It's The Fed's Fault

This note was originally published at 8am on April 10, 2014 for Hedgeye subscribers.

“And oftentimes excusing of a fault, doth make the fault the worse by the excuse.”

-William Shakespeare


As we high-earning commoners read the inflationary “minutes” from our un-elected overlords @FederalReserve yesterday, we gave thanks and praise for not being the 80% of America that will be plundered by them.


To be, or not to be plundered (by the aristocracy)? That remains the question that my man William asked The People over 400 years ago. In storytelling terms, Shakespeare’s questioning of the perceived wisdom of his day is timeless.


The aforementioned quote comes from The Life and Death of King John. But what will become of thy modern day central planning Queen Yellen? “Here once again she sits; once again crown’d”… and in real-life terms, the poor are getting hungrier…


Back to the Global Macro Grind


BREAKING: “Beef Price Hits All-Time High” –LA Times


It's The Fed's Fault - cow


And whilst all-time is by many considered a very long time, whatever you do, do not call this #InflationAccelerating! Immediately after the Federal Reserve released their groupthink meeting “minutes” yesterday, commodities ripped to freshly squeezed YTD highs.


Orange juice (+18% YTD) or Coffee (+68% YTD) for breakfast anyone?


I know. Silly Mucker. This, according to the Keynesian jesters in the high court of devaluing the Dollar, is “non-core” to American life. Food prices +20% YTD (CRB Foodstuffs Index) and the broader commodities complex (CRB Index, 19 commodities) +10.7% YTD (versus the almighty Dow down YTD) is nothing but a manifestation of my own cherry picking. At least I can eat those.


But that your royal pleasure must be done, this act is as an ancient tale new told.” –Shakespeare


And that tale is called a Policy To Inflate. Calling it by any other name, would be un-American.


To review what brainiacs in academic call “causal”, this is how the Policy To Inflate works:

  1. The Fed says something along the lines of price fixing the rate of return on American Savings at 0%, forever
  2. Then the Global Currency Market reads price fixing as US Dollar Bearish (that’s why we have a 22% allocation to other FX)
  3. Then the Commodity, Gold Bond, and #YieldChasing community buys everything they can with Burning Bucks

#cool, eh?


For the 20% of us who can buy inflation and slow-growth, maybe. For the 80%, not so much. That’s why the emerging “inequality” in this country that has been perpetuated by both the Bush and Obama administrations is largely the Fed’s Fault.


Unfortunately, you can’t eat an iPad.


It's The Fed's Fault - Burning Cash


If you’re in the top quintile of Americans (yes, most of you reading this are), you don’t have to worry about your kid dropping the next $700 burning bucks on the Qe6 iPhone upgrade either – you just need to keep buying inflation in order to finance his/her spending:

  1. Gold up another +0.7% this morning to +10.1% YTD
  2. Slow-growth Utilities (XLU) up another +1.0% on the Fed “minutes” yesterday to +10.3% YTD
  3. #YieldChasing REITS up another +0.7% yesterday to +10.3% YTD too!

Yes, there is something eerie about all three of these things being up the same % per day and YTD (Hint: it’s called machines front-running the Fed – which, in turn, slows US real consumption growth).


In real-life, you’ll be getting paid in nominal terms today. Nominal means whoever is writing the checks doesn’t adjust your weekly comp as the value of your purchasing power falls (i.e. the things that you need to buy go up in price).


Nominal is always obfuscated by money printers and plunderers alike as real growth. As you can see from the Chart of The Day, nominal US consumption growth is on a death path to perdition (i.e. it’s both secular and cyclical). That’s largely the Fed’s Fault too.


Rather than rant any longer (see our newly minted Q2 Global Macro Themes slide deck for all the non-Fed propaganda details – 48 slides, I will leave you with the only solution to all of this (from King John):


“What you would have reform'd that is not well,
And well shall you perceive how willingly
I will both hear and grant you your requests”


Unfortunately all that is not well is not being reformed. Neither your Republican nor Democrat governments are hearing your requests. Both parties support weak Dollar policy. Excusing the Fed’s Fault this time will only make all of this worse.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.63-2.75%

SPX 1830-1890

Nasdaq 4041-4203

VIX 13.11-15.67

USD 79.41-80.04

Gold 1295-1325


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It's The Fed's Fault - Chart of the Day

ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds

Takeaway: In the most recent week both equity and fixed income flows were very light however equity production was the "less bad" of the two

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds declined week-to-week, although the slack in equity fund flow was less pronounced than fixed income:


Total equity mutual fund flow decelerated sequentially week-to-week, producing a tally below the 2014 year-to-date weekly average. The $2.3 billion that came into all equity mutual funds during the most recent 5 day period ending April 16th was split between a weak $636 million inflow into U.S. equity funds and the marginally stronger $1.7 billion that moved into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.9 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.3 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.1 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 


Fixed income mutual fund flow also decelerated week-to-week, reversing last week's trend lines in the product graphs below, which had displayed improving momentum for bond funds versus equity funds. For the week ending April 16th, $659 million flowed into all fixed income funds, as opposed to last week's $1.6 billion inflow. The worsening of bond fund inflow amounted to $630 million which flowed into taxable products and a mere $29 million inflow into tax-free or municipal products. Still, the inflow into taxable products this week was the 10th consecutive week of positive flow and the inflow into municipal or tax-free products was the 14th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 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 moderately negative trends during the week, with a notable week of redemption in stock ETFs with $2.2 billion of net outflow. Bond ETFs experienced only a slightly positive inflow of $204 million for the most recent 5 day period. The 2014 weekly averages are now a $973 million weekly inflow for equity ETFs and a $931 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 negative $754 million spread for the week ($109 million of total equity inflow versus the $863 million 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 $7.5 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 -$37.5 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 - Lackluster fund flow in both Equity and Fixed Income Funds - 1



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



ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 2


ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 3


ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 4


ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 5


ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 6



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



ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 7


ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 8



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $754 million spread for the week ($109 million of total equity inflow versus the $863 million 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 $7.5 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 -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 



ICI Fund Flow Survey - Lackluster fund flow in both Equity and Fixed Income Funds - 9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA



TODAY’S S&P 500 SET-UP – April 24, 2014

As we look at today's setup for the S&P 500, the range is 54 points or 2.10% downside to 1836 and 0.78% upside to 1890.                                                     













  • YIELD CURVE: 2.26 from 2.26
  • VIX closed at 13.27 1 day percent change of 0.61%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Durable Goods Orders, March, est. 2% (prior 2.2%)        
  • Durables Ex Transportation, March, est. 0.6% (prior 0.2%, revised 0.1%)
  • Capital Goods Orders Non-def Ex-Aircraft, March, est. 1.5% (prior -1.3%, revised -1.4%)               
  • Capital Goods Shipments Non-def Ex-Aircraft, March, est. 1% (prior 0.5%, revised 0.6%)               
  • 8:30am: Initial Jobless Claims, April 19, est. 315k (prior 304k)       
  • Continuing Claims, April 12, est. 2.745m (prior 2.739m)  
  • 9:45am: Bloomberg Consumer Comfort, April 20 (prior -29.1)     
  • 10am: Kansas City Fed Manufacturing Activity, April, est. 8 (prior 10)       
  • 10am: Freddie Mac mortgage rates        
  • 10:30am: EIA natural-gas storage change                     


    • House, Senate out of session on recess
    • Obama in Japan, meets with Japanese PM Shinzo Abe, holds press conf., attends state dinner, speaks at youth event   
    • 8:45am: Export-Import Bank holds annual conf., President Fred Hochberg delivers opening remarks       
    • 12pm: Justice Samuel Alito speaks at Food and Drug Law Institute conference   
    • U.S. ELECTION WRAP: NYT Senate Poll; Tea Party Endorsements              


  • GE said to be in talks to buy Alstom for $13b       
  • Google to Netflix pay-for-access deals said to get FCC review    
  • Apple stock split removes obstacle to inclusion in Dow avg          
  • German business confidence unexpectedly rises in growth sign               
  • Obama says U.S. ready to move on additional Russia sanctions  
  • Nokia to exclude India plant from Microsoft deal on tax issues  
  • E-cigarettes to fall under FDA as U.S. seeks to tame trend           
  • Forbes sale said to founder with Axel Springer not bidding          
  • Gartner sees 12% rise in semiconductor cap equipment spending            
  • Spain auctions 10-yr bonds at 3.059%, lowest yield on record     
  • Williams Opal gas explosion cuts pipe flows as town evacuated         

AM EARNS:        

    • 3M (MMM) 7:30am, $1.80          
    • Aetna (AET) 6am, $1.55 - Preview            
    • Alexion Pharmaceuticals (ALXN) 6:30am, $1.26  
    • Altria Group (MO) 6:58am, $0.57 - Preview         
    • AmerisourceBergen (ABC) 6:15am, $1.00  - Preview        
    • Avnet (AVT) 8am, $1.08               
    • BankUnited (BKU) 7:30am, $0.45             
    • Bemis (BMS) 7am, $0.57              
    • Brunswick (BC) 7:39am, $0.60    
    • Cameron International (CAM) 7:30am, $0.72 - Preview  
    • Caterpillar (CAT) 7:30am, $1.23 - Preview             
    • Celgene (CELG) 7:30am, $1.65 - Preview               
    • CMS Energy (CMS) 7:30am, $0.72            
    • Coca-Cola Enterprises (CCE) 7:30am, $0.44          
    • Colfax (CFX) 6:01am, $0.45          
    • Delphi Automotive (DLPH) 7am, $1.09   
    • Diamond Offshore Drilling (DO) 6am, $0.65 - Preview     
    • Domtar (UFS) 7:30am, $1.67       
    • DR Horton (DHI) 6am, $0.34 - Preview   
    • Dunkin’ Brands Group (DNKN) 6am, $0.36           
    • Eli Lilly & Co (LLY) 6:30am, $0.71 - Preview            
    • Entergy (ETR) 7am, $2.29             
    • EQT (EQT) 7am, $0.89    
    • First Niagara Financial Group (FNFG) 7:15am, $0.17         
    • Freeport-McMoRan Copper & Gold (FCX) 8am, $0.42 - Preview
    • General Motors Co (GM) 7:30am, $0.04 - Preview           
    • GrafTech International (GTI) 7:01am, ($0.02)      
    • Graphic Packaging Holding  (GPK) 7:30am, $0.13               
    • Helmerich & Payne (HP) 6am, $1.48        
    • Hershey  (HSY) 6:58am, $1.14    
    • JetBlue Airways (JBLU) 7:30am, $0.07 - Preview
    • KKR & Co LP (KKR) 8am, $0.51    
    • Lorillard (LO) 7am, $0.72               
    • Mead Johnson Nutrition (MJN) 7:30am, $0.91   
    • NASDAQ OMX Group (NDAQ) 7am, $0.71            
    • New York Times (NYT) 8:30am, $0.03     
    • Nielsen Holdings NV (NLSN) 7am  , $0.41              
    • Nucor (NUE) 9am, $0.38               
    • Patterson-UTI Energy (PTEN) 6am, $0.24              
    • Peabody Energy (BTU) 8am, $0.01 - Preview      
    • Potash  (POT CN) 6am, $0.35 - Preview 
    • PulteGroup (PHM) 6:30am, $0.20 - Preview        
    • Quest Diagnostics (DGX) 7am, $0.88 - Preview   
    • Raytheon (RTN) 7am, $1.77        
    • Reliance Steel & Aluminum (RS) 8:50am, $1.23  
    • Royal Caribbean Cruises (RCL) 8:31am, $0.27      
    • SCANA (SCG) 7:30am, $1.15       
    • Sigma-Aldrich (SIAL) 7am, $1.03
    • Sirius XM Holdings (SIRI) 7am, $0.02       
    • Sonus Networks (SONS) 7am, ($0.01)    
    • Southwest Airlines (LUV) 6:35am, $0.17 - Preview           
    • Stanley Black & Decker (SWK) 6am, $0.96             
    • Starwood Hotels (HOT) 6am, $0.56          
    • T. Rowe Price (TROW) 7:29am, $1.04      
    • Time Warner Cable (TWC) 6am, $1.67 - Preview
    • Timken (TKR) 7:30am, $0.81       
    • Under Armour (UA) 7am, $0.05 - Preview            
    • United Continental (UAL) 7:30am, ($1.36)            
    • United Parcel Service (UPS) 7:45am, $1.08 - Preview      
    • USG (USG) 8:30am, $0.19            
    • Valley National Bancorp (VLY) 7am, $0.14             
    • Verizon Communications (VZ) 7:30am, $0.87 - Preview  
    • Waste Management (WM) 7:30am, $0.45            
    • Wyndham Worldwide (WYN) 6:29am, $0.75        
    • Yandex NV (YNDX) 6am, $8.77  
    • Zimmer Holdings (ZMH) 7am, $1.47               

PM EARNS:        

    • Altera (ALTR) 4:15pm, $0.32       
    • (AMZN) 4pm, $0.23            
    • Baidu (BIDU) 4:30pm, $6.24        
    • Barracuda Networks (CUDA) post-mkt , $0.01    
    • Broadcom (BRCM) 4:05pm, $0.46             
    • Cerner (CERN) 4:01pm, $0.37 - Preview
    • Chubb (CB) 4:03pm, $1.56           
    • Cincinnati Financial (CINF) 4:05pm, $0.54              
    • Cirrus Logic (CRUS) 4pm, $0.32  
    • Cliffs Natural Resources (CLF) 4:22pm, ($0.23)   
    • Deckers Outdoor (DECK) 4pm, ($0.14)   
    • Eastman Chemical Co (EMN) 4:36pm, $1.59         
    • Edwards Lifesciences (EW) 4:01pm, $0.69 - Preview        
    • Freescale Semiconductor (FSL) 4:05pm, $0.25    
    • KLA-Tencor (KLAC) 4:15pm, $1.11            
    • Las Vegas Sands (LVS) 4:22pm, $0.94      
    • Leggett & Platt (LEG) 4:05pm, $0.38        
    • Maxim Integrated Products (MXIM) 4pm, $0.39               
    • Microsoft (MSFT) 4:01pm, $0.63 - Preview          
    • Newmont Mining (NEM) post-mkt , $0.19 - Preview       
    • Noble Energy (NBL) 5pm, $0.75
    • Olin (OLN) 5pm, $0.34   
    • Pandora Media (P) 4:01pm, ($0.14)         
    • PerkinElmer (PKI) 4:05pm, $0.44              
    • Principal Financial Group (PFG) 4pm, $0.92          
    • Regal Entertainment Group (RGC) 4pm, $0.19   
    • Republic Services (RSG) 4:05pm, $0.44  
    • Starbucks (SBUX) 4:03pm, $0.56 - Preview           
    • Stericycle (SRCL) 4:01pm, $0.99 
    • SunPower (SPWR) 4:05pm, $0.32             
    • Superior Energy Services (SPN) 4:05pm, $0.21   
    • Swift Transportation Co (SWFT) 4:01pm, $0.12   
    • Synaptics (SYNA) 4:05pm, $0.57
    • Universal Health Services (UHS) 5pm, $1.22        
    • Validus Holdings (VR) 4:15pm, $1.56       
    • VeriSign (VRSN) 4:05pm, $0.63  
    • Visa (V) 4:05pm, $2.18  
    • Weatherford International (WFT) 4:40pm, $0.11              


  • Goldman Sets Out Case for Commodity Holdings as Rivals Cut Back
  • WTI Trades Near Two-Week Low as Stockpiles Climb; Brent Steady
  • Coffee’s Prayers for Rain Met With Threat of Deluge: Commodities
  • Banks Reducing Commodity Trading Seen Ending Link to Equities
  • LME to Start Clearing Collateral in Yuan as Asia’s Power Rises
  • Copper Touches Three-Week High as Growth Rebound May Spur Demand
  • Gold Trades Near 10-Week Low as U.S. Data Weighed With Ukraine
  • Arabica Coffee Drops as Rain Heads for Brazil; Sugar Also Falls
  • Rebar in Shanghai Rises to 1-Wk High on Demand Pickup, Inventory
  • U.K. Shale Could Spark $55 Billion in Investment, E&Y Says
  • Marubeni Says China May Have Detained Three Grains Unit Staff
  • Deadly Illegal Mining Booms Below South Africa’s City of Gold
  • Asia Energy Bull & Bear Pit China Reforms vs. OPEC: BI Outlook
  • Castoffs in Barrick Newmont Merger May Become $4 Billion Rival

























The Hedgeye Macro Team














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LEISURE LETTER (04/24/2014)




  • 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 


PENN/GLPI  – petitioned the Iowa Racing & Gaming Commission to reconsider their decision last week to shutter the riverboat casino by July 1.

Takeaway:  While we do not practice law, the facts seem to indicated the closing is an inevitable outcome.  Let’s stop spending shareholder capital, come to acceptance with the decision and outcome.


PENN Jamul Casino – the lawsuit filed by two relatives of several deceased Jamul tribal members against CalTrans, the agency which controls the permits under which the tribe’s contractors are working, was summarily dismissed by Superior Court Judge Ronald Prager. Thus far, twenty cases to prevent construction of the casino have been dismissed since 1995. Three additional cases remain pending in state and federal court.

Takeaway:  A teflon casino opportunity for PENN?


MPEL – received an Air Operators Certificate to fly/operate an Agusta 109 helicopter between Hong Kong and Macau in a six passenger configuration. Similar aircraft are operated by Sky Shuttle Helicopters Ltd between the two cities but in 12 passenger configuration.

Takeaway: VIP shuttle, management team shuttle or investor shuttle - an elegant way to travel but bring your personal flotation device. There's a long history of helicopters ditching into the South China Sea.


Hard Rock Hotels  – named Marco Roca as EVP of Hotel Development for Hard Rock International worldwide in an attempt to further fuel the brand's aggressive development activity and expansion prospects. Most recently, Roca was Senior Vice President Development at Starwood, responsible for franchise and management contract sales for all seven Starwood brands in Eastern United States, Canada and the Caribbean. He also worked for Wyndham and Hilton Hotels.

Takeaway: Could Hard Rock be positioning itself for another run as a public company?


HOT – As we expected, HOT beat the Street nicely for Q1 and provided lower than consensus guidance for Q2 but in-line for 014. No mention of stock buyback...

Takeaway:  We like HOT over the intermediate and long term.  Any weakness associated with Q2 guidance and lack of share repurchases could be a buying opportunity.  We think HOT will be more aggressive with share repurchases and asset sales in the coming quarters and lodging fundamentals remain strong.


LHO – increased its quarterly dividend to $0.375 from $0.28, a 33.9% increase.

Takeaway:  LHO now yields 4.6% on a forward dividend yield basis, more than 2x the S&P 500 Index.



Macau Visitation during Easter (Macau Business Daily) Had 624,588 visitors during the Easter holidays, 27.2% more than in the equivalent period last year.  The busiest point of entry or exit was the Gongbei border crossing, where 660,248 people entered the city and 685,810 left.

Takeaway:  Very positive supporting data point for mass traffic and mass gaming revenues. 


Changi Singapore Airport - visitation ticked down again, -2.5% YoY in March

Takeaway:  Could be an ugly quarter for Mass revenues in Singapore 


LEISURE LETTER (04/24/2014) - c1


Macau March visitation - Visitor arrivals totaled 2,625,997, +10% YoY.  Mainland visitors surged by 24% YoY to 1,769,408, with 738,287 (42% of total) traveling to Macau under the Individual Visit Scheme.  Visitors from Hong Kong fell 15% YoY.  The average length of stay of visitors stood at 1.0 day.

Takeaway:  Solid visitation numbers.  Strong Mainland visitation growth offset a 12th consecutive monthly decline in HK visitors.


LEISURE LETTER (04/24/2014) - macau1


Macau/Hengqin - Shun Tak Holdings Ltd., (0242.HK) noted in its annual results for 2013 that it has applied for a land grant to the Macau government vis-a-vis its plan to launch a hotel development project in Cotai. The firm also expects the foundation works for an integrated property project comprising office, hotel, commercial and serviced apartments in Hengqin to start in the second half of 2014.  Additionally, Ms. Pansy Ho (a Shun Tak managing director) recently increased her shares in the company with 50 million share purchase at HK$4.00/share via Classic Time Developments Ltd.

Takeaway:  Pansy increasing her holdings in Shun Tak and looking to the next big regional development play - Hengqin.  



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.


Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




Total revenues:  $3,905 million

EBITDA:  $1,354 million

EPS:  $0.92/share






    1. How do you drive growth in Singapore?
    2. VIP outlook given all the concerns?
    3. Update on the CFO search process
    4. Previously indicated 75 more mass table at SCC in spring 2014 – are those now installed, game types (is this Dragon Master)?
    5. Update on efforts to rationalize excess gaming floor capacity at the Venetian Macau?
    6. Any plans to add additional ferries to the fleet given the current capacity constraints?
    7. Update on the opening of the Parisian?
    8. Update on the monetization of the entire Macau retail real estate portfolio – previously alluded to a $12-$14 billion portfolio value?
    9. Discuss the mechanics of repurchasing SCL shares, if approved by shareholders?  Is the repurchase contingent on a Macau asset sale?
    10. Expectations for Japan gaming expansion given the Japan Gaming Congress in three weeks?
    11. Update on the sale of the St. Regis Tower and Bethworks?



  • We remain on budget and on schedule. Subject, of course, to timely government approvals that may be required, we continue to target a late 2015 opening of our latest Integrated Resort.


  • We will open our Dragon Master room (premium mass) later this year, probably in the spring
  • Mass win per table per day was $13,900 Q4 of 2013 and we believe we can get to $15,000, $16,000 a table.

Macau Mass:

  • We expanded mass table productivity to $12,143 of mass win per table per day across our Macao property portfolio from just $9,716 per day one year ago
  • Goal: $15,000 win per mass table in 2014 (as well as portfolio wide)

 Macau VIP:

  • Rolling volume per table of approximately $1.23 million per day, which was a record for the company and was up 33.7% compared to the quarter one year ago

Singapore Premium Mass:

  • ADR increasing to $425 and occupancy approaching 97%
  • We expect to drive growth in the future as we focus our marketing efforts on high-value visitors from the surrounding Southeast Asian region
  • We're still running 60%-plus margins in the premium mass segment.
  • Mass gaming win increased to $4.63 million per day,  Our goal is to get to $5 million a day
  • So we're buying more rooms from the hotel and that may have an adverse effect, a point or two on the margins

Dividend/Buyback/Balance Sheet:

  • Raised our recurring dividend for the 2014 calendar year to $2 per share, an increase of 42.9% compared to the $1.40 recurring dividend we will have paid this year.
  • We have every intention of increasing the dividends at Las Vegas Sands and Sands China in the years ahead as our business and cash flows continue to grow.
  • With $1.4 billion remaining under the term's stock repurchase authorization and in the future we expect to repurchase at least $75 million of stock per month.
  • Subsequent to year end through February 28, 2014, we repurchased 8,224,255 shares of our common stock for $663.8 million
  • During 1Q14, VML established a new $2 billion credit agreement.   A portion of this new credit agreement was used to repay the $819.549 million of term loans by non-consenting lenders.   The consenting lenders, representing ~$2.386 billion consented to an extension of the maturity of term loans to March 31, 2020.

YUM: China Leads The Way


YUM reported 1Q14 earnings AMC yesterday, missing top line estimates by 241 bps while beating bottom line estimates by 392 bps.  As expected, China led the way in 1Q delivering 9% same-store sales growth and an 80% improvement in operating profit.  These results prove that the supply chain debacle is largely beginning to fade and consumers have regained trust in the KFC brand.  Despite strong performance in China, KFC Division, Pizza Hut Division and Taco Bell Division results were less than desirable, weighing down earlier optimism over impressive China numbers.  The stock traded down intraday, suggesting a China recovery is baked in.  As such, we believe the street is looking to Taco Bell to be the source of incremental upside in 2014, but a disappointing 1Q14 has raised concerns. 


China Division delivered 9% same-store sales growth including 11% growth at KFC and 8% growth at Pizza Hut Casual Dining.  Restaurant margins grew 6.8% over the prior year.  However, lapping last year’s productivity measures and additional labor and food costs pressure will likely slow the rate of margin improvement moving forward.  Management guided to a full-year restaurant margin of 17%, in the middle of its prior 16-18% guide.  KFC appears to have regained consumer trust and plans to capitalize on its current sales momentum by bringing more innovation and excitement to the brand.  A new menu was rolled out to 4,600 restaurants in late March should help achieve this.  KFC plans to revamp the menu once a year.  Better sales forecasting, labor scheduling, optimizing operating hours and other initiatives have helped improve restaurant margins.  New advertising, packaging, staff uniforms and menu boards are all additive to the brand restage.  The team has plans for a new mobile app which will allow for preordering/electronic payment and expects free Wi-Fi to be available in over 2,000 restaurants by year-end.  Pizza Hut casual dining generated strong same-store sales in the quarter and continues to resonate with customers as it offers compelling value and a flexible menu (refresh 20% of the menu twice a year) which is increasingly including breakfast.  A strong economic model will allow the team to continue aggressively expanding into lower tiered cities.  Home service continues to be a strong, local brand as 40% of what they deliver is Chinese food.  There are approximately 200 home delivery units with room for substantial upside.


India Division same-store sales declined 1%.  India continues to be a long-term opportunity for YUM, but is largely immaterial to the current business.  KFC plans to launch a new vegetarian line of products and management remains focused on developing a stronger economic model for expansion into lower-tiered cities.  Pizza Hut delivery grew same-store sales at a faster clip than its largest delivery competitor while Taco Bell continues to be a potential source of growth in India.


KFC Division delivered 1% same-store sales growth, led by international strength and offset by a struggling U.S. business.  Restaurant margin and operating margin declined 30 bps and 60 bps, respectively.  We remind you that 90% of KFC profits are generated outside the U.S.  With only 2 stores per 1 million people, KFC is well positioned to capitalize on a growing consumer class in emerging markets.  Australia and the U.K. continue to be pockets of strength for the developed markets segment, while the U.S. and Canada continue to woefully underperform.  The team plans to apply overseas best practices to these two regions in 2014.


Pizza Hut Division same-store sales declined 2%, due in large part to a struggling U.S. business and marginally offset by international strength.  Restaurant margin and operating margin declined 420 bps and 580 bps, respectively.  The U.S. business continues to lose share to competitors offering more compelling value.  WingStreet and new Garlic Parmesan Pizzas could provide a bit of a short-term boost, but the brand’s issues go well beyond a lack of innovative offerings.  Management is moving quickly to find ways to fix their value proposition and engage the digital consumer, but noted that the brand could trail prior estimates in FY14.  Outside the U.S., we expect the pace of global development to accelerate in 2014.


Taco Bell Division same-store sales declined 1%.  Restaurant margin and operating margin declined 260 and 140 bps, respectively, as operating profit fell 16%.  Restaurant margin was hurt by a mix of labor intensive promotional products and higher than expected commodity inflation.  Management also cautioned that commodity pressure could mitigate 2Q profits.  Taco Bell rolled out breakfast at the end of 1Q and, according to management, is off to a good start.  The team plans to introduce mobile ordering soon, in addition to a major new product launch in 2H14.  Net new unit growth should accelerate from 78 to 100 in FY14.  Though 97% of profits currently come from the U.S., management has plans to make Taco Bell YUM’s third major global brand.


YUM is a largely franchised business, with over 90% of stores outside China franchised and will generate approximately $2 billion in franchise fees in FY14.  As such, it is a very high return business.  It is also positioned exceptionally well to capitalize on a long-term growth opportunity in emerging markets.  This quarter wasn’t the best, but the turnaround in China is the number one thing we wanted to see.  The domestic Taco Bell business will stabilize and, in our view, accelerate meaningfully from here as breakfast, new product innovation, digital initiatives and additional pricing will drive incremental sales.  When all is said and done, we believe YUM will be able to generate greater than 20% EPS growth in FY14.  China looks strong, emerging markets have positive momentum and the Taco Bell business is poised to bounce back after a quarter in which most restaurants struggled.


In addition to strong growth prospects, YUM offers an attractive and growing dividend yield and has three main levers (growth investments, growing dividend, share repurchases) to continually support the stock and drive shareholder value.  Barring an unexpected upheaval of issues in China, we view YUM as a sound investment that offers attractive upside in both the near and short term.



YUM: China Leads The Way - YUMN




Howard Penney

Managing Director


Fred Masotta


Early Look

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