VIDEO | Keith's Macro Notebook 4/23: RUSSIA YIELD SPREAD VOLUME

PODCAST | McCullough: Three Risks on My Radar Screen

In this morning’s macro call with subscribers, Hedgeye CEO Keith McCullough discusses three market risks on his global macro radar screen, how to play various markets around the globe, and why investor caution is advised here in the U.S. 

Slow Motion Train Wreck

Client Talking Points


Russia is getting wrecked (again) on both the stock and bond market front. The Russian 10-year Bond auction effectively failed this morning as the Russian Trading System Index continues to crash. It’s down -0.6% this morning to -18.7% year-to-date – Putin needs oil higher.


Don’t tell anyone but the 10s/2s Spread has compressed another 6 basis points this week to +227 bps wide. The Financials (XLF) don’t like this and the market needs the Financials to power new all-time bubble highs. Classic #GrowthSlowing signal. 


Total US stock market volume is down -18% and -23% respectively yesterday versus the one month and three month volume averages. #Nice – not. With the Nasdaq still below my 4203 TREND line, FB, AAPL, and QCOM have some heavy lifting to do tonight. Meanwhile, from a US Dollar perspective, I feel like I am watching a slow motion train wreck every morning.

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.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Gold held $1271 support; Corn, Nat Gas, Wheat all want to make higher highs #InflationAccelerating @KeithMcCullough


"To live is the rarest thing in the world. Most people exist, that is all." - Oscar Wilde


An audit revealed that the IRS paid bonuses to employees  in trouble over tax issues themselves. More than $2.8 million, plus thousands of hours of paid time-off, were doled out over two years to employees who had recently been disciplined for various types of misconduct, according to an audit report. About $1 million of that money was given as bonuses to 1,100 employees who were in trouble over tax related issues. (CNN)

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LEISURE LETTER (04/23/2014)



Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • RCL Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529
  • LA March revenues out

Friday, April 25

  • PEB Q1 earnings – 9:00 a.m.

Monday, April 28

  • CHH Q1 earnings – 10:00 a.m. , Passcode: 70683172

Tuesday, April 29

  • NCLH Q1 earnings
  • VAC Q1 earnings – 10:00 a.m. , Passcode: 4679876
  • MGM Q1 earnings – 11:00 a.m. , Passcode: 20455736


MGM – A group including MGM Resorts, Cirque de Soliel, Ron Burkle, and Roberto Medina announced plans to build a 33-acre open-air music venue named “City of Rock” and built between the Circus Circus resort and Sahara Avenue on the Las Vegas Strip.  The venue is planned to host a four-day Rock in Rio USA festival beginning in May 2015.  MGM will invest $20 million to develop infrastructure and a five stage, 80,000 patron capacity venue which is forecast to draw 300,000 people over the four days music festival.

Takeaway:  It is said, mockery is the greatest form of flattery and such is the case because Las Vegas already has Electric Daisy, iHeartRadio Music Festival, as well as Life is Beautiful.


LVS – Cotai Strip Resorts Macao, including The Venetian® Macao; Conrad Macao, Cotai Central; Sheraton Macao Hotel, Cotai Central; and Holiday Inn Macao Cotai Central, is launching an Anniversary 5-Day Sale promotion from April 22 until 10 p.m. April 26, 2014 (Macao time), offering an appealing discount of 35% of each participating hotel’s room rate, valid for stays between April 22 and July 10, 2014.

Takeaway:  The only company with enough rooms to actually run a promo.


Galaxy (Macau Business) announced the refurbished Grand Waldo will reopen in early 2015.  What is unclear is whether the property would retain any gaming amenities. 

Takeaway:  The gaming tables have already been moved.


Summit Ascent – plans to increase its interest in the Vladivostok casino project from 45% to 60% with the purchase of half of Mr. Oleg Drozdov’s 30% interest in the development.  Mr. Drozdov is Summit’s local development partners.  Fitch Enterprises will continue to own 20%, while Melco International will continue to own 5% and Mr. Drozdov will own 15%.  The first phase of the planned casino-resort in Primorye Russia is scheduled to open by the end of this year.

Takeaway:  Lawrence Ho (Summit) continues to build his own empire.



Macau to review VIP rule – Chief Executive Fernando Chui Sai On has said the government will review the rules governing VIP gaming rooms when it negotiates the renewal of gaming licences in 2015-2016. The Chief Executive conveyed 2015-16 is “an appropriate time” for the city to discuss the renewal of the six gaming concessions and sub-concessions, which will expire from 2020 to 2022.                 

Takeaway: The concession renewal discussions are earlier than we expected.  Hard to imagine that discussions will yield anything positive for the concessionaires.  Status quo is the best outcome.


Macau Junket Crackdown (Macau Daily Times) as a follow up to the comments on March 17 and the arrest of a person linked to junket operator Neptune, it is now known the person arrested was Ng Chor Har, the wife of Cheong Chi-tai, owner of the Neptune Group.  Ms. Ng was apparently targeted by an anti-corruption operation by the Chinese central government.  Additionally, the Chinese central government is allegedly targeting a list of more than 20 junket operators who are supposedly assisting corrupt mainland officials in money laundering.  

Takeaway:  This story explains the recent slowdown in VIP gaming traffic from Mainland China to Macau.  We've long thought that corruption crackdowns are the most likely near term risk for Macau.


Hengqin Land Request –  the Macau government has officially put in an application for use of five square kilometers of land on neighboring Hengqin Island, as well as asking to be granted maritime authority similar to that which Hong Kong exercises over its nearby marine territory.

Takeaway:  An attempt by the Macau government to address the housing shortage.


Gulf Coast Gaming – the Poarch Band of Creek Indians are looking to build a new Las Vegas-style casino in Escambia County, Florida, just over the border from the Mississippi Gulf Coast casinos. The casino would offer slot machines, poker, craps and roulette tables.

Takeaway: More competition for Mississippi by tribal gaming.


Hotel M&A  

  • Santa Cruz Holiday Inn Express sold for $16.5 million. The property features 100 guest rooms and is located at 1410 Ocean Street.  According to various trade journals, the property is in turn-key condition and does not require significant capex.

Takeaway: At $165k/key, this seems like a reasonable transaction price and valuation.  

  • Langham Hospitality Group, the hotel arm of Great Eagle, is looking to make a big splash in the U.S., with an expectation to acquire 10 hotels.  Langham wants to expand its portfolio to 100 hotels over the next five years.  The company is reviewing acquisition opportunities in Washington, D.C., Miami, New York, San Francisco, London, Prague and Shanghai.  Langham owns or manages 23 hotels, under The Langham, Langham Place, and Eaton brands, with more than 8,500 rooms. It has more than 30 hotel projects either confirmed or in a developed stage of negotiations from China through India and the rest of Asia to the Middle East.

Takeaway:  A prudent buyer or simply a buyer looking for size and scale?  


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.

DRI: The Hour Between Dog And Wolf

Yesterday was a big day – DRI rose 3.5% on 2x the average daily volume.  As we’ve said before, the theme here is consistent: the stock rises on days change is in the air and falls when management publicly digs their heels in.


The title of this note derives from the French saying: “L’heure entre chien et loup.”  It refers to the moments following sunset, when the sky darkens and vision becomes unclear, making it difficult to distinguish between dogs and wolves.


We’re using this expression to create a metaphor for the uncomfortable situation that is unfolding at Darden, following the news that Starboard Value has won shareholder consent to call a Special Meeting.  With yesterday’s victory, the sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.


From where we sit, there is enough light to see the animal in front of them is a dog.  Unfortunately, management appears predisposed to a certain view.  As a result, they see a wolf and, by extension, feel trapped.  It didn’t have to be this way.  The truth is, there is a way out of this situation that would leave all constituents feeling safe and shareholders feeling happy.  For some reason, this has been so unclear to the powers that be in Orlando.


Part of the haze may be stemming from the notion that Starboard only got 55% of shareholders to consent.  On the surface, this might appear like a slim margin of victory.  However, the turnover since the record date, shares short and the retail component are all factors that suggest this is a convincing margin of victory.  We hope Darden’s advisors will give the Board and management a straight story, so that they can see the situation more clearly.  If they wait until nightfall, however, we suspect that dog could soon become a wolf.


This French saying also highlights the stark contrast between the “familiar and comfortable” and the “unknown and dangerous.”  Ever since activists began pushing for change at Darden, management has retreated and found solace in the confines of Orlando, where they have lived a comfortable life for many years.  Between the lifestyle they are fighting to protect and the considerable financial resources at their disposal, they have been unwilling to face the harsh reality of the situation.  In its 18 years as a public company, Darden has never found itself in a similar situation.  Knowing how to properly respond, therefore, can be a daunting task.


Under significant pressure, CEO Clarence Otis has been unwilling to hold himself accountable for his decisions.  For example, Mr. Otis failed to stress test his plans to create shareholder value with critical Wall Street analysts, opting, instead, to conduct one-on-one meetings with shareholders.  Alas, the moat he has built around his castle is not serving him well.  As a result, the Board and management now find themselves in the center of a very uncomfortable situation in which they are losing control of the company.


Yesterday, Jeffrey C. Smith, Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value LP, went on CNBC to discuss Darden’s proposed separation of Red Lobster.  Reading between the lines, Mr. Smith is very clear about what needs to happen at Darden:


“There clearly have been operational issues and clearly there are strategic issues now and that all starts at the top.  I mean, so as a shareholder, our power, our control is with the Board.  Our power is, in theory, at some point to be able to nominate directors and potentially replace the Board if they’re not going a great job in overseeing management and how the business is being run.  The biggest decision for a board is in choosing the CEO and continuing to choose the CEO and I think there are some strategic issues here and operational issues.  So, is Mr. Otis in a hot seat?  I think he is in a hot seat.”


The shareholders of Darden have spoken – it is time for significant change.


One wild card, and a current “unknown” to outsiders, is the financial performance of Darden to-date in 4QF14.  With nearly two-thirds of the quarter in the books, management knows precisely how the period is shaping up.  The leverage they might have with shareholders is to prove their recent operational initiatives are gaining traction.  However, given the current data we are seeing on sales trends, we highly doubt there will be much good news to talk about when they report earnings.  In fact, considering the lack of momentum in the business, we expect to hear disappointing guidance for FY15.  Even after two disastrous years of -10% and approximately -25% EPS growth, it’s unlikely they will be able to hit the current consensus estimate of 12% EPS growth in FY15.


Change is in the air.




Howard Penney

Managing Director


Fred Masotta


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