Down USD, Up Oil

Client Talking Points


Down Dollar has wicked correlation whip around the world, and it’s not just taking WTI +5% in an hour – Australian stocks +2.3% overnight to +8.7% year-to-date (they also cut rates earlier in the year), Russian stocks +3.3% this morning to the top-end of their immediate-term range; CRB Index up 2x the SPX yesterday (in % terms) on the day.


WTI is up another +1.1% this morning to $51.79 (USD is down on Euro up to $1.14) and the risk ranges for both Oil and the USD are now narrowing ($47.42-53.45) so you can look at that in more ways than one. Short term-top in OVX (Oil volatility), higher-lows of support, but also lower-highs of resistance.


All things considered a good GDP print out of Germany of +1.6% year-over-year (vs. +1.2%) so mainstream media will roll with that today, as Italy prints a recessionary GDP of -0.3% year-over-year and France says 0.2% year-over-year (vs. 0.4% – all Q4 numbers, and the JAN economic data in Europe this morning was #deflation101 (Swiss PPI -2.7% year-over-year, Spain CPI -1.3% year-over-year).

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.


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.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


***Game on at 8:30am ET Hedgeye CEO @KeithMcCullough hosting Morning Macro Call LIVE (Click below. It's free)



You earn your reputation by the things you do every day.

-Dave Thomas


Total U.S. Equity Market Volume, including dark pool, was down -17% yesterday vs. its 1 year average.

February 13, 2015

February 13, 2015 - Slide1



February 13, 2015 - Slide2

February 13, 2015 - Slide3

February 13, 2015 - Slide4

February 13, 2015 - Slide5

February 13, 2015 - Slide6



February 13, 2015 - Slide7 

February 13, 2015 - Slide8

February 13, 2015 - Slide9

February 13, 2015 - Slide10

February 13, 2015 - Slide11
February 13, 2015 - Slide12

February 13, 2015 - Slide13

CHART OF THE DAY | PIE CHART: Current Hedgeye Asset Allocation

CHART OF THE DAY | PIE CHART: Current Hedgeye Asset Allocation - 99


This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.


My net asset allocation to US Equities bottomed on February 3rd at +2% (damn hedgie, I think of everything on a net longs minus shorts basis) and today it’s +9%. My max net asset allocation to any asset class is 1/3 of the total pie, and I’m close to max in Fixed Income at +31% (see pie chart).


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.

Important Truths

“What important truth do very few people agree with you on?”

-Peter Thiel


When Thiel interviews people, he asks them that question. It’s a good one. And while he doesn’t think everyone has good answers to it, if he asked me I’d go into something he knows nothing about (like being a lifelong Toronto Maple Leafs fan!)


This question sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is by definition agreed upon…


“… and it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius.” (Zero To One)


Important Truths - th5


Back to the Global Macro Grind


BREAKING: US Retail Sales and Jobless Claims miss, US Stocks Rip To All-Time Highs


How many people agree with that summary of yesterday’s no-volume (Total US Equity Market Volume, including dark pool, -17% vs. its 1yr avg yesterday) ramp to 2088 in the SP500?


Follow the knuckle-puck (Peter, see the intellectual masterpiece that is Mighty Ducks 3 #brilliance):


  1. US Retail Sales slowed -0.8% month-over-month in JAN (after slowing -0.9% in DEC)
  2. US Jobless Claims popped back up over the important 300k line to 304,000
  3. US Treasury Yields dropped -5bps (on the 10yr from 2.03% to 1.98%) on the news
  4. US Dollar went straight down, -0.9%
  5. Oil (WTI) went straight up, +5%, and Energy Stocks (XLE) had a +1.3% day
  6. CRB Commodities Index (-0.95 correlation to USD) popped +1.9% on the day


Then, the counter-TREND knuckler weaved its way into the Global Macro Correlation trade:


  1. Australia’s stock market loved the commodity bounce, closing +2.3% leading everything in the East
  2. Russia’s stock market ramped another +3.3% on the Down Dollar, Up Oil news
  3. And the bloodied Euro is testing 3-week highs up at $1.14 vs USD


Is this the truth? Or is it a version of that which very few people were positioned for? If you nailed this iteration of the counter-TREND move, I sincerely salute you. Going top-shelf from the other team’s end, Mighty Ducks style, isn’t easy!


That last point on the Euro going up has another whole set of truths to consider this morning. There’s a boat load of European growth and inflation data on the tape:


  1. Germany’s Q4 GDP accelerated to +1.6% year-over-year
  2. Italy’s Q4 GDP slowed to -0.3% year-over-year #recesssion
  3. France’s Q4 GDP slowed to +0.2% y/y vs +0.4% last
  4. Swiss PPI (producer prices) deflated to new lows of -2.7% y/y in JAN
  5. Spain CPI (consumer prices) deflated -1.3% year-over-year


So mainstream media will focus on Germany today (the bullish news). They should because the divergence between good and bad balance sheet countries in Europe is glaring, but that doesn’t mean that Global #Deflation forces now cease to exist.


By the way, the truth is that if you are long the DAX you are killing it at +12% YTD. If I had to rank order which of the 3 major global equity indexes I’d buy on pullbacks from here, Germany would be in my Top 3 (so pullback already!):


  1. Nikkei
  2. DAX
  3. Russell 2000


Who, me? Buy stocks? Of course I like to buy stocks A) on pullbacks to the low-end of my immediate-term risk ranges and B) in the sub-sector style exposures of the markets that I like from a Macro Theme perspective.


Rank ordering the majors like that isn’t what I’m talking about – buying something that’s in our Top 3 Macro Themes for Q1 like #HousingAccelerating is. Both Housing (ITB) and Consumer Discretionary (XLY) are in our Top 5 Macro Ideas (last slide of our Macro Deck). We’ve been consistent in reiterating that.


My net asset allocation to US Equities bottomed on February 3rd at +2% (damn hedgie, I think of everything on a net longs minus shorts basis) and today it’s +9%. My max net asset allocation to any asset class is 1/3 of the total pie, and I’m close to max in Fixed Income at +31% (see pie chart).


My biggest mistake on the long side in February was staying with my biggest win from January (being long Long-term Bonds). And my biggest mistake on the short side was staying with the Financials (XLF).


Whether or not staying with my lower interest rate call (Long long-term Treasuries, Short Banks) is working in the moment or not, I am accountable to every day’s mistakes. That’s the truth that I built this firm on. And I think most people can agree with me on that.


Our immediate-term Global Macro Risk Ranges are:


UST 10yr Yield 1.65-2.09%
SPX 2054-2094

Nikkei 175
DAX 108

EUR/USD 1.12-1.15
Oil (WTI) 47.42-53.45


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Important Truths - 99

USA Inc.

This note was originally published at 8am on January 30, 2015 for Hedgeye subscribers.

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.” T. S. Eliot

Is the USA a good business? 


It’s the most fundamental question of all and one of ongoing import for both global capital suppliers and domestic residents as returns to capital increasingly accrue to foreign investors in the wake of decades of cumulative trade deficits and trillions in net capital inflows.  It’s also a topic for a different Early Look.  


Considering the “business of America”, however, leads to a question of equal import to Macro investors – and a relevant one alongside the release of the advance estimate of 4Q GDP this morning.    Specifically, does it make sense to model the Macroeconomy as you would a company?


Think of it this way:   Would you want to be long a company with accelerating topline, expanding margins and a competent management team while being underweight/short the converse?   No brainer, right.  


Conceptually, we view Macro investing in the same way.  In the context of our GIP (Growth/Inflation/Policy) model, we want to be long accelerating topline (GDP), expanding margins (decelerating Inflation) and competent management (policy effective in supporting sustainable growth). 


Q:  How do you model companies?...or put differently, how many companies that you follow reported earnings results on a QoQ annualized basis this quarter? …I’ll take the under on “one”.


How does the U.S. report/ measure GDP?  Officially QoQ, kinda….it depends

  • BEA: The BEA reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis, but….
  • ....when they report longer run data they report it on a year-over-year basis using an average of the quarterly data
  • FOMC:  The Fed projections typically estimate growth on a Q4-over-Q4 basis
  • Consensus:  Consensus estimates are generally available for both QoQ and full year.  However, attempting to true up quarterly estimates with the full year growth estimate is typically a quixotic pursuit.   Fuzzy math and data collection/sample differences drive the delta and incongruity.   

Conveniently, all this variation lets both policy makers and pundits speak to whichever estimate best fits the narrative du jour and/or writes the best revisionist history.  Same goes for inflation measurement.  


We’ve found modeling growth on a year-over-year basis - and backtesting it against equity/sector/asset class performance – to be an effective approach.  It makes intuitive sense to us as well. 


Relatedly, how many countries report GDP principally on a year-over-year basis? …. Most.


As it relates to this morning’s 4Q14 growth data - Consensus is expecting +2.95% QoQ SAAR and the Fed’s GDPNow model is estimating +3.5%.  For illustrative purposes, if we simply split the difference and assume 3.2% for the quarter, full year growth for 2014 will be ~+2.4% YoY. 


So, inclusive of two ~+5.0% QoQ prints, we’re still essentially a 2% plus-or-minus economy.   We think 2% with cyclical oscillations above and below remains the right reflection of our intermediate term reality.  


The GDP table below provides a redux ahead of this morning’s data.  I’ll tweet out the updated table after the release (@HedgeyeUSA)


USA Inc. - GDP table


Yesterday’s Early Look explored the value of asking both a lot of questions and, importantly, the right questions in generating investing insight.  Given some of the (superficially) internal inconsistency in recent macro data it makes sense to extend that discussion.  


Consider yesterday’s Housing data:  


Pending Home Sales:  Pending Home Sales in December were pretty bad…..or pretty good

  • MoM:  On a month-over-month basis, PHS dropped the most in a year with seasonally-adjusted sales declining -3.7% sequentially .
  • YoY:  On a year-over-year basis both SA and NSA sales accelerated to their fastest rate of growth in 18 months.   Seasonally adjusted sales accelerated +220bps sequentially to +6.1% YoY while NSA sales accelerated to +8.5% YoY from +1.5% YoY in November.  So, from which rate of change metric should you take your cue?
  • Our take:  With Purchase Application accelerating sharply thus far into January, the preponderance of housing data improving as we traverse progressively easier comps, and PHM, DHI and RYL results reflecting positive momentum of late, we’re inclined to maintain our constructive view on housing.  


Household Formation vs Homeownership Rate -  A Tale of Two (or Three) Metrics:

  • Homeownership Rate:  Housing Vacancy and Homeownership data released from the Census Bureau yesterday showed the national homeownership rate declining to 64% to close out 2014- the lowest level since 1994.  Doesn’t sound too good, right?
  • Household Formation:  The same survey data showed household formation was en fuego in 4Q.  As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years. 
  • Headship Rate:  Rising household formation rates will show up in a rising Headship Rate.  The Headship Rate represents the percentage of adults who head households (Headship Rate = Households/Population) and is a more comprehensive measure than the homeownership rate.  It’s important to understand the distinction.   Definitionally, Households can be either  1. Owners or 2. Renters and the Homeownership Rate = Owners/Households.  Thus, similar to Unemployment Rate dynamics, the Homeownership Rate could ‘improve’ due to fundamentally negative developments.  For instance, if both the number of owners and the number of renters declines (an obvious negative for housing broadly) the homeownership rate could actually increase if the magnitude of decline in renters is larger than that for owners.   The Headship Rate is less ambiguous. 
  • Our Take:  Accelerating household formation and a retreat from peak in “basement dwelling” is a broad positive for the housing market.  Even if the balance of activity is occurring on the rental side – which it appears to be thus far – the broader recovery in headship rates will ultimately see flow through to single-family purchase activity. 


More broadly:  The preponderance of domestic macro data has been slowing from a rate of change perspective the last couple months (retail sales, durable/capital goods, ISM/PMI’s).  Less than 56% of SPX constituents have beaten topline estimates in 4Q thus far and less than a third of companies have registered sequential acceleration in revenue growth.   Corporate earnings estimates are sliding and revenue revision trends are almost universally negative alongside decelerating global growth and the ongoing energy price cratering.   


Does a modest deceleration in domestic growth matter for domestic assets in the face of the flood of global capital inflow and relative value reaching?  While the US may benefit broadly from the inflow, with the long bond (TLT) up +7.9% YTD vs. -1.83% for the SPX, its seems that capital deluge is, indeed, discerning. 


The YTD performance divergences across equity sectors are equally large…and the year is young.  Performance chases price, particularly in the immediate term, and with the fundamentals rightly supporting deflation leverage and defensive yield flows, we think what has been working continues to work.   


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.82%
SPX 1993-2035

Nikkei 17406-17929

VIX 16.61-21.98
USD 92.63-96.11
WTI Oil 43.22-46.26

Gold 1247-1287 


Re-think. Re-work. Reward. 


Christian B. Drake

U.S. Macro Analyst


USA Inc. - HH formation


Takeaway: BYD completes the regional gaming beat cycle for Q4. Margin improvement is a welcome change.


  • Made meaningful progress in 4Q
  • Gaming and non-gaming growth in LV Locals business
  • Revenue growth remains modest
  • LV Locals:  non-gaming was very strong.  Hotel revenues grew more than 13%, driven by higher room rates. F&B grew as well.
  • Downtown:  Visitation from Hawaii remain strong
  • Regionals:  stabilizing trends in 3Q continued into 4Q
    • Kansas Star:  rev and EBITDA grew.  Op margins grew 65bps YoY to nearly 44%. Positive trends have continued into January.
    • Delta Downs:  +15% EBITDA growth in Q4. EBITDA growth continued into December even with entrance of Golden Nugget. +4.5% gaming revenue growth for January. Cautiously optimistic.
    • Blue Chip:  increased market share by 80bps; grew admissions by 8%.  Strong non-gaming (hotel/spa/entertainment) driving strong growth in visitation esp from Chicago area.
  • Borgota: quarterly record in slot win, table win, poker and GGR. Hotel rev grew 6% in 4Q. Have kept Water Club open for 17 additional days in 2014 (generating an additional 9,500 occupied room nights)
  • Borgata online:  generated $2M in EBITDA in 4Q
  • Going forward, debt reduction remain a priority 
  • By end of 1Q, will complete 400 rooms of SunCoast. Next up:  1,000 rooms at Orleans, more than 400 rooms at the IP and nearly 200 rooms at Blue Chip.
  • In 4Q, opened bar at SunCoast and California noodle house in downtown LV
  • Earmarked $45m to reposition non-gaming (multi-year program)
    • 11 more projects planned in 2015
  • Continue to evaluate REIT option
  • 4Q capex; invested $55mm ($11m Peninsula)
    • 2014 capex: $140m (Boyd/Peninsula)
  • 7m Borgata capex (2014: $19M)
  • Maintenance capex budget: Boyd ($100m), Peninsula ($15m), total: $160m

2015 guidance

  • 2015 capex spend to be slightly higher YoY
  • Borgata capex: $40m ($25m maintenance, $15m property enhancement)
  • D&A: $210-215m  ($140-145m - Boyd, $70m Peninsula)
  • Borgata D&A: $60m
  • Interest expense: $225m (assume no refi)
    • $155m - Boyd, $70m - Peninsula
  • Borgata interest expense: $60-70m
  • Corporate expense: $65m -reflects incremental spending in IT, business analaytics, and marketing
  • Deferred rent: $4m
  • Pre-opening expense: $10m
  • Share-based compensation: $12m
  • 112m- share count
  • LV Locals:  +2-3% EBITDA growth
  • Downtown: flat EBITDA
  • Midwest/South:  flat EBITDA
  • Peninsula: +2-3% EBITDA growth
  • Borgata: $155/160m EBITDA
    • Assume increased real estate tax rate

1Q 2015 guidance

  • LV Locals and Downtown on a combined basis flat YoY
  • Midwest/South/Peninsula: +2-3% EBITDA growth
    • Borgata: $30-35m

Q & A

  • Margin improvement:  have put in several cost initiatives and more effcient marketing costs....getting tougher and tougher to find improvement in margins
  • Downtown Las Vegas ADR:  largely driven by Hawaiian packages (60-65%) which are pre-priced.  Have some ability to drive rate but not significant since not much cash rooms. Visitation on Fremont Street have increased.
  • AC tax settlement:  $88m (agreement's been extended. Have 60 days to create a plan by emergency manager.) Fully expect to get that $88m.
  • Want to find profitable promotions.  Low-end database (casual gamer) certainly more sensitive to promotions
  • New acquisition opportunities:  LV Locals, Pennsylvania
  • Rio Rancho deal in Sacramento progressing as scheduled
  • Low gas price boost? Generally, have a halo effect but it's difficult to tell whether consumers will spend more money on gaming
  • Spent a couple of million on REIT proposal in 2014
  • Unwilling to call a 'trend' at this point
  • 4Q Corporate expense:  timing related expenses 
  • Louisiana affected by low oil?  Not expect tremendous risk from Houston area. Robust economy in Lake Charles area ($9bn infrastructure developments, offsetting some of the energy decline)
  • Asset impairment:  multiple assets from portfolio
  • Want to combine Boyd and Peninsula debt but want to be ready
  • Borgata online:  mostly variable cost; could generate $3-5m EBITDA in 2015.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%