place, and are very much in-tact. We think that the company will earn $1.40 in 2016, which is 40% above the consensus. The company reports earnings around Nov 6, and we’re comfortable getting ahead of that event. We’ll be hosting a call in the coming weeks to outline our thesis in full detail.


KATE – Adding To Best Ideas List as a Long - katetable


Stock Roadmap. This is a company that should grow earnings at a 60% CAGR over 5-years. The stock might look expensive at 40x next year’s earnings. But keep in mind the following. 1) The consensus is wrong. We’re 15% above consensus next year, and are probably conservative. It’s trading at less than 30x the real number. 2) Earnings should ramp by between $0.50 and $0.80 per year off a base of only $0.28 – for every single year through 2018. That’s a CAGR of 60%. What kind of multiple does that growth deserve? Even if you want to argue that it deserves a higher risk premium to account for fashion risk, we think that at least a 40x multiple is extremely fair. If our model is right, that equates to a stock of $38, $65 and $87, and $120 in years’ 1 through 4 of our model (50x in year 1 giving way to 40x as it matures).


Still Huge Runway. And while we talk about ‘maturity’, let’s keep in mind that Kate might have been around for a while, but it is still in its early adolescence from a global branding perspective. Kate Spade only did $743mm in sales last year. That compares to $4.8bn for Coach, and $3.6 for KORS. KATE does not exactly want to aspire to be Coach. But the reality is that KATE can double in size and still be only 50% as big as KORS. It’s even smaller than Tory Burch, which is likely to go public over the next 12-18 months. Our point is that fashion risk in this space matters most at two points; 1) when a brand is tiny and is trying to gain consumer acceptance. Kate has already done that. 2) When the brand becomes ubiquitous, margins are stretched, and the company needs to find non-core areas to grow. Kate is nowhere close to that point.


That last statement deserves some context. Kate Spade is nowhere near the point where it needs to grow outside the core. But the reality is that it is with its Kate Spade Saturday brand. Quite frankly, we couldn’t care less about Kate Space Saturday. It only has 10 stores today, and generates about $20mm. That’s only about 1.8% of sales. It simply does not matter as it relates to the growth runway in Kate Spade New York. But the reality is that the company is investing in the concept, which is likely to pressure margins (this is what largely drove the stock down after the print). So even though it’s irrelevant to our thesis, the fact that the company is backing it financially means that – to an extent – we need to care about it.  



Margin Targets. Here’s the statement from the COO that sucked the oxygen out of the room on the conference call.

“With respect to our 2016 targets, which we outlined at our Investor Day last year, we expect to achieve an adjusted EBITDA margin of 25% for the former Kate Spade segment. Given the longer-than-expected Kate Spade Saturday ramp-up coupled with our revised 2014 margin rate outlook and because of our limited visibility into 2016, we feel that it is responsible to re-evaluate the timeframe of achieving this goal, which we will perform as part of our annual business planning process later this year. We will assess whether any short-term adjustment to the timeframe is warranted, and we'll update you in November during our third quarter earnings call. To be clear, if a short-term adjustment is even necessary, we expect the most likely adjustment would be a shift to 2017. This is all the commentary we will have on this topic today, and we will not address this further during the Q&A.”


This wss one of the worst commentaries on a company’s outlook that we’ve ever heard. This is a company that had just crushed the quarter with the stock up 12% pre-market. Here’s a couple of thoughts on the margin target.


1) Yes, margin targets will very likely get pushed out by a year. But we don’t care. What the company should have said is “We’re probably going to hit our 2016 revenue target two years early because of how well we’re executing on our plan. Growing the footprint of our brand(s) is our top priority, and if we have to give up 2-3 margin points in order to achieve our goal, then we’re perfectly happy to do that.” That’s good offense. They played bad defense. But we think they since got the message.


2) Consider the following math: Previous target from the company was $1.2bn in revenue at a 25% EBITDA margin. That’s $300mm. If we take down margins by 300bp and apply to where the top line is likely to come in ($1.9bn), we get to $418mm.  That’s 40% higher EBITDA than previous guidance suggests. That would have been valuable information to include on that last conference call.


3) There are many people that will differ with us (the market certainly does) but we simply don’t care a whole heck of a lot about margins right now. The margin will come. For now we want pure unmitigated growth. If this was Coach, Kors or any other mature company, then margins would matter a lot more to us. But for a company that can triple its revenue base in 4-5 years, we’re a lot more inclined to focus on the top line, and will usually (within reason) support the costs that might go along with achieving those goals.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Earlier today the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 4Q14 and the associated investment implications.


We encourage you to check out the Video Replay (click on the image below); the Audio Replay and Presentation Materials can be accessed via the links underneath.


Video Replay:  CLICK HERE

Audio Replay:  CLICK HERE

Presentation:  CLICK HERE



  • #Quad4: Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
  • #EuropeSlowing: Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 
  • #Bubbles: The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes.  The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return. 

 - Hedgeye Macro

Bullish on Bloomin'


After removing BLMN from our Best Ideas list as a short back in May, we now find ourselves turning constructive on the name, albeit for atypical reasons.  The company continues to operate what we believe to be an unsustainable business model, comprised of a portfolio of five different casual dining brands.  Furthermore, the fundamentals of the company – decelerating same-store sales, cost of sales inflation (beef, seafood, dairy), margin deterioration and little brand momentum – remain unattractive.  The value, however, is there and we suspect management will be forced, or tempted, to unlock it one way or another.  With casual dining sales improving, brand initiatives underway and an inflection point in cost of sales approaching (could become a tailwind in 2015), we believe now is an opportune time to get long the stock.


Key Themes:

  1. Same-Store Sales: Two-year average same-store sales have been deteriorating at all of Bloomin’s brands since the end of 2011.  In fact, two-year average same-store sales have decelerated nearly ~400 bps since 1Q12.  Outback’s dinner business, the core business of BLMN, has shown notable weakness lately as management continues to rollout weekday lunch.  Coincidence?  We think not.  Carrabba’s new menu launch at the end of February proved unsuccessful and Bonefish, in a similarly dire situation, launched a new menu on July 29th.  Internationally, the Brazil business continues to be strong but Korea has been a material headwind, as casual dining sales have fallen over 20% the past two quarters likely due to an oversaturated market.  We have little visibility into trends in this region, but believe management will take an aggressive approach to stem this decline.
  2. Daypart Expansion: Management continues to rollout weekday lunch at Outback and Carrabba’s restaurants and was being served in 56% and 51% of locations, respectively, at the end of 2Q.  While adding a new daypart should boost same-store sales in the immediate-term, we believe it has hampered the core dinner business and, subsequently, margins.  We continue to have our doubts with the lunch daypart, as casual dining chains have been falling out of favor to more convenient fast casual restaurants that offer similar (or higher) quality food at a lower price point.  
  3. Potential Transaction: We recently penned a note calling for management to sell-off its non-core assets and refocus on growing the profitability of the Outback Steakhouse brand.  The crux of our reasoning is that multi-concept casual dining companies are structurally flawed and the current fundamentals of the company would suggest the same.  If management can restructure the company by pairing it down to one (Outback) or two brands, it could then focus on improving low margins at Outback and growing the business internationally, where it has had great success (save for Korea) to-date.  Our sum-of-the-parts analysis values the total of Bloomin’s chains close to $35 and suggests shareholders are getting the Outback business at a discount and the company’s four other brands for free. 


Valuation & Sentiment:

The street is bullish on BLMN for reasons we don’t necessarily agree with as 73.3% of analysts rate the stock a buy.  Short interest is also fairly low at 4.67% of the float.  At 7.7x EV/EBITDA (NTM), BLMN trades at a discount to its peers, reflecting structural issues, lower margins and a high debt-to-EBITDA (~3.6x).


*Appendix: Same-Store Sales

Please note that consensus estimates are shown.

Bullish on Bloomin' - 11


Bullish on Bloomin' - 22


Bullish on Bloomin' - 33


Bullish on Bloomin' - 44


Bullish on Bloomin' - 55


Bullish on Bloomin' - 66


*Appendix: Margin Structure

Please note that consensus estimates are shown.

Bullish on Bloomin' - 77


Bullish on Bloomin' - 88


Bullish on Bloomin' - 99


Bullish on Bloomin' - 1010


Bullish on Bloomin' - 1111


Bullish on Bloomin' - 1212


Email or call with questions.


Howard Penney

Managing Director


Fred Masotta


The Hong Kong Government Has Already Lost

This note was originally published October 01, 2014 at 08:18 in Morning Newsletter

“The triumphant success of Hong Kong demands - and deserves - to be maintained.” Charles, The Prince of Wales

The big picture

The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.


The Hong Kong Government Has Already Lost - zz. EL 2

Macro grind

How did this all get started?


In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.


Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.


While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.


The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.


To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.


Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?


In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.


How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.


Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.


Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?


The people of Hong Kong appear ready to find out.

  • CASH: 58

Our levels

UST 10yr Yield 2.46-2.55% (bearish)

SPX 1957-1986 (neutral)

RUT 1090-1026 (bearish)

EUR/USD 1.26-1.38 (bearish)

WTIC Oil 90.16-94.42 (bearish)


Michael Blum

President and Resident of Hong Kong


The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor

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