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The government has permitted Mocha Clubs to open two slot machine parlours, replacing others forced to close last month.  The slot machine division of MPEL has permission to open a parlour next to Ponte 16 and another in Centro Commercial Kuong Fat in Rua de Pequim.  Mocha Clubs president Constance Hsu Ching Hui said a third parlour would open once the company had found a suitable hotel to put it in.  They replace parlours closed on November 26 because the law forbids gaming establishments in residential areas.



Sri Lanka has approved Crown Resorts Ltd’s US$400-million (MOP3.2 billion) development in Colombo.  While Crown does not have explicit permission to operate casinos at the lakeside resort, gaming operations are likely to be part of the project.  Chairman James Packer, who is co-chairman of MPEL, has partnered with Rank Entertainment Holdings Pvt Ltd on the project.


Rank holds two casino licences in Sri Lanka.  

Spiking Skew

This note was originally published at 8am on December 04, 2013 for Hedgeye subscribers.

“My reading of history convinces me that most bad government results from too much government.” -Thomas Jefferson


Over the Thanksgiving break, I started reading “Thomas Jefferson: The Art of Power” by Jon Meacham.   For many of you Americans (like Keith I’m Canadian), undoubtedly studying the founding fathers is old hat, but for me the book has a number of revealing insights.


The key insight relates to the quote at the outset.  Specifically, this idea that too much government may, in fact, be too much government.  No doubt there are some pensioners in Detroit who are thinking just that as they are beginning to realize that the “government guarantee” of their pension is not as solid as they believed it to be.


Like most great men, Jefferson had his faults.  Regardless, the author of the Declaration of Independence was a stalwart protector of individual liberty, especially in the face of the threat of government.  Compared to the Jeffersonian era, the individual American certainly has much broader freedoms than he, and especially she, would have had in the early 1800s.


The one caveat to this of course is in the area of economic freedom, specifically taxation.  From the Jeffersonian period to the early 20th century, the government was both a small percentage of the economy and direct taxation was originally very limited.  On the last point, as recently as 1895 the Supreme Court of the United States actually ruled that federal income tax was unconstitutional.


Today as we “gladly” hand over 1/3+ of our incomes to the federal government and the government comprises 20%+ of the economy, it certainly begs the question of whether we have the personal economic freedoms that our Founding Fathers envisioned.


Back to the global macro grind . . .


Related to the topic above, one sneaky macro positive that has been emerging domestically is a shrinking of the federal budget deficit.  Over the past four years, the federal budget deficit has been cut in half from the peak level of $1.4 trillion.  Certainly, a $700-ish billion budget deficit is still too large, but in this regard the trend is definitely our friend, especially as it relates to U.S. dollar tailwinds.


Sadly, none of today’s current politicians have the political acumen of Thomas Jefferson, so the primary method to halt federal government spending growth has been for the Tea Party to effectively hijack the government, which most recently led to a government shutdown.


In 2014, we may have déjà vu all over again.  Consider the federal government catalysts we have in front of us in the next three months:

  • December 13th – The bipartisan budget committee is supposed to report back on budget / compromise progress;
  • January 15th – The Current Continuing Resolution runs out;  and
  • February 7th – The next debt ceiling deadline. . .

The threat of more negative government catalysts is actually coming at a really complacent and inopportune time for the U.S. equity markets. Specifically, the VIX’s monthly average price was just under 13 in November and at the lowest level we’ve seen in over two years.  As many of you well know, there is an inverse correlation between the VIX, a measure of volatility, and the price of the SP500.  Suffice it to say, the equity volatility ball is sufficiently under water . . .


In the Chart of the Day, we highlight the SKEW Index compared to the VIX index.  As the chart shows, SKEW is spiking and historically SKEW has been a decent leading indicator of volatility.  Intuitively this makes sense as investors are becoming more compelled to hedge exposure given the highs in the market and the fact that year-end is fast approaching. 

A potential spike in volatility and decline in equities also makes sense given a number of other signs of a near term top.


Consider a couple of headlines from the Wall Street Journal and Reuters from yesterday:

  • “More Hedge Funds Turn to Long-only Strategies”
  • “Short Sellers Trying to Cope”

No doubt, this has been a challenging year for short sellers as stocks with high short interest have outperformed meaningfully, but when more than half of hedge funds launch or plan to launch long only strategies it does reek of capitulation.  (And no, the Hedgeye Long Only ETF won’t be launching anytime soon!)


Before signing off, I also wanted to remind you of Hedgeye’s Energy Best Idea call on Boardwalk Partners (BWP) this Thursday at 11am.  BWP is a $6.4 billion market cap MLP primarily engaged in the transportation and storage of natural gas in the south/central US.  The diversified holding company Loews Corp. (L) owns the 2% GP interest in BWP, all IDRs (currently in the 50/50 split), and 52% of the BWP’s outstanding common units.


BWP is a high-conviction short idea given the Company’s deteriorating base business, aggressive accounting, high leverage, unsustainable distribution, valuation.  If this thesis sounds a little like our calls on Kinder Morgan (KMP) and Linn Energy (LINE), it should.  We think the valuation of the MLP sector is grossly overstating the intrinsic value of the underlying businesses held in these structures.  If you’d like to get access to the call, email sales@hedgeye.com.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Spiking Skew - SKEW


Spiking Skew - 12 4 2013 8 07 41 AM

[video] $KMP: Kaiser/Gasparino Part Deux (Beware of Kinder Morgan?)

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Please join us for our Cruise Pricing Survey Flash Call today, December 17th at 2:30pm EST

We will discuss the results of their latest Cruise Pricing Survey timed just before CCL's earnings release on Thursday.  CCL should provide fiscal 2014 guidance in their release and the Street expects the company to provide guidance below current estimates.  Listen in and see what our survey suggests for CCL's guidance as well as potential pivots in the trends for both RCL and NCLH.


Participant Dialing Instructions

  • Toll Free Number:
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  • Conference Code: 297289#
  • Materials: CLICK HERE


Best Idea Update: $DRI

Takeaway: We suspect 2QF14 will be ugly, but we are bullish on the long term prospects of Darden.

Editor's note: Hedgeye Managing Director and Restaurants analyst Howard Penney added Darden (DRI) to our Best Ideas list as a long on 10/10/13.  That being said, he expects the company’s 2QF14 earnings release on Thursday to be a disaster as its two largest brands, Olive Garden and Red Lobster, continue to struggle. Here's an excerpt from a note he wrote earlier today.


Our bull case is centered on the inherent value of Darden.  As we’ve been saying for the majority of the year, we believe the business is grossly mismanaged and in need of a major overhaul.  Barington Capital entered the fray as an activist back in October, but has been relatively quiet since then. That changed this morning, when the company released an 84 page report detailing its recommendations to improve long-term shareholder value at Darden.  


If these changes are implemented, Barington values Darden’s stock between $71 and $80 per share.  If our plan to fix Olive Garden is implemented, we see even more upside in the stock.


Best Idea Update: $DRI - how2


The full report, featuring several of our own quotes, can be accessed HERE.  Barington intends to promptly share these recommendations with Darden Chairman and CEO, Clarence Otis.


Best Idea Update: $DRI - dar5


If Barington, or another activist, is successful in forcing change, we would expect significant shareholder value creation.  In our opinion, the most value will be created from cutting excessive G&A spending and turning around the company's crown jewel, Olive Garden.  You can read more about the activist situation and our thoughts on the matter in a recent article published by Barron’s: Darden Shares Could Jump 40% On Hedge Fund Plan.


Click here to watch Penney's video "Darden: Major Upside Coming?"



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