Dangerous New Highs for the Market?

After nearly two months under water, the benchmark S&P 500 has finally made a new all-time high. While optically impressive, there are a myriad of quantitative signals underneath the hood that do not support chasing the market here.


Immediate-term TRADE Duration Risk: The SPX is at the top end of its immediate-term risk range of 2,091-2,130.


With nearly 2% downside, 0% upside and the VIX nearing the low end of our 11.29-14.59 immediate-term risk range, investors would do well to book gains in U.S. equities here (i.e. reduce gross and/or tighten net exposures). As Keith highlighted on today’s Macro Show, if 2,091 breaks, there’s no support to 2,035.


Dangerous New Highs for the Market? - SPX


Intermediate-term TREND Duration Risk: Our Tactical Asset Class Rotation Model (TACRM) is now generating a “DECREASE Exposure” signal for U.S. equities. Currently, TACRM is generating a commensurate bearish signal for each of the six primary asset classes tracked by the model (slide 6).


Sell everything? As predicted in our previous refresh, the recent bullish-to-bearish reversals in Emerging Market Equities, Foreign Exchange and Commodities were, in fact, a harbinger for similar breakdowns across the Domestic and International Equities asset classes. Our recent decision to add SPY to the short side of our thematic investment conclusions confirm how we are thinking about this risk in real time. At the bare minimum, it implies investors would do well to reduce their gross exposure and/or tighten up their net exposure to global asset markets.  


CLICK HERE to learn more about TACRM, what these signals imply and how best to incorporate them into your investment process.


Long-term TAIL Duration Risk: Market breadth is broadly deteriorating and in dangerous territory.


One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak very late into the economic cycle – well after broad-based signs of deterioration have emerged at the single-stock level.


In the face of a #LateCycle slowdown, benchmark indices are able to continue higher due to the fact that investors increasingly crowd into large-caps and/or stocks that have idiosyncratic growth opportunities that are less tethered to the [deteriorating] economic cycle, at the margins. Ultimately the cycle always prevails (see: 2000-2002 or 2007-2009), but positive absolute returns can be sourced from an increasingly narrow group of stocks and/or style factors well into the start of any given bear market.


Dangerous New Highs for the Market? - SPX 2000 02

Source: Bloomberg L.P.


Dangerous New Highs for the Market? - SPX 2007 09

Source: Bloomberg L.P.


There’s a number of ways to measure market breadth on a trending basis (e.g. % of stocks making new highs, % of stocks correcting, % of stocks crashing, etc.), but for the sake of simplicity we track the percentage of stocks below their respective 50-day and 200-day moving averages in the Russell 3000 Index – which, at covering about 98% of the investable public equity market, makes it the broadest measure of the U.S. stock market.


On this measure, broad U.S. equity market breadth is as poor as it has been at any local peak since 10/9/07 – the previous cycle’s all-time high closing price for the SPX – surpassing the deterioration we saw at the 5/21/15 high, which was very much on par with the 7/19/07 local peak.



Dangerous New Highs for the Market? - BMBI 7 20 15


October 9th, 2007:

Dangerous New Highs for the Market? - BMBI 10 9 07


May 21st, 2015:

Dangerous New Highs for the Market? - BMBI 5 21 15


July 19th, 2007:

Dangerous New Highs for the Market? - BMBI 7 19 07


While not useful as a timing indicator, the aforementioned deterioration does imply the duration and scope for prospective returns are substantially worse than many investors may assume given consensus expectations for the length and strength of the current economic cycle, which we can loosely infer from consensus expectations for U.S. monetary policy.


Checking back in with TACRM, we are seeing market leadership increasingly concentrated amongst the exact style factors we’d expect to outperform in the latter innings of an economic and market cycle: large-caps (defensive safety and dividends), healthcare (increased consumption and the ability to maintain pricing power during economic downturns) and growth (many biotech and new tech companies don’t have earnings to speak of, therefore investors don’t have to worry about earnings misses derailing the momentum of the respective charts).


Dangerous New Highs for the Market? - 8


All told, we hope you find these quantitative signals helpful with respect to your individual investment mandate. As always, feel free to email us with questions.


Best of luck out there,




Darius Dale


The SEC Tweets – Relentless Pursuit

By Moshe Silver


The SEC trumpets its latest investor protection enforcement actions (Litigation Release 23303 / July 14) charging 34 individuals and entities with manipulating microcap stocks. Among the alleged perpetrations, the activities of one Harold Bailey “B.J.” Gallison II caught our eye. 


Call us cynical, but we’ve been around this industry a long time.  In fact, we were already seasoned professionals back in 2000 when the SEC brought fraud charges that resulted in said B.J. Gallison being sentenced to five years in prison. 


The SEC Tweets – Relentless Pursuit - z eye


This week’s SEC 67-page complaint describes Gallison as “a repeat securities law violator,” citing his “extensive regulatory history” back to 1996.  Gallison, now 57, is charged with running a brokerage operation out of Costa Rica that facilitated fraud by providing “anonymity to customers who sought to manipulate the market for microcap stocks in the US,” including shares in a company with the imposing name of Warrior Girl.


Details of the alleged fraud include such Hollywoodesque monkeyshines as having US-based fraudsters posting fake background photos on their Skype accounts to give the impression they were located in Costa Rica – rather than sitting in an apartment in Spokane, WA, where they were not registered and therefore not eligible to run stock orders for US customers.  The press release alleges some $5 million in purported illicit gains from only two of these activities; the full extent of customer losses may never be determined.


The bottom line is that every dollar fraudulently obtained by such activities is an after-tax dollar taken right out of the pocket of a private investor.  And, given that these frauds have been around for decades, it continues to be the least sophisticated investors who get caught in them – read: the least well educated and the least affluent.  The $5 million or so referenced in today’s press release likely represents serious pain for families who can ill afford the losses.

Once there were two people who decided to go into business together: one of them had money, the other had experience.  A year later, the positions were reversed.  Welcome to our world.


For all the Commission’s turning up the heat, we find it not so comforting to know that a convicted stock fraudster continues to ply his trade over a decade after his last case came to light.  The prosecutor in the 2000 case told news media at the time that Gallison showed open contempt for regulatory efforts to block his activities, and he predicted that Gallison would continue to run his illicit activities from his prison cell (Take that, El Chapo!)  It is not clear whether any measures were put in place to hinder or even surveil Gallison’s activities subsequent to his being released from prison.  We’d guess not.


It is worth quoting verbatim from the SEC release:


“ ‘This case demonstrates the Commission’s resolve to relentlessly pursue the villains behind these microcap fraud schemes wherever in the world they may be hiding,’ said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force, added: ‘This case presents an excellent example of the capacity the Microcap Fraud Task Force has developed to pierce the layers of sham entities and nominee accounts that predators employ to harm investors and evade detection by law enforcement.’ ”


We are not aware of any serious effort either by law enforcement or by academics to calculate how much money is lost by small investors who get caught up in these scams, but our best estimate is: lots and lots.  It may be a cheap shot to go after the Commission for cases such as this, but with Gallison on their radar as far back as 1996 – and with him having done jail time for essentially the same activities – we wonder where the Justice Department is on such cases – not to mention apparent lack of international coordination, though it is well known that such frauds are routinely perpetrated from offshore – and we wonder equally what yardstick the SEC is using to measure their “relentless resolve.”


The SEC is asking for the usual: disgorgement and restitution.  We’re not sure where that money is supposed to come from, nor how far the law will punish Gallison and his cronies if they are convicted.  If you had the opportunity to buy shares in Warrior Girl and didn’t, this would be a good moment to wipe your brow and praise Divine Providence.  If you did buy shares in Warrior Girl, we suggest you seek solace in the relentless resolve of the federal agency.


And don’t do it again.


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.


MCD is on the Hedgeye Restaurants Best Ideas list as a LONG.

A widely popular McDonald’s survey released last week, articulated how dissatisfied McDonald’s franchisees are with the current environment in which they operate.  We don’t disagree with the conclusions of that survey; in fact, the survey sheds light on some alarming concerns that we highlighted in our recent Black Book.


Our thesis on McDonald’s is that the company is broken and is in the process of being fixed and there are other issues to consider when analyzing the health of the McDonald’s franchise system.  In addition, most of the broader opinions in that survey are backward looking.


Taking the other side of this debate and looking at it from a different perspective, there are two critical metrics to consider: 

  1. Franchisee profitability
  2. Franchisee EBITDA valuations

MCD is far from fixed and there are problems within the franchise system that still need to be addressed, but the company and franchisees are healthy.  From the franchisee perspective, the MCD concept is one of the best quick service restaurants to own and we remain confident McDonald’s management is taking the right steps towards returning the business to prosperity.


In fact, the same survey that says the company is broken makes the same point we are.  As one operator in the survey said:


“…We have the best cash flow in the industry driven by our higher sales and guest counts…Operators will need to evaluate the lifestyle they currently live and determine if five or less stores will generate enough cash to support their habits and complete investments necessary to keep the brand strong.”


Below is a chart that looks at McDonald’s Franchise system sales and margin performance.  This chart makes the point above that the McDonald’s concept has the best cash flow in the industry. 




According to our data, Franchisee EBITDAR margins peaked in 2010 at 25.3%.  We would note that this is the same year MCD made its big push into beverages and launched the “cold” side of its McCafe strategy.  With the big push into beverages and expanding the afternoon day-part, average unit volumes peaked two years later in 2012 at $2.6 million. 


Since their respective peaks, by 2014 margins had fallen 260bps and average unit volumes had fallen by $62K.  It’s also important to note that in 2014 MCD EBITDAR margins although down remained strong at 22.7%.


After 3-4 years of declining margins its only normal for franchisee anxiety to be at peak levels and it also makes for great press as MCD is an easy target.

What is even more challenging is taking the other side (being LONG) and convincing people that there are plans in place that are going to help franchisees and shareholders be better off.


Clearly, some of the concerns and negativity from franchisees are warranted, but management is working hard on improving the business and alleviating these concerns.  Change will not happen overnight. 


Another issue the company faces is that there are a significant number of McDonald’s franchisees, and management is not going to make everyone happy.  The largest MCD franchisee owns 60 stores, with the top ten largest franchisees owning a total of 409 stores in the U.S., representing 2.9% of the system. The implications are that there are thousands of franchisees that all have an opinion on how things should be run!


Another important metric to consider is franchisee valuation trends.  Looking at the data from Restaurant Research, the data on valuation trends also point to a very healthy system.


The chart below displays the unit level EBITDA multiple valuation trend for MCD, which peaked in 2014 at 5.75x, +16% higher than the segment average. 




The demand for MCD restaurants among new and existing franchisees remains very healthy, despite the issues the company faces. 


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 80.47%
  • SHORT SIGNALS 78.68%

McCullough: Being Long Gold is a Disaster

With The Open Championship wrapping up in Scotland (and the HedgeyeCares Charity Golf Event tomorrow), Keith had no shortage of golf metaphors on The Macro Show to explain falling gold prices.  


Subscribe to The Macro Show today for access to this and all other episodes. 


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LEISURE LETTER (07/20/2015) - LVS/1928.HK, 01680.HK, 678.HK, Airbnb

TICKERS: LVS/1928.HK, 0618.HK, 678.HK, Airbnb


July 23 8:30am: Macau Legend 2Q CC: ; PW: 3270523# 

July 23 9am:  PENN 2Q CC

July 23 5pm: BYD 2Q CC ; pw: 1397357

July 24 11am-2pm:  PENN Plainridge tour and investor day

July 28 8:30am: WYN 2Q CC ; pw: WYNDHAM

July 29 10:00am: HLT 2Q CC ; pw: 74328196

July 30 9:00am: HST 2Q CC

July 30 10:00am: MAR 2Q CC ; pw: 66506287

July 30 1:00pm: HOT 2Q CC ; pw: 69941686

August 1

  • Wild Rose Jefferson opens
  • St Regis Macau opens

August 4: 11:00am: MGM 2Q CC ; pw: 0575269

August 4: 5:00pm: AWAY 2Q CC

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)


LVS, 1928.HK - The Labor Affairs Bureau is investigating the death of an imported worker in a Sands China construction site in Cotai. For now, they have stopped works. A 50-year old imported worker from the Mainland was helping with crane works in a construction site at the Venetian.


According to a preliminary investigation, the metal frame came loose and the metal belt used to tie the framework broke, causing around three tons of frameworks to fall on the man. The man lost consciousness on the scene and was pronounced dead after emergency treatment at the hospital.


The bureau says they ordered the contractor to terminate the relevant crane works, as well as requested the submission of a report on the accident. Further investigations are underway


Takeaway: Unfortunate incident could further delay Parisian opening.


01680.HK - Macau Legend Development has announced that it expects to report a loss for 1H 2015.  Last year, Macau Legend generated a first-half profit.   The company told the Hong Kong Stock Exchange that the loss it expected was due mainly to less revenue from gaming and greater costs, particularly staff costs.

Macau Legend is also reportedly building an integrated resort on Cape Verde islands, an archipelagic nation off the northwest coast of Africa.  The gaming and entertainment complex, which is expected to need US$200 million in investment, will include high-end hotels, casinos, conference centers and yacht piers, among other facilities, the Hong Kong Economic Journal reported on Monday, citing unnamed sources.



Takeaway: Not surprising given tough demand environment and high cost structure.


Genting HK - said on Friday it expects net profit for the six months to June 30 “of not less than” US$2.1 billion, compared to US$142.2 million for the prior-year period.

  • The numbers contained in its most recent update did not include the contribution from Travellers International Hotel Group Inc – a venture with a Philippines partner that operates and is expanding the Resorts World Manila casino resort – and from Norwegian Cruise Line Holdings Ltd (NCLH), Genting Hong Kong said.
  • The firm said the expected increase in net profit is mainly attributable to, among other factors, a gain of US$599.6 million “from the disposal of certain stakes in NCLH” and a one-off accounting gain of US$1.57 billion “recognized upon completion of a secondary offering of NCLH’s ordinary shares”.
  • Genting Hong Kong’s interest in NCLH decreased from about 22.0% to approximately 17.7%, the company said, adding that it now accounts for its share of results and net assets of NCLH as an “available-for-sale investment”.


Takeaway: Further Genting/Apollo sales have already been a headwind for NCLH investors but NCLH is setting up to have a great year.

Airbnb - NYC is spending $2.8 million to shut down illegal Airbnb rentals. 

  • The city is doubling down on its efforts to regulate illegal home conversions, according to the New York Post. And for its crackdown, the Mayor’s Office of Special Enforcement — which is tasked with fighting illegal subletting, among other things — now has a $2.8 million budget to work with.
  • The office will expand to a staff of 29 from 12, turning the division into an active investigative unit, according to the newspaper. 
  • “OSE will no longer be a reactive group but one that will go out and shut down the illegal hotels,” said Upper West Side Council member Helen Rosenthal. 


Takeaway: A small positive for NYC lodging. "Illegal" rentals, for now, simply mean a sublet which lasts longer than 30 days. NYC continues to be one of the most difficult cities for Airbnb to work with as regulators refuse to strike a productive deal.


Travelodge - The owners of Travelodge are preparing to check out of the hotel business after appointing Deutsche Bank to advise them on a £1bn IPO.   An initial public offering is believed to be less likely than a sale, and there is speculation that Travelodge could draw the attention of an Asian suitor. 

  • Travelodge currently has 521 hotels, including 12 in Ireland and five in Spain, although the business has identified about 250 locations in Britain where it would like open a site in the future, the chief executive added.
  • Travelodge, like other companies across the hospitality, retail, leisure and social care industries, is expected to suffer higher costs as a result of the plan for a new national living wage for workers aged 25 or over, which was unveiled by Chancellor George Osborne earlier this month. The minimum wage is currently £6.50, but will rise to £7.20 next April and reach £9 by 2020. 



Crystal Cruises/Genting HK-  will turn the two-ship, luxury ocean cruise line into a luxury “one call” — using the Crystal brand to add new ships, new yachts, new river cruise ships and a new airline.

  • Three new luxury ships are going to be built. They are large (100,000 tonnes) but will only carry 1,000 passengers with one-to-one service from the 1,000 crew members. 
  • The ships will be the most luxurious afloat with suites twice as large as any of the luxury brands and they’ll feel even bigger with higher than normal ceilings. 
  • In a unique move, President and CEO Edie Rodriquez told USA Today there will be 48 residences offered as second homes on the top deck. Your own restaurant, reception and facilities go with your new home at sea.
  • The first of these super luxury ships will be sailing by 2018. The Crystal River Cruise ships will be sailing by 2017 with two custom-built vessels with the same luxury appointments and service you will find on the ocean liners.


Takeaway: Who says the luxury cruising market isn't getting crowded as well. 


Avalon Waterways - Low water levels on European rivers are forcing many river cruise companies to evaluate their upcoming sailings.  Avalon Waterways has canceled the departure of its "Highlights of Germany" river cruise on Avalon Affinity, due to low water on a stretch of the Danube River. The cruise was due to begin on July 19, sailing from Passau to Basel.  

  • The company has offered affected customers the option of another European river cruise on a similar departure date or a full refund with a future cruise credit allowance.

  • "As of today, all our cruise programs are operating as per schedule; however, the water levels are low on the Rhine, Main and Danube so we are monitoring the situation closely," the line said in a statement.



Vladivostok, Russia - Hundreds of new staff being trained for next month's landmark casino opening in Vladivostok. 

  • The first casino resort in the the Primorye Entertainment Zone is due to open next month by Macau magnate Lawrence Ho' gambling investment firm Summit Ascent Holdings.
  • The $500 million complex will boast 121 rooms alongside a luxury casino suite and gaming floor.  It is due to open on 28 August after completing construction and undertaking final government inspections. 
  • Initially, styled as Tigre de Cristal this will comprise five VIP gaming tables, 42 mass market gaming tables, and 759 slot machines in a $172 million first phase.
  • Some 700 staff have been trained for the opening as croupiers, dealers, floor managers and the like, a number that will increase to over 1,000 when the complex is operating at full capacity.


Takeaway: With close proximity to China, Japan, and Korea, Vladivostok certainly has potential.  


Australia - Australia’s Echo Entertainment Group Ltd has been chosen by the Queensland government to develop a multibillion-dollar casino resort in the Queen’s Wharf area of the state capital Brisbane, local media reported on Monday.  Echo’s bid beat a proposal from market rival Crown Resorts Ltd, led by James Packer.

  • Ms Palaszczuk, the Queensland Premier, stated the Echo bid was the standout one because of its better proposals for the use of public space and because the company was in a position to start construction soon.
  • Construction is due to begin by late 2016 and is likely to be completed by 2022, according to media reports.
  • The project will have luxury hotels: including one under the Ritz-Carlton brand and one under the Rosewood brand; residential apartment towers; luxury shopping; and public spaces along the Queen’s Wharf’s dock.




North Dakota - Lottery ticket sales increased slightly in North Dakota over the last fiscal year despite fewer multi-million dollar jackpots, the state's lottery director said.  North Dakota gamblers wagered just more than $27 million on lottery games for the fiscal year that ended June 30, or about $100,000 more than fiscal 2014, lottery director Randy Miller said.  



Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.

P: Thoughts into the Print (2Q15)

Takeaway: We expect a light 3Q guide, but 2015 is irrelevant. Web IV is all that matters now, and we expect P to lose the one debate that it can't.


  1. 2Q15 UNINSPIRING, BUT 2015 IS IRRELEVANT: We’re having a hard time getting to 2H15 consensus Advertising Revenue estimates, which essentially call for accelerating growth in its conflicting growth drivers (see table below).  In turn, we’re expecting 3Q revenue guidance to disappoint.  Further, we suspect P’s y/y user growth could slow to the point where it prints another sequential decline in users, which will likely take the street by surprise.  But even if we’re wrong on all the above, we don’t see P catching a bid this close the potential fallout from Web IV.
  2. WHAT WE’RE KEYING IN ON: Listener Hours. Web IV is all that really matters now, and we expect P will lose the one debate that it can’t on royalty rates (different rates for ad-supported vs. subscription music).  Given the potentially significant increase in rates, the more hours P enter 2016 with, the more bearish we become.  The situation would be far too sensitive to just apply a simple listener cap, and hope it would suffice (see table below).  P would need to take more drastic steps to reign in content costs.  We’ll be in Washington for final arguments tomorrow; we’ll report back what we learn.


Let us know if you have any questions, or would like to discuss in more detail.  For Web IV supporting analysis, see links below. 


Hesham Shaaban, CFA




P: Thoughts into the Print (2Q15) - P   2H15 Ad rev scen v2 




P: Losing the Critical Debate?

04/08/15 08:53 AM EDT

[click here]


P: Worst-Case Scenario? (Web IV)

03/23/15 09:30 AM EDT

[click here]


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]

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