Hijacking A Hockey Player

“Don’t let your emotions hijack your thinking.”

-Ray Dalio


While we’d all love to be as objective as we can be in this profession, being human often challenges us on that front. Especially if we’re not running a purely rules-based strategy (which has its risks), we’re always going to have a qualitative debate bouncing around in our heads.


In another solid chapter from Learn or Die titled “Emotions: The Myth of Rationality”, Ed Hess reminded me of this basic reality by asking a simple question:“If cognition and emotion are inherently integrated, is it possible to leave emotions out of the discussion?”


Probably not. But that doesn’t mean we can’t create a risk management process that subordinates our individual emotions during the debate. If you’re like me, and you choose to work on a research team, keeping everyone else’s emotions in check is a big challenge too.


Hijacking A Hockey Player - z9


Back to the Global Macro Grind


If you’ve seen me play hockey (or look up my penalty minutes), you get that I can’t play the game without emotion. I get that – but I didn’t get how much that would affect me as a “stock picker” when I first became a buy-side analyst. It didn’t affect me in a good way.


Especially on the short side when you have a boss and/or a large audience of peers watching your position, when something is going against you, it’s doesn’t feel cool.


As I grew into a PM I used to tell my analysts: ‘you either fight it, or close it’ (as in the short position) – and depending on who I was talking to (and what their emotional state was that day), I’d get a wide array of reactions to a pretty basic ultimatum.


Eventually, I just stopped letting my analysts trade and size their positions. That made our discussions more objective. The analyst either wanted me to have it on or not. Other than mapping calendar catalysts, all of the timing and trading of positions was up to me.


With responsibility comes a repeatable process, so I built my multi-duration “risk range” model as a result.


At a very basic level, here’s how my decision making process works:


  1. Analysts are constantly picking securities and generating new ways to express their ideas
  2. In parallel, I run multi-duration, multi-factor risk metrics on their ideas
  3. Then I pick the highest probability ideas defined by a math-based (objective) process


Trust me, I don’t have any emotional affiliation with any of their ideas. They are all just tickers to me. And once I pick from what they’ve picked, the risk range #process has the following decision making tree from a timing/sizing perspective:


  1. Immediate-term TRADE risk range gives me a high and low end of price probability… and
  2. I try my best to make sales at the high-end of the range and buys/covers at the low-end… as I’m
  3. Constantly trying to contextualize the TRADE within my intermediate (TREND) and long-term (TAIL) durations


That’s it. That’s what I do. And I can tell you that it took a long time to get that this is the best way to keep my competitive (emotional) risk factor at bay. To each their own, eh.


Today’s note is more of a process one (let me know if you want more or less of these – there are many processes within The #Process – and processes are always evolving) but if you go back to yesterday’s Early Look on Oil, it explains what we signaled and why quite well:


  1. Analyst (Ben Ryan) doesn’t like Oil right now  
  2. In parallel, my risk management process, which includes cross asset class correlation analysis with USD…
  3. Picks WTI (instead of Brent) as the best way to express that = SELL at the top-end of the risk range = $53.68


WTI Oil = down -5.6% on the day. So easy two hockey-heads (Ben was drafted by the Nashville Predators) can do it. And, fortunately, Ben is far less emotional than I can be – so we compliment one another as line-mates in decision making quite well.


For those of you who are new to evaluating our #process, every day (in our Daily Trading Ranges product) I give you A) the immediate-term TRADE risk range with B) our intermediate-term TREND research view in brackets. Here are all 12 of those big macros for today:


UST 10yr Yield 1.84-1.93% (bearish)
SPX 2070-2093 (bullish)
RUT 1 (bullish)
DAX 111 (bullish)
VIX 13.03-15.95 (bullish)
USD 96.95-98.99 (bullish)
EUR/USD 1.07-1.09 (bearish)
YEN 118.99-120.68 (bearish)
Oil (WTI) 46.53-53.68 (bearish)
Natural Gas 2.56-2.81 (bearish)
Gold 1180-1218 (bearish)
Copper 2.65-2.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hijacking A Hockey Player - 04.09.15 Chart

April 9, 2015

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Gizmo or Gremlin?

This note was originally published at 8am on March 26, 2015 for Hedgeye subscribers.

“No matter how much it cries or begs, NEVER feed it after midnight”

-Gremlins, 1984


According to 1980’s legend, feeding a mogwai after midnight catalyzes the transformation from cutesy, wellmeant Gizmo to mischievous, malevolent Gremlin.   Hijinks, hilarity, and the creation of the first PG-13 rating ensue. 


The spat of soft early March housing demand data had many wondering whether we’d already reached midnight on the current housing inflection and if the fund flows and improving sentiment feeding the multi-month run of outperformance were set to spawn a reversal in the related equity complex. 


We think the hour is nearer twilight than midnight… and Gizmo has more to give as it relates to housing. 

Gizmo or Gremlin? - 15


Back to the Global Macro Grind….


We reviewed our bullish thesis on Housing in a late-February Early Look – see: Dr. House-ing.  The subsequent ping-pong match in housing data over the last month has, at the least, been interesting.


In a recent note to institutional clients we compared and contextualized the competing realities promulgated by the March to-date data. 


Consider the following juxtaposition: 


(False) Reality:   

  • 3/13:  Mortgage Purchase Applications | Purchase demand declined -1.5% sequentially with year-over-year growth sliding back towards the zero line at +0.7%.
  • 3/16:  NAHB HMI | Builder Confidence declined -2pts month-over-month in March, marking the 3rd consecutive month of decline and the lowest reading since July of last year.
  • 3/17: Housing Starts | New Home Starts in February dropped -17% sequentially, posting their biggest month-over-month decline since January 2007
  • March:  Seasonality | Performance in Housing related equities shows marked seasonality. In short, the housing complex outperforms from Nov-Feb ahead of the Spring selling season and subsequently underperforms modestly in March as (presumably) some of that cumulated optimism comes off and again in mid-year as the heart of the selling season concludes (see 1st and 2nd charts below).  We show the seasonal pattern that has typified the last 20 years in the Chart of the Day below.

So, certainly not the numbers accelerating recoveries and sustainable outperformance are made of. 


We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 


As it relates to builder confidence, the Current Traffic component of the index led the weakness in the composite reading, which is consistent with a severe weather related drop in the flow of active buyers.  The NAHB also cited supply chain concerns, particularly in terms of labor supply.   Residential construction employment saw its largest monthly increase in employment in nearly 10 years in January and employment at the industry level continues to run in the high-single digits.  


There is clearly strong demand for labor in the sector, however, wage growth has yet to really accelerate according to BLS data so it remains equivocal whether rising labor demand is, in fact, driving accelerating builder cost pressure and/or labor supply shortages at the aggregate level.  Further, 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. The 57% collapse in starts in the Northeast drove the bulk of the headline decline, again consistent with unusually cold/severe weather weighing on activity.  


Sure, seasonality and weather are not new phenomenon but resolving the volatility and vagaries inherent in month-to-month changes in activity in seasonal industries remains challenging despite the best efforts of evolving seasonal adjustment methodologies.   


Further, staring at industry numbers from the aseptic environment of a spreadsheet has the sneaking ability to, at times, drive a wedge between expectations conceived in an analytical echo chamber and the practical realities of the underlying business.  Having been in the construction industry, digging a foundation or auguring down to below the frost line to pour piers in frozen terrain is a largely quixotic pursuit. 


Anyhow, we expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


Reported Reality:  

  • 3/19-20:  Builder Earnings | Reported results for 1Q15 out of the Builders LEN and KBH had both companies beating sales and earnings estimates while reporting strong pricing and accelerating orders growth.  Further, they talked down the weakness in reported Starts in February and guided to incremental margin improvement over the balance of the year with the expectations for continued, ongoing improvement in the demand environment.  We’re not inclined to take management’s word for it but in this particular case, we’d agree on the intermediate term outlook. 
  • 3/23:  Existing Home Sales | Sales of Existing Homes accelerated to +4.7% YoY, marking the fastest rate of growth in 17-months. 
  • 3/24: New Home Sales | New Home sales in February hit their highest level since February 2008 rising +7.8% MoM to 539K vs an upwardly revised January estimate.  More notably, sales were up a remarkable +25% year-over-year and should continue to look strong from a second derivative perspective as we traverse a 5-month period of easy comparisons.  
  • 3/25:  Purchase Applications | Purchase application saw some positive mojo in the latest week, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.


What’s our suggested interpretation of this Tale of Two Housing Realities?


We’d argue that much of the weakness in the reported February data was weather related and, in effect, created a mini-ball underwater dynamic.  Over the next 6-8 weeks, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity.   


Indeed, behind the data volatility in March, the crux of our underlying thesis remains largely unchanged.   Labor market strength + credit box expansion + (very) easy compares should continue to support improving rates of change in housing demand over the intermediate term.  


We’ll be hosting our 2Q Housing Themes call next Thursday, April 2nd at 11am to update our outlook for the industry and the related equity complex.  Please contact if you are interested in attending. 


No matter how much it [your position] cries or begs, NEVER capitulate at a manic, short-term bottom.


Our immediate-term Global Macro Risk Ranges are now 


UST 10yr Yield 1.81-1.98%
SPX 2046-2084

DAX 11566-12143
VIX 14.03-16.97
EUR/USD 1.04-1.11
Oil (WTI) 42.37-52.28 


To hair bands, Hungry Hippos and Volker-style policy sobriety,


Christian B. Drake

U.S. Macro Analyst


Gizmo or Gremlin? - HB Seasonality

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

LEISURE LETTER (04/09/2015)



HLT - Blackstone has reportedly been approached by a Chinese consortium including Shanghai-based JinJiang International.  Whispers have suggested Blackstone has been offered $45/share for its controlling stake but Blackstone wants more.


Takeaway: HLT has done well on solid lodging fundamentals. This rumor would further support its share price.


MGM - The Bellagio has just completed a resort-wide remodel of the guest rooms and 403 suites in its main tower.  The Mandalay Bay Convention Center is on schedule to open the first phase of its expansion in August.


ZNGA - has announced the resignation of CEO Don Mattrick after just short of two years in the CEO hot seat. Former CEO and founder/chairman Mark Pincus will return to CEO, effective April 8. Pincus tells the WSJ that the company is preparing a new set of mobile games.


FCH - announced prelim Q1 REVPAR growth of +13.1% on same-store basis.  “We are extremely pleased with our strong year-to-date results, which are significantly ahead of our expectations. Lodging fundamentals continue to be robust and our same-store RevPAR growth continues to outperform the industry," said Richard A. Smith, President and Chief Executive Officer of FelCor. “We are also making great progress on completing the sales of our remaining non-strategic hotels. We have sold three hotels during 2015, including one in March, and three of the five remaining hotels are under contract to be sold.”


Melco International - $700 million casino in the Russian gambling zone of Primorye at Vladivostok will open its first phase in July.  This will include a casino and a 140-room hotel. 

Takeaway: This project has been long delayed.  


WYNN -  “The corporate governance committee will name one or more diverse directors to the board by the end of 2015,” said WYNN in a filing. Wynn Resorts would “prioritise women and diverse candidates in its search,” the filing added.



  • People familiar with an investigation by regulator the Autorité des marchés financiers tell the Globe and Mail that the AMF has seized documents of and communications records between CEO David Baazov and CFO Daniel Sebag.
  • The Globe and Mail reports that the AMF and the company's board are looking into trading in Amaya stock before the $4.9B purchase of Rational Group (PokerStars) last summer, and that the regulator has executed search warrants on Amaya, its financial adviser Canaccord Genuity (CF.CN), and Manulife Securities (MFC.CN).
  • In other news, NYX has agreed to purchase from Amaya all of the issued and outstanding shares of Amaya's subsidiaries, Amaya (Alberta) Inc. (formerly Chartwell Technology Inc.) and Cryptologic Limited on a cash-free and debt-free basis.
    • The total cash consideration for the transaction is C$150,000,000, subject to working capital adjustments.
    • As part of the transaction, a subsidiary of Amaya and NYX anticipate entering into a supplier licensing agreement for a term of six years, under which NYX will provide certain casino gaming content to Amaya's real-money casino offering which Amaya intends to integrate into the PokerStars and Full Tilt branded casino websites.
    • Pursuant to the Licensing agreement, a subsidiary of Amaya will provide NYX with a minimum license commitment in the amount of C$12,000,000 per year for each of the first three years of the Licensing agreement. 



Pollard Banknote - its $5 instant lottery game Frogger is already the Vermont Lottery’s highest-selling instant game despite being on the market less than three months. The game, licensed from Konami, is outperforming all other instant games introduced in Vermont since 2010.


Less Mainland visitors - Macau received fewer visitors from the mainland but more from both Hong Kong and Taiwan over the Easter and Ching Ming holidays between Good Friday and Monday, Macau Government Tourist Office (MGTO) Director Helena de Senna Fernandes said.

Senna Fernandes said that the city received 641,000 visitors during the four days, up 2.7% YoY. While the number of mainland visitors dropped 3.5%, the number of visitors from Hong Kong and Taiwan rose 20% and 42% respectively, the city’s tourism chief said. 

Meanwhile, the Government Information Bureau (GCS) said in a statement on Wednesday that the number of “tourist arrivals” rose 1.67% to 775,086 between Good Friday and Tuesday.


Takeaway: Weak Mainland visitation could partly explain the lower revenues in the 1st week of April.


Singapore - Singapore is trying to use judicial means to compel dozens of Chinese gamblers to pay up. Last year its two casinos filed 49 lawsuits against individuals in Singapore’s High Court for gaming-related debts, up from just two a year earlier. The resorts brought 12 more cases in the first quarter of 2015. 


Takeaway: Without junkets, Singapore casinos are more exposed to the VIP downturn and collecting debts.


South Korea - According to news agency Yonhap, national officials supported a measure that would ease some foreign investment conditions relating to Saemangeum, an area of reclaimed land (pictured) in North Jeolla, in the southwest of the country. The government-backed bill is said to simplify the registration process for foreigners-only casinos in that area. Under the current rules, only casinos that are attached to luxury hotels and have at least US$500 million of investment are qualified to register, reported Yonhap. 



Romania - The Romanian government has triggered an investigation into the affairs of national lottery Loteria Romania, accusing the company of entering the gambling proper business without licence or authority by introducing 6,263 slot machines over the period 2006 to 2014 in collaboration with an Intralot subsidiary, Lotrom SA. Prosecutors claimed Wednesday that this illegal activity has impacted state budgets to the tune of over Euro 100 million (a preliminary estimate). The officials declined at this stage to provide further details, and Loteria Romania declined to comment on the issue in view of the ongoing investigation.  Sources close to the investigation told Reuters that the enquiry was criminal in nature, and that bank accounts belonging to the two companies involved had been frozen.



Indiana GGR declined 7.3% YoY in March

Takeaway: A couple of % points below our expectations.


Thoroughbred races -  Handle on thoroughbred races grew 9.46% YoY to $984.365 million in March. Race dates rose 1.81% to 394.

Takeaway:  Horse racing betting did well in March.


Four-river cruise in China -  Asia's first four-country river cruise from the Mekong to China has been introduced by locally based operator Pandaw. The new seven-night itinerary will sail from Chiang Saen, in Thailand, to Myanmar, then on to Laos before crossing the Chinese border for the first time to reach the city of Jinghong in Yunnan Province.



Chinese Ministry of Finance to ease restrictions on NPL write-offs 

  • China Securities Journal cited banking officials who said that China's MoF will further ease restrictions on banks writing off bad loans. The officials said that the government will allow some banks to write off some bad loans before tax to encourage banks to increase lending.

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.

#EmergingOutflows Reversal Risk Management

Takeaway: We now find it prudent for investors to broadly cover their shorts in/across the emerging market space.

We arrive at the aforementioned conclusion for the following three reasons:


  • We have identified three key top-down fundamental factors that drive the bulk of EM asset price performance and, at the margins, these factors are becoming less bearish.
  • While the preponderance of our quantitative signals does not yet support going long EM asset beta, there are enough signals underneath the hood that support a continuation of the developing relief rally across EM assets.
  • Should this relief rally continue, our analysis shows that it is likely to continue to be led by the most risky economies and securities. As such, we are covering all of short ideas in the EM space and booking the gains in our [defensive] long ideas as well. The conclusion: we are taking down our hypothetical gross exposure to this asset class amid what may (or may not) turn out to be a bearish-to-bullish phase transition.


CLICK HERE to download our 20-slide presentation which contains the supporting analysis behind these views.


Have a wonderful evening,


Darius Dale


REPLAY | ZOES: Standing Out From the Crowd

Earlier today we hosted a conference call to discuss the recent addition of ZOES to our Best Ideas list on the long side.  This is a name in which we see upside to $68 per share versus downside to $25 per share over the next three years.



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