Macro Notebook 10/15: Volume | Volatility | Europe


Hedgeye Senior Macro Analyst Darius Dale shares the top three things in Keith's macro notebook this morning.

European Banking Monitor: Widening in PIIGS Spreads Leads the Way

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email  




European Financial CDS - Swaps were sharply wider in Europe last week. Much of the weakness was driven by Greek banks, which widened by an average 85 bps on the week.


European Banking Monitor: Widening in PIIGS Spreads Leads the Way - chart5 Euribor OIS spreadvf


Sovereign CDS – European Sovereign swaps widened notably last week. Portugal and Spain saw swaps widen 28 and 18 bps, respectively. Meanwhile, Italian and French swaps were wider by 14 and 10 bps. The US and Japan also widened by 2 and 4 bps. 


European Banking Monitor: Widening in PIIGS Spreads Leads the Way - chart2 sovereign CDS


European Banking Monitor: Widening in PIIGS Spreads Leads the Way - chart3 sovereign CDS


European Banking Monitor: Widening in PIIGS Spreads Leads the Way - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 9 bps.


European Banking Monitor: Widening in PIIGS Spreads Leads the Way - chart5 Euribor OIS spread


Matthew Hedrick 



Ben Ryan





LEISURE LETTER (10/20/2014)



  • Oct 23:
    • RCL Q3 earnings 10 am
    • PENN Q3 earnings 10 am
    • LHO Q3 earnings 10 am "LaSalle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am


CZR – Caesars Entertainment Operating Company a subsidiary of Caesars Entertainment received a notice of default from holders purporting to own at least 30% in principal amount of the subsidiaries outstanding second-priority senior secured notes issued under the Indenture, dated December 24, 2008. 

Takeaway: Debt pressures continue to increase.


CZR – Caesars Entertainment Corporation and its subsidiary Caesars Entertainment Operating Company, Inc. announced they executed non-disclosure agreements with certain beneficial holders of debt issued by CEOC, including senior secured term loans, pursuant to the third amended and restated credit agreement, dated as of July 25, 2014, enabling the commencement of formal discussions with the Bank Lenders. On September 12, 2014, Caesars Entertainment and CEOC announced that they executed non-disclosure agreements with certain beneficial holders of CEOC's 11.25% senior secured notes due 2017, 8.5% senior secured notes due 2020 and 9% senior secured notes due 2020.


GLPI – Moody's recently downgraded Cannery Casino's outlook from stable to negative and noted declining EBITDA will pressure Cannery's covenant cushion.  More importantly, Moody's noted the decline at Cannery's Meadows Casino has caused its leverage to rise to 8x and interest coverage ratio to fall to 1.2x.

Takeaway: Maybe not such a great acquisition for GLPI and this could be the reason why no has operator surfaced.


LVS – is looking at a site near Taoyuan International Airport in Taiwan. Business leaders in the area are advocating the legalization of a casino there as part of that area’s commercial development.

Takeaway:  Add Taiwan to the list of opportunities for LVS.


MGM & 2282.HK – Pansy Ho speaking at the Global Tourism Economy Forum commented that labor costs and a shortage of construction workers could put back the opening of MGM Cotai, scheduled for 2016.

Takeaway: A delay in the opening looking more like a reality.


PEB – announced that it has successfully amended and restated its senior unsecured revolving credit facility. The amended credit facility has been increased to $600 million and is composed of a $300 million unsecured revolving credit facility, an extension of the Company’s existing $100 million unsecured term loan, and a 180-day option to draw down an additional $200 million in unsecured term loan proceeds. The pricing on the amended credit facility has been significantly reduced, the revolving credit facility now matures in January 2019 with options to extend the maturity date to January 2020, and the term loan now matures in January 2020

Takeaway: Capital markets increasing appetite to lend to the lodging industry.


CCL ( Costa Cruceros announced the cancellation of its four planned departures of Costa Pacifica from Buenos Aires, citing “commercial difficulties” and “economic situation of the region” as the main reasons for this decision. The company also refers to the growing demand in the Mediterranean as a reason for this strategic move. It is cancelling cruises departing from Buenos Aires on February 27 and March 7, 10 and 18, so that the ship may return to Europe earlier than expected.

Takeaway: Managing the deployments for higher profitability and returns.

CCL – Princess is offering a $149 five-night inside-cabin Caribbean sailing over Thanksgiving while a balcony cabin is quoted at $249 for the itinerary aboard the Caribbean Princess departing Ft. Lauderdale to Costa Maya and Cozumel.

Takeaway: Less expensive than a Thanksgiving feast - book now!


RCL (TTG Digital) – Celebrity Cruises 'game-changing' agent incentive  

Celebrity Cruises has launched a new “game-changing” loyalty program starting Nov 1 for the trade, allowing agents to choose their prizes rather than the cruise line. It enables the trade to earn points when they sell cruises, which they can then redeem for luxury gifts such as iPads, or put towards a cruise with Celebrity.

Takeaway: Not really game-changing.



  • Released new Ebola guidelines for all brands which includes a public health questionnaire that all adults must complete prior to check-in. 
  • Carnival Magic disembarks in Galveston, blood test clears Ebola lab worker
  • Cruise Lines International Association recommends additional 'contact screening,' on top of travel history screening, and denial of boarding for anyone who had physical contact with, or helped care for, a person with Ebola within 21 days before embarking a cruise.

Takeaway: A relief to cruisers that Ebola tests came out negative but we have been hearing cancellations due to the Ebola fear. More Ebola screenings now being taken on the ships.


Japan Gaming Likely Delayed (Reuters) Japan's plan to legalize casino gambling has likely been delayed again, a senior official said on Monday. Parliament was unlikely to have enough time to pass the controversial law during the current session of parliament, the coalition official said. The hurdle is quite high for both lower and upper houses to enact it during the current session which ends on Nov. 30, according to Keiichi Ishii, policy chief of Komeito, the junior partner in Abe's coalition government.

Takeaway:  This is disappointing news. Some sources say Japan is now or never. 


Deputy PM Support(Kyodo News) The deputy prime minister of Japan, Taro Aso said he was in favor of allowing casinos to operate in the country with the aim of promoting tourism and boost economic growth.  But Mr Aso also emphasized the importance of developing legislation to prevent the opening of casinos from causing law and order problems and increasing gambling addiction,


Delta Bridge Accident – Early Sunday morning, an accident at a construction site for the Hong Kong-Zhuhai-Macau Bridge (Delta Bridge) in Chek Lap Kok, Hong Kong resulted in the death of a worker and four injuries. Local media reported that five workers at a 15-meter high pier were operating a crane machine to lift construction materials, when the pier collapsed and two workers fell to the ground. One of them, a 43-year-old, died after being rushed to hospital. Among the four injured, three of them are still in hospital, with one in critical condition.

Takeaway: We hope this does not lead to a broader investigation and construction delays. However, no private casino companies to blame here.


Ho Tram Strip – The Grand Ho Tram Strip casino resort in Vietnam on Saturday added another major attraction to its roster with the opening of The Bluffs, a new 18-hole golf course designed by Greg Norman.

Takeaway: The programming of Ho Tram continues, but infrastructure improvements to get to Ho Tram are still needed. 


Las Vegas Gran Prix(The Independent) Formula One executive Bernie Ecclestone is in discussions about hosting a grand prix on the streets of Las Vegas, including The Strip.  Mr. Ecclestone indicated the race circuit "would include The Strip for sure". A senior source in the US racing scene added that F1’s track designer Hermann Tilke had visited Las Vegas several times to work on the layout of the course, showing that the project is at an advanced stage. 

Takeaway: We have seen and experienced first hand the energy, excitement and success of the F1 in Singapore and we believe an F1 Grand Prix in Las Vegas would surely bring significant interest from sponsors, fans, as well as media. Would be a good draw to international visitors.


Colorado Ski Season– Ski season is officially starting in Colorado with the opening of Arapahoe Basin. Some skiers were lined up before dawn on Friday to make turns on the single intermediate tail opening at 9 a.m. A-Basin began making snow Oct. 2 and, over the course of several days, created the 18-inch base necessary for opening. The ski area also received about a foot of natural snow in the past several weeks. Vail Resorts says Keystone plans to open on Oct. 31. Breckenridge will follow on Nov. 7, Vail on Nov. 21 and Beaver Creek on Nov. 26.

Takeaway: Let it snow!


Hedgeye Macro Team remains negative 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 bottoms up slowing in Europe 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 F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


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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Bears Bounce

Client Talking Points


We see way too much single factor (price momentum vs. a moving average) commentary about markets relative to what’s happening on a basic multi-factor (price, volume, volatility) basis; on the SPX “bounce” Friday (Russell was down on the day), Total U.S. Equity Market Volume was -11% vs. it’s 1 month average; that’s bearish.


From a front month VIX perspective it’s important to realize where we just came from. At 1208 Russell on July 7th, the VIX = 10.32. As of Friday’s close (21.99), the VIX is +113% from there and +60.3% year-to-date, making higher-highs vs. all of 2013-2014 earlier in the week. This is a phase transition. No resistance to 28.92.


FTSE, DAX, MIB, CAC, etc. -0.7-0.9% = no follow through from the no-volume late-week bounce there either; what is the catalyst for European Equities? If it’s economic gravity (slope of the line in all European growth data slowing), that’s bad – and we think the follow through to U.S. Equities with European businesses will be too.

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).


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


GOLD: after a rock solid week of +1.4%, up another +0.2% this morning to +3% YTD vs Russell -7%



Never go to a fight you are invited to.

-Jim Chanos


IBM Q3 revenue of $22.4 billion was the lowest since Q1 2009, consensus estimate was $23.37 billion.


Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. Our analysis of the "bounce" in DM Equities reaffirms our view that the path of least resistance in this primary asset class is lower (in PRICE terms)  
  2. In our never-ending search to disconfirming evidence to analyze, TACRM is picking up on some very nascent signs of bottoming inflation expectations


Best of luck out there,


Darius Dale

Associate: Macro Team

Deflation's Good Fortune

This note was originally published at 8am on October 06, 2014 for Hedgeye subscribers.

“See your disappointments as good fortune – one plan’s deflation is another’s inflation.”

-Jean Cocteau


After another tough week of #bubbles popping in the US stock market, there was some good fortune in being long bonds!

Deflation's Good Fortune - Super TLT cartoon 10 01 2014


Back to the Global Macro Grind…


Golf clap for the no-volume bounce to lower-highs in US Equities on Friday. Is it just me, or was there some irony in the US government printing a rosy picture of jobs in America on the last employment report before the mid-term elections?


The thing about conspiracy theories is that sometimes they are true. Regardless, the lagging of lagging economic indicators (the US unemployment rate) can now only go one way from here – up. That’s a good thing, if you are long the long end of the bond market.


With mostly everything Global Equities and Commodities deflating last week, here’s what long-term Treasuries looked like:


1. US Treasury 10yr yield down another -9 basis points week-over-week

2. US Treasury 10yr yield now down -59 basis points, or -19.5%, for 2014 YTD

3. Total Return of the iShares 20yr Bond Fund (TLT) +18% (vs. Russell 2000 -5.1% YTD)


The other disappointing thing that happens when the long-end of the curve (bond yields) falls is that this thing called the Yield Spread compresses. Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield). That compressed another 8 basis points to +188bps wide (-77 basis points YTD).


Both Yield Spread and the Long-end of The Curve are leading indicators for the rate of change in US economic growth. Whereas things like non-farm payrolls and the unemployment rate are what we call lagging indicators.


“So”, if you’re a cyclical investor like me, you want to be shorting what we call “early cycle slowdown” (and/or #bubble) stocks and commodities at the end of an economic cycle (i.e. when the lagging indicators look good). And you want to be re-allocating your capital to cash and bonds all the while.


Back to the deflations in stocks last week – it was a global affair:


1. Russell 2000 deflated for the 5th week in a row, -1.3% to -5.1% YTD

2. SP500 deflated for the 2nd week in a row, -0.8% to +6.5% YTD

3. European stocks (EuroStoxx600) were down another -2.1% to +2.1% YTD

4. Emerging Market Equities (MSCI) were -2.6% to down -0.5% YTD

5. Russian stocks continued to crash, -5.5% on the week to -24.3% YTD


I know – what could possibly go wrong…


If we look one layer underneath the crust of the US equity market selloff, in S&P Sector Style terms here’s what happened:


1. Energy stocks (XLE) got slammed another -4.1% on the week to DOWN now for the YTD (-0.4%)

2. Basic Material stocks (XLB) deflated -3.9% on the week to +4.8% YTD

3. Consumer Staples stocks (XLP) outperformed, closing +0.8% on the week to +5.7% YTD


Unlike the first half of 2014 (when the Hedgeye GIP Model had us in #Quad3, where inflation was accelerating and growth slowing), the 2nd half has us in #Quad4 where both growth and inflation are slowing. That’s bad for commodities and their commodity linked equities and good for Consumer Staples.


With the US Dollar up another +1.2% last week, here’s what happened to commodities:


1. CRB Commodities Index -1.4% on the week to down that much now for the YTD

2. Oil (WTI crude) was down -4.1% on the week to -3.9% YTD

3. Gold dropped another -1.9% on the week to -1.1% YTD


No, being long Gold isn’t as bad as being long the small cap US equity #bubble. But it was deflating nevertheless.


The thing about the deflation becoming a good thing for the consumer spirit inflating is that it comes on a lag too. Coffee and cattle prices were up +11% and +4%, respectively, last week (they’re +72% and +43% YTD, respectively!) so don’t expect to get a price cut at Starbucks or Chipotle any time soon.


Fully loaded with rent at all time highs (anyone get a rent reduction due to REIT deflation last week?) and real wages sucking wind (oh, that was in the jobs report too), that’s the real problem with US GDP – almost 2/3 of the country is already in an early cycle recession.


But both the Russell and the 10yr UST yield already signaled that to you, so you don’t have to be disappointed. This is our market life. It’s cyclical too. And our good fortunes are best inflated by allowing markets to help us looking forward, not in the rear-view.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.39-2.50%

SPX 1938-1980

RUT 1081-1132

DAX 9181-9489

VIX 13.34-17.31

USD 84.71-86.89

EUR/USD 1.25-1.28

Pound 1.59-1.62

WTIC Oil 89.13-93.14

NatGas 3.81-4.19

Gold 1185-1235

Copper 2.98-3.06


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Deflation's Good Fortune - 10.06.14 Deflating Bubbles

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