Scottish Independence Squashed

This note was originally published at 8am on September 19, 2014 for Hedgeye subscribers.

“Every human has four endowments - self awareness, conscience, independent will, and creative imagination. These give us the ultimate human freedom... The power to choose, to respond, to change.”

-Stephen Covey


As of early this morning the vote is in:  the Scots squashed independence and with it the 307 year old union with England remains intact… at least for now.  The vote was 55% NO to 45% YES.


And did Pound Sterling ever bounce on the outcome, rising as high as $1.65, and currently is settling in at $1.64!   We were positioned long the GBP/USD (via the etf FXB) ahead of the event (we added it on 9/8 to our Real-Time Alerts) with a succinct thesis:


A NO vote leads to a relief rally (see the chart below) and a YES vote leads currency traders to assess the United Kingdom’s fiscal health without Scotland as much improved, which leads to a long term tail wind for the Pound.


 In effect, a win-win situation. And we didn’t even have to use our crystal ball!


Scottish Independence Squashed - hed


Back to the Global Macro Grind


In some sense the Scottish independence vote felt like another Greece moment during the thralls of the Eurozone crisis. There were many ways to interpret what was the “best” outcome.: Greece in or out of the union?   And what prevailed was politicians fear mongering on the consequences of a breakup and impressing how the whole is stronger than the sum of its parts – and so Eurocrats quelled the Greek urge for self-determination outside of the Eurozone.


It appears that in Scotland, like Greece, the more rational perception of economic wellbeing (along with the fear of myriad uncertainties associated with independence) won over the emotion of nationalism.


But is economic wellbeing in Scotland, like Europe, a myth?


Our macro team has been making a call for growth slowing in Europe these last months (we’ve recommended shorting Eurozone equities (EZU), France (EWQ), and the EUR/USD (FXE) throughout the quarter), as Eurozone GDP rolled over in Q2 and everything from confidence figures to industrial production and retail sales fell across most European countries over the last 3-6 months.


In recent weeks, and in classic lagging fashion, we’ve seen confirmation of this descent in the form of numerous European central banks, countries, and economic organizations revising down their economic expectations for the year:

  • The ECB revised down its 2014 Eurozone GDP projections to 0.9% vs 1.0% in June
  • The Swiss National Bank cut its 2014 GDP projection to 1.5% vs 2% previously forecast
  • Italy’s 2014 GDP projection was cut to 0.4% by the OECD vs the government forecast of 0.8%
  • France’s Finance Minister cut 2014 GDP projection to  0.4% vs 1.7% initially forecast
  • Sweden’s Riksbank cut 2014 GDP projection to 1.7% vs 2.2% forecast in July

Additionally, when we evaluate “health” at the country level based on unemployment rates, it appears that the crisis in Europe has hardly passed. The Eurozone unemployment rate is elevated at a sticky 11.5%, almost double the U.S. at 6.1%. Moreover, when you look at unemployment for people under the age of 25 the numbers are staggering:

  • Spain 53.8%
  • Greece 51.5%
  • Italy 42.9%
  • Ireland 25.1%
  • France 22.5%

Now while it’s plenty easy to push back on these figures and say we’ve mostly cherry-picked the weakest countries (well, France is the 2nd largest economy of the Eurozone), or that there’s no merit in the way unemployment rates are calculated (possibly fair, but the European figures here all come from Eurostat), the point we’re making is that there will be generational TAILs from what some have call this “lost” generation of youth that cannot or will not find a job/establish a career and will rely even more heavily on state support throughout their lives.


As the ugly equation of declining growth + high unemployment + low and deflating inflation comes home to roost, the ECB’s newest response is to lever up its balance sheet (ECB President Mario Draghi has indicated the willingness to increase it by €1Trillion) and extend QE as the “elixir” to inflect weak and declining fundamentals across the region. 


As Keith mentioned in yesterday’s Early Look:


“When it comes to central planning limits, there are none (yet). And that’s making your job as a Risk Manager all the more challenging. No matter what you think the Fed, ECB, and BOJ should do, you have to operate within the paradox of what they will do.”


Our view on the impact of ECB policy and the direction of Eurozone fundamentals remains decidedly bearish; here’s a look at how we’ve sized up the latest actions since the ECB’s last meeting on Sept 4th:

  • While QE has proven to put a floor in equities in the past, QE is far from the elixir to inflect weak and declining fundamentals across the region.  Witness Japan’s failed efforts with QE!
  • While on the margin Draghi’s credit easing programs should help to encourage lending and therefore growth to the real economy, the failure of past LTROs to improve lending conditions are fresh in memory. This time the TLTROs may in fact not be different. Interestingly, the first TLTRO tranche yesterday saw take-up by the banks of only €82.6B, well below consensus estimates of €150B
  • We reiterate that inflation (via currency debasement) is not growth, even if Draghi showers us with QE
  • From here our proprietary GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates (see the chart of the day below)


Don’t forget that a full 45% wanted Scottish independence. Certainly some significant percentage of this group’s thinking also anchored on the hope that a vote for independence would benefit their personal stead. But interestingly it appears that this camp was not favored by a youth presence (today’s vote included age 16 and above). In fact, a poll by TubeMogel ahead of the vote asked 16-18 year olds their preference and 57% selected NO.


And this actually makes some sense: the life of this group has been so influenced by the global recession and impacts from the Eurozone crisis on slower growth and joblessness (if not for them directly, then their parents and others around them) that their highest priority for this vote was limiting future economic uncertainty.


While Scotland is not Catalonia and France is not Greece, there remain many cracks across Europe, economic and cultural alike. We suspect these cracks are here to stay and that even the mighty Draghi QE wand can’t fix them. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.36-2.63%

SPX 1996-2016

FTSE 6759-6885

USD 83.78-84.69

EUR/USD 1.28-1.30

Pound 1.62-1.65


Have a great weekend!


Matthew Hedrick



Scottish Independence Squashed - d cod

October 3, 2014

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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


















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 80.43%
  • SHORT SIGNALS 78.34%

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 – 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.


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

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