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Confusion's Masterpiece

This note was originally published at 8am on April 30, 2015 for Hedgeye subscribers.

“Confusion now hath made his masterpiece!”

-William Shakespeare


Oh boy, are macro markets confused by the collision of central plans now!


Shakespeare fans will remember the aforementioned quote from Act II (Scene 3) of Macbeth. It’s a great metaphor to use in answering the question I get from most long-term risk managers: “How does this all end?


While it would be reckless to predict precisely how it ends, I have a pretty good idea how the beginning of the end looks – confusing. Confusion in the timing of central planning breeds contempt. And that perpetuates volatility which, in due course, crushes confidence.

Confusion's Masterpiece - Card house cartoon 12.03.2014


Back to the Global Macro Grind


How confident are you in explaining how rates can ramp to the top-end of their respective ranges as the US Dollar goes straight down? In rate of change terms, German Bund Yields doubled in 48 hours! Irrespective of what the Fed said, did that have anything to do with the US move in rates? Big time.


Was the rates move linked to the currency and commodity move (Down Dollar = Up Oil, Energy Stocks)? I don’t think so. The FX (foreign currency) market move and Global Rates moves went in the opposite direction of what most correlation models would have predicted. #Fun? Not.


But isn’t this what we’ve all signed off on? Wasn’t central planning of markets supposed to be a “smoothing” exercise whereby all of us “smart” people could make linear-assumptions to drum up macro correlation models for all of our asset allocations and bonuses?


Let’s get real here. Macro markets just did.


Setting aside the non-linear-multi-standard-deviation-move in both German Bund Yields and the European Currency for a minute, let’s bring this discussion back to the USA and what the Federal Reserve said yesterday:


  1. On Growth – ‘our forecasts continue to be too high, but it’s all “transitory” because it snows in the winter time’
  2. On Inflation – ‘our forecasts on 2% inflation were wrong, but that’s transitory too – everything we get wrong is’
  3. On Timing –  ‘rate liftoff is data dependent on the labor market – so run money on best #NFPGuesses’


That last point isn’t a joke (neither are paraphrasing points 1 and 2). The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be.


Since my research team cannot predict an un-predictable number (we’ve tried to build models to front-run BLS Labor report data and, trust me, I’d have a prediction if there was a repeatable #process to be accurate with one), guessing is the only option.


Confused yet? You should be. Much like the March 18th Fed decision on “to, or not to, be lower on rates for longer” the May 8th jobs report is a binary event:


A)     Jobs report “beats” useless forecasts of lagging indicator = Dollar Up, Rates Up, Oil Down (hard)

B)      Jobs report “misses” useless forecasts of lagging indicator = Dollar Down, Rates Down, Oil To Infinity And Beyond


“So”, as my hedge fund friends in Chicago would say, place your bets!


Oh, did I mention that this is only a 6-7 day trading bet? Dammit this is getting good! Not only do we have to now day-trade US monetary policy based on best-guesses, but we have to completely ignore this longer-term thing called the cycle, at the same time.


What happens if the June and/or July jobs reports are bad? What happens if the May report is bad? I can tell you one thing – the entirety of Old Wall Consensus isn’t predicting anything bad – every question I get on rates has to do with ‘what if it’s good?’


There is nothing good about confusion in macro market correlations when volatility accelerates. There is no risk management #process in guessing either. So I’m selling in May and getting the heck out of the way. For now, going to cash beats confusion.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.06%

SPX 2085-2117
RUT 1237-1260

VIX 12.96-14.91
USD 95.12-97.66

EUR/USD 1.05-1.12
Oil (WTI) 52.96-59.69

Gold 1180-1215


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Confusion's Masterpiece - z 04.30.15 chart


SHAK is on the Hedgeye Best Ideas list as a SHORT.


Last night SHAK posted impressive 1Q15 earnings $0.07 above-consensus 1Q15 EPS of $0.04 on same store sales of +11.7% vs consensus' +5.1%.  In the release management raised full-year same-store sales guidance to "low-to-mid single digits" vs. prior "low-single-digits."  Our bearish view is that the market is placing too much value on SHAK's differentiated burger concept.


The better than expected 1Q15 EPS was driven by:

  1. Stronger than expected operating margin
  2. Better 1Q15 comps of +11.7% vs. consensus’ +5.1%
  3. Price of +6.0%
  4. Sequential better traffic +2.1%
  5. Positive mix of +3.6%
  6. Strong store-level margins of 25.7%
  7. Better-than-expected food and paper costs and sales leverage on other operating line items


Management Increased 2015 guidance following 1Q15 results:

  1. 2015 Revenue of $161mm to $165mm vs. prior $159mm to $163mm
  2. Same-store sales growth of low-to-mid-single digits vs. prior low single digits.
  3. Unit development guidance of at least 10 new domestic company-operated Shacks and at least five international licensed Shacks in U.K. and Middle East.


Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward.  The most visible place of uncertainty is in same-store sales guidance.  In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year.  This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits.  Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.


While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling!  If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side.  If we value the company closer to CMG the downside approaches 75% from current levels. 



CHART OF THE DAY: Epic Move In The Energy Space [WTI Crude #Oil]

Editor's Note: The chart and brief blurb below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. It costs $1 a day to subscribe. Learn more and subscribe here


CHART OF THE DAY: Epic Move In The Energy Space [WTI Crude #Oil] - z 05.14.15 chart


On the road yesterday in Boston, Darius Dale and I were spending a lot of time on risk managing the short-term within our longer-term view. That can be summarized in a picture (slide 52 of our Q2 Macro Themes deck) as follows:


  1. US Dollar Index can trade as low as 90.11, before it resumes its longer-term breakout
  2. Euro (vs. USD) can trade as high as $1.19-1.20, before it blows up again on Draghi devaluation
  3. Oil (WTI) can trade as high as $71.38/barrel, before it resumes its longer-term #deflation


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%

Early Surprises

“One of the key benefits of experiments is they allow you to get surprises early.”

-Scott Cook


I thought that was an excellent quote from the co-founder of Intuit from a solid chapter in Learn Or Die titled “It’s Time To Bury Caesar” (i.e. the “kind of boss who gives thumbs up or down on all decisions” pg 170).


Thumbs down? If that’s how you run your investment team or firm, I’m thinking that’s probably not going to end well. It would be the equivalent of a coach getting in your face after every mistake. It doesn’t build confidence. The insecure mind is weak.


Be creative… take chances…  fail fast… learn, pivot, evolve. Yeah, I like that. And so do the people you lead. Provided that experimenting is on a progressive path, you should wake up every morning looking forward to that element of surprise.


Early Surprises - 11


Back to the Global Macro Grind


Oh, you don’t like getting scored on right away? You don’t like losing money? Too bad. That’s the game. If the New York Rangers buckled after going down 1-0 last night (or 3-1 in the series for that matter), they’d be golfing today.


I don’t know about you, but I need a real-time signaling mechanism in order to risk manage the many early surprises Mr. Macro Market provides us an opportunity to learn from.


Some of the big ones (counter-TREND moves) as of late are as follows:


  1. Dollar Down, Euro Up
  2. Dollar Down, Oil up
  3. Euro Up, German Stocks Down


What is the market telling us?


  1. The US economy is experiencing a #LateCycle slowdown
  2. The most lagging of cyclical indicators (Labor) is slowing, in rate of change terms
  3. The Fed has no policy shift for that other than to push out the “dots” on rates #LowerForLonger


Now you might say, “but rates have gone straight up in the last few weeks.” Yep. And I’d say back that:


A)     US rates have de-coupled from the US Dollar move and moved in sync with European Bond Yields

B)      US Dollar has traded in sync with the rate of change in high-frequency economic data


Yesterday’s key US economic data (Retail Sales missing at 830AM) immediately crushed the US Dollar (10yr fell to 2.20% on the “news” too, then traded back up as German Yields rose).


What up with US Retail Sales #slowing, bro? Was it the nice April weather? Nope, it was the cycle:


  1. After bouncing in March, Retail Sales were dead flat at 0.0% sequentially in April
  2. After slowing from cyclical highs of +4-5% (since November), year-over-year Retail Sales are now 0.9%


Not cool. If you are one of the consensus bulls on US Consumer (XLY) and Retail (XRT) stocks, that is … Yes, on bounces I’d short both of those Sector Style Factors in the US stock market. I’m adding both to the bear side of our Macro ETF Playbook today.


Got SELL ideas with #timing on top? While the Euro and Oil will continue to signal immediate-term TRADE overbought within their longer-term TAIL risk setups, I wouldn’t be selling those short, other than for short-term trades.


On the road yesterday in Boston, Darius Dale and I were spending a lot of time on risk managing the short-term within our longer-term view. That can be summarized in a picture (slide 52 of our Q2 Macro Themes deck) as follows:


  1. US Dollar Index can trade as low as 90.11, before it resumes its longer-term breakout
  2. Euro (vs. USD) can trade as high as $1.19-1.20, before it blows up again on Draghi devaluation
  3. Oil (WTI) can trade as high as $71.38/barrel, before it resumes its longer-term #deflation


The calendar catalyst for that are:


  1. May 29th = downward revision to US GDP
  2. June 5th = US jobs report
  3. June 17th = FOMC meeting


For now, this is what I believe the market is signaling as a probable continuation of what’s become a big ole macro Pain Trade.


And while I was surprised early by some of these v-bottom bounces in things like Euros and Oil related securities, one of the key benefits to being crazy enough to get up and write to you every day is that I get to change my mind. Timing matters.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.95-2.32%

SPX 2080-2117
USD 93.25-95.43
EUR/USD 1.10-1.14
Oil (WTI) 55.47-61.71


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Early Surprises - z 05.14.15 chart


Takeaway: 1Q miss driven by weak VIP volumes. Lost more share to Marina Bay Sands (LVS) in 1Q.

Q & A

  • Environment for VIP market has weakened significantly 
  • Do not see this VIP business coming back anytime soon
  • VIP win %: 2.5%
  • VIP rolling volume market share: 48%
  • On gross level, 43% Mass/57% VIP
  • 41% GGR market share
  • 41% mass market share
  • No weakness on mass business as S'pore casinos are very regional 
  • Made some minor changes to VIP commissions paid
  • Mass hold rate: ~25%
  • 43% slot market share
  • Universal Studios Singapore spend $81; 9,000 visitors on a daily basis.
  • Marine Life Park spend $29; 6,700 visitors on a daily basis
  • VIP volume came down quite a bit
  • Gaming spend per visitor down as well
  • Industry Singapore hotel performance have come down as visitor arrivals have jumped
  • VIP relationships are much more difficult.  Bad debt provision will be similar in 2Q
  • VIP volume decreased by 18% QoQ, 48% decline YoY
  • Mass volume holding steady
  • Korea: Jeju general assembly passed casino ordinance this morning. Process of casino license should go smoothly.
  • Japan: casino bill introduced to national parliament.  Debate will start in next 2 months. More optimistic on bill than past months. 
  • Jurong hotel opened 144 rooms (~50% of inventory); full opening will be some time in June. Bookings are very encouraging. Weekends are running full with leisure and casino customers. Giving promotions to casino rewards customers. Running shuttle from hotel to RWS on a 24-hour basis. Gaining traction for family/wedding events.
  • Regional business is steady (mass/VIP)
  • Net win VIP/mass mix: mass 72%
  • Fair value derivatives loss not due to FX swings, but due to other hedges (e.g. utilities). These derivatives are being wound down.
  • Chinese visitors to Singapore have jumped significantly 
  • Hold-adjusted EBITDA: S$250m
  • Slot hold not major change
  • Share buyback program: no plans to reduce share buyback but will not disclose a specific target. 
  • Need to come to agreement with Jeju govt some time in 2016

REPLAY | The Macro Show with Keith McCullough

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. Today's edition even includes some analysis of the Rangers' Game 7 victory last night, plus a look ahead and both the Eastern and Western Conference finals.



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.