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January 23, 2015

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Knowledge, Experience and Ability

This note was originally published at 8am on January 09, 2015 for Hedgeye subscribers.

“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience and ability.”

-Henry Ford


For those of you that are currently employed on the buy-side, replace “money” with “performance” and “independence” with “job security” and re-read that quote.


Thought-provoking, isn’t it?


I borrowed that quote from the late Henry Ford to help make the following point: the buy-side and, to a large extent, the sell-side (via commission dollars) can be an ultra-competitive environment.


Specifically, it can be argued that no other industry has such an overt focus on consistently producing favorable outcomes as the financial services industry – well, maybe with the exception of NFL head coaching. Moreover, we can all agree that consistent production is integral to remaining gainfully employed in such a competitive industry.


That’s certainly not to say anyone who’s ever been let go was incapable of producing; in fact, I’ve seen some really sharp, incredibly outgoing people let go, and if you’ve been in the industry long enough, you have as well. The good news is that the good ones always land on their feet.


Back to the Global Macro Grind


Keeping with the theme of consistent production, has your favorite macro strategist(s) consistently produced for you over time?


While I have no frame of reference on how to answer that question, the following chart can be used as a rough proxy to reasonably conclude that there is a possibility you have been overpaying for macro research and should strongly consider narrowing your list of service providers to those that consistently add value:


Knowledge, Experience and Ability - Chart of the Day


Contrast that performance data that with the following sampling of key research calls our macro team has made since inception:


  • July ’08: moving to 85% cash in our model asset allocation (CLICK HERE to review)
  • March ’09: bullish on the S&P 500 (CLICK HERE and HERE to review)
  • May ’10: bearish on Eurozone periphery sovereign debt (CLICK HERE to review)
  • June ’11: bullish on long-term Treasury bonds (CLICK HERE to review)
  • November ’12: bearish the Japanese yen/bullish on the Nikkei (CLICK HERE to review)
  • December ’12: bearish on Gold (CLICK HERE to review)
  • January ’13: bullish on the S&P 500 (CLICK HERE and HERE to review)
  • April ’13: bearish on Emerging Market assets (CLICK HERE and to review)
  • May ’13: bearish on U.S. Treasury bonds (CLICK HERE and HERE to review)
  • February ’14: bullish on  U.S. Treasury bonds (CLICK HERE to review)
  • August ’14: bullish on the U.S. dollar and defensive large-cap U.S. equities/bearish on commodities and commodity-linked assets (CLICK HERE to review)


That’s certainly not to say that our performance would have been any good (or bad) if we were running a fund instead of our mouths over the past five-plus years!


In fact, we tip our hats to anyone who’s performed even modestly well throughout this era of centrally-planned markets. Moreover, we would tend to agree with the general assertion that the post-crisis era has provided investors with a difficult macro environment to consistently produce positive absolute returns and/or generate alpha in.


Rather, we highlight these calls to showcase that no matter the setting – i.e. buy or sell side – we’d employ the same top-down quantitative + bottom-up fundamental framework that led us to each of the aforementioned research conclusions.


If Henry Ford were alive today, he’d likely agree with our paraphrasing of his “knowledge, experience and ability” clause as the most important possession anyone in our industry can have – i.e. a #RepeatableProcess.


Will we always be on the right side of such integral macro market moves? Absolutely not! Just as in years past, there will be plenty of things that we completely miss or are flat-out wrong on.


The only thing we can promise you is that our six-person macro team will work tirelessly on your behalf. And in terms of manpower, analytical depth and #RepeatableProcess, we’ve come a very long way over the years; for example, please note the following juxtaposition:



To the extent you have not yet reviewed our 1Q15 Macro Themes, which we introduced yesterday afternoon, we encourage you to do so. As always the presentation is jam-packed with cutting edge data analysis and thoughtful, well-researched assertions.


The thematic investment conclusions of that presentation are as follows:


  • LONG U.S. Treasury Bonds (TLT)
  • LONG U.S. Dollar (UUP)
  • LONG large-cap Consumer Staples (XLP)
  • LONG large-cap Health Care (XLV)
  • LONG Homebuilders (ITB)
  • SHORT Japanese yen (FXY)
  • SHORT Emerging Markets (EEM)
  • SHORT High-Yield Credit (JNK)
  • SHORT large-cap Industrials (XLI)


Email us if you’d like to discuss these views further. As always, we encourage thoughtful pushback and appreciate a healthy debate. That’s what makes a market.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.89-2.11% (bearish = bullish Long Bond)

SPX 1995-2090 (bullish)

EUR/USD 1.17-1.19 (bearish)

YEN 118.10-121.01 (bearish)

WTI Oil 46.43-51.86 (bearish)

Gold 1175-1225 (bearish)


Keep your head on a swivel,




Darius Dale

Associate: Macro Team

Cartoon of the Day | Mario Draghi: A Modern Day Sisyphus

Cartoon of the Day | Mario Draghi: A Modern Day Sisyphus - Sisyphus cartoon 01.22.2015

"Anyone who thinks they can centrally plan economic gravity," Hedgeye CEO Keith McCullough wrote earlier today, "is a certifiably arrogant academic." We'll throw in Sisyphean for good measure.



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Draghi Delivers The Drugs!

Decision day is now FINALLY behind us:  ECB President Mario Draghi left rates unchanged but delivered the “drugs”, delivered “more cowbell”, delivered the QE biscuit, however you want to put it.


Draghi Delivers The Drugs! - Draghi cartoon 01.20.2015


Here’s a quick overview of the minimal details disclosed on the €1.1 Trillion QE package (beating market expectations of ~€600 Billion).

  • The ECB expands purchases to include bonds issued by Eurozone central governments, agencies, and institutions in the secondary market against central bank money
  • In theory, the institutions that sell the securities can use the funding to buy other assets and extend credit to the real economy
  • Combined monthly asset purchases is set at €60 Billion
  • The program will include the ABS and Covered Bond purchase programs issued last year
  • The purchases are intended to be carried out until at least September 2016 and until the ECB sees a “sustained adjustment in the path of inflation” towards its goal of 2%
  • The sharing of losses (pooled) will equate to 20% of the program


Our Take-Aways:

  1. The package signifies the Bank’s intention to maintain a weak EUR/USD [although Draghi would never state this publically]
  2. We think there “isn’t a hope on this side of central planning hell” that Draghi gets 2% inflation which should help solidify a weak EUR/USD and guarantee an extension of this existing package and future QE packages (sound familiar to Federal Reserve measures?). Additionally see our chart below on the correlation between the EUR/USD and oil
  3. Economically we do not see the Eurozone escaping the #deflation trap on Draghi’s QE wand and expect the feedback loop of the “necessity of certain member states to carry out country-level reforms” to persist (resulting in no improvement) over the medium to long term
  4. The lack of shared (pooled) losses is likely a nod to the German camp (which itself was against QE from the start) 

Draghi Delivers The Drugs! - zzz. correlation


Shorting The EUR/USD:  Head’s You Win; Tail’s You Win

As we outlined in our note More Cowbell!  A Roadmap Ahead of the ECB’s Thursday Meeting we called for a scenario of shorting the EUR/USD with the byline “Head’s You Win; Tail’s You Win”. Intraday following Draghi’s remarks the cross has been down as much as -1.6%, pressing the $1.14 level.  In short, Draghi DID in fact deliver the drugs, and we foresee a combination of forces maintaining downside pressure on the cross:

  • The package is both 1) above market expectations of ~€600 Billion and 2) above Draghi’s claim last year to expand the ECB’s balance sheet by €1 Trillion
  • The move in the EUR accurately reflects a region plagued by deflation and stagnation
  • We expect a stronger USD and weaker oil to continue pushing the EUR lower
  • We expect anticipation about the need for future QE packages to push the EUR lower
  • We expect an ECB bent on the export fruits of a weak EUR (backed by the Germans) will continue to perpetuate weak EUR/USD policy given the Bank’s lesser ability to impact the inflation rate

Draghi Delivers The Drugs! - zzzzz. euro

Draghi Delivers The Drugs! - bruning euro 08.25.2014


Matthew Hedrick


Keith's Macro Notebook 1/22: Euro | Commodities | KOSPI


Hedgeye Macro Analyst Ben Ryan shares the top three things in Keith's macro notebook this morning.

LEISURE LETTER (01/22/2015)



  • Jan 22:  Carnival Vista event
  • Jan 28:  LVS 4Q CC
  • Jan 29:  PENN 4Q CC
  • Feb 2: Cod Manila Grand Opening
  • Feb 3:  GLPI 4Q CC

headline story

Macau Visitation fell in December – Macau received a record-breaking number of visitors in 2014 – more than 31.5 million visitor arrivals, +7.5% YoY according to director of Macau Government Tourist Office (MGTO) Maria Helena de Senna Fernandes. Mainland China visitation grew 14.1% in 2014. She also expects 5% visitation growth for CNY 2015 and FY 2015.


The average length of stay for visitors was 1.9 days, with 46.2% of them in 2014 choosing to stay overnight. The average occupancy rate of hotels in Macau is 86.5%, up by 3.4%, with total overnight guests in 2014 reaching 10,710,000. The average room rate of 3 to 5 star hotels in Macau was $199.9, up 8.6% YoY.

Article HERE

Takeaway:  This suggests overall December visitation fell 2% and would represent the 1st monthly decline since January 2013. As for Mainland visitation in December, growth was 1% - the slowest pace since March 2013. Official results will be released tonight by DSEC. 




MPEL  has said it will press on with extending the shopping arcade in its City of Dreams despite the death of a worker on the construction site. The Labour Affairs Bureau halted the use of all hoists on the site after a worker operating a hoist there fell to his death on Tuesday. Melco Crown said, "The temporary suspension of construction will not affect progress.” The company hopes to open the extension next year.

Article HERE

Takeaway:  No delays for MPEL


GTECH/Italy Lottery tax  The additional gaming tax on video lottery and AWP licensees in Italy has now come into force and has been also allocated among licensees with surprises among operators.   The peculiarity of such tax is that will be shared among video lottery licensees depending on their number of video lottery and AWPs regardless of the revenues generated by each machine.  This circumstance led licensees to disinstall a large number of underperforming machines before the end of the year in order to maximize the revenues generated by their network and have a lower portion of the € 500 million additional tax allocated to them.


And apparently some licensees were very aggressive in disinstalling machines since, according to Italian gambling regulator, AAMS, some of them are now running a number of machines much lower than the video lotteries and AWP in place before the coming into force of the budget law.


GTECH is leading the table of tax payers with over € 96 million of allocated taxes.

Takeaway:  This is the compromise for not having a gaming duty tax increase in Italy but still a higher cost, nonetheless, for the video lottery licensees. We're still waiting to see who gets the Lotto license. 


CLDT  guided Q4 REVPAR to $112. $3.5m secondary offering at $30.

Takeaway:  This is at the low end of their Q4 guidance of $112-114.

PEB –  guided 2015 Same-Property RevPAR growth rate to 6.5-7.5%

Takeaway:  Not surprisingly, this is lower than 2014's expected growth of 8.25-8.75%.  However, it's a strong number.


RCL – The Celebrity Century will become the SkySea Golden Era this May, as she transfers to the new SkySea brand, a joint venture between Royal Caribbean Cruises, Ctrip and Stone Capital.  Among the changes on the vessel will be a complete rethink of the restaurants, aiming them at the Chinese market. Also being added will be an ice bar, trampoline at sea, and mini-golf.


CTRP has a 35% stake in SkySea, while Royal Caribbean has an equal 35% share. Stone Capital has a 30% share and is a Shanghai-based private equity firm that invests for China’s wealthiest families and entrepreneurs. The ship’s inaugural season will see it homeport in Shanghai from May to October.

Article HERE 


CCL Cunard has launched an all-inclusive package for Grills Suites passengers to mark the line's 175th anniversary this year. The Grills Suites Inclusive Package includes onboard credit of $60 per day, four bottles of wine, dining credit, included gratuities, a photo, coffee card and internet minutes, all depending on the length of the cruise.

Takeaway:  Another operator following the trend of offering all-inclusive deals


CCL - Carnival COO Alan Buckelew said, "We are looking at double-digit growth in China—20%, 30% annually—over the next few years while overall growth [in the industry] is around 3% and 4%.”  “In China, the 25- to 45-year-olds are buying the cruises,” he said. “That is where the wealth is in China. They often bring along their parents. Extended-family cruises are common.”


Vacations are also shorter in China, with the average cruise lasting for four days compared with seven days in the West.  Carnival says it already enjoys a 55% to 60% share of the tiny but fast-growing Chinese market, and executives expect it to grow to about half the size of the U.S. market—the industry’s largest—by 2020.  


The Chinese also don’t stand in line for buffets, and spa treatments that are popular on Western routes have yet to catch on. Chinese cruisers require plenty of space for morning tai chi classes, and prefer private gambling parlors to the sort of elaborate evening shows that are popular in North America. 

Takeaway:  These demographics are well-known. China is a certainly a big opportunity but could also be a costly one, up front.


Las Vegas  According to the Las Vegas Review, January has been a big convention month for Las Vegas, starting with the International Consumer Electronics Show, which drew a record 170,000 attendees.  The largest show this week will be the Shooting, Hunting & Outdoor Tradeshow, which is expected draw 67,000 visitors.

Article HERE

Takeaway:  Convention business for Q1 2015 could be shaping up better than anticipated.


Maryland  – wants to remove 300 slots each to make more room for table games and amenities. CZR wants to add 30 table games and Cordish intends to add 13. The Maryland Lottery must approve the reductions. Earlier, it allowed Gaming and Leisure Property’s Hollywood Casino to remove 308 machines..


Malyasia offers free visa for tourists from China. 

Article HERE

Takeaway: Another reason for tourists not to go to Macau. Korea/Philippines are also benefiting from Macau's slump.


US Treasury  The U.S. Treasury is telling casinos to do more to stop criminals from using their sports books to launder money in its latest warning to the industry to bolster compliance programs.

Article HERE


China Q4 GDP - 7.4% growth vs consensus of 7.2%


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.

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.