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We Think a Coming Fed #FreakOut Sends Yields Lower

Editor's note: This is a brief excerpt from Hedgeye morning research. To learn more about becoming a subscriber click here.


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Right now, the market is still positioned net SHORT -128,000 contracts (net futures and options positions) in the 10YR treasury bond market. In other words, bond bears are getting royally creamed as the 10YR crashes alongside growth and inflation expectations.




As of this morning, the 10YR yield is down -26% year-to-date to 2.25%. That’s called a #Crash. Our immediate-term level of short-term support is 2.22%.


On a related note, the Yield Spread has compressed to 173bps. That’s the lowest of 2014. And yes, it is a bearish growth signal.


For the record, we still think yields go lower as the Fed freaks about #deflation in Q1 of 2015.


We Think a Coming Fed #FreakOut Sends Yields Lower - 111

LEISURE LETTER (11/26/2014)

Tickers:  HLT, NCLH, CCL


  • Dec 1:  8:30 am  IKGH Q3 earnings
  • Dec 2: 11 am ISLE Q2 2015 earnings
  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 12: Trump Taj Mahal Closing
  • Dec 17:  Upstate NY casino decision


TCG.LN – Thomas Cook offered a less optimistic outlook for its forward bookings for 2015.  Winter bookings are now expected to be down 2%. However, Thomas Cook is more encouraged about its Summer 2015 booking cycle, led by its UK business (UK: bookings up 8%, prices +1%). Thomas Cook also announced that its CEO, Harriet Green, has stepped down from the business and will be replaced by COO, Peter Fankhauser, who will take over with immediate effect.


LEISURE LETTER (11/26/2014) - ww

Takeaway:  Thomas Cook's lowered outlook is an indication of weaker demand leisure trends in Europe particularly in the next 3-6 months. It seems that the UK, and only the UK, is leading the growth in Europe. This news does not bode well for the European business for the cruisers and lodgers in the near-term.   

HLT – Hilton Worldwide Middle East and Africa has launched its annual Winter Sale, offering travelers an opportunity to save up to 33% on their stays throughout 2015.


HLT – The Maui Lu Resort, a hotel development in Hawaii, sold to Japan-based Capbridge Group for an estimated $60 million. Once complete, the property will become a Hilton Grand Vacations Timeshare with 388 vacation villas on a 28-acre property. Capbridge Group, which announced plans to buy the property in October, will tackle the final development phase in 2015. The property will come online in 2017.

Article HERE

Takeaway: Hilton Hotels continuing to pursue a capital light timeshare strategy.


NCLH – announced an agreement with Princess Cruises, Ltd. to purchase the 684-passenger ship Ocean Princess for its newly acquired Oceania Cruises brand. The new addition will be named Sirena. Upon delivery in March 2016, Sirena will immediately undergo a 35-day, $40 million refurbishment in Marseille, France to elevate the ship to the Oceania Cruises' standard of elegance. The ship will welcome her first guests in late April 2016. 

Takeaway:  NCL paid $82m for the 15-yr old Ocean Princess or ~$120k per berth.  Including the $40m investment in Ocean Princess, that translates to $178k per berth. For comparability, the recently launched Regal Princess cost ~$201k per berth and the NCL Escape/Bliss cost $225k per berth. From Norwegian's perspective, they remain committed to growth and buying this older ship may generate a higher ROIC than if they built a new one.


CCL – When ms Koningsdam debuts in 2016, the ship will feature Holland America Line's first-ever purpose-built staterooms for families as well as single staterooms among its 1,331 guest accommodations (total capacity is 2,650). In addition, many familiar stateroom categories such as Neptune, Signature and Vista suites will be available in a wider range of sizes and different configurations to choose from.

Article HERE


CCL Princess Thanksgiving Cyber Week Sale 

Guests can save up to 50% off short cruise Getaways and weekend cruise vacations and bring along their friends and family with third and fourth guests as low as $50 per person. In addition to low fares, guests can book their stateroom with deposits of only $1 per person for getaway cruises shorter than five days.


Mainland Corruption Crackdown, Tycoons in Hiding – Many Mainland Chinese tycoons are hiding out at the five-star Four Seasons in Hong Kong to avoid being investigated or questioned by officials as part of China's anti-corruption campaign. While in residence, the tycoons turned guests are kept informed of the progress of their graft cases by visitors from the mainland. 

Article HERE

Takeaway: A clear indication that business people are taking the corruption seriously. 


Macau Urged to Diversify Its Investment Away From China – The 2003 winner of the Nobel Prize in Economics Robert F. Engle advised Macau Government Officials to invest more money abroad in order to diversify its investment portfolio. “If the biggest risk to the Macau economy is the Chinese economy, then you do not want to invest all your money in the Chinese economy. You should invest in other assets around the world”, he said. According to Mr. Engle, such investment strategy would have limited impact but would make the Macau economy more resilient against downturns in the Chinese economy.

Article HERE


The King of Gambling Celebrated 93rd Birthday – Macau casino mogul Stanley Ho Hung Sun celebrated his 93rd birthday on Tuesday. Mr Ho and members of his family celebrated by giving HKD2 million (US$258,000) to the Community Chest of Hong Kong charity fund. 

Article HERE

Macau MICE Booming – The latest data from the Statistics and Census Service indicates 240 MICE events were held in 3Q 2014, an increase of 14 events versus the same period last year.  Receipts from these exhibitions exceeded MOP37 million (US$4.6 million) in the quarter, up 81% compared to MOP21 million in receipts during the same period last year. During 3Q 2014, the total number of participants and attendees to MICE events reached 724,800, up 16% compared to the same period of last year. Some 214 of the total events, or almost 90%, were meetings, which nevertheless only attracted 4% of total participants and attendees. The other 96%, totaling 695,456 individuals, joined the 26 exhibitions instead. 

Article HERE

Takeaway: Non-gaming is certainly doing better than gaming in Macau.


Hengqin Residential Sales Increasing – Over the last month, the pre-sale of apartments planned in Hengqin have been gaining in popularity. According to a local sales data, more than two hundred pre-development flats sold out within three weeks. Sales data indicates, about 70% to 80% of buyers are local residents, and most of them are young people below the age of 30.

Article HERE

Takeaway: Newly developed, larger flats at a lower price with better air quality and a shorter commute making Hengqin Island real estate more appealing for workers commuting to Cotai than the Macau peninsula.


Mainland China Crackdown on Indoor Smoking – China is considering fining smokers who light up indoors as much as 500 yuan (USD81) and penalizing operators who don’t stop them, a sign of rising political willingness to curb an industry that brings in billions in tax revenue. If implemented, the changes would mark a reversal in the world’s most populous country, which so far hasn’t succeeded in eliminating smoking in public indoor places such as bars and restaurants. China is home to about 300 million tobacco users, and cheap cigarettes are often exchanged as a social courtesy – almost like a handshake. Surging health-care costs are now forcing China to follow other parts of the world in restricting such public smoking.

Article HERE

Takeaway: Smoking-related matters is getting more attention in China too


Foxwoods Casino to Shrink– Foxwoods Casino, the largest casino resort in North America, is getting rid of 1,000 slots and 120 table games to free up space for nightclubs and other new attractions as it adapts to fierce competition.  

Article HERE

Takeaway: Similar to the the Las Vegas Strip properties, Foxwoods is now looking to stronger food and beverage offerings as a way to drive revenues.   


UK Hotel Chains Listed – KSL Capital Partners, a private equity firm based in Denver, Colorado, has appointed the investment bank UBS to conduct a full review of strategic options for Malmaison Group including Malmaison Hotels and Hotel du Vin Hotels. KSL acquired Malmaison for £200m takeover in March 2013.  Malmaison operates 13 hotels throughout the United Kingdom with a brand premise of "Hotels that dare to be different".  While Hotel du Vin is a luxury boutique hotel chain that has fifteen hotels throughout the United Kingdom.

Article HERE

Takeaway: Might Starwood Capital be interested?




Macau inflation increased by 6.18% YoY and 0.49% MoM.


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:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 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.

Keith's Macro Notebook 11/26: Oil | UST 10YR | Sentiment

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Takeaway: We juxtapose recent strength in consumer stocks w/ our "early-cycle slowdown" thesis and what we need to see more of to turn bullish.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)




  • Early Cycle Strength Percolating: One of the reasons we refresh our Tactical Asset Class Rotation Model (TACRM) daily is to force ourselves to analyze market signals that may or may not be supportive of our active macro themes. Today is one of those days. Specifically, at #4, #5 and #6 respectively, Large-Cap Consumer Discretionary (XLY), Retailers (XRT) and Homebuilders (ITB) have each crept into the top-10 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe as defined by TACRM (~200 ETFs in aggregate). Recall that our VAMDMI metric is a proprietary measure of momentum that is specific to TACRM and is designed to front-run [non-linear] regime changes across macro markets (CLICK HERE for more details). On this score, early cycle consumer stocks have clearly broken out to the upside ahead of a bullish #Quad1 setup in 1Q15.
  • Housing Is Supportive of the Bullish #Quad1 Narrative: Recall that our Macro Team has been marginally positive on housing since November 5th (when we closed our ITB short) and emerging trends in the data continue to support this directionally bullish shift: “INFLECTION INSPECTION |  FLEDGLING STABILIZATION IN HPI” (11/25), “EXISTING HOME SALES – EMERGENT MOJO, DAY 3” (11/20) and “STARTS & APPS – MORE POSITIVE HOUSING DATA TURNING THE TABLE GREENER” (11/19).
  • Deflation Is Supportive Too: In addition to this bullish impetus provided by the housing sector, we continue to record a healthy amount of deflation in the median consumer’s “core” PnL. Specifically, rent (20.9% of median consumer PCE), food (11.5% of median consumer PCE), utilities (8.3% of median consumer PCE) and gasoline (6.4% of median consumer PCE) have all deflated from their YTD and/or all-time highs at -1.3% (1Q), -13.3% (MAY), -1.7% (OCT) and -24% (APR), respectively. On a weighted basis – both relative to each other and to their cumulative share of total PCE – the median consumer has received a cumulative tax cut worth about -360bps of aggregate expenditures. Arguably more impressively, our proprietary Consumer Squeeze Index is now registering seven consecutive months of sequential deflation – the longest streak since at least the start of 2007!
  • Do NOT Buy Early-Cycle Stocks Up Here, However!: Obviously with housing turning the corner, on the margin, and the consumer continuing to receive a #StrongDollar tax cut, our research focus is slowly but surely shifting to a likely [bullish] #Quad1 setup in 1Q15. That being said, however, we still have 5-6 weeks of [bearish] #Quad4 to get through first! While it's easy to assume that missing this Centrally Planned rally off the mid-October lows is cognitively preventing us from getting bullish on early cycle stocks up here, we can assure you that our refusal to participate in this market at the current juncture is purely a function of process. Neither sentiment, nor consumption data are supportive of capitulating on the bearish side today. As such, we will continue to patiently wait for an opportunity to buy early-cycle stocks [much] lower in the coming weeks. This call is also supported by our industry “axe” Brian McGough, who thinks the recent strength in consumer stocks is largely a function of misguided bullish sentiment surrounding Black Friday. As alluded to above, however, time is indeed running out for our bearish “early-cycle slowdown” thesis. IT'S GAME TIME, BABY!














***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Uber Bullish! (11/26)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Top Ten Reasons to Stay Short the Euro (11/5)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges, Hedgeye's proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published November 26, 2014. Click here to learn more and subscribe.

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BABA: What the Street is Missing

Takeaway: China’s Elite drives BABA’s GMV. BABA's user growth moving forward will come from a much weaker consumer; a double-edged sword for its GMV.


We hosted a call last week laying out our BEAR case on BABA, and the key metric we're tracking to time the short opportunity (contact us for the deck and replay).  We're going to publish a series of short notes detailing the salient points from the call.  This is the first, and maybe the most important.



  1. CHINA’S ELITE DRIVES BABA’S GMV: Both GMV/Active Buyer (average spend) and its cohort commentary suggest China’s upper class drives its GMV.  After comparing these metrics to China consumer demographic data, there is no other plausible explanation.
  2. GROWTH WILL COME AT A PRICENew BABA consumers will have considerably less funds to spend.  In turn, user growth will pressure BABA’s average GMV; turning what was a growth driver into a headwind, and leading to a sharp deceleration in GMV growth through F2017.  Note that ~85% of BABA’s revenues are linked to its GMV.



The average consumer on BABA’s China Retail sites spends roughly ¥6.5K annually (~USD $1.1K).  In the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  In short, BABA’s GMV would be a prohibitively large amount for most consumers in China; especially since BABA can’t sell’s everything.   


BABA: What the Street is Missing - BABA   China s Elite

BABA: What the Street is Missing - BABA   Can t Sell Everything


The other thing to consider is BABA’s cohort commentary on its F2Q15 earnings call, which we have pasted below. 


BABA F2Q15 Earnings Call (Maggie Wu): “Let me share with you some color on this average spending per buyer. As I said that the longer customers stay with us, the more they're going to spend annually on our platform. I'll give you an example”

    • “The customer who stayed with us for a year's time, their average annual spending level is somewhere around RMB 1,000
    • “And for the ones who stayed with us for five years' time, their spending level is somewhere around RMB 15,000
    • “And then for the ones who stayed around 10 years, their levels is going to above RMB 30,000


The amounts spent by those on the platform for more than 5 years are just jaw-dropping when you consider the income distribution of China’s internet users.  If we compare these metrics to the first chart above, only 5% to 14% of China's internet population at most could afford to spend ¥15K-¥30K annually; let alone BABA's ¥6.5K average GMV. 



The obvious takeaway is that BABA’s GMV is currently hostage to the whims of its upper class consumers.  What’s more concerning is that GMV growth moving forward will be driven primarily by new consumers with considerably less to spend.  In turn, new user growth will come with disproportionately lower GMV growth since average GMV is facing decline; turning what was a growth driver into a headwind.


We illustrate this dynamic in our China GMV Market Model, which is driven by user growth and e-commerce spending projections (both by income cohort); the former being the more important driver.  As new lower-income consumers join the BABA platform, they will grow in proportion to BABA’s total users; driving down both average income and average spending of its user base. 


BABA: What the Street is Missing - BABA   GMV Model Penetration

BABA: What the Street is Missing - BABA   GMV Model growth


Note that roughly 85% of BABA’s revenues are linked to its GMV, which our model suggests is heading for sharply decelerating growth through F2017. 


We will be publishing a follow-up note with more detail on the impact of our GMV projections on BABA's business model.  In the interim, see link below for broader summary of our bearish thesis, or let us know if you would like to see our BABA deck.



BABA: Leaning Short, But...

10/21/14 07:02 AM EDT




Hesham Shaaban, CFA



the macro show

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