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LEISURE LETTER (03/27/2014)



 Friday, March 28 

  • Nevada gaming revenues release for February 
  • MPEL board meeting
  • Wynn Macau board meeting

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day


CZR – announced its intention to close Harrah’s Tunica in Mississippi on June 2, resulting in 1,300 job losses.  "There’s just too much supply in that market.  The Harrah's has not been profitable for a while,” said John Payne, president of the company's central markets division. 

TAKEAWAY:  Another sign of the tough times.  Interesting there are no interested buyers for the property...or maybe there is a lack of funding for such acquisitions.


CZR – the company announced, via an SEC filing, it received correspondence from a law firm representing a group of its bond holders who want the company to shutter Caesars Growth Partners.  The bond holders assert the parent company violated its fiduciary duties to the creditors when the parent company opted to sell certain assets to the Caesars Growth Partners.

TAKEAWAY:  Never attempt to run-over your bondholders as they never forget and doing so will jeopardize future borrowing negotiations. 


MPEL – unveiled final plans for its newest hotel at City of Dreams. The 40 story hotel will include 780 guestrooms, suites, and villas as well as spa, ultra lounge, and sky pool.  The property will open in early 2017.

TAKEAWAY:  City of Dreams needs the additional hotel capacity.


LVS – reduced the payout for blackjack at its Venetian and Palazzo tables from 3:2 to 6:5, resulting in the payout falling from $15 to $12 on a $10 bet. 

TAKEAWAY:  Hold could be higher for the coming quarters. Media contrasting that with Sheldon's "concern" for the average joe who could be duped with on line gaming.


LaQuinta – proposed ticker LQ, offering 37.2m shares, IPO Price $18-$21, proceeds of $678 million used to prepay long-term debt.  Post offering Blackstone to own 66.7% or 63.8% if underwriters option exercised.  

TAKEAWAY:  We're favorably inclined on the lodging cycle although near-term revpar may be under pressure.


Four Season Hotels – recently has made several announcements regarding leadership appointments at the executive vice president level. 

TAKEAWAY:  While we didn’t take note individually of each appointment/promotion, when viewed in totality, it would appear Four Seasons is getting ready to go public.  


RCL –  RCL introduced a more flexible dining program for its newbuilds Quantum of the Seas and Anthem of the Seas. Called Dynamic Dining, the new program will give passengers a choice of 18 restaurants, of which seven will be fee-free for all guests: four full-service and three casual eateries.  A new reservations system also will be used onboard so passengers can decide when, where and with whom they want to eat each night. 

TAKEAWAY:  This innovative change will help onboard spending - an area which RCL had led in growth recently 


INDUSTRY NEWS              

US Gaming Industry to vet gamblers funds – the United States Department of Treasury Financial Crimes Enforcement Network (FinCEN) is considering rules which would require US casinos to fully vet the source and origin of a gambler’s funds.  FinCEN is also investigating possible compliance lapses at other Las Vegas casinos.

TAKEAWAY:   The US Treasury efforts are to explicitly regulate casinos like a financial institution in an attempt to crack down on potential money laundering activities.  Political payback to Wynn and Adelson?


Las Vegas casinos subject to anti-money laundering probe – the United States Department of Treasury Crimes Enforcement Network is currently investigating un-named Las Vegas Casinos for possible anti-money laundering compliance lapses.  This investigation follows, Las Vegas Sands August 2013 agreement with the Department of Justice to pay $47 million fines for anti-money laundering lapses at LVS’ Venetian and Palazzo properties in Las Vegas.

TAKEAWAY:   Stay tuned, more headlines and fines forth coming...


New Jersey Casino Expansion Bill – despite outspoken opposition by various elected officials, legislation was introduced to allow casinos at Meadowlands and Monmouth Park racetracks.   As we noted last week, officials indicated no expansion of gaming would be considered until after 2016, when the Atlantic City revitalization plan expires.

TAKEAWAY:  We doubt this legislation will pass given the Governor's vocal opposition. 


Federal Legislation to ban internet gaming – legislation was introduced in the US House of Representatives and the US Senate to reinstate the Wire Act of 1961 regulations which would thus make internet gambling illegal.

TAKEAWAY:  The proposed legislation appears to strictly prohibit all existing  and considered forms of internet gambling including online poker and lottery activities.  No grandfathering provisions were offered. We doubt this passes.



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 US.

Bubbles Popping

Client Talking Points


They don’t have Facebook in the Italian MIB index which is up well over +11% year-to-date. Guess what? Asian and European stocks didn’t particularly care about what happened in the growing US Social Media bubble yesterday. Impressively, the DAX and EuroStoxx50 are both up this morning, holding TREND supports. Meanwhile, US Social Media bubbles are popping as the Candy $KING gets crushed.

US Consumer

The only sub-sector in the US stock market that has already gone bearish on both our TRADE and TREND durations is US Consumer Discretionary (XLY down -4.1% year-to-date). We'll say it again: again #InflationAccelerating slows consumption growth.


The 10-year yield is doing precisely what it should be doing (falling) as consensus comes to the realization that US #GrowthSlowing in 2014 isn’t just about the weather. 2.70% on the 10-year is compressing the Yield Spread (10-year minus 2-year) by 7 basis points on the week.

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.

Three for the Road


UK Retail Sales +3.7% in FEB as #StrongPound powers the purchasing power of The People @KeithMcCullough


"It’s not what you look at that matters, it’s what you see..." - Henry David Thoreau


Connecticut lawmakers have become the first in the country to pass legislation that would increase a state’s minimum wage to $10.10 an hour by 2017, the same rate President Obama wants for the federal minimum wage. The bill passed the General Assembly, which Democrats control, largely along party lines. (New York Times)

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Boom, Crush!

“Boom, crush. Night, losers. Winning, duh.”

-Charlie Sheen


I was in Vegas playing cards with Sheen last night and that’s what he told me about his short Facebook (FB) position. Social Media Bubble, yep. Crushing it.


I’m here to give the keynote rant today (11AM Las Vegas time) at the Government Investment Officers Association (GIOA) conference. Kidding on the Sheen part; not on the government.


USA going on the fritz (Federal Reserve Induced Trauma Zone) won’t be the subject of my speech. I’m going to give these guys the Hedgeye wood - #InflationAccelerating slows real US growth.


Back to the Global Macro Grind


I know no one wants to call it a bubble. There’s career risk in calling something what it is. But seriously mo bros, with Facebook (FB) -17% since March 10th (coincided with the all-time-bubble-high in US stocks) and Twitter (TWTR) -30% YTD, what’s the fuss?


BREAKING: Candy Crush (KING) -15.6% on IPO day


Boom, Crush! - social bubble


Boom! Crush. This stuff gets real in a hurry doesn’t it? But does the whole free world care? While 2AM PST isn’t my favorite wakeup call on The Strip, I did smile to see that almost all of Asian and European Equity markets didn’t care about USA’s baggage.




Yes, after creating the 1st internet bubble (1999), then the US real estate bubble (2005-2006), then the commodity bubble (2011-2012)… then the bond bubble (2011-2012), then the 2nd half-baked internet bubble (2013), this is a uniquely American experience.


Maybe that’s why (in spite of the social media stock time-spanking into the close yesterday):

  1. South Korean Stocks (KOSPI) built on yesterday’s gains, closing +0.7%
  2. Indian Stocks (BSE Sensex) closed up another +0.3% to +4.7% YTD
  3. Italian Stocks (MIB Index) are trading up small this morning at +11.5% YTD

I know. The Italians have a lot of crony socialism issues, but one of them is not trying to talk their entire country into calling $2B for a headset (Ocular) another brilliant Zuckerberg idea. WhatsApp was a cool Bud Light commercial for a few weeks too don’t forget.


Back to the real world and our GIP model (Growth, Inflation, Policy):

  1. US continues to see #InflationAccelerating (CRB Commodities Index up again yesterday to +7.6% YTD)
  2. And the slope (rate of change) in real US Growth continues to slow (not just the weather)

But don’t take my word for it, ask the bond market:

  1. US 10yr Treasury Yields down again this week to 2.70%
  2. Yield Spread (10yr minus 2yr) continues to compress (-7bps this wk)

This is precisely what happened in 2011. As the Yield Spread compressed (leading indicator for growth slowing) the Financials (XLF) started to underperform slow-growth-yield-chasing (Utilities) and the US stock market saw multiple compression.


In other words, if you weren’t levered long YELP yesterday, but had:

  1. Commodities long
  2. Bonds long
  3. Anything that looks like a bond (Utilities, REITS, etc.) long

You crushed it.


Yeah, I know. We have you long Gold, and that’s not working this week. At -0.7% this morning, it’s still +7.7% YTD though. Beats Twitter. And it sure beats being long who gets crushed by inflation (US Consumers):

  1. US Consumer Discretionary Stocks (XLY) -4.1% YTD
  2. Utilities (XLU) +7.0% YTD

These performance divergences are called variance. And finally we have ourselves an Angry Bird like game here folks – where stuff actually goes down (hard), while other things stay up.


Coming off generational lows in US sector variance (i.e. you could have bought any sector and been up last yr), across longer-term investing cycles, this is as mean reverting as any portfolio risk in macro. Yep, sector and stock picking is cool again.


So, from here, do you buy the Candy Crusher or the new banking fees boy king at FB? Or do you do neither and go back to buying the Bernanke Bubbles (Commodities, Gold, Bonds) that blew up last year? We’ll do the latter. Mean reversion bubble trading works, duh.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.63-2.75%


VIX 13.03-17.14

USD 79.18-80.40

Pound 1.65-1.67

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boom, Crush! - Chart of the Day


Boom, Crush! - Virtual Portfolio

Back To The Future

This note was originally published at 8am on March 13, 2014 for Hedgeye subscribers.

“The future is here. It’s just not evenly distributed yet.”

-William Gibson


While you might think it’s 1999. It’s not, yet. According to the Wall Street Journal yesterday, 74% of companies that have come public in the last 6 months don’t make money. So it’s not the mother of all bubbles, yet – because in 2000, that percentage was 80%.


The aforementioned quote comes from the beginning of chapter 1 of a fantastic book I reviewed in the Early Look a few years ago titled, The World in 2050Four Forces Shaping Civilization’s Northern Future, by Laurence C. Smith.


My defense partner, Daryl G. Jones, will be hosting Mr. Smith on an Institutional Conference Call at 1PM EST today. Please ping Sales@Hedgeye.com if you’d like access. Global water shortages and NORCs (Northern Rim Countries) will be focus topics, not Candy Crush’s pending $7 billion dollar back-to-the-future-bubble IPO.


Back To The Future - earth


Back to the Global Macro Grind


The Dow Jones Index is -1.4% YTD and Gold is ripping (+14.1% YTD). The US Dollar is being burnt to a crisp (fresh YTD lows) this morning too. Calling the froth in the US equity market (companies trading at 20x revenues with no earnings) is getting easier, by the day.


But have no fear, the future of America is here.


And it’s definitely not evenly distributed. That’s why the politicians who have devalued America’s currency are focused on whining about the “inequality” that their policies created. That’s what Policies to Inflate do. They pay the bailed out banker who is bringing Crush public, and they pulverize the poor.


But everyone reading this rant is rich, right? So just suck it up and buy inflation protection (TIP) or Gold (GLD) or anything that looks like a bond (Utilities, XLU) as you try to keep up with Elmer Fudd’s pesky wabbit (inflation).


But, but, the SP500 rallied into the close yesterday (on no-volume), and is up +1% YTD:

  1. Yep, who cares?
  2. It was led by Utilities (XLU) which ripped a +1.3% move for the home team on the day (+6.1% YTD)
  3. And Consumer Discretionary (XLY) stocks closed down -0.15% to -0.16% YTD

That’s right, “Duck Wabbit, Duck!”


You can go back to the future and remind yourself that this happened in both Q1 of 2008 and 2011. If you’re American, your economy is now the rabbit. You have to burn your savings and just buy whatever you can that will inflate at a faster rate.


Cool, eh? Go flip a house before prices crash again.


Larry Smith will walk through the nonsense of all this groupthink on our conference call today, but here’s the upshot about civilizations who starve long-term investment for the sake of short-term-pay-me-now-Kinder-Morgan-dividend pops….

  1. They create unintended consequences (i.e. underinvestment in long-term fixed capital projects that have positive ROIC)
  2. Which, in turn, create shortages in critical capacity
  3. Which then perpetuate #InflationAccelerating

I know, paying $2.89 for a bottle of water isn’t inflationary. Eat an iPad.


And if you’re not into the whole Republican/Democrat, Nixon-Carter, Burning Buck and US Debt Monetization thing, move to a country that gets what both Reagan and Clinton did – like New Zealand!


BREAKING NEWS: New Zealand Raises Key Rate to Become 1st Developed Nation To Tighten


Love that.


Oh, and the New Zealand stock market must have gotten crushed on #RatesRising, right?



  1. New Zealand raised rates on savings accounts with a +25 beep bump to 2.75% on its base rate
  2. The New Zealand Kiwi (it’s currency) strengthened alongside interest rates
  3. The New Zealand stock market closed UP on the day to +7.9% YTD

So why bang your head against a wall trying to call the Dow “cheap” when its down YTD and you can buy a country’s currency and stock market that is emulating the best of the best in American pro-growth 1980s and 1990s policy history?


As Marty (Michael J. Fox) said in Back To The Future, “maybe you weren’t ready for that… but your kids are going to love it.”


Our immediate-term TRADE risk ranges across Global Macro are now as follows:


UST 10yr Yield 2.60-2.80%

SPX 1845-1888

VIX 13.18-15.75

USD 79.31-80.11

Brent 106.37-110.44

Gold 1342-1375


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Back To The Future - NZD


Back To The Future - rt7

ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness

Takeaway: In the most recent week, domestic equity mutual funds had drawdowns with fixed income taking the baton as the more stable asset class

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent week, while fixed income inflow wasn't historically impressive considering the significant inflows in the beginning of last year, bonds have clearly been the more stable asset class year-to-date considering declining equity trends especially within domestic equity funds recently:


Total equity mutual funds produced the first week of net outflow in 6 weeks with $968 million of net redemptions, a deceleration from the $3.1 billion inflow the week prior. The $968 million outflow was caused by domestic fund losses during the most recent 5 day period ending March 19th, with $3.8 billion flowing out of U.S. equity funds versus $2.8 billion that flowed into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.3 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 


Fixed income mutual funds continued improving fund flow trends for the week ending March 19th with $2.4 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $2.2 billion into taxable products and a $237 million inflow into tax-free or municipal products. The inflow into taxable products this week was 6th consecutive week of positive flow and the inflow into municipal or tax-free products was the 10th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.5 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).


ETFs experienced positive trends during the week, with a very strong week of subscriptions into stock ETFs with $10.1 billion in net inflow with bond ETFs experiencing a slightly above average inflow of $1.3 billion for the 5 day period. The 2014 weekly averages are now a $620 million weekly inflow for equity ETFs and a $926 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $5.4 billion spread for the week ($9.2 billion of total equity inflow versus the $3.8 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   



ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart AA


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart BB



Most Recent 12 Week Flow in Millions by Mutual Fund Product:



ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 1


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 2


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 3


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 4


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 5



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:



ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 6


ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 7



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $5.4 billion spread for the week ($9.2 billion of total equity inflow versus the $3.8 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).



ICI Fund Flow Survey - Equity Funds Showing Signs of Weakness - ICI chart 8 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


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