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U Know Sergio?

“You Know Sergio?”

-Smirnoff Ad


You know Janet?  Heavy set, thin lady … dovish, kinda hawkish … super conventional, mostly ZIRP-y …  hyper Bullish, but also a pretty Bearish ... (dehydrated, but super healthy)


Ahh …. the life of a central planner charged with equivocating in all messaging while simultaneously smoothing volatility by providing the market with absolute certainty.   


(If you’ve never seen the Smirnoff ad above, check it out, it’s good)  


If there’s been a voice of non-prevarication in recent years on the policy side, it’s probably been Stanley Fischer – FOMC vice-chair and former head of the Bank of Israel (and not to be forgotten – the 1st central banker to raise rates and pursue policy normalization coming out of the recession)


Here’s my hack theory on Fischer:


You know how when people get old they get to the point a lot faster.  What is lost in tact is made up for in unfettered insight –   a kind of unadulterated, politically quasi-correct truth serum.   Little kids don’t know better, old people do but don’t care anymore. 


While I think Greenspan has probably lost it,  I think Fischer’s entered still-coherent, old-dude, truth serum prime time. 


Consider some of his more recent quotables: 


  • Fischer On Forward Guidance:  "if you give too much forward guidance you do take away flexibility ….we don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise ….you can’t expect the Fed to spell out what it’s going to do...because it doesn’t know."


  • On Fed Forecasting Credibility:  “Year after year we have had to explain why the global growth rate has been lower than predicted.”


  • On Patience & Policy Lags:  “We tend to underestimate the lags in receiving information and the lags with which policy decisions affect the economy …. Those lags led me to try to make decisions as early as possible, even if that meant there was more uncertainty about the correctness of the decision.”

 U Know Sergio? - Fed cartoon 04.30.2015


Back to the Global Macro Grind...


You know Bergoglio? … from Buenos Aires?  … the guy who has all the streets shut down in NYC on Thurs/Fri while we’re trying to get through a stacked schedule of meetings in the papal party zone?


Pope Francis has shouldered the charge of change and evolution at the Vatican.  Raised in Argentina during recurrent LatAM hyperinflations and currency devaluations, the Pontiff could probably also produce some positive P&L in the current Global Macro chop. 


Argentina offers a convenient and relevant case study in interconnected global macro and its derivative impacts, so let’s stick with it:


Argentina Currency Crisis:  In an attempt to quell recurrent hyperinflations, Argentina adopted a formal currency board in 1991 – which means they held a dollar (& gold) against every peso in circulation and stood willing to exchange the two one for one.   The goal of a currency board, in effect, is to import another country’s monetary policy – in this case Argentina wanted to displace the lost credibility of its own central bank by importing the legitimacy of the U.S. central bank and its monetary policy with the goal of re-anchoring inflation expectation.   


The regime was stable and successful for a decade before collapsing spectacularly in late 2001. 




Brazil (not Argentina).  The flow of impact can be sufficiently captured in the following way: 


Brazil Currency ↓  -->  Argentine Currency (relative to the Real) ↑  -->  Exports to Brazil (largest trading partner) ↓ --> Argentine Growth ↓  --> Argentine Unemployment ↑/Budget Deficits ↑ --> investor angst over Argentine growth/deficit ↑ --> Argentine interest rates↑/ability to tap credit markets ↓/ability to service debt↓ --> currency board abandoned/Peso devalued  --> Argentine Peso ↓


In other words, Brazilian fiscal and monetary policy and the government budget constraint ultimately manifest in the massive devaluation of Argentina’s currency.


What’s the point:

  1. Interconnectedness:  Global Interconnectedness is real, dynamic, and non-linear – when a particular set of circumstances will reach a critical state and catalyze a “phase transition” in an asset class or macroeconomy is not always obvious
  2. Macro Bread Crumbs: The ability to forecast and front-run 2nd and 3rd derivative effects of Growth/Inflation/Policy/Currency phase transitions remains the wellspring of non-consensus macro alpha. 
  3. Re-Runs:  Hmmm … This Brazil slowing, Real currency collapse movie feels familiar.   


Timing markets and front-running major macro inflection is our job – it’s also hard and requires dynamic risk management.   While maximizing macro alpha necessitates an active management strategy - particularly when volatility is percolating - it’s not for everyone. 


Last week, I extolled the merits of The Mom Test and its unique ability to bring clarity to an investment thesis.  Some readers rightly pointed out that while I described the merits of “the test”, I didn’t actually offer an answer to it.


Here’s the laymen, common sense, sleep-fine-at-night, largely passive management frame-up: 


What if I told you:

  1. We are 76 months into the current expansion (the mean & median over the last century are 59-months and 50-months, respectively. Meanwhile, Fischer’s Fed, is forecasting above trend growth through 2018 – implicitly forecasting the longest expansion ever)
  2. Global growth is slowing currently and given global leverage and demographic dynamics, slower for longer will remain the prevailing reality
  3. Policy has proven to be impotent in printing sustainable real growth and the capacity for another large scale and sustained easing and asset purchase campaign is low.
  4. The market is up 186% off the 2009 lows – it’s been a great run, maybe there’s some modest runway left but the expansion is certainly in its twilight. 


Would you:

  1. Raise some cash
  2. Downshift equity beta exposure
  3. Allocate to long-duration fixed income on pull backs
  4. Buy stocks that look like bonds and/or equities with solid free cash flow yields, relative inelastic demand and pricing power – particularly with a fundamental catalyst, negative sentiment and elevated short interest
  5. Or, my Moms answer:  Buy a bigger mattress?


Active management and the pursuit of peak alpha is cool.  So is “sufficiently simple”. 


Bluish, whitish collar …. Long and Short … sophisticated but sufficiently simple. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.07-2.21% 

SPX 1 

VIX 19.98-26.51
USD 94.41-97.11
Oil (WTI) 43.65-47.82 

Gold 1125-1155


You Know Hedgeye?


Christian B. Drake

U.S. Macro Analyst


U Know Sergio? - z CoD Smirnoff Trade

LEISURE LETTER (09/25/2015) - 0880.HK, 0027.HK, SGMS, HOT, QUNR, AIRBNB, UBER



  • Hedgeye call on BYD: Sept 25
  • G2E (Sands Expo): Sept 29-Oct 1
  • Hedgeye cruise call: Oct 5


0880.HK - Casino operator SJM Holdings Ltd executive director Angela Leong On Kei expects no big upturn in Macau’s gaming business over the National Day golden week of holidays in the mainland next month.  Ms Leong told reporters in Hong Kong that it was improbable that the number of visitors to the city over the holidays would be 10% or more greater this year than last.  But the F&B business might do well, she said.


Takeaway: Not exactly useful insight. Golden Week will be stronger than recent weeks but likely down from last year.


0027.HK - Macau’s gaming market has “stabilized”, said Lui Che Woo, chairman and founder of casino firm Galaxy Entertainment Group Ltd.  Below are some of his comments from his interview. 

  • “I think the situation there [Macau] has already calmed down. It has stabilized. I am optimistic that in one year or two years, it will improve,” said Mr Lui, in an interview with BBC. 
  • Mr Lui said a slowing in the Chinese economy would allow the nation to move in a “new direction”. China’s Premier, Li Keqiang, this week called for the country’s manufacturers to focus on “innovation.”
  • He added: “At the moment the Chinese economy is turning a corner. It is changing direction. You can’t be accelerating at the same time. They have to figure out a new direction. If they succeed, the future would be incredible.”


Takeaway: On the margin bullish comments from Galaxy's chairman. We think Mass may have stabilized - minimum bets levels have not declined the past 2 months - and October is a much easier comparison. However, there is little evidence of junket stability.


Tiger Resorts - Tiger Resort, Leisure and Entertainment Inc has confirmed it has been given a construction timetable extension for its Manila Bay Resorts casino venue (pictured in a rendering) and that the “projected opening of the property will be December 2016.” It additionally mentioned “expansions and “improvements” to the casino project, including “an additional 97,000 square metres [1.04 million sq feet] of gross floor area, covering two hotel towers.” 



SGMS -  announced that the Company has signed a new two-year contract with four two-year extension options to provide instant games and related services to the Ohio Lottery. The contract, began in July 2015 and includes instant games as well as marketing, licensed brands and interactive services.  Ohioans purchased a record $1.5 billion in instant games in fiscal year 2015, an 8.8% increase YoY.



HOT/QUNR - Qunar, a Chinese OTA platform, announced a partnership with Starwood Hotels & Resorts Worldwide, Inc.  Under the new partnership, Qunar's travel user base, one of the largest in the world, will get instant and direct access to Starwood's global hotel inventory through Qunar's mobile and PC transaction platform.


AIRBNB - An Airbnb representative says the company has experienced a 270% increase in Philadelphia listings since April, and that demand there is eight times the norm. Airbnb also pushed Philadelphians to offer more inventory. The company introduced a charity incentive, promising that for every new host who lists property by December 31, it would donate $250 to charity. Philadelphia is the first city where Airbnb has offered such an incentive.


Takeaway: Airbnb continues to get creative in order to drive listings growth.  


UBER - A Belgian court upheld a ban of the ride-sharing app UberPOP on Thursday, giving it 21 days to cease operations in the country or face substantial penalties. The more expensive UberX service is unaffected, however.  



Overnight Subsidy - Macau Government Tourist Office director Maria Helena de Senna Fernandes has denied a newspaper report that her office means to subsidize tours for overnight visitors.  The Portuguese-language Jornal Tribuna de Macau reported that the government had plans to pay tour operators MOP200 (about $25) per head to accommodate tourists in the city overnight.



Macau Smoking Ban - Macau’s Health Bureau has said in a written reply to a Macau legislator that it expects – if implemented – a full smoking ban in the city’s casinos would result in a 2.7% to 4.6% reduction in casino GGR.  

  • The report quoted the written reply saying the assessment was done in conjunction with Macau’s gaming regulator, the Gaming Inspection and Coordination Bureau. 
  • The government forecast was based on estimates regarding the percentage of Macau gamblers that are smokers and the potential impact of a reduction in the number of their visits to casinos.


Takeaway: Most Street estimates project a bigger hit. We're in the 5-10% range but in terms of the profitability impact, it's much lower. 


Macau Unemployment - Statistics and Census Service (DSEC) indicated that the unemployment rate for June-August 2015 was 1.9%, up slightly by 0.1% from May-July; the underemployment rate remained stable at 0.4%.  


Total labor force was 402,700 and the labor force participation rate stood at 73.3%. Total employment decreased by 2,800 from May-July, at 395,100. Analysed by industry, employment in Construction and Retail Trade registered decrease, while that in Hotels, Restaurants & Similar Activities saw increase.



McCarran August Traffic - Las Vegas visitor traffic continues to rise. August saw 7.2% YoY growth in arriving and departing passengers. Domestic air traffic led the way with a 7.8% YoY growth while international and helicopters posted 3.3% and 0.8% growth respectively. This is the second consecutive month of 4 million or more visitors to Las Vegas. 

LEISURE LETTER (09/25/2015) - 0880.HK, 0027.HK, SGMS, HOT, QUNR, AIRBNB, UBER - mccarran

Takeaway: Air traffic continues to push higher, but are these people gambling? 


Singapore Smog - Singapore has closed its schools after the pollution levels caused by the smoky smog enveloping the city hit dangerously high levels.  On Friday the PSI hovered near the hazardous range again, hitting 255, with the 24-hour figure at 264-321.  Reports suggest, that the El Nino phenomenon, which results in very dry weather, means the haze could continue until the monsoon season begins in November.  


Takeaway: Could impact visitation if the reports prove to be true. 


Singapore Manufacturing Output - Manufacturing output in the Republic fell 7% YoY in August, the Economic Development Board (EDB) said on Friday.




The Hedgeye Gaming, Lodging, and Leisure Team is adding BYD as a best idea LONG, and will be hosting a call today at 11am to discuss our views on the stock. Here is a brief summary of our thesis.



  • Regional Gaming Stability = Earnings Visibility 
    • As predicted, August would look weak and pressure the stocks. However, the states will begin releasing stronger September results beginning next week. 

    • The underlying demand/supply fundamentals in regional gaming are much improved and likely sustainable

  • Operational improvements and favorable market exposure could drive upside

    • Atlantic City and LV Locals could be surprise growth drivers. Supply exodus in AC is mostly to Borgata and the sustained housing recovery is finally translating into gaming revenue growth. These markets generate higher incremental margins for BYD's aggregate portfolio.
    • BYD's management changes are paying dividends  
  • Valuation

    • 15% free cash flow yield and 8x EV/EBITDA. PNK going out ~10x EV/EBITDA and PENN/GLPI split around 10-11x.
    • We believe BYD is undervalued at current prices 

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USD, Rates and Stocks

Client Talking Points


The UST 10YR hits 2.08% on slowing Durable Goods; rises to 2.16 on Janet Yellen's forecast – the #1 risk remains her forecast. FX market moves 70 basis points on this (USD vs both Yens and Euros), but looks far from convinced. The USD Index would have to breakout above 97 (Euro below 1.09) for us to believe that the market actually believes she’ll hike into the Q3 GDP slowdown.


This is the 8th time this year that the UST 2YR will test 0.75%, but on what? There’s certainly no inflation or growth data to support a rate hike – but Yellen has clearly been politicized to change her tune at the whim of stock market moves, so good luck with that. The UST 10YR risk range is low-vol and manageable = 2.07-2.21%.


What kind of stocks love the idea of USD up? Japanese and European stocks! Because their FX is down on that trade, but don’t forget the context of today’s Nikkei and DAX “bounce” (the German stock market is in crash mode -22% since APR). We would short more U.S. Financials and Industrials today too.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s remains one of our Restaurant teams Best Ideas on the LONG side.  We continue to believe that 3Q15 will be the inflection point for the company’s turnaround and that we are going to be looking at a much different company 1-3 years from now.


Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.


Penn National Gaming continues to be our favorite Regional Gaming stock.


Regional numbers for August have come in soft, but we predicted the August weakness. September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels. 


Slower (and Lower) For Longer remains our non-consensus call. It's nice to see that the Fed is finally starting to see what the #GrowthSlowing late-cycle data does.


  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no


Our estimate for Y/Y% GDP for Q3 is a range of 0.1% to 1.5%. Even the Q/Q SAAR # that consensus hangs on will be comping against a 3.7% Q/Q SAAR GDP print (second revision). Good luck positioning for a rate hike. Prepare for the fade…. AGAIN.


Three for the Road


Cliggott: ‘Uncomfortably High Probability of Significant Correction’ https://app.hedgeye.com/insights/46495-real-conversations-doug-cliggott-an-uncomfortably-high-probability… via @HedgeyeDJ #markets  



I found out that if you are going to win games, you had better be ready to adapt.

Scotty Bowman


4.6 million people tuned in to watch Donald Trump on The Late Show with Stephen Colbert  on Tuesday, a  46% increase from the previous Tuesday.

September 25, 2015

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The Macro Show Replay | September 25, 2015


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.