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LEISURE LETTER (04/15/2014)




Wednesday, April 16

  • HTZ at BAML Auto Summit

Thursday, April 17

  • Iowa Racing & Gaming Commission Meeting - to decide whether it will grant Cedar Crossing Casino a state gaming license, which would make the Cedar Rapids facility the 19th casino in Iowa.
  • GE 1Q14 Earnings - 8:30 am Conf Call - real estate comments?
  • BX 1Q14 Earnings - 11 am Conf Call PIN 149 943 55 - lodging comments & color?
  • DIS - Investor Day - cruise & parks commentary?

Monday, April 21

  • IGT FQ2 earnings - 5 pm Conf Call   , Passcode: IGT

Monday, April 22

  • Genting Singapore - Annual General Meeting

Thursday, April 24

  • PENN Q1 earnings - 10 am
  • HOT Q1 earnings - 10:30 am , Passcode: 12049644
  • LVS Q1 earnings
  • LA March revenues released


MGM - Clark County District Judge Elizabeth Gonzalez has ordered that the Harmon Tower be demolished - dismantled floor-by-floor. 

TAKEAWAY:  While everyone is talking about the dismantling, we wonder what MGM & City Center will rebuild on this very visible and valuable piece Las Vegas Strip real estate?


MGM - MGM Resorts International and Hakkasan Group announce formation of JV hotel Company MGM Hakkasan Hospitality

TAKEAWAY:  Building hotel brands is not an easy business.


Atlantic City - rumors are circulating that Showboat will be the next casino to close in Atlantic City.  Management is apparently moving players redeeming promotions to Harrah's.

TAKEAWAY:  While any walk-in traffic lost (low end grinders anyway) because Revel would be even farther from the nearest open casino, at the margin, less supply is a modest positive for the adjacent Revel and all of the operators including Borgata.


Japan - (Reuters) Yumeshima, with about 170 hectares (420 acres) of land available for development, is likely to be designated as the preferred site for a casino when Osaka officials meet on April 22 to discuss possible gaming site, Governor Ichiro Matsui said


Tokyo, the other city most likely to host a casino, has yet to officially name a site for a development, although the Odaiba area in Tokyo Bay is being touted as the preferred location.  Tokyo Governor Yoichi Masuzoe has yet to say whether he supports a casino in the capital. 


Proponents of the initial bill expect debate to start in May, and aim to pass it before the house adjourns in June.  Matsui believes casino operators will invest more than 500 billion yen ($4.91 billion) in an integrated resort in the city, adding that he was visited last week by Lawrence Ho, CEO of MPEL. 

TAKEAWAY:  Probabilities look better than ever


New Jersey I-Gaming - Internet gaming win was $11.9M, up 15.2% from February 2014.  Borgata and party.poker generated $4.4M in online gaming revenue, up from $3.2 million the prior month, leading the New Jersey online gaming market with a 37% share.

TAKEAWAY:  Slow and steady but not close to the billion dollar run rate many politicians expected.  We care about Poker share and Borgata upped its share to 51%.


Massachusetts Gaming Poll - a survey by the Western New England University Polling Institute, conducted March 31 through April 7 of 477 adults, found that 59% of adults indicated they support establishing casinos in Massachusetts, while 34% were opposed and 7% were either undecided or declined to answer the question. The margin of sampling error for the survey was plus or minus 4.5 percentage points.  Still, many respondents took a "not in my backyard" approach to the issue, as 55% indicated they were opposed to having a casino in their community, 42% said they supported having a casino in their community, while 3% were undecided or declined to answer the question.

TAKEAWAY: Just build the casinos! 


Greece VLTs - (GamblingCompliance) Publication is reporting that progress is being made on legislation to potentially allow for 35k VLTs.

TAKEAWAY:  This has been a frustrating, dragged out process for the suppliers.  Even now our sources are downplaying the likelihood. Nevertheless, SGMS popped 4% on the news.


Ireland I-Gaming - A massive increase in gambling problems among young people is being linked to the rise of smartphones and tablets. According to the data, among the under-25 year old age group, as many as 90% started gambling on a handheld device. 

TAKEAWAY:  Why the trends in Ireland but not elsewhere? 



China Macro

  • New yuan loans: 1.05 trillion yuan vs consensus 1 trillion
  • Total social financing: 2.07 trillion yuan vs consensus 1.85 trillion, -19% YoY

TAKEAWAY:  Lending was ok in March but there is still fears of a credit slowdown as China keeps an eye on shadow banking.


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.

Add It to the List

Client Talking Points


Nikkei bounces a whopping +0.6% after moving to oversold at -14% year-to-date. Here’s a piece of trivia: If you are -14% in a drawdown, you need to be up +16.3% from the lows to get back to break-even. #Unlikely for the new Japanese stock bulls with Yen strong versus the US Dollar.


A big whiff on the German ZEW at 43.2 for April (versus 46.6 in March) is just one of a string of less than good German economic data in the last month. The DAX is trading back below Hedgeye TREND resistance of 9391 now, too (we don’t have any European longs currently in #RTA). The rate of change in German #GrowthAccelerating is starting to slow – alongside United States and Japan. Add it to the list.


A 2.65% 10-year yield continues to signal the nasty – if 2.57% TAIL risk support snaps, watch out below. There are a lot of people who are still long US #GrowthAccelerating in the back half of 2014 – we think the consumer slows well into the third quarter (tough comps).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


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


After yesterday's no volume bounce, the Nasdaq and Russell are still -7.7% from their YTD highs $IWM @KeithMcCullough


"Education is what remains after one has forgotten what one has learned in school." - Albert Einstein


The UK inflation rate as measured by the Consumer Prices Index (CPI) fell to 1.6% in March from 1.7% in February, according to the Office for National Statistics (ONS). It is the third consecutive month inflation has been below the Bank of England's 2% target rate, and the lowest rate since October 2009. (BBC)

Early Look

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Animal Spirits

“In the long history of humankind (and animal kind, too) those who learned to collaborate most effectively have prevailed.”

-Charles Darwin


In his 1936 book, “The General Theory of Employment, Interest and Money”, John Maynard Keynes used the term animal spirits to “describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior.”  He goes on to use consumer confidence as an example of how animal spirits can be measured economically. 


In our Q2 Themes presentation, we did a lot of work on the median consumer and took a detailed look at his / her income statement and balance sheet.  Currently, there are a number of major headwinds for the median consumer.  The obvious first one is the rampant acceleration in food costs in the year-to-date, the second is the anemic interest rate that they get on their savings, and, finally, the last headwind is the softening in the housing market.


For many average consumers, the house is in effect the balance sheet, so as home prices go up so too does net worth.  The two points that bode most negatively in our models for future home prices are the dual facts that pending home sales are down -14.5% from their peak and mortgage applications for purchase are down more than -20%.   Ultimately, home prices follow demand on a lag (as shown in the Chart of the Day), so we should expect that home price growth softens from here.


As it relates to the consumer, late last week the Bloomberg Consumer Confidence slipped to -31.9 from -30.0.  This is well below the long run average of -16.5 and normally a number above -30 is the level at which the economy is considered to be in recovery mode. More alarmingly was the personal finance sub-index which fell to -2.9, the worst level in five months. 


On a higher level, last week Michigan Consumer confidence came in at 82.6.  This was better than the expected 81.0 and an increase from the prior month.  So the animal spirits of consumer confidence appear to be intact . . . at least for now, but keep your eye on those home prices.


Back to the Global Macro Grind . . .


Yesterday was a slow grind in global macro land and today seems to be similar in tenor.  As it relates to the pin action of stock markets, the Shanghai Composite today is -1.36%.  The punditry is attributing this downward move as front running China’s GDP tomorrow, albeit the positive move in Chinese equities yesterday was considered a precursor to positive GDP, so the question of course is: which is it?


At a minimum, it seems that the government may be trying to talk down economic growth and the timing of the following report is suspect coming out one day ahead of GDP:


“Researcher with State Information Center said in Shanghai Securities News that efforts to address overcapacity, deleverage the economy and curb property bubbles could push GDP below 7%, something that would trigger massive unemployment.”


My colleague and our Asia Analyst Darius Dale had some detailed thoughts on the topic:


“In the 15 quarters since Chinese real GDP growth hit a cycle-peak of +11.9% YoY in 1Q10, Chinese economic growth has accelerated sequentially only three times. It’s basically been a straight leg down for four consecutive years – so much so that on a trailing 3Y basis, the current z-score for this series is (0.6x), which is actually up from trough of (1.6x) in 2Q12. In non-statistical speak, this implies that the “surprise factor” of Chinese #GrowthSlowing is burning off.


That isn’t to say that Chinese economic growth is not still slowing. In fact, the broad swath of high-frequency economic data points to a continued slowdown. The current risk range in our predictive tracking algorithm has probable downside to +7.3% YoY for Chinese real GDP growth here in 1Q14, which would: A) be the slowest growth rate since 1Q09; and B) imply that the Chinese economy is not taking advantage of extremely favorable base effect tailwinds – a sign that sequential momentum is indeed decelerating (as evidenced by the MAR PMI data).


One thing that investors should be aware of, however, is that Chinese policymakers are content to stand pat for now. Expectations for big stimulus has been dramatically tempered in recent weeks, most recently by Premier Li Keqiang’s prepared remarks at the Boao Forum for Asia Annual Conference. Perhaps they are storing up their fiscal and monetary “gun powder” to arrest any potential deceleration through the low +7% range in real GDP.


Or perhaps China’s intermediate-term growth trajectory isn’t really isn’t as dour as it has appeared in recent months and their superior visibility into the state-run Chinese economy leads them to believe that a large stimulus is simply not warranted. Time will tell; next up: tonight’s releases of 1Q GDP and MAR high-frequency growth data…”


The Hedgeye team will never be confused of being supportive of the interventionist nature of the world’s central bank.  A key critique we often held is that as a result of activist monetary policy, the markets tend to get manipulated.  We aren’t sure yet whether the Fed is more evil than those dastardly high frequency traders, but recent data on correlations emphasize our concern.


Specifically, according to ConvergEx, since 2009, the 10 industry sectors in the SP500 have averaged 85% correlation to the index.   In the past thirty days, correlations have dropped markedly to 77.5%.  Most interestingly though is the fact that long run correlations, before Fed intervention, have averaged 50%.  (Hint: Michael Lewis, there is a book here somewhere.)


The most challenging part of dealing with central banks may be in discerning whether they mean what they say.   The most recent example of course is the jawboning from ECB head Mario Draghi, who specifically indicated that the ECB was ready and willing to take monetary policy to an extreme level.  The Euro, despite a down move yesterday, has by and large shrugged Draghi off and is up 0.6% on the year-to-date.  Credibility anyone ?


Our immediate-term Global Macro Risk Ranges are now:



Nasdaq 3

Nikkei 135

USD 79.27-80.01

EUR/USD 1.37-1.39

Brent 107.34-109.41

NatGas 4.46-4.71


Daryl G. Jones

Director of Research


Animal Spirits - Chart of the Day

April 15, 2014

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TODAY’S S&P 500 SET-UP – April 15, 2014

As we look at today's setup for the S&P 500, the range is 51 points or 1.45% downside to 1804 and 1.33% upside to 1855.                                                










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.28 from 2.28
  • VIX  closed at 16.11 1 day percent change of -5.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Empire Manufacturing, April, est. 8 (prior 5.61)
  • 8:30am: CPI m/m, March, est. 0.1% (prior 0.1%)
  • CPI Ex Food and Energy m/m, March, est. 0.1% (prior 0.1%)
  • 8:30am: Fed’s Lockhart speaks at Stone Mountain, Ga., conf.
  • 8:45am: Fed’s Yellen speaks to Stone Mountain, Ga., conf.
  • 8:55am: Redbook weekly sales
  • 9am: Net Long-term TIC Flows, Feb. est. $30b (prior $7.3b)
  • Total Net TIC Flows, Feb. (prior $83b)
  • 10am: NAHB Housing Market Index, April, est. 49 (prior 47)
  • 3pm: Fed’s Plosser moderates panel at Stone Mountain
  • 4pm: Fed’s Rosengren speaks in Bangor, Maine
  • 4:30pm: API weekly oil inventories
  • 8pm: Fed’s Kocherlakota speaks in Fargo, N.D.


    • FEC 1Q filing deadline for congressional campaign cmtes, some PACs and some party cmtes
    • 2pm: Bloomberg Government holds “Is This The First (And Final) Act of the Tax Overhaul?” Webinar
    • House, Senate on recess
    • U.S. ELECTION WRAP: RNC’s Focus on Women; First Quarter Funds


  • Diageo offers $1.9b to gain United Spirits majority stake
  • China new credit declines as money-supply growth slows
  • Obama warns Putin on Ukraine after deadly clashes in East
  • German investor confidence declines for fourth month in April
  • Nestle reports slowest 1Q sales growth since 2009
  • Roche’s 1Q sales fall on strength of Swiss Franc
  • SABMiller considers options for $1.04b Tsogo Sun stake
  • Moelis IPO offers founders riches as investment bank shrs fall
  • GM CEO seeks new top spokesman, replaces human resources chief
  • Heartbleed hackers steal encryption keys in test showing danger
  • Hedge fund’s gains on distressed debt decline to 7-month low
  • Dell extends offerings for SAP’s Hana to win business clients
  • JPMorgan, Citigroup, others release monthly delinquencies
  • Encana seeks to tap oil royalties demand with unit IPO by June
  • Rio produces record iron ore output as global supply gains
  • Onex, Cineplex said in lead to buy Dave & Buster’s: WSJ
  • Fed’s Yellen speaks via video to Stone Mountain conf.

     AM EARNS:   

    • Charles Schwab (SCHW) 8:45am, $0.22
    • Coca-Cola (KO) 7:30am, $0.44 - Preview
    • Comerica (CMA) 6:40am, $0.72
    • Johnson & Johnson (JNJ) 7:45am, $1.48 - Preview
    • Northern Trust (NTRS) 7:30am, $0.78 – Preview

     PM EARNS:   

    • Boston Private (BPFH) 4:05pm, $0.19
    • CSX (CSX) 4:03pm, $0.37
    • Intel (INTC) 4:01pm, $0.37 - Preview
    • Interactive Brokers Group (IBKR) 4:01pm, $0.30
    • Linear Technology (LLTC) 5pm, $0.53
    • Wintrust Financial (WTFC) post-mkt, $0.67
    • Yahoo! (YHOO) 4:05pm, $0.37 – Preview


  • Nickel Drops Most in Nine Months as Metals Fall on China Concern
  • WTI Falls From Six-Week High With Brent on U.S. Supply Forecast
  • Profit Tastes Like Chicken in Search for Cheap Meat: Commodities
  • Palm Oil Crop at Risk Across Southeast Asia as El Nino Looms
  • Gold Falls From 3-Week High on U.S. Outlook as Palladium Drops
  • White Sugar Halts Decline Before Delivery as Coffee Also Climbs
  • Corn Declines as Planting Concerns Ease While Soybeans Advance
  • China Gold Demand Rising 25% by 2017 as Buyers Get Wealthier
  • Rio Produces Record Iron Ore Output as Global Supply Gains
  • Coal Returns to German Utilities Replacing Lost Nuclear: Energy
  • Canada’s Climate Warms to Corn as Grain Seeks Great White North
  • Pump Prices in U.S. Climb to Eight-Month High as Supplies Slide
  • Nestle Sees 2H Commodity-Cost Rise, Will Raise Prices: BI Chart
  • Gold Seen Losing 22% by Westpac’s Smirk to End Year at $1,025

























The Hedgeye Macro Team














Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.