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McCullough: Why You Won't See Me In Barron's Any Time Soon

In this brief excerpt from today’s Institutional Morning Macro Call, Hedgeye CEO Keith McCullough discusses failed forecasts from Barron’s and the only catalyst for the long bond.


Cartoon of the Day: Red October...

Cartoon of the Day: Red October... - Russia cartoon 12.15.2014

"The risk that was developing in Russia has been crystal clear," Hedgeye's Keith McCullough tweeted earlier today. "It's nothing new." On a related note, the Russian stock market crash continues unabated... down another -5.7% #NoWorries right?

FLASHBACK: Hedgeye's Keith McCullough on #Russia Crash $RSX and the 'Worldwide Gong Show'

The Russian circus and its related market and economic implications has been looming large on Hedgeye CEO Keith McCullough's radar screen lately. Here's a quick recap from just two weeks ago in his daily Top-3 things morning look.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Monday Mashup: DRI, BLMN and More

Monday Mashup: DRI, BLMN and More - 1


Recent Notes

12/08/14 Monday Mashup: MCD, KKD and More

12/08/14 MCD: Weakest U.S. Comps in Over a Decade

12/08/14 SBUX: Will the Big Bet Pay Off?

12/08/14 Restaurant Sales, Traffic Dip in November

12/09/14 YUM: Hiccup Aids the Bull Case

12/12/14 Knapp Sales Weak, Reiterate Short DRI


Events This Week

Tuesday, December 16th

  • BLMN Analyst & Investor Day
  • PLAY Earnings Call 4:30pm EST
  • DRI Earnings Call 5pm EST


Chart of the Day

Live Cattle prices are up +20.5% YTD and +22.5% YoY.


Monday Mashup: DRI, BLMN and More - 2


Recent News Flow

This Morning

  • BOBE announced CEO Steve Davis has stepped down by mutual agreement with the board, effective immediately.  The board has established an interim office of the chief executive (CFO Mark Hood, BEF President Mike Townsley) to provide ongoing leadership and oversight while they search for a new CEO.
  • DRI was upgraded to market perform from underperform at Telsey Advisory Group with a $54 PT.
  • COSI announced completion of its previously announced right offering.  Cosi anticipates issuing 13.3 million common share for gross proceeds of $20 million.

Monday, December 8th

  • JMBA announced it has engaged Peak Franchise Capital to lead its refranchising efforts.  The company plans to refranchise up to 114 stores during 1H15, while simultaneously focusing on future growth initiatives as well as cost cuts.  Management believes it will achieve its target of at least 80%+ franchise-to-company owned stores in the next twelve months.
  • PLKI announced that Central Michigan will square off against Western Kentucky in the inaugural Popeyes Bahama Bowl.  The game, which will be played on December 24th at Thomas A. Robinson National Stadium in Nassau, will be nationally televised in the US on ESPN and will be broadcast on ESPN radio.  During the game, Popeyes will unveil its newest LTO.
  • BWLD launched the Million Dollar Bowl Pick'Em Challenge which will run through December 19th.  Guests are encouraged to visit the GameBreak gaming platform in restaurants, or on their mobile device/desktop, to pick winners of all 39 college football bowl games.  If a guest accurately predicts all 39 winners, they could win $1,000,000.
  • EAT announced Scarlett May has been named Senior VP, General Counsel, and Secretary of the company.  May most recently served as Senior VP, Chief Legal Officer, and Secretary for Ruby Tuesday.

Tuesday, December 9th

  • CAKE announced the opening of its two newest restaurants in Bay Shore, NY and Fort Worth, TX.  The restaurant in Bay Shore has an approximately 8,100 square-foot dining room that accommodates 210 guests, while the restaurant in Fort Worth has an approximately 8,700 square-foot dining room that accommodates 230 guests.
  • THI shareholders approved the transaction with BKW.  Upon close of the transaction, shares of Restaurant Brands International will trade on the NYSE and TSE under the symbol QSR.
  • YUM guided FY14 EPS growth in mid-single-digits versus prior guidance of 6-10%. It also guided to FY15 EPS growth of at least 10%, well below the 17% the street had been projecting.

Wednesday, December 10th

  • EAT was downgraded to hold from buy at Miller Tabak with a $59 PT.
  • COSI extended its rights offering deadline to December 12th.
  • MCD announced it will trim its menu by eight items in January and will cut the options for EVMs from the current 16 to 11.

Thursday, December 11th

  • GMCR announced it has renewed its partnership with Caribou Coffee through a new 10-yr agreement for the "manufacturing, marketing, distribution, and sale of Caribou Coffee in Keurig pack formats."  The companies will also begin offering Caribou Coffee in carafe formats for the Keurig 2.0 brewing system and Keurig Bolt carafe brewing system.
  • YUM dealReporter commented that 3G Capital could be considering a Yum! Brands takeover.
  • LOCO announced a new credit facility, closing on a new five-year $200 million senior secured credit facility that will replace its existing $205 million credit facility.  Upon completion of the refranchising, the company will have approximately $165 million of total debt outstanding.

Friday, December 12th

  • QSR Restaurant Brands International announced the successful completion of the Tim Hortons and Burger King transaction.

Sector Performance

The XLY (-2.1%) outperformed the SPX (-3.5%) last week.  In aggregate, casual dining stocks outperformed while quick service stocks underperformed the XLY.


Monday Mashup: DRI, BLMN and More - 3


Monday Mashup: DRI, BLMN and More - 4


XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.


Monday Mashup: DRI, BLMN and More - 5


Casual Dining Restaurants

Monday Mashup: DRI, BLMN and More - 6

Monday Mashup: DRI, BLMN and More - 7


Quick Service Restaurants

Monday Mashup: DRI, BLMN and More - 8

Monday Mashup: DRI, BLMN and More - 9



Howard Penney

Managing Director


Fred Masotta


LEISURE LETTER (12/15/2014)

Tickers:  MGM, PENN, WYNN, RCL


  • Dec 17:  Upstate NY Casino Decision
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

Chinese President Xi dates confirmed – Chinese President Xi Jinping is scheduled to attend a gathering in the Macao Special Administrative Region (SAR) on Dec. 19-20 for the 15th anniversary of Macao's return to the motherland, authorities said on Sunday.  Experts believe Xi's tour is expected to enhance cooperation between Macao and the mainland and guarantee that the great cause of "one country, two systems" can be passed on by generations to come.

Article HERE

Takeaway: We expect awful GGR numbers this coming week as high profile gamblers would not want to be seen in Macau during Xi's visit. 


MGM – There are major rumblings that The Light Group (TLG) reportedly has been booted from MGM Resorts properties in Las Vegas. While TLG still oversees, for the time being, Light nightclub and Daylight dayclub at Mandalay Bay, gone are its operating roles at 1 OAK in the Mirage, the Bank in Bellagio, Deuce Lounge, Gold Lounge and the new Alibi Lounge in Aria and more. A high-ranking MGM Resorts executive has ordered the move after recent sexual-harassment allegations and has decreed that the Hakkasan Group take over management.

Article HERE

Takeaway: We understand Hakkasan will now manage 20 Light Group venues in a transition that began more than two weeks ago.


PENN – The former Argosy Sioux City's operator has asked the Iowa Supreme Court to overturn a lower court ruling that upheld a series of state regulatory decisions that led to the gambling boat being replaced by the Hard Rock Hotel & Casino Sioux City. The Argosy operator, Belle of Sioux City, a subsidiary of Penn National Gaming Co., filed its notice of appeal with the Supreme Court on Friday. The notice sets in motion a lengthy appeal process that legal experts say could take more than a year to resolve.

Article HERE

Takeaway: When will shareholders begin to take notice PENN is spending shareholder capital on appeal after appeal after appeal, in hope of a sympathetic ear?


WYNN – Somerville filed a lawsuit last week against the state Gaming Commission, asking a state court judge to void the Wynn license. The city argues regulators should have disqualified the company or at least required it to abandon its proposed site after it became public that a convicted felon had a financial interest in the land deal, a violation of state law. Meanwhile, the gambling commission's staff last week disclosed it is conducting an inquiry after the Wall Street Journal reported that the IRS's Criminal Investigation Division requested information on Wynn's clients, domestic and overseas marketing offices and internal controls. The newspaper said federal authorities are probing whether the Las Vegas-based gambling giant violated money laundering laws.

Article HERE


RCL – announced it had refinanced its deal in place for Brilliance of the Seas by terminating the lease and buying the ship outright for $275 million. Royal Caribbean leased the ship when it was built back in July 2002 under a 25-year operating lease.  The move today eliminates that lease obligation by purchasing the ship. Royal Caribbean funded the purchase through drawings under their revolving credit facilities.  Royal Caribbean also indicated they will not recognize any gain or loss in connection with this refinancing deal.

Article HERE


RCL – Royal Caribbean is informing passengers set to embark on this week's Freedom of the Seas cruise that the ship, "is currently experiencing a small restriction on her top speed." As a result of the speed reduction, the ship will have to change the Eastern Caribbean itinerary.  The ship will skip a port call at the company's private island of CocoCay and reduce the time the ship will spend in St. Maarten. There is no word on what caused the propulsion problems.  Freedom of the Seas is scheduled for a dry dock session in January 2015. Royal Caribbean is also giving all passengers an undisclosed amount of onboard credit.  A letter with the credit amount will be delivered to each stateroom.

Article HERE


Neptune's Cheung More Details – As Beijing's crackdown on corruption continues, top figures in Macau's casino junket sector are coming under scrutiny ahead of a visit to the city later this week by President Xi Jinping. After a week in which the starkest warnings yet were delivered by senior mainland figures that Macau must move away from its over-reliance on gaming revenues, it has emerged that Hong Kong police have frozen the assets of key casino junket operator Cheung Chi-tai.  Cheung - who was alleged to be a triad member during the money-laundering trial of Carson Yeung Ka-sing, the former owner of soccer club Birmingham City - is wanted for questioning by detectives in Hong Kong investigating offences under the Organised and Serious Crimes Ordinance. Cheung's name has also appeared in court documents in Las Vegas in an ongoing illegal bookmaking case there with strong links to Macau and Hong Kong. A photocopy of Cheung's passport was found by the FBI during a raid in July on three luxury Caesars Palace villas, believed by federal authorities to be the headquarters for an illegal multibillion-dollar World Cup betting scheme. The passport copy was labelled under the file name "HK Boss".

Article HERE


Macau Protests To Increase – The New Macau Association (ANM) is seeking to organize a demonstration next Saturday advocating for universal suffrage. The city is commemorating the 15th anniversary of its handover to China on Saturday, and Chinese president Xi Jinping is scheduled to visit. The association has already filed a request with the Public Security Police to organize the protest, but has not yet received a reply. The New Macau Association has been advocating for the implementation of universal suffrage in the next Chief Executive elections in 2019.

Article HERE

Takeaway: Unlike the protests in Hong Kong, we expect any public protests in Macau to be very small and quietly kept out of the news and away from President Xi.


Macau Smoking Violations – From January through the end of November, In 2014, the majority of people smoking in prohibited areas were males (6,730) accounting for 92.9% of the 7,247 infractions, while females accounted for 7.1% of the infractions (517 cases). Macau residents accounted for 61.1%, while tourists accounted for 35.4% and non-residents accounted for 3.5%.
The majority of breaches of the tobacco control law occurred in cyber cafés with a total of 1,300 cases (17.9%), video game parlors 1,282 (17.6%), followed by parks/public gardens and other leisure places 847 occurrences (11.6%).
 In relation to the smoking ban inside casinos, it is worth noting that in October the law was tightened, as it is now prohibited to smoke on mass market gaming floors.
 From January 1, 2015 the more restrictive tobacco control law will be applied to bars, dance halls and sauna parlors, where smoking will be completely prohibited. Breaching this law will result in a MOP400 fine.

Article HERE


Cypress Casino Gaming – Last Wednesday, the Cypriot government approved casino legislation to regulate the establishment, operation, supervision and control of casinos for the first time in Cyprus. Thirteen potential investors have shown keen interest according to sources familiar with the project, including Las Vegas heavyweight Caesars and international resort operator Kerzner.
Other potential investors showing interest come from Greece, the Czech Republic, Atlantic City and Macau.

Article HERE


Saipan Integrated Resort Viability Questioned – Gaming industry analysts have raised doubts about the proposed $7.1 billion investment by Imperial Pacific in Saipan’s first large-scale integrated resort. The company was granted a 25-year license to build and operate a casino on the Northern Marianas island in August, with an option to extend for a further 15 years. The following month it more than doubled its budget to $7.1 billion, with plans for 4,200 hotel rooms and 1,600 gaming tables.

Article HERE

Takeaway: Since Day 1, we have been outspoken critics of Saipan as visitation and airlift does not support the hotel room count. 


Revel Tribulations – A bankruptcy court judge on Friday voided the proposed sale of the former Revel Casino Hotel in Atlantic City to a Canadian firm. Judge Gloria Burns granted a request by Revel Entertainment to cancel the $110 million. The judge scheduled a hearing for Jan. 5 to consider Revel’s request to award the sale of the casino to Straub.
Article HERE

Takeaway: Glenn Straub gets his opportunity to buy Revel.


Connecticut Casinos Redux – In an attempt to fend off new competition from the currently under development properties in Everett, Springfield, and Plainville, Foxwoods is re-inventing itself.  For the reinvention of Foxwoods, CEO Rappaport looks to modern-day Las Vegas, where successful resorts now make more money on nongambling amenities, including rooms, restaurants, and nightclubs, than they do on profits from slots and table games. Foxwoods still makes about 80% of its money on the games but he wants to grow nongambling revenue and make the resort “stickier” by adding attractions to encourage guests to come more often and stay longer. The average stay at Foxwoods is 1.4 days, he said, less than half the four-day average in Las Vegas.

Article HERE

Takeaway: Unlike Las Vegas, gamblers across the Northeast do not need to spend the night due to their close drive-in proximity.


FBI Investigates Russia Nationals On Slot Machine Fraud – Four Russian nationals have been indicted on charges of conspiring to travel to the United States to cheat on a certain type of slot machine in casinos there. The defendants are accused of conspiring to cheat at casinos in Missouri, California and Illinois using an electronic device that communicates with a foreign server, allowing them to predict the behavior of the Aristocrat Mark VI slot machine game.

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.


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


  • The WHEAT, SOYBEANS, AND SILVER markets experienced the most BULLISH relative positioning changes week-over-week
  • The SUGAR, COTTON, AND COFFEE markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 cftc


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The SUGAR, CORN, AND LEAN HOGS markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, COCOA, AND ORANGE JUICE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - SPOT 2ND MONT VF


3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The SUGAR, BRENT CRUDE OIL, AND COTTON markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, AND COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1yr basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 open interest         


Ben Ryan


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.