McCullough: My Thoughts on Doug Kass’ Short Bonds Call


In this brief excerpt from today’s edition of The Macro Show (click here for full replay), Hedgeye CEO Keith McCullough discusses Doug Kass’ call (yet again) for rising interest rates. 

MCD: Still Lacking Direction

We hope there are better days ahead for MCD, but on the surface it looks like the company is still struggling to find its way.  We continue to believe MCD is a short.

Yesterday’s announcement about higher wages was largely a public relations stunt.  Unlike the other large retailers that have announced similar wage rate actions, the majority of McDonald’s workforce is not eligible for this wage increase – unless the franchisees decided to follow suit (highly unlikely).  To be clear, PR stunts and marketing gimmicks will not fix McDonald’s.  It’s time for the company to get serious about making changes that will improve the operations of the company.


Traditionally, increased inflation (higher menu prices) benefits MCD’s bottom line which means that, on the surface, this announcement could potentially benefit the new CEO.  If the franchisees are forced to raise wages, they’ll certainly raise menu prices, which will benefit MCD’s royalty stream.  Good news for MCD right?  Not so fast. 


This news, along with other recent announcements, solidifies our short case for three reasons:


1.  It appears the subject of raising wages was not on the agenda at the recent franchisee convention.  If this is, in fact, true it raises the question: why was the new CEO unwilling to openly talk about this with franchisees?  This goes against the founding principles of the company.  The McDonald’s system was built on Ray Kroc’s vision of franchisees working not for McDonald’s, but for themselves in conjunction with McDonald’s.  He constantly promoted the slogan: “In business for yourself, but not by yourself.”  This philosophy was based on the simple principle of the 3-legged stool:

  • Franchisees
  • Suppliers
  • Employees

Given that the stool is only as strong as the three legs that formed its foundation, if one leg is broken the whole system will fail.  Franchisees must be profitable and successful – the future of the company depends on  it.


2.  MCD is in no position to raise prices given the market place’s current brand perception.  MCD already has a price-value perception issue and this will only be exacerbated by higher prices.  The closer McDonald’s average check gets to the “better burger” category (without an improvement in quality), the more market share it will cede.


3.  The new CEO hasn’t proven that he is willing to make drastic changes.  While we’re in the early days of Steve Easterbrook’s tenure as CEO, it appears that he hasn’t yet taken charge of the company.  The continued test of Create-Your-Taste and the recent announcement that the company will be testing all-day breakfast in Southern California are clear signs that this company isn’t serious about turning around.

Keith's Macro Notebook 4/2: UST 10YR | Oil | Russia

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

The Top Three Things are part of The Macro Show, Hedgeye TV’s live and interactive pre-market show where we break down what’s happening in the markets and Global Macro. CLICK HERE to watch today's full 24-minute show.

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LEISURE LETTER (04/02/2015)



OPAP - is extending an open invitation for the Expression of Interest (EoI) by interested parties regarding the concession of the right to install and operate 18.500 VLTs in Greece. The EoI process will run until 30 April 2015. The full EoI document plus other relevant information can be found at


The EoI process will be followed with the issuance of an RFP in an open, international tender for the submittal of binding financial proposals by prospective concessionaires.  Participation in the EoI process will not be a prerequisite for participating in the tender process which will follow.

Takeaway: The 2nd round of Greece is an important growth opportunity for SGMS and GTECH and will be closely watched.


Genting Singapore - As stated in the March 9th and 11th Announcements, the share buy-backs referred to in the Announcements do not constitute the purchase, redemption or acquisition by the Company of its own shares under the Isle of Man Companies Act 2006 until the name of the Company has been registered in its Isle of Man register of members in respect of those shares. The Company wishes to inform that the name of the Company has been registered in its Isle of Man register of members in respect of 11,989,400 shares which are the subject of the share buy-backs referred to in the Announcements, and such shares have been cancelled on 1 April 2015.

Takeaway:  Those shares represented only 1% of outstanding shares.


Genting HK-  Genting Hong Kong is seeking shareholder approval for a new mandate to dispose of NCLH shares at the company's discretion. This gives it the flexibility to sell shares at appropriate occasions, without having to get approval for each transaction.


Genting HK's 2014 mandate for selling up to just under 56.82m NCLH shares is expiring on April 25 and, as expected, a new 12-month mandate has been proposed.  Under the 2014 mandate, Genting HK has sold 6.25m NCLH shares to date.


In a filing Tuesday, Genting HK said the future disposal may constitute a major transaction or a 'very substantial disposal.' 



LVS - Sands Bethlehem wants to expand its gaming floor with the addition of a multimillion dollar live dealer electronic table game stadium. Sands officials made an informational presentation for the Pennsylvania Gaming Control Board on Tuesday. Sands has yet to apply to the board to add the gaming stadium.

If approved, the 150 betting terminal, live dealer electronic gaming stadium would be the first in a Pennsylvania casino. It would feature four to eight live dealers.



AirBnB - starting today Airbnb will allow Americans to book accommodations in Cuba.  More than 1,000 properties are currently available across the island with 40% in Havana. Airbnb believes Cuba could become one of its largest markets in Latin America. 



RCL - Bernard Aronson, a director of Royal Caribbean Cruises Ltd. since 1993, has decided not to stand for re-election at the company's upcoming Annual Shareholders Meeting in May, citing the time commitments required of his new responsibilities.  In February 2015, Aronson was named by President Obama as U.S. Special Envoy to the Colombian Peace Process.


CCL - Following its inaugural Europe season in 2016, Holland America Line’s new Koningsdam will homeport at Port Everglades in Fort Lauderdale, Fla.

The ship will sail a series of Caribbean voyages and one cruise to the Bahamas from November 2016 through March 2017. Itineraries range from one four-day cruise to seven days and 10 and 11 days.


NCLH - is testing an enhanced room service menu on Breakaway-class ships that incurs a convenience charge of up to $7.95 per order. Room service orders by Haven and suite passengers will not be charged the convenience fee.  


No comment yet on whether this charge will roll out to the rest of the fleet.

The new room service fee comes shortly after the cruise line instated an automatic 18% gratuity on all specialty and entertainment dining.


Takeaway: Sure these changes would benefit onboard yields but why would potential cruisers want the higher costs by sailing NCL?


BYD - The Borgata casino has confirmed it will file an appeal of its property tax assessment for this year by Wednesday’s deadline, the Philadelphia Inquirer reported. Last year, the Borgata won $88.25 million in a settlement with AC over its appeal of 2014 property taxes.





March GGR shares - March GGR shares: SJM (23.2%), Sands China (21.4%), Galaxy (20.0%), MPEL (14%), Wynn Macau (11.2%), MGM China (10.2%).



Takeaway: Wynn had the most improvement month-over-month while LVS took the biggest hit. New junkets at Wynn finally making an impact.


Online bust - Mainland China police have apprehended 1,071 people allegedly involved in a large online gambling network, said Xinhua. The agency described it as the largest ever enforcement action against an illegal operation trading in bets on the results of China’s legal state lotteries – the welfare lottery and the sports lottery.



Gaming taxes - The government has reduced its estimate of revenue from gaming tax this year by 27.3% to MOP84 billion (about US$10.5 billion) in view of the downturn in the casino market, Secretary of the Economy and Finance Lionel Leong Vai Tac has said.


Leong told the Legislative Assembly that this means he now expects revenue from all sources of MOP119.9 billion, 22.4% less than before. The government now forecasts that gross gaming revenue will average MOP20 billion per month this year, having previously forecast an average of MOP 27.5 billion.


Takeaway: Leong's forecast would imply a 31% YoY decline, below our estimate of 25%.


Package tours hotel stats (Feb 2015) - Attributable to the Lunar New Year holidays, visitors on package tours increased by 13.2% YoY to 983,000. Package tour visitors from Mainland China increased by 21.5% YoY.


A total of 756,000 guests checked into hotels and guesthouses, down by 9.9% YoY. Guests from Mainland China (512,000) and Hong Kong (87,000) decreased by 6.4% and 16.2%. In the first two months, hotel guests totaled 1,559,000, down by 8.9% YoY; the average occupancy rate stood at 79.8%, a decrease of 6.1% points.




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.

[Unlocked] Keith's Daily Trading Ranges

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. It was originally published April 02, 2015 at 07:13. Click here to subscribe.

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UST 10YR Yield, OIL, Russia

Client Talking Points

UST 10YR Yield

UST 10YR Yield: 1.85% this morning, it is testing the low-end of our immediate-term 1.82-1.93% risk range as lower-for-longer starts to get priced in – both the March ADP and ISM reports slowed, sequentially, yesterday –“data dependent” rates.


The USD was overbought and was the right immediate-term signal, alongside the inventory numbers yesterday, that helped Oil bounce big to lower-highs – WTI risk range has tightened to $45.81-50.99, so we would re-short Oil and its related stocks/bonds closer to the top-end of the range.


+1.5% this morning for the Russian Trading System Index, finally tapping the top-end of its 837-929 risk range – We have been waiting for a re-entry point on the short side there, it looks like we’re going to get that.

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


WE'LL DO IT LIVE!!! Join The Macro Show at 8:30AM ET (for free) w @KeithMcCullough @Hedgeye 



"Yesterday's homeruns don't win today's games."

-Babe Ruth


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Daily Trading Ranges

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