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Here we go again...



Notwithstanding the “catch a falling knife” risk, some of these Macau stocks may look like screaming buys, potentially after today’s blood bath.  The uncertain China Macro environment has created the backdrop for fear escalation.  Whether it’s the Union Pay issue rearing its ugly head again or the alleged theft and disappearance of an individual associated with a junket, when it rains it pours.  Historically, heightened fears have created huge buying opportunities.



  • Our biggest near-term fear has always been a junket crackdown by Chinese authorities.  The impact on GGR would be meaningful but likely short-lived.  The Chinese government needs to show its constituents that it is against corruption but it also doesn’t want to permanently maim Macau.  Remember that China needs Macau and Hong Kong to succeed to ultimately convince Taiwan to join the SAR structure.  Any crackdown would pressure the stocks but also provide a buying opportunity. 

The latest news (first reported in April) is that a shareholder of the Jin Jin junket may have stolen over $1bn in investor funds and disappeared. While the junket was a player at MGM Macau, Altira (MPEL), and Starworld (Galaxy) the theft itself didn’t appear to directly impact those properties.  However, going forward Jin Jin may not have the liquidity to drive volumes.  More importantly for the market, to the extent that the government decides it needs to keep up the appearance of anti-corruption, any punitive measures could keep some VIP players and junkets out of Macau until the dust settles.


  • The Union Pay Issue – we wrote about this issue in our "Leisure Letter" on March 13, 2014 and March 18, 2014.  The issue seems to always surface when other fears gain momentum and investor sentiment wanes.  Mass players use Union Pay cards to retrieve cash in Macau to gamble and pull money out of China.  We believe Union Pay is a major contributor to the Mass business in Macau and any crackdown on its use would be detrimental to gaming revenues.  However, we’ve heard this story before and we have trouble believing China would slay the golden goose of Mass business in Macau.  If a crackdown is in the works, we haven’t seen the impact as Mass performed very well in April and anecdotal evidence supports a health start to May.  

While we have not seen a copy of the e-mailed statement made by the Macau Police regarding the arrests in February and March of this year related to Union Pay, we believe these arrests are related to the recent reports of individuals who were caught with five illegal Union Pay point of sale processing terminals, over 300 bank cards, 580 point of sale invoices and over HKD3.4 m million in a Macau hotel room.  Finally, we note, there has been NO discussion regarding shutting down the use of Union Pay cards nor the Union Pay processing network. 


  • Credit/Liquidity in China – this is a real concern although we’ve seen fairly healthy volumes as recently as last week.  The VIP business in China was flat in April, slightly below our expectations, and the first week of May showed GGR up 12% over last year and up 38% over the same week of 2012.  With this kind YoY growth and VIP must be doing reasonably well considering it comprises 60-65% of the gaming revenues.


  • Continued reports of very busy Mass floors
  • To offset any potential VIP slowdown, more “side betting” volume could be pushed through the casino.  This is the VIP cushion we’ve spoken about over the past 2 years.  With casinos providing more liquidity than ever before - and even more if Wynn gets more aggressive – the pressure is on the junkets to maintain volumes.  And we all know there is a lot of side betting volume out there.
  • May GGR surprise on the upside – our model has consistently projected 20% GGR growth for May which would be a positive and potentially a big one considering that expectations have been ratcheted down with the recent news.
  • Japan Gaming Congress next week – Japan looks like a huge potential market and LVS, WYNN, MGM, Genting Singapore, and MPEL all are potential players
  • G2E Asia the week after – investors will meet with managements that could assuage fears


  • Given last night’s dismal trading in the Hong Kong listed Macau gaming stocks last night, LVS, MGM, MPEL, and WYNN are all headed sharply lower this morning. 
  • We suspect the stocks will be buys sometime soon as the recent periods of fear have led to concentrated and compacted contractions in the stocks but little change in the intermediate and long term fundamentals. 
  • WYNN remains our favorite name as its Macau property has more levers to pull to bolster its VIP business.

ICI Fund Flow Survey - Domestic Equity Funds Plummet

Takeaway: Last week's data reveals significant deceleration in equity fund flows, capping off a week of less-than-stellar performance.

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 fell week-to-week, with domestic equity funds booking the biggest outflow all year. 


Total equity mutual fund flows had their biggest redemptions year-to-date with over $3.8 billion being yanked from stock funds with the leading culprit the U.S. domestic stock category. Of the $3.8 billion that flowed out of all equity mutual funds during the most recent 5 day period ending April 30th, $3.9 billion came out from domestic equity funds which was saved by a slight $104 million inflow from international stock funds. This outperformance from foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.5 billion per week thus far this year in addition to the $2.6 billion inflow averaged per week last year in 2013 versus domestic fund trends averaging an inflow of just $932 million 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 $3.5 billion, a slight improvement from the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flow also decelerated on a w/w basis, although managing to leg out a slight inflow for the week. For the five day period ending April 30th, $931 million flowed into all fixed income funds, as opposed to last week's much stronger $2.3 billion inflow. The deterioration of bond fund inflow this week was the result of only $602 million that flowed into taxable products and $329 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 12th consecutive week of positive flow and the inflow into municipal or tax-free products was the 16th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.8 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still 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 had a strong showing this week, with a notable weekly subscription for equity ETFs, which experienced an inflow of $4.0 billion. The previous week saw only $193 million inflow into stock ETFs. Bond ETFs fell slightly this week, still, the $818 million inflow was only slightly below the previous week's $1.2 billion inflow. The 2014 weekly averages are now a $920 million weekly inflow for equity ETFs and a $896 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 $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion 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 $7.8 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 - Domestic Equity Funds Plummet  - 1.3



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


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 2


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 3


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 4


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 5


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 6



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


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 7


ICI Fund Flow Survey - Domestic Equity Funds Plummet  - 8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $1.6 billion spread for the week ($148 million of total equity inflow versus the $1.7 billion 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 $7.8 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 - Domestic Equity Funds Plummet  - 9.2 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


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.


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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?

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




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