This note was originally published at 8am on August 09, 2013 for Hedgeye subscribers.
“Success is stumbling from failure with no loss of enthusiasm.”
Four years ago, Keith, myself and Todd Jordan, our Managing Director of our Gaming, Lodging & Leisure team, embarked on a journey in which many people predicted we had little chance of succeeding at. With the support of our colleagues at Hedgeye, we entered the process to purchase the Phoenix Coyotes, a bankrupt NHL franchise. Our proposal to purchase the team was seemingly received well (as you might imagine Keith played the lead role in that meeting!) and enabled us to become the key contender to own the team.
Our analysis of the situation in Phoenix was vintage Hedgeye. We started with a macro perspective that it was likely the ideal time to buy a distressed asset in the Phoenix region as housing was literally in free fall. Our view was that housing would ultimately revert to the mean, and thus home prices would see a strong recovery, which would then drive discretionary spending on things like sporting tickets. In the Chart of the Day, we show the improvement in home prices in Phoenix since that period.
We then took a hard look at the financials of the team (hat tip to our colleague Anna Massion for some good work here), we found a business that was bloated on the cost side with some easy pro-forma cost reductions. On the revenue side, we developed a plan for steady revenue growth with the unique idea of playing five games in another market (think the Buffalo Bills playing in Toronto). Even though we came to agreement with the NHL on the parameters of a purchase via a letter of intent, the deal ultimately fell through as we were unable to agree to terms on an arena lease.
At that point, we chalked it up as a loss, but a win on the learning side, and watched over the last couple of years as various other groups attempted, yet failed, to purchase the franchise. With the advent of the new collective bargaining agreement in 2013, which from our view created a very compelling economic situation for smaller market NHL teams, we decided to revisit the opportunity, almost three and half years after first looking at the team.
Over the course of the last few months, we and our partner Anthony LeBlanc were able to put together a very intriguing financing package with a major hedge fund as the lender. With Anthony’s guidance, an arena lease was negotiated that exemplifies a true public / private partnership. And finally we found a lead equity investor in my friend George Gosbee from Calgary, who is now the Governor of the franchise, and closed the transaction earlier this week.
For Hedgeye and our partners, the deal was a true lesson in perseverance and teamwork. Quitting at any point would have been easy, but ultimately we persevered and put the puck in the net. While we are quite excited about the prospects for NHL hockey in Phoenix, I will ease the minds of any NHL hockey fans out there . . . despite owning a small piece of the team, you can be rest assured Keith and I won’t be getting on the ice any time soon!
Switching back to the global macro grind, we have a slew of data out this morning. It was a big macro day in China, in particular with Chinese CPI coming in at +2.7%, PPI declining for the 17th straight month down -2.3% y-o-y, and retail sales up a solid +13.2% y-o-y. That last data point continues to be supportive of our view that Chinese GDP is in a phase transition from an export led economy with a focus on infrastructure build out, to a consumption driven economy, with a lower aggregate growth rate.
This Sunday we will be getting preliminary GDP numbers from Japan and this will undoubtedly be the focus of many global macro investors. The main event in global macro this year has clearly been the rapid decline and volatility of the Yen. In turn, this has supported strength in the U.S. dollar, which has implications across asset classes with varying degrees of correlations.
We have a lot of things at Hedgeye, but a crystal ball is not one of them, so we aren’t going to attempt to tell you where the number will come in. That said, we continue to have conviction that regardless of any short term data, the Japanese will have to continue to stimulate, and aggressively so, in order to get anywhere in the zip code of their long run inflation target of 2% and nominal growth of 3%. To get to these targets, the Japanese policy makers will require a whole lot of “Control P” (printing), which makes the long run bear case on the yen very compelling.
Back in the U.S., the ferocious bear raid in U.S. equities (to quote my colleague Christian Drake) took its toll with a cumulative decline of 71 basis points over the last four days (#SarcasmAlert). We’ve been harping on this all year, but as the U.S. economy continues to transition from stabilizing to accelerating with labor and confidence hitting levels not seen since 2007, U.S. equities will continue to find a bid on any sell off.
The longer term supporting bid in U.S. equities is, of course, the theme that our financials team has been focused with their recent launch on asset managers, which is the current, and we expect continued, outflows from fixed income assets as interest rates grind higher. This will only accelerate if U.S. economic data continues to come in strong.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.57-2.73%
Have a great weekend with your friends and families!
Keep your head up and stick on the ice,
Daryl G. Jones