Earlier today the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 2Q15 and the associated investment implications.




Keith's Macro Notebook 4/7: U.S. Dollar | Commodities | China


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


Takeaway: March volumes a little worse than GGR indicates as market played lucky. Trends in grind Mass should be the focus on Q1 earnings calls.


The Macau stocks appear to be in a trading range with March coming in essentially in line with expectations.  While we definitely picked up on some potential bright spots while in Macau, 2015 EBITDA estimates look high to us, particularly LVS which maintains more exposure to the grind Mass segment. While exposure there should prove beneficial over the long-term, we fear the Street is overestimating growth in that segment this year. Disappointing results in the highest margin segment will impact profits disproportionately.  We believe this is the major driver of the disparity between the Street and us, despite similar GGR forecasts (-25%).


We will be hosting a call on Friday morning at 11am to discuss our Macau outlook and to provide an in-depth look into the Direct VIP segment.



  • GGR fell 39% and 41% on a hold adjusted basis – the casinos played a little lucky
  • Unadjusted Mass and VIP revenue fell 29% and 45%, respectively
  • Adjusted for the reclassification of certain tables from Mass to Direct VIP to circumvent the Mass smoking ban, VIP and Mass revenue fell 48-50% and 16-20%, respectively
  • Junket volume dropped 54% - the 2nd worst decline behind February’s 60% drop
  • We estimate Direct VIP accounted for 8.5% of VIP volume in March compared to 8.3% over the past 3 months and 7.0% in March 2014

MACAU MARCH 2015 DETAIL - 4 7 2015 9 29 58 AM

  • Slot revenue tumbled 25% YoY 



Sands China (LVS)

  • GGR share at 21.4%, in line with its 3 month average but 100bps below the 12 month average.  The discontinuance of phone proxy betting in October has caused the share decline. As of now, the Sands China properties are the only ones that will not accept phone proxy betting.
  • Eliminating phone proxy betting likely contributed to the market leading 62% decline in junket volume.
  • On a YoY basis, GGR fell 41%, the 3rd worst in the market
  • We estimate adjusted Mass revenues declined 22-24%, the 2nd worse decline ever behind February’s -26-28%
  • Adjusted for mass reclass, hold was normal in March
  • We remain concerned with Street estimates given the worse than expected performance in the grind Mass segment and slots (down 32% YoY in March)


Wynn Macau

  • The new junkets at Wynn Macau appear to favorably impacting market share – Wynn’s GGR market share grew 150bps versus its 3 month average driven by a 220bp increase in Junket volume share
  • Wynn also resumed its phone proxy betting operation which also contributed to the Junket and GGR share improvement
  • However, on a YoY basis, Wynn is fighting an uphill battle.  GGR fell 43% from March 2014, the worst in the market, despite higher hold compared to normal and last year.
  • The precipitous drop in VIP has certainly freed up some hotel rooms for Mass customers.  Wynn’s Mass business was the best performing in the market with only a 5% decline
  • Wynn Macau should continue to be a market share gainer in the coming months


MGM China

  • GGR fell “only” 34%, the 2nd best performance in the market driven by very high VIP hold (3.4%)
  • During the month, MGM converted its reclassed Direct VIP tables back to Mass so going forward the comparisons will be apples to apples for Mass and VIP
  • Market share was solid, 40bps and 60bps higher than its 3 and 12 month averages.
  • Junket volume dropped 57%, slightly worse than the market



  • For the 2nd straight month, MPEL’s GGR fell the least in the market, despite the lowest hold in the market
  • Adjusted VIP hold was only 2.6%, so volumes appear to be “relatively” healthy
  • Junket volumes led the market on a YoY change basis
  • While market share came in below recent trend, hold was the likely culprit.  Junket volume share actually improved markedly in March



  • GGR declined in line with the market but market share was well below trend
  • Lower VIP hold percentage was the likely culprit for the lost share as Junket volume share actually increased sequentially
  • Junket volume declined 44% YoY, better than the market. However, in previous months, Galaxy had been significantly outperforming in VIP.

Here are the relevant market shares:





Please note that these hold percentages are estimated for 2 reasons. First, total VIP revenues included direct VIP while Rolling Chip volume only includes junket volume. Thus, direct VIP volume needs to be estimated. Second, the revenues reclassified from premium mass to direct VIP need to be estimated and subtracted out of reported VIP revenues.




Our 2015 GGR forecast of -24% YoY change remains unchanged.




While a little less negative than we’ve been in a long time, this coming earnings season could shine a light on the deterioration of the high margin grind Mass segment. The Street still appears to be projecting decent growth in this segment in 2015, despite recent monthly declines. The weekly and monthly data do not break out grind Mass and premium Mass but table minimum bet levels and anecdotal evidence suggests a negative trend. Looking ahead, we’re encouraged by some recent trends in Direct VIP and some stability in the grind Mass segment, albeit at levels likely lower than Street expectations.


Client Talking Points


After a 2-day drop, then straight back up overnight as EUR/USD backs off from $1.10 to $1.08 and the Yen failed @Hedgeye resistance too – US currency doesn’t operate in a vacuum – TRADE and TREND support for USD Index intact.


The CRB Index was +1.8% yesterday to close at 220 + +5.3% off multi-year lows but now at the top-end of its 209-221 risk range with Oil and Gold backing off the top-ends of theirs too; USD is holding its ground keeps #deflation risks on.


Epic ramp for the Chinese stock market (up another +2.5% overnight to +22.5% year to date for the Shanghai Comp = 7 year high as A) both growth and inflation data slows and B) stimulus hopes run rampant) – We just had a Real Conversation @HedgeyeTV w/ Steve Roach where we focus the 1st part on China here:


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


EVENT: Hedgeye's Q2 Global Macro Themes Call 11AM EST @KeithMcCullough


“I played the game one way.  I gave it everything I had.  It doesn’t take any ability to hustle.”

                        -Wade Boggs


Once again, ZERO perfect NCAA March Madness brackets were submitted.

CHART OF THE DAY | Initial Claims: As Good As It Gets?

CHART OF THE DAY | Initial Claims: As Good As It Gets? - 04.07.15


Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye Director of Research, Daryl Jones. Click here to subscribe.


In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s.  The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough.  More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does. 


Dream Themes

“Deep into that darkness peering, long I stood there, wondering, fearing, doubting, dreaming dreams no mortal ever dared to dream before.”

-Edgar Allan Poe


Yesterday was the championship game for college basketball and like most NCAA tournaments, this one was full of its share of surprises.  To many (especially Wildcat faithful) the biggest surprise in the tournament was the premature end to Kentucky’s perfect season.  (Although after last night’s 5th national victory for Coach K, the Duke basketball faithful probably aren’t too concerned about Kentucky!)


The dream of a perfect season in NCAA basketball begins anew next season.  It has been 39 long years since Indiana, under Bobby Knight, last had a perfect season in 1976.  That’s a long time for basketball fans to wait for a proverbial “Dream Team”.  Luckily for all of you, once a quarter Hedgeye releases our "Dream Themes" and today at 11am ET we will be walking you through our Q2 2015 investment themes (ping if you haven’t already received the dial-in).


Clearly, we are being somewhat facetious in suggesting our quarterly investment themes are perfect.   But even if we aren’t perfect, every quarter we endeavor to highlight the top three macro-economic themes that we believe are most relevant.  To some investors, quarter-to-quarter thematic investing may seem counterintuitive. 


In a globally integrated economy that is increasingly being managed by governments and central bankers, we think nothing could be further from the case.  When the direction of the markets can be influenced by the simple changing of a single word in a central bank’s policy statement, frankly it is careless not to stay on top of the real-time changing currents in macro investing.


Dream Themes - central planning cartoon 01.04.2015


Back to the Global Macro Grind...


The key themes we will be discussing later this morning are highlighted below and as usual there will be heavy focus on the U.S. economy:


1. LateCycle USA: Employment, Inflation and Earnings follow an archetypic progression over the course of the economic cycle and always look best before the crest.  We'll detail where we are in the current cycle, the likely trajectory for this trinity of late-cycle macro indicators from here and how best to be positioned in the twilight of the current expansion.  


2. DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the "secular stagnation" thesis most recently highlighted by Bernanke's blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...


 3. Oil's #DeflationDeck:Taking a birds-eye view of oil prices throughout the peaks and troughs in business cycles provides essential context as deflation's dominoes continue falling on a global scale. With the U.S. production machine changing the supply/demand dynamics in global energy markets, a deep-dive of this shift is key to generating sector-specific alpha into 2016 and beyond.     


Given the recent disappointment in U.S. employment, the #LateCycle USA is likely to be the most controversial to investors.  Specifically, on Friday the Labor Department’s data showed the U.S. added a mere 126,000 jobs in March.  The economic bulls of course will tell you, and there is some credence to their argument, that part of the fall in March was a one-time correction in the energy sector as domestic oil drilling adjusts to a new, and much lower, paradigm in oil.


In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s.  The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough.  More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does. 


With the current expansion getting long in the tooth at 71 months versus a median expansion of 51 months,  you probably get very clearly why we think the most important current macro topic is to focus on where we are in the cycle.  In as much as we’d like to dream of economic cycles that expand in perpetuity, that’s not how the world works outside of academia.


In typical reactionary fashion, members of the Federal Reserve are now beginning to explicitly push out the so-called “dots”.  Yesterday Atlanta Fed President Dennis Lockhart, who is currently a voting member, said he favors a July or September “lift off” instead of June, with the caveat that most of the negative data in Q1 was transitory (which is how most economists classify data that doesn’t agree with their prevailing view).


The irony of course is that to the extent that the Fed doesn’t continue to be wrong on real-time economic data, and does at some point in the next couple of quarters get the chance to raise rates, the Fed will be signaling that we are likely in the longest economic expansions in the history of the U.S. economy.  This assumes that the Fed then raises rates through 2017, which would put the U.S. economic expansion at near 100 months!


Sounds like a bit of a dream to you? Well, us too.  And as Victor Hugo wrote about dreams in Les Miserables:


“There is nothing like a dream to create the future.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-1.93%
SPX 2044-2094

VIX 13.63-16.21
YEN 118.98-120.49
Oil (WTI) 46.39-52.24
Gold 1180-1218 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Dream Themes - 04.07.15

the macro show

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