Macro Notebook 10/7: USD | UST 10YR | Russell 2000


Takeaway: VIP and Mass slowing continues, we expect additional mass deceleration owing to increased margin pressures

The GGR decline of 12% was only part of the story


  • Expectations for September market wide GGR ratcheted lower following August’s details, as a result September’s GGR decline of 12% was in line with recently revised lower expectations.  
  • Mass revenue growth was 15%, confirming our Mass Decelerating thesis for 2H 2014 and we expect additional deceleration during Q4 2014 and Q1 2015.
  • We remain concerned with the potential for continued margin pressure as labor costs continue to escalate and player reinvestment rates rise. 
  • While stock valuations look 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 12%
  • What was not known was that VIP growth was -26%, a further deceleration from August’s -17% and -16% contraction for the prior three months.
  • Mass YoY growth only +15%, slightly above August’s increase of +14% and the third month of mid-teens Mass growth as compared to 1H 2014 growth of +36%.
  • Our Mass Decelerating theme (first espoused in June) of 2H 2014 is continuing and we expect additional mass deceleration during Q4 2014 and Q1 2015 – at a faster (slower growth) rate than even we thought.
  • VIP hold was close to normal for the market and slightly higher than last year
  • Rolling Chip volume declined 19% YoY – the second sequential month of such a decline and the worst performance since early 2009
  • Galaxy & MGM performed well while LVS was below trend.




  • Market share dropped to 21.8%, 110bps below the 6 month average driven by very high hold
  • VIP revenues declined nearly 14% YoY, while hold was higher than expected at almost 3.6% a 15 bps improvement YoY.
  • Disappointing GGR growth was driven by Rolling Chip volume that fell 39% YoY, worst in the market
  • Mass revenue grew 15%


  • Market share increased 20bps above the 6 month average due strong Mass revenues
  • Wynn’s VIP hold percentage fell about 60bps on a YoY basis but was respectable near 3.1%
  • GGR fell 16% YoY due to lower VIP hold but Mass revenue grew at 29%
  • Rolling Chip volume dropped 19% in line with the market


  • Galaxy’s GGR share was 22.8% an improvement of 190 bps from August and 240 bps above the 6 month average
  • Galaxy’s estimated VIP hold improved 35 bps YoY and was near 3.55% for September
  • YoY GGR growth of 9% led the market based on market leading VIP growth of 9% and Mass growth of only 10%
  • 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


  • MPEL’s GGR share was 12.6% a decline of 30 bps over the 6 month average
  • GGR dropped more than 19% due in part to lower VIP hold and a nearly 35% decline in Rolling Chip volume
  • While below last year, MPEL’s September VIP hold was a slight below normal and down almost 50 bps on a YoY basis
  • Mass revenues declined 20%


  • MGM GGR share was 11.1% an increase of 180 bps over the 6 month average and 230 bps above July and August details
  • YoY GGR driven by high hold near 3.4% an increase of 70 bps YoY
  • Market leading Mass revenue growth was +36%
  • Rolling Chip volume declined 26%
  • Mass share was slightly better than the 6 month average

KSS - The Risk In 'KSS Rewards'

Takeaway: Decoupling KSS Credit from the Rewards Program is fine. But 57% of revs and $1.24 in EPS is dependent on Credit. KSS shouldn't disrupt this.

Yesterday KSS announced an 'official' change to its rewards program. We think this represents more of a risk than anything else.


Here's the Release

Kohl’s Pioneers New Approach to Customer Engagement with Launch of Yes2You Rewards Loyalty Program



What It Is: Put in simple terms, this is a decoupling of KSS' credit card from its loyalty program. Previously, anyone that wanted to enroll in the 'rewards program' also had to have a KSS Credit Card. 


Why It's Not New: This was largely a press release to the general public -- not to Wall Street. Earlier this year KSS decoupled its rewards program from its credit card in Pittsburgh, Milwaukee, and most markets in Texas and California. The company said that it would change up the rest of the US in the back half of the year -- which it just did.


Why We're Concerned

  1. First off, in our recent survey, 18% of people said that they are members of KSS rewards program, which is the highest rate of any department store in our survey (ie might not go much higher). The interesting thing is that 57% of KSS Sales flow through the credit card -- up from 47% 5-years ago.
  2. This is a program with CapitalOne, switched three years ago from Chase. It's worth noting that the median credit scores for CapitalOne's portfolio range from 600-650 compared to Chase at 700-750. So it's safe to assume that the last 700bp in KSS sales bought on the store card came from a consumer with lower credit quality, and presumably is in a less enviable financial position.
  3. While it's possible that Kohl's 'Pioneered Approach to Customer Engagement' increases customer loyalty, we'd actually wonder if this gives an outlet for current rewards members to no longer use the KSS card. KSS flowed $407mm in credit card income through its P&L as an offset to SG&A last year -- that's 9.5% of total SG&A, or $1.24 per share in earnings. That's probably headed down, not up. 

KSS - The Risk In 'KSS Rewards' - 10 7 kss1


KSS - The Risk In 'KSS Rewards' - 10 7 kss 2

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Daily Trading Ranges, Refreshed [Unlocked]

Takeaway: This is a complimentary look at our proprietary buy and sell levels on major markets, commodities and currencies for Tuesday October 7, 2014

This note was originally published October 07, 2014 at 07:45. Click here to learn more and to subscribe to Daily Trading Ranges.

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Dollar, UST 10YR and Russell

Client Talking Points


If you didn’t know macro markets are highly correlated to USD correlation risk, now you know. USD correlations to big stuff like Gold and Oil are running -0.8-0.9 on 60-90 day correlations right now; yesterday’s up move in Gold is just the upside down of what’s been an epic EUR/USD meltdown.


UST 10YR Yield dropping to 2.41% after some hoped that Friday’s jobs report was going to mean they got paid on the short side of bonds – not so much as the UST 10YR Yield moves back toward crash mode (-20% year-to-date); the Long Bond remains our best Macro Long Idea for 2014.


The Russell 2000 was down another -0.8% yesterday taking its draw-down to -9.4% from its all-time #bubble high established on July 7th, 2014; next support is 1079, but that’s just an immediate-term level – intermediate-term there’s no support down to 1015 ish.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


Our Ace, Todd Jordan @HedgeyeSnakeye  has been making the bear call on Macau since June - reiterating SELL $LVS today



The four most dangerous words in investing are: “this time it’s different.”

-Sir John Templeton



Merger and acquisition activity has jumped this year, the total M&A volume is now $1.29 trillion in 2014 on pace for a record, according to data provider Dealogic.

Pygmy Minds

This note was originally published at 8am on September 23, 2014 for Hedgeye subscribers.

“The government which governs the least, governs best.”

-Thomas Jefferson


After the election of 1800, Alexander Hamilton didn’t like the aforementioned Presidential acceptance speech from Thomas Jefferson. He called it the “symptom of a pygmy mind.” Jefferson sounded pretty darn smart to me.


What wasn’t smart was what Hamiltonian central planner and New York group-thinking Fed head, Bill Dudley, said about the purchasing power of the American people (the US Dollar) at a Bloomberg conference in NYC yesterday:


“We would have poorer trade performance, less exports… and if the Dollar were to appreciate a lot, it would dampen inflation… making it harder to achieve our objectives.” I couldn’t make that up if I tried. In stark contrast to the Reagan/Clinton administrations, who trumpeted Strong Dollar (and raised rates), this is how the Bush/Obama economic teams thought/think.


Pygmy Minds - dud


Back to the Global Macro Grind


Evidently, alongside his protectionist big government spenders at the US Treasury, Mr. Dudley is lost in some 18th century British time warp. And you know what, you’re going to have to deal with it. Because it’s not going away. In an economy that is 70% consumption, it’s all about the “exports”, baby!


To put this day in American history in context, Bloomberg’s “50 Most Influential” are mostly government guys. My partner, and Director of Research @Hedgeye, Daryl G. Jones, was at their conference yesterday (Mike, we’re a big customer – love the data product!). From raging Keynesian, Jason Furman, to Jack Lew, this was quite the central planning affair.


To recap yesterday’s headlines, in addition to Dudley talking down the Dollar and rates (good for our Long Bond  (TLT) position):


  1. Lew wants to limit inversions
  2. Jason Furman wants to spend
  3. Larry Summers wants a “major spend”


In other words, when all monetary policies fail to create real, sustainable, economic growth, the USA needs to move the goal posts (again) and spend, spend, spend. Isn’t that just wonderful.


In other news…


  1. The BABA #Bubble stopped inflating yesterday (Dudley, get on that)
  2. The Russell 2000 lost another -1.7% on the day, reiterating its bearish TREND for 2014
  3. The 10yr Bond Yield is falling (again) this morning to 2.54%, -16.2% YTD


Oh, and there are some bombs dropping in the Middle East again too, but no worries. At 55x trailing earnings, and 42% of the names in the Russell 2000 crashing (-20% or more from their 12 month peak), the US stock market is “cheap.”


Talk is cheap. Especially the central planning kind. Remember the narrative that 0% rates forever were going to provide Americans their housing dream? Well the news on that front sucked (again) yesterday, as Existing Home Sales for August slowed (again).


And what do you think US government monetary and fiscal policy is going to do as Housing and Employment gains from 2013 slow?


A)     Get tighter on interest rates and spend less

B)      Get tighter on rates and spend moarrr

C)      Get looser on rates and spend, spend, spend


Alex, I will take C).


As opposed to betting alongside consensus (which still thinks rates are going to rise), this Mr. Market chose C) yesterday too:


  1. Housing stocks (ITB) got crushed on the “news” -2.1% to -6.8% for 2014 YTD
  2. Russell 2000 diverged, big time, from the big cap Dow, -1.7% to -3.0% for 2014 YTD
  3. Consumer Discretionary (XLY) was down -1.4% yesterday, underperforming Utilities 2x


Yep, when US GDP growth expectations slow, you buy the Long Bond (TLT = +13.1% YTD) and anything that looks like a #YieldChasing bond (Utilities), and you like it.


The biggest risk to buying anything US equities (especially REITS and Commodity linked stocks) is that we are right in our US economic projections and entering what we call Quad 4 (where both inflation and growth are slowing, at the same time).


With that, my pygmy mind (I’m 5’9 in the 1994 hockey program, standing on pucks in my socks) agrees with Mr. Dudley, wholeheartedly. If these guys turn this place into Japan, they won’t be achieving anyone’s growth or inflation “objectives.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.59%

SPX 1977-2011

RUT 1115-1154

VIX 11.66-14.22

USD 83.99-84.96

Gold 1211-1256


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Pygmy Minds - Chart of the Day

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