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Macro Stars

This note was originally published at 8am on January 15, 2015 for Hedgeye subscribers.

“Stars can’t shine without darkness.”



It is indeed the contrast that draws one’s eye towards something that is different.


Every once in a while in Independent Research we earn an opportunity to see that light develop before consensus does. God willing, the search for macro stars is what has my two feet on the floor each morning of every risk management day.


While it would be convenient to skip over the #deflation part of an epic central planning experiment, unfortunately that’s not the way the cycle from day to night works. There will be darkness before America’s free market economy can shine again.

Macro Stars - 445


Back to the Global Macro Grind


Don’t forget that I had the lowest grade in my freshman creative writing course @Yale. “So”, I’m still working on it (thanks for bearing with me over the years!). I’d love to go back to New Haven and slap some hash-tags on my English Lit prof’s desk.


While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:


  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice
  2. OIL – follow the #Deflation Dominos – Yens, Euros, Francs panic/burn > Up Dollar > Crashing Oil Spreads blow out in High Yield Energy > Energy States lose moneys and jobs > Financials and Industrials follow (late-cycle rolls) > Fed doesn’t hike … this was the call I made in our Macro Themes Deck for Q1, reiterating it this am
  3. FINANCIALS – yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst perf #divergence vs Utilities, ever. XLF already -5% for the YTD and the Regional Banks are in the midst of a 10% draw-down since that no-volume all-time SPX high on December 29th (2090)


“So” how are you feeling about some of our #Quad1 US equity long ideas now? After seeing the US stock market drop in 10 of the last 12 trading days, I’m thinking some of those look a tad early!


What’s really cranking for us are these #Quad4 Deflation ideas (Long #TLT!). And that makes complete sense to me, because:


  1. In Q1, globally #Quad4 doesn’t bounce to #Quad1 anywhere but in the USA
  2. USA is still coming to grips with the #Quad4 slowdown that happened in DEC and Q4 of 2014


Slowing? Yeah, that “everything is awesome” LEGO gas station thesis that everyone and their brother in long-only USA equity land ended up being almost as fictional as the movie. At -0.9% month-over-month, that was a big US Retail Sales miss.


It wasn’t recessionary, and that wasn’t our call anyway. It was simply A) slower in rate of change terms (both sequentially and on a 2yr comp basis) and, more importantly, B) way worse than the Old Wall was prepped for.


Go back and read their tweets. My boy Lavorgna was tweeting in sync with Bloomberg/CNBC’s new editorial JV macro team that the US economy was “booming” and that it was a “closed economy, unaffected by the global slowdown.”


Then they got Swissy’d.


Don’t you hate when that happens? When an un-elected Swiss dude wakes up in the morning and whacks his country’s stock market for a 7% down day and takes out Zervos’ spoooz at the knees?


Yes, I am going to call these people out by name this time. Oh, right – I did last time too. And, no, it’s not “mean” or unprofessional. It’s what someone with a spine needs to do, or our profession will never be held to account and evolve.


Due to the countless conflicts of interest associated with the aforementioned brokers, banks, and advertisers, the consensus complacency about risk remains the greatest risk to your country, children, and their future stars.


Our immediate-term Global Macro Risk Ranges are now (I’ll give you all 12 Big Macs in our Daily Trading Ranges report from this morning – in brackets is our intermediate-term TREND views):


UST 10yr Yield 1.78-1.97% (bearish)

SPX 1991-2031 (bearish)

SMI (Swiss Index) 8471-9016 (bearish)

FTSE 6230-6467 (bearish)

VIX 19.27-22.51 (bullish)
USD 91.48-93.11 (bullish)
EUR/USD 1.16-1.19 (bearish)

Yen 116.43-119.12 (bearish)
Oil (WTI) 44.43-48.97 (bearish)
Natural Gas 2.74-3.31 (bearish)

Gold 1213-1245 (neutral)

Copper 2.45-2.71 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Stars - 01.15.15 chart


Takeaway: Details don't live up to the headline beat. Underlying metrics look weak across the board


  • Despite Macau challenges, pretty good quarter
  • Mainland China visitors are increasing (14% YoY)
  • 13K room supply in Macau (45% market share)
  • $1.4m net sq ft of retail mall offerings (70% of Macau)
  • After completion of Parisian, expect to double retail offerings in future
  • CoD Dancing Water do not have much repeat customers
  • Sands' 15k arena in contrast brings back plenty of repeat customers
  • 35% EBIDTA share in 1st 9 months of 2014 (up from 32% for same period in 2013)
  • Singapore:  MBS has 60% EBITDA share
  • 80% of operating profit in both Macau and Singapore was due to Mass and non-gaming
  • Macau strategy:  anchored about mass market
  • Mainland Chinese to HK grew 16% YoY
  • Over the past four years, the VIP component of GGR have hardly grown
  • Have been delivering on Macau's diversification (MICE, retail, entertainment, convention, employment opportunities on tour sights)
  • 2015 MICE attendance will represent >80% of Macau's convention attendance
  • 95% leased at Parisian
  • 22,000 employees (promoted just under 2,500)
  • Hedgeye thinks VIP/mass hold-adjusted, ex property tax refund, MBS EBITDA was closer to US$355m, which would be close to our estimate of US$347m but below the Street.
  • Asian opportunities:  Korea/Japan/Vietnam
  • S&P/Fitch:  investment grade rating for LVS
  • The Company's Board of Directors Raised the 2015 Annual Dividend to $2.60 per Share, an Increase of 30% Over 2014; increased dividend will be made on March 31, 2015
  • $1.66bn stock capacity remaining under its buyback program


Q & A

  • Macau mass margins (slide 13):  why not move more tables to base mass since they are higher margin?  The reason is because the market is in flux. 
  • MBS mass:  premium mass ex Singaporeans have grown that property's business 
    • Didn't mass volumes fall at MBS?
  • Macau VIP margins:  don't move that much, dependent on hold
  • Macau premium mass margins: in downturn, they can't adjust payroll that quickly; focusing on reducing opex other than labor
  • Pleased with overall Macau margins but room for improvement
  • Parisian govt:  nothing wrong with $11/12k win/table.  Want fair share of tables.  Earn more EBITDA/table in Macau than double gross in Vegas 
  • Sands China:  leader in non-gaming income (80% market share)
  • Sands China special dividend is because of a special reason
    • Would rather have regular dividends since they are reliable and predictable
  • Mass competitive environment:  it is changing.  Confident on 'new Macau' model - mass based, non-gaming based model.  Other operators' margins will come down a little bit because there 'is less at the top'. 
  • Las Vegas:  REVPAR down 2.7%; no change in strategy.  Competitors have done better.  Wynn/Bellagio dominant players in baccarat.
  • Full smoking ban?  Will abide by whatever government says 
  • Intent to grow dividend by 10% each year
  • Hurt by lower performance from a concentrated super premium mass segment but growth in base mass may offset some of that
  • Plenty of gaming capacity in Macau.  Big believer ETGs will grow.  Slots not as bullish.
  • Venetian Macau REVPAR decline: revisiting strategy on premium mass and base mass 
  • Parisian opening date: sometime in 2016.  Thinking about a possible partial opening (restaurants/entertainment)... will talk to new macau govt regarding construction labor. Will shuffle labor from St. Regis building once that is done to the Parisian. Do have the permits to complete the property. 
  • There are people looking for more labor
  • Sands has 58% of all concessionaires rooms
  • $91m property tax rebate:  relates to 5-year period. 9 cent after tax impact. Going forward, it will be a smaller property tax.
  • LVS stock down a lot more than where it deserves
  • Adelson have not sold one share of stock since 2006 (it was a secondary sale for diversification purposes)
  • Wondering when Galaxy will put in some MICE in their Galaxy Macau Phase 3/4/5/6

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Cartoon of the Day: Hike?

Cartoon of the Day: Hike?  - Fed cartoon 01.28.2015

If the Fed raised interest rates with the world slowing, and deflation doing what it's doing right now, well.... look out.

Changes in Latitude, Changes in Attitude

After a few cold weeks in the Northeast, we’re thinking about warmer places.


Following Brinker’s earnings release this morning, we decided to make two changes to our Investment Ideas list.

  1. Remove BLMN from the Long List
  2. Bump up DFRG to the Short List


Changes in Latitude, Changes in Attitude - 1


Inflation is the common theme for both of these names.  Red meat inflation, in particular, is the one commodity we believe will limit upside to earnings – despite strong sales trends.  On the EAT call, management cited “unfavorable commodity pricing stemming from a greater than anticipated increase in the price of burger meat, cheese and avocados,” as a significant headwind to EPS during the quarter.  We suspect that won't change anytime soon.  Next quarter, EAT will be rolling a difficult comp, when cost of sales were down 93 bps y/y in 3Q14.


BLMN: All Good Things Must Come to an End

BLMN has enjoyed a nice run since the end September of last year, when we added it to our Long List.  The stock is up 6% and 31% over the past one and three months, respectively.  Unfortunately, we believe the stock has a lot of good news baked into it ahead of the quarter.  Given the recent stock move and earnings estimates that have remained flat, the stock is finally trading in-line with the group.  If we thought there was significant upside to earnings, we’d stay long the name – but we don’t believe that to be the case.  There has never been a significant amount of leverage in the BLMN business model, which has traditionally relied on pricing and productivity, to offset commodity inflation, to protect margins.  In addition to the aforementioned, the overwhelmingly positive sentiment gives us incremental cause for concern.


Recent Notes

11/04/14 BLMN: Notable Progress, Still Bullish

10/02/14 BLMN: Bullish on Bloomin’

09/25/14 BLMN: Same As It Ever Was


Changes in Latitude, Changes in Attitude - 2

Source: FactSet


DFRG: Hello Darkness, My Old Friend

The bottom line on DFRG is a little more sinister, because the business model is broken.  In our view, DFRG should not open another Del Frisco’s Grille for the foreseeable future – never mind six this year!  Please refer to the Black Book we published back in July 2014 for additional details.  Perhaps more importantly, however, is the fact that the company will not grow EPS 17% in 2015 and it certainly won’t accelerate to 23% in FY16. 


Trading at 20x an inflated NTM EPS estimate, the stock looks like a good value.  Alas, consensus reflects a recovery that will not happen.  The optimism in DFRG’s earnings estimates is a direct reflection of the 100% buy rating on the stock.  The target price of $27.60 suggests 37% upside from current levels.  If we set price targets here at Hedgeye (we don't), ours would be closer to $10 (~50% downside).


Recent Notes

10/16/14 DFRG: Timing is Critical

10/09/14 DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales

07/22/14 DFRG: Inflated Multiple Deflating

07/21/14 DFRG: Thoughts into the Print

07/02/14 DFRG: A Castle-in-the-Air

06/16/14 DFRG: Running Through Our Thesis

06/05/14 New Best Idea: Short DFRG


Changes in Latitude, Changes in Attitude - 3

Source: FactSet

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