Keith's Macro Notebook 9/4: Draghi | Volume | UST 10YR

LEISURE LETTER (09/04/2014)



  • Sept 4:  MGM at Mizuho Investment Conference
  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8: MAR Analyst Meeting
  • Sept 9: 
    • BofAML Gaming & Lodging Conference
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference


BYI – announced an agreement with the Ontario Lottery and Gaming Corporation (OLG) to provide the central casino gaming system solution throughout the province. According to Bally, in conjunction with the system modernization, the OLG will implement Bally’s system technology to align and comply with “Conduct and Manage” responsibilities under Canada’s Criminal Code, and implement enhanced responsible gambling tools to the casino gaming facilities and operations across Ontario.

Takeaway:  This is an important win for Bally, I mean SGMS. 


IGT – Wheel of Fortune Spins its Way to Mobile and Desktop on IGT's DoubleDown Casino

Today marks the first time IGT's Wheel of Fortune Double Diamond slot game is available across all platforms including social and mobile devices.  Today's announcement is the first in a series of Wheel of Fortune titles to launch as part of the multi-year agreement with Sony Pictures Consumer Products.  

 Takeaway:  Long-awaited moment for Wheel of Fortune on DoubleDown.


GLPI – declared a cash dividend of $0.52 per share on common stock for the third quarter of 2014. The dividend will be payable on September 26, 2014 to shareholders of record at the close of business on September 15, 2014

Takeaway: Important because it signals a status quo pay-out ratio.


CHSP – announced several transactions, including:

1) entered into an agreement to acquire the 337-room JW Marriott San Francisco Union Square located in San Francisco, California, for a purchase price of $147.2 million, or approximately $437,000 per key; 

2) entered into an agreement to sell the 153-room Courtyard Anaheim at Disneyland Resort located in Anaheim, California, for a sale price of $32.5 million, or approximately $212,000 per key. Both transactions are expected to close within 45 days; and,

3) announced 4.2 million share common share offering and intends to use the proceeds from the offering and hotel sale to fund the acquisition of the JW Marriott.

Takeaway:  CHSP adding to its San Francisco platform while upgrading the quality of its portfolio.  Thayer Lodging Group purchased the JW Marriott Union Square from Ashord Hospitality Trust in March 2011 for $96 million.


HOT & HLT– Thayer Lodging Group closed on its purchase of the Westin Diplomat Hotel (oceanfront), Westin Diplomat Golf & Tennis Club and adjacent open land parcels for $535 million. The seller was The United Association, a 370,000-member plumber and pipefitters union.  Thayer plans a $100 million capex renovation of the property.  Thayer will likely name a developer in the coming weeks to build three to five towers for a total of 1,500 rooms on open land

Takeaway: Most importantly, Thayer will deflag the Westin brand and rebrand the property Diplomat Resort & Spa and will join Hilton Worldwide's newest brand, Curio - A Collection by Hilton.  HOT would lose the 998 rooms and associated fees from its managed/franchised segment, while HLT would gain the incremental fees.  Neither HOT nor HLT have confirmed the re-flagging.


IHG – sold 19 Holiday Inn hotels to Kew Green, an owner/operator of high quality limited and full service branded hotels (Holiday Inn, Crowne Plaza, Holiday Inn and Days Hotels) in prime locations throughout the UK. The 19 hotel portfolio acquistion increases Kew Green’s portfolio of Holiday Inns up to 38.

Takeaway: IHG continuing its Holiday Inn asset sales.


PEB – announced 3 million share secondary offering and which will use the net proceeds to repay the approximately $91.0 million outstanding on the company’s senior unsecured revolving credit facility and the balance for general corporate purposes

Takeaway: Small equity raise at a 52 week high share price while preserving dry powder for opportunistic, value creating acquisitions.


CCL – Princess '3 For Free' sale Seatrade Insider

Running through Nov 20, Princess Cruises has three offers for travelers booking Alaska, Europe or Japan cruises and cruise-tours sailing in 2015. The '3 For Free' sale gives stateroom location upgrades, a free shore excursion credit and on-board credit, and also features a refundable deposit of $100 per person.     

Takeaway:  Princess has been leading the promotional charge.


NCLH – Regent Seven Seas has canceled calls to Cabo San Lucas (scheduled for Thursday, September 4) and Puerto Vallarta (Friday, September 5) to avoid the harsh weather conditions from Hurricane Norbert.


Macau Customs Bust (Macau Daily Times) During an inspection on August 26 at the cargo terminal of the Macau International Airport, the Macau Customs Service (SA) found a consignment of counterfeit watches that was to be re-exported to South East Asian countries. The thirty-four boxes that contained more than five thousand watches were spotted alongside goods that had been declared to the SA. Most of them were later confirmed to be counterfeit products, with a total street value of more than MOP20 million. The SA has arrested the manager of the logistics company involved, as well as a cargo truck driver. They will be handed over to the Public Prosecution Office and may face a jail time of up to six months.

Takeaway: The crackdown on illegal activities continues.


Macau Airlift Contraction (Macau Business Daily) Low cost carrier AirAsia Zest reduced the frequency of its flights for the Macau-Manila run from daily to three times a week in mid-August, an adjusted schedule that is likely to remain for the rest of the year.

Takeaway: Interesting schedule contraction since AirAsia just recently  expanded its Macau/Manila/Macau schedule to daily service on July 1. 


Lodging Industry Outlook – PKF Hospitality Research forecasts the lodging industry in 2015 will achieve a record 65% occupancy (up 0.9% YoY) coupled with ADR growth of 5.7% for an overall RevPAR increase of 6.7%, according to the firm's Sept 2014 "Hotel Horizons" industry report. Additionally, PKF-HR believes that hoteliers will be able to increase their ADRs at an average annual pace of 5.7% from 2015 through 2017. 

Takeaway: Strong lodging industry trends prevail. 


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.

Arrest Economic Gravity

Client Talking Points


Since both the Fed and BOJ have proven that Policies To Inflate do not perpetuate sustainable economic growth (Kuroda acknowledged Japan’s slowdown last night, but blamed the “weather”, lol), the ECB definitely has to double down on that – or will he? He will. Draghi cut rates this morning.  Easing #expectations were huge ahead of this morning’s announcement.


The good news is that on yesterday’s AAPL down move, some U.S. equity volume came back (the bad news is that, in rate of change terms, it only comes back on down days); Total U.S. Equity Market Volume = +8% vs. the 1 month average, flat vs. the 3 month average.


One down day for yields does not a trend make, but Old Wall media keeps writing about the “risk of rising rates” (our 2013 call) when the real risk is not buying the long bond on dips; UST 10Yr Yield 2.40% after failing @Hedgeye 2.46% TRADE resistance; no support to 2.33%.

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


$MCD preparing for launch of NFC-based mobile payments system and making a bet $AAPL IPHONE6 has NFC



Once you say you’re going to settle for second, that’s what happens to you in life.

-John F. Kennedy


Aggregate coffee demand next year is expected to be around 34 million bags. Due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.

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CHART OF THE DAY: A Monetary Paradox? #ECB Deposit Rate

CHART OF THE DAY: A Monetary Paradox? #ECB Deposit Rate - Chart of the Day

Failing Successfully

“If you try to fail, and succeed, which have you done?”

-George Carlin


In theory, investing is very straightforward.  You buy stocks in great companies and the stock prices goes up.  You short stock in bad companies and the stock prices go down.  Practically, of course, that’s never really how it happens, except in fundraising power point presentations. 


A real paradox of investing is that there are periods in which the stock prices of “weaker” companies actually dramatically outperform “stronger” companies. Over the last three months, stocks in the highest quartile of short interest have outperformed low short interest stocks by 240 basis points over the last three months - +5.5% vs +3.1%.  In part, this is facilitated by so called short covering.


Our lives are, of course, replete with paradoxes, so a little paradoxical market action should on some level be easy to stomach, right?


 Some notable paradoxes of different genres include:

  • Paradox of voting - For a rational, self-interested voter the costs of voting will normally exceed the expected benefits, so why do people keep voting?
  • Fenno's paradox  - This is the belief that people generally disapprove of the United States Congress as a whole, but support the Congressman from their own Congressional district.
  • Hedgehog's dilemma – This is the paradox that human intimacy cannot occur without substantial mutual harm (This is maybe the best philosophical defense for long term bachelors like myself!)
  • Archimedes paradox – The paradox that a massive battleship can float in a few litres of water

Lastly is one of my personal favorites - the St. Petersburg paradox.


According to the St. Petersburg paradox, a casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The pot starts at $2 and is doubled every time a head appears. The first time a tail appears, the game ends and the player wins the pot.


Thus the player wins $2 dollars if a tail appears on the first toss, $4 if a head appears on the first toss and a tail on the second, $8 if a head appears on the first two tosses and a tail on the third, $16 if a head appears on the first three tosses and a tail on the fourth, and so on.


What would be a fair price to pay the casino for entering the game?


Back to the Global Macro Grind...

Failing Successfully - Putin 09.03.2014


As it relates to recent events in Russia, the term circus comes more to mind than paradox.  Yesterday Russian President Putin introduced a hastily patched together seven point peace plan at a press conference.  This came shortly after President Obama upped the rhetoric in terms of the U.S.’s willingness to support Ukraine (and also NATO countries in the region) and ahead of a two day NATO summit that begins today.   


By some pundits, this “ceasefire” was perceived positively.  But the ever thoughtful George Friedman from Stratfor (the largest non-government intelligence agency) had a more paradoxical take and wrote the following:


“This rapid turnaround on the battlefield (in reference to the recent thwarting of a Ukrainian offensive) had two main purposes. The first was to assert Russian military power and convince the West that Moscow would not be afraid to use it in spite of the economic consequences. The second was for Moscow to use its military gains to make it appear that the West was utterly irresponsible in trying to wrest Ukraine out from Moscow's shadow. Now, by dangling an ambiguous cease-fire before the Americans, Russia is essentially telling the United States that to defeat Russia it must fight Russia directly, knowing that NATO is loath to engage directly with the Russian military.


That deal goes well beyond a cease-fire. Russia wants its buffer in Ukraine recognized and respected, along with sanctions lifted so it can get on with repairing its economy. And with winter approaching, Russia also has the means to turn the screws on Europe's natural gas supply at the same time it holds a clear military advantage on the Ukrainian battlefield.”




Of course, the real news in Europe this morning are the monetary moves from the ECB and not that geo-political move from Russia yesterday.  In an announcement that was a surprise to most, the ECB cut interest rates from 0.20% to 0.05%, cut the deposit rate by 10 basis points to -20 basis points, and also cut the re-fi rate and marginal lending rate by 10 basis points. 


Although this isn’t necessarily monetary shock and awe, with the Euro trading down about 80 basis points, Draghi was seemingly able to get his point across with this move on some level.  Practically speaking though, it is not clear that this will necessarily be a catalyst to ignite European economic activity.


Certainly a negative deposit rate incentivizes banks to lend out their money and sovereigns such as France, with a negative short term borrowing rates, have benefitted.   That said, at least based on the initial foray into a negative deposit rate early this summer, this policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy.


All eyes will now be on Draghi’s press conference where he is likely to now introduce a QE type plan that also surprises to the dovish side.  But the paradox of these surprises moves from such low levels is related to the answer to the St. Petersburg paradox, which is: infinity.   Unfortunately infinite monetary policy moves from zero do not grow an economy.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.33-2.43%


Shanghai Comp 2

VIX 11.34-12.95 (bullish)

WTI Oil 92.51-96.53 (bearish)

Gold 1 (neutral)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Failing Successfully - Chart of the Day

Hedgeye and Seeking Alpha Announce New Video Partnership

“Contributor Call” series will be produced by HedgeyeTV.




STAMFORD, Conn., September 4, 2014 -- Seeking Alpha (SA) and Hedgeye Risk Management today announced a new partnership with the creation of a new video series called “Contributor Call.”   Produced by HedgeyeTV, the series will feature one-on-one conversations hosted by Hedgeye CEO Keith McCullough who will speak with top SA contributors about their highest-conviction investing ideas.


Viewers can watch “Contributor Call” on,, HedgeyeTV’s mobile app and on Hedgeye’s YouTube channel (


The new partnership brings together Hedgeye, a leading independent investment research and media firm, with Seeking Alpha, the Internet’s #1 crowd sourced equity research platform.


"We're thrilled to partner with Hedgeye on this extremely exciting initiative,” said Colin Lokey, Director of Contributor Success at Seeking Alpha. “This represents a new and compelling way for Seeking Alpha contributors to share their best ideas with the investing public."


The inaugural “Contributor Call” features Ben Axler, founding partner of Spruce Point Capital, a long/short hedge fund, explaining to McCullough the reasoning behind one of his top short calls.



"This marks the beginning of what we think will be a great partnership between Hedgeye and Seeking Alpha,” said Keith McCullough, CEO of Hedgeye Risk Management. “Investors are thirsting for actionable investing ideas with deep, professional analysis and insight. This new pro-to-pro format gives it to them."


HedgeyeTV was launched last year and produces daily video content, including programs such as “Real Conversations” which has featured notable guests including national bestselling “Currency Wars” author James Rickards, Jim Grant, founder of Grant’s Interest Rate Observer and Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.




Seeking Alpha is a crowd-sourced investment research platform that sources equity and fixed income analysis from over 9,500 contributors. With 3.5 million registered users and 2 million real-time alert subscribers, Seeking Alpha is the web's go-to destination for actionable investing ideas." 



Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Technology, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Semiconductors, Consumer Staples, Internet & Media.


CONTACT: Dan Holland


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