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My Crystal Ball

This note was originally published at 8am on January 06, 2015 for Hedgeye subscribers.

“It’s far better having an approximate answer to the right question, than an exact answer to the wrong question.”

-John Tukey


Tukey was one of the most important mathematicians of the 20th century. The probability man died in 2000 and the only knock on him is that he went to Princeton. Yes, he was a Bayesian. He was also a Bell Labs guy. That’s where they asked the right questions.


The Global Macro question remains: will global #GrowthSlowing + #Deflation matter to both the US economy and its stock, bond, currency, and commodity markets? If you thought yes, then how so? Oh, and how did you position for that?


After rubbing it this morning, my crystal ball (my wife got me one for my birthday – no joke, a real one) says A) yes, it mattered and B) it translated into both crashing global long-term bond yields and commodity prices. “So”, let’s keep re-positioning…


My Crystal Ball - 78


Back to the Global Macro Grind


Re-position? Yes, as in rotate. With the UST 10yr Yield tapping the 1%-handle this morning:


  1. Book some gains in those Long Bond (TLT, EDV, BND, MUB, etc.) holdings
  2. Re-position some of that capital into oversold US consumption equities
  3. And send your Old Wall broker an email that says your crystal ball guy said to :)


In Hedgeye Asset Allocation terms (re-positioning = rotation of the allocation!), that means:


  1. Taking net Fixed Income down from max allocation to an asset class (1/3 of my capital) to +28%
  2. Taking net US Equity asset allocation up from +3% on December 29th, 2014 to +10%
  3. Do nothing in International Equities and/or Commodities


No, I don’t want to chase Gold up here. I haven’t told you to engage in amateur knife catching crude oil contests for the last 6 months either. My net asset allocation to #deflation (Commodities) = 0% because the answer to THE question mattered.


“Net” – what does that mean, net?


Net (and in rate of change terms) is how I think. Not because my crystal ball told me so (remember, I didn’t have one until today!), but because that’s how I learned, at a young age in the hedge fund business, to manage risk.


I know having longs and shorts isn’t for everyone. And it really shouldn’t be. On the short side in particular, at least 2/3 of hedge funds don’t do the hedging thing very well, don’t forget.


We are better than bad at that – and we also don’t tell our long only investors to chase tops. That’s why I referenced December 29th, specifically. If you are in the business of compounding returns and dynamically allocating assets, that day mattered because:


  1. The SP500 was 70 handles higher than yesterday’s 2020 close, at an all-time closing high of 2090
  2. The yield on the 10yr US Treasury was 2.25%


If you are a portfolio manager of anything Fixed Income or US Equities, THE question that day was:


  1. BUY
  2. SELL


As all of you veterans of the risk management gridiron know, sometimes doing nothing is the best answer. But, unless you are in the business of low-fee generating-passive-asset-management, sometimes you do need to BUY or SELL!


“So”, as the Old Wall analysts like to say, on December 29th:


  1. If you bought more Long Bond (TLT) exposure, the 10yr Yield just had a 12% move from there (1.98% last)
  2. If you bought more SPY (there was a big fund flow into it that week), you just lost -3.3%


“So”, crystal ball says you wanted to have done 1. And not 2.


The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:


  1. After another swift -3.1% correction, the Russell 2000 is signaling immediate-term TRADE oversold
  2. The inverse of that beta trade (VIX) is signaling immediate-term TRADE overbought at 20.59
  3. Hedge Fund Consensus is short the Russell (IWM) vs long SPY


Back to the “net” concept. If you want to earn your keep in 2 and 20 land, it’s usually best to not be pressing the lows on the short side of your net exposure in a crowded macro short.


Rather than rant any further this morning, here’s a 2 minute video explaining why “I Would Not Do What Hedge Funds Are Doing” in what was one of our best Global Macro short ideas 1-year ago today:


Crystal Ball just told me to stop there. #Cool. I’m already starting to like this thing.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.16%

SPX 2017-2051

VIX 16.26-20.59
Oil (WTI) 48.45-54.15

Gold 1166-1217

Copper 2.73-2.84


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Crystal Ball - 01.06.15 chart


Takeaway: Worse than expected, the latest week's results has us cutting our January forecast again.

An analysis of the latest weekly Macau numbers

call to action

The third week of January displayed continued deterioration in already soft table revenues.   We're now forecasting full January GGR to fall 15-21% YoY.  That's a bad month but looks even worse when considering that January 2014 is the easiest comparison until June.  Despite a basing in the Macau stocks, the fundamentals continue to worsen with no visibility of a turn.

the latest numbers

The weekly numbers are out for last week and they aren't pretty, albeit against a difficult comparison.  Daily table revenues averaged HK$689 million, down 31% from the comparable week of last year.  Unfortunately, January 2015 faces the easiest comparison (+7% in January 2014) until June, yet table revenues are trending down 25% month to date.  Due to an easy comparison in the last week of January, the YoY decline should lessen.



market shares

Wynn Macau, MPEL, and Galaxy continue to outperform here in January.  Relative hold percentages are likely playing a role.  Wynn may also be benefiting from bad luck the last 2 months which from the player's perspective would mean good luck and a lucky place to visit.  LVS is really struggling and we suspect the elimination of phone proxy betting is contributing.  We wouldn't be surprised to see LVS and/or Wynn Macau reinstate proxy betting.  Stay tuned.



2015 forecast

We don’t expect to see positive growth in GGR until Fall 2015, absent any big hold months.  




We remain generally negative on the Macau operators but acknowledge the potential for another relief rally immediately following earnings.  MPEL looks like a potential winner - or at least a non-loser - this earnings season and remains the only Macau company where we are projecting a beat, albeit very small.  We remain below the Street for 2015 for all of the Macau operators, despite the recent estimate reductions.

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.

My Slowing Posterior

This note was originally published at 8am on January 05, 2015 for Hedgeye subscribers.

“Ye shall know them by their posteriors.”

-The Theory That Would Not Die


For those of you who know me well, I’m not getting any younger today. And for those of you who will play men’s league hockey against me on Thursday night, you’ll note that my posterior continues to slow too.


What’s fascinating about language is that things like words can mean very different things. A “posterior” can be “A) a person’s buttocks, B) further back in position, or C) coming after in time as in subsequent to, or following”… (Wikipedia)


In Bayesian stats (probability-speak), there’s the “prior” and the “posterior.” In our profession, everyone has a prior (subjective forecast of the future), but few have accurate macro posteriors. That’s mainly because consensus tends to chase their behind.


My Slowing Posterior - 40


Back to the Global Macro Grind


Rutgers professor Glenn Shafer says that “much that has been written about the history of probability has been distorted by the English-centric point of view” (The Theory That Would Not Die, pg 129). Since most things have a bias, it’s hard to disagree with that.


It’s even harder to disagree that both #OldWall Street and the financial media that panders to its posteriors don’t have a perma-growth and inflation point of view. After all, central planning Policies To Inflate should give us asset price inflation, forever, right?


Not so much. In rate of change terms, market expectations both inflate and deflate. That is #history. And whoever wants to suggest “it’s different this time” can do so at the risk of other people’s moneys…


In what was supposed to be a “quiet week” to end 2014, the posterior of #deflation continued to manifest across Global Macro:


  1. US Dollar was up another +1.2% week-over-week as the Euro was burned -1.5% by more Draghi QE jawboning
  2. CRB Commodities Index (19 Commodities) didn’t enjoy that, closing the yr on its lows, and -2.7% wk-over-wk
  3. Oil (WTI) dropped for the 6th straight week, -3.9% wk-over-wk, crashing to $52.61/barrel
  4. Russian and Greek stocks led Global Equity #deflation, down -4.6% and -2% wk-over-wk (vs. SP500 -1.5%)
  5. Oh, and the former inflation expectations #Bubble known as Bitcoin, ended the yr on its lows, < 278


Germany’s 5yr Breakeven rate dropped -14 basis points last week to, get this, -0.07%. To put that in context, Japanese and American 5yr Breakevens are +0.35% and +1.24%. That’s just a flat out nasty #deflation signal to the world. Respect it.


All the while, the perma-bulls on US economic growth still think that the prior Q3 US GDP is going to provide for a posterior of USA “de-coupling” from global #GrowthSlowing + #Deflation risk…


*(i.e. the same risks that unglued US Commodity, Energy, and Junk Bond investors for the last 3-6 months)


The only problem with that “US is a closed economy” bull case for US economic growth is the current data. In rate of change terms, the data for December slowed versus both November and the Q314 data that growth bulls are anchoring on:


  1. ISM (USA) for DEC slowed from 58.7 NOV to 55.5
  2. PMI (Markit) for DEC slowed from 54.8 NOV to 53.9


The reason why our posteriors focus on rate of change is quite simply because the #history of market prices do. When growth and inflation are slowing, at the same time, 10yr US Treasury Yields fall and the Long Bond rises. On DEC data, that’s what happened last wk:


  1. US 10 yr Treasury Yield dropped a big -14 basis points wk-over-wk to 2.11%
  2. US Yield Spread (10yr minus 2yr) compressed another 6 basis points on the wk to 145bps


Yet Consensus Macro (net long/short positioning in CFTC non-commercial futures/options contracts) stayed with:


  1. LONG US Equity Beta (SP500 Index + Emini) net LONG position of +108,167 contracts (vs. 3mth avg of +28,575)
  2. SHORT US Treasuries (10yr) with a massive net SHORT position of -277,477 contracts (vs. 3mth avg of -121,963)


In other words, since consensus has a posterior of the prior (consensus thinks US growth is as good as it was in Q3), they think stocks get “multiple expansion” (from 19x ttm SP500 and 55x Russell) alongside rising bond yields and rate hikes.


I still think the Best Macro Idea (low-volatility, higher relative return) in positioning for our non-consensus posterior of global #GrowthSlowing + #Deflation is long the Long Bond (TLT).


That’s not to say I won’t cover my posterior (best short ideas) on pullbacks like we had last week, and signal buy in our best US domestic consumption long ideas (RH, HOLX, WWAV, etc.). In Real-Time Alerts, ye shall know my positioning by my #timestamps!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.20%

SPX 2052-2090

VIX 15.91-19.94

USD 90.29-91.57

EUR/USD 1.19-1.21

Oil (WTI) 51.76-55.12


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


My Slowing Posterior - 01.05.14 Chart

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, HOLX, MDSO, MUB, RH, TLT, XLP and YUM.

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - moran 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - currency wars

Currency War? It's game on as Switzerland roils markets around the globe.



We presented our bullish thesis on Medidata Solutions to institutional clients on a Best Idea Long call yesterday.  While stock performance has been disappointing since we added it to Investing Ideas, there has been no change to our fundamental bullish thesis and intermediate valuation target of $65.  We would remind subscribers that MDSO is a small-cap, growth company that often exhibits higher volatility (higher beta) than the broader market.


Medidata’s revenue is derived from the # of active clinical trials and the share of those trials that are being conducted on Medidata’s cloud-based platform.  What we are seeing when we track the number of trials first received (leading indicator for new trials), is a substantial acceleration in growth through 2014.  This pickup in growth and activity more broadly, is consistent with the positive commentary we heard from management on earnings calls for much of the year.


Investing Ideas Newsletter      - MDSO 1 

Macro Monitor identified these clinical trial data series as having an extremely high correlation to the y/y rate of change (ROC) in application services revenue on a two-quarter lead.  As you can see from the image below,  theses series (which drive our model) point to a material acceleration in revenue growth through the first quarter of 2015.  When we convert this growth into dollars, the results are estimates that are much higher than consensus.  While management has not formally announced an earnings date, we believe they will report in the first week of February (same period as last year).

Investing Ideas Newsletter      - MDSO 2


Long Bond, Long Money


Another week, another big bag of cash delivered to investors on the long side of the long bond:

  • TLT: up +1.6% WoW
  • EDV: up +2.2% WoW
  • MUB: up +0.4% WoW
  • XLP: up +0.3% WoW

Contrast those returns with that of the S&P 500: down -1.2% WoW.


For 2015, the gap between the TLT and the SPY is cavernous; even a former offensive lineman like myself can fit through the spread without turning sideways:

  • TLT: up +5.8%
  • SPY: down -1.9%

Reviewing our Investing Ideas update from last week:


“If the DEC Markit and ISM Composite PMI data is of any indication, the preponderance of DEC high-frequency growth data will continue to slow as we progress throughout the month of January.”


Much like its SEP counterpart which precipitated the 10/15 swoon in both stocks and bond yields, the DEC Retail Sales print stole the show as it pertains to this week’s domestic high-frequency growth data:


  • Total YoY: +3.2% from +4.7% in NOV
  • Total MoM: -0.9% from +0.4% in NOV
  • Control Group (i.e. the portion of retail sales that feeds directly into GDP) YoY: +3.2% from +4.3% in NOV
  • Control Group MoM: -0.4% from +0.6% in NOV


“If the DEC Average Hourly Earnings data from Friday’s Jobs Report is any indication, the trend of reported disinflation will continue when we get the DEC CPI data next Friday”:


  • Headline CPI YoY: +0.8% from +1.3% in NOV
  • Headline CPI MoM: -0.4% from -0.3% in NOV
  • Core CPI YoY: +1.6% from +1.7% in NOV
  • Core CPI MoM: unchanged from +0.1% in NOV




“The buy-side is perhaps even more bullish on rates (i.e. bearish on Treasury bonds) at the current juncture. The net SHORT position of 215k 10Y Treasury note futures and options contracts is the widest net SHORT position since April of 2010. On a TTM Z-Score basis, which we use to show deviations that are typically indicative of crowded trades, the buy-side hasn’t been this net SHORT of long-term Treasuries since March 2012, October 2011 and April of 2010. The subsequent draw-downs in the 10Y Treasury note yield from those peaks in bearish sentiment are -99bps, -45bps and -160bps, respectively.”


Since 12/19, the 10-year Treasury yield has fallen -33bps. The median and average of the aforementioned draw-downs (in bond yields) hover around -100bps.


We’re not prophets. We’re not magicians. We’re just a group of reasonably intelligent people with a repeatable investment process and we hope we can continue to add value to yours.


Restoration Hardware announced on its 3Q earnings call the four new Full Line Design Galleries we can expect in 2015. The markets are as follows: Chicago, IL, Tampa Bay, FL, Denver, CO, and  Austin, TX.


Investing Ideas Newsletter      - rh5


The Street 'gets it' that the economics in these stores are significantly better than in the legacy 9,000 ft stores. But there are massive questions (and doubts) about the economics associated with a mega-store like what RH built in Atlanta.


Here are some reasons we think RH’s new bigger footprint format makes sense.


  1. As we outlined in our RH Real Estate Deep Dive, you need to look at market size of every single store -- which we define as home furnishings spend for consumers earning over $100,000. We did that in every single region RH operates.
  2. Our math suggests that there are 66 existing RH markets that could support locations 45,000 sq. ft. or greater. This assumes 2018 market share of 10%, and sales productivity of $1,200.
  3. Of these 22 locations, Atlanta is #3 on the list, behind New York and Houston, Chicago 17, Tampa Bay 44, Denver 11, and Austin 34. Our math suggests RH could have a store size as great as 90,000 feet.
  4. The rent economics work. Relative to RH's existing Legacy properties, we think that occupancy math lines up well as RH transforms its real estate portfolio.


We believe YUM has an under-leveraged balance sheet, highlighted by the recent Burker King (BKW)/Tim Hortons (THI) merger.  We ran through this recently in a presentation for institutional investors back in December. 


Here's the bottom line: if YUM were to leverage its balance sheet, it would have the ability to repurchase a significant amount of stock or pay a large special dividend.


Investing Ideas Newsletter      - yum


As we wrote last week, this is a stock that continues to trade at a significant discount to its intrinsic value, making it one of our favorite long-term buys in the restaurant space.  We wouldn’t be surprised to wake up one day to news of a prominent activist buying up shares of YUM.  There’s simply too much value here to ignore and the stock’s multi-year underperformance is not going unnoticed. Learn to ignore the day-to-day volatility and prepare yourselves to own this stock for the long haul. 


We thought Hologic would have a good quarter. They did. Expect it to continue.




We thought Hologic would have a good 1Q15 based on stable trends in Pap/Thinprep (table below), positive patient volume trends during the quarter, and breakout 3D Tomo sales. Consensus had come to rest at $632M, the midpoint of company guidance of $625-$635 for F1Q15 (Dec).  At the JP Morgan Healthcare Conference this week, HOLX pre-announced revenues of $653M, well above the guidance range.


Most of the beat versus consensus came within Diagnostics at $304M (vs $295M), but Breast Health was also strong at $242M (vs $236M) as was GYN Surgical $84M ($80M). Based on our model, we expect further upside throughout 2015.


s-curve forecast


Using three data points we derive our monthly forecast curve using an s-curve methodology.  The analysis minimizes the variance between actual placements (the monthly data charted above) and the prediction curve by adjusting s-curve inputs.  The current variance between predicted and actual is currently 0.14%.

Investing Ideas Newsletter      - yows


* * * * * * * * * * 


oh canada! target shutters north of border

Closing Canada from a position of strength. Good move. But if former management could be so off on this call, what else could be buried here?

Investing Ideas Newsletter      - t5

one step back for U.s. & two for energy states

Not a good sign if you make your living in energy states as they continue to see their labor markets decouple from the broader US trend.

Investing Ideas Newsletter      - t57

Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 USD correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 volatility

Commodities: Weekly Quant - chart7 sentiment


Ben Ryan