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Draghi Jawboning and EURO Falling, Again

ECB President Mario Draghi once again is talking down the EUR/USD – this time in a New Year’s interview with the German newspaper Handelsblatt that further hints that the Bank may issue QE.


While the market is selling the EUR/USD to levels not seen since 2010, Draghi’s timing of QE still remains vague and undecided.  He states that the risk to price stability is higher now than 6 months ago– but is this a surprise?  NO: the ECB has been unable to revert deflation over the past 18 months and the massive move in energy prices (oil is down -39% over the last 3 months) has completely caught the Bank’s economic and inflation predictions off guard.   


As we approach the ECB’s next policy meeting on 1/22, our call hasn’t changed. We expect Draghi to continue to talk down the EUR/USD (etf FXE) through the prospect of QE.  The cross remains broken across our TRADE, TREND, and TAIL durations.   


Draghi Jawboning and EURO Falling, Again - bb. euro


On QE timing, we continue to expect louder opposition from the Germans (in particular) against QE which may well extend out the prospect of a potential issuance (late last year the Bank target a Q1 arrival). Just today we received comments from a senior member of Merkel's party, Michael Fuchs, who warned against the ECB pouring money into struggling Eurozone states through bond purchases as this would reduce pressure on them to enact much-needed reforms.


We continue to warn not to confuse Draghi’s policy to inflate with economic growth and believe our Q4 macro theme of #EuropeSlowing remains intact. Eurozone PMI Manufacturing figures for December were released today –they are ugly on an absolute and rate of change terms basis (see chart and table below).  


Based on our proprietary GIP model, we expect slowing in the region until at least Q3 of this year, and continue to call for a negative divergence from France (etf EWQ) that delivered a PMI of 47.5 and remains anchored well below the 50 line indicating contraction.


Draghi Jawboning and EURO Falling, Again - bb. pmi

Draghi Jawboning and EURO Falling, Again - bb.table


Happy New Year and enjoy the weekend!


Matthew Hedrick


The Global Growth Slowing, Deflationary Math Right Now

Editor's note: This is a brief excerpt from Hedgeye CEO Keith McCullough's research this morning. For more information on how you can subscribe click here.


*  *  *  *  *  *  *

If you ask the global manufacturing PMI data for December, the world slowed. Not only did the U.S. Markit PMI readings slow, but both China and all of Europe was either flat to down month over month vs. November.


Global #GrowthSlowing + #Deflation keeps the Long Bond (TLT) my top Big Macro Long idea right now.


The Global Growth Slowing, Deflationary Math Right Now - 55


LEISURE LETTER (01/02/2015)


Today's Headline Story

Macau December GGR – December GGR totaled MOP22.607 (HK$ 23.285, US$ 2.9150 billion, -30.4% YoY.

Takeaway: December results were in line with our expectations  


SJM- announced a 5% pay raise for all its employees, effective Jan 1.  SJM announced internally that it would consolidate basic pay and tips, known as tea money, for the purposes of contributions to the provident fund.  SJM also announced an increase in other perks enjoyed by staff. The Macau government has already announced a 6.8% pay rise for 2015 for public sector workers.

Article HERE

Takeaway: 5% may not be enough.


CZR – A consortium including a unit of CZR made a conditional deal to acquire the land for a casino project at Incheon, in South Korea, for just under US$95.9 million. The plot has an area of approximately 89,170 square meters. The grouping – known as LOCZ Korea Corp – is planning a multi-phase casino project on a site close to Seoul’s Incheon International Airport. The casino will serve foreigners. In October, Steven Tight, president international development for Caesars Entertainment, said the goal was to start construction on the project in July 2015.

Article HERE


GLPI & PENN – Hollywood Casino Columbus is adding an Asian noodle restaurant to diversify dining options and cater to a large base of Asian-American gamblers. Zen, as it'll be called, should open by the Chinese New Year on Feb. 19.

Article HERE

Takeaway: Should be additive. 


PENN  – Hollywood racino at Mahoning Valley in Ohio closed its inaugural meet with its best one-day handle yet of $1.103 million. That compares to the meet’s daily average of $614,716.
Article HERE

Takeaway: Decent performance from its racing business. The casino has averaged $7.8m in revenues the last two months.


GTECH - signed a 6-yr draw-based/instant-ticket system contract with Mexico's Pronosticos Para La Asistencia Publica for a minimum of 11,000 draw-based lottery terminals, a communications network, as well as additional lottery products and ongoing services.  The contract is expected to commence in September 2015. GTECH expects to receive more than $130 million in revenues over the six-year period. 

Takeaway: Another contract from a long-term GTECH customer

LVS – A company led by a Taiwan businessman, who argues that in 2001 he proposed being senior partner in a joint venture with Las Vegas Sands Corp to get a Macau gaming license, has voluntarily withdrawn a lawsuit on the issue previously filed on July 9 with the U.S. District Court in Nevada. The lawsuit against Las Vegas Sands was claiming intellectual ownership of as much as 72.5% of the US$20 billion-plus profits the plaintiff estimated the gaming operator has made in Macau since the award of its gaming rights there in 2002.

At a minimum, the suit from Asian American Entertainment Corp Ltd (AAECL), a Macau-registered company, asked for US$5 billion from Las Vegas Sands, with pre-judgement and post-judgement interest. 

Article HERE

Takeaway: The end to another distracting litigation event - a welcomed relief for the senior management team who is focused on returning growth to the top-line.


242.HK – Shun Tak Holdings Ltd has indicated that the start of work on its Harbour Mile project may be delayed until 2017 at the earliest. The waterside project is meant to link One Central and the Macau Tower, both of which belong to Shun Tak, either in whole or part. Shun Tak indicated its purchase of land for the project was delayed two years until the end of next year, while the government makes up its mind about its urban master plan. The company intends to put housing, shops and a hotel on the land.

Article HERE


HLT – During Q4 2014 Hilton opened 53 new hotels, including 34 U.S. properties.

Takeaway: The 53 new openings was less than our modeled 75 new openings, it would appear many openings slipped to Q1 2015.


HOT – During Q4 2014, Starwood Hotels opened 32 new hotels, including 9 U.S. properties.

Takeaway: The 32 new openings was better than our forecast of 26 new opening during Q4 2014.


BEE – announced the company closed a $225 million limited recourse loan secured by the JW Marriott Essex House hotel originated by Metropolitan Life Insurance Company.  The new financing replaces the $186 million financing previously encumbering the property. Under the terms of the loan agreement, the loan bears interest at a floating rate of LIBOR plus 295 basis points and has a three-year initial term with two, one-year extension options available to the venture upon satisfying certain financial and other conditions.


Macau Unemployment Remains Very Low & Gaming Related Jobs Increase – Nov unemployment remained steady at 1.7%.  The number working in gaming rose by 1.6% to 85,900 and the number working in construction rose by 1.9% to 56,800.

Article HERE

Takeaway: Despite falling gaming revenues, gaming related employment increased during November.


Macau Property Values Drop in November – The average price of housing in Macau fell to MOP91,731 (US$11,483) per square meter in November, 13.7% less than the month before. The Financial Services Bureau data indicated the decrease was due to the average prices of homes on the peninsula and Coloane decreasing. The average price of homes on Taipa increased.

Article HERE

Takeaway: Given the slowdown in gaming revenue, we believe Macau will experience additional property value declines.


Sochi Russia Gaming – Sochi mayor Anatoliy Pakhomov has said that the Sochi gambling zone will open its doors in May 2015. He also expressed confidence that an open sky regime coupled with a possible 72-hour visa-free transit and the zone's location in Krasnaya Polyana will attract more tourists to Sochi.

Article HERE

Takeaway: While the gaming zone will be open, thus far there's been no discussion of which gaming operators hope to open casinos in Sochi or if the casinos will be government run.


Ukraine Approves Casinos & Online Gaming – Ukraine will allow casinos and online gambling under a new austerity budget passed to help the government raise capital. The budget, which shrinks social spending and will boost the price of imports, is designed to reduce Ukraine’s budget deficit to 3.7% and spur growth in 2016. Ukraine banned gambling in 2009.

Article HERE


Washington slots - Twenty seven of Washington’s 29 Indian tribes have agreed to new gaming compacts that allow more slot machines. Casinos will be allowed 1,075 gaming machines, up from 975.

Article HERE

 Takeaway: More slot sales for Washington


China December PMI – The final reading of the Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was 49.6 during December down from 50 in November, and compared with the Dec. 16 reading of 49.5.


Singapore GDP Slowed in 2014 – Singapore’s economic growth cooled in 2014 and the nation will experience slower expansion than it’s used to, Prime Minister Lee Hsien Loong said. Gross domestic product rose 2.8% this year, Lee, 62, said in his New Year message. That compares with a November forecast of about 3%, and an expansion of 3.9% in 2013.

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.  

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Keith's Macro Notebook 1/2: Euro | Oil | PMIs

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

Hedgeye Retail Black Book – e-commerce Deep Dive

Takeaway: We expect to have no fewer than 15 Black Books in 2015 – the first of which will be a deep dive on e-commerce.

Please mark your calendar for the first of several Hedgeye Retail Black Books we’ll be releasing this quarter. The first one will be a Deep Dive into e-commerce, and will include a detailed presentation and conference call on Thursday, January 22nd at 11am ET. As always, we’ll tie it into key stock ideas – some existing, some new.


Our Research, which will utilize many different resources including a detailed consumer on-line spending survey, will be focused  on four primary areas:

  1. Secular vs Cyclical Growth
    • The Secular growth in e-commerce is undeniable. But where exactly are we in its evolution?
    • Is e-commerce something that will allow retailers to push through historical peak margins? That’s the call that needs to be made to justify margin improvement from here. We’ll quantify the puts and takes.
  2. Category Analysis
    • Which categories in retail (Apparel, Home Furnishings, Electronics, Footwear, Home improvement, about 20 in total…) have the most advanced e-commerce models, and which are most deficient?
    • Consumer opinion on which categories they are incrementally shifting dollars away from brick & mortar, and towards online channels?  Where is there the greatest opportunity to see changes in consumer spending behavior over the next three years?
    • Are the companies aligned with the likely shift in spending, or not?
    • Where does Amazon fit in as it relates to market share in each category, and how is that evolving?
  3. Profitability Implications
    • We’ll take a look at e-commerce vs B&M margins across companies and retail sub-sectors.  There is an extremely wide bifurcation in margins between the different players.
    • A comparison across Retail of spending on IT systems, DC infrastructure, and the ability to use B&M stores as warehouses to facilitate e-commerce growth goals.
    • Where will we see the greatest incremental return on investment (sector and company) as growth continues?
    • A look at how e-commerce sales are inextricably linked to B&M and how that relationship may lead to fewer store closures than we would otherwise suspect.
  4. E-commerce Trends By Category and Company
    • A quantifiable examination at the differences in visitation, shopping patterns, and demographics across categories in retail. And how that affects spending and consumers’ willingness to take purchases online.
    • How do the key metrics (visitation, reach, basket size, and conversion) correlate with reported e-commerce sales figures and what that looks like going forward as e-commerce becomes a more meaningful driver of sales growth.

Welcome to 2015!

Client Talking Points


Mario Draghi is out daily now with jawboning and lobbying for QE at the JAN 22nd meeting – he’s clearly concerned about A) what markets have been signaling (#deflation) and B) not having German support (yet). The Euro moves to immediate-term oversold within its $1.20-1.22 risk range.


Oil up on the EUR/USD oversold signal? That’s definitely what you should be thinking about with the USD overbought – any Down Dollar day should provide a bone for knife catchers who continue to buy oil futures/options contracts – risk range for WTI is finally tightening (implies less volatility) to 52.61-55.38.


If you ask the global manufacturing PMI data for December, the world slowed – not only did the U.S. Markit PMI readings slow, but both China and all of Europe was either flat to down month over month vs. November. Global #GrowthSlowing + #Deflation keeps the Long Bond (TLT) my top Big Macro Long idea right now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.



As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. 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. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


COMMODITIES: after crashing in the last 6 months of 2014 #deflation remains an obvious risk



Don't be a spectator, don't let life pass you by.

-Lou Holtz


German bonds yields hit a new record low on Tuesday, ending 2014 with their biggest annual fall in six years.

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