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LEISURE LETTER (05/08/2014)

Tickers: CZR, H, MHGC, WYN, RCL, MTN


Thursday, May 8

• MPEL Q1 – 830am , Passcode: MPEL

• CAR Q1 – 830am , Passcode Avis Budget

• BEE Q1 – 10am , Passcode: 10895989

• HOT – 1010am presenting at Baird's 2014 Growth Stock Conference

• SGMS Q1 – 430pm , Password: SGMS

• STN Q1 –


Friday, May 9

• HLT Q1 earnings – 10am , Passcode: 25981567

• AHT Q1 earnings – 11am


Monday, May 12

• DRH Q1 earnings – 10am , Passcode: 66393516

• HMIN Q1 earnings – 9pm

• SJM Holdings Q1 earnings 


Tuesday, May 13

• WYN - 8 am presenting at Normua Global Gaming/Lodging Conf.

• HTHT Q1 earnings – 9pm , Passcode 28722442


Wells Fargo Gaming Conference in Las Vegas (all times EDT)

• 1140 am PNK

• 1220 pm IGT

• 1220 pm CHDN

• 1pm BYD

• 1pm MGAM

• 140 pm PENN

• 225 pm BYI

• 505 pm SGMS

• 505 pm Seminole Gaming

• 550 pm GLPI

• 550 pm Golden Nugget

1:1 meetings only – MPEL, Station Casino, Motor City Casino & Hotel, and Jacob’s Entertainment.


Wednesday, May 14:

• Atlantic City April Revenues

• Japan Gaming Conference thru Friday, May 16



CZR – weighs closing one or more of its four casinos in Atlantic City due to oversupply. 

Takeaway:  Right sizing supply for dwindling demand.


RWLV – The Nevada Gaming Control Board on Wednesday recommended Genting be given a preliminary finding of suitability to hold a state gaming license. Malaysia-based Genting Berhad will finish developing the former 87-acre Echelon site for Resorts World Las Vegas. The initial phase will cost $4 billion and will include 3,000 hotel rooms, a casino with a combined 3,500 slot machines and table games, 30 food and beverage outlets, a 4,000-seat theater and an elaborate garden attraction that will serve as the property’s front door to the Strip. Genting will also build a rooftop sky park and observation deck atop the 674-foot-tall tower, whose height has already been approved by the Federal Aviation Administration

Takeaway: This is the formal step in the approval process.  During our recent visit to Las Vegas, we already observed construction activity - thus, the hearing was a formality in our opinion. 


H – announced the sale of Hyatt Residential Group for approximately $190 million to Interval Leisure Group.  Additionally, Hyatt will sell to Interval Leisure its interest in a JV that owns and is developing a 131 unit vacation ownership property in Maui and Hyatt will be reimbursed an additional $35 million for this operation. Finally, Hyatt selected Internal as Hyatt's exclusive licensee in vacation ownership. Transaction closing is expected in Q4 of 2014.

Takeaway: Hyatt remains an active recycling capital out of non-core assets and preferred equity interests into more Hyatt branded assets in gateway cities with an upper-upscale and luxury focus - a long-term strategy we applaud.  


MHGC – Yucaipa Companies, led by Ron Burkle, sent a letter to interim CEO Jason Kalisman regarding Morgan's Board of Directors subverting "Yucaipa's board observations rights."

Takeaway: We expect this discussion will take media center stage at Morgan's 2014 Annual Meeting of Stockholders is scheduled for May 14, 2014.


WYN – Scott McLester, EVP & General Counsel, sold 15,000 share at an average price of $72.0012 on May 5.  Mr. McLester owns additional 14,509 shares as well as 56,004 restricted stock units granted under the 2006 Equity Incentive Plan.


RCL Royal Caribbean faces claims of 'stealth cuts'  TTG Digital
Travel agents have accused Royal Caribbean International and Celebrity Cruises of introducing commission cuts “by stealth”, by increasing the proportion of the booking that is non-commissionable since last year.  A Royal Caribbean spokeswoman denied there had been any changes to commission policy.  

Takeaway: It's no surprise that agent commissions are being cut in a highly promotional environment.  Princess and other brands are doing it too except maybe in a more open manner.

MTN – Beaver Creek residents voted to take on $5 million in debt to buy an easement, which they say will force Vail Resorts to move its proposed alpine slide up the mountain toward Spruce Saddle, and away from them. That, they say, will help preserve their property values.

Takeaway: Just when investors thought the execution of the Epic Discovery was about to roll-out at the Vail/Beaver Creek resort, a slight adjustment to the plan. 


Union Pay – This morning the Macau Police confirmed crackdowns on UnionPay and noted the agency made 3 separate arrests in February and March of this year.  China's state-backed bank payment card UnionPay announced sweeping measures in Central Government led effort to combat overseas money laundering, capital flight and other illegal bank card use in the former Portuguese colony and gaming mecca, Macau. 

Takeaway: Thus far it appears the crackdown is focused on illegal hand held processing devices rather than legitimate point of sale devices in retail establishments.  Current policy does not allow Union Pay terminals on casino gaming floors.  We've seen these concerns surface in the past and we wrote about in our Leisure Letters dated 3/13/14 and 3/18/14.


Avian Flu H5N6 – A 49-year-old man, from Nanchong in the southwestern province of Sichuan died from the H5N6 strain of bird flu, in what is believed to be the world's first case of human infection from the virus subtype. According to Taiwan's Centers for Disease Control, H5N6 has previously been detected in the environment in Germany, Sweden and the US.  Bird flu has been more virulent in China with a total of 250 cases and 96 deaths from the H7N9 strain in the January to March 2014 timeframe, according to the National Health and Family Planning Commission. Last year China recorded 46 deaths and 144 cases from the H7N9 outbreak, which started early in 2013 and returned in the autumn.

Takeaway:  More and more new strains popping up.


Massachusetts Gaming – the Commission is scheduled to vote today on Boston Mayor Walsh's demands for Boston to be recognized as a host community to the proposed casinos in Revere and Everett. 

Takeaway: Wynn remains opposed to host community status for Boston while Mohegan Sun is attempting to complete an agreement with Boston city officials.


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.


Yellen’s Fictional Depiction of Inflation

Client Talking Points


#StrongCurrency setup developing here – and, similar to the UK’s #StrongPound setup. I like it. Aussie Equities led gainers in the East overnight (up +0.8% to +4.2% year-to-date) after another solid 5.8% unemployment rate repeat for April.


Three-day mean reversion bounce to sell into in Russian Equities – best way to do that is through the RSX, unless you want to fade Putin locally (still one of the nastiest Equity markets on my risk management screen). Good hedge against long Oil. 


The yield bounces 3 beeps this time #hooray. There’s a series of lower-highs developing as Yellen preps the runway for oncoming dovish commentary at the June meeting. That’s Dollar bearish and bullish for all your inflation and/or slow-growth-yield-chasing longs (Utilities XLU up another +1.7% yesterday to +14.2% YTD!). Likewise, Yellen’s fictional depiction of inflation is entertaining – at least she’s on the #HousingSlowdown call now.

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


TURKEY: up another +1.2% to +13.5% YTD as some EM's love the smell of USA's Burning Buck @KeithMcCullough


"When you come to a fork in the road, take it." - Yogi Berra


Barclays has announced it will cut 19,000 jobs by 2016, with about half to go in the UK. Barclays' investment bank has been hit by a slowdown in the demand for government and company debt. (BBC)

RL - 3 Key Questions for Ralph

Takeaway: Here are three key questions for Ralph Lauren (the man, not the company) that we think are central to the debate on RL right now.

Here’s the Three Key strategic Questions we’d ask Ralph Lauren in conjunction with its 4Q14 print on Friday morning.  Note that we have been addressing these ‘Three Key Questions’ as if we had 5 minutes with the CEO to address only 3 issues that are central to the debate.  But the reality is that the chance of anyone getting access to Ralph Lauren himself after the call is just about zero. But let’s keep it real and address these to the CEO. As long as he has the title, he deserves the questions.  Here goes…


  1. Lower-Return Mega-Cycle?
    The Context. This question revolves around one major theme. This is a company that has successfully navigated through decade-long mega-cycles over the past 40 years, and it’s starting a new one right now. Some cycles have been choppy, some were perfectly executed. But all had to do with changing control over content – either from a channel, geographic, or category perspective (or all at once, like we saw in the latest cycle). The strongest cycles were when RL was taking back control of its content (as opposed to licensing it out). For example, taking back a handbag license when the licensee only generated $100mm in sales on what should have been a billion dollar business. Or taking back a $400mm label like Lauren from Jones Apparel Group when JNY was generating a 28% margin and only paying RL 7%. There are over a dozen examples. But with RL taking back the Chaps label from PVH/Warnaco, there are officially no more meaningful licenses RL can pull back in house.  This matters because these license acquisitions are some of the most accretive deals we’ve ever seen in retail – and that’s not just because the acquisition costs for RL have usually been zero.  While RL re-took control of its content, we saw RNOA go from 13% to 26% -- making RL one of the highest return retailers in its segment of retail. 

    The Question: So the question here is this…RL is starting off a new cycle where it has to invest significant capital to grow. The opportunities are there, we think. But there’s a real capital cost that needs to be put against these ideas. Is it mathematically possible for these new initiatives to be higher return than the slam-dunk growth opportunities that RL has had over the past 10-years? If not, how should we think about the trajectory of financial returns? If returns go down, the multiple probably is not going up.
  2. Succession Planning.
    The Context: There are only seven CEOs in the S&P who are 74 or older. Ralph Lauren is one of them. Interestingly enough, this year with the pseudo retirement of Roger Farrah (who has been critical to RL’s growth trajectory), Mr. Lauren is taking a greater role in the organization as opposed to the diminishing role one might expect from a 74-year old CEO.  We’re ok with that for one reason --  and that’s the enhanced responsibilities given to Chris Peterson, who added CAO to his CFO role this year. We think that Peterson is every bit the rock star that Farrah was. But what we don’t know is what the company will look like in a Ralph-less state. We understand why the company is unlikely to openly discuss succession. Few companies do. But we don’t necessarily need to know its plan – we just need to know that it has one. That’s where we’re unsure about RL. We can’t imagine that Mr. Lauren starts off every Board meeting saying “let’s talk about who’s going to take my job.” Also, unlike other iconic majority holders in a dual-class structure company – like Phil Knight at NKE (who exited gradually and gracefully) – Ralph remains critical to product design and the strategic direction of the Brand. So on one hand, we absolutely want him to remain in his current role. But on the other, we need to gain some confidence that the company will not miss a beat in the event that we wake up one day and Ralph Lauren is no longer a part of the company he built.

    The Question: So the question for Ralph is whether he has given the Board a mandate to go external for the next CEO, or if it will come from within? If the latter, will Ralph hand the keys over to David Lauren (EVP Marketing) as his legacy? The question for Peterson, Nemerov, Farrah and the rest of the ‘Office of the Chairman’ is whether or not they have confidence that a succession plan actually exists? This seems like a bogus question, but it’s one we need to be crystal clear on for a company with $13bn in equity value and has one holder who accounts for over 60% of the voting power.
  3. Ton-o-Cash.
    The Context: You’ve never had this much cash before, which happens to come at a time when there are fewer acquisition opportunities than at any time in the past 20 years. Specifically, over the next 5-years, you should generate nearly $7bn in cash from operations, and maintenance capex of maybe $1.75 billion. Tack on another $850mm in dividends, another $1bn in stock repurchases to offset the dilutive impact of options. That’s about $3.6bn, and leaves an extra $3.4bn in cash – on top of the $500mm in net cash you already have.

    The Question: The simple question is whether or not you will push for the Board (i.e. Ralph) to meaningfully step up stock repo activity. You’ll get paid more for that than for building a war chest of cash. But the real question is how many high-return capital projects can you invest in to deploy that capital in a way that will accelerate top line growth and/or margin improvement.



Bonus Question (knowing full well that we're already well over our theoretical 5-minute time limit.)

Cyclical Margin Risk

The Context: About 40% of your cash flow comes from US department stores. While that is down materially from when Retail and Int’l were both in their infancy, it’s still a big pill to swallow. Your real estate and positioning within department stores is probably the most defendable of any major brand. But one fact remains – the department store group as a whole just completed year 5 of a margin expansion cycle and is now sitting at peak margins. There has never been a margin expansion cycle that’s lasted longer than…you guessed it…5-years.  

The Question: If we see margins correct in your US wholesale channel, do you think that the macro factors causing the decline would also hit your retail business? Do you think you can sustain margin even in the event of a broader industry margin correction? What levers do you have to pull to help you deliver?

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Chart of the Day: Housing Isn't Working (How Will Yellen Respond?)

Chart of the Day: Housing Isn't Working (How Will Yellen Respond?) - Chart of the Day




So, Challenge Their God

“It was fortunate that the Commodore was not educated; for had he been, he would have been a god.”

-New York Sun, April, 1878


You know I love 19th century American Capitalist history. You know I love the epic story of Cornelius Vanderbilt too. The aforementioned quote comes from Part Three of The First Tycoon (pg 333). We should all thank our respective gods that Vanderbilt wasn’t an Ivy League economist.


Counter to popular Marxist beliefs in this country, the capitalists built the steamships and rails. They blew themselves up trying to make money plenty of other ways too – and they liked it. That’s the only way to learn and evolve – having a very real chance that you can fail.


Yesterday, Janet Yellen failed to convince me that she isn’t the ideologue that her partner in pulverizing America’s poor was. I don’t think she’s going to persuade anyone who doesn’t get paid by QE either. That’s at least 80% of the country, fyi.


Back to the Global Macro Grind

So, Challenge Their God - Titanic 03.31.2014 

No worries about the long-term in this country. When I am long dead, maybe my son, daughters, or theirs will have an opportunity to live an American life that doesn’t included an un-elected academic droning on like Charlie Brown’s teacher about how the Fed hasn’t perpetuated all-time highs in asset price inflation.


Cost of living in this country is bubbling up to all-time highs. And instead of talking about that yesterday, Yellen was more concerned about what we have been signaling now for months – a redo of a US #HousingSlowdown.


“So” (in classic groupthink lingo, she prefaced every Keynesian comment she made yesterday with that), instead of following the money, follow how her Policy To Inflate Housing Prices plays out from here:

  1. She starts to talk down Housing’s recovery and, in doing so, rhetorically un-tapers…
  2. As she un-tapers the hybrid tightening (tapering), the currency and bond markets look more and more right…
  3. US Dollar Down, Rates Down = Moar Commodity #InflationAcceleraring, and Moar Real #ConsumerSlowing

That’s right. As the cost of living ramps, 80-90% of this country has less dollars to spend. Inflation is real-time, whereas your wages (if you are lucky) adjust on a 1yr lag… and things like rent inflate on a 12-18 month lag to home price appreciation (US Home Prices were +12-13% nationally last year).


“So”, if you are in the 30% (and climbing) of Americans who rent (that’s 1/3 of the cost of living for the median US Consumer – see our Q2 Macro Themes slide deck on the math), Yellen’s narrative on how 0% “is good for housing” is really good for you, right? Yeah, a really good kick in the teeth.


David Einhorn challenged Yellen’s god (Bernanke) on this at a dinner recently (see yesterday’s Bloomberg story: “Einhorn Finds Dinner Chat With Bernanke Frightening”), “so”, take his word for it if you can’t take mine.


Einhorn is obviously a lot smarter than I, but he and the Thunder Bay Bear have a few things in common:

  1. We were raised in the 1970s (Nixon/Carter bipartisan support to Burn The Buck – i.e. The Policy To Inflate)
  2. We both learned linear Keynesian economics at Ivy League schools (Cornell and Yale)
  3. We both learned, as young hedge fund managers in 2000-2001, what Fed bubbles that pop look like when they are popping

“So”, call our paths experience… or something like that. But don’t call us the guys who were buying-the-damn-bubble-stocks on January 1st, 2014. By the way, Twitter (TWTR) is up +3% this morning. “So”, if you bought it JAN 1, you’re down 50%, and only need to be up another +98% from here to breakeven.


In hedgie land (the difference between a hedgie like Einhorn and a Hedgeye is that he runs money and I run my mouth), we call blowing up in names like Zooolilly (ZU) or Fireye (FEYE) or YELP! “drawdown risk.” For the high-multiple momentum bulls, that risk is #on.


“So”, the real reason why Yellen wouldn’t call anything a bubble yesterday – or why Bernanke didn’t call the all-time highs in Housing (2006-2007), Oil (2008), Gold (2011), Food (2012), Bonds (2012), or Junk (2014 – I think Janet called that “high yield”) bubbles, is that they are bubbles.


So, Challenge Their God - Chart of the Day


The only way to prevent a bubble from popping is to: A) not call it one and B) rhetorically signal why you should buy moarrr of it. Or so the Fed thinks. “So”, I think you should take your time observing this gong show and challenge The Fed’s ideological god by shorting the bubbles that start to pop, with impunity.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%


RUT 1101-1121

VIX 12.83-14.52

USD 79.01-79.59

EUR/USD 1.38-1.39

Pound 1.68-1.70


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Seeking Revenge

This note was originally published at 8am on April 24, 2014 for Hedgeye subscribers.

“If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us shall we not revenge?”

-William Shakespeare


For those who called it a bubble, the tech sector is seeking its revenge this morning.   Two of the mighty horsemen of technology, namely Facebook and Apple, exceeded expectations and as a result the Nasdaq is trading 1.5% higher this morning according to the futures market.


Seeking Revenge - fba


One of our top contrarian sources, The Street (known as the street.com in the last tech bubble) actually predicted this rally.  Specifically, two days ago the headline on The Street was, “What Will Cause Tech Stocks to Plunge?”   Funnily enough,  Jim Cramer from The Street (retire already Jimbo!) actually critiqued one of the world’s top hedge funders yesterday for not making enough money on the social media swoon in March. 


But, enough talk of side shows and carnival barkers, we actually had some legitimate questions on yesterday’s Early Look on this idea of bubbles and an insightful subscriber from London emailed us back with the following question:


“I’m also not sure why you’re so convinced that we’re in a Social Media bubble. Some Internet stocks are highly valued sure but for the likes of FB and LNKD these are real businesses with major competitive advantages, why are you so bearish on these too?”


Our Internet Analyst Hesham Shaaban had a thoughtful response, which included the following:


“The reason why valuations are so high is because of elevated growth expectations, which you can see in the table below.  The market sees Social Media as one collective industry, assuming the rising tide will carry all ships, and historical growth is a sign of things to come. 


Social Media is not one industry.  These players have varying business models, revenue sources, and growth prospects.  We see at least 2 big losers in the group (TWTR and YELP), and once growth expectations come in, their multiples will collapse with it.”


In the table directly below, we’ve included a summary of the growth expectations and valuations of $FB, $LNKD, $TWTR, and $YELP.  Certainly if there is a bubble, it is not that all of these companies have broken business models (though we believe some do), but rather, as Shakespeare also said, that expectations are the root of all heartache.  (Email us at sales@hedgeye.com if you’d like to be added to an institutional trial of our internet research.)


Seeking Revenge - chart of day


Back to the Global Macro Grind...


One of our other favorite contrarian sources, Peter Tchir from TF Markets, actually made a great contrarian statement on Twitter the other day (you can follow him @tfmkts if you’d like access to the contrarian signal) when he tweeted that he wasn’t a bear on housing. 


Ironically, in many ways, the housing market and the principal supply-demand-price dynamics underneath it are rather straightforward.  Admittedly, in other, sometimes very mechanical ways, understanding the prevailing trends in the housing market can be challenging for the uninitiated or marginally interested.


So, what’s the current state of housing?


Across the 22 primary metrics we track as part of our housing compendium monitor, 15 have worsened sequentially and 18 have worsened from a trend perspective. 


Indeed, the housing data released over the last few days offered further support to our expectation for an intermediate term #HousingSlowdown as current demand metrics (Existing & New Home Sales) continued to wane, while mortgage application data is signaling a further deceleration in forward transaction activity.   


That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable.  


To quickly review this week’s data:

  • Mortgage Applications:  The composite MBA mortgage application index declined -3.3% WoW as the Purchase Applications and Refinance sub-indices hit new lows in YoY growth.  As it stands, Purchase Applications are down -19.3% off the May 2013 peak and -18.5% YoY while refinance activity is down -71% YoY!
  • Existing Home Sales:  Existing Home Sales declined -0.2% MoM and -8% YoY.  The March decline marks the 3rd month of  negative year-over-year growth and a third straight month of accelerating decline.  Sales were down across  all geographies with the West region again leading the declines
  • New Home Sales:  New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011.   The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.

So, the demand deceleration has been both significant, geographically pervasive and has extended through March / April – all of which confute the "it’s the weather" in isolation thesis.  


While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term.  


Home price growth, which follows the slope of demand on ~18mo lag, will follow the demand deceleration.   Given that home prices have a very high correlation to discretionary spending and the U.S. economic output is 70% driven by the consumer, we see the slowdown in housing as a looming headwind for economic growth domestically.  Aye, there’s the rub!


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


UST 10yr Yield 2.59-2.73%

SPX 1836-1890

VIX 13.02-14.72

NatGas 4.63-4.80

Gold 1271-1309 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research

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