Blind Belief

"Blind belief in authority is the greatest enemy of truth."
— Albert Einstein


If you need a solid dose of anti-academic dogma, read “Einstein: His Life and Universe” by Walter Isaacson. Never again will you accept the Blind Beliefs of modern day academics who purport to know exactly what is going on in your life and the global economy.


In addition to an ominously timed story titled “The Return of the LBO”, Barron’s ran an interview with Vincent Reinhart this weekend titled “The Case for Quantitative Easing.” If you haven’t read it yet, you should. It will cost you 5 debauched bucks to get a consensus opinion that’s worth about that much.


Vincent Reinhart shouldn’t be confused with his wife, Carmen Reinhart, who co-authored one of the most important empirical works in modern economic times (“This Time Is Different” with Ken Rogoff). Carmen is a self-taught Cuban-American who came to America with her family and 3 suitcases in 1966, whereas Vincent spent almost his entire career as a yes-man at the Federal Reserve.


If you don’t want to waste 5 Burning Bucks (the US Dollar closed down again on a week-over-week basis last week for the 17th out of the last 20 weeks), here’s a recap of some fairly shocking one-liners in the Reinhart interview (*reminder – Reinhart was a Greenspan “consigliore”):


1.  Barron’s: “You must feel some vindication that the very policy you have been pushing for several years is now being embraced”

Reinhart: “It’s too early to take credit until they actually do something meaningful.”


2.  Barron’s: “Quantitative easing has very little history in economics.”

Reinhart: “There was one other important case study, the 1930s, when short term rates were about zero from 1932 onward.”


3.  Barron’s: “Is that a good or a bad thing?”

Reinhart: “That depends on your outlook. Certainly you can’t expect the Chairman of the Fed to go around making speeches saying ‘hooray, we are depreciating the currency. Yet dollar weakness is a good thing as long as it is limited, controlled and gradual.”


Maybe a better acronym for QE is government sponsored BS.


While we do applaud the Barron’s interviewer for giving Hedgeye some knucks calling QE “financial kryptonite” (in our Q4 Macro Themes presentation from 3 weeks ago we coined QE “Krugman’s Kryptonite”), we’re hardly going to support another professional politician with no market practitioner background for pandering to the academic dogma of a Fed Chairman who is still lost in his historical studies of the Great Depression.


I think the groupthink embedded in these quotes is pretty obvious, so I won’t dissect it in detail, but I will summarize the risk in what both Reinhart and Ben Bernanke aren’t telling you.


1.  With 43 MILLION Americans in line for the Food Stamp program and a 9.6% unemployment rate there should be no credit given to the charlatans of the broken promises associated with ZERO percent rates and Big US Government Market Intervention.


2.  Quantitative Easing has plenty of history – it’s just not the history that fits the storytelling of those who perpetuated Jobless Stagflation in both the mid-1930s (Germany and USA) and Japan since 1997.


3.  Debauching a country’s currency and attempting to fear-monger its citizenry into believing that the rate-of-return on their hard earned savings accounts should be ZERO as the government implodes itself with debt is something the Fed Chairman should be protecting Americans from rather than perpetuating via its politicized policy making.


As Washington fat cats take pictures petting their pooches in front of some inflated art like Vincent Reinhart did for his interview, remember this … and remember it well… Americans aren’t paid off to have Blind Belief in short-term dollar depreciation oriented stock market rallies. They know who is getting paid by the Piggy Banker Spread in 2010 – and it’s not them.


Americans want someone in government to tell them the truth. The enemy of truth is the posturing of truth itself.


My immediate term support and resistance lines for the SP500 are now 1167 and 1181, respectively. As the bulls were Snorting QE on Wednesday, I finally re-shorted the SP500 (SPY) near its intra-week high. I titled an EL note last Monday “Defend Yourself” and I am currently living that strategy out loud.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blind Belief - blind

PSS: GILTy As Charged

Interesting timing that Saucony shows up as a headline in a sneaker trunk sale on GILT just days in advance of the PSS analyst day. The question to answer for mgmt will need to be strategy at core PSS. But tough to hide momentum at Saucony and Sperry -- which are more meaningful to cash flow than people think. 


PSS: GILTy As Charged - 12


PSS: GILTy As Charged - 22

Malthusian Tails

This note was originally published at 8am this morning, October 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The power of population is indefinitely greater that the power in the earth to produce substance for man.”

-Thomas Malthus


Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations.  Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  We call this our Trade-Trend-Tail Process.


There is, of course, another duration, which I will simply call the longer term.  This is the time frame beyond 3 years.  While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term.  One key force that will shape the longer-term with some predictability is demographics.


One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus.  His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32.  Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society.  Eventually, a large enough population would not be self sustaining and, as Malthus wrote:


“The superior power of population cannot be checked without producing misery or vice."


In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies.  Below we’ve outlined 3 key Malthusian Tails that we are focused on.


1.  Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults.  In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married.  Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried. 


Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs.  Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift.  According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively. 


2.  The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan.  Once again, a key driver here is demographics, in particular the aging of society.  In 1985, roughly 10% of Japanese society was over 65 years old.  Currently, almost 23% of Japan’s population is over 65 years old.  The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements. 


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%.  In just ten years time, that ratio will be equal to 48%.  We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.


3.  The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled:  “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email


In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.


While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it.  The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.


Boomer Employment (45-64 yr olds) reached its crescendo in the 1993-2002 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.


At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:


“Age is not a particularly interesting subject.  Anyone can get old.  All you have to do is live long enough.”


Yours is risk management,


Daryl G. Jones


Malthusian Tails - DJEL

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The Week Ahead

The Economic Data calendar for the week of the 18th of October through the 22nd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2


Unlike most quarters, the news here is that we are not far off from consensus:  7% above on Macau EBITDA and 1% higher on Vegas.



Wynn’s Q3 shouldn’t be the huge beat we’ve seen in recent quarters.  Market share losses in Macau should prevent outsized outperformance but the quarter should still be solid.  We think Wynn’s market share remains disappointing post the Encore opening but strong Macau market growth makes the market share argument fairly weak, until it’s not.  Here are the details in our model:



3Q2010 Detail:


We project Wynn Macau & Encore to report $205MM of EBITDA on net revenues of $686MM

  • Net casino revenue of $640MM
    • RC volume of $21BN at a hold of 2.9%, producing gross VIP table revenue of $623MM
    • We assume a 84bps rebate rate and a 40.6% revenue share commission rate
    • Mass table win of $138MM and slot win of $60MM
  • $46MM of non-gaming revenues net of comps
  • $366MM of variable expenses comprised of taxes, gaming premium, junket commissions in excess of rebates, and bad debt
  • $21MM of recorded non-gaming expenses
  • $95MM of fixed expenses

We expect Wynn Las Vegas & Encore to report $65MM of EBITDA on net revenues of $327MM

  • Net casino revenue of $134MM and expenses of $70MM (up 3% YoY and $1MM QoQ)
    • Table drop of $579MM and hold of 19% for total table win of $108MM
    • Slot win of $765MM and revenues of $46MM
    • Discounts of 13% or $20MM
  • $77MM of room revenue and expenses of $30MM
    • 90% occupancy and ADR of $195
  • $107MM of F&B and $54MM of entertainment, retail and other revenue
  • $44MM of promotional expenses
  • $61MM of SG&A

Other stuff:

  • D&A:  $105MM
  • Net interest expense:  $54MM
  • MI:  $34MM

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.