Video | McCullough: Only Wall Street Will Tell You It’s Not Inflation

In this excerpt from our daily macro call for institutional investors, Hedgeye CEO Keith McCullough and senior macro analyst Darius Dale talk inflation and why the Fed just has it wrong.

Sell Growth: SP500 Levels, Refreshed

Takeaway: The weather turned, but the consumption data that matters most didn’t.



But whatever you do, don’t call falling bond yields (do not sell bonds here!) on today’s #ConsumerSlowing (Retail Sales +0.1%) print a US growth slowing confirmation. The weather turned, but the consumption data that matters most didn’t.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1901
  2. Immediate-term TRADE support = 1866
  3. Intermediate-term TREND support = 1845


In other words, you have -1.8% and -2.9% immediate (TRADE) and intermediate-term (TREND) risk to the downside if you get plugged chasing the all-time SPY high here. So don’t do that.


Both the Russell2000 and UST 10yr yields remain bearish, because growth is slowing.



Keith R. McCullough
Chief Executive Officer


Sell Growth: SP500 Levels, Refreshed  - SPX

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Crickets in the Currency Market

Client Talking Points


Don’t take my word for it – the bond market has had this nailed for 4.5 months. The 10-year yield of 2.65% (with immediate-term TRADE resistance of 2.67%) couldn’t care less about what high-multiple momo stock bounced on no volume yesterday.


There are crickets in the currency market this morning as the Euro/Pound/Yen complex moves like 10 beeps. That’s not going to cut it in arresting the bearish TAIL risk the US Dollar Index has developed in 2014...neither will it slow #InflationAccelerating in the US.


Calling total US Equity Volume a cricket yesterday wouldn’t be giving it its due credit! On the “all-time-high” CNBC Dow cheers (RUT and QQQ are down -5% to -6% from their year-to-date highs) volume was down -10% and -31% versus one-month and three-month averages, respectively.

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


Italy's consumer prices remain relatively low as CPI comes in at +0.6% y/y APR #StrongEuro @KeithMcCullough


“You miss 100% of the shots you don’t take.” – Wayne Gretzky


49, the number of points LeBron James scored for the Miami Heat last night in a playoff victory against the Brooklyn Nets. That tied his career playoff high for points.

LEISURE LETTER (05/13/2014)



Tuesday, May 13

• SNOW FQ3 earnings – 5pm

• HTHT Q1 earnings – 9pm , Passcode 28722442


Nomura Global Gaming & Lodging Conference in New York

• 8am WYN

• 3pm RHP

• 430pm HOT

According to Nomura's website, confirmed companies include: CCL, STAY, GLPI, HLT, HST, MAR, MGM, NCLH, PENN and  Industry Experts: Smith Travel Research, Inc. and International Casino Institute (Japan Gaming)


Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 1140am PNK

• 1220pm IGT

• 1220pm CHDN

• 1pm BYD

• 1pm MGAM

• 140pm PENN

• 225pm BYI

• 505pm SGMS

• 505pm Seminole Gaming

• 550pm GLPI

• 550pm Golden Nugget

1:1 meetings only – MPEL, Station Casino, Motor City Casino & Hotel, and Jacob’s Entertainment.


Wednesday, May 14:

Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 1205pm MCRI and MNTG

• 1250pm MGM

• 135pm ISLE

• Atlantic City April Revenues

• Japan Gaming Conference thru Friday, May 16



SJM – (Macau Business Daily) chief executive Ambrose So Shu Fai thinks state-backed electronic payments system operator China UnionPay Co will curb mass-market gaming revenue in Macau by tightening controls on the use of its cards to obtain cash in Macau. However, the Chief Executive indicated the tightening would not harm SJM Holdings, which focuses on VIP gaming. (Macau Business Daily)

Takeaway: Easy for him to say without the Mass exposure.  We certainly haven't seen any impact yet.  We'll take the other side.

Bloomberry – said it expects double-digit annual growth in gaming volume, as its Solaire Resort & Casino in Manila brings in more high rollers from Asia. Solaire’s VIP gaming area will double following its $500 million expansion to be completed in the fourth quarter

Takeaway:  Bloomberry continues to ramp up but TTM gaming revenue is less than US$500m, hardly anything compared with Macau's $48b annual revenue.  CoD Manila  will contend later in the year, likely around Oct Golden Week.


MGM – Massachusetts Gaming Commission is holding a final public host community hearing on the MGM's proposed Springfield Casino project tomorrow at 4pm at the MassMutual Center Ballroom. 

Takeaway: Progress despite a snail's pace while also waiting for a decision regarding the repeal referendum.  

PENN – in a suit filed with the Massachusetts Gaming Commission, Raynham Park owner George Carney requests the Massachusetts Supreme Judicial Court revoke the slots license the commission issued in February to Penn National. Carney asserts PENN’s casino at Plainridge racetrack would benefit its former owner, Ourway Realty, which was found unsuitable for a license because its former President, Gary Piontkowski, took more than $1 million from the track’s cash room over a 10-year period. Ourway sold the track to PENN, though the lawsuit claims Ourway still holds a financial interest in Plainridge. The suit also alleges that PENN failed to disclose Ourway’s stake in Plainridge to state gaming regulators.  The commission awarded the slots license to Penn National in March on a 3-2 vote, with Raynham Park getting no votes. 

Takeaway: Could delay the project.  Stay tuned, we're researching the issue.

PENN/GLPI – The Iowa Racing and Gaming Commission upheld its decision to close the Argosy Sioux City riverboat casino by July 1. The commission on Monday quietly turned down a request from Penn National Gaming, Argosy's parent, to rehear a protracted case involving the gambling boat's state license.

Takeaway: As expected, but we now await PENN's next salvo in this battle of words and dollars.


HOT – Director Thomas O. Ryder sold 22,653 shares of HOT stock in a transaction dated Friday, May 9th, at an average price of $78.74, for a total value of $1,783,697.22. Following the completion of the sale, the Mr. Ryder directly owns 3,100 shares in the company, valued at approximately $244,094

Takeaway:  First signs of insider selling following the share repurchase announcement.  


WYN (Skift) launched its 1st multi-brand television advertising campaign featuring all 12 of its lodging brands.  

Takeaway: Stay tuned, we look forward to hearing the cost-benefit analysis conversations on the Q2 earnings call about this campaign.  Historically, multi-brand, non-differentiated advertising campaigns don't result in an increased immediate consumer awareness. 


TUI Travel – Current trading outlook:

  • Overall, pleased with Summer 2014 trading with 60% of holidays sold to date 
  • Higher average prices across Mainstream offsetting slightly lower 
    overall volumes against strong comparatives 
  • Excellent online performance – bookings up 6% on prior year

Takeaway:  Holiday travel provider TUI offers a decent outlook for the UK/Europe leisure market


New York Gaming Expansion – according to details released by New York's Gaming Facility Location Board, developers proposing to build a casino in Orange or Dutchess counties must commit to investing at least $350 million in the project, while the Capital region minimum investment is $135 million and the Lower Tier region requirements span $70 million to $135 million depending on location and number of licenses.

Takeaway: Based on our math, it would appear New York will generate $720 million in licensing fees should the Commission seek to "maximize" licensing fees to the State of New York - representing one casino in Orange or Dutchess counties, one license in Columbia, Delaware, Greene, Sullivan and Ulster Counties, one license in the Capital Region, and one license in Wayne or Seneca Counties.


UnionPay – New reports across China indicate US technology company Apple is likely to incorporate a near field communication payment function in the net generation iPhone and has reached an agreement with China UnionPay on a mobile payment service. According to the Brightware report,"Under the deal with China UnionPay, users would be able to download the bank card organization’s app to Passbook in their iPhones and make mobile payments on over three million China UnionPay ‘QuickPass’ POS machines in China,”

Takeaway:  We added this story as proof to the skeptics who don't believe in the legitimacy of UnionPay.


Slot Equipment Merger – American Gaming Systems ("AGS"), a leading designer and manufacturer of Class II gaming machines for the Native American market with an emerging presence in a broad range of commercial Class III markets in the United States, today announced their acquisition of Colossal Gaming. As of December 31, 2013, AGS had 8,563 gaming machines in 184 gaming facilities in 19 U.S. states, with 154 gaming facilities under revenue sharing agreements and 30 facilities under daily fixed fee agreements. Colossal Gaming was founded in 2003 by industry veterans Steve Weiss, Alison Stroh, and Lowell Hansen, as a game design studio with the mission to bring new and unique game play to the industry. Colossal is a pioneer in large-format slot gaming, and the designer and manufacturer of the top performing games "Hot at the Top" and "Colossal Diamonds".

Takeaway:  Small slot players joining forces 


China Property - China Banking Regulatory Commission instructs banks to accelerate personal mortgage loan approvals and not suspend mortgage loans. 


China Economic Data - Industrial Production for April was 8.7%, below the 8.9% consensus estimate, April retail sales were +11.9% below the 12.2% consensus, and Fixed Asset Investment was +17.3% vs. expectations of 17.7% for April.


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. 

The Monster

This note was originally published at 8am on April 29, 2014 for Hedgeye subscribers.

“The monster is trying to kill me, but I will kill it.”

-Andrew Jackson


That sounds pretty hard core; especially coming from the President of the United States!


“The Monster, formally known as the Second Bank of The United States (and more commonly as the Bank), originated as the brain child of Alexander Hamilton… Jackson saw himself in arms against the dragon, an infernal, demonic entity that must be destroyed.” (The First Tycoon, pg 93)


The Monster - jackson bank monster


And you thought I was bearish on the un-elected and un-accountable US Federal Reserve. As I was flying from Indianapolis, IN to Minneapolis, MN last night reading this, I pulled the Delta Airlines polyester red blanket up to my chin and asked the flight attendant for cookies and milk.


Back to the Global Macro Grind


#ScaryMonster, this US Policy To Inflate has become. The more I travel and talk this through with investors, the less convinced most are that this ends well. There’s no irony in that. Unless it’s “different this time”, burning the credibility of a country’s currency has never worked, for any country.


If I’m right and 2014 US GDP growth (real, not nominal) is closer to 1-2% than the 3-4% consensus economists and perma bulls alike are expecting, I think the societal side to this risk starts to kick in. That’s because what gets us to 1-2% is #InflationAccelerating. And nothing kills The People’s confidence more than a government that they think is lying to them.


In 1832… so began the Bank War; the result of not merely Jackson’s obsessions, but the cultural crisis of the times. It broke out because two great waves now crashed into one another: the individualistic, anti-aristocratic, competitive impulse fostered by the Revolution, and the instinct to organize, amalgamate, develop, and bring order to the chaos of the marketplace.”


Sound familiar?


Indeed, out of this conflict would emerge a new American economic outlook; a culture that embraced equality of opportunity and fierce competition, as well as sophisticated business institutions.” (The First Tycoon, pg 95)


Sophisticated about applying chaos theory and non-linear risk analytics to their linear models, the Fed and Old Wall Street are not. I think they might be getting dumber (see Bank of America (BAC) yesterday, who had to report that they miscounted the moneys, again!).


That’s one of the reasons why the Financials (XLF) got tagged for a -0.6% loss yesterday (with the SP500 +0.3% on the day). What’s happening out there at both the sector and style factoring levels of the market is crystal clear – it’s called variance:

  1. Variance rises during market phase transitions (i.e. from US #GrowthAccelerating in 2013 to inflation slowing growth in 2014)
  2. Variance plummets when you can literally buy anything (because everything goes up)

For the US stock market, the so-easy-a-monkey-can-do-it (low-variance) environment ended on December 31, 2013. Here’s what I mean by that if you look at the variance in yesterday’s US stock market move:

  1. Financials (XLF) -0.6%
  2. Biotech (IBB) -0.4%
  3. Russell2000 (IWM) -0.4%


  1. #YieldChasing Consumer Staples (XLP) +1.1%
  2. Slow-growth-yield chasing Utilities (XLU) +0.5%
  3. Energy #InflationAccelerating (XLE) +0.2%

That’s why I said it in my investor meetings yesterday in Indy and I’ll say it again in Minneapolis to long-only risk managers today – if you want to be invested alongside our 2014 Macro Themes, you:

  1. Buy Inflation (XLE, DBA, COW, CAFÉ, TIP, etc.)
  2. Buy Slow-Growth Yield Chasing (XLU, TLT, BND, etc.)
  3. Buy late cycle companies that can jam customers with pricing (VNQ, XLI, etc.)

If you are a Global Investor, this gets a lot easier – mainly because you can not only be long US #InflationAccelerating but you can buy countries who are doing the right thing from a protecting-the-purchasing-power-of-the-people (read: #StrongCurrency) perspective.


At the top of that list is the UK:

  1. The British Pound continues to pound the pig that is the US Dollar (GBP +10% vs USD in the last 6 months)
  2. UK GDP Growth for Q114 was reported +3.1% y/y this morning – a fresh new #GrowthAccelerating high

The Monster - Chart of the Day


Newsflash: the UK had the “weather” too. They just don’t have to blame the weather in order to CTA (substitute T for Y) on why almost every one of them (consensus economists from Old Wall and Washington) had their Q114 US growth forecast dead wrong.


Sadly, tomorrow the United States of America will report a GDP growth rate for the 1st quarter that is maybe 1/2 of what the United Kingdom just did. Sure, you’ll have month-end markups in the US stock market … and the Fed will release their 2nd or 3rd coming of Christ…


But once that storytelling is done with, Americans will go back to eating it – the Policy to Inflate, that is. And if we don’t have the courage to kill this broken and un-elected US economic policy, The Monster  of a devalued currency might just eat us too.


Our immediate-term Global Macro Risk Ranges are now as follows:


Nasdaq 4006-4143

USD 79.21-79.99

Pound 1.67-1.69

Natural Gas 4.55-4.81

Gold 1280-1310

Corn 5.05-5.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

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