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LEISURE LETTER (04/02/2014)

TICKERS:  LVS, MPEL, BEE

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

 

Friday, April 4

  • March NFP report

 

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

 

Wednesday, April 9

  • SHO Investor Day

 

Thursday, April 10

  • HST Investor Day

 

COMPANY NEWS

LVS – the unfinished $600 million St. Regis condominium tower between The Venetian and Palazzo may soon come back to life.  The company recently studied converting the tower into a time share complex, a third hotel-casino, as well as a simple expansion to The Venetian and Palazzo.   

TAKEAWAY:  In a town that is experiencing a strong economic recovery, idle real estate doesn’t stay dark for long.  LVS maintains a number of value levers.

 

MPEL – will begin hiring 8,000 workers to staff its Studio City by end of 2014.  MSC on track to open mid-2015.

TAKEAWAY:  Affirming a mid-2015 opening continues to be encouraging.  Should give MPEL a first mover advantage among the new properties.

 

Okada Group -  Century Properties Group Inc has sought court intervention to stop Japanese gaming tycoon Kazuo Okada from scrapping their agreement to develop a portion of the $2-billion Manila Bay Resorts in Entertainment City.  In a disclosure to the Philippine Stock Exchange, the property firm of former ambassador Jose EB Antonio said it filed on Monday a petition for interim measures of protection before the Regional Trial Court of Makati against the Okada Group.

TAKEAWAY:  The Okada controversy continues...

 

BEE – announced it closed on the sale of its Marriott London Grosvenor Square Hotel for $207.7 million or $877K/key.  Net proceeds from the sale are about $97 million after the company pays off property level debt of $111 million.  Additionally, the company announced it closed on the acquisition of its 50% remaining interest in the 649-room Fairmont Scottsdale for total consideration of $149.1 million including $58.5 million of debt.

TAKEAWAY:  The Comany is finally achieving the stated goal of reducing leverage to below 5x net-debt to EBITDA.

 

OCEANIAOceania will completely refurbish its three R-class ships by June 2014 Cruise Critic

The 684-passenger Regatta, Insignia Regatta, Insignia and Nautica will receive some of the most popular features already found on the line's O-class ships Marina and Riviera. The $50 million investment begins this month with Insignia's dry dock in Marseille. 

TAKEAWAY:  We wonder if an IPO is still in the works

 

Viking River Cruises CEO Has No Interest in IPO or Selling to a Cruise Corp Skift

Viking is in the midst of an enormous expansion.  18 Viking ships were inaugurated late last month, 10-12 more river longships will be introduced in 2015 and up to 5 ocean liners will be under construction over the next 5 years.  Viking founder and Chairman Torstein Hagen said each new ship cost approximately $35 million to build.

 

Despite investment coming in from at least three banks including UBS and KFW, neither an IPO or acquisition are what Hagen says wants for his 17-year-old company at this time.  “I don’t wish it upon my colleagues to be owned by a large cruise company. We don’t foresee any capital need. I don’t see a purpose in being a public company," said Hagen.

TAKEAWAY:  The competition from the river cruises are for real and should not be taken lightly.

INDUSTRY NEWS             

Macau - Zero-fee tours continue to operate Macau Daily Times

Despite a recent Chinese Tourism Law aimed at shutting down such operations in Oct 2013, the zero-fee tours continue to be widespread.  The alleged purpose of zero-fee tours is to promote inexpensive travel packages.  However, such tours often require clients to shop at designated stores and spend required minimum amounts at each shop. 

TAKEAWAY:  Inflates visitation numbers relative to gambling revenues.

 

Package Tours and Hotel Occupancy Rate for February 2014 DSEC

As the Lunar New Year fell in February this year, visitor arrivals in package tour totaled 851,000 in February 2014, +5% YoY.  Visitors from Mainland China totaled 645,000, +7% YoY, with 312,000 coming from Guangdong Province; meanwhile those from Taiwan (59,000), the Republic of Korea (38,000) and Hong Kong (36,000) recorded decreases.

 

There were 99 hotels and guesthouses operating at the end of February 2014, providing 28,000 guest rooms, -1% YoY.  The average occupancy rate of hotels and guesthouses surged by 15% points YoY to 92%, with 5-star hotels leading at 93%.  The average length of stay of guests increased by 0.1 night YoY to 1.5 nights. 

TAKEAWAY:  CNY shift helped...

 

Maldives - The Economic Ministry reports that investment opportunities will be opened for the five mega projects planned to be developed in the Maldives.  The five mega projects that will be open for foreign investment at the forum will be: project to develop Ihavandhippolhu as an economic zone; Project to develop 'I-Heaven' and Ibrahim Nasir International Airport (INIA); project to develop Hulhumale at its second phase; project to change the current commercial harbour to Thilafushi and its development and the project to extract fuel and gas from the Maldivian region.

TAKEAWAY:  Interesting to us how the Maldives is attempting to remake itself in the face of global warming and rising ocean levels...


Kansas Gaming - House Bill 2272, which was introduced by state Sen. Jacob LaTurner, would lower the investment requirements for a casino in the Southeast Gaming Zone.  Similar legislation passed the Senate 28-10 earlier this session.  The current casino licensing requirements are $225 million with a privilege fee of $25 million.  The new HB 2272 legislation would lower those costs to $50 million and a privilege fee of $5.5 million which are similar to the requirements for the casino built in Dodge City, Kansas.

TAKEAWAY:  A southeast Kansas casino represents another threat to the State of Missouri gaming. 

 

Massachusetts Gaming  - If Mohegan and Suffolk Downs are awarded a casino license, their project completion could be delayed by months after the state ruled in favor of a do-over for the project’s environmental impact study. The new casino plans were ruled to be so different from the original that state officials would need to see a new set of reviews for traffic and other impacts. The project was originally supposed to be located mostly in Boston, but was quickly moved to Revere after East Boston residents rejected the plans in a November referendum.

TAKEAWAY:  The political and legal jockeying continues...

 

Mississippi Gaming - developers of the Scarlet Pearl Casino in D'Iberville were unable to meet the 5 p.m. deadline Monday to close on the financing for the $250 million resort.  Developers of Hemingway Casino at the Gulfport Harbor face a deadline at 5 p.m. today to complete their financing of a $112 million casino.  Scarlet Pearl -- and Hemingway Resort if it misses today's deadline -- must go back through the entire review process with the Gaming Commission and meet the new, more stringent development requirements.  Scarlet Pearl may qualify under the new rules because it has the required 300 hotel rooms, along with an elaborate 36-hole miniature golf course, an event center and other amenities.  The Hemingway Casino in Gulfport doesn't have enough rooms under the new regulations. It is proposed as a 205-room luxury hotel rooms operated by Hemingway Hotel and Resorts and based on the life of author Ernest Hemingway. It also is 5,000 square feet short of the minimum of a 40,000-square-foot or larger casino.

TAKEAWAY:  Financing low ROI projects is never easy. 

 

Wisconsin Gaming - local media reports the State of Wisconsin agreed to pay a Michigan law firm up to $1.5 million to study the proposal made by the Menominee Tribe to build a casino on the property left vacant by a defunct greyhound racetrack in Kenosha.

TAKEAWAY:  Regardless of the decision by the Wisconsin Governor regarding the proposed Kenosha casino, this issue seems destined for litigation in the court system.  Maybe that's why the Governor retained a law firm to conduct the gaming study. 

 

LODGING M & A - Sotherly Hotels bought the upscale 326-room Georgian Terrace Hotel from Fremont Realty Capital for US$61 million. Average price per key was $187k.


MACRO

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.



Contagious Exploration

“We shall not cease from exploration, and the end of our exploring will be to arrive where we started and know it for the first time.”

-T.S. Eliot

 

Yesterday we held our quarterly firm meeting in Stamford, CT.  It was by all accounts a very successful day.  We introduced new employees, celebrated recent wins and also contemplated strategic shifts to keep Hedgeye moving forward.

 

As an aside, it also coincided with my personal favorite day of the year, April Fool’s Day.  Unlike those April Fool’s days of prior years, like when I fired Keith one year, this year’s joke was more benign, though we did manage to “suck” a few people in again.  For those that didn’t see the faux press release about Wall Street 2.0: Hedgeye the Movie, it can be found here.

 

So at the company meeting, a key topic of discussion was how to generate contagious content / ideas.  For those that didn’t know, the term, “content is king”, was first used in 1994 and then popularized by Bill Gates in an essay about two years later.  So, as ideas go, the idea of content is king is not new, but it is certainly contagious.

 

Contagious Exploration - content is king1

 

Back to the Global Macro Grind...

 

In my mind, activist investment ideas are examples of ideas that need to become contagious before they become successful.  Yesterday activist Starboard filed a presentation outlining the potential for Darden Restaurants ($DRI).  A key take away from the presentation is that the Company’s EBITDA margins are at 7.4% versus the industry median of 10.3%.

 

As many of you know, Darden is also currently a favorite of Restaurant Sector head Howard Penney and is on our Best Ideas list.  As a result, Starboard was kind enough to reference our work on Darden in their presentation. Specifically, they referenced a recent poll that we did:

 

“According to a recent poll conducted by sell-side research firm Hedgeye Risk Management, 84% of respondents said that they did not believe that management’s plan to spin-off Red Lobster would create value.”

 

We actually have created a polling product to specifically gauge sentiment and opinion in a more quantified fashion, which has, obviously, also had the derivative impact of creating contagious content.

 

Included in the Starboard presentation as well was this tweet from Penney:

 

“$DRI management shuts me out of another earnings call. Running out of time is not an excuse. @jannarone article on #CNBC was $$”

 

This point goes to the crux of Penney’s thesis on Darden, which is that management operates in a vacuum and is totally unwilling to listen to new ideas, especially from analysts that may disagree with them.  Ignoring great ideas is the death knoll for any company.  If you’d like to learn more about our thesis on Darden before it goes too viral, please email .

 

While we are on the topic of contagious content, I thought it would be worth highlighting an essay that Warren Buffett wrote for Fortune in 1977 (back when periodicals like Fortune still published essays):

 

“There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn't going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.

 

It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their Value in real terms, let the politicians print money as they might.

 

And why didn't it turn but that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.”

 

As you can see this basic concept that we have been pounding on, which is that when a currency is devalued that devaluation naturally creates inflation in dollar denominated asset classes, is not new.  Neither is the idea that at a point, this inflation begins to negatively impact economic growth, which has the potential to have a negative impact on the returns of those assets classes levered to economic growth.

 

Certainly, of course, we aren’t suggesting we are in the midst of 1970s style inflation.  Or, frankly, on the path to that any day soon, but commodity inflation is here, is persistent and is likely to be sticky.  Most notably on the inflation front is what is happening to food (you know that stuff we eat).

 

In the chart of the day below, we’ve compared the performance of consumer discretionary stocks in the year-to-date versus the CRB Index versus the BLS Foodstuff Index.  For those that can’t read the fine print, I’ll give you the punch line. The CRB commodity index is up more than 7% in the year-to-date, the BLS Foodstuff Index is up more than 20%, and consumer discretionary stocks are down on the year.

 

As Warren Buffett might say, you don’t need an economics PH.D. to see that correlation!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.66%-2.80% 

SPX 1 

VIX 13.01-14.72 

USD 79.91-80.40

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Contagious Exploration - Chart of the Day

 

Contagious Exploration - Virtual Portfolio


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April 2, 2014

April 2, 2014 - Slide1 

BULLISH TRENDS

April 2, 2014 - Slide2

April 2, 2014 - Slide3

April 2, 2014 - Slide4

April 2, 2014 - Slide5

April 2, 2014 - Slide6

 

BEARISH TRENDS

April 2, 2014 - Slide7

April 2, 2014 - Slide8

April 2, 2014 - Slide9

April 2, 2014 - Slide10

April 2, 2014 - Slide11


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 2, 2014


As we look at today's setup for the S&P 500, the range is 32 points or 1.57% downside to 1856 and 0.13% upside to 1888.                                         

                                                                                      

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.33 from 2.32
  • VIX closed at 13.1 1 day percent change of -5.62%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, March 28 (prior -3.5%)
  • 8:15am: ADP Employment Change, March, est. 195k (prior 139k)
  • 9:45am: ISM New York, March (prior 57.0)
  • 10am: Factory Orders, Feb., est. 1.2% (prior -0.7%)
  • 10:30am: DOE Energy Inventories
  • EU finance ministers, central bankers continue Athens meeting
  • 12:30pm: Fed’s Lockhart speaks in Miami
  • 4pm: Fed’s Bullard meets reporters in St. Louis

GOVERNMENT:

    • 10am: Supreme Court hears worker stock plans case arguments, may issue opinions
    • 10am: GM CEO Mary Barra, NHTSA Acting Administrator David Friedman at Senate Commerce, Science and Transportation panel on defective ignition switch recall
    • Budget panels/hearings:
    • 10am: House appropriations panel: Energy Dept’s Sec. Ernest Moniz; Treasury Sec. Jack Lew
    • 10am: House Energy and Commerce panel: EPA Administrator Gina McCarthy
    • 10am: House Armed Services Cmte: Navy Adm. Cecil Haney, commander of the U.S. Strategic Command, Army Gen. Curtis Scaparrotti, commander of U.S. Forces Korea
    • 10:30am: House appropriations panel: Labor Sec. Thomas Perez; U.S. Ambassador to United Nations Samantha Power
    • 10:30am: House Energy and Commerce hearing on Obama’s plan to give up control of system for assigning website addresses
    • 2:55pm: Obama speaks on minimum wage in Ann Arbor, Mich.
    • U.S. Election Wrap: Camp Replacement; Scott Brown Visits Senate

WHAT TO WATCH:

  • Amazon said set to debut TV-viewing device
  • Netflix plans to target French mkt from Luxembourg: Les Echos
  • Virtu said to delay IPO amid furor over Michael Lewis book
  • GM CEO Barra, NHTSA Acting Admin Friedman at Senate on recall
  • Microsoft executives speak at “Microsoft Build 2014”
  • Energy Future plan said to almost wipe out owners KKR to Goldman
  • House sends Ukraine aid bill to Obama rebuking Putin
  • Russia pressures Ukraine to disarm “radicals” as NATO mulls response
  • Greece said to plan EU2b bond sale in 1H
  • British nuclear submarine joins search for missing Malaysian jet
  • Malaysia sees possibility cause of MH370 loss won’t be known
  • SAC asks managers to sign 2-yr deals to prevent departures: NYT
  • GE to bid for part of Investec’s Australian ops: Australian
  • ADM says it may seek to raise GrainCorp stake: WSJ
  • Univar exploring IPO that may value co. at $6b: Reuters
  • BNP Paribas sells Miami private bank to Santander: Les Echos
  • Cofco to pay initial $1.5b cash for Noble Unit stake
  • Bouygues says earlier offer for Vivendi’s SFR remains valid

EARNINGS:

    • Acuity Brands (AYI) 8:47am, $0.83 - Preview
    • Monsanto (MON) 8am, $3.06 - Preview
    • Resources Connection (RECN) 4pm, $0.05
    • Texas Industries (TXI) 6:21pm, ($0.58)
    • UniFirst (UNF) 8am, $1.39

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Copper Pares Gains as Chile Earthquake Leaves Mines Undamaged
  • Brent Falls Below $105 for First Time in Five Months; WTI Slides
  • Billionaire Amazon Bet Vindicated as Apple Buys Tin: Commodities
  • Gold Rises on Speculation Drop to Seven-Week Low to Spur Demand
  • Sugar Falls With Coffee as Investors Review Brazil Drought Risk
  • Soybeans Climb Third Day to 9-Month High as U.S. Stocks Dwindle
  • Copper Surplus Seen by Study Group Growing to 595kt in 2015
  • California Mountain Snow Pack Improves While Drought Persists
  • Louis Dreyfus Commodities Readies for Possible IPO or Stake Sale
  • MORE: Europe Would Need $215B Capex to Cut Russia Gas: Bernstein
  • U.S. Joins EU in Seeking New Gas Supplies for Europe, Ukraine
  • South Africa’s Platinum-Belt Economy Crippled by 10-Week Strike
  • Powder River Coal Grabs Market Share in North Asia, South Korea
  • Rebar in Shanghai Falls 1st Time in 4 Days on Ore Price Outlook

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


The Fox In the Hen House

This note was originally published at 8am on March 19, 2014 for Hedgeye subscribers.

"I am sometimes a fox and sometimes a lion. The whole secret in government lies in knowing when to be one or the other."

-Napolean Bonaparte 

 

The old farm yard analogy of a fox licking its chops and entering the proverbial hen house can likely be applied to many current situations. On the global macro front the situation in the Ukraine and stand-off, of sorts, between the West and Vladmir Putin is likely the most relevant. 

 

Certainly, the foxes in the Kremlin are licking their chops since annexing the former Soviet territory of Crimea.  Is this the beginning of another Cold War? It is likely not. But the ineffectiveness in combating the Russian move certainly increases the likelihood of additional and more aggressive moves by the Russians. (By ineffectiveness, I read yesterday that the current, proposed sanctions by the U.S. would freeze the assets of a mere seven Russian citizens.)

 

The Fox In the Hen House - fox

 

Late yesterday, the first fatality occurred as a Ukrainian military base in Crimea was overtaken by Russian / Crimean troops. Albeit only one serviceman was shot, and reports are still conflicted as to how and by whom, the response by the leadership in the Ukraine is to now allow their military to use force as needed in Crimea. 

 

Perhaps most telling yesterday was Vladmir Putin’s hour long speech, specifically this excerpt:

 

“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun.  They have come to believe in their exceptionalism and their sense of being the chosen ones.  That they can decide the destinies of the world, that it is only them that can be right.”

 

Clearly, the old Russian fox Putin is licking his lips.

 

Back to the Global Macro Grind . . .

 

Assuming hostilities don’t accelerate in Crimea, the most significant impact from the annexation of Crimea by Russia is likely to be on the upcoming midterm elections.  The media has been very clearly painting President Obama and his administration to have been ineffective in dealing with the Russians and Obama’s approval rating is starting to reflect as much.

 

According to the RealClearPolitics approval aggregate, Obama’s disapproval rating is now 52 and his approval rating is 43, for a spread of 9.  Gallup runs the longest running approval poll and the spread in that poll is even wider.  Currently, according to Gallup, Obama’s approval is at 41.  This is the worst approval rating of Obama’s Presidency and lower than President George W. Bush at the same time in his Presidency.

 

The fact that President Obama’s approval rating is in free fall is likely to be felt by the Democrats in the upcoming midterms.  In fact, the generic congressional poll aggregate, which effectively asks the respondent to say whether they would vote Republican or Democrat in congressional races, is basically tied (with the Republicans actually leading in some polls).  This is an inflection point as the Democrats have led in this generic poll very consistently since the last mid-term elections.

 

Speaking of polls, yesterday our daily Hedgeye poll asked, “Are you feeling the price pinch at the breakfast table?”  More than 75% of the respondents responded, yes.  This obviously shouldn’t be a surprise given the fact that coffee, orange juice and lean hog prices have had almost parabolic moves in the year-to-date.  Of course, for those consumers who don’t eat breakfast (or eat for that matter), they may yet be immune to food based inflation!

 

As my colleague Christian Drake highlighted yesterday in an intraday note, inflation is also percolating in other parts of the economy.  Specifically, CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.  

 

Even as most consumers are seeing inflation, the bigger question will be whether the Fed sees it. Fed Chair Janet Yellen will get a chance to address this in her first news conference today at 2:30 pm (following the Fed statement at 2:00 pm).  Certainly the stock market is seeing the consumer getting squeezed as well, as the consumer discretionary and consumer staples sectors are both down on the year.

 

Speaking of the stock market, despite the somewhat tepid return in the year-to-date, (the SP500 is only up just over 1% in the year-to-date and most major markets are down on the year), the latest US Investor's Intelligence poll shows that a predominance of investors remain bullish. 

 

According to the poll:

  • Bearish sentiment is unchanged at 17.4%;
  • Those expecting a market correction increases to 30.6% from 27.5%; and
  • Bullish sentiment decreases to 52.0% from 55.1%.

To be fair, it is likely difficult to envision much of a correction when the stock market is barely up on the year, but nonetheless investor complacency, at least based on this polls, seems noteworthy to say the least.

 

Our immediate-term Global Macro Risk Ranges are now (we have 12 ranges in our Daily Trading Range product):

 

UST 10yr Yield 2.62-2.74% 

SPX 1848-1891 

VIX 12.79-17.34

USD 79.31-79.83 

Gold 1331-1385 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Fox In the Hen House - Chart of the Day

 

The Fox In the Hen House - virtual portfolio


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