The Visible Hand

“It is a magnificent feeling to recognize the unity of complex phenomena which appear to be things quite apart from the visible truth.”

-Albert Einstein


“What is the truth,” you ask? Well, on being long China, Bridgewater’s Dalio says he’s #out. Or at least that’s what it says on the front-page of the WSJ (Wall Street Journal) this morning. A market that you can’t get out of, really Ray?


Meanwhile, on the front-page of the CSJ (China Securities Journal) this morning, there’s a new chapter of the communist government’s centrally-planned-market-manifesto, trumpeting the benefits of their “visible hand” in the stock market!


Adam Smith, eat your heart (and invisible hand) out, buddy.

The Visible Hand - China cartoon 07.07.2015


Back to the Global Macro Grind


Halt I say, halt! If the “chart” breaks, show those price momentum boys the hand, ladies. Or was it the ladies that were all amped up about anything with liquidity and a “good looking” chart (i.e. price momentum as a Style Factor) prompting the boys?


Who knows. What we do know is that if you’re:


A)     Levered long anything “value” that is hidden within the visible truth of #StrongDollar Deflation and/or

B)      Long what you thought was “Low Beta” but is actually trading with wicked high #deflation beta


You’re probably not having as good a month as the cool boys and girls who were long Google (GOOGL), Amazon (AMZN), and Facebook (FB).


Sure, Apple (AAPL) rocked the alpha-cart some yesterday. But as long as the other ones never go down (imagine that?), the big cap liquidity + growth investing style factors are rocking anything that’s cyclical + slowing.


Enough about Style Factoring (modern day risk management tools that a large % of PMs don’t use) your portfolio as a means of explaining the unity of complex phenomena already, KM… let’s talk about some ideas. Show us your picks!


In Real-Time Alerts, here’s what I’ve had on the LONG side this week:


  1. Hologic (HOLX) – still one of our Best Ideas in the Healthcare sector; Tom Tobin held a call on it again yesterday
  2. US Housing (ITB) – alongside Healthcare, has been one of our Top 3 fav sector exposures for all of 2015
  3. Utilities (XLU) – hasn’t been a favorite for 6 months, but is morphing back into one (alongside REITS)
  4. Long Bond (TLT) – remains the best long-term idea as a way to express growth and inflation slowing
  5. Starbucks (SBUX) – long-time favorite that looks every bit as good (and overbought) as Google and Amazon


Then in our INVESTING IDEAS product (weekend product with longer-term ideas) we still have names like General Mills (GIS) that has pretty much every Style Factor a PM would need right now (Big Cap, Low-Beta, Nice Chart).

The Visible Hand - BENNY 07.23.15 chart


But I’m not going all style factor on you – I promise! (isn’t that a visible truth)


Lots of our SHORTS have been working… especially the stuff:


A)     That looked like “value” but has

B)      Commodity #Deflation and

C)      Debt (leverage) #Deflation


Like Chesapeake (CHK)… there was a lot of perceived “value” in the “dividend”, I guess, until they cut it this week.


#Deflation is not a typical “style factor” that my former quant partners in Chicago would use. That would be a “Macro Idea” to them, and they “don’t do macro”, because they think that’s making a market call (they don’t like those).


I personally love making macro market calls – because, eventually, all of the Big Macro Themes find themselves implied in style factors that many quants have to chase anyway.


Put another way, Macro Phase Transitions (think points of market entropy, waterfalls, and yes, breaking the 50-day moving monkey) are where most of the non-linearity lives. They sometimes happen slowly, then all at once.


What’s not working for me right now is the short call on the US Financials (XLF). For now, this is where the style factors (shorter term) are colliding with my Macro Theme (longer-term) work. In other words:


  1. I’m short the Financials because I think rates will back off (again)
  2. Many Financials are #LateCycle stocks with late-cycle earnings
  3. Most levered parts of FICC (Fixed Income, Currencies, Commodities) imploding is bearish


And yes, rates backed off at lower-long-term-highs for the umpteenth time (2.31% 10yr Yield in US Treasuries this morning) as Fed Fund Futures back off SEP rate hike expectations…


And yes, both Junk and High Yield that is levered to #Deflation retested YTD lows alongside Commodity exposures yesterday…


But the Financials (XLF) were +0.75% on the day to +3.4% YTD…


So either the bond market (spread risk rising as the both the economic and profit cycle slows – yield spreads compressing too) has it right or the equity quants chasing (Big Cap, Low Beta, Nice Chart) 1-3 month price momentum do.


And I have this magnificent feeling that the bond market’s invisible long-term growth and inflation hand still has it right.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.22-2.39%

SPX 2100-2130

VIX 11.81-16.42
USD 96.71-98.56
Oil (WTI) 48.63-51.19

Gold 1079-1130


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Visible Hand - Chart of the Day

Growth, Greece and Housing

Client Talking Points


For the first time in 5 years, large-cap growth is trading at a premium to large-cap value and we anticipate this trend will continue as the cycle slows. Specifically, when broad economic growth slows, investors pay up more for real growth opportunities and rotate out of turnaround growth stories at the margins. 


You think things are all wrapped up in Greece? (Last night Greek lawmakers approve a second set of reforms, 230 to 63)  Far from!  While we expect Greece will ultimately receive another lifeline (and debt concessions), the Eurozone parliaments all need to vote on the “details”.  We expect the indecision along the way to finalize a deal to continue to pressure Europe’s markets to the downside.  Side note, Greece’s equity market is still not expected to open until next week, at the earliest.


Locally and globally, rates continue to make a series of lower-highs as sovereign bond market volatility calms (and dovish Fed rhetoric ramps) – long-term investors stayed with the Long Bond because they get growth/inflation slowing – people chasing charts, sold them (German 10yr = 0.76%, Swiss 10yr back to negative yield -0.01%, 10yr JGB down to 0.40%).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.


According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.


After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road


Nice but sleepy quarter out of $DNKN



If the stars should appear but one night every thousand years how man would marvel and adore.

Ralph Waldo Emerson


New York City -- A state wage board has voted, unanimously, to raise the minimum wage for restaurant workers to $15 an hour. At that pay rate, a fast-food worker will make $600 a week for 40 hours of work, or $31,200 a year.

July 23, 2015

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ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011

Takeaway: Investors withdrew -$11.5 billion from active domestic equity funds last week, the largest weekly withdrawal since August 2011.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The standout in the most recent ICI mutual fund survey was that investors withdrew -$11.5 billion from domestic equity funds in the five day period ending July 15th. This amounts to the largest weekly withdrawal from the asset class since August 2011 and now amounts to the worst start year-to-date in the public ICI data for U.S. stock funds. Cumulative outflows in 2015 have now reached -$75.1 billion in the first 28 weeks of the year, over -$12 billion worse than the 28 week start in 2012 where -$63 billion left the active domestic equity mutual fund category (and over -$20 billion worse than the draconian 2008 period). Conversely, investors continue to pour money into World or International stock funds with cumulative 2015 inflows tallying +$79.6 billion. That is good enough for a +$3 billion better start than the prior best 28 week period in 2013, where the first 6.5 months generated +$76.2 billion in investor inflow.


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI12



In the most recent 5-day period ending July 15th, total equity mutual funds put up net outflows of -$7.7 billion, trailing the year-to-date weekly average inflow of +$161 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.8 billion and domestic stock fund withdrawals of -$11.5 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$487 million, trailing the year-to-date weekly average inflow of +$1.9 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$35 million and taxable bond funds withdrawals of -$452 million.


Equity ETFs had net subscriptions of +$7.8 billion, outpacing the year-to-date weekly average inflow of +$2.5 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$2.6 billion, outpacing the year-to-date weekly average inflow of +$907 million and the 2014 average inflow of +$1.0 billion.


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI1 2


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI2


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI3


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI4


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI5


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI13


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI14


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI15


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI7


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the Financials XLF ETF lost -$1.5 billion or -7% to redemptions. The large outflow was likely due in part to dovish comments by Fed Chair Janet Yellen on July 15th. In addition, the iShares 20 year Treasury ETF had a better week with the TLT gathering $176 million in new assets, good for a +4% increase in AUM.


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI17


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.0 billion spread for the week (+$173 million of total equity inflow net of the +$2.1 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.6 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI10


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Eye Popping Domestic Equity Outflow - Worst Week Since 2011 - ICI11 



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA




  • Starts off discussing the Cape Verde investment, and calls it his first step in diversifying outside of Macau. 

  • Published a profit warning a week ago, and briefly cited the weakening gaming market in Macau

  • They feel comfortable with their positioning in Macau particularly within the mass market segment 

Cape Verde Comments

  • Cape Verde is also a former Portuguese colony

  • They believe Cape Verde is well positioned for tourism expansion from markets like Europe, South Africa, Western Africa and South America

  • Main Airport is 10 mins from their property site 

  • Site will be in Praia the capital city, on the main island of Santiago

  • They view it is as the next Macau. Say the govt. is into new alternatives for growth. 

  • They'd like to bring about the same themes as Macau

  • They are aiming for completion of the integrated resort in 3 years 

  • They received the Island's 2nd license for land based gaming. HLT has the first license. 

  • Macau Legend now holds the exclusive license for online gambling/gaming and betting

  • They look to continue to build off the Portuguese culture and go where there are competitive tax rates, growing and established tourism, but look to help other countries grow and prosper along the way

  • Capital budget for the project 250 million euros, and will use the same contractors as they use in Macau. Reason being is they want to minimize execution risk

  • Property will include beach access and will also have island access.  

  • 150 hotel rooms, and additional Boutique hotel will be on the property

  • Cape Verde room rates and occupancy were cited as strong 

  • They were awarded two land leases, one for beach and for the island, both are 75 year long leases and offer favorable terms (which were not disclosed).

  • Taxes for their land based casino operations will be as follows

  • 10% on GGR for Mass

  • 7.5% on GGR for VIP 

  • There is no limit on the amount of tables or slots they can operate 
  • Cape Verde government is using Macau gaming laws as a basis for their laws

Comments on Cape Verde as Country

  • Noted as a safe and stable place 

  • Relatively developed and growing 

  • They have been enjoying a serious ramp in visitation, mostly from Europe and Africa

  • Flight times to Europe 3-6 hours 

  • Flight times to Brazil 3 hours 

  • Lots of Chinese in the surrounding areas

  • Europeans do not need visas 

  • Macau citizens do not need visas

  • Chinese citizens can obtain visas, process cited as "very simple and fast"

  • The project will include shopping and attempt to mix in Asian culture 

  • They will be rolling out online betting and gaming site which will open prior to the land based casino

  • They have plenty of financing available and have been approached by many firms and local banks that want to underwrite the financing on the project

Q & A

  • Project will be on the island of Santiago, the main commercial island, with the most people and visitation. 
  • Cite that they will tap into tourism junket business in Europe as a big opportunity 
  • There are 4 intl airports on CV, and their property is next to the biggest one, which is currently getting an upgrade
  • Caribbean feel to the island, it's not like the Maldives or Fiji 
  • Chow focused on the idea the Santiago could be a good spot for the VIP market, citing that business people travel in and out. Wealthy from Africa and Europe. 
  • They are seeking first mover advantages, by being the first to offer a integrated resort experience. Islands close by and will offer great experience for guests for day trips
  • They expect customers from the UK, the Netherlands, Angola, South Africa, Western Africa, South America (short flights)
  • Why Cape Verde? Opportunity to generate a new market in this part of the world, and could compliment and draw European gamblers and specifically all the Chinese people who have immigrated to Europe. 
  • Chow saying that there is potential for GGR to bigger than European casino market. 
  • Basically, there is no comp in the area.
  • Tax advantages are a huge for the bottom line
  • Continued to cite that they feel there is a need for a casino 
  • Question on Market size? EBITDA? ROIC? 50 tables 150 slots/EGT's - "EBITDA margin can be better than Macau"
  • Would not give any forecasts on EBITDA
  • ROIC - something starting with "2" and has to beat Macau which they are confident that it will
  • How will they finance the project?  As of now, they will seek a bank loan, term loan financing + a mix of corporate level financing 
  • How should the hotel perform? A lot of the hotel rooms can be sold - both non gaming EBITDA has potential to be very strong 
  • Chow has a very close relationship with the CV govt. 
  • Question about the project prior to the full opening:  Online/sports betting component and exclusivity, a major a plus. But they will not operate a temporary casino, Chow doesn't want to hurt the brand name before official opening.
  • Chow cited huge opportunity in being a leader in online gambling and sports betting on the island and in the region. 
  • For construction - Phase 1 shore zone, Phase 2 island zone - both should be done at the same 3 year period.  
  • Angola very relevant, because of the influx of Chinese companies and Chinese people there. 
  • Synergies from Macau for the new project? Chow mentioned that marketing will create the network, and Chow's network is strong and will leverage that in the future to bring customers to the project. Operational synergies exist. Govt. connection, hotel oprations synergies from the Macau properties. 
  • Chow calls Cape Verde the new Caribbean, because it is untouched and offers the same qualities. 
  • Online gaming exclusivity is huge. anyone from a country with legalized online gaming can clear through them. They cite it as an opportunity for online gaming around the world. 
  • No guidance when the online gaming will begin, but will definitely be before the land based casino. They would like to use it as a marketing tool for the resort. 
  • How big of a portion should the online gaming be to EBITDA? No projections. Land based gaming contribution tends to be the biggest, then online gaming, then regular hotel operations. 
  • Question on their balance sheet being stretched, needing for additional funding for these new projects and expansions?
  • Chow: "Fisherman's Wharf needs no more financing or funding efforts, and the second hotel is approved, and will be building it as fast is the labor market permits."
  • CV project should be heavily sought after in terms of debt financing, and they expect to finance very competitively on any future projects. 
  • For Macau they will not be laying off any workers but will be relocating workers around their existing properties after closing some of their VIP tables. 
  • Cites China stock market crash as potential to further erode junkets earnings and the Macau gaming market in general
  • Smoking ban? Chow doesn't think the government will put full ban on smoking and sees room for the government and casino operators to make a deal. 




Takeaway: StreetAccount consensus estimates for Q2 net physician adds were just released and they look reasonable.



StreetAccount consensus estimates for Q2 net physician adds were just released and they look reasonable.  Relative to consensus, our estimate comes within a margin of error for athenaCollector and athenaClinicals, which are the most important products when gauging the health of the business.  We are ~500 lower for athenaCommunicator after adjusting our mix assumptions due to several quarters of coming in higher than actual results.  However, we don't think it will make a difference as our model is forecasting above consensus Sales and Non-GAAP EPS of $229.3 mill ($227.0 mill Consensus) and $0.30 ($0.25 Consensus), respectively.  Chart above above shows the build up and break down of how we arrived at the net physician count for the quarter.


We will get into the details of our process and provide a comprehensive review of our long thesis in a Best Idea Update Call tomorrow at 11:00 am ET.  As a reminder, the company will be reporting earnings after the close that day.


key metrics

  • athenaCollector
    • Consensus 1,697 vs HRM 1,642
  • athenaClinicals
    • Consensus 1,077 vs HRM 1,154
  • athenaCommunicator
    • Consensus 1,907 vs HRM 1,415


Please call or email with questions.


Thomas Tobin
Managing Director 



Andrew Freedman



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