Keith's Macro Notebook Special Edition: Why He Saw the Big GDP Miss Coming

LEISURE LETTER (06/25/2014)

Tickers: IGT, RCL, HOT, MAR


IGT – BWIN.PARTY agreed to integrate IGT's mobile and online game offerings into BWIN's US and European web-site portals.

Takeaway:  Licensing royalty deal for IGT


RCL – announced a sale featuring 50% off 2nd guest (excludes taxes, fees, port charges) for select 2015 and 2016 sailings. This offer ends July 15, 2014.

Takeaway: This (Buy One Get One) 50% deal was extended from May's promotions.


Insider Transactions

HOT – CEO Frits D. Van Paasschen sold 51,435 shares on Thursday, June 19th at an average price of $81.01/share and now owns 246,915 shares. The shares represent 25% of an equity award covering 102,870 shares which vested in four equal installments beginning 2/28.2009.  The cost basis of the security was $48.61/share.


MAR – J W. Marriott, Jr. sold 200,000 shares on Friday, June 20th at $63.47/share and now directly owns 188,229 shares.

Takeaway: As we've repeatedly written, if the lodging industry fundamentals are so strong and the industry is only in the fifth inning, why is insider selling increasing? 


IVS - Macau, Beijing in talks on Individual Visit Scheme (GGRAsia)

Macau’s Secretary for Social Affairs and Culture, Cheong U, and mainland China officials have discussed whether changes should be made to the Individual Visit Scheme (IVS).  The scheme allows mainland passport holders to visit Macau and Hong Kong as independent travellers rather than as part of a tour group. 


Local residents have expressed concerns in mainstream and social media about the growth in visitor arrivals. Some tourism experts and tourism industry insiders have called for a strategic plan to ascertain the city’s capacity to receive more visitors.


Takeaway:  Visitation hasn't been off the charts lately so it would seem odd to change the IVS program. 


Pokerstars - could be live in NJ by autumn (EGR Magazine)  

Takeaway:  While we don't know how the NJ Division of Gaming Enforcement will handle the Pokerstars acquisition by Amaya, they could take over the NJ I-gaming market if allowed by DGE.  Pokerstars would use the Resorts Casino license.


Macau Infrastructure – The Pac On ferry terminal faces more delays.  Currently, only a temporary terminal is in operation, with a limited number of sailings per hour. 

Takeaway: More delays 


Philippines Tourism – Short-term travel movements to and from the Philippines by Australian residents increased 11.6% year-over-year to 67,300 in the four months to April 30, according to the Australian Bureau of Statistics. 

Takeaway: Would appear to be a shift away from Thailand and Malaysian destinations toward the Philippines and could serve a broader customer base for the Manila casinos. 


Nevada Online Poker – Peppermill Resorts launched "Ultimate Online Poker" an online poker offering with a system run by Ultimate Gaming, a Station Casinos controlled company.  Peppermill is the fourth online gaming offering in Nevada, joining Stations Casinos, Caesars and South Point.

Takeaway: Slow and steady expansion of online poker. 


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.


Takeaway: Mortgage purchase applications are down 18% YoY. The only recovery in housing at this point is the new and high end market ($1M+).

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.




Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 20. 


The spring slump gives way to the summer slump with purchase demand leading the composite index lower for the week ending 6/30. Yesterday’s May New Home Sales figures were encouraging, but the best forward indicator on demand volume continues to signal slowing momentum.


* Composite Index:  Down 1.0% WoW to 348.1 on the index, the second lowest print YTD


* Purchase Apps:  Down -1.2% WoW with the YoY worsening 280bps sequentially to -17.9%.  The second quarter finishes up +3.2% QoQ. 


* Refi;  Down -0.9% WoW with the YoY “improving” to -56.5% from -58.4%. 


* Rates:  30Y Rates dropped -3 bps to 4.33%.  Notably, mortgage rates were -2.9% YoY in the latest week – the 1st time the 30Y FRM contract has been negative on a YoY basis since 5/13/2013


Taken in conjunction with the previous week's 4.7% w/w decline in purchase applications, this week's -1.2% drop continues the erosion of the post-holiday bounce and returns the index to 176.4.


As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.


Our expectation remains that the back half of this year and the first half of 2015 should see steady downward pressure on the rate of home price appreciation.











MAY FLOWERS SUCCUMB TO JUNE MOWERS - Composite Index LT w Summay Stats 





About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.


Joshua Steiner, CFA


Christian B. Drake

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Client Talking Points


So far so good – it’s not different this time. The VIX has never held below 10 and it stopped going down this time at 10.61 (June 18); +14.3% from there, if front month VIX can start to make a series of all-time-higher-lows, this should get interesting, faster.


WTI crude continued higher this morning, then backed off small – higher-lows and higher-highs continue to signal there’s going to be one heck of a tax hike at the pump in the summer months for U.S. consumers; bond yields agree.


UST 10YR yield back down to 2.58% and the Yield Spread (10s minus 2s) continues to compress (down to 209bps wide this morning, breaking down to fresh year-to-date lows, which is an explicit #GrowthSlowing signal).

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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


I published an updated deck on $DRI yesterday - the issues will never be fixed unless the company’s vision changes.




“There is far more opportunity than there is ability. “

-Thomas A. Edison


On June 20th the most-traded gold option the previous day was a $1,350 August call. The contract surged more than four-fold to $8.60, from $1.80 the previous day - the biggest gain since at least November 2012. (Bloomberg)

CHART OF THE DAY: The Pinch of Rising Inflation

Takeaway: Got #InflationAccelerating yet? Hedgeye reiterates the Street high on inflation expectations for 2014 and slowing US growth.


CHART OF THE DAY: The Pinch of Rising Inflation - Chart of the Day

The Fourth Turning

“That which hath been is now; and that which is to be, hath already been”



That’s the opening volley in one of the most recommended books Institutional Investors have offered up to me in the last year: The Fourth TurningWhat Cycles of History Tell Us About America’s Next Rendezvous with Destiny. I’m finally reading it on my family vacation this week in the homeland.


The Fourth Turning - flag


Back to the Global Macro Grind


One of the best ways to insure yourself against groupthink is not anchoring on a confirmation bias that “it’s different this time.” That’s why so many thoughtful buy-siders like The Fourth Turning. Its main premise is pretty much the only protection against long-term risk – mean reversion.


In order to contextualize mean reversion risk, I think you need to:


  1. Study #History (so that you can contextualize where you are)
  2. Understand #Math (2nd derivative moves and how they are a leading indicator for mean reversions)
  3. Embrace Uncertainty (from a #Behavioral perspective, accept that risks happen fast, and slow)


Or at least that’s what my ongoing studies (which started with being immersed in linear-supply/demand Keynesian Economics @Yale in 1995) and risk management experience in real-time markets has led me to believe, so far…


If it is indeed, “different this time” (as the Ben Bernanke’s and Mohammed El-Erian’s of the world would lead you to believe), I’ll be dead wrong on my fundamental #history #math #behavioral framework. But none of us will know that until I’m long gone anyway.


That’s one of the most humbling points William Strauss and Neil Howe make in The Fourth Turning about cycles. They are long. And by the time you read enough #history to know that you just happen to be alive within one of them, you’ll wish you had read more, sooner.


What was America like 80 years ago?


We were proud as people, but modest as individuals…” –Strauss/Howe


How important are you, personally, to this world today?


Fewer than two people in ten said yes when asked around WWII… Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled.” –Strauss/Howe


That’s page 1 of the book. Since it was written in 1997, I’m betting that 7, 8, or 9 in ten central planners think of themselves as the epicenter of the universe today. How else could someone at the Federal Reserve wake up every morning fundamentally believing that they can bend economic gravity?


Gravity? How do Strauss/Howe define cycles?


Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:


  1. The First Turning is a High
  2. The Second Turning is an Awakening
  3. The Third Turning is an Unraveling
  4.  The Fourth Turning is a Crisis


The good news is that after a decade of Bush/Obama inflation policies slowing real-consumption growth and perpetuating “inequality”, we’re already solidly in The Fourth Turning in America.


You’ll get the updated US GDP report for Q114 to remind you of that today. Inclusive of the central-planners making up that US inflation is only running in the “low 1%” range, real (inflation-adjusted) GDP growth will be revised to negative, yet again.


The only way out is time.


Eventually, time runs out on broken policies. Sometimes this happens slowly; sometimes it happens all at once.


Now that US equity volatility (VIX) has made another all-time-higher-low at 10.61 (June 18th, 2014), we’ll see if it really is different this time – or if the crisis phase of US growth being infected by Federal Reserve Policies to Inflate is to be what it hath already been.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.46-2.64% (bearish)

SPX 1 (bullish)

RUT 1155-1195 (neutral)

India’s BSE Sensex 246 (bullish)

USD 80.17-80.51 (bearish)

Pound 1.69-1.71 (bullish)

WTIC Oil 105.71-107.28 (bullish)

Gold 1 (bullish)


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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