Zero To Something

This note was originally published at 8am on February 10, 2015 for Hedgeye subscribers.

“Every moment in business only happens once.”

-Peter Thiel


I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:


“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”


If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.


Zero To Something - zero to one


Back to the Global Macro Grind


Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.


This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.


But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?


Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?


  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that


I’m not sure what got rates to go up more:


A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation


As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?


It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.


For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!


Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:


  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN


Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.


Then what?


  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was


Then what?


Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!


Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?


That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.62-1.99%

SPX 1987-2075
VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Zero To Something - Labor cycle table CoD


Takeaway: Disappointing all around. Even on a hold-adjusted basis, Q4 missed expectations. Lower market share and cautious VIP commentary.


  • Jeju:  will be 1st major integrated resort in Korea
  • Market share #s:
    • GGR: 42%
    • RC volume: 54%
    • mass drop: 43%
    • Slot/ETGs: 43%
  • 4Q VIP hold rate: 2.2%; hold-adjusted win is 2.85%
  • Genting: has become more prudent, not accepting as much VIP players as before; VIP has become more risky and players getting more cash-strapped. 
  • VIP 2015 outlook: challenging. 
  • Will look closely at their provision for bad debt. It will not be pretty for one or two quarters
    • Bad debt increased 42% YoY in Q4.
  • Q4 Mass revs as a % of GGR: 56%
    • 75% revenue contribution in slots/ETGs? You could say that.
    • Slots have gone up slightly while ETGs have been flat. 
    • Mass table revenues slightly down
    • Very focused on promos
  • Japan: lot of activity to try to push the casino bill through. Still hopeful the bill gets through some time in May.
  • Scaling back VIP business.  Will focus on mass and premium mass business. Expect no growth in VIP for rest of year.
  • Jeju:  has received construction approvals for IR. Waiting for bill to be presented to Jeju govt. Once that is done, govt will gazette the regulations. Expect casino license in 6-12 months.
  • Jurjong:  soft opening in April 2015. Fully open by June 2015. Expect 80-85% occupancy in initial stages. Expect 1,500/1,600 people to visit the attractions. Should boost casino attendance. 
  • Korea:  no information on junket operations.  
  • Share repurchases: stopped in January because of quiet period (blackout period).  No comment on further share repurchases.
  • Large gains in Q4 balance sheet:  exiting most of the portfolio investments in preparations for Jeju/Japan.  Needed cash.
  • More optimistic on Japan than other people.  Diet Parliament ends in June. 
  • Why not raise dividend of 1 cent?  Still need to consider where they stand on cash flow.  May raise in future.
  • Q4 VIP RC Volume decreased 12% YoY
  • 2014 VIP RC volume unchanged YoY
  • Provision for bad debt:  jump in longer-term debt. In Q4, number of customers either they negotiate for longer-term payment or that they have no money.  Going forward, provisions may be higher.
  • Jurong hotel vs RWS pricing: Jurong pricing will be much lower than Sentosa. Room rates of S$200 (RWS had S$422 in Q4). Room sizes are smaller.
  • Jeju # of tables:  unsure until casino bill is enacted
  • RW Jeju:  casino license will be issued by Governor of Jeju
    • Genting HK Korea license is different but gaming tax will be the same
  • VIP volume:  softness throughout but impact from Mainland China particularly strong 
  • Japan:  hasn't been less enthusiastic on gaming legislation
  • 2015 Capex:  nothing major. Opening Puss/Boots at USS and Battlestar in April
  • 20k visitors (12k USS, 8k in MLP).   USS $80 spend/visitor; MLP $30 spend/visitor
  • Jurong construction costs not major: $50-60m
  • Jeju capex for rest of year: do not need to put in any more money
  • Mass initiatives: coming up with few more programs along with Jurong hotel

McCullough: Plan for Uncertainty

The remarks below were delivered by Hedgeye CEO Keith McCullough as part of an update to our macro team's #GlobalDeflation theme at Asset Allocation 2015: Liquidity, a conference hosted by The Boston Security Analysts Society. He was asked how he expects the Fed to dance its way through the next 6-12 months.


McCullough: Plan for Uncertainty - 34

In the past, six or seven years ago, I would mistakenly start with what the Fed should do, versus what the Fed could do. Of course, these are two very different things.


I’m not Janet Yellen, I never want to be Janet Yellen. And she doesn’t want to be me. What she could do here is raise rates, with the deflationary force and global growth slowing at the same time. That would be a huge policy mistake.


What the Fed is effectively trying to do—and this is the core of central planning—is promise you, my mom, my dad, and the whole world, certainty. That’s not possible. So whatever their plan is, I’m not buying it. I don’t think you can plan certainty with respect to things like economic gravity.


So, what would I plan for? I’d plan for uncertainty.

McCullough: Plan for Uncertainty - dollar cartoon 07.02.2014

And I think the most uncertain thing you could have right now is not only how the Fed reacts to their inability to forecast accurately, but also, how they act in the moment.


Again, I think if Janet Yellen is sitting there, raising rates into what I think is going to be a sub-1% CPI and deflation rolling out like it did between September and January, that could be a very nasty thing that she will have to address in Jackson Hole later this year.


Don’t forget, we have only had one Jackson Hole in the last four, where we didn’t have to get a big central plan from the Fed.


It’s going to be an interesting dance to watch. 


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Editor's note: This is a brief excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.

*  *  *  *  *  *  *

Good #StrongDollar morning to you!


The +0.6% USD Index move to +5% year-to-date is good for plenty of commodity-based inverse correlation moves (see #deflation); WTI Oil -1.2% (after a -5.3% week), Gold -0.7% (after a -1.8% week) – Copper still looks like death. 

Click image to enlarge.

It’s All About the Dollar… - brye


On a related note, Japanese “Weimar Nikkei” is all sorts of jacked up on weak Yen (vs USD) to 15-year highs at +5.8% year-to-date – and this is after plenty of headline news that Japanese Corporates (70% of them) see “no need for more easing.”


We can’t imagine why… it’s only been 18 years.

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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

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