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REPLAY | Fed Coverage Hosted By Hedgeye CEO Keith McCullough



Keith provided unobstructed, real-time commentary regarding the impact today’s FOMC decision and language have on markets with 10yr yields retesting 2% this morning, USD strength, oil crashing (WTI -21% YTD), and other key factors.




Oil Crashing

Client Talking Points


Never mind oils epic crash of 2014, now it’s crashing (again) in 2015 – with today’s #deflation of -2.9%, WTI Oil is now -21% for 2015 year-to-date and they’re going after Saudi stocks (-4.3% this morning); Greek stocks back in crash mode, -21% since FEB.


The VIX remains in what we’ve called a bullish phase transition since July of 2014 (see our #VolatilityAsymmetry Macro Themes deck); no matter what the Fed does today, we expect cross asset volatility to remain bullish.


We’ve liked the IWM (iShares Russell 2000 ETF) but we don’t like chasing things at their all-time closing highs (the Russell 2000 hit that again yesterday at 1242) – ahead of this Fed circus of mismanaged expectations, we say book some profits, raise cash.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We’ve liked the IWM (iShares Russell 2000 ETF) but we don’t like chasing things at their all-time closing highs (the Russell 2000 hit that again yesterday at 1242) – ahead of this Fed circus of mismanaged expectations, we say book some profits, raise cash.


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


Big Day for @HedgeyeTV - tune into The Macro Show 830AM and Fed Show 150PM EST



They sleep, we grind.

-Erykah Badu


Foot Locker estimates that 90% of their online traffic will come from phone/tablet in 2018. 

LEISURE LETTER (03/18/2015)



  • March 16-19: Cruise Shipping Miami Conference
  • March 18: 9am IGT Investor Day: (1877) ; pw: 1325073
  • March 19: 5am Galaxy FY 2014 results
    • (), Passcode: 712943


RCL/CCL/NCLH: Cruise shipping Miami Day 1 tidbits and other news 

  • Pricing remains a top challenge. Cruise companies have yet to achieve double digit ROIC growth, the US-based execs concurred.
  • Europe
    • 6,387,000 European passengers in 2014 (+0.5% YoY)
    • In 2014, Germany overtook the UK to become Europe’s first source country with 1.77m passengers (+5% YoY), while France consolidated itself as the fourth largest source market in Europe, with an impressive growth of 13.7%.
      • UK/Ireland passengers dropped 4.8% due to ‘reduced capacity’ in the region
      • Number of UK and Irish passengers taking fly cruises increased 3% in 2014
      • German growth had been driven by capacity increases from German cruise lines AIDA and TUI Cruises.
    • Italy remains the third largest source market, despite a 3.1% decrease that is explained by the decrease of capacity deployment in the Med.
    • Spain has continued to decline (–4.5%), due to the decrease in capacity in the Med and the closed operations of Iberocruceros, although this year’s decrease was much softer than the previous two years.
    • The Scandinavian market has increased by 5.6% this year.
  • China
    • With China’s potential as the world’s largest ‘nation of tourists’, annual industry growth should be double-, rather than single-digit, Donald indicated.
    • Cruise lines hosted nearly 1.4m Asian vacationers in 2014, a 34% compound annual growth rate since 2012.
    • Since 2013, passenger capacity grew at a 20% compound annual growth rate and is expected to reach almost 2.2m in 2015. The Asia region has quickly progressed to fourth in passenger capacity deployment, tied with Australasia.
    • This year, 52 cruise ships will operate in Asia, a 10% compound annual growth rate since 2013. 
    • In 2014, 697,000 passengers were from mainland China which is almost as many passengers as all other Asian markets combined (701,000).
    • In four of the largest cruise markets – China, Malaysia, Indonesia and Philippines – more than 4 out of 10 passengers were under 40.
    • More than nine out of ten Asian passengers (91%) cruised within Asia. The remaining 9% flew to cruise destinations outside the region, primarily in Europe, followed by Alaska and Caribbean.
    • 48% of Asian passengers choosing 4 to 6 day cruises in 2014, 38% choosing cruises of 2 to 3 nights, and only 12% opting for 7 to 13 night cruises.
  • Bookings for Alaska are strong. The CEOs for Holland America andCelebrity said they are adding capacity in the region for 2015.
  • South America - because of chaotic politics and economies and labor issues that impact logistics -remains a challenge  
  • Costa
    • In 2014, five out of ten guests in the major Continental European markets spent their vacation on board a cruise ship operated by the Costa Group, says Michael Thamm, ceo of the Costa Group (Costa Cruises and AIDA Cruises).

    • The Costa Group claims to be the market leader in Italy, Germany, France and Spain in 2014.

    • Last year German passengers booked every second cruise with the Costa Group brands, in France it claims a market share of around 45% and 40% in Spain.

    • In China around four out of ten bookings in the rapidly growing market are made for Costa ships, the group says. Costa Atlantica, is currently on the first 86-day round-the-world cruise for Chinese passengers and in April 2015, Costa Serena will be the third Costa vessel offering cruises from China. 

  • MSC Cruises
    • Seaside prototype ship in 2017—with its open-to-the-water design—will be based at Miami year-round, joining MSC Divina, which is to continue seasonal Caribbean operations.
    • Seaside newbuild has a revolutionary design with the engine room positioned in the center of the ship and a 'completely novel shape' that resembles shoreside more than marine architecture
      • Water park: five water slides including 'slideboarding,' which combines racing slide features with video gaming elements.
    • A stronger presence in the world's leading cruise market, North America, is a priority for MSC
    • And though MSC will position a ship in Asia eventually, it's currently not the line's No. 1 focus.
  • CLIA chairman Adam Goldstein, citing statistics released by CLIA in February, forecast 23m people will cruise globally this year, up 4% from 22.1m in 2014. 

    Takeaway: China obviously was a key topic. CCL/RCL need to understand that the reason the average cruiser age in China is much lower than US/Europe is because the older generation there has little interest in cruising. Anemic growth in Europe last year was blamed on capacity shifts; while capacity will be higher in 2015 (e.g. Allure), we think European-sourced demand will be weaker than expected. Alaska is the hot spot in 2015 while Bermuda is also on the upswing.


    CZR - Caesars Entertainment Corp (CEC) has issued a “going concern” warning in relation to bondholder lawsuits – some of them linked to the fact of the bankruptcy proceedings of its operating unit. The casino group said in a Nasdaq filing on Monday: “We have concluded that the material uncertainty related to certain of the litigation proceeding against CEC raises substantial doubt about the company’s ability to continue as a going concern.”


    FCH - sold Embassy Suites San Antonio International Airport Hotel for $29.5m

    Takeaway: This UUP hotel changed hands at only $113k/key.


    March Forecast - Local casinos are expected to close in March with a YoY revenue drop of at least 35%, with one gaming operator even expecting a fall of over 40%.


    “We are in a new phase of adjustment, readapting to a reality where the VIP gamblers are not coming to Macau and are looking for new places [to gamble],” a SJM source told Lusa news agency. “Macau is a preferred place for the Chinese gamblers. The money transferences must be controlled, but we can’t scare the gamblers as if all of them were doing something illegal. We must bet in a sustainable market and growth, which should also benefit the local society.”


    Takeaway: On average, -40% sounds right for March GGR


    Prostitution ring - Macau police break up prostitution ring, arrest 42.  All those arrested were from the mainland, with the youngest aged 17. The syndicate was operating in a Macau hotel.


    China February new home prices (0.3%) m/m vs (0.2%) in January - MNI


    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.

    investing ideas

    Risk Managed Long Term Investing for Pros

    Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

    CHART OF THE DAY: Bottom-Ticking Generational Lows In Volatility

    CHART OF THE DAY: Bottom-Ticking Generational Lows In Volatility - dd1


    Editor's Note: This chart was featured in today's Morning Newsletter which was written by Senior Macro Analyst Darius Dale.

    Dissonance Reduction

    "Indecision may or may not be my problem."

    -Jimmy Buffett


    Per our friends at Wikipedia:


    “Cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas or values… [H]umans strive for internal consistency. When inconsistency (dissonance) is experienced, individuals tend to become psychologically uncomfortable and they are motivated to attempt to reduce this dissonance, as well as actively avoiding situations and information which are likely to increase it.”


    We use the term “friends” perhaps less loosely than one might think. Personally, I’m a sucker for their intermittent fundraising campaigns; I honestly can’t remember the last time I didn’t donate $5 dollars when prompted. This is likely because of my own dissonance reduction.


    In their marketing language, there is a sentence that reads, “If Wikipedia is useful to you, take one minute to keep it online another year by donating whatever you can today.” The reason this command is so effective is because it induces feelings of cognitive dissonance in anyone who initially chooses not to donate. Of course the reader finds Wikipedia useful. As such, not donating and continuing to peruse the page puts the reader’s actions in direct conflict with each other. The more of the page consumed the more guilt he or she feels until, finally, the reader relieves that stress by recalling that all it takes is “one minute” to donate whatever small amount he or she feels like parting with.


    I just avoid the stress altogether now by donating every time I’m prompted. Call me a sucker for dissonance reduction – which is typically achieved in four ways:


    1. Adapting one’s behavior or choice to the dominant cognition
    2. Justifying one’s behavior or choice by changing the conflicting cognition
    3. Justifying one’s behavior or choice by adding new cognitions
    4. Ignoring or denying any information that conflicts with existing beliefs


    Dissonance Reduction - Fed forecast cartoon 03.02.2015


    Back to the Global Macro Grind


    Poor Janet Yellen. There is no “donate” option when it comes to setting monetary policy. In fact, the Federal Reserve’s own dual mandate of “maximum employment” and “price stability” often sends conflicting signals as it pertains to the most appropriate path of monetary policy. Transforming all of the oft-conflicting legions of economic data into one policy prescription requires a fair amount of dissonance reduction along the way. In recent statements and testimonies, the Fed has achieved said dissonance reduction in the traditional manners:


    1. Adapting one’s behavior or choice to the dominant cognition (e.g. maintaining hawkish guidance amid forecasts for a pickup in wage growth and broader economic growth – despite emerging evidence that neither the domestic nor global economy can withstand “policy normalization”)
    2. Justifying one’s behavior or choice by changing the conflicting cognition (e.g. looking through price instability by deeming it “transitory” and sticking with existing  guidance so long as policymakers can be “reasonably confident” that inflation will return to their +2% target)
    3. Justifying one’s behavior or choice by adding new cognitions (e.g. adding “international developments” to the list of factors the FOMC will consider in setting monetary policy)
    4. Ignoring or denying any information that conflicts with existing beliefs (e.g. blatantly ignoring market-based signals like trending yield curve compression and/or the impact of a rising USD on the demand for and prices of domestically produced goods and services)


    Going back to the legions of economic data the Fed factors into its policy debate, yesterday we held a conference call to dissect the domestic labor market from both a cyclical and secular perspective. We also quantified the impact of job losses in the energy sector, which has been a key area of focus in our recent discussions with our buy-side clientele. Additionally, we included a deep dive on wages and offered a well-researched view on why we have yet to see meaningful wage growth in the current cycle.


    In the latter half of the presentation, we make a fairly robust case for why the Fed should be tightening monetary policy and an equally, if not more robust case against said tightening. The presentation is concluded with an analysis of historical tightening cycles and what tightening may imply for key asset classes.


    ***CLICK HERE to access the video replay and accompanying presentation (77 charts and tables)***


    The conclusions of the presentation were as simple as the supporting analysis was complex:


    • Even beyond the headline numbers, the labor market is actually quite healthy. The current energy-related headwinds to employment growth are being drowned out by broad-based strength across other sectors.
    • That said, however, we have not yet reached full employment and slack continues to dissipate in a painfully slow manner.
    • While there are structural headwinds to wage growth, we may not understand their full impact on restraining wages for quite some time because wage growth typically doesn’t pick up until late in the economic cycle.
    • The case for monetary tightening is supported by ample evidence of the U.S. economy being soundly in the middle stage of business cycle and that deflationary forces are indeed transitory.
    • The case against monetary tightening is supported by ample evidence that the Fed is well ahead of the curve and the (growth and inflation) data, as well as emerging evidence that the U.S. economy is in the latter stage of the business cycle with increasingly probable catalysts to perpetuate a downturn.
    • While the Fed has gone to painstaking lengths to reassure investors that the path to policy normalization will be “gradual” and “data dependent”, history would suggest otherwise. The median length of time and cumulative increase in the Fed Funds Rate over the last five tightening cycles is 47 weeks and +300bps, respectively.
    • This is interesting given the current consensus positioning across the investment community: the U.S. dollar tends to weaken in the months following the initial rate hike, which is supportive of the tendency of the prices of crude oil and gold to appreciate after the initial rate hike. As it pertains to interest rates, the long end of the curve tends to back up fairly dramatically, particularly six and 12 months following the initial rate hike – with the noteworthy exception of the last tightening cycle which saw consistent spread compression. Lastly, the stock market (S&P 500) initially falters shortly after the first rate hike, but ultimately tends to recover six and 12 months later.


    So what is an investor to do with this information? Our best advice is to remain “patient” and “data dependent”. Why attempt to front-run the Fed when the Fed itself doesn’t even know what it plans to do? Why not just follow the trends in the data, keeping in mind that A) the FOMC’s forecasts for both growth and inflation have experienced a large degree of tracking error in the post-crisis era and B) the voting constituency of the 2015 FOMC is much more dovish than the aggregate body (i.e. lots of hawkish commentary emanates from non-voters)?


    While such a strategy obviously requires more active risk management of factor exposures, the recent breakout in cross-asset volatility leaves investors with little choice.


    Our immediate-term Global Macro Risk Ranges are now:


    UST 10yr Yield 1.98-2.24% 
    SPX 2029-2105 
    RUT 1

    VIX 13.91-17.43 

    USD 98.65-101.22

    Oil (WTI) 41.59-47.05

    Gold 1131-1162 


    Keep your head on a swivel,




    Darius Dale



    Dissonance Reduction - Chart of the Day

    Invest In Yourself

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

    “The best investment you’ll likely ever make is in yourself.”

    -Cullen Roche


    That’s one of the better quotes from the latest book I am reviewing: Pragmatic Capitalism, by Cullen Roche. While the book has underwhelmed me so far, there’s usually something positive to see in people – if you look hard enough.


    This week is a big stressor for me in that we are holding tryouts for our Mid Fairfield and CT Junior Rangers hockey programs. The hardest thing to do isn’t reporting who are the best players on the ice; it’s evaluating which ones have the most potential.


    That’s not unlike how I think about investing. Anyone on mainstream TV can tell me what’s worked. What I really need to get right is what’s going to start working next.

    Invest In Yourself - Central banker cartoon 03.03.2015


    Back to the Global Macro Grind


    The biggest risk management question I’m thinking about right now is whether or not the phase transition (from late-cycle bullish at this time last year, to bearish now) of Global #Deflation is going to accelerate to the downside.


    If you look one screen past the commodity headlines (Oil and Gold), this is what you were looking at yesterday:


    1. Orange Juice -7% on the day to -16.9% YTD
    2. Coffee prices down another -6.6% on the day to -24.2% YTD #crashing
    3. Hogs (as in pigs) -2.4% on the day to -18.7% YTD


    Mortimer! Get me some #deflation in my breakfast already!


    Will you see that #deflation on your local diner (or SBUX) menu? Of course not. At least not in real-time. Companies that had food cost accelerating to the all-time highs (2012 was the all-time high for corn prices as Bernanke was devaluing USD) are finally seeing some of those cost pressures alleviate. Local dinner guy’s healthcare and other costs, not so much…


    But what about the poor bastard who is selling pigs?


    Yes, this whole #deflation thing has winners and losers. #Deflation pays the conservative consumer, whereas it punishes the levered-up debtor whose revenues and cash flows are pinned on higher inflation expectations!


    Q: What horse does the Wall Street have in this consumer vs. debtor debate?

    A: higher inflation expectations + leverage + banking fees generated by both


    In other causal Global #Deflation news, don’t forget that the two most important live quotes on your screen continue to tick this morning. Those are, of course, currency quotes:


    1. Burning Euros
    2. Burning Yens


    In order to get the rate of change in Global #Deflation right, you need to get the US Dollar right. And… in order to get the US Dollar’s rate of change right, you need to front-run the devaluation policies of its major competing currencies, alright?


    1. Euros (vs. USD) are being blown up to fresh YTD lows this morning (-7.3% for 2015) at $1.11
    2. Yens (vs. USD) can’t find a bid after Japan reported the worst Services PMI in the world overnight


    Services PMI? Yep. It’s one of the many monthly macro economic data points we pop into the Hedgeye Predictive Tracking Algorithm (the model we built that helps us front run bond yields, central planners, etc.) … and voila, le rate of change appears!


    1. Japanese Services PMI slowed to 48.5 in FEB vs. 51.3 in JAN
    2. Italian Services PMI slowed to 50.0 in FEB vs. 51.2 in JAN
    3. German Services PMI was 54.7 in FEB vs. 55.5 in JAN


    “So”, Italian stocks are up on that (German stocks are down) to +15.8% YTD. #lol


    It’s funny, sort of, but sad … all at the same time. The worse the Japanese and Southern European economies (i.e. the most levered debtor countries) get, the better their stock markets get, as the entire world front-runs their central planners burning their respective currencies in response.


    The inverse correlation of burning Euros and Yens to their respective country stock markets is surreal (inverse meaning when FX drops, stocks rip higher). And, as you can see in the Chart of The Day (this is slide 8 in our current Global #Deflation deck), we continue to see it as mathematically impossible that either Draghi or Kuroda will achieve their monetary-math “inflation” targets.


    That’s a lot to noodle over as you try to invest in your own noodle. But setting aside what we get right and wrong both in markets and on the ice, that’s the best way to invest in yourself in this good life – to educate yourself empowers your progress and potential.


    Our immediate-term Global Macro Risk Ranges are now:


    UST 10yr Yield 1.88-2.17%

    SPX 2083-2121
    Nikkei 18601-19005
    VIX 13.03-16.33
    USD 94.51-95.94
    EUR/USD 1.11-1.13
    YEN 118.54-120.36


    Best of luck out there today,



    Keith R. McCullough
    Chief Executive Officer


    Invest In Yourself - 03.04.15 chart

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