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MACAU: SLOWER WEEK

We’re now projecting full month YoY GGR growth of +7-9% for April, slower than our original projection of +14%, probably due in part to low hold %.  This past week's daily table revenues averaged HK$904 million, only 2% above the comp from last year.

 

Seemingly becoming a trend, SJM is once again gaining share as we approach the end of the month.  Share of 25.2% is above the company’s recent trend.  MPEL is the only other company meaningfully above trend.  Galaxy improved its share this past week but April has not been kind to that company’s properties.  LVS is also now tracking below its 3 month moving average.

 

We still expect a nice rebound in May revenues in Macau which could approach +20% YoY growth.

 

MACAU: SLOWER WEEK - macau22

 

MACAU: SLOWER WEEK - macau23


Marijuana Legalization: Facts & Figures

Last week we hosted a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic. 

 

Dr. Kilmer co-authored the book Marijuana Legalization: What Everyone Needs To Know. Below we’ve summarized the first half of the book in which the authors provide a number of facts & figures on marijuana legalization. With increasingly more Americans supporting marijuana legalization, in fact a slight majority (54%) based on a recent Pew Research survey, we believe the data and studies provided in the book (while some are rough estimates and contested) offer a starting point for sizing up marijuana and the potential road to its legalization in the U.S.

 

Marijuana Legalization: Facts & Figures - Pew marijuana chart

 


Chapter 1: What is Marijuana?

  • The marijuana plant contains concentrated amounts of mind-altering chemicals known as cannabinoids.
  • Marijuana (or cannabis) is neither a stimulant nor a depressant.
  • THC (delta-9-tetrahydrocannabinol) is the main psychoactive ingredient in marijuana, and can vary based on the wide genetic diversity of marijuana.
  • When marijuana is consumed as a joint, less than half of the THC is inhaled and absorbed by the lungs (the rest is burned up by the smoke).
  • THC enters the bloodstream and begins to reach the brain within seconds.
  • Ingesting marijuana orally (e.g. eating marijuana brownies) is less efficient, with smaller fraction entering the user’s bloodstream.
  • Marijuana can be detected in a user’s system well after the high, therefore complicating testing in determining usage.

Chapter 2: Who Uses Marijuana?

  • Globally, 125-200 million people use marijuana in the course of a year, or ~ 3-4% of the world’s population age 15-64, making cannabis by far the most widely used illicit substance.
  • The prevalence of marijuana use in the U.S. is about three times the global average.
  • In the U.S., 44% of 12th graders have tried the drug at least once, 6% are daily users.
  • Marijuana use is highest among 18-25 year olds, with first use around the same time of alcohol use, ~ age 16.
  • While marijuana did not achieve mass-market status in the U.S. until the mid-1960s, historically it is one of the oldest of the psychoactives
  • Hemp cord dates back 10,000 years and the first recorded use of medical was in China around 2700 BC.
  • By the late 19th Century, marijuana was a common ingredient in many medicines and was widely available, however not consumed as an intoxicant until the early 1900s.
  • By 1931, 29 states had criminalized marijuana (such movies as Reefer Madness propagated strong anti-marijuana government propaganda).
  • Usage did not pick up until the 1960s. A 1967 Gallop poll of college students reported a 5% lifetime prevalence of use. In 1969 the same poll totaled 22%, and by 1971 51%.
  • President Nixon signed the Comprehensive Drug Abuse Prevention and Control Act of 1970, which along with the Controlled Substances Act (CSA), created a scheduling system that place psychoactive substance such as heroin, LSD, and marijuana as Schedule I drugs.
  • The Reagan administration in the 1980s increased anti-marijuana rhetoric with the “Just Say No” campaign and marijuana use dropped.
  • However in the 1990s usage bounced back, yet below the levels reached in 1979-80.
  • 40-50% of the people who have ever tried marijuana report a lifetime total of fewer than 12 day of use.
  • Regular users are in the minority, but they dominate market demand. 6 million Americans aged 12 and over use marijuana on a daily basis, according to National Survey on Drug Use and Health, in 2009.
  • There’s a clear trend since the 1960s of more potent marijuana offerings, and while marijuana use tended to be “upscale” demographically in the 1960s, the bulk of marijuana consumed today is smoked by people both poorer and less educated.
  • Estimates suggest the total market value of marijuana (medical and illicit) at $15 to $30 billion annually (versus estimates of $23 billion for corn and $17 billion for soybeans)

Chapter 3: How is Marijuana Produced and Distributed Today?

  • Today in the U.S. marijuana is mostly grown on a small scale, and can be grown outdoors or indoors, with or without soil; the cannabis plant is hardy.
  • Unlike cocaine and heroin, marijuana need not be extracted or refined; the dried plant material is the drug.
  • With reasonable confidence it is estimated that the majority of marijuana consumed in the U.S. is imported from Mexico (1/2 to 2/3rds); domestic production is the next largest source (1/5th to 2/5th), with smaller amounts imported from Canada, Jamaica, and a few other countries.
  • California dominates for outdoor plants (74% of the 9.8 million plants in 2009) and to a lesser extend indoor plants (41% of the 300,000 plants), followed by Washington (indoor and outdoor), Tennessee (outdoor), and Florida (indoor).[Note: we’d suspect that Colorado (indoor) growth may be entering this list if more current data was available].
  • Most marijuana entering the U.S. from Mexico is smuggled in by violent drug trafficking organizations.
  • The price of marijuana goes up markedly as it moves down the distribution chain from grower to user.
  • Commercial-grade marijuana produced in bulk in Mexico (4-6% THC) sells for about $35-$50/pound in Mexico and $200-500/pound just inside the U.S. border, increasing at a wholesale price of ~ $400/pound for every thousand miles away from the Mexican border, reaching $1,000 - $1,400/pound in the East and Northeast.
  • Marijuana is so expense primarily because production and distribution are illegal.

Chapter 4: How Stringent Is Marijuana Enforcement in the U.S.?

  • In 2010 there were more that 1.6MM state and local arrests for drug violations
  • > half of arrests were for marijuana offenses; 46% for possession and 6% for sale/manufacturing.
  • With an estimated 30MM Americans users of marijuana per year, only 2.5% of users got arrested.
  • Not all marijuana arrests lead to prosecution. Even if convicted, what happens depends on age, number of prior arrests, amount of marijuana possession, and the jurisdiction.
  • Alaska has the most lenient statutory sanctions for possession of small quantities: Possession of 1 ounce in private residence is not considered a criminal act and carries no penalty.
  • In California, Maine, Massachusetts, and Nebraska possession of up to one ounce is consider a civil infraction, or petty act, with no jail time, but fines may range from $100 to $600.
  • Reasonable estimates put total incarceration costs at $1.2B (about 40,000 inmates at $30k per year).
  • Seven states, referred to as the M7, account for about 90% of marijuana cultivated: California, Hawaii, Kentucky, Oregon, Tennessee, Washington, and West Virginia.

Chapter 5: What Are The Risks Of Using Marijuana?

  • There is no clear evidence on what type of person is the most typical user.
  • Epidemiological study by James Anthony and colleagues found that 9% of those that had used marijuana wound up being clinically dependent on marijuana at some point in their lives, males are at a much greater risk than females. Comparable rate for alcohol = 15%; cocaine = 16%.
  • Heavy marijuana users can experience withdrawals, but physical discomfort generally pales in comparison to that experience by those with serious addictions to alcohol or heroin.
  • Robin Room and colleagues found that marijuana posed less addictive risk than tobacco, alcohol, cocaine, stimulants, or heroin.
  • In 2009 marijuana accounted for more than 350,000 drug treatment admissions in the U.S.
  • The Center for Disease Control’s WONDER database reports only 26 deaths between 1997 and 2007 due to the use of cannabinoids.
  • Marijuana smoke contains carcinogens.  What is not clear is whether exposure is great enough to cause cancer.
  • Marijuana users generally inhale more deeply than cigarette smokers, but consumer far less marijuana than regular cigarette smokers consume tobacco.
  • Kids who use marijuana, particularly those who start marijuana use at a young age, are statistically more likely to go on to use other drugs than their peers who do not use marijuana.
  • Being stoned impairs driving performance, but driving stoned isn’t as dangerous as driving drunk, however determining toxicity is a challenged because marijuana can stay in the system for a number of days.
  • The two major research projects that follow expectant mothers and their children after birth both found an association between prenatal marijuana exposure and poorer cognitive development, attention and executive functioning.

Chapter 6: What Is Known About The Nonmedical Benefits Of Using Marijuana?

  • Astoundingly little, claim the authors.
  • Serious scholarship in the U.S. is hamstrung by administrative rules. Only one facility is allowed to grow cannabis for use in research, and that supplier is only allowed to provide it to the government.
  • Scientists can’t get legal supplies of research material without applying for a grant from the National Institute on Drug Abuse; that agency has not proven especially responsive to requests from researchers interested in studying either the benefits or harms of marijuana.
  • So while heroin, cocaine, methamphetamine, or LSD are available to researchers, marijuana remains an exception.

Chapter 7: What Are The Medicinal Benefits Of Using Marijuana?

  • It depends on who you ask.
  • U.S. Federal government unwaveringly argues that marijuana has no medicinal value, the states’ positions are mixed.
  • Polls conduction In 2010 by ABC News/Washington Post and Pew showed that 8 in 10 respondents supported medicinal marijuana.
  • Proponents point to marijuana as having therapeutic value in treating a range of symptoms; among the most common are appetite loss, nausea, chronic pain, anxiety, sleeping disorders, muscle spasms, and intraocular pressure.
  • The Federal government has placed marijuana in Schedule I, the category of substances with no accepted medicinal use.

We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis.  We hope you can join us for future calls.

 

Matt Hedrick

Associate


NCLH 1Q 2014 - EARNINGS PREP

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

 

 

1Q14 GUIDANCE/CONSENSUS

 

NCLH 1Q 2014 - EARNINGS PREP - n

 

QUESTIONS FOR MANAGEMENT

  • What was the decision making behind sailing Eastern Caribbean year round for Escape?
  • Will cost cutting be the driver to meeting guidance this year?
  • How should we think about the Caribbean pricing pressure?  Is it mainly an aggressive promotional environment from MSC and Carnival or is demand faltering?
  • Is NCLH responding to the fierce marketing tactics by Carnival i.e. will marketing expenses go higher this year?
  • Getaway/Breakaway premiums have remained relatively steady.  But is that due to plummeting prices from its peers in their respective markets?
  • Is Europe strong overall or are some stronger regions offsetting others?
  • How do you feel about the Quantum competition in Q4?

 

RECENT MANAGEMENT COMMENTARY

 

1Q:  

  • Solid quarter.  Will be more on the ticket side in terms of improvement as opposed to load

Bookings outlook:

  • Thinks they lost a little bit of ground but not anything to be concerned.  Is comfortable with each of the quarters.

Breakaway:

  • Breakaway is going to have another very good year, and the pricing is in the zone of where it was last year

Getaway:

  • We've been having a consistent performance in the Miami market

Promotional:

  • Environment has remained in a promotional state

Alaska: 

  • Some softness in Alaska where the introduction of a third ship for the first time since 2009 was coupled with a unique itinerary
  • Feel pretty good about Alaska

Caribbean/Bermuda:

  • There's a lot of capacity in Miami, but it's no different than anything else
  • More focused today on Bermuda and optimizing that opportunity in that premium itinerary.

Europe:

  • Feel pretty good about Europe

Fuel efficiency: 

  • Expect consumption savings to increase as further energy saving initiatives are implemented and NCLH take delivery of newer more fuel-efficient ships.
  • Have received exemptions from the appropriate regulatory agencies to burn high-filter bunker fuel until installed. These scrubbers carry a very attractive return on investment and reduce our sulfur emissions to comply with the upcoming eco fuel Standards.

2Q NCC:

  • Expect adjusted net cruise cost, excluding fuel per capacity day, to decrease around 3% in 2Q

Cost cuts:

  • Leveraging SG&A, with bringing on these additional ships and their being roughly double the size of NCLH's existing fleet.

Organic pricing/ comp fleet:

  • Very positive

Capital allocation:

  • Shorter-term solution or answer would be to do some stock acquisition.  If the selling shareholders are still in the puzzle,could marry with that at the appropriate discounts or whatever. And then, at some point, start a dividend (probably would be at least a year later than the first step with the share repurchase).

Onboard:

  • Haven't changed pricing



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European Banking Monitor: Greek CDS Continues Tightening

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - It was a mixed bag for European swaps this past week. 25 swaps widened and 13 swaps tightened. The Greek banks continue to tighten notably, dropping an average of 33 bps in the past week and 185 bps in the past month. Belgian banks also tightened considerably, dropping an average of 9 bps w/w. Russia’s Sberbank, Germany's IKB, and France's Societe Generale all widened w/w, by 25, 15, and 11 bps, respectively. 

 

European Banking Monitor: Greek CDS Continues Tightening - chart 1 euro financial cds

 

Sovereign CDS – European Sovereign Swaps mostly tightened over last week. French sovereign swaps tightened by -3.9% (-2 bps to 46 ) and Portuguese sovereign swaps widened by 1.8% (3 bps to 173).

 

European Banking Monitor: Greek CDS Continues Tightening - chart 2 sovereign cds

 

European Banking Monitor: Greek CDS Continues Tightening - chart 3 sovereign cds

 

European Banking Monitor: Greek CDS Continues Tightening - chart 4 sovereign cds

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread did not change from the previous week, remaining at 15 bps.

 

European Banking Monitor: Greek CDS Continues Tightening - chart 5 euribor ois spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 



Shorting Bill Gross

Client Talking Points

CHINA

The Shanghai Comp is down for the fourth consecutive day (-1.6% to -5.3% year-to-date) as mostly every Asian stock market closed down overnight. Indonesia led the losers down -1.4% and Japan was down another -1% to -11.7% Nikkei YTD.

OIL

WTI crude – starting the week off well – bid up +0.9% to $101.46 and has no immediate-term resistance in our risk range model to $105-106. I’m staying with the long inflation trade via commodities (Food, Oil, Gold, etc.) and TIPs.

US #ConsumerSlowing

We’ll get US GDP slowing (Q1 to be reported with a 1% handle on Wednesday), but no worries, that was just weather, right? Consensus certainly hopes so. This PIMCO call is the consensus call for high 2%, low 3% into the toughest GDP comps of the year (Q3) as inflation heads higher and classic slowing indicators like US Dollar and rates head lower.

Asset Allocation

CASH 32% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 18%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

DRI

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

TWEET OF THE DAY

CRB Food Index corrected a whopping -0.2% last wk (still inflated by +21.5% YTD) #InflationAccelerating @KeithMcCullough

QUOTE OF THE DAY

"The quality, not the longevity, of one's life is what is important." - Martin Luther King

STAT OF THE DAY

Several current and former cheerleaders are suing their NFL employers over pay. One former cheerleader for the Cincinnati Bengals said she was paid no more than $90 for each game and worked 10 games. Including $75 for a public appearance, she said she was paid $855 for the 2013 season and worked "well over 300 hours a year." Including the games, practices and other events, she calculated her hourly wage at $2.85. (CNN)


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