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Average Daily Table Revs (ADTR) jumped this past week to HK$1,065, up 38% YoY.  Our full month GGR projection including slots is for YoY growth of 7-11%.  Remember, our initial April projection was 12-16% growth and we suspect that low hold is the primary driver of the underperformance. 


We continue to believe that growth will reaccelerate in May, potentially up 20% YoY.  With the stocks down 20-25% in less than 2 months, the May performance could be a big catalyst.  For now, this past week’s strong data should alleviate some concerns of a massive VIP slowdown.


Market shares continued to regress toward the mean.  Despite a 110bp drop from the mtd as of last week, LVS is still tracking above recent trend.  MPEL came down from the clouds this past week but still is tracking well above recent trend.  Galaxy is the only laggard from recent trend although share looks much better than it did last week.






The federales are unlikely to approve a tax-free spin






We believe a tax-free spinoff to shareholders of a REIT by Pinnacle Entertainment is a low probability event.  Meanwhile, back at the ranch, the fundamentals aren’t good and new competition risk remains high.






Based on the Pinnacle Entertainment Form 13D filing by Orange Capital (“Orange”) and PNK stock price up almost 6% yesterday, we wanted to revisit the comments we made regarding PNK and a potential PNK REIT spin four weeks ago during our Goodwin Proctor REIT Thought Leader Conference Call regarding Boyd Gaming’s potential conversion.



First and foremost, similar to Orange, we believe a REIT spin is a worthy endeavor and strategy for lowering the cost of capital for a large portion of the current PNK enterprise.  However, we also believe a potential tax-free REIT spin is a low probability event for Pinnacle Entertainment.   As we stated during our conference call, PNK may be able to affect a less attractive taxable spin-off of the REIT or potentially sell real estate to an existing REIT.



Hurdles to a tax-free spin: 


  • Most importantly, Orange assumes the receipt of a tax-free spin Private Letter Ruling (PLR) by the Internal Revenue Service.  We note, Lamar Outdoor announced in August 2012, it would pursue a REIT conversion and as of today has not yet received an Internal Revenue Service PLR.
  • Orange also assumes House Ways & Means Committee Chairman Dave Camp’s February 25, 2014 proposed REIT rule modifications will not be enacted. 
    • The Camp Proposals would prevent these transactions from being tax-free to the distributing corporation and its shareholders by providing that a REIT cannot be a distributing corporation or a controlled corporation in a Section 355 distribution.
    • The Camp Proposals also provide that any distributing or controlled corporation involved in a Section 355 spinoff must wait 10 years before making a REIT election.
    • The Camp Proposals would apply to all spinoffs occurring after February 26, 2014 unless a binding commitment to complete the spinoff was in place prior to February 26, 2014
    • We believe there is bipartisan support for eliminating tax-free REIT spins.  The IRS is unlikely to provide PLR with the political momentum moving against these types of transactions.


Orange Capital’s assumptions and where we differ:


  • Orange assumes a $700m equity raise pre-spin.  That’s a big equity deal.
  • Post transaction valuation assumptions - Orange assumes:
    • Significantly higher REIT (Prop-Co) EV/EBITDA multiples of 13x to 15x versus our 10x, 12x and 14x
    • Significantly lower REIT (PropCo) G&A of $15m vs. our $31m assumption
    • OpCo EBITDA of $280 million vs. our $313 million
    • REIT EBITDA of $335 million vs. our $309 million (G&A differential)
    • Orange ignores the NOLs currently on PNK’s balance sheet - and the inherent value to shareholders.  PNK’s income will be mostly shielded from taxes for a long time even without a REIT spin.  As of December 31, 2013, PNK had $553 million of federal net operating losses, which can be carried forward 20 years and will begin to expire in 2028.  PNK also had $862 million of state net operating loss carry-forwards, predominantly in Louisiana and Missouri, that expire on various dates beginning in 2014.
    • Pro forma Orange assume a REIT leverage of 6.25x debt/EBITDA will have access to capital for acquisitions.
    • The PNK REIT could be 40% smaller than GLPI which could be a hurdle to a decent trading multiple




  • Future potential new competition in Illinois would adversely impact the revenues and EBITDA of Pinnacle’s Ameristar East Chicago property.
  • Casinos in Texas look inevitable to us which brings into question the sustainability of fixed rent payments from the PNK’s numerous and large Louisiana properties
  • Orange assumes the REIT will be competitive in bidding for new acquisitions while GLPI has sourced one small acquisition in its limited standalone life. 

There's a Large Asterisk Next to the Market's Recent Run

Takeaway: Lower-highs on lower-volume doesn't confirm a renewed bull.

If you look at the complexion of the stock market sell-offs and bounces over the last month, US Equity Volume on DOWN DAYS is +8% versus the 1-month average. Volume on UP DAYS is -5% versus the average.


Over the last 5 (up) days, volume has been -14% versus the average. Yesterday, US Equity volume was -18% vs the 1-month average.


In other words, lower-highs on lower-volume doesn’t confirm a renewed bull.


There's a Large Asterisk Next to the Market's Recent Run - Volume Total Mkt

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Where’s the Volume?

Client Talking Points


Leaders lead on the equity front this morning with Denmark up +2.2% (+15.2% year-to-date) and Ireland up +0.9% (+9.9% YTD). Both are crushing the Dow as the European Currency continues to strengthen versus the US Dollar.


If you look at the complexion of the selloffs and bounces for the last month, US Equity Volume on DOWN DAYS is up +8% versus the one month average, whereas volume on UP DAYS is down -5% versus the average – for the last five days volume has been down -14% versus the average. Sorry, lower-highs on lower-volume don’t confirm a renewed bull.


It’s just sad to watch the poor thing meander in no-man’s land. The Yellen Fed restated its view last week that it has 0% intention to fight inflation – so rock on commodities, as oil and Energy (XLE) join what’s becoming a broad based breakout. Monetary policy has consequences.

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


Gold-Corn +0.14-0.66%; both are yellow and beating the Dow, handily, YTD #BuyInflation @KeithMcCullough


"If I look at the masses, I will never act. If I look at the one, I will." - Mother Theresa


Netflix announced plans to raise prices by $1-2 per month, initially for new customers but eventually for everyone, “to acquire more content and deliver an even better streaming experience.” With the company set to surpass 50 million streaming subscribers by the second half of 2014, the price increase could add between $600 million and $1.2 billion to the company’s revenues within the next two years. (Forbes)

LEISURE LETTER (04/22/2014)



Tuesday, April 22

  • IGT FQ2 earnings:  5 p.m. Conf Call   , Passcode: IGT

Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • RCL Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529
  • LA March revenues out

Friday, April 25

  • PEB Q1 earnings – 9:00 a.m.

Monday, April 28

  • CHH Q1 earnings – 10:00 a.m. , Passcode: 70683172

Tuesday, April 29

  • NCLH Q1 earnings 
  • VAC Q1 earnings – 10:00 a.m. , Passcode: 4679876
  • MGM Q1 earnings – 11:00 a.m. , Passcode: 20455736



PNK - Activist group Orange Capital has acquired a 4.5% stake in PNK.  Orange Capital would like PNK to consider a REIT spin-off.

TAKEAWAY:  We are highly skeptical that PNK could obtain a Private Letter Ruling from the IRS for a tax-free spin-off.  That doesn't mean there aren't other avenues for unlocking real estate value.


MGM - has begun site preparation for its Prince George's County casino and could start construction in July, 

TAKEAWAY:  On time timetable


NCLH - announced its DASH sale, offering exceptional savings on all sailings of three days or longer, fleet-wide. Guests who book a Norwegian cruise vacation from Tuesday, April 22, 2014 through Friday, April 25, 2014, can receive up to $250 per stateroom to spend on board (based on cruise length and stateroom category) and reduced deposits. Air credits up to $1000, Military, AARP and Latitudes Rewards discounts also apply to select sailings.

TAKEAWAY: This is a WAVE sale for post-Wave...not good.

CCL - Princess pulls back to one ship in Japan, adds shorter cruises Seatrade Insider

For 2015, its third season in Japan, Princess Cruises will deploy Diamond Princess but not Sun Princess, which is going to Australia. The line will also introduce cruises as short as three nights to appeal to local travelers seeking a quick get-away.

TAKEAWAY:  Decision likely based on tough demand environment in Japan.


RCL -entered into a credit agreement for the US dollar financing of a portion of the third Oasis-class ship (the “Dollar Facility agreement”) for 178 million euros. Oasis 3 is expected to be delivered Q2 2016.




Tiger Resort - (Macau Business Daily) Okada's Manila integrated resort will be ready to open by end of 2015.  With an investment ranging from US$1.3 billion to US$1.5 billion, the first phase will focus on gaming.  It will offer 1,000 rooms with 3,000 slot machines and 500 tables, the majority of which will be for baccarat. For the gaming promoters market, the complex will offer nine junket rooms, the biggest with 20 tables, and an option for six more.


Being an integrated resort casino, the Tiger will also have, in this first phase, some 7,500 square metres of shopping area, 2,400 parking places, nightclub and beachclub and a dancing fountain, similar to the one in front of the Bellagio in Las Vegas “but bigger”, says the vice-president for casino operations, Matt Hurst. 

Hurst said Universal Entertainment is “very confident” that the final license for Tiger Resort will be issued by the Philippine authorities, namely PAGCOR.

TAKEAWAY:  Still unresolved issues before we pencil this timetable in.


Packer eyes Cosmopolitan - (The Australian) The owner of the Cosmopolitan, Deutsche Bank, is calling for bids before the close of business today.  Crown Resorts headed by James Packer could bid US$ 2 billion.  The Cosmopolitan, built at a cost of about US$4 billion, opened in 2010 and has never turned a profit.

TAKEAWAY:  $2 billion still sounds like a lot to us.


Crimea casinos -  Crimean first deputy PM hopeful about gaming zone Macau Business
Crimean First Deputy Premier Rustam Temirgaliyev thinks a gaming zone in Crimea may prove to be a serious rival to Macau, Las Vegas and Monaco.  Temirgaliyev said, “Our task is to create a tourist cluster, which will operate year-round, using a gambling zone as an advantage. We have been considering construction of a gambling township on Crimea's southern coast and have been considering several more sites.”  He said plans would be drawn up by the middle of May.

TAKEAWAY:  Not sure the Macau operators are exactly bracing for this new competition just yet.


Japan -  Japan Theme Park Considers Buying Island to Boost Casino Appeal Bloomberg

Huis Ten Bosch theme park is thinking of buying a deserted offshore island in an expansion to boost its appeal as a possible site for a casino resort.  “We are planning to buy new land to offer more games at the Huis Ten Bosch theme park,” said Hideo Sawada, chairman of the Tokyo-based travel agency and park operator.  He said at least 100 billion yen ($974 million) is needed to fund a gambling resort at the park.  


H.I.S., the country’s largest listed travel agency, plans to lease land to casino developers at Huis Ten Bosch in Nagasaki on the western edge of Japan’s Kyushu island.  The travel agency is in talks with video game makers in Japan and overseas to partner on building what Sawada calls a “Game Kingdom” at Huis Ten Bosch.  The facility will offer a variety of interactive games, including a paintball-like battle simulation known as “survival games” in Japan.

TAKEAWAY:  Let the jockeying begin...


STR - Upper upscale REVPAR ended March up 8.5%. 

TAKEAWAY:  Q1 UUP REVPAR will be solid at ~6.5% but we think April will show a sequential deceleration.


Hotel M&A - Concord Hospitality Enterprises announced the sale of a portfolio of 13 premium-branded, select-service hotels to companies owned by a global investment fund for approximately $240 million in an all-cash transaction. Concord will continue to operate the hotels under a long-term management agreement. The portfolio is comprised of a total of 1,650 rooms representing 11 Marriott and two Hilton-branded hotels

TAKEAWAY:  Average price per key of $145k which seems about right for a transaction in the upscale segment.


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.

Prospect Theory Wins

This note was originally published at 8am on April 08, 2014 for Hedgeye subscribers.

“One of the main tenets of prospect theory is that people don’t evaluate things in absolute terms.”

-Jonah Berger


Prospect Theory was originally developed by Dan Kahneman and Amos Tversky in 1979 (i.e. after all the Keynesian economic policy makers who worked for Nixon and Carter failed). But Kahneman didn’t win his Nobel Prize for #behavioral economics until 2002. And one of the most important books you’ll ever read, Thinking, Fast and Slow, wasn’t published until 2011.


All the while, this thing called the US economic and policy crisis happened. And linear (Keynesian) economic theorists working for Bush and Obama didn’t change a damn thing. There is no #behavioral or non-linear chaos theory embedded in what they do. Almost every lick of what comes out of the US Treasury and/or Federal Reserve deals in absolutes, on a lag – not forward looking rate of change.


While that is a national embarrassment for a country that hangs its entitled hat on meritocratic evolution and technological change, it remains your opportunity. Whether it’s Jonah Berger teaching social influence (marketing) at Wharton, or me ranting about macro every morning – it’s what happens on the margin that matters most. Prospect Theory is winning.


Back to the Global Macro Grind


Rate of change, or the accelerations/decelerations in the slope of a line measuring momentum, is easy to understand; especially when you show it in pictures. This is why a lot of people in our profession look at charts.


Prospect Theory Wins - Its not where you look that matters its what you see


But, as Henry David Thoreau wrote, “it’s not what you look at that matters, it’s what you see.” And, in a general sense, that is the Hedgeye Risk Management process when I talk about considering multiple factors and multiple durations, all at the same time.


In other words, it’s easier to see what’s going on in this globally interconnected macro marketplace of colliding factors, policies, and prices if you take a step back and look at the big picture. So let’s do that this morning, and take a look at 3 big places:

  1. JAPAN – on both our immediate-term TRADE and intermediate-term TREND durations the Japanese stock market remains bearish. From a GIP (Growth, Inflation, Policy) modeling perspective, Japanese #GrowthSlowing continues to be our call.
  2. EUROPE – mostly every major European stock market is still bullish on both our TRADE and TREND durations - in sharp contrast to the Dow (-2% YTD), the Italian stock market is +17% YTD (they don’t have social media or biotech bubble stocks). From a GIP modeling perspective, the Eurozone growth recovery is lagging what was the US one in 2013 by 6-18 months.
  3. USA – both the Nasdaq and the Russell 2000 have recently broken both @Hedgeye TRADE and TREND support levels. The SP500 is bearish on our immediate-term TRADE duration (1869 resistance) and barely bullish TREND (1830 support). In our GIP model, US #InflationAccelerating still sets up to slow US growth until at least the end of the 3rd quarter.

Accelerate and decelerate, fast and slow. That’s what centrally planned economies do. Get used to it.


Considering macro markets across multiple-factors also helps. I still can’t for the life of me understand how you’d have an informed opinion on multiple expansion or compression in stocks, if you don’t have a repeatable process considering:

  1. Currencies
  2. Commodities
  3. Interest Rates

But that’s just me. And to be crystal clear on this, I didn’t get that I needed to develop a process to consider all of the non-linear factors within the dynamic ecosystem that I invested in until I got run-over in my “best stock ideas.” Macro phase transitions can crush alpha, fast.


What is a phase transition?

  1. It’s a term used to explain thermodynamic systems
  2. “the transformation from one phase to another by heat transfer” (Wikipedia)

I realize that the alternative to considering market risk this way is using a 50-day moving monkey average. I also get that the guys who taught me about this business used to hold up pieces of paper to their trading screens trying to delineate higher-lows and higher-highs.


But guess what, without considering multi-factor, multi-duration global macro, they were still right in considering rate of change:

  1. Higher-lows + higher-highs = bullish momentum
  2. Lower-highs + lower-lows = bearish momentum

That said, that’s only considering 1-factor (price). And while it’s a good one to start with if only considering price momentum, you don’t have to stretch too far to start adding other factors, like volume and volatility, in order to front-run #OldWall’s behavior.


I’m not saying I have all the answers. I’ve made more mistakes with live ammo than almost anyone my age in this business. I have seen people lie, cheat, and lose. I have seen others evolve, learn, and win.


So I wanted to thank you for the opportunity to learn from all my mistakes out loud. Sometimes I learn fast; sometimes it’s slow. Building Hedgeye in an open, transparent, and accountable environment has helped us improve our process. I’m grateful for that.


We’ll be hosting our Q2 Global Macro Themes conference call this morning at 11AM EST. If you have time, we’re looking forward to your questions about what our risk management process is signaling next.


SPX 1830-1867

Nasdaq 4051-4166

Nikkei 14366-15083

VIX 14.11-16.52

Gold 1278-1322


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prospect Theory Wins - Chart of the Day


Prospect Theory Wins - Virtual Portfolio