MPEL: Removing from Investing Ideas

We are removing Melco Crown Entertainment (MPEL), a casino operator in Macau, from our Investing Ideas list today.  


MPEL was added to Investing Ideas on March 18th. It closed that day's trading at $20.33. Yesterday, MPEL closed at $28.11.


Hedgeye Gaming, Lodging and Leisure Sector Head Todd Jordan writes, “After a long steep climb, the MPEL engine may be slowing down.”


Jordan writes, “We're still positive on Macau, so it’s difficult to be negative on MPEL.  However, MPEL’s recent share losses in the (higher-end) Junket segment are a little disconcerting and could continue.  Moreover, MPEL’s mass (segment) share could be at risk as Sands Cotai Central begins its push into premium mass (segment) next year.”

Rates Rising: Rinse & Repeat

Client Talking Points


Don't look now but #StrongDollar is clocking a 6-week high this morning. The greenback is up for the 4th straight week. It's starting to look a lot like late June on that side of the Macro correlation scorecard. The trend correlations remain positive at +0.6 between the S&P 500 and US Dollar. Meanwhile, the last week or so of US economic data clearly support this move.


As you may have already surmised, I spend more time worrying about the long-end of the yield curve (because Ben Bernanke marks the short end to model), but that hasn't stopped the 2-year yield from putting on a monster rip show in the last few weeks to 0.48%. What exactly constitutes a big rip? How about a 60% surge in a month! Kaboom. Look, lots of (most?) people don’t model entropy risk on a percentage basis. We do here at Hedgeye. It works. Got #RatesRising yet?


We have no position in anything Gold right now. But with #StrongDollar and #RatesRising, I certainly don’t wake up in the morning thinking about anything other than where can I re-short it. When an asset’s price is in full-on crash mode, we aren’t smart enough to catch falling knives. The trend resistance for Gold is firmly intact at $1483. Tail risk resistance is well above that at $1661. Don't catch a falling knife.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road


UST 10yr 2.92% taking another run at the YTD highs for the right reasons #RatesRIsing



"I have to believe that when things are bad I can change them." -James "Cinderella Man" Braddock


Treasury prices sank this morning, sending the 10-year Treasury note yield to its highest level since July 2011 as it continues its steady march toward 3%. The 10-year note was up 5 basis points at 2.951% while the 5-year note yield was up 7 basis points at 1.819% and the 30-year bond yield was up 3.5 basis points to 3.835%.

The Desert

This note was originally published at 8am on August 22, 2013 for Hedgeye subscribers.

“What makes the desert beautiful is that somewhere it hides a well.”

-Antoine de Saint-Exupery


Volumes are light, ideas are sparse and the Hamptons are packed.  Welcome to summer on Wall Street!


The desert is the most pertinent geographical analogy to this part of the investing year.   Deserts are defined in a number of different ways, but generally the classification is based on the amount of precipitation that occurs in any year.  Below a certain level of precipitation, the region is considered a desert.  Think of precipitation as the idea generation engine of Wall Street that slows during the summer.


Interestingly, while most of us likely perceive a desert as a vast region of sand and limited plant growth, the reality is that only 20% of deserts have sand.  The largest desert in the world is actually the Antarctic Desert, which is, naturally, in Antarctica and covers more than 5.5 million square miles of ice and snow.  So, no, cold desert is not an oxymoron.


One place you don’t want to go after a long night of cavorting and over indulging is the Atacama Desert, which is the driest place on Earth and virtually devoid of life.  The average rainfall in parts of the Atacama is less than 1mm per year.  Further, evidence suggests that the Atacama may not have had any rainfall for the four hundred year period between 1570 and 1970.  Needless to say, even if you feel your portfolio is devoid of new ideas, there have been worse droughts!


In the Chart of the Day, I’ve attached our current Best Ideas list, which is comprised of the ideas that our research team recommends for three months and beyond (TREND) in our models.  Independent of this list I want to highlight the three ideas that I find most compelling.  They are as follows:


1.   International Game Technology (IGT) – IGT makes gaming machines and is, not to mince words, a free cash flow monster.  Over the course of the past three fiscal years, operating cash flow has outpaced total capital expenditures by over a $1 billion dollars in aggregate.    Compared to the current market capitalization of just under $5BN, this provides IGT ample cash to return to investors via share repurchases or debt pay down.


Speaking of debt pay down and cash flow, one of the more compelling reasons to own this stock is its potential interest to private equity firms and its inherent private market value.   As our Gaming, Lodging & Leisure Sector Head Todd Jordan has oft noted, four private equity firms were interested in IGT’s competitor WMS and one made it to the final round before Scientific Games ultimately won out.


2.   Nationstar Mortgage Holdings (NSM) – The roll up of mortgage servicing is a trillion dollar opportunity and NSM is ideally positioned.  (Translation: this is huge market.) NSM recently put up an EPS number for Q2 of $1.37, which outpaced the consensus estimate by almost 50%.  We think there is continued upside in numbers through 2014.  Currently based on the midpoint of NSM’s 2014 guidance, the stock is trading at less than 7x earnings with upward revisions and continued acquisition catalysts on the horizon.


3.   Fed-Ex (FDX) – FDX is just shy of a 52-week high and has outperformed the SP500 over that period, so is not necessarily a contrarian stock.  On a valuation basis, the stock is cheap trading at less than 6x TTM EV/EBITDA and has net cash on its balance sheet (excluding leases). 

Setting aside the financials, which are bullet proof, we think a key reason for owning the stock is that investors are currently ascribing little value to FedEx Express.  We think this division, once restructured, could have a similar margin to UPS or DHL’s express margin and generate an incremental $1.5BN in additional EBIT per year.   Frankly, if the Germans can make DHL Express profitable, it should be achievable for FDX.  If FDX can’t do it, there is no doubt an activist will consider stepping up.


Speaking of Fed-Ex, its key competitor UPS announced late yesterday that it was going to be dropping 15,000 spouses who are eligible for coverage from their own employer from its health insurance plan due to higher anticipated costs under the Affordable Care Act.  UPS expects to save up to $60MM per year on this “initiative”.


We’ve long extolled the benefits of limiting governments, in large part, due to unintended consequences of policy.   In the UPS instance, it may lead to less or more limited coverage for 15,000 working women.   There has also been ample evidence of workers hours being reduced so employers can avoid the punitive impact of the Affordable Care Act on their bottom line.


On a more macro level, there are potentially long term impacts to the labor market.  As Chicago Economist Casey Mulligan wrote in a recent blog for the New York Times:


“The Affordable Care Act’s explicit taxes on employers, subsidies for layoffs and implicit taxes on employees, together amount to five or six percentage point addition to the marginal tax rate on labor income.”


By Mulligan’s analysis, this may contract the labor pool by 3% in 2015.  At the end of the day, this shouldn’t really surprise any of us for as Milton Friedman said on the topic of government management:


“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”




Our immediate-term Risk Ranges are now:


UST10yr 2.74-2.96%

SPX 1631-1669

DAX 8249-8417

USD 80.91-81.81

Yen 96.21-98.56

Gold 1329-1392


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Desert - COD


The Desert - vp 8 22

investing ideas

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To increase the betting turnover in the mass market, tables with minimum bet of $50, $100 are all replaced by electronic table games, and table limits of gaming tables are raised to $500 or above.  This strategy has proven great success by casino operators.  With the increase of minimum bets of gaming tables to $500 and up to $3,000, the latter mainly for high-end customers, scholars believe mass market business and VIP business will not be overlapped in this case, because low limit VIP tables are unprofitable due to the high operating cost in VIP business.



SJM CEO Ambrose So said its Cotai project will cost HK$25BN, $5BN higher than its previous forecast, due to rising labor and construction costs. 



MGM China CEO and Executive Director, Grant Bowie, said that its new development project is progressing in an orderly manner. He expects to hire 7,000-8,000 employees after completion and stressed that priority will be given to Macau residents. He also added that the company will apply to the Government for 500 gaming tables.



The Meteorological and Geophysical Bureau (SMG) twice issued rainstorm warnings yesterday.  Schools were closed in the morning with flooding witnessed in some areas of Taipa and Coloane.   The Land, Public Works and Transport Bureau has received four reports of landslides in Coloane, one of which took place near residential buildings. 

September 5, 2013

September 5, 2013 - dtr



September 5, 2013 - 10yr

September 5, 2013 - spx

September 5, 2013 - nik

September 5, 2013 - dxy

September 5, 2013 - oil

September 5, 2013 - natgas



September 5, 2013 - eem

September 5, 2013 - VIX

September 5, 2013 - yen

September 5, 2013 - gold
September 5, 2013 - copper


ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows

Takeaway: Bond fund outflows continue with a substantial $9 billion out of fixed income against a marginal, albeit positive inflow into stocks

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Equity mutual fund inflow slowed to a trickle or just $300 million for the week ending August 28th, down from the $1.3 billion inflow the week prior but remaining positive


Fixed income mutual fund outflows remained substantial with a $9.1 billion withdrawal by investors, a slight decline from the $11.1 billion draw down last week but remaining at out-sized levels


Within ETFs, both equity and fixed income exchange traded fund money flow was negative for the week ending August 28th with just over $1.0 billion coming out of passive equity products and over $900 million coming out of passive bond products although both outflows were improvements from the week prior


ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 1

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 2



For the week ending August 28th, the Investment Company Institute reported softening equity mutual fund flow trends, albeit positive flow trends, and continuing out sized withdrawals in fixed income mutual funds. Total equity fund flow totaled just a $300 million inflow which broke out to a $1.3 billion inflow into international equity products and a $1.0 billion outflow in domestic stock funds. These trends were a softening from the prior week's total equity fund inflow of $1.3 billion. Despite this deceleration in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, outflow trends continued at exaggerated levels for the week ending August 28th with the aggregate of taxable and tax-free bond funds combining to lose $9.1 billion in fund flow, the fourth biggest weekly draw down in 2013 in what now has become the biggest bond withdrawal in the history of the ICI data. The taxable bond category specifically shed $6.2 billion in the most recent period versus the $7.3 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $2.9 billion in the week ending August 28th, continuing its trend from last week which experienced a $3.7 billion outflow. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $136 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.


Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.1 billion in the most recent weekly period. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.



ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 3

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 4

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 5

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 6

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 7



Passive Products - Slight Outflows Across the Board:



Both categories of exchange traded funds experienced redemptions by investors for the week ending August 28th. Equity ETFs lost $1.0 billion, rebounding from the biggest equity ETF outflow in 5 years of over $12.0 billion last week and only the 10th negative week in the 35 weeks of 2013. Despite this week's outflow, 2013 weekly average equity ETF trends are averaging a $3.0 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.


Bond ETFs also had soft trends in the most recent weekly period losing over $900 million in fund flow. This outflow was a slight improvement from last week's $2.3 billion withdrawal and has now forced the 2013 weekly average to just a $284 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.



ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 8

ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 9



HEDGEYE Asset Management Thought of the Week - The Shift Change is On:


For investors that are still defiant that an asset allocation rotation has not started need to look no further than the weekly money flow trends since the start of May. While equity mutual fund and ETF inflow on a weekly basis has slowed from the usual seasonally fast start to the year, stock fund flow has remained solidly positive through the most recent week to end the summer. Conversely, fixed income mutual fund and ETF trends on a weekly basis have taken a sharp turn for the worse and are now in massive weekly redemption through the most recent week.


Up until the week ending May 22nd this year, fixed income fund and ETF products were averaging over a $5.9 billion weekly inflow. Since the end of May however, fixed income trends have cascaded down sharply and since the 3rd week of May have averaged a massive $8.5 billion outflow. While the single week of June 26th represented the biggest weekly bond outflow in history of over $31 billion is skewing the weekly average on the margin, fixed income trends have been persistently negative on a weekly basis since the end of May. On the flip side, equity trends have been consistently positive albeit slowing into the summer period. For equity mutual funds and stock ETFs, weekly flow trends have been averaging a $3.2 billion inflow since May 22nd after averaging a $7.3 billion inflow weekly prior to the Fed's "tapering" comments before the week ending May 22nd this year. While all fixed income dollars drawn down are not being replanted one-for-one back into the equity markets, we do estimate that over time the reallocation from fixed income and into cash and money markets will continue to fuel a slow turn from the generational 30 year run in bonds into higher investor asset allocation into stocks.    



ICI Fund Flow Survey - Continued Smoldering in Bond Fund Flows - ICI chart 10



Jonathan Casteleyn, CFA, CMT



Joshua Steiner, CFA



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