Keith's Macro Notebook 10/15: Europe | Oil | UST 10YR

Europe, Oil and the UST 10YR

Client Talking Points


The economic data coming from Europe is flat out awful, in rate of change terms it’s simply ugly. If you get rate of change right you get bond yields right. This is why the German bund yields are falling this year, because growth is falling in rate of change terms. The FTSE and the DAX remain decidedly bearish trends on our quantitative model.


In the U.S. we are definitely in #QUAD4, which happens when growth and inflation slows at the same time. Today is not the day you want to short oil. Immediate term trade oversold for WTI Oil is $80.07, oil remains in a bearish trend formation on our quantitative model.


The finishing move in UST 10YR as we move towards 2% is that the Fed comes in line with our call and gets more dovish on the margin. Jon Eric Hilsenrath (the chief economics correspondent for The Wall Street Journal) said that the Federal Reserve is looking at the CRB Index, the Fed only looks at the CRB Index when it is going down. When the CRB Index was up 12% they didn’t need to raise rates?  When the market and the economy and/or both go down the Fed gets easier, so the UST 10YR goes lower. Today is not the day to buy the TLT you buy it on pullbacks or you buy it on days that bond yields bounce.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).



The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.


Three for the Road


At least 2/3 of the country has had negative wage growth and seen cost of living hit all time highs @KeithMcCullough


Don’t be afraid to give up the good to go for the great.

-John D. Rockefeller       



The German Government lowered its GDP forecast (leaked on Friday) to 1.2% in 2014 (vs 1.8% prior); and 1.3% in 2015 (vs 2.0% prior).


LEISURE LETTER (10/15/2014)



  • Oct 15: LVS Q3 earnings 4:30pm , pw 12611335
  • Oct 17: Hedgeye cruise pricing survey (mid-October)
  • Oct 23: PENN Q3 earnings 11 am
  • Oct 23: LHO Q3 earnings 11 am "La Salle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am


959:HK Amax International Holdings– announced it completed the purchase of a 60% interest in Forenzia Enterprises Ltd, a firm that has access to an online gaming license for the Pacific island nation of Vanuatu. The transaction total consideration was HKD48.1 million (US$6.2 million). Amax International plans to use the license to operate from the country’s capital Port Vila live table games videoed and streamed for online players. At the same time it will seek to arrange for junkets to fly high rollers from mainland China and elsewhere in Asia to Vanuatu to take part in those table games. Vanatu, an archipelago country, is located about 1,100 miles east of Cairns Australia, 300 miles northeast of Nwe Caledonia and about 700 west of Fiji. The resident population is estimated at 260,000 people. During 2013, nearly 60% of visitors were from Australia, 13% New Zealand and 12% New Caledonia and more than half of all visitation is via cruise ship. 

Takeaway: A very small and very remote casino location. However, the "video" betting is a recent development and a trend we expect to gain greater acceptance once Studio City Manila opens, maybe in December or early January.


BRBY:LN – warned that second-half wholesale revenue will decline and that it expects “slight downward pressure” on margins sent the shares down as much as 6.2%, the steepest intraday decline in a year. Fewer Chinese tourists have been shopping in Hong Kong because of pro-democracy protests over the past three weeks, while fighting in Ukraine and the resulting sanctions have depressed Russian spending in Europe. 


 CWN:AU – Yesterday, the Victorian Parliament’s upper house approved Victoria’s Casino and Gambling Legislation Amendment Bill 2014, if fully approved, the law will extend Crown Melbourne casino resort's gaming license from 2033 to 2050. The extension is part of a wider number of reforms that include the removal of the super tax on commission-based play for international and interstate VIP players from next year. The legislation also allows for more gaming tables and gaming machines across the floors of the casino.The number of tables will increase from 400 to 440, but only 10 of the new tables will be allocated for VIP play. The casino operator will also be allowed to increase the number of fully automated table game terminals from 200 to 250. The property will also be able to add 128 new gaming machines to its floors. Crown Melbourne is the largest casino in Australia and is managed by Crown Melbourne Ltd, a unit of Australia’s Crown Resorts Ltd. Crown Resorts.

Takeaway: Mr. Packer strengthening the positioning of his Crown Melbourne casino both with better tax economics as well as table and game terminal programming. 


HLT – announced the launch of Canopy by Hilton, a new hotel brand that redefines the lifestyle category around the mindset of today’s leisure and business travelers. Christopher J. Nassetta, president and CEO of Hilton Worldwide, unveiled the Canopy by Hilton concept to nearly 1,900 owners and development representatives at Hilton Worldwide’s Global Partnership Conference in Orlando, Florida.  Nassetta said. “We saw an opportunity to not only enter the lifestyle space by developing a new brand, but also to redefine this category by creating a more accessible lifestyle brand. We identified the need to take the emphasis off of capital-intensive design and deliver exactly what the target consumer desires: an energizing, comfortable stay with more included value.”

Takeaway: Finally, the Hilton lifestyle brand. We look forward to seeing the concept first hand, once deployed. It's likely a long, uphill battle to acceptance, however.


HST – announced that on October 3, 2014 the Company's litigation related to the San Antonio Marriott Rivercenter hotel ended in favor of Host Hotels & Resorts as the Texas Supreme Court denied the motion for rehearing from Keystone-Texas Holding Corp.  On June 13, 2014, the Texas Supreme Court had overruled a lower court's $57.3 million verdict against the Company for allegedly interfering with an effort to sell a San Antonio shopping mall and adjacent land underlying the San Antonio Marriott Rivercenter hotel.  Now that the decision by the Texas Supreme Court is final, the Company will reverse the $69 million loss contingency previously recorded under GAAP.  In addition, a court-ordered bond will be released and the Company will recoup its previously funded $25 million escrow. 

Takeaway: A favorable resolution to the legal proceeding.


CCL –  Carnival signs MOU Deal with Chinese Shipyard at CCS9 in Tianjin

joint venture aimed at accelerating the development and growth of the Chinese cruise industry, expected to be one of the largest cruise markets in the world with 4.5 million passengers by 2020, according to the Chinese Ministry of Transport (MOT).  The MOU outlines the framework for exploration of a partnership between Carnival Corporation and the CSSC that includes the possibility of forming a shipbuilding joint venture that could become a three-way arrangement involving Fincantieri of Italy, the world's largest cruise ship building company, in support of the Chinese government's plans to grow the cruising industry in China and could result in the first world-class cruise ship to be built in China.

Takeaway:  A favorable shipbuilding deal for CCL and China.  


RCL – Celebrity Cruises has announced an All-Included Europe Package beginning Monday, Oct. 13.  Guests can now fly directly from New York or New Jersey where they can embark on their European vacation.  The Celebrity All-Included Europe Package is available for the following prices: $2,999 Oceanview lead rate for seven-night Celebrity Equinox Mediterranean sailings; $3,499 Oceanview lead rate for 12-nights on the Silhouette to the Baltic; and $3,499 Oceanview lead rate for 10- or 11-nights on the Reflection on Mediterranean sailings

Takeaway:  All-inclusive deals continue to be more popular. Celebrity taking a page out of Prestige's playbook.


October Macau GGR(LUSA/Macau Daily Times) The gaming sector should see its revenues shrink for the fifth consecutive month in October. Sources linked to Sociedade de Jogos de Macau (SJM) and Melco Crown contacted by the news agency Lusa estimate that the decrease could range between 10 and 13%. “We are still at the beginning of the month, but given the results of the Golden Week we believe that the October revenues will improve when compared to the previous four months.  However, year-on-year the results will decrease above 10% again,” an SJM source said “Gaming revenues are falling and a profit fall when compared to 2013 can’t be discarded,” a Melco Crown source told Lusa. The same source added that the losses are related to “a stricter control on the part of the mainland authorities of the money that is transferred outside its borders, that is limited [by law] to 20,000 yuan.”

Takeaway:  We bet the decline will be larger and margins will be worse = snakeyes for the operators. 


Macau GGR vs. Employment(Macau Daily) Reported that if gaming revenues drop below MOP22 billion per month, as compared to MOP25 billion now, a wave of dismissals in casinos will begin. However, the article lacked any reference to a spokesperson or government official.  By contrast, Carlos Siu, Associate Professor for the Gaming Teaching and Research Centre at the Macao Polytechnic Institute does not currently foresee any impact on employment resulting from the deceleration of gaming profits, saying, “In terms of the global [economic] environment, Macau is still having a rather good one.” He believes that the city need not worry if staying alert.

Takeaway:  Politics will be played in preventing job losses.


Macau-Zhuhai Border Checkpoint (Macau Daily Times) Zhuhai authorities will strive to finish the expansion of the border crossing channels at the Zhuhai-Macau Cross Border Industrial Zone before mid-December.  Although the authorities stated that they are yet to make the decision on which groups will be allowed to cross the border through the Industrial Zone checkpoint, it is likely that Macau residents, non-resident workers, mainland tourists and students may soon be able to cross the border between midnight and 7 a.m.  The expansion will add at least six automated passenger clearance channels in both directions, as well as a manual clearance channel. It is expected that, after the expansion, the Industrial Zone checkpoint will be capable of handling around 12,000 people between midnight and 7 a.m.

Takeaway: A long-term infrastructure positive but not likely to stimulate additional near term demand for the Macau casinos.


China Corruption Crackdown Continues – Agile Property Holdings (3383:HK) saw its share price plummet following a report Mainland authorities are investigating an alleged involvement of the company's chairman, Chen Zhuo Lin, in a bribery case linked to officials in Yunnan Province over property project approvals. 

Takeaway: The crackdowns continue.


New Jersey Sports Betting – The New Jersey State Senate approved a sports betting bill on Tuesday.  The bill now goes before the Assembly for review and vote. If passed in its current form, the legislation will then go to Governor Christie for signature. If the legislation becomes law, the law will likely be heard by U.S. Federal Court.

Takeaway: An uncertain outcome still remains.


Hurricane Gonzalo – maintaining its strength as a strong Category 3 Hurricane with sustained winds of 125 mph and is moving northwest on a heading of 320 degrees at 13 mph.  Gonzalo over the next 12-18 four hours is expected to turn away from the East Coast of the United States and pass just of the Western shore of Bermuda early Friday morning.  Both CCL and RCL skipped ports of call this week across the Caribbean but expect for Bermuda rerouting over the coming days.


LEISURE LETTER (10/15/2014) - hurricane bermuda




Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottom-up slowing in European cruise pricing in our monthly survey.  Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis.  To a lesser extent, HOT and HLT are also exposed to European weakness.


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.

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Napoleon Complex

“Pretend inferiority and encourage his arrogance.”

-Sun Tzu


On this day in 1815, Napoleon Bonaparte began his exile on the island of St. Helena.  For the next six years, mostly in isolation, Napoleon would write his memoirs before eventually succumbing to what most physicians now believe was stomach cancer.  Despite an ending that was less than triumphant, Napoleon had a pretty stellar career for a short guy.


At the age of 29, when most of us were just finishing with our MBA studies, or just finishing the third level of the CFA if we were really contrarian and didn’t get an MBA, Napoleon took control of France via a coup d’etat and named himself First Consul.  Four short (no pun intended) years later, Napoleon named himself Napoleon I, Emperor of the French.


Over the next decade he would lead France in the Napoleonic wars and eventually conquer most of continental Europe.   It is believed that Napoleon fought 60 battles and lost only seven, a record of conquest that is almost unprecedented.  So much so that the great English General Wellington, when asked who the greatest general of the time was, he responded:


                “In this age, in past ages, in any age, Napoleon.”


But, alas, even the great Napoleon eventually had an off day of performance.  While he was eventually and finally defeated at the famous battle of Waterloo, his off performance actually came a few years earlier in the Invasion of Russia.  Although French troops were able to beat back the Russians past Moscow, by the time Napoleon’s army returned to France its numbers had dwindled down to some 40,000, despite starting at more than 400,000.


Speaking of performance, Blackrock recently published a report that showed in aggregate the hedge fund industry has produced negative alpha for the first half of the year.  Similar to this, a recent report by eVestment showed “in the first seven months of the year, 79.58% of the overall portfolio volatility within the 30 largest hedge funds in its data universe could be explained by systemic or market risk.” Levered beta anyone?


If there is a moral of the story it is that even the best generals have off days. So if this year has been challenging from a performance perspective . . . channel your inner inferiority complex, go back to your contrarian roots, and fight on!


Back to the Global Macro Grind


We’ve obviously been tooting our revolutionary horns fairly loudly on the concept that the economy is, or has, entered #Quad4, which is characterized by slowing growth and decelerating inflation.  For those that are holding out that the economic growth may be better than expected, they point to the U.S. employment picture, which, admittedly, has been strong.


In the Chart of the Day, which is titled “Payroll Growth That Would Even Make Napoleon Proud”, we highlight the dramatic improvement in the labor market, but the caveat of course is that the labor market is unlikely to get much better from here.  As my colleague Christian Drake (@HedgeyeUSA ) wrote when posting the note with this chart in it:


“At +1.93% YoY, Nonfarm payrolls in September recorded their fastest rate of improvement since April 2006.  The current pace of improvement is inline with peak growth in the last cycle and may be as good as it gets given the demographic and labor supply headwinds and the secular slowdown in employment growth over the last 30 years.”




In terms of global growth, the Bank of Korea this morning lowered their domestic growth forecast for 2015 and cut rates to a four year low.  While Korea certainly doesn’t yield the economic power of the U.S., it is still one of the largest 15 economies on the planet and this is just another sign that growth expectations are being lowered globally.


With global growth continuing to decelerate and U.S. growth and employment likely peaking at best, the only risk to the Fed not getting incremental dovish is inflation.  Unfortunately, signs of inflation are benign at best.  One of the best commodity proxies for inflation, oil, is down more than 10% in a straight line over the past two weeks (making our MLP Short thesis even juicier!).  As well, 10-year break evens shrank to 1.9%, the narrowest spread since June 2013. #Quad4 anyone?


The question, as always, of course is where to find the alpha even if we are right on the economy.   One area that we believe continues to be ripe with short ideas, as noted above, is the Upstream MLP Sector.  Our Energy Sector head Kevin Kaiser will be doing a conference call this coming Wednesday to provide his updated thoughts on the sector.  With oil in free fall and likely to decline further due to U.S. production growing and global demand at five year lows, cash flow coverage will be very, very tight for MLPs. If you’d like to join the call, please ping


The other area we’ve been pounding the table on in terms of finding shorts is the small cap space in general.   Interestingly, according to a Bloomberg article this morning the most shorted stocks in the Russell 2000 have fallen 15% in the last month, which is almost three times the underling gauge. 


Even as the Russell 2000 has underperformed dramatically in the year-to-date, it is important to note that stocks in the Russell are trading at 24.8x P/E versus 15.6x for the SP500.  Given that valuation dichotomy, the Russell may well still be the Waterloo of small cap growth investors this year who try to buy the dip.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.19-2.36%


RUT 1037-1077

VIX 18.33-25.44

USD 85.03-86.64

WTI Oil 80.07-86.20


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Napoleon Complex - NFP NB

Rate Retreat - Refi Ramps, Purchase Demand Dips

Takeaway: Purchase demand declined -0.7% W/W and is tracking +2.5% Q/Q. The largest retreat in rates in over a year juiced refi activity +10.6% W/W.

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.


Rate Retreat - Refi Ramps, Purchase Demand Dips - Compendium 101514


Today's Focus: MBA Mortgage Applications


MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended October 10th. 

  • Total Mortgage Applications rose +5.6%% W/W buoyed by the +10.6% rise in refi activity alongside the largest sequential decline in rates in over a year
  • Purchase Activity declined a modest -0.7% W/W after last week’s bounce above the 170-level on the index.  4Q is currently tracking +2.5% Q/Q with the YoY improving to -4.1% in the latest week.  Comps continue to ease significantly against 4Q13 and into 1Q next year as we lap the collective shock of rising rates, QM implementation, and FHA loan limit reductions.
  • Refinance activity rose +10.6% W/W, on the back last week’s 5% rise, as rates retreated a full -10bps to 4.20%.  After dropping -13bps in the last two weeks, rates are now back at their lowest level YTD and the lowest level since June of last year.

Rate Retreat - Refi Ramps, Purchase Demand Dips - Purchase   Refi YoY


Rate Retreat - Refi Ramps, Purchase Demand Dips - Purchase Apps Qtrly    YoY


Rate Retreat - Refi Ramps, Purchase Demand Dips - Purchase Apps Qtrly Ave LT


Rate Retreat - Refi Ramps, Purchase Demand Dips - Purchase Apps LT w Summary Stats


Rate Retreat - Refi Ramps, Purchase Demand Dips - Composite Qtrly    YoY


Rate Retreat - Refi Ramps, Purchase Demand Dips - Composite LT w Summary Stats


Rate Retreat - Refi Ramps, Purchase Demand Dips - 30Y FRM


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


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