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Keith's Macro Notebook 9/2: Europe | China | Industrials


Takeaway: Disappointing Mass continues to be the story in Aug. Our Mass Decelerating theme remains intact and could continue to pressure the stocks.

The GGR decline of 6% wasn’t the only story



August’s GGR decline of 6% is worse than what we anticipated when the month started. Most disappointing, YoY Mass revenue growth decelerated to 14% in August. Our Mass Decelerating thesis for 2H 2014 has played out faster than we expected. We also remain concerned with the potential for continued margin pressure as labor costs continue to escalate and player reinvestment rates rise.  The stock valuations look more attractive but we don’t see any positive catalyst on the near term horizon. We remain cautious on the Macau stocks with the exception of Galaxy.  


Macau Market:

  • As already known, GGR fell 6%
  • What was not known was that Mass YoY growth was very disappointing at only +14%, below July’s increase of +17% and 1H 2014 growth of +36%
  • Our Mass Decelerating theme (first espoused in June) of 2H 2014 is occurring at a faster (slower growth) rate than even we thought. We had only heard in the last 2 weeks that August could be as slow as July for Mass – and now we know it was worse.
  • VIP hold was close to normal for the market and slightly higher than last year
  • Rolling Chip volume declined 19% YoY – the worst performance since early 2009
  • Constant hold in both periods would’ve produced a YoY decline of 9% in GGR




  • Market share increased to 24.7%, 180bps above the 6 month average driven by very high hold
  • Despite a nearly 1% YoY increase in hold percentage, GGR only increased 2%.  LVS has been quite lucky in 2014; YTD, hold has been 3.3%.
  • Disappointing GGR growth was driven by Rolling Chip volume that fell 32% YoY, worst in the market
  • Mass revenue grew 18%, better than the market



  • Market share fell 60bps below the 6 month average due to low VIP hold
  • Wynn’s VIP hold percentage fell about 30bps below normal
  • GGR fell 17% YoY but Mass revenue grew a market leading 43% off of an easy comp
  • Rolling Chip volume grew in line with the market



  • Galaxy’s estimated VIP hold was below normal but higher than last year
  • Despite the low hold, Galaxy’s GGR share of 20.9% was 40bps above the 6 month average
  • YoY GGR growth of 15% led the market, despite Mass growth of only 12%
  • Galaxy remains our favorite stock in the group given its ability to drive VIP revenue growth amid a difficult environment and the likely earlier than expected opening of Phase II on Cotai.  We think Phase II could operate for 6-9 months as the only new property on Cotai



  • While below last year, MPEL’s August VIP hold was a little above normal
  • Yet, GGR fell 15% owing to a 29% decline in Rolling Chip volume
  • Mass grew in line with market



  • MGM held 55bps below its normal %
  • Low hold contributed to a market worst 20% decline in GGR
  • However, Mass revenue growth was strong at +29%
  • Rolling Chip volume declined 22%
  • Market share of 8.8% was the property’s worst performance in 3 years, driven by the low hold
  • Mass share was in line with the 6 month average



Post-Labor Day Mashup

Investment Ideas

The table below lists our Investment Ideas as well as our Bench -- a list of potential ideas we are watching closely.  We intend to update this table regularly and will provide detail on any material changes.


Post-Labor Day Mashup - 1

Recent Notes

08/25/14 Monday Mashup: BKW, BWLD and More

08/26/14 Expert Call: Coffee Outlook in 2015 and Beyond

08/26/14 BKW: Flame-Broiled Crawlers

08/27/14 Expert Call | Analyzing the BKW/THI Merger

08/28/14 BKW/THI Call Replay & Summary

08/28/14 BOBE: Leaving Much to be Desired

08/29/14 Restaurant Sector Valuation

Events This Week

Wednesday, September 4th

  • LOCO earnings call 5pm EST
  • KONA Liolios Group Gateway Conference

Chart of the Day

Milk prices are up 17.1% YTD and 24.3% YoY.


Post-Labor Day Mashup - 2

Recent News Flow

Monday, August 25th

  • TXRH upgraded to overweight at Stephens with a $32 PT.
  • BWLD took a minor stake in Rusty Taco which has nine locations in three markets.
  • JMBA entered into an agreement with Capgemini in order to accelerate franchise recruiting and development.

Tuesday, August 26h

  • BKW announced the acquisition of THI for C$94.05/share in cash and stock.
  • THI downgraded to sector perform at Scotiabank with a C$90 PT.
  • THI downgraded to hold at Miller Tabak with an $81 PT.
  • PLKI announced its title sponsorship for NCAA Football's Bahamas Bowl.
  • BOBE announced that four of Sandell's nominees were elected to the company's 12-member board.

Wednesday, August 27th

  • THI upgraded to neutral at Credit Suisse with a C$89 PT.
  • THI downgraded to market perform at BMO Capital with a C$92.75 PT.
  • THI downgraded to market perform at Raymond James with a C$92.50 PT.

Thursday, August 28th

  • BOBE downgraded to underweight at Stephens with a $40 PT.
  • DRI reschedules 2014 annual meeting for Friday, October 10th.

Sector Performance

The SPX (+0.8%) outperformed the XLY (+0.3%) last week.  In aggregate, casual dining stocks performed in-line with the XLY as quick-service stocks outperformed the index.


Post-Labor Day Mashup - 3

Post-Labor Day Mashup - 4

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.


Post-Labor Day Mashup - 5

Casual Dining Restaurants

Post-Labor Day Mashup - 6

Post-Labor Day Mashup - 7

Quick Service Restaurants

Post-Labor Day Mashup - 8

Post-Labor Day Mashup - 9


Howard Penney

Managing Director


Fred Masotta


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Panic! Market Up

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

“Panic! Dow Plunges Through Floor”



The 1980s were awesome. From big hair bands to Boesky getting bagged, there was a lot going on. A straight up stock market went straight down. The Dow dropped -22.61% in a day (October 19th, 1987)… but, if you ask the perma bulls, “the market was flat that year.”


It’s already August and the Russell 2000 is still trying to get back to flat for the year. With the 10yr Bond Yield having crashed alongside fanciful 1980s like +3-4% US GDP growth expectations, in Greenwich meetings yesterday I was told that GDP “doesn’t matter anymore anyway.”


Yep. This time is different. Roger that.


Panic! Market Up - Black Monday the Stock Market Crash of 1987 NYT


Back to the Global Macro Grind


The rate of change in US economic growth may not matter to long-short stock pickers, but it matters, big time, to both the bond market and the sector asset allocations that are driving performance in the US stock market. As growth slows, big-cap-slow-growth #YieldChasing stocks & sectors outperform.


They didn’t yesterday though. My Connecticut investor meetings were great, but my recommended positioning sucked:


  1. Housing (ITB) led gainers at +2% on the day
  2. Regional Banks (KRE) were right behind the builders at +1.7%


The only thing that has sucked more than having that short position yesterday, has been having it as a long position all year.


BREAKING:Wall St Rallies on M&A Blitz and Home Builder Data” –Yahoo


Yahoooo! Everyone is going to buy everyone as US growth slows. Why not? And I’m not being sarcastic about that either. That said, there’s also a greater chance of Big Alberta Cows jumping over the moon than the US economy accelerating as US Housing and consumption slows.


Another US equity only manager told me yesterday that if I was right on #Q3Slowing (and that Janet Yellen gets more dovish, in kind), that “oh, the stock market is going to go higher on that.”


In other words:


  1. If growth accelerates, as Consensus Macro has been calling for since January, stocks are going to rip
  2. If growth slows, stocks are going to rip too




It’s a good thing everyone is going to be a winner under any scenario with Global Macro volatility (across Equities, Currencies,  Commodities, and Fixed income – ping sales@Hedgeye.com for our Q3 Macro Theme of #VolatilityAsymmetry) at all-time lows.


That hasn’t happened before, but neither did 1987.


Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots


Or at least a lot more than there are PMs, strategists, and (god forbid) economists, who are in print like this Canadian mutt writing about the US economic cycle similarities between Q3 of 2007 and 2014.


Enough of the ranting – here are some #timestamped short ideas for this morning’s “futures are up” to sell into:


  1. Russell 20000 (IWM)
  2. Housing (ITB)
  3. Toll Brothers (TOL)
  4. Target (TGT)
  5. Brinker (EAT)


Yep. On the no-volume bounce (Total US Equity Market Volume was -15% and -39% vs. its 3 month and YTD averages yesterday), I’m going right back to the wood (i.e. the SELL calls that worked for me in both 2007 and 2014). They are early-cycle slowdown housing and consumption shorts.


And no, I don’t think that what’s going on in Ferguson, Missouri right now is a bullish catalyst for the 80% of this country being smoked by the all-time highs in Fed-inflated cost of living. Neither would I be surprised if the US stock market had a 3-6% down day in the next 3 months. Then you’ll see panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42

SPX 1950-1977

RUT 1115-1161

MIB Index 18994-20246

VIX 11.14-17.29

USD 81.31-81.72

Gold 1293-1321


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Panic! Market Up - Chart of the Day

Welcome to September

Client Talking Points


Another solid move for our two favorite macro equity markets overnight (China and India) with the Shanghai Comp +1.4% to a new year-to-date high of +10.4% and India at a new year-to-date high of +29.7%.


Hope springs eternal that QE (quantitative easing) will once again save the day (ECB decision Thursday) – not the bull case European growth bulls were looking for 9 months ago, but who cares! DAX and CAC @Hedgeye TREND resistance lines = 9642 and 4452, respectively.


Total U.S. Equity Volume was -40% vs its year-to-date average last week but it was interesting to see the weekly divergence between Industrials (XLI) which were down -0.2% on the week vs slow-growth #YieldChasing Utilities (XLU) which were +2.0% to +14% year-to-date #EarlyCycleSlowdown.

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


FX: Yen testing fresh 3mth lows vs USD at $104.89 with whispers of incremental Japanese easing



If it doesn’t challenge you, it won’t change you.

-Fred Devito


AAA Travel projected 34.7 million Americans would journey 50 miles or more from home during the Labor Day holiday weekend, the highest volume for the holiday since 2008 and a 1.3% increase over 2013.

CHART OF THE DAY: #ConsumerSlowing (look a little closer)


CHART OF THE DAY: #ConsumerSlowing (look a little closer) - Chart of the Day

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