Keith's Macro Notebook 3/17: Asia | USD | Oil


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



This is an excerpt from The Macro Show, Hedgeye's daily broadcast before the market opens. CLICK HERE to watch today's full 24-minute show, with special guest commentary from Kevin Kaiser, Hedgeye's head of Energy research.

LEISURE LETTER (03/17/2015



  • March 16-19: Cruise Shipping Miami Conference
  • March 17: 4pm Land and Buildings MGM conf call: 
  • March 18: 9am IGT Investor Day: (1877) ; pw: 1325073
  • March 19: 5am Galaxy FY 2014 results
    • (), Passcode: 712943


MGM- Registered investment manager, Land and Buildings, issues investor presentation proposing REIT conversion, which it believes offers MGM the opportunity to monetize real estate and reduce leverage in a cost- and tax-efficient manner.  Land and Buildings believes the net asset value of MGM is $33 per share and sees a path towards $55 per share value. They intend to nominate four highly-qualified candidates for Board. 


Takeaway: The REIT frenzy continues, however, hurdles exist. MGM carries a lot of financial leverage.  Moreover, MGM’s EV/EBITDA multiple (ex Macau) is pretty high and not too far off from the current weighted average GLPI/PENN multiple.  We will have more color on this.


Bloomberry - said its subsidiary Solaire Korea Co Ltd has signed an agreement to acquire up to 92% of Golden and Luxury Co Ltd, which owns and operates T.H.E. Hotel and Vegas Casino on South Korea’s southern holiday destination Jeju Island. Solaire Korea has also signed a deal to buy the 20.96-hectare (51.79-acre) Silmi Island near Incheon in the north of the country


The casino operator gave no value for the deals announced on Tuesday. Both transactions are still subject to South Korean government approvals.


Takeaway: South Korea has been getting a lot of attention lately. Everybody wants a piece of the action.


Cruise shipping Miami pre-conference tidbits and other news -

  • John Tercek, VP of new business development at Royal Caribbean Cruises Ltd., rattled off dozens of cruise markets that will be developed around the world and the challenges they face. Most markets, he said, are not as saturated as Australia and New Zealand, where 1 million people out of 20 million travel on cruise ships. However, Royal Caribbean is still seeking new international customers in Australia, in addition to Germany, France, Mexico, Brazil, China, Colombia and Hong Kong. 
  •  Big ships won't be able to go everywhere.
    • "A lot of [destinations] in Asia are on rivers, it's different than a deep water port," Tercek said. He noted that a destination like Myanmar will only be able to handle small ships because of its geography.
  • Just because you build it, doesn't mean they will come.
    • Cruisers don't want to travel to a destination and find a water park similar to the ones they left back home, said Marc Melville, director of Chukka Caribbean Adventure Tours. He stressed that travelers will pay more for experiences that are unique to their destinations.

      "People want multiple experiences on one site for less money and usually for less time," Melville said. "Stay local, stay local, stay local." 

  • China Cruise Shipping Conference and Show Confirmed for Shanghai in October

  • MSC South America: While many cruise lines are decreasing the number of ships in South America, MSC's bookings there are up, said Gianluca Suprani, MSC's head of global port development and shore activities. Santos, Rio de Janeiro, Buzios and Buenos Aires are some of the hot ports of call.

  • Shore excursions: Cruisers are searching for “authentic” and “exclusive” shore excursions and tours - and they're willing to pay more for the experience.

  • Azamara has committed to Australasia for a third season in 2018, with Azamara Journey coming for the first time in 2017 and Azamara Quest returning the next year.

  • Rumors: 
    • MSC Cruises USA has promised a “big announcement” during a Tuesday afternoon press conference. The rumors won’t stop that one of the MSC newbuilds is heading to homeport on the East Coast, could this be the confirmation? It would be coming more than two years out.


Singapore floating casino - A spokesman for New Century Tours, the ship's Singapore-based tour operator said, "Our business dropped drastically after the casinos opened. We had fewer than 500 passengers on some days. But as the (Singapore) casinos lost their novelty, the crowds started to come back in 2013." Now, the spokesman said, it gets between 600 and 700 passengers daily, four in five of whom are Singaporeans, and the rest, Malaysians.


There used to be three such floating casinos in recent years, but Leisure World is the only one known to be operating close to Singapore now.


Takeaway: Minor impact on the Singapore mass business - mainly targeting the lower end.


Macau in recession:  4Q GDP fell 17.2% YoY, following a 2.3% drop in Q3.

Takeaway: You can thank gaming for that. Will Mainland China be more proactive in supporting Macau's mass gaming business? 


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.

Retail Callouts (3/17): AdiBok, NKE, FINL, FL, DG, JCP, Chain Store Sales

Takeaway: AdiBok shows how not to negotiate endorsement deals by backing out of NBA deal. Moderately positive March via ICSC, comps tougher in April.


Retail Callouts (3/17): AdiBok, NKE, FINL, FL, DG, JCP, Chain Store Sales - 3 17 chart2





AdiBok, NKE, FL, FINL - Adidas won't bid on NBA apparel deal



Takeaway: This is exactly how a brand should NOT behave. If Herbert Hainer was the CEO of a US company instead of being domiciled in Germany, he'd have been fired years ago. We understand that a company has to look hard at the ROI when it comes to endorsement deals, and it's pretty obvious that the $36mm and change the company coughed up per year to put it's logo on NBA jersey's wasn't making adequate returns as the company continued to shed market share in the basketball category. But, how would NKE have handled this situation? Look no further than the Man-U negotiation where Nike stepped away from a 13-year kit deal with the club only after bidding up the annual fee by 3.2x from £23.5mm per year to £75mm. Now it's a one horse race for the NBA deal which means Nike will pay far less to sponsor a category that it already dominates than it otherwise would had AdiBok played its cards closer to the chest. Who else could compete for this deal? UA needs to be in the conversation, and maybe a Chinese player like Li Ning, though we doubt the NBA would go that route. Let's say the new deal comes in at $45mm per year, that's just 4.5% of NKE's existing endorsement budget, for UA it's 50%.

Now AdiBok wants to focus on NFL and MLB athlete endorsement deals. We'll give the company the benefit of the doubt for this exercise that it knows what it is doing. Think about what that means for Adi's existing wholesale partners. Those are not categories that translate to more floor space. Which means NKE, who already accounts for around 70% of purchases for FL and FINL, becomes even more dominant in it's assortment. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. FL and FINL want nothing more than to have a strong staple of contenders looking to take a few points of share. That's not gonna happen.


ICSC RETAIL SALES (80 General Merchandise Stores)


Takeaway: Two relatively positive data points from the ICSC to start March, though on a 2-yr basis we saw a slight deceleration for the week ended 3/14. Not the type of strength we would have expected given the easy compares from last year. Two more weeks for retailers to make up some lost ground before comps get much tougher through Spring and Summer.

Retail Callouts (3/17): AdiBok, NKE, FINL, FL, DG, JCP, Chain Store Sales - 3 17 chart1

Retail Callouts (3/17): AdiBok, NKE, FINL, FL, DG, JCP, Chain Store Sales - 3 17 chart3





DG - Dollar General will expand hours, not wages



JCP - JCPenney CMO Debra Berman Departs Company



AMZN - Amazon expands in Canada with move to new Toronto skyscraper



Permira to Shed Remaining Hugo Boss Shares



Elizabeth Wood to Head HR at Levi Strauss & Co.



UA - Under Armour Releases Kevin Plank’s Earnings



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TWTR: Are Acquisitions Enough?

Takeaway: TWTR tried to warn consensus, but they weren’t listening. TWTR now needs to hasten its M&A pace, but we doubt the street pay up for that.


  1. THE ISSUE WITH THE MODEL: Monetization has been both TWTR’s largest source of revenue growth, and what we believe will be its biggest challenge moving forward.  We estimate that a persistent surge in ad load has been driving monetization, which will be a difficult feat to sustain; at least as it relates to revenue growth expectations through 2016.
  2. WAS CONSENSUS LISTENING? On the 4Q14 call, TWTR’s CFO quantified the 1H14 benefit from the Olympics, and the much bigger World Cup (non-recurring tailwinds with no comparable event in 2015).  That said, consensus estimates suggest that adjusted advertising revenue growth (ex events) will moderately decelerate in 1Q, and then slightly reaccelerate in 2Q15; a tall order for a company struggling to drive ad engagements above user activity.
  3. ARE ACQUISITIONS ENOUGH?: We believe TWTR needs to acquire growth to hit 2015/2016 consensus estimates, and the company appears to be moving toward another acquisition push in 1Q15 QTD.  We doubt the street will accept inorganic upside, but we're not sure when they will recognize it.  Further, we don't believe TWTR can sustain this acquisition push, especially as move closer to 2016.  We remain short, but this one could go against us until the street realizes TWTR's guided upside isn't organic.



TWTR has three core growth drivers:

  1. User growth (MAUs)
  2. Engagement (Timeline views/MAU)
  3. Monetization (Ad revenue/timeline view). 

Monetization has been TWTR's chief source of growth over the LTM, but is also where we expect TWTR to see the most pressure through 2016.  The reason is ad load, which we estimate has been driving monetization.  It’s not that TWTR can’t increase ad load, but we don’t believe it can do so at a rate that can drive the revenue growth the street is expecting (68% and 53% in 2015 and 2016, respectively)


TWTR is well past the 2Q13 Supply Shock, which we believe was a sudden and sustained surge in ad load that drove much of TWTR's revenue growth through 2014 (more detail in our note, and S-1 excerpt below).  


TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

[click here]


TWTR S-1/A MD&A (11/4/2013): “The decreases in cost per ad engagement over these periods [3Q12-3Q13] were primarily due to an increase in supply of advertising inventory available in our auctions, which was partially offset by increased demand for our Promoted Products. Supply of advertising inventory increased as we expanded the distribution of our Promoted Products to our mobile applications and additional markets outside of the United States in 2012. The increase in advertising inventory provided us with additional opportunities to place ads on our platform.”


Now TWTR is at a point where it’s struggling to drive ad engagements above user activity, which means TWTR must find a way to drastically improve its ad targeting ability, or increase ad load at a disproportionately higher rate to achieve comparable ad engagement (TWTR runs a CPC Ad Model).


TWTR: Are Acquisitions Enough? - TWTR   Supply Shock 4Q14 

TWTR: Are Acquisitions Enough? - TWTR   Ad vs. user engagement 4Q14 q q 



During the 4Q14 call, TWTR’s CFO (Noto) quantified the 1H14 benefit from the Olympics, and the much bigger World Cup.  Both events are non-recurring tailwinds with no comparable event in 2015.  The 1H14 benefit was provided in q/q terms, so we translated it to y/y terms for context.  These events provided incremental revenue growth of 10% and 20% in 1Q14 and 2Q14, respectively.


We believe the reason why Noto quantified this incremental benefit was to temper 1H14 expectations/estimates, but estimates still rose after the print.  Now consensus estimates suggest that adjusted advertising revenue growth will moderately decelerate in 1Q, and then slightly reaccelerate in 2Q15; a tall order for a company struggling to drive ad engagements over user activity.  For context, the only time TWTR reported accelerating advertising revenue growth (ex events) was 3Q13: the quarter following the 2Q13 Supply Shock.


TWTR: Are Acquisitions Enough? - TWTR   FC Adj Ad 2 4Q14

TWTR: Are Acquisitions Enough? - TWTR   Ad vs. user engagement 4Q14 y y



We believe TWTR needs to acquire growth to hit consensus estimates in 2015/2016.  The tea leaves have been pointing toward another acquisition push, similar to 2Q14 & 3Q14 when it spent a combined $165M in acquisitions.  So far in 1Q15, TWTR appears to have already spent $160M on acquisitions (based on preliminary data complied by Bloomberg).


We doubt the street will accept inorganic upside, especially if its favors the Data segment (similar setup to 3Q14 when the stock sold off).  However, the other questions is when will the the street recognize inorganic upside, which will be harder to isolate since TWTR is not reporting timeline views moving forward.


But the better question may be how long can TWTR sustain its M&A spending spree. TWTR has an inconsistent history of generating cash flow.  TWTR currently has roughly $3.6B in cash ($1.8B was raised in 3Q14), and the company had guided to $500M-$650M in 2015 Capex (with no mention of acquisitions in guidance).  While it’s possible that TWTR can acquire enough growth to achieve the 68% growth the street is expecting in 2015, the feat will be that much harder in 2016 when TWTR needs to generate another 53% on top of that.  


We remain short, but this one could go against us until the street realizes its guided upside isn't organic.  Timing that is the challenge.  


TWTR: Are Acquisitions Enough? - TWTR   HRM vs. Consensus 4Q14 Ad

TWTR: Are Acquisitions Enough? - TWTR   CF Leverage 4Q14



Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA


Global Equity Melt-Up

Client Talking Points


Big stimuli (or rumors of moarrr) and Japanese/Chinese stocks love it! The Nikkei and Shanghai Composite up another +1% and +1.6% overnight to +11.4% and +8.3%, respectively. The KOSPI is trying to breakout now too, +2.1% after being bearish for most of 2014.



Down Day for USD yesterday had everything from Biotech (IBB) to Yield Chasers (Utilities and REITS) roaring to the upside – this is what Wall St. is begging for from Janet Yellen, lower USD and lower rates, for longer – we’ll see if she delivers #patience.


Oil doesn’t buy into the idea that USD will have more than 1 down-day, falling another -1.2% this morning to $43.34 with our refreshed risk range signaling lower-highs and lower-lows at $43.05-47.36; some of our best E&P MLP short ideas crushed yesterday.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


TODAY AT 8;30AM ET Watch The #MacroShow, Live w/ @KeithMcCullough SPECIAL GUEST: @HedgeyeENERGY (Kevin Kaiser)



The power of imagination makes us infinite.

-John Muir


1 in 4 people in Japan are above the age of 65.

Shaping Buffett's House

This note was originally published at 8am on March 03, 2015 for Hedgeye subscribers.

“You shape your houses and then your house shape you.”

-Winston Churchill


William Thorndike introduces Warren Buffett in chapter 8 of The Outsiders (pg167) as “The Investor CEO.” He uses the aforementioned (and ironic) Churchill quote then cites Berkshire’s sculptor himself: “being a CEO made me a better investor, and vice versa.”


Although I’ve only been a CEO for 7 years (and, at 40 years old, I’m a very young one at that!), I definitely agree. Running a company is a lot different than generating a hedge fund P&L. Both experiences have taught me invaluable lessons about life and investing.


While Buffett’s former #1 Rule in Investing was “don’t lose money”, he doesn’t really say that anymore when promoting his positions and politics on CNBC. To be clear though, Buffett became Buffett by selling high and buying low.


By 1987, in advance of the October market crash, Buffett had sold all of the stocks in his portfolios, except for his 3 core positions. After his Capital Cities transaction, he did not make another public market investment until 1989” (pg175), when he bought Coke (KO).


The house that shapes Buffett’s commentary today is not the See’s Candies he bought in 1972 for $25 million. Buffett, due largely to his brilliant performance and compounded returns, is now the stock market. His #1 Rule now is to protect that house.


Shaping Buffett's House - b9


Back to the Global Macro Grind


I’m calling that out as there’s plenty of video circulating on CNBC’s backslapping network this morning, replaying a fawning Becky Quick with Mr. Chuckles. If you were able to play the mainstream media to your advantage like this, you’d be chuckling too!


Here’s my 1 minute video on the matter:


Another reason to callout the chart-chasing buy-high-and-hope-to-sell-higher strategy (commonly called momentum and/or performance chasing) is that the US stock market closed at its all-time high of 2117 (+2.8% YTD) yesterday.


All-time, as I like to remind time-series fans, is a long time. And you generally don’t want to have the all-time high as your invested cost basis. You can ask some of the private equity firms who bought upstream and/or MLP Energy assets with a $105-120 price deck about that.


While it might be nice to avoid Buffett’s advice about having no shorts on “when the tide rolls” out, I did have 3 of them on in Real-Time Alerts yesterday, so it’s worth calling all 3 of them out as things that didn’t work for me, in that product, yesterday:


  1. Copper (JJC)
  2. J P Morgan (JPM)
  3. Foot Locker (FL)


Yep, while all 3 of these securities have sucked in 2015 YTD (i.e. they have negative returns), I guess I was the one who sucked having them on the short side yesterday. If you’re not sucking sometimes, you don’t have mirrors in your house either.


To review why I kept these “SELL” ideas on versus others:


  1. Copper – down -1.6% this a.m. (-6.4% YTD) remains one of the most obvious ways to play our top theme, Global #Deflation
  2. JPM – down -1.3% YTD is in 1 of the 2 US Equity Sector Styles I like the least (Financials – sector ETF -0.8% YTD in an up tape)
  3. FL – down 2 cents YTD is on our Best Ideas SELL list (Brian McGough is the analyst, ask our team for his deck for details)


The other thing that went wrong for me yesterday was another one of these counter-TREND moves in US (and global) interest rates. While many might quibble with the simple calculation of +10% move in German Bund and Japanese Government Bond Yields (when you devalue to zero, that is the math), the move on the long-end of the US rates curve is where I seem to have the most lovers and loathers.


After dropping -12 basis points last week, the 10yr US Treasury Yield bounced +9 beeps (basis points) on the day yesterday. That brought back a whole host of tweeters who have been shorting the Long Bond via TLT for, well, the last 25% of the up move (since January of 2014).


One mainstream economic headline that hit the tape was the ISM slowing in FEB to 52.9 versus the initially reported 53.5 for JAN (which was then revised lower). So, other than it not being the worst monthly decline since OCT 2008 (like the PMI was on Friday), I don’t see any fundamental economic reason to be selling Long-duration, low-volatility, high return bonds.


That said, we need to risk manage the range, and here’s some time and space to consider:


  1. Immediate-term TRADE risk range for the 10yr Yield has widened to 1.84-2.16%
  2. Intermediate-term TREND resistance for the 10yr Yield = 2.39%
  3. US monthly Jobs Report is due out on Friday and that will definitely move the bond market


On a jobs miss, I think you test the low-end of that immediate-term risk range. On a jobs beat, I think you test the high end. The house that I built alongside my teammates @Hedgeye won’t make our call any more complicated than that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.16%
SPX 2096-2122

VIX 12.80-16.39

USD 94.63-95.81

Oil (WTI) 48.04-52.23
Copper 2.55-2.73


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shaping Buffett's House - 03.03.15 chart

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