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[PODCAST] Keith's AM Call: Bernanke

Hedgeye Risk Management CEO Keith McCullough takes his gloves off on the Central Planners at the Bernanke Fed. Keith's economic strategy this morning? Prayer.



Client Talking Points


Dollar Down is Ben Bernanke’s go-to move. Oil, Gold and Silver (virtually everything that’s regressive and unproductive to real consumption growth basically) is ripping. We definitely didn’t get the super-secret memo coming on that. This changes our US #GrowthAccelerating call to potentially SLOWING sequentially in Q3, and in a hurry. It's sad.


What’s more dangerous for rising oil prices? A Syrian overlord or a Monetary overlord like Bernanke? Someone evidently knew he was going to trump the Fed Minutes (half the Fed actually disagrees with him now) with his comments. Oil was front-running that, big time. Now Brent is above our long-term TAIL risk ling of $108.11/barrel. That's just great (if you’re long #GrowthSlowing this morning, that is).


The "Long Treasuries" lobby is large and Ben Bernanke buckled to it. The 10-year (2.58% last) sees the immediate-term risk range open wide to 2.41-2.77% now. Make no mistake, this central planning “communication tooling” vs economic gravity is only going to drive FICC (Fixed Income Currency Commodity) volatility higher, not lower. Atta boy Ben.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Top 3 Bloomberg headlines this morn are all about the almighty central planner in Chief; just as Jefferson designed it



"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
- Henry Ford


Global equities have lost about $3 trillion in value and 10-year Treasury yields have surged more than 50 basis points since May 22, when Bernanke indicated the central bank may reduce its bond-buying program as economic risks subside. (Bloomberg)


Earnings season for the big cap gaming operators has something for everyone.



Despite the panic surrounding the China economy right now, Macau fundamentals look healthy.  The health should be on display, generally, during the upcoming Q2 earnings season.  We’re projecting beats for the most part and positive commentary regarding Q3 in Macau.  As the chart shows, MPEL looks like the big winner in that market vs consensus followed by MGM Macau.




Not surprisingly, MPEL and MGM are our favorite gaming stocks.  Both companies are projected to handily beat consensus company EBITDA estimates.  We have Galaxy beating as well but WYNN could be a disappointment.






With 100% exposure to Macau and a higher than normal VIP hold percentage, MPEL should knock the cover off the ball when they report Q2.  Even on a hold adjusted basis, MPEL would handily best consensus expectations.  We’re projecting $300-305 million in adjusted company EBITDA after normalizing the high VIP hold at both City of Dreams and Altira.  Assuming normal hold in both periods, MPEL should grow its EBITDA around 50% YoY in Q2.  And this management team deserves a huge valuation discount to the group?  We think not!



May Las Vegas numbers should come out today and we think the Strip will be a blowout – up mid-teens on a hold-adjusted basis.  We have MGM beating in Macau by a wide margin as seen in the chart above.  More surprisingly, we actually think they will beat in Las Vegas as well ($324 million vs the Street at $297 million).  A comprehensive beat and positive commentary about Q3 should be the fundamental fuel to boost this stock through the technical resistance of $16.  Then to the moon, Alice!



LVS looks good in general, although we think the Street has caught up to a strong quarter.  We’re slightly ahead in Macau and slightly below in Las Vegas.  An in-line quarter is probably not good enough but the company’s intermediate and long-term prospects are so bright, it’s hard to be negative.  Look for buying opportunities here.



We’re estimating a 5% miss in company EBITDA, driven almost exclusively by Macau.  Wynn Macau posted a disappointing quarter despite overall market strength.  Hold was slightly below normal but volumes were also disappointing.  We’ve got flat VIP volumes and Mass revenues up only 7% vs the market at +18% and +31%, respectively.  Wynn Macau should continue to lag the market and a potential earnings miss and a delay in the opening of Wynn Cotai could weigh on the stock.



Another Macau pure play (for the most part) that should exceed estimates, although not to the extent of MPEL and MGM, Galaxy looks attractive.  The stock trades at a discount to the peer group and retains the nearest new build catalyst.  The Galaxy Macau expansion should open in early 2015, a full year before Wynn Macau, MPEL’s Macau Studio City, or LVS’s Parisian may open.  For Q2, Galaxy held a little high at its two properties but volumes were strong.  Q2 should be a clean beat.  

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July 11, 2013

July 11, 2013 - DTR



July 11, 2013 - 10yr

July 11, 2013 - spx

July 11, 2013 - dax

July 11, 2013 - nik

July 11, 2013 - dxy

 July 11, 2013 - oil




July 11, 2013 - VIX

July 11, 2013 - euro

July 11, 2013 - yen

July 11, 2013 - natgas
July 11, 2013 - gold

July 11, 2013 - copper


This note was originally published at 8am on June 27, 2013 for Hedgeye subscribers.

“There is thy gold, worse poison to men’s souls,

Doing more murder in this loathsome world,

Than these poor compounds that thou mayst not sell.”

-William Shakespeare


My colleagues and I ventured up to Toronto (nicknamed Hogtown due to the vast pork processing plants that used to call Toronto home) yesterday to meet with some old clients and some new prospects.  The first prospect’s office we strode into had a massive solid gold coin and paintings from French Impressionists on the walls.  Clearly, the commodity, and in particular gold, boom, has been good to Canadian investment managers.


As we made our rounds yesterday, it became increasingly obvious that Canadian money managers were also doing their utmost to diversify from this commodity heritage and in the short run that means diversifying more into U.S. equities.  In part, this was actually due to a perception of potential strength in the U.S. dollar, a theme which is very near and dear to our hearts, of course.


One manager actually made a very interesting point on gold companies, which was that as the majors were being increasingly forced to hedge out gold prices, they put their company at even greater risk in the future if, and when, gold prices and operating costs increased.  His view is that intrinsic value of many major Canadian gold companies is substantially lower than where Mr. Market is currently valuing them.


Given how much fun we’ve had analyzing the hedging strategies of LINN Energy, the Canadian gold sector may be an interesting short research project to work on next.  But as always, while you can marry your longs, it’s highly recommended to only date your shorts.


Back to the global macro grind . . .


Despite a little bit of a market freak out last week, global markets are seemingly stabilizing.  An important tell for us on this front is sovereign debt markets in Europe where, logically, risk capital seems to flee first.  After peaking over 5% on Monday, Spanish 10-year bonds are back down well below 5% and on their way back to 4.5%.


Admittedly, though, even as some of the risk has decreased over the past couple of days, the low volume price recovery in many key markets has been uninspiring.  In Asia, the bounce has been very uninspired with China down small over night and Hong Kong only up 0.5% for the second day of its bounce.  In Europe, Greece is back in crash mode as is down -2.7% this morning.


Speaking of yields, the future direction of yields on U.S. Treasuries is one of the topics our international clients are increasingly focused on, which is no surprise given the blood bath that has occurred in the U.S. government debt market over the last thirty days.  But, where will yields go from here?


Many bond experts had been adamant that the Federal Reserve would defend the 2% line on the 10-year.  Clearly, that was about as defendable as a Canadian Football League offense against a NFL defense.  In the Chart of the Day, we look at the yield on the 10-year going back ten years.   On a basic level, if the market truly begins to price in the end of quantitative easing, the blood bath in the bond market is likely in early days. 


Conversely, as interest rates go up in the U.S., this should bode well for the U.S. dollar especially given the positive relative position versus the Yen and the Euro.  In Japan, to generate anywhere close to 2% inflation will require substantially more quantitative easing.  Meanwhile in Europe, the continued economic bifurcation between countries makes it unlikely the ECB will tighten anytime soon.  On the last point, the best example of this is like the gap in unemployment rate of Germany at 6.8% and the rest of the Euro zone at 12.2%.


Another key theme that will continue to play out if rates in the U.S. increase and the U.S. dollar naturally strengthens is Emerging Markets outflows.  In fact, in the strong dollar era from 1995 to 2001, the SP500 CAGR was 15.8% and the CAGR of the MSCI EM Index was -5.3%.  Conversely, in the weak dollar period of 2001 to 2011, the SP500 CAGR was 1.4% and the MSCI EM Index returned 14.5%.  Now clearly, there were and are other factors at play, but the U.S. dollar will continue to be one of the most influential.


As it relates to interest rates, today’s jobless claims print will be the most important data we will get through the end of the week.  If claims are better than expected, then interest rates are likely to continue their ascent.  So far, equities have not acted well with interest rates breaking out to the upside, though that could change if a stabilizing economy becomes increasingly evident.


The global markets are having a difficult time finding their identity.  As Shakespeare wrote:


“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”


Indeed, we are all stock market players.  The key is to make sure, whether it is gold, U.S. treasuries, or LINN Energy, that we are not the last players to exit.


Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):


UST 10yr 2.39%-2.74% (bullish)

SPX 1558-1618 (neutral)

DAX 7606-8096 (bearish)

Nikkei 12,578-13449 (bearish)


VIX 15.17-20.97 (bullish)

USD 82.27-83.67 (bullish)

Euro 1.29-1.31 (bearish)

Yen 96.41-99.53 (bearish)


Oil 98.98-103.36 (bearish)

NatGas 3.64-3.89 (bearish)

Gold 1207-1316 (bearish)

Copper 2.98-3.12 (bearish)

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Hogtown - Chart of the Day


Hogtown - Virtual Portfolio

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.