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Warrior Tape!

This note was originally published at 8am on February 04, 2015 for Hedgeye subscribers.

“The two most powerful warriors are patience and time.”



I love that quote. When I think about risk managing my firm, the Global Macro tape, and what I need to improve upon – as I get older, I usually come back to patience and time.


Can I maintain opposing thoughts, across multiple durations, and still operate objectively? Can I help both my team and yours understand the difference between an immediate-term TRADE risk and an intermediate-term TREND?


To me, the words patience and time don’t have to imply “long-term investor.” To be a long-term active risk manager (someone please market their fund as doing so!) you have to be patient so that, sometimes, you can act quickly.


Warrior Tape! - hrg


Back to the Global Macro Grind


Since centrally planned markets move quickly, why wouldn’t you, sometimes, risk manage quickly? As I’ve been sitting here this morning the S&P futures have gone from down 2 to down 9, to down 2 (on a Chinese rate cut), to down 6 twenty minutes later.


Yeah, that’s about as free-market as the Nikkei being jammed +2% into the bell on a “rumor that the BOJ is going to add another dovish member.” Lol! Seriously, like Japan hasn’t been dovish for 2 decades – they are printing 90 TRILLION Yens a year!


To be a warrior of this actively managed tape, in addition to patience and time, you have to have a lot of weapons at your disposal. One of the biggest ones is historical context. Another is keeping yourself together, mentally.


If you have neither context nor emotional control, you will get wrecked.


To review this most recent 3-day counter-TREND move in macro markets:


  1. It’s all about the Dollar
  2. Reversing an epic 6 month #StrongDollar move started with a bad US GDP print on Friday
  3. Down Dollar’s counter-TREND move picked up momentum when the ISM # slowed on Monday
  4. By Tuesday, the EUR/USD was headed to the top-end of its $1.11-1.14 risk range
  5. USD had one of its biggest DOWN days in a year (yesterday)
  6. CRB Index had one of its biggest UP days in a year, closing +3.2%


Yeah, Oil ramped. I get it. If you knew what a Down Dollar move would do to both Oil and the Commodities complex, you should have absolutely got that right too. To remind you where the trending probabilities were heading into this 3-day move:


  1. USD 3-month inverse correlation to CRB Index = -0.91
  2. USD 3-month inverse correlation to Crude Oil = -0.95
  3. USD 3-month inverse correlation to SP500 = -0.29


Sure, it should have been harder to convince yourself that the SP500 could have a big up move on a Down Dollar move – but it really wasn’t that big – certainly not on an absolute or relative basis to the move in Commodities and their linked stock sectors:


  1. From the Friday closing low of 1995, SP500 = +2.7%
  2. Whereas the CRB Index ramped +6.6% from its low of last week
  3. And Oil & Gas Stocks (XOP) ramped +10.4% in 3 trading days


I know, as long as you bought Greek stocks alongside everything that has been crashing in Commodities and their linked US equity sectors for the last 6 months, you absolutely crushed it yesterday.


I am not saying this is easy. I am simply reminding you how the next crisis looks – because you are already in it. It’s called a market volatility crisis perpetuated by central planners who move into panic mode in a final effort to “smooth” the tape.


Volatility crisis?


Yes, do you know what Oil Volatility (OVX index) did in the midst of crude going from $43 to $53? It went up! And the implied volatility for the SP500 on my intermediate-term TREND duration did not change.


No, I do not profess to know how to call this, play by play, with everyone of these countries randomly coming out with made for Bloomberg ad rev headlines on what they are going to try to do to markets next…


But my longest term risk management conviction remains that this epic central planning experiment of markets will not end well. It will end the way that it is already ending – with confusion and volatility. Have patience with that.


Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with TREND signal in brackets like this are in our Daily Trading Range product):


UST 10yr Yield 1.61-1.82% (bearish)
SPX 1987-2066 (neutral)

Nikkei 17292-17889 (bullish)

Greece (Athens Index) 674-849 (bearish)

VIX 16.06-21.87 (bullish)

USD 93.45-94.84 (bullish)

EUR/USD 1.11-1.14 (bearish)
YEN 116.03-118.34 (bearish)
WTI Oil 42.35-52.79 (bearish)
Natural Gas 2.60-2.81 (bearish)
Gold 1255-1291 (bullish)
Copper 2.42-2.59 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Warrior Tape! - 02.04.15 chart

KATE - Big Deal For KATE

Takeaway: This announcement out of KATE that it is transitioning its watch business to FOSL is bigger than the headline otherwise suggests.

This announcement out of KATE that it is transitioning its watch business to FOSL is bigger than the headline otherwise suggests. We get to a dime accretion by year three for a company that will end up earning $0.30 in 2014, with an even greater impact on cash flow.  Here are some key considerations.


1) As it stands today, KATE has about an $80-$100mm watch business, which is about 7% of KATE’s total business at retail ($1.35bn footprint – grossing up the value of wholesale and licenses). But by our estimate, the business is only marginally profitable, with EBIT of around $5mm, or around 3% of total. Accessories like watches should be 2-3x the margin rate of things like apparel, shoes and other core categories.

2) KATE was determined to develop its watch/jewelry business in house. That might work for a sub-$100mm brand, but without the scale of a larger design and sourcing operation it would likely stay a $100mm business forever. There is a reason why KORS, Tory Burch, Marc Jacobs, etc. all have deals in place with FOSL. If KATE wants to take the watch business closer to $500mm over time (no pun intended), which it does, then the deal with FOSL makes perfect sense.

3) Bye bye Adelington. We’ve been wondering for a while now why Adelington (its in-house private label jewelry design company for department stores) still exists as a part of Kate Spade. The brand itself is losing licenses left and right and is now margin dilutive. We can only think that it served some support function for Kate’s Jewelry/Watch design effort, but now that it’s moving over to FOSL we don’t see the need to keep it around. We have it coming off the P&L in our model by the end of 2016.

4) Over the past 3 years KORS watch/jewelry business has grown over 140% to $730mm as of the end of FY13. That’s huge. Let’s say KATE can grow 3x in 3 years. That means we take away about $100mm in consolidated revenue at about a 5% margin, or $5mm. Then in year 1 we take the business to $150mm at a 10% royalty – that’s $15mm at about a 60%margin (could be as high as 80%). That’s $9mm, which is about 80% growth in watch-related EBIT in year 1 – and that’s not to mention the fact that it takes working capital off the balance sheet. The net is $4mm, or about $0.02-$0.03 per share. That might not seem like a lot, but it’s actually about 10% earnings accretion in year 1. 

5) In year 2, the math works out to be something like $225mm x 10% x 60% = $14mm, or $9mm net of lost consolidated sales. There’s an extra nickel in earnings. We’ll likely build closer to a dime by year 3.

6) Not only is KATE signing up for FOSL expertise and sourcing power, it will now be able to tap into the brands global supply network. In the past KATE had been signing distribution agreements ad-hoc region by region. This helps simplify that.

7) The only real issue we can think of would be KORS ties with FOSL. The brand currently accounts for about 25% of FOSL’s revenue. That’s the equivalent of UnderArmour starting up a line at a new shoe factory in Asia only to find out that the entire building is otherwise dominated by Nike.  That said, KORS and FOSL just signed a 10yr deal which locks in the license through 2024. If KORS were going to have bargaining power it would have been a few months back. In addition, this is not FOSL’s first rodeo. It’s dealt with competition like this before. If it mismanages either of the two brands (KATE, most notably) it will shoot itself in the foot as it relates to reputational risk. FOSL management won’t let that happen. 


KATE - Big Deal For KATE - kate financials

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Cartoon of the Day: Rotten

Cartoon of the Day: Rotten - Hamlet cartoon 02.17.2015

Risks are rising around the world.






  • US cash flow highest in 6 years
  • Wholly-owned domestic resorts reported highest quarter since 2007
  • CityCenter impacted by low hold at Aria
  • MGM Macau:  grew margins YoY in 2014
  • Shake Shack opened in December 2014 - 2nd highest grossing (1st grossing is at Times Square)
  • AEG Arena:  anticipated in Spring 2016. Construction going well
  • Mandalay Bay:  Delano had double-digit revenue growth in January
    • Will add 350k of meeting space
    • Signed LOIs for new business into that new expansion area
  • MGM Cotai:  almost 2x the size of existing property
  • Best year ever at MGM Sanya
  • Recently signed agreement to build a Bellagio in Beijing
  • National Harbor: remain on track to open in Fall 2016
  • Springfield:  groundbreak this spring.  Targeting 2H 2017 opening
  • Broad-based growth in room categories and casino
    • Increased margins by 10bps
    • Broad-based single-digit growth in hotel, casino, and F&B
    • Higher convention mix drove REVPAR growth of 7%
    • 2014:  highest convention mix ever at slightly over 17% of room nights
    • 2015:  expect convention bookings to be at or slightly beat 2014 levels
    • Q1 2015 REVPAR guidance: +2-3%
    • CityCenter:  tough hold comparison at Aria. Aria's table game hold fell 450bps YoY and lower volumes. Higher convention mix drove highest catering/banqueting quarter revenue.
    • Crystals: strong performance
  • $1.1 bn in available under corporate revolver. $1.1 bn excess cash at US
  • MGM China:  $1.5 bn revolver availablity 
  • CityCenter: $410m cash ($134m restricted cash); total debt: $1.5 bn
  • Domestic Capex:  Invested $114m in Q4; $387m FY
  • Capex: $77m at National Harobr/Springfield in Q4; $138m FY
  • Capex: $48m at Arena/Hospitality ventures
  • 2015 capex:  domestic resorts ($425m, room renovation at Mandalay Bay, expansion of convention space at Mandalay Bay, park between Monte Carlo/NYNY) development $500m (national harbor $375m, MGM China $80m, investments in JV (predominately Arena investment) $50m
  • MGM China Q4 capex: spent $14m at MGM Macau, $37m at MGM Cotai
  • MGM China FY 2014 capex: spent $45m at MGM Macau, $275m at MGM Cotai, bringing total investment to date of $500m
  •  2015 capex:  MGM China $100m, $1.1bn at MGM Cotai
  • MGM China 
    • Q4 EBITDA Margins increased 10bps YoY
    • Only concessionaire that reported growth in mass revenue
    • Reallocated capacity. Half of tables are now allocated to mass floor. Mass contributed 75% of EBITDA in 2014 (60% in 2013)
    • MGM Macau $100m capex:  redesign traffic layout, introduced 15 retail outlets, new F&B offerings
    • MGM Cotai:  on schedule to open in Fall 2016.  
    • 80% of mgmt team are local employees.  Looking to increase that %
  • Las Vegas:  showing solid signs of growth.  Visitation up 4% in 2014. LVCVA expect 45m visitors in next few years; expect 30% international mix. No new capacity and airlift is expected to be up 3% in 1Q.
  • 70% of LV revenues are non-gaming. Customers are spending more.
  • 2015 off to very strong start in January. CES had strong attendance.  
  • Super Bowl drew 2nd largest crowd in city history
  • Rocking Rio will debut in May. 


Q & A

  • January strong baccarat month
  • LV: <5% EBITDA comes from Chinese baccarat
  • MGM China:  committed to annual dividend.  Special dividend will be on a case-by-case basis.
  • Non-luxury (core) is outperforming luxury due to easier comps.  Still 50% off of 2007 peak ($300m EBITDA opportunity)
  • Luxury:  high-end gaming and F&B improvement opportunity
  • Margins:  tough comp for 4Q 2014
  • 2015 Bookings:  mid single digit increase YoY
    • 60% of future bookings are corporate (50% a couple of years ago)
  • Will achieve similar convention mix in 2015
  • 1Q 2015 convention mix:  23% (similar YoY - last year had ConAgg)
  • Core properties:  high slot handle at Monte Carlo.  High room revenue at Monte Carlo in January
  • Rate drivers at Core properties:  lower gas prices, higher convention mix, and higher airlift
  • 2014 Cash taxes:  will pay some but minimal (<$50m)
  • REIT option?  Will look at everything.  Sees challenges from a tax perspective.
  • Doing great in Detroit and Mississippi in January 
  • MGM China:  will move product into the mass market.  Junket market is soft. 
  • Pacman vs Mayweather:  holding a date in May at MGM Grand. REVPAR will be through the roof if fight happens.
  • LV:  Genting still have not broke ground
    • Guess no new property opens in Strip until 2018
  • SouthWest talking about growing more flights into Las Vegas
  • Mirage:  had very low hold in 4Q 2014
  • M-Life loyalty:  record number of enrollments (+9% YoY); active M-Life members grew 8% YoY
  • CityCenter:  taking down Harmon (a floor/ a week) - 2.2 acres of prime real estate.  CityCenter board to decide how to best use that property. CityCenter is underleveraged. 


Guest Speaker Call: OUTLOOK FOR NATURAL GAS PRICES AND BASIS - Marketing Image


Tomorrow (Wednesday, February 18th at 11:00 a.m. EST) Hedgeye’s Macro and Energy teams will host a guest speaker call on US natural gas fundamentals with Keith Barnett, Head of Fundamental Analysis at Asset Risk Management (ARM), which is an independent producer services company that provides solutions for more than ninety clients through financial hedging advisory, physical marketing, and midstream solutions.


Topics for Discussion:

  • Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances…
  • Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings…
  • British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development…
  • Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development…
  • And more…

Dial-In Instructions*:

US Toll Free:

US Toll:

Conference number: 39017544


*A visual presentation will be available an hour prior to the call.


About Keith Barnett……Keith Barnett is Senior Vice President and Head of Fundamental Analysis at Asset Risk Management.  He has over 30 years of experience in the energy industry with leading companies like Chevron, Columbia Gas Transmission, American Electric Power, and Merrill Lynch Commodities. Keith held engineering, managerial and executive positions with those companies in the areas of production, drilling, offshore platform design, natural gas marketing, fuel procurement, trading and structuring analytics, corporate strategy and fundamental analysis of energy markets. He had significant participation in two National Petroleum Council studies; including leading the power demand team in the 2003 natural gas study and serving on the steering and report-writing committees. Keith was also the Natural Gas Task Force lead for the Edison Electric Institute for several years. He has testified before the Federal Energy Regulatory Commission and the Senate Sub-committee on Energy on natural gas and power matters. He is a frequent speaker on natural gas, power, and global energy markets. 


Prior to joining Asset Risk Management, Keith served as Director of Strategic Analysis for Merrill Lynch Commodities where he led the effort to create an integrated global point of view for energy commodities that could serve short term trading and longer-term investment horizons. He also worked most recently with Spring Rock Production, which is producing a state of the art natural gas and oil production forecast for the USA and Canada.  Keith has an engineering degree from Texas A&M University.


About Asset Risk Management……Headquartered in Houston (with offices in Chicago, Denver and Pittsburgh), Asset Risk Management (ARM) has been helping oil and gas producers make better hedging decisions since 2004. ARM represents more than 85 public and private companies and interacts with all major energy commodity counterparties. ARM’s value is realized not only in the development and implementation of dynamic strategies, but in the ongoing optimization of those strategies as warranted by market volatility, execution efficiencies, reporting and continual monitoring of technical and fundamental factors in the market with the client's best interests and specific objectives in mind.  Learn more:


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