Takeaway: Slow and steady wins the race. That's the characterization of the labor market right now. We continue to watch for any negatives.


The main takeaways from this week's labor report are that the trend of sub-300k claims persists, further reducing the slack in the labor market. While the y/y rate of change is slowing, this is to be expected as that series will naturally converge toward zero since 300k is the frictional bottom for claims. In other words, the data is strong and consistent even thought the rate of positive change is slowing. What we're more interested in, at this point, is any signs of an unfavorable inflection. If the rate of change begins to turn positive (i.e. rising claims) or materially diverges from the trendline then all (long) bets are off. 




The Data

Prior to revision, initial jobless claims fell 16k to 297k from 313k WoW, as the prior week's number was revised up by 1k to 314k.


The headline (unrevised) number shows claims were lower by 17k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 299k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.8%





















Yield Spreads

The 2-10 spread fell 0 basis points WoW to 172 bps. 4Q14TD, the 2-10 spread is averaging 183 bps, which is lower by -16 bps relative to 3Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Retail Callouts (12/4): PVH, DG, GIL, WMT, TGT, COH

Takeaway: PVH - 15x earnings with limited top-line growth potential doesn't get us excited. DG lose/lose. WMT stat supports need for physical stores.



PVH - 3Q14 Earnings


Takeaway: PVH turned a 1% top line miss into a 3% EPS beat, but guidance for the balance of the fiscal year leaves a lot to be desired. The $0.08 beat with the $0.10 guide down for the year translates to a $0.18 guide down on the top end of guidance for the fourth quarter. A few quick takeaways. 1) This is the 5th straight quarter where PVH has underperformed on the top line. Excluding the Bass divestiture, the top line slowed 200bps sequentially on the 1 yr and 570bps on the 2yr. Comparisons get easier (again) into the 4th quarter and guidance looks doable even with the currency headwind. But, over a slightly longer duration we have a hard time getting to the Street's numbers which call for 6% growth per annum. 2) Manny made his traditional post-earnings CNBC shop and touted how healthy the company's inventory position was. By our math, the sales/inventory spread was -8%. That's in stark contrast to the company's rhetoric.  3) Reduced interest expense and tax rate drove the 11% earnings growth in the quarter. We're cognizant of the fact that debt reduction alone will drive 3% to 4% of earnings growth. But that's not a reason for us to get excited about owning a name at 15x earnings with limited top line growth prospects when we're at the tail end of a margin cycle for its wholesale distribution channel.

Retail Callouts (12/4): PVH, DG, GIL, WMT, TGT, COH - 12 4 chart1



DG - 3Q14 Earnings


Takeaway: We'll take the FDO commentary to mean that the current 11.6x EBITDA bid isn't enough and the final offer will be closer to $80 or about 13x. When a company is looking to pay that much for such a poor quality asset, we need to really ask ourselves about the prospects management sees in its core. On the other side of that - the stock is up 14% since the bid for FDO was announced in mid-August and Dreiling committed to push off his retirement. Clearly, the Street thinks that there's some merit to DG buying FDO -- even at a higher price. We'll take the other side of that.  We still think that with DG, if it wins the FDO bid, then shareholders lose. If it loses, then the stock retraces closer to where it was before the bidding war began.



GIL - 4Q14 Earnings


Takeaway: We don't have an opinion on GIL's stock right now, but are not particularly surprised by today's disappointment. Interesting as well to see the company change up its reporting structure. Companies usually don't do that when they want to improve transparency over the near-term.  It will take a lot more than a 12% sell-off for us to get interested in this name on the long side.

Retail Callouts (12/4): PVH, DG, GIL, WMT, TGT, COH - 12 4 chart2



WMT - Report: Wal-Mart CEO says 10% of mobile orders are in-store



Takeaway: This is simply a fascinating statistic. It shows how e-commerce and brick & mortar is inextricably linked. We maintain our view that this will cause many retailers to hang on to stores that they would otherwise close due to weak productivity. Not a good margin event.





TGT - Debit, credit issues temporarily affect Target stores Canada-wide



"Customers at Target stores in Canada could only pay with cash for about 90 minutes Tuesday afternoon due to a problem with the retailers main card processor."


COH - Coach May Spend Big to Acquire Stuart Weitzman



WMT - Walmart Canada Extends Store Hours for the Holiday Season



U.K. Targets Tech Firms With ‘Google Tax’



Vineyard Vines Docks on Upper East Side



"The store had a soft opening before Thanksgiving and so far, sales are exceeding expectations. They declined to provide a volume projection for the unit, which had its grand opening on Wednesday night."


SPLS - Staples Announces Staples Exchange, Bringing More Products and Services to Customers



"Staples  announced the roll-out of Staples Exchange, a world-class platform that makes it easy for suppliers to offer products to Staples customers."

"Staples Exchange is a unified platform that allows vendors to sell through all of Staples’ e-commerce channels, with multiple integration options. Unlike other retailers, Staples does not require vendors to use a third party that charges integration fees, instead giving them a single portal to enroll with all of Staples’ sites, like, and coming in 2015, Staples Advantage, Staples Canada and"

Keith's Macro Notebook 12/4: Euro | Yen | Oil

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LEISURE LETTER (12/04/2014)

Tickers:  IGT, MGM, HLT, HST, CCL


  • Dec 4: Normua Investment Forum - MPEL, WYNN & Genting Singapore
  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 8: Golden Nugget Lake Charles Opening?
  • Dec 12: Trump Taj Mahal Closing
  • Dec 14: City of Dreams Manila soft opening
  • Dec 17: Upstate NY Casino Decision

Today's Headline Story

Mainland China Official: Macau Too Reliant on Gambling– Li Fei, deputy secretary general of the National People’s Congress Standing Committee, on Wednesday said the Macau SAR government should address its over reliance on the gaming industry and to put more effort into economic diversification and take into account the interests of mainland China. Mr Li, who is also chairman of the Basic Law Committee, was in Macau on Wednesday to take part in a seminar on Macau’s Basic Law, which came into effect following the city’s handover from Portuguese administration in 1999. 

Article HERE

Takeaway:  We have heard similar comments from the Chinese government in the past but we expect more discussion on this particularly in the face of declining GGR.


GENS.SP – Genting Singapore today repurchased 12 million shares (35.3% of today's trading volume) for S$13.338 million. Cumulative shares repurchased year-to-date = 109,665,000.  Following today's share repurchase, the total shares outstanding = 12,123,371,480.

Article HERE

Takeaway:  Thus far, Genting has completed 8.9% of the total authorized shares.  They are authorized to purchase up to 10% of ordinary shares.


IGT & GTK.IM – The merger of the two companies could increase NewCo's EBITDA by as much as $280 million. In an IGT filing on behalf of GTech to Nasdaq in New York, management said “industrial efficiencies” could have a positive EBITDA impact of US$85 million; with “overlapping corporate activities” accounting for a US$125 million positive impact; and a further US$20 million improvement from “optimized” research and development spending. GTech added that what it called “natural revenue enhancements” from sales in Italy – GTech’s home base – plus benefits from cross selling and “mobile exploitation” could produce a further US$50 million positive impact on EBITDA.

Article HERE

Takeaway: It's good to be optimistic on revenue and cost synergies. 


MGM – MGM Resorts International asks Obama Administration to proceed with caution before granting federal recognition to Pamunkey Native American tribe of Virginia.

Article HERE

Takeaway: MGM seeking to prevent potential competition from a Native American casino at its MGM National Harbor project under development.


HLT – welcomed The Franklin Hotel Chapel Hill to its growing global brand, Curio – A Collection by Hilton. Selected for its strong connection to the community and tradition of excellence among guests, The Franklin Hotel Chapel Hill offers travelers the local discovery and authentic travel experiences at the core of the Curio brand.


HST - authorized a regular quarterly cash dividend of $0.20 per share and a special dividend of $0.06 per share on the Company's common stock.  The total dividend of $0.26 per common share is payable on January 15, 2015 to stockholders of record on December 31, 2014.

Takeaway: HST had mentioned on its 3Q call that a special dividend was possible in 4Q.

CCL – Princess Cruises is celebrating 50 years of cruising and kicking off its Wave season with the cruise line's biggest sale ever featuring savings on vacation destinations around the globe. Guests can save up to $500 per person on all cruise vacations seven days and longer, sailing between May and December 2015. In addition to these special savings, guests will enjoy free dining for two at one of the line's specialty restaurants and receive up to $200 per stateroom of free onboard credit to be spent as they wish, including on commemorative 50th anniversary keepsakes, a rejuvenating massage at the Lotus Spa, or an in-depth cultural experience on a Princess shore excursion.


Guests can also bring along friends and family and save up to 50% on third and fourth guests in a stateroom. They can additionally reserve their cruise with a reduced, refundable deposit of only $100 per person.

Takeaway:  Wave Season promotions are generally early this year.


Virgin Cruises – the Branson family- owned branded investment group, today announced the formation of Virgin Cruises, its new cruise line business, as well as the appointment of a CEO and its lead investment partner, Bain Capital.  
Proven industry leader Tom McAlpin will join Virgin Cruises as CEO and will head the management team. Most recently, Tom has been President and CEO of The World, Residences at Sea. Tom also served as President of Disney Cruise Line having joined as part of the founding management team. 
Virgin Cruises will be headquartered in the Miami/Fort Lauderdale area and plans to design and construct two new world class cruise ships.

Article HERE


Jeju - Jeju's casinos have opened offices in China to tout for gamblers there. One agent has organized 53 gambling trips to Jeju for Chinese gamblers over the last 2 years. In some instances, Chinese tourists have turned to loan sharks on the resort island, have their passports confiscated and commit suicide when their luck refuses to turn.

Article HERE

Takeaway:  The gaming world is becoming more sensitive to negative media articles. This time, it's South Korea.

Macau International Airport Traffic +9.5% in November – During November, passenger volume was recorded at over 450,000, +9.5% YoY. Aircraft movements posted over 4,600, an increase of 11.5% YoY from 4,400.

Article HERE

Takeaway: Strong airport traffic not translating into casino revenues. Some of the increased airport traffic could be MICE attendance. 


Macau Residential Real Estate Prices Drop 10% – A slump in gaming revenue, the mainland crackdown on corruption and competition from nearby Hengqin Island in Zhuhai have combined to drive home prices in Macau down 10%, and the fall is expected to extend into the new year, according to property agents. 

Article HERE


Hong Kong-Macau Organized Crime Crackdown – A joint crackdown organized by police in Guangdong Province, Hong Kong and Macau has busted 38 cross-border criminal gangs, Guangdong police said. The crackdown focused on guns, drugs, prostitution, money laundering and illegal border crossings, said Lin Weixiong, director of the criminal investigation bureau of Guangdong Pubic Security Department. Over 470 suspects have been arrested in the joint operation, Guangdong police said. More than 180 guns and one ton of drugs were found.

Article HERE

Takeaway: Mainland China cleaning up both Hong Kong and Macau.


Blackstone Group Closer to Closing The Cosmopolitan Acquisition – Yesterday the Nevada Gaming Control Board recommended that Blackstone Group be licensed to acquire the 4-year-old Strip hotel-casino. The Nevada Gaming Commission will take up the matter on Dec. 18. Blackstone representatives told the Control Board it planned to make changes at The Cosmopolitan, including adding another restaurant and renovating areas of the casino to improve revenue. The Cosmopolitan’s Strip frontage may get a new look.

Article HERE


Clark County Nevada Class A Slot Machine License Amended – Clark County commissioners on Wednesday approved regulations affecting slot machine operations in taverns. The new ordinance requires taverns to operate a full-service kitchen and embed more than half of the location’s slot machines into a bar top. If that requirement isn’t accomplished, the taverns must show that slot machine revenue is 50% or less than other revenue. If a tavern is unable to accomplish at least one of those requirements, it must reduce the number of slot machines from 15 to seven. The ordinance is effective immediately for future tavern applicants.

Article HERE


European Low Cost Airline Results Strong But Outlook Uncertain – Ryanair raised its profit forecast for the second time in a month on Thursday after passenger numbers jumped 22% in November. Ryanair said that despite increasing its seat capacity by 13% during November, as a result of opening new routes designed to appeal to business customers, it also increased its load factor by 7% to 88%.  However, the company also indicate its final full-year profit would still be heavily reliant on bookings and fare yields in the January-March quarter over which it said it "presently has very little visibility".

Article HERE


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.


BABA: Model Facing Secular Pressure

Takeaway: We expect a weaker consumer to pressure GMV growth; turning one of BABA's core growth drivers into a secular headwind.


  1. GMV DRIVES BABA’S MODEL: Marketing & Commissions represent ~80% of BABA’s revenues.  Both are driven off its GMV, which we expect to decline precipitously through F2017 as weaker consumer pressure average spending.  See link below for more detail. 
  2. MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  The bigger issue is Marketing Revenues (~60% of total), which is facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We’re already seeing this in BABA’s financials today.


Below is a quick review of BABA’s core segments and drivers.  In short, GMV drives roughly 80% of its model.

BABA: Model Facing Secular Pressure - BABA   GMV Model Impact 

  • Marketing Revenues (~56% of total): sourced from vendors on BABA’s sites advertising to BABA’s consumers, vying their GMV.  Roughly 75% of BABA’s marketing revenues come from P4P ads, which require users to click the ads for BABA to get paid.  BABA’s ad prices are determined through on online auction platform, which means its vendors set the price based on expected ROI.  In short, the same factors that drive GMV also drive its marketing revenues. 
  • Commission revenues (~23% of total): generated as a percentage of the GMV transacted on its Tmall platform specifically settled through Alipay (BABA’s equivalent to Paypal).  The commission rate ranges between 0.3% and 5.0%. 

We expect GMV to decline precipitously through F2017.  The key theme is that user growth will come from a much weaker consumer who can’t afford to spend as much.  In turn, GMV will grow at a disproportionately lower rate than user growth since average spending/GMV will be on the decline; reversing what was a considerable tailwind into a headwind.  We detailed our GMV analysis in the note below. 


BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]



model facing secular pressure

Naturally, slowing GMV bodes poorly for commissions.  The bigger issue is BABA’s Marketing revenues (~56% of total).  Our concern here is secular pricing pressure.  BABA’s new user growth will come from less-affluent consumers who must be more selective with their purchases.  Ultimately, that means that a vendor’s advertising ROI will decline as ad conversions (transactions) are inhibited by the average user’s waning ability to spend on its platform (as measured by average GMV). 


In essence, the value of advertising on BABA’s platforms is directly linked to its average GMV, which we expect to decline through F2017, pressuring ad rates along the way.  We already saw signs of this in its F1Q15 quarter ending 6/30/14 (comparable data isn't available for its most recent quarter).  BABA attributed the F1Q15 decline in cost-per-click to a higher proportion of mobile marketing services, "for which our vendors currently pay a lower cost-per-click"  


 BABA: Model Facing Secular Pressure - BABA   P4P pressure 2



BABA’s ad prices are determined through on online auction platform, which means its vendors set the price. We suspect the reason why mobile rates are lower is because mobile is the low-cost vehicle for internet access in China.  Put another way, mobile is how China’s less affluent access the internet.  BABA’s reported metrics suggest as much, given that its mobile users spend less on average (mobile represents the majority of its shoppers, yet the minority of its GMV).


BABA: Model Facing Secular Pressure - BABA   Mobile vs Total


Mobile will likely remain the primary source of both new internet users and new BABA shoppers moving forward.  New user growth will come a progressively weaker consumer moving forward; meaning the pricing pressure that BABA is already seeing in its marketing business is actually as secular headwind.




See the link below for a broader summary of our thesis.  Let us know if you have any question or would like to discuss in more detail.  


BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

[click here] 


Hesham Shaaban, CFA




Takeaway: In today's Macro Playbook, we show how central bank-induced asset price inflation is a MAJOR headwind to the active management industry.


Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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



So Easy An ETF Can Do It: Since the end of October, one of the topics we’ve been hitting on fairly consistently is the slow-but-steady share shift away from active management in favor of passive management. From our perspective, this trend is primarily a function of incessant central bank intervention in markets, which tends to depress both the variance and volatility needed for active managers to outperform their benchmarks and justify their fees (click HERE and HERE for more details). Well, unfortunately for everyone involved (including us), recent data is supportive of this trend.




Per Jonathan Casteleyn of our financials team this AM: “In the most recent 5 day period, mutual fund activity was subdued with investors continuing to prefer exchange traded funds. All ETFs took in over +$12.7 billion (both fixed income and equity) versus the total take for all mutual fund products at  just +$1.5 billion. Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds (with $122 billion netted by equity ETFs versus just $47 billion inserted into equity mutual funds).” To the extent you’d like to review his weekly deep dives on fund flows and their associated investment implications, please reply to this email and we’ll get you squared away with that...




Moving along, recent performance data also supports a continuation of the aforementioned trend. On the equity mutual fund side, only 9.3% of active managers are beating their benchmarks per Wharton Research Data Services; the previous annual low was 12.9% in 1995. On the equity hedge fund side, the YTD performance of the HFRX Equity Hedge Index is a mere +197bps, which remains on pace for the third-worst annual return ever (2008 and 2011). Again, the value proposition for active managers is being dramatically reduced amid central bank-induced asset price inflation, calling into question the perverse nature of investors broadly cheering on #GrowthSlowing data.


THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return




***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: Golden Headfakes (12/2)


#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.


QE Conundrums – Draghi’s Misguided Intervention? (11/26)


#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.

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