LEISURE LETTER (04/09/2014)




Wednesday - Thursday, April 9-10

Mid-America Gaming Congress (Columbus, OH)


Wednesday, April 9

SHO Investor Day


Thursday, April 10

HST Investor Day


Monday, April 14

Atlantic City March revenues 


GENTING - expects to go before Nevada gaming regulators on May 7th or 8th for the suitability ruling that will bring the start of construction on the Las Vegas Strip’s next super resort, a $2 billion project with an Asian theme.

TAKEAWAY:  We are currently in Las Vegas and it would seem the suitability ruling is mere formality as we witnessed construction already underway at the RWLV (Echelon) site.


Macau Legend -  Fisherman’s Wharf renewal to finish before 2017 Macau Daily Times

CEO of Macau Legend Development (MLD), David Chow Kam Fai, has estimated that the renewal of Fisherman’s Wharf will be finished before 2017.  He revealed that MLD will apply for another 350 gaming tables once the renewal is completed, which will boost MLD’s number of gambling tables to around 500.  Currently, MLD has ~140 gaming tables.  Chow indicated that the first hotel of the renewal project would be opened in August 2014.

TAKEAWAY: More supply...


CZR - Online Gambling not taking business away from land casinos

Caesars spokesman Seth Palansky told the Press of Atlantic City Tuesday that the company does not believe gamblers logging on to the online sites are staying home to have a flutter instead of traveling to Atlantic City. “We’re finding very similar patterns as other companies. The people online are people that haven’t visited us in a while or are new players altogether,” Palansky said. “We’re not seeing cannibalization.” In the Caesars study many online gamblers are accessing the websites from locations that are just an hour’s drive from the land operations, but they are not the same clientele who usually visit the land casinos.

TAKEAWAY:  Not hard to make these conclusions when I-gaming is only $10 million/ month.  Borgata remains the leader in I-Poker which we believe is the most important stat.


HOT - sold the Aloft Tucson University to Lightstone Value Plus Real Estate Investment Trust II, Inc for $19 million or $127k per key.

TAKEAWAY:  The execution of the asset light strategy continues.


LQ - LaQuinta IPO priced at $17 (below $18-21 price range). Offering upsized from 37.2 million to 38.3 million shares.

TAKEAWAY:  Low pricing shouldn't have been a surprise given the multiples for the indicated range.


CCL - AIDAprima delivery to be delayed by 6 months. Seatrade Insider

The maiden voyage will now start from Yokohama, Japan on October 1, 2015.  "Mitsubishi Heavy Industries asked us for more time to complete the construction of AIDAprima,’ said AIDA spokesman Hansjörg Kunze.  "Although we were surprised by the request, it is nothing unusual for the construction of prototypes," he added.

 TAKEAWAY:  Shifting berth growth to Q4 2015.  Berth count should grow ~3% in 2015.


412,000 Visitors during Ching Ming Festival Macau Daily Times

According to the Macau Public Security Police Force (PSP), the number of Macau visitors hit 412,000, +16.9% YoY. Nearly 70% of the border crossings were made using the border gate connecting to Gongbei in Zhuhai. The Macau Ferry Terminal was the second-most popular checkpoint for both arrival and departure, accounting for some 12% of total numbers. 

TAKEAWAY: Don’t blame the holiday (or weather) for the weak early April GGR results


Google Checks In to the Hotel Business

Google had struck a licensing deal that will give it access to technology from hotel-booking software startup Room 77.  By adding more photos and reviews to its hotel listings, they increasingly resemble those of OTAs.   The idea is to encourage travelers to plan more of their trips directly on Google. In the process Google gets them closer to making a booking, which experts expect will make referrals more valuable, prompting travel agencies and hotel operators to pay more for clicks on Google ads over time. It also encourages more hotel operators to place ads on Google directly, bypassing online travel agencies that charge commissions of up to 25%.

TAKEAWAY:  Google has always been a formidable competitor and partner for the OTAs.  Is this finally a game changer in the hotel search business? Regardless, it’s negative for the OTAs, particularly for TRIP.


SLS Las Vegas began accepting hotel room reservations

Initial room rates from now through the end of April 2015, include a promotional opening rate of $109 per night on weekdays and $139 per night on weekends. The offer requires a two-night minimum stay and is valid beginning Sept. 1 through Dec. 27.

TAKEAWAY:  The SLS Las Vegas is positioned as a luxury, boutique hotel and maybe viewed as a competitive threat to Wynn and Encore.  However, the SLS does not appear to offer the same level of amenities as Wynn and Encore.   Yet, Las Vegas visitor has demonstrated a willingness to try new properties – especially at a promotional rate. 


Cruise Industry Continues to Battle Unfavorable Tides WSJ

According to a Harris Poll surveyed between Feb 10-14, 2014, consumer perceptions of the cruise brands fell relative to January, following norovirus incidents on Caribbean Princess, Explorer of the Seas, and Norwegian Star).


"We've all heard the saying that a rising tide lifts all boats," says Deana Percassi, Vice President and Public Relations Research Consultant with Nielsen, "but the inverse also holds true. In a field as crowded as the cruise industry, bad press for a small handful of brands -- or even a single one -- can have negative repercussions for major players across the board." 


A majority of Americans (54%) also agree that they're less likely to take a cruise now than they were a year ago, with this sentiment proving stronger among those who have never taken a cruise (58%) than among those who have (44%). 

TAKEAWAY:  Not comforting stats for the cruise industry.  Although, we've already heard February was a weak month.



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.

Rules of Thumb

“A good rule of thumb is that if you’ve made it to thirty-five and your job still requires you to wear a name tag, you’ve made a serious vocational error.”

-Dennis Miller


As many of you may have noticed, our research team has been busy so far this quarter adding new names to our Best Ideas list.  In fact, later today we will be doing a conference outlining our short case on Yelp (ticker also YELP).  No surprise, at more than 10x market cap / revenue the short call on YELP has garnered some interest because clearly if we are correct, there is valuation downside.


Rules of Thumb - yelp


Tomorrow we will be going over our short case on Annie’s (ticker BNNY) and this one has also garnered a lot of interest.  In fact, one prospect responded to our marketing email suggesting it was somewhat irrational to short a stock with 20% short interest.  In part, he’s right as there is increased risk of a short squeeze, but more broadly his email begs the question: is it an appropriate rule of thumb to not short highly shorted stocks?


Interestingly, based on the market factors we track, highly shorted stocks definitely do not consistently outperform lower shorted ones.  In fact, over the last six months, the lowest quartile of short interest stocks are up 14.4% and highest quartile of short interest stocks are only up 12.5%.  Now to be fair, over other time frames, high short interest stocks have outperformed, although rarely meaningfully so.


There are also a number of studies highlighting that over time highly shorted stocks underperform.  Specifically, a paper from a group of MIT professors titled, “Short interest, institutional ownership, and stock returns”, concludes:


“Stocks are short-sale constrained when there is a strong demand to sell short and limited supply of shares to borrow.  Using data on both short interest (a proxy for demand) and institutional ownership (a proxy for supply) we find that constrained stocks underperform during the period 1988 – 2002 by significant 215 basis points per month on an equally weighted basis . . .”


So, the moral of the story is that you shouldn’t let “tough to short stocks” get in the way of a good short idea.


Back to the Global Macro Grind . . .


Yesterday, we held our quarterly themes call and touched upon our three key macro themes heading into Q2.  These themes are #ConsumerSlowing, #HousingSlowdown, and #StructuralInflation.  Rather than give you my complete rehash (you can actually listen to the replay here), I wanted to highlight a key slide and point from each section.


Clearly, with consumer discretionary stocks relatively underperforming in the year-to-date (-5% on the YTD versus utilities +9%), the #ConsumerSlowing is not new news.   In this presentation, though, we truly tried to quantify the impact of commodity inflation on the median consumer by rebuilding their income statement.   As it turns out, the average American consumer spends more than 20% of after tax income on food and utilities.  When gas and motor oil are added to the mix, the combined total of direct commodity exposure of after tax expenditures is closer to 27%.


The average consumer also primarily generates 95% of his or her income from wages, self employment, and/or government income. In aggregate, less than 1.5% is currently sourced from interest and dividends.  So, perversely, as interest rates are kept low, it constrains the average consumer from earning more income and also leads to dollar devaluation.  This dollar devaluation then inflates commodity prices and squeezes the consumer from the cost side. 


The second key theme of #Structuralnflation gets away slightly from the concept of commodity inflation via dollar debauchery and looks at the potential for a labor market that tightens quickly.   A key reason this may happen is because businesses have been consistently under investing in both capital expenditures and employees.


The Chart of the Day compares the year-over-year change of capital investment by businesses, compensation of employees, and corporate profits after taxes going back to 1983, so more than thirty years.  As this chart shows, over time investment in infrastructure and employees largely maps with corporate profits.  The exception of this is the last five years in which corporate profit growth has CAGRed at near 20%, while capital expenditures have CAGRed at +1.3% and employee compensation at +0.9%.  The point being if hiring reverts to the mean it will likely be good for economic growth, but also accelerate inflation meaningfully.


The last theme for Q2 is #HousingSlowdown.  This is obviously a reversal of our view for most of 2012/2013 where we were calling for acceleration in home prices.  That parabolic move off the bottom is now decidedly in the rear view mirror based on our models.  The most compelling support for a decline in housing demand and commensurately home prices is mortgage applications.

From the peak in April of 2013, purchase applications are down by -20%. 


Further, the combination of both purchase applications and re-fi is now trending at a growth rate of -55% versus the same month a year ago.  A key culprit behind this dramatic decline is the new Qualified Mortgage (QM) rules that were implemented as of January 10th.    


While on one hand, more stringent underwriting rules will prevent excesses from developing, the new QM rules are also basically taking new and young home buyers out of the market.  So be forewarned, the #HousingSlowdown is no illusion!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.75%


Nasdaq 4044-4203

VIX 14.11-16.62

USD 79.58-80.31

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Rules of Thumb - Chart of the Day

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Social Bubbles

This note was originally published at 8am on March 26, 2014 for Hedgeye subscribers.

“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”

-Mark Twain


Imagine that – if there were only one bubble, tulip, or social media stock left in the world – what on earth would we pay for it? Someone at Morgan Stanley can surely answer that with a comp table.


I have to give it to the folks @Facebook. They’re nailing it on “scarcity value.” I didn’t know that either of their last two acquisitions existed. After spending $21 billion on WhatsApp and Oculus, FB’s stock has broken my mo-bro line of $67.52 support too.


Social Bubbles - social media bubble burst


Imagine there was only one bro left in the marketplace? How much would he pay for the all-time-bubble-high in the last social media stock that stops going up? It’s all fun and games until someone gets popped.


Back to the Global Macro Grind


Never mind trying to figure out what Oculus is (an “immersive virtual reality company”) or that it was “valued” at $30M in June. These guys just got $400M large (in cash) and another $1.6B in Facebook’s (FB) bubbled up stock. #cool


Until it’s not…


In FB inflated currency terms, Oculus is “cheap” though. Ask the bankers. When you slap it on a sheet of paper next to Candy Crush (coming public today with at least a $7B valuation), it’s probably relatively “cheap” too.


I know. Fourteen years ago (Q2 of 2000), while I was leaving the big bubble house that Frank Quatrone built (Credit Suisse First Boston), calling a bubble what it was back then was subject to some really smart “it’s different this time” analysis.


But it wasn’t. This time won’t be different either.


Moving along, why don’t they just jam the US stock market right back to the all-time-bubble closing highs (SPX 1878) again in the next few trading days?

  1. It’s quarter-end…
  2. There’s no-volume out there anyway,
  3. And squeezing hedgies who keep shorting low and buying high is easy to do

On that last point, at least from a Style Factoring perspective, being long High Short Interest stocks is back!


Now tracking +2.8% YTD, that beats being long either Low Short Interest (as a style factor in the SP500) which is only +0.8% or, god forbid, the Dow (which is still down -1.2% YTD).


Alternatively, you can triple bypass the stress associated with buying the high short-interest bubble and:

  1. Buy #InflationAccelerating
  2. Buy #GrowthSlowing
  3. Short the US Consumer

How do you buy #InflationAccelerating?

  1. CRB Food Index +18.1% YTD
  2. Gold +9.5% YTD
  3. CRB Commodities Index +7.5% YTD

What about #GrowthSlowing?

  1. Utilities (XLU) +7.4% YTD
  2. REITS (MSCI Index) +8.1% YTD
  3. Bonds (yep, long-term Treasury Yields are down 30 bps YTD)

Oh, and the Short US Consumer Discretionary (XLY) position acts fantastic with the sub-sector -3.3% YTD. That’s horrendous on both an absolute and a relative basis. If you’re into that sort of thing…


You might be into buying former bubbles that blew up too. After all, isn’t that what being long of Gold and as many homes as you can get your hands on from A&E’s house flippers is all about?


Or is the show called Flip This House? Who cares what these $2, $7, or $19 billion dollar companies or shows are called. Fully loaded, listening to #OldWall bankers and mortgage brokers pitch us on why it all makes sense is just getting fun to watch.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.81%

SPX 1854-1878

VIX 13.09-17.47

USD 79.18-80.41

Gold 1301-1345


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Social Bubbles - Chart of the Day


Social Bubbles - Virtual Portfolio

April 9, 2014

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TODAY’S S&P 500 SET-UP – April 9, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 1.19% downside to 1830 and 0.81% upside to 1867.                                         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.29 from 2.29
  • VIX closed at 14.89 1 day percent change of -4.37%

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, April 4 (prior -1.2%)
  • 10am: Wholesale Inventories, Feb, est 0.5% (pr 0.6%, rev 0.7%)
  • Wholesale Sales m/m, Feb., est. 1% (pr -1.9%, rev -1.8%)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed issues March 18-19 FOMC minutes
  • 3:30pm: Fed’s Evans speaks in Washington
  • 7:30pm: Fed’s Tarullo speaks in Washington


    • President Obama speaks at Fort Hood memorial service, then attends DCCC, DSCC fundraisers in Houston
    • House Financial Services Cmte panel holds hearing on capital formation for growth cos, 10am
    • Senate Judiciary Cmte hears from Comcast exec. VP David Cohen on proposed $45b purchase of Time Warner Cable, 10am
    • House Armed Services Cmte holds hearing on natl defense priorities, 10am
    • House Ways and Means trade subcmte holds hearing on trade implications of U.S energy policy, LNG exports; 1:15pm
    • Budget (Senate Appropriations):
    • EPA Administrator Gina McCarthy testifies, 9:15am
    • Labor Sec. Thomas Perez, 10am
    • Clinton says no imminent decision on presidential run


  • Toyota recalls more than 6m vehicles globally
  • Alcoa sees almost decade-long aluminum surplus ending on cuts
  • La Quinta raises $650m pricing IPO below marketed range
  • GM fined by U.S. safety agency for incomplete recall answers
  • Comcast to pitch its Time Warner deal as boost to innovation
  • Tougher leverage limits for U.S. banks approved by regulators
  • Tesla plans to find more financing for new Model S leasing unit
  • Weather Channel returns with less reality after DirecTV blackout
  • SAC Capital judge seeks profit info before approving plea
  • Greece said to plan opening book for 5-yr note sale tomorrow
  • Goldman Sachs considers closing Sigma X dark pool, WSJ reports
  • Goldman, Warburg in next round for Huarong stake: Reuters
  • Zayo explores IPO that values co. at $7b: Reuters
  • Detroit said near deal with some bond insurers: WSJ
  • Microsoft issues final security update for XP: Reuters


    • AngioDynamics (ANGO) 4:01 pm, $0.09
    • Apogee Enterprises (APOG) 4:30 pm, $0.29
    • Bed Bath & Beyond (BBBY) 4:15 pm, $1.60 - Preview
    • Cogeco Cable (CCA CN) Aft-Mkt, C$1.11 - Preview
    • Constellation Brands (STZ) 7:30 am, $0.76 - Preview
    • Dollarama (DOL CN) 7:30 am, C$1.10
    • MSC Industrial (MSM) 7:30 am, $0.85
    • PriceSmart (PSMT) 4:10 pm, $0.87


  • WTI Retreats From Month-High as Crude Supplies Gain; Brent Slips
  • World’s $8.9 Billion Banana Trade Threatened by Deadly Fungus
  • Texas Cotton Desert Boosts Cost for Clothing Makers: Commodities
  • Gold Trades Near Two-Week High as Investors Await Fed Minutes
  • Raw Sugar Rises as Brazil Seen Delaying Sales; Coffee Declines
  • Soybeans Climb to 10-Month High as U.S. Reserves Seen Declining
  • Grandfather’s Utility Threatened by Renewable Islands of Profits
  • Codelco Sees Copper Glut Imperiled by Project Lags: Commodities
  • OPEC Plans to Make Room for Extra Oil From Iran, Iraq, Libya
  • MORE: Iraq to Soon Reach Oil-Export Deal With Kurds, Luaibi Says
  • Copper Falls Amid Concern About Potential China Debt Defaults
  • Morgan Stanley Raises 2014 Brent Crude Forecast to $105/Barrel
  • Aluminum Surplus Seen Ending by Alcoa as Producers Pare Supplies
  • Renewables Replace Declining Nuclear, Coal in Northwest Europe

























The Hedgeye Macro Team














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