LEISURE LETTER (03/24/2104)



Tuesday, March 25

  • CCL to report earnings pre-market, conf call at 10am EST ()

Wednesday, March 26

  • PENN at TAG Spring Consumer Conference
  • Melco Crown Extraordinary General Meeting
  • Melco Crown Board Meeting  

Thursday, March 27

  • None    

 Friday, March 28

  • None  



GALAXY (27.HK) – several news stories indicate Galaxy Entertainment Group is looking to expand its gaming empire with a possible acquisition based on Lui Che Woo’s comment that he is looking for opportunities in foreign markets, including the United States. 


Takeaway:  We wonder if he would like to pursue single asset or platform acquisition strategy… Could Borgata be on the block or Fontainebleau Las Vegas?


RCL – After holding off for several weeks to see how events developed in the Crimea peninsula between Russia and Ukraine, several cruise lines have changed their Black Sea itineraries to avoid the ports of Odessa, Sevastopol and Yalta.  For its June 12 sailing, Azamara Quest (RCL) has replaced the three cities with Bartin in Turkey, and Volos and Nafplion in Greece, as well as adding an extra day in Istanbul.  Oceania, Regent Seven Seas, Windstar and MSC also have substituted ports in other countries, including Turkey, Romania, Georgia and Bulgaria.  


Takeaway:  Minor itineraries for Azamara.  So far, CCL brands, Cunard and Costa, are staying put.


CZR – The Nevada Supreme Court ruled Harrah’s Operating Co. is entitled to a $4.4 million refund on the use tax paid on two planes purchased out of state.  The gaming company had sought an $8.6 million refund on four aircraft it purchased in 2006 to fly employees and customers on business trips. The court said two of the planes were used in interstate commerce and qualified for the use-tax exemption.


Takeaway:  When a company owns as much real estate as CZR’s, one way or another the State of Nevada will get their fair share…  


Intralot – the Wyoming Lottery announced the selection of Intralot as its gaming vendor, the company tasked with furnishing convenience stores and other retail outlets with the games of chance.  Early last week, Intralot signed a new 10 year technology supply agreement with the Irish Lottery.  Intralot, was founded in 1992, is headquartered in Athens Greece and trades on the Athens Stock Exchange under the ticker “INLOT”. 


Takeaway:  Seems this company has quietly taken market share from its US-based counterparts.


OEH – announced the completion of a $657.0 million senior secured credit facility, consisting of a $552.0 million seven-year term loan ("Term Loan B") and a $105.0 million five-year, multi-currency revolving credit facility via Barclays Bank and JPM Morgan Securities. The Term Loan B is comprised of a $345.0 million U.S. dollar-denominated tranche and a EUR150.0 million euro-denominated tranche ($207.0 million as of the closing date). The Company intends to utilize the Term Loan B proceeds to refinance all of the funded debt of the Company and its subsidiaries other than the debt of Charleston Place in South Carolina, a consolidated variable interest entity with separate non-recourse financing.


Takeaway:  This was the next step in the transformation from the old Orient Express to the new Belmond.  This company is worth watching given the recovering European consumer and continued health of the wealthy consumer.





Macau Visitor Arrivals – Visitor arrivals increased by 8% YoY to 2,560,560 in February.  Mainland visitors totaled 1,714,776 (+14% YoY), with 821,844 (48% of total) traveling to Macao under the Individual Visit Scheme, up by 9% YoY.  Visitors from the Republic of Korea and Japan surged by 33% and 23% YoY respectively.  The average length of stay of visitors stood at 1.0 day.


LEISURE LETTER (03/24/2104) - MACAU1


Takeaway:  Solid visitation growth so far in 2014 but the trend higher spend per visitor continues to drive most of the gaming revenue growth.


Changi Airport passenger movement

Singapore's Changi Airport total passengers grew 6.3% YoY in January but declined -0.2% YoY in February.


LEISURE LETTER (03/24/2104) - changi


Takeaway:  Disappointing visitor growth for Singapore mass market


Las Vegas Gambler Budget Survey Signals Increased Spending Bloomberg

According to a survey by LVCVA, the average gambling budget of Las Vegas visitors rose 10% to $530 in 2013, the biggest increase since 2005.  “We look at the gaming budget more as a psychological indicator of visitor mindset. It does reflect a positive trend of attracting visitors setting aside growing budgets for the gaming part of their Vegas experience," said Kevin Bagger, the authority’s senior director of strategic research and analytics.


Takeaway:  Meanwhile, actual slot play continues to decline. We attribute the trend to demographics and not attitudes.


American Gaming Association (AGA) – AGA Chairman Jim Murren, who is also MGM Resorts Chairman and CEO, wants the group to dial down its lobbying and advocacy efforts on behalf of legalizing Internet poker because the activity is fracturing the membership of the Washington, D.C.-based trade organization.  Murren, started a two-year term as chairman in January, said the group still supports passage of federal legislation that would legalize, regulate and tax Internet poker.


Takeaway:  This is an interesting change of face for an industry and Chairman who are both usually very vocal proponents of gaming expansion. 


Las Vegas Downtown – two recent items:  First, Hsieh’s Downtown Project bought the shuttered Western Hotel casino from Tamares Real Estate for $14 million.  The Project plans to invest $200 million in real estate, $50 million in small businesses, $50 million in education and $50 million in tech startups through the Vegas TechFund.   For more details see   Second, this past Friday evening, Scott Cohen set ablaze his “Life Cube”  which was a take his Burning Man sculpture transferred into an urban setting.  “Life Cube” was a 24-by-24-foot plywood cube, painted and filled with notes from thousands of people.


Takeaway:  The rebirth of Downtown and the downtown locals continues.  We will further explore this topic during our upcoming trip to Las Vegas on April 7 & 8.



Cruise Ships Stuck at Sea, In Port After Fuel Barge Collision Cruise Critic

Carnival Magic and RCL's Navigator of the Seas are stuck outside of Galveston Bay, while Caribbean Princess has been stranded at the port of Houston overnight after a collision between a tanker and a fuel barge partially sunk the barge and released more than 150,000 gallons of fuel into the bay.  Carnival Magic should be returning to port later today. Passengers may choose to cancel without penalty. However, refunds will not be provided for flight changes, hotel accommodations, meals, transfers or other incidental costs resulting from the delay. 


Takeaway:  Minor but media happy incident for the cruise lines 



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 


Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the 

Can’t Blame the Weather

Client Talking Points


China’s 48.1 PMI in March versus 48.5 February is nothing new. It’s the fifth straight month of slowing. But what remains is the equity markets speculating on a Chinese stimulus as the Shanghai Comp and Hang Seng bounced +0.9% to +1.9% on the news.


In the last week, two #GrowthSlowing data points have come out of Germany (ZEW and PMI) with a 53.8 in March versus 54.8 in February. Since all that really matters in our model is rate of change, these bearish deltas are A) new and B) impacting DAX, which has gone bearish on our immediate-term TRADE duration with 9377 resistance. Both Chinese and European PMI’s slowed sequentially in March – it wasn’t the “weather”.


With Food Inflation (CRB Food Index) up another +1.8% last week, bringing it to +18.1% year-to-date, Oil needs to deflate to offset. And it needs to deflate a lot. It’s down -0.3% this morning and both Brent and WTIC remain bearish TREND Hedgeye.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve), and strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road


RUSSIA: bounces +1.3% on the RTSI, -20.2% YTD @KeithMcCullough


"He who is not everyday conquering some fear has not learned the secret of life." - Ralph Waldo Emerson


Put on auction as the only camera that made it to the moon and back, the Hasselblad 500 sold over the weekend at nearly $760,000. The camera is described by Vienna auctioneers Galerie Westlicht as part of the equipment carried by the 1971 Apollo 15 mission — and the only camera ever brought back from the moon. It says the others were left behind to make room for mineral samples. (New York Times)

Punishing Her Currency

This note was originally published at 8am on March 10, 2014 for Hedgeye subscribers.

“The punishment process is as important as the reward system.”

-John Allison


As I quote one of my favorite post-2008-crash books, The Financial Crisis and The Free Market Cure (pg 177), I’m thinking more about the full body ache I have from our old-man hockey semi-final yesterday than what’s going on in the market. That’s not good.


Neither was the US stock market’s reaction to Friday’s US jobs report that “beat” expectations (must have been the weather). Stocks raged to all-time highs on the open, then got pancaked by midday. Newsflash: the monthly jobs report is a lagging indicator.


I didn’t have a good week, but it could have been worse. With the CRB Commodities Index +9.6% YTD (vs. the Dow -0.7%), this year’s Burning Buck rally in some asset prices has a lot more to do with #InflationAccelerating than anything else.


Back to the Global Macro Grind


While I am certain that if they had @CNBC Kiev, Ukraine would look just fine (Ukrainian currency crash has its stock market +29.8% YTD in Burning Currency terms); it’s not. Especially when a country’s currency is in free fall, her stock market is not the economy.


In Russian terms, Putin’s Ruble is crashing (-10% YTD) and so is his stock market (-24% since OCT and -19.7% YTD). Meanwhile the Chinese just printed a -18.1% year-over-year export disaster for FEB. The Shanghai Composite dropped -2.9% on that to -5.5% YTD.


Argentina’s Burning Currency is -17.1% YTD, but there’s probably nothing to worry about there either. Unless you are an Argentine, that is… Oh, and after trying the whole debt-levered-currency-devaluation thing, Venezuela is about to default on its debt.


In other news last week…


  1. US Dollar Index remained on its YTD lows (below @Hedgeye TAIL risk line of $81.14)
  2. US 10yr Yield popped +14bps to 2.80%, but failed to overcome @Hedgeye TREND resistance of 2.81%
  3. Coffee Prices ripped another +9.2% on the week to +74.3% YTD


No that’s not a typo – up +74.3% is the number, so whatever you do – don’t call that #InflationAccelerating.


With the CRB Foodstuffs Index +14.9% YTD, it’s not just coffee prices that are inflating:


  1. Corn was up another +5.5% last week to +13.7% YTD
  2. Soy was up another +3.1% last week to +14.2% YTD
  3. Lean Hogs were up another +5.8% last week to +24.6% YTD


Yes, basically you’re going to have to back everything out of your breakfast and call eating anything with pig in it “non-core” as the Fed tells you to consume a gluten-free Whatsapp for a buck a day instead.


Have you ever asked yourself why neither the Fed nor Bush/Obama ever talk about America’s currency?


As John Allison points out plainly on page 187 of the aforementioned book, “The fundamental issue underlying the boom-and-bust cycle in the financial industry is the lack of sound money. Unfortunately, the Fed is constantly manipulating the value of the dollar.”


And our profession gets that – or at least the machines do. It’s called Correlation Risk – and this is how it works:


  1. Down Dollar starts to trend as the Fed abandons anything that remotely resembles a two-way policy
  2. “Bad” economic news becomes good for asset price inflation, as the market front-runs the Fed easing
  3. Correlation Risk (asset price inflation trading inversely with US Dollars) starts to dominate


On that last point, here are the 30-day inverse correlations between US Dollar and the big stuff:


  1. Gold -0.88
  2. SPX -0.87
  3. CRB Index -0.75


In other words, the market calls what the Fed is signaling a Policy To Inflate (humans call it a tax). And yes, #InflationAccelerating will slow growth. That’s why you saw me buy bonds on Friday (and anything that looked like a bond, including Utilities, XLU).


Punishing The People with food, energy, rent, etc. inflation can only last for so long. Unless you think America has it in her to become Argentina, she has a tendency to rise up against these types of un-constitutional taxes. So stay tuned on that. History repeats.


The Unites States has already had two failed central banks. Between 1870 and 1913, the US experienced the greatest economic boom in history without a central bank.” –John Allison, pg 187


UST 10yr Yield 2.59-2.81%

SPX 1860-1889

Shanghai Comp 1969-2071

VIX 12.95-15.64

USD 79.46-80.16

Gold 1321-1355


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Punishing Her Currency - Chart of the Day

Punishing Her Currency - Virtual Portfolio

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March 24, 2014

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Quiet Is Not Safety

“Quiet is no certain pledge of permanence and safety.”

-James A. Garfield


From the innovation that flowed from the US Centennial Exhibition Fair in Philadelphia in 1876 to the uncertainty associated with the Republican Convention in Chicago in 1880, Destiny of The Republic (by Candice Millard) ranks at the top of my #history reading list YTD.


Garfield may be one of the lesser known US Presidents, but the prescience and leadership embedded in some of his quotes are quintessentially free-market American. #timeless


He embraced uncertainty; he encouraged winning and losing. He didn’t prey on the ignorance of The People; he encouraged its education. He was as progressive as any President before him. He was nothing like the politicians you have to endure today.


Back to the Global Macro Grind


Today you have to deal with a US government (both Republicans and Democrats) that is either lying to you about real-world economics (inflation) or isn’t market-literate enough to be able to tell you the truth if it tried. I’m not sure what’s worse.


However, I am sure that whatever is left of free-markets will front-run the government’s proactively predictable behavior. While they may not be acknowledged in D.C., Burning The Buck and never calling a devalued currency inflationary are core market beliefs.


For a few days last week (actually for a day and a half), the market suspended this belief and:

  1. Bought US Dollars
  2. Sold Gold
  3. Sold Bonds



That’s what you should have done for literally all of Q1 of 2013 though. It’s Q1 of 2014, and the 2013 @Hedgeye TREND is over.


On Friday, everything reverted to the mean (towards the 3 month TREND):

  1. Dollar made another lower-YTD-high and went back down
  2. Gold made another higher-YTD-low and went back up
  3. Bonds had another great day, after v-bottoming from their Wednesday #RatesRising headfake

All the while, with the Dow Jones Industrials Index banging its head against the #OldWall to try to get itself to “up” for 2014 YTD (it’s -1.7%), food #InflationAccelerating continued with the CRB Foodstuffs Index up another +1.8% to +18.1% YTD.




Sure, oil remained under pressure (Brent Oil -1.2% last week) and that remains a bearish TREND signal @Hedgeye this morning (don’t be long oil with +406,967 net long futures/options contracts outstanding!), but that didn’t offset more of the same in terms of what components of the US equity market are delivering you the absolute return bacon YTD.


Mmm, #bacon (lean hog prices +31% YTD)…


From a sub-sector perspective in the SP500 YTD, this is what I mean by that:

  1. US Consumer Discretionary Stocks (XLY) -0.3% last wk (with the SP500 +1.4%) to -1.7% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) +0.1% last wk to +6.7% YTD

In other words, whether your government calls it inflation or not, inflation slows real-consumption growth in America. So don’t get frustrated by it – just own it. #InflationAccelerating is a position that at least 10-20% of Americans can profit from.


No, that’s not a US political leadership message. It’s the winning market message – and, sadly, that is a losing one for at least 80% of America. The quiet and safety of the world buying US Dollars last year is ending. The 1-year average net long position in the USD (CFTC futures and options contracts) is +16,540 contracts, but:

  1. 3 months ago, the net long position went to flat
  2. 2 weeks ago, it moved to modestly net short
  3. Last week it dropped to a 1yr low of -12,167 net short

Yep, as Hemingway would say, at first the risk of your currency losing credibility happens slowly, then it happens all at once. The pledge of permanence of a #StrongCurrency advocated by Presidents like Garfield may be as worn out as (pre-1913 Fed Act days) free-market capitalism itself.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.82%


VIX 13.38-17.42

USD 79.11-80.49

EUR/USD 1.37-1.39

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Quiet Is Not Safety - Chart of the Day


Quiet Is Not Safety - Virtual Portfolio