The Bond Battler

“You got to be tough.”



In classic Ernest Hemingway terms (tight and to the point), that’s what a young man by the name of Nick was told by an old street fighter after he got busted by a brakemen (thrown off a train) up near Macelona, Michigan. #BlackEyes


The short story is called The Battler – and it’s a beauty for those of us who have to (and love to) grind it out every day. Win, lose, or draw – there’s a lesson to be learned from every experience.


After being bearish on Treasury Bonds in 2013, I’ve been battling it out on the long side of these barbarous low-volatility-high-return Long Duration Bonds for going on 17 months now. Every time bond yields bounce to lower-highs, I hear it from every corner of the Twitter-sphere. You got to be tough to fight off the perma Bond Bears.

The Bond Battler - 3  yield Godot 07.27.2014


Back to the Global Macro Grind


Being deaf would probably help me too.


If all I did was what you should do when you are trying to handicap the probability of Long-term Bonds rising/falling (front-run the rate of change in growth/inflation), I’d concern myself less with daily moves. But some of you pay me to fight. So fight today, I will.


“They all bust hands on me – but they couldn’t hurt me.” –Hemingway


If you can take a punch (both in this game and the one I used to play on the ice), your career will last longer. Here’s what the body blows have looked like on rallies (in Long Bond Yield terms) for the last 6 months:


  1. December 2014, US 10yr Treasury Yield rallies to 2.28% on expectations of accelerating Q1 US growth
  2. March 2015, UST 10yr Yield rallies to 2.25% post another #LateCycle US Jobs report
  3. May 2015, UST 10yr Yield rallies to 2.14% on…


On what?


  1. Global Bond Yields having their biggest 6-day % move (off the all-time lows)?
  2. The Almighty Bond “Bubble” finally popping, for real this time, because it’s “expensive”?
  3. Expectations of a mean reversion back to #LateCycle jobs gains in the US (May 8th report)?


Triple Crown fans, if we’re betting on expectations, I’ll take all 3 for the trifecta. And I’ll fade #3, staying long The Battler (Long Bond) to win at Friday’s run for the roses.


I obviously get that all 3 of the aforementioned expectations can come to fruition. But I also get this thing called probability that I won’t fade unless I have fundamental reason to do so.


It’s been what, 37 years, since Affirmed won the Triple Crown? While it hasn’t been that long for Bond Bears to get paid (2013), don’t forget that the key wager then was that US growth would accelerate from 2012. And it did.


Put another way, until our models signal real US #GrowthAccelerating (year-over-year), we’re probably staying with our biggest asset allocation horse.


Since I gave the bears some air-time, don’t forget to contextualize what actually happened after those December and March Lower-Highs for 10yr yields:


  1. JAN-FEB 2015 = re-test of the all-time lows at 1.67% after bad US GDP data
  2. APR 2015 = two separate selloffs to 1.84% after a bad March Jobs report


In other words, “long-term investors” (i.e. those who understood that Global Growth and Inflation expectations were too high) who have remained bullish on Long Duration Bonds have been paid to take a few punches from the pundits.


But, but… according to consensus, jobless claims are “good.” C’mon now – that’s not true. They are actually fantastic! And that’s the point about the cycle. See slide 13 of our #LateCycle Macro deck – they are as good as they get.


In that same slide deck (slides 12-17) our Macro Research Team reviews the mean reverting #history of the labor cycle, reminding you what that economic indicator is – one of the latest and lagging indicators there are.


Yep. I’ll take the bi-monthly black eyes for staying long Treasuries (TLT). For the next 3-6 months we think year-over-year US growth continues to slow. Staying with the process isn’t always easy. But we’ve got to be tough.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-2.17%

SPX 2096-2126
VIX 11.73-14.70
EUR/USD 1.06-1.13
Oil (WTI) 54.85-60.39
Copper 2.79-2.97


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Bond Battler - z 05.05.15 chart

May 5, 2015

May 5, 2015 - Slide1



May 5, 2015 - Slide2

May 5, 2015 - Slide3

May 5, 2015 - Slide4

May 5, 2015 - Slide5




May 5, 2015 - Slide6

May 5, 2015 - Slide7

May 5, 2015 - Slide8

May 5, 2015 - Slide9

May 5, 2015 - Slide10

May 5, 2015 - Slide11
May 5, 2015 - Slide12

REPLAY | The Macro Show

We apologize for the sound issues on this morning's Macro Show.



The Macro Show is Hedgeye's dynamic pre-market rundown highlighting the most important global macro developments where CEO Keith McCullough shares 15 minutes or less of prepared market analysis and commentary and then answers your questions in a live Q&A session.




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MCD: Investors Left Playing the Waiting Game


Although heavy on content, McDonald’s Turnaround Plan was rather light on detail.  Management announced several initiatives that should keep investors content over the next few months, but the lack of color surrounding operational initiatives was disappointing.  CEO Steve Easterbook made it clear that there is more to come and held out a few carrots (potential for additional refranchising, leverage, and real estate scrutiny) for investors to nibble on.  With that being said, it is abundantly clear that the road to recovery will be a long, bumpy one.  We’re staying on the sidelines, for now, until management devises a strategic, actionable, and well-articulated plan to fix the operations of the business.


The Main Event

McDonald’s unveiled a reorganization of its business this morning in a video sent out by CEO Steve Easterbrook.  The company will transition to a new organizational structure within the following market segments: U.S., International Lead Markets, High-Growth Markets, and Foundational Markets.  The new structure will be supported by streamlined teams and fewer layers, which should allow for better focus within closely aligned markets.  By restructuring the company, management hopes to eliminate its cumbersome and stagnant decision making process.


McDonald’s also announced it will accelerate its refranchising efforts, with the intention of bringing its franchise/company owned mix to 90%/10% by the end of 2018.  The two initiatives combined should begin yielding $300 million in annual G&A savings by the end of 2017.  In addition, the company will return $8-9 billion to shareholders in 2015 and plans to reach the top end of its 3-year $18-20 billion cash return range by end the end of 2016.


New Market Segments


  • Accounts for more than 40% of operating income
  • Will be led by current USA President Mike Andres

International Lead Markets

  • Australia, Canada, France, Germany and the U.K.
  • Accounts for approximately 40% of operating income
  • Will be led by current Europe President Doug Goare

High-Growth Markets

  • China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands
  • Will be led by current APMEA President Dave Hoffman

Foundational Markets

  • Remaining markets in the system
  • Will be led by current APMEA CFO Ian Borden


Takeaway: Value levers need to be pulled to offset the negative fundamental momentum. This was not a good quarter.




  • Mayweather/Pacman fight:  record REVPAR weekend.  Tremendous gaming drop at MGM's properties.
  • LV REVPAR 1Q:  outperformed LVCVA reported Strip REVPAR of -1.5%
  • MGM China increased its market share
  • Lower volume and hold at Aria
  • Vdara/Crystals:  record EBITDA quarters
  • Had expanded credit facility to $3bn - will continue to invest in Macau
  • Arena 50/50 JV: MGM will invest $87m (equity contribution); during 1Q, secured Cola-Cola, Toshiba, and Snider Electric contracts. In negotiations with 8 other providers. Signed contracts for over 50% of the suites.  
  • Mandalay Bay expo convention space will open in Aug 2015 (already booked).  Will renovate rooms in June 2015 and will be completed by March 2016.
  • MGM Detroit:  invested $800m in total (earning $150m/year)
  • MGM National Harbor:  moving towards Q4 2016 opening
  • Springfield opening:  Late 2017 - feels like MGM Detroit return profile
  • MGM Cotai:  remain on track for Q4 2016 opening.  Mass-centric.
  • Land & Buildings:  suggested $2.6bn special dividends in MGM Macau. Pitch full of mistakes. Tabloid-like campaign.
  • Concept of REIT is not a new one. Board have evaluated that option in prior year. But MGM business model is evolving.
  • Non-luxury/regional properties were strong offset by luxury Strip resorts.  
  • LV REVPAR Q1:  Jan (Double-digit growth), Feb (low-to-mid growth), but March very tough (excluding Conagg week, REVPAR would have been up 6%)
    • But Q1 guidance had already accounted for difficult ConAgg comps
  • Q2 LV REVPAR guidance: at least 5% REVPAR (helped by Mayweather/Pacquiao fight)
  • Aria:  250bps decrease in table game hold YoY.  Lower volumes from high-end Chinese business.
  • Aria: 9% increase in convention room nights and 7% in ADR
  • CityCenter: MGM received $200m dividend last Friday.
  • Cash:  $469m at MGM China.  $1.1bn RC availabilty. $1.4bn of excess cash
  • $1.5bn convertible notes converted into net 71.7m of MGM stock
  • At end of 1Q: $950m in debt outstanding.
  • CityCenter: $1.5bn debt outstanding, does not account for special dividend paid out last week
  • Capex: $92m (domestic operations), $54m (Springfield/National Harbor). $19m Arena contribution. $14m MGM Macau. $132m at MGM Cotai.
  • MGM China:  targeted marketing efforts. Mix-shift (high-end premium floor): 50% of revs and 80% of EBITDA coming from mass. Additional 44 tables moved to mass vs prior year quarter (55% of total tables are mass). 80% of mgmt team are locals.
  • Convention:  lead volumes up 70% YoY. Corporates driving 60% of booked room nights.

Q & A

  • LV Strip REVPAR guidance: better and better at forecasting it.  
  • LV REVPAR: +4% in April 
  • Chinese LV customers:  <5% of total cash flow in LV.  -30% collectively in Q1 or $15-20m in net gaming revenues.
  • Japan/Korea/Taiwan customers doing well in LV
  • March softness:  particular in ConAgg week. 
  • May boxing weekend: benefited REVPAR by 1%
  • Cost control:  Costs up 2% in 1Q, FTEs flat in 1Q
  • Very focused on margins in LV  
  • Still expect annual 50% flowthrough in Vegas
  • Bellagio margins better than Wynn and LVS LV properties
  • Luxury LV properties:  more isolated from city-wide conventions
  • Core LV properties:  benefit from city-wide conventions.
  • Core LV REVPAR in 1Q: up 4%
  • Core REVPAR has outperformed luxury for last 3 quarters because they're farther away from peak.
  • $8m wholly-owned 'bad luck': Bellagio, Mandalay, MGM Detroit - there wasn't any bad luck, however, as hold percentage was smack dab in the middle of the historical range
  • % of room nights on the books for Q3 2015:  booked a big business for August (in the year for the year). A little softness in international leisure travel but can be offset by domestic business.
  • Q1 2015:  some high-rollers delayed their trips to come visit for the Big Fight
  • Crystals:  a couple of years, explored sale.  Had high level of interest. Being actively discussed at the board level. 
  • Only thing they agreed with Land&Buildings: MGM is undervalued
  • Cash paid taxes in 2015:  will be <$50m. Will be up a little bit in 2016.
  • MGM China:  very strong in premium mass.  Focused on building out entertainment base and MICE business on Cotai. 
  • 3Q REVPAR/4Q REVPAR guidance:  +2-3% comfortable target
  • MGM China:  Up to 35% of NI paid as regular dividends.  Board will take a look at that. 
  • Leverage constraint:  5x for MGM China

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.