Keith's Macro Notebook 3/31: Euro | Oil | Housing

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

LEISURE LETTER (03/31/2015)



SJM - SJM CEO Ambrose So Shu Fai described the government’s latest estimated average monthly gaming gross receipts of 20 billion patacas for this year as “a bit conservative”.  However, he was quick to add he believed that the government was just being cautious.



Thomas Cook Group trading update

  • The UK business continues to trade ahead of last year, with significant bookings growth resulting from robust demand particularly for our Winter Sun holidays 
  • Trading in Continental Europe and Northern Europe, while still tough compared to last year's strong performance, has improved since we reported FQ1 results
  • Demand for holidays to our Concept Hotels is growing, with bookings up by 20% versus prior year
  • Summer 2015 trading is developing satisfactorily, with improving trends seen across most markets since our last update. The season is now 54% sold for the Group as a whole, 2% higher than this time last year.


Takeaway: For the summer season, stronger bookings are seen for this tour operator but pricing is still flattish which we expect is also the case for the cruise lines in Europe. 


SGMS - has signed a contract to provide OPAP S.A.("OPAP") with 5,000 video lottery terminals ("VLTs") pursuant to OPAP's10-year license to operate a network of 16,500 VLTs across the country.  Deployment is expected to begin in spring 2015 and conclude by the end of the year.

Takeaway:  30% share is roughly in-line with expectations. Greece has been a long-delayed project. Will it finally get off the ground this year?


HELLENIC LOTTERY (OPAP)/SGMS - scratch ticket revenues for the Hellenic Lottery grew 13% QoQ in Q4 2014 to 100m euros while other lottery revenues declined 5% QoQ in Q4 2014.  Total Hellenic lottery revenues grew 7% QoQ to 141m euros. OPAP says "The H2 revenues’ run rate is seen as a normalized trend to be expected in the foreseeable future as well."

Takeaway:  Hellenic Lottery seems to be growing modestly. SGMS (16.5% equity interest in Hellenic Lottery) recorded income of $2.3 million in FY 2014.  SGMS also recognized revenue of $6.3 million from the sale of instant games to Hellenic Lotteries during FY 2014. Operations under the Hellenic Lottery concession agreement commenced in May 2014.


PENN - has informed the partners of Endeka Entertainment LP (“Endeka”) of its intent to withdraw from the proposed Lawrence Downs Casino and Racing Resort project. An application by Endeka for the proposed $225 million integrated racing and gaming facility in Lawrence County, Pennsylvania has been pending before the Pennsylvania Gaming Control Board (PGCB) since May 2013.


“We are disappointed to be withdrawing from this project,” stated BJ Fair, Chief Development Officer for Penn National Gaming. “However, given the continued softness in the economy and the level of market saturation -- not just in Western Pennsylvania, but across the Commonwealth -- we are regrettably unable to justify this investment at the statutorily required spending levels,” said Fair.

Takeaway: Rifts between PENN and Endeka caused the withdrawal.  In addition, in the trailing 12 months, total casino revenues in Pennsylvania have been flat, which suggests a mature market. 


ERI -  will ask state regulators for permission to remove 140 slots as part of a $5 million improvement plan that ERI says will right-size its operations. The reduction will leave Presque Isle with 1,580 slots. ERI also wants to reduce its number of table games from 46 to 42.

Takeaway: Pressure from Cleveland openings.


Macau casino tax budget - The amending budget proposal, which will be voted upon at the Legislative Assembly on Wednesday, includes a 30 percent cut in revenues derived from gambling taxes. According to the proposal, the government expects to cash in MOP84 billion derived from the casino tax revenue. In the budget announced in November 2014, revenue was estimated to be around MOP115 billion. 



Hotel transactions to ebb - hotel investors at the Hunter Hotel Conference said volume levels will be lower than what was seen in 2014.  Sujan S. Patel, managing director at NorthStar Realty Finance Corporation, said his company’s focus will be on smaller-sized deals of $50 million or higher. “There’s a limited arena of big deals,” he said. “This is probably the year of smaller-scale transactions. Clearly, there are groups of people who have built large hotels and some groups might decide to sell them. From NorthStar's perspective, we are certainly not a seller this year. We will be acquiring.”


Select service is a particularly sought-after class of hotels. Tyler Morse, CEO of MCR Development, said consumers favor select service because of the lower cost of their stay.  “It’s a great value proposition,” he said. “There’s been a secular shift with consumers from full service to limited service.”


An attractive debt environment will continue to help spur deals during 2015. While it is a good time to buy assets, the panelists agreed it is an equally if not more favorable time to sell. 






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.

BABA: Solid Pushback → Same Conclusion

Takeaway: Group-buying has come up a few times as a counter to our thesis. Definitely plausible, but points to the same conclusion, if not worse.


  1. OUR THESIS: We believe China’s Elite is driving the bulk of BABA’s GMV.  Average spending on the platform is well in excess of what the average Chinese consumer could afford.  In turn, we expect GMV/Active Buyer to decline as a progressively weaker consumer joins the platform, leading to precipitous slowdown in GMV growth, which will pressure its entire model.
  2. GROUP-BUYING COUNTERARGUMENT: One very plausible explanation for BABA’s elevated Average GMV is that often one person is placing orders for multiple people.  However, this would need to occur at a very wide scale to counter our thesis.  If that was the case, then BABA has penetrated a much greater portion of the Chinese population than its reported metrics suggest.
  3. SAME CONCLUSION, IF NOT WORSE: If a new BABA user was already shopping on the platform via someone else's device, then their GMV will be pulled from one device into another, leading to declining average GMV.  What's worse, if the counter is true, that also means BABA's core GMV growth driver moving forward would be wallet share; a challenge since new product expansion may not yield much for BABA (see below for historical context).



We believe China’s Elite is driving the bulk of BABA’s GMV.  Average spending on the platform is well in excess of what the average Chinese consumer could afford.  In turn, we expect GMV/Active Buyer to decline as a progressively weaker consumer joins the platform, leading to precipitous deceleration in GMV growth, which will pressure its entire model (see note below for more detail).  


BABA: New Best Idea (Short)

02/11/15 11:12 AM EST

[click here


On the first point, in the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  BABA's Average GMV is well in excess of what the average consumer could afford to spend, especially since BABA’s core product offering only caters to roughly 40% of the consumption needs of the average urban consumer (see note below for more detail).


BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]


BABA: Solid Pushback → Same Conclusion - BABA   Avg GMV vs. Internet CY14



One very plausible explanation for BABA’s elevated GMV/Active Buyer is that one person is placing orders for a group of people.  For example, one person in rural setting is placing orders for a small village, or one person is placing orders for neighbors in their apartment complex.  Naturally, this would have an inflationary impact on GMV/Active Buyer.  However, this would need to occur at a very wide scale of counter our thesis.  


We illustrate this point in the below chart, which is a scenario analysis of what BABA’s actual GMV per active shopper would be at varying level of actual consumer penetration.  Most of the calculated metrics are still in excess of what the average consumer could afford to spend. 


However there is a more important point here.  If China’s Elite isn’t driving the bulk of BABA’s GMV, then actual e-commerce penetration is considerably higher than BABA's reported metrics suggest.  


BABA: Solid Pushback → Same Conclusion - BABA   Avg GMV scen 2



We're expecting new user growth in the form of a weaker consumer will lead to declining Average GMV.  The counterargument would suggest that same.  For example, if a new BABA user was already shopping on the platform via someone else's device, then their GMV will be pulled from one device into another.  


However, if the counterargument is true, that also means BABA's core GMV growth driver moving forward would be wallet share (retail moving online) since e-commerce penetration is already much higher than BABA's reported metrics suggest.  


As we've stated previously, BABA's wallet share opportunity is debatable, largely because BABA’s core product offering can only cater to roughly 40% of the consumption needs of the average urban consumer.  We realize that BABA will continue to expand into new product categories, but historically that hasn't mattered much.  BABA's core offerings have only grown as a percentage of total online consumption despite product expansion.  


That said, we're not suggesting that BABA won't be able to penetrate new product categories.  But just because BABA is offering new products, doesn’t mean that consumer uptake will be widespread.  


BABA: Solid Pushback → Same Conclusion - BABA   Urban Per Cap Consumption

BABA: Solid Pushback → Same Conclusion - BABA   E com product share 2 



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


Hesham Shaaban, CFA




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I Can't See Land!

This note was originally published at 8am on March 17, 2015 for Hedgeye subscribers.

“The problem was sight.”

-Peter Zeihan


That quote is not alluding to the Fed’s decision tomorrow. Peter Zeihan was describing what I am sure all of your FOMC day previews are writing about this morning - 14th century macro strategy.


In the world before 1400, true ocean transport was a rare thing, being neither quick nor reliable nor safe… once line of sight to the land was lost, you had to more or less guess.” (The Accidental Superpower, pg 24)


Guess? When I was first hired on the buy-side, sometimes I’d guess. Then I’d lose lots of other people’s money and my boss, Jon Dawson, would tell me not to guess. “We don’t do open-the-envelope investing.” It was a great risk management lesson.


And it’s one that has stuck with me for the 14 years since he taught it to me. That’s why I’ve been taking down my asset allocation to long-term Treasuries on the recent bounce. I can’t guess what Yellen says tomorrow. I’d rather raise cash and react to it. I Can't See Land! - Yellen cartoon 09.17.2014NEW


Back to the Global Macro Grind


This is not to suggest that what super “smart” people on the Wall Street refer to as an ‘educated guess’ can’t make you a lot of money. As I implied in my intro, the smartest of those types have figured out to bet big with other people’s money!


Will Janet Yellen remove the word “patient” from tomorrow’s Fed policy language? Will she replace it with another scrabble word score? Will she leave the word in there and be “data dependent”? Will a ramping US Dollar find its way into the language? How about the dirtiest word she’s ever whispered publicly, #deflation?


You can buy-pass the whole seeing thing if you just have answers to the aforementioned questions in advance. It’s called inside information. Some pay a lot of dough for it! If you’re a little Mucker in Stamford, CT – you’re going to have to wait and watch.




Since we said buy both stocks and bonds before they started bouncing last week, now we can sell some of what we bought, raise some cash, and sleep soundly. Chasing beta by levering up your bets after markets bounce is no way to live.


Bets? Yes, people in this profession bet. Before yesterday’s US stock and bond market ramp, here’s where consensus macro bets were leaning, from  CFTC Non-Commercial futures and options perspective:


  1. SP500 (Index + Emini) net SHORT position hit a YTD high of -39,891 contracts
  2. Russell 2000 net SHORT position hit a YTD high of -40,793 contracts
  3. Long-bond Bears ramped the net SHORT position in the 10yr Treasury to -173,194 contracts
  4. Crude Oil Bulls remained pervasive with a net LONG position of +294,609 contracts
  5. US Dollar Bulls hit YTD highs at +81,210 NET long contracts


And, guess what? Every single one of those Consensus Macro positions was wrong on the day:


  1. After 3 straight down weeks (yes people get bearish after corrections), SP500 popped +1.35%
  2. Russell 2000, which has been our favorite of the US major indexes, tested an all-time high
  3. 10yr UST Treasury Yield dropped to 2.07% (TLT was up +1% on the open)
  4. Oil continued to crash with WTI closing -2.3% on the day at -17.7% YTD
  5. US Dollar Index had one of its biggest down days of 2015, -0.76%


“So”, what does this mean?


  1. You should pay attention to modern day mind-maps like futures and options positioning
  2. Wall Street is begging for Janet to devalue Dollars and keep rates lower for longer
  3. If Yellen delivers #dovish tomorrow, you’ll see a lot more of Consensus Macro bets being wrong


I personally don’t like being wrong. That’s why, especially heading into an open-the-envelope event day like tomorrow, I lower the probability of being wrong by raising cash.


Do I have an opinion on what the Fed should do? Of course. But that and a bus ticket will get me a swift beating at a men’s league hockey game in northern Quebec. What the Fed should and could do are two very different things.


Since we’ve had a good run here in March, I’d rather cling to my cash (US Dollars) than pretend to see something I have absolutely no edge on. And I’ll let the clairvoyant vision of the Federal Reserve rule another non-free-market day.


Today we’ll be hosting a Macro Call on the US Employment Cycle at 11AM EST (ping for access). Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.01-2.14%

SPX 2053-2112
RUT 1222-1243

VIX 13.72-17.39
USD 98.50-101.17
Oil (WTI) 43.05-47.36
Gold 1131-1169


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I Can't See Land! - 03.17.15 chart

Euro, Oil and Housing

Client Talking Points


The Euro is down -1% to $1.07 on neither inflation nor employment data doing anything month-over-month (the EUR/USD is down because markets expect ECB President Mario Draghi to deliver more cowbell in attempts to create inflation, which looks impossible right now). EU CPI went from -0.3% to -0.1%; unemployment rose from 11.2% to 11.3%...European stocks love Burning Euros.


Oil does not love Burning Euros because that equals #StrongDollar. Down -2.2% to -11% year-to-date for WTI Oil this morning after failing at all lines of @Hedgeye resistance – Energy and Financials (in equity land) remain our 2 favorite sector shorts/under-weights.


Our favorite sector long/over-weight remains U.S. Housing – for Pending Home Sales to be +3.1% with that weather was very bullish, because the housing data only gets more bullish with the Spring thaw. The ITB (Housing ETF) signaled overbought within a very bullish TREND yesterday (+9.1% vs SPX +1.3% year-to-date).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.


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. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.


While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


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. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road


The Macro Show, Live and Interactive w/ @KeithMcCullough at 8:30AM ET today. Click here to watch for free:



It is good to have an end to journey toward; but it is the journey that matters, in the end.

-Ernest Hemingway


The Pending Home Sales index rose +3.1% sequentially in February, taking the index to a new 19-month high.  

CHART OF THE DAY: Does Strong #Dollar = Strong America?

CHART OF THE DAY: Does Strong #Dollar = Strong America? - Chart of the Day


Editor's Note: This is a brief excerpt from today's Morning Newsletter by CEO Keith McCullough. Click here for more information on how you can subscribe. 


Back to more local matters, like the relationship between US Dollars and American Purchasing Power, Consumption, and Savings… what Heli-Ben didn’t quite get (or blog about) was that these very important things are positively correlated.


#StrongDollar à Slowing Inflation (think cost of living) à Rising Real Consumption à Moarrr Savings


I swear, this is rocket science, eh? Don’t forget that the 1983-1989 and 1993-1999 periods of > +4% real US GDP growth was not only sustainable for more than a few quarters – but it punished those who invested in Down Dollar Inflation Expectations assets.


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