Morning Macro Call with Hedgeye's Keith McCullough: Deflationary Dominoes!

On this morning’s institutional Macro Call, Hedgeye CEO Keith McCullough discusses epic #Quad4 deflation (aka "crash") and the global investing reverberations and implications.


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LEISURE LETTER (12/16/2014)

Tickers:  LVS, MGM, MPEL, PENN


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

Today's Headline Story

IHG.LN – has agreed to acquire Kimpton Hotels & Restaurants for $430 million in cash. Kimpton is a fully asset-light business that manages 62 hotels covering 11,300 rooms across 28 cities in the United States with a further 16 hotels (3,000 rooms) in the pipeline. It operates 71 hotel-based destination restaurants and bars. Kimpton’s EBITDA is expected to be approximately $20 million for the year ended 31 December 2014, and IHG expects to be able to deliver future growth in Kimpton EBITDA to approximately $39 million by 2017 from the opening of hotels in the pipeline and the achievement of certain back office and technology savings. The Transaction will be financed through existing cash resources and new debt facilities, and is expected to close during the first quarter of 2015 upon satisfaction of certain customary conditions, including Hart-Scott-Rodino anti-trust clearance and Kimpton shareholder consent.  

Article HERE

Takeaway: With the acquisition of Kimpton, IHG is attempting to in-fill the life-style, boutique brand between InterContinential and hotel INDIGO while simultaneously accelerating U.S. expansion. 


582.HK – Landing International Development Ltd will pay HKD868.7 million (US$112 million) for Wealth Seed Group Ltd, which operates, via a Korean subsidiary, the foreigners-only Alpensia casino at Holiday Inn Resort in Pyeongchang. The deal should close by February 28, 2015 “or such later date as the company and the vendor may agree in writing”. Alpensia casino has a total of 16 gaming tables, including nine baccarat tables, and 42 slot machines. Landing International said it plans to expand the casino from the existing 16 to 70 gaming tables. Pyeongchang, in the country’s Kangwon province, will host the Olympic Winter Games in February 2018.

Article HERE

Takeaway: Landing International continues to build on its numerous investments in South Korea.

1076.HK – Imperial Pacific International Holdings Ltd said it has successfully completed a share subscription and placing operation, raising net proceeds of about HKD774 million (US$99.8 million). The funds will be used as general working capital, including to finance Imperial Pacific’s casino project on the Pacific island of Saipan. The total development cost of the casino project is estimated at US$7.1 billion, the company said in September. Imperial Pacific – an investor in the profit stream of Macau junket firm Hengsheng Group – issued 510,000,000 shares at HKD1.55 apiece, it said in a filing to the Hong Kong Stock Exchange on Monday.

Article HERE

Takeaway: We take the under on Saipan.


LVS & 1928.HK – The Poker King Club moved to the Venetian Macao casino-resort from the StarWorld casino, according to Poker 777 website. The new club now occupies temporary premises in front of Morton’s in the Venetian Macao, pending completion of its permanent premises, which will cost US$1 million (about MOP8 million).

Article HERE

Takeaway: Sands China back filling empty casino floor space with a poker area/room.


MGM & 2282.HK – Macau casino operator MGM China Holdings Ltd will invest in a non-gaming project over the border on Hengqin Island.  According to MGM China CEO Grant Bowie, the mainland authorities are considering whether to give permission for the land for the project to be used for the purpose the company has in mind. 

Article HERE

Takeaway: We understand the Chinese President Xi will visit Hengqin Island during his upcoming visit to Macau late this week. This commentary and headline would appear to be self-serving by the CEO and MGM China given the lack of details and specificity. 


MPEL – Melco Crown Entertainment Ltd has been dropped from the Nasdaq Q-50 Index. The change will become effective prior to market open on December 22. 

Article HERE


PENN – Hollywood Casino Perryville asked Maryland gaming regulators to take away about 300 slot machines, the second time they have done so since the casino opened in 2010. They are calling the exercise “right sizing.” The casino currently has 1,158.

Article HERE

Takeaway: This is the right decision as there is just too much competition in Maryland right now.




Mainland China Banking Liquidity Is Very Poor – Chinese banks, desperate to attract customers who are finding alternatives for their savings, are turning to giveaways such as an iPhone 6 Plus or a Mercedes-Benz. The banks lost 950 billion yuan (USD154 billion) of deposits in the three months through September, the first quarterly drop since 1999. In the first 11 months, new deposits were 23% lower than in the same period last year, People’s Bank of China data show. 

Article HERE


UnionPay Comes of Age – China UnionPay Bank is working on a new app for Android phones that will allow mobile payment processing on these devices. The China UnionPay app, known as Android Pay, is scheduled to be introduced in the third quarter of 2015, and some say it is an attempt to compete with Alipay.

Article HERE

Takeaway: Earlier this year, UnionPay came under scrutiny for its point of sale and handheld terminals in Macau. With this new app, Mainland Chinese gamblers will be free to use their UnionPay funds as desired. 


New Macau Plans Protest During President Xi's Visit – Macau authorities have not yet replied to the New Macau Association’s request to hold a protest on Saturday, but the pro-democracy group’s vice-president, Bill Chou, is convinced it will not encounter any hurdles, since the law is clear when entitling them to organize such a demonstration.

Article HERE

Takeaway: With Hong Kong’s Occupy Central movement culminating in the clearing of the remaining occupied parts of town last week, some have speculated whether Hong Kong activists will head to Macau on Saturday to make their voices heard by president Xi Jinping. The New Macau Association will be handing out leaflets and other materials to further explain the concept of universal suffrage. They will be distributing these materials near local schools as well.


Phone Betting in Cambodia – Grand Dragon Resorts, owned and operated by Dai Long Co Ltd, located in Chreythom, Kandal province, has partnered with live dealer gaming system provider Ezugi to offer proxy betting. The agreement will see Ezugi using its casino streaming technology to broadcast live table action direct from the casino floor, including baccarat tables and VIP tables.

Article HERE

Takeaway: Grand Dragon Resorts efforts follow the recent Gaming Inspection and Coordination Bureau mandate that U.S. gaming operators in Macau must know their customer. As such, proxy betting at casinos operated by U.S. based firms ceased.  In October, Singapore's parliament passed the Remote Gaming Act which banned online gambling within Singapore.


Bermuda Gaming Expansion – The Bermudan House of Assembly has approved new laws opening the island up for the introduction of three casinos.

Article HERE

Takeaway: Yet another gaming option   


U.S. Regional Gaming – Regional casinos must develop a unique personality to keep or attract customers, a marketing expert says. For years, “regional casinos have pretty much relied on convenience,” says Mark Sutter, chief strategy officer of The Halo Group, a New York marketing agency. “Convenience as a marketing strategy is dead. There are too many casinos competing for the same market.”

Regional casinos attract most of their customers from a limited area, as opposed to destination casinos such as the behemoths on the Las Vegas Strip that draw from across the country and around the world.

Article HERE

Takeaway: From Washington DC to Boston, approximately 50% of the population lives within 25 miles of a casino - a competitive trend that will only intensify when the Springfield, Everett, National Harbor and additional Philadelphia casinos open.


Moscow Hotel Occupancy Falling – The loss of foreign travelers is posing a problem for Moscow hotels, whose livelihood depends on a steady stream of foreign tourists and businesspeople. Hotel occupancy in Moscow fell to about 60% in the first three quarters of the year, its lowest level since 2011. This is a decline of 7.4% by market analysts at consultancy Cushman & Wakefield or 9% according to Jones Lang LaSalle (JLL). Historically, foreign guests, account for up to 80% of Moscow hotels' occupancy.

Article HERE

Takeaway: Russia is having all sorts of trouble - tourism included.


U.S. Senator Charles Schumer Calls for Investigation of Airlines – The New York Senator has called on the Departments of Justice and Transportation to investigate airfares because some airlines still assess fuel surcharges, even though the price of oil has dropped a lot

Article HERE


China HSBC Flash December PMI fell to 49.5 in December from November's final reading of 50.0 and below the 50.0 forecast expectation by economists. The new orders sub-index fell to 49.6, the first contraction since April. 


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.


It’s Not Different This Time

Client Talking Points


Epic #Quad4 Deflation (commonly called a crash) continues with WTI down another -3% to $54.25/barrel this morning taking the crash to -49.5%, since June and our refreshed risk range to 53.27-61.15 #LowerLows.


Mainstream media is figuring out that Russia has been crashing (for months) – that’s helpful; Russia’s panic move (raising rates another +650 basis points) was not – this is how central planning expectations end, abruptly – Russia’s stock market -6.8% this morning to -51.6% year-to-date (Argentina was -8.8% yesterday; Saudi stocks -7.9% this morning).


Don’t forget that A) volatility in FX, Fixed Inc, Equity, etc. is coming off all-time lows (July) and that B) panic in FX policy perpetuates the volatility accelerating in Global Macro trading; Yen rips to immediate-term overbought this morning and Nikkei loses another -2% (-3.6% in 2 days) in kind.

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


$LINE $LNCO Investor Relations (per BBRG News): “The volatility in commodity prices is making it more difficult to put together a budget.”



Goals live on the other side of obstacles and challenges. Be relentless in pursuit of those goals, especially in the face of obstacles. Along the way, make no excuses and place no blame.

-Ray Bourque


The Norwegian krone has fallen to 0.993 per Swedish krone, the lowest since 1992 and below parity for the first time since 2000.

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CHART OF THE DAY: Is It Really Different This Time? (Consensus U.S. GDP Forecast Edition)

CHART OF THE DAY: Is It Really Different This Time? (Consensus U.S. GDP Forecast Edition) - 12.16.14 chart


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Revolutionary Outlook

“The Revolution transformed science from a popular hobby into a full-fledged profession.”

-Sharon Bertsch McGrayne


While December 16th was one of the beauty days of the American Revolution (the Sons of Liberty dumped loads of tea in the Boston Harbor #TeaParty), that is not the revolution the aforementioned quote is alluding to…


Believe it or not, there was a time when the French were hard core evolutionists in math, science, and innovation too.”For almost 50 years (from the 1780s until Pierre Simon Laplace’s death in 1827), France led world science as no other country has before or since.

-The Theory That Would Not Die (pg 30)


Today, Canadians and Americans (sorry, had to include the homeland) have a once in a lifetime opportunity to revolt and redo the entire profession of mainstream economic and market analysis. During the 18th century American and French Revolutions, they needed a crisis to change. Sadly, I don’t think the change I’m envisioning will be born out of something that’s different this time.

Revolutionary Outlook - minutemen01 jpg


Back to the Global Macro Grind


While I realize there is tremendous value in fading the forecasts of the #OldWall (and that we should probably pay to keep them in business for that reason alone!), eventually redoing all of this means we must move forward and evolve.


Moving forward starts with understanding where we came from. So let’s do that and look at the almighty US growth and inflation “2014 Forecasts” (summarized in bond yield terms) from Barron’s on what was going to happen this year:


  1. Bank of America (Savita Subramanian) 10yr Yield forecast = 3.75%
  2. Tom Lee (formerly JP Morgan) 10yr Yield forecast = 3.65%
  3. Barclays (Barry Knapp) 10yr Yield forecast = 3.50%
  4. Morgan Stanley (Adam Parker) 10yr Yield forecast = 3.45%
  5. Citigroup (Tobias Levkovich) 10yr Yield forecast = 3.25%


With the 10yr US Treasury Yield crashing to 2.09% today (-31% YTD), my congratulations goes out to the fine folks at Citigroup for being closest to the pin. If you had client moneys in that strategy, you’d be short the Long Bond (and long the Russell, which is -2.1% YTD).




Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):


  1. Tobias @Citigroup inched his forecast down to 2.95%
  2. Parker @MorganStanley opted for 2.85%
  3. And Savita @BofA went all-bearish on bond yields at 2.75%!


I couldn’t make this up if I tried.


And on the why, don’t ask me, because I genuinely do not understand A) the process that got them to 3.25-3.75% in 2014 to begin with and/or B) the risk management components of the 2.75-2.95% forecast cuts, when they should be 100 basis points lower than that.


Both Barron’s and Bloomberg Magazine recently ran “This Time It’s Different” on their covers (Barron’s did on the weekend before their almighty god Dow dropped over 700 points). But, for the life of me, I can’t find an 2014 Outlook that read something like this:


  1. Worldwide growth will start to slow in the back half of 2014
  2. In response to #GrowthSlowing Europe, Japan, and China will all panic and print
  3. After seeing late cycle inflation peak in 1H14, #deflation will take hold by Q4
  4. Oil will start to crash…
  5. Then Russia will crash…
  6. As Energy stocks crash
  7. And the High Yield debt markets will start to shake…
  8. As Emerging markets will continue to crash


I’ll stop there…


Q: Who nailed all of that? A: Not Ed & Nancy.


The only thing that is different this time are the names of the macro “forecasters” on the sell-side who are willing to subject themselves to my #timestamping. With Tom Lee out, JP Morgan has enlisted some dude named Dubravko.


“So”, excited to hear of new competition, I looked Dubravko up hoping to find some innovation in his process. Unfortunately, while his resume says he has some experience as a “Quantitative Researcher”, his 2015 “forecast” looks very #OldWall to me:


  1. US GDP Growth = 3.0%
  2. UST 10yr Yield = 2.80%
  3. SP500 “target” = 2250


Nice round numbers that ultimately imply:


A)     US growth to “de-couple” from global #GrowthSlowing and accelerate year-over-year

B)      US Bond Yields and Growth Equity returns to rise in response to that


I wish you luck, Dubravko. And thank you for being part of a Consensus Macro that we will continue to fade with a revolutionary process and risk managed outlook.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.21%


RUT 1125-1151

VIX 16.31-23.47

YEN 116.28-121.01

WTI Oil 53.27-61.15


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Revolutionary Outlook - 12.16.14 chart

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