Takeaway: Global risk measures remain in check as Europe continues to progress.

Current Best Ideas:




Key Callouts:

There was a fair amount of movement in this week's Risk Monitor, especially in Europe where bank swaps tightened further, falling by an average of 8 bps w/w. 


*European Financial CDS  Almost all European swaps tightened last week. Most of the 31 swaps that tightened did so by a notable amount. On average, Belgian swaps tightened by 15 bps, German by 6 bps, Greek by 31 bps, Italian  by 7 bps, Portuguese by 11 bps, and Russian by 26. Only Hannover Rueckversicherung, National Bank of Greece, and DNB widened at all, and by only 1, 3, and 2 bps, respectively.  


*High Yield (YTM) Monitor – High Yield rates fell 4.9 bps last week, ending the week at 5.53% versus 5.58% the prior week.


*Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 17 bps. For reference, Euribor-OIS is now 4 bps wider m/m.


*2-10 Spread – Last week the 2-10 spread widened to 224 bps, 8 bps wider than a week ago.


*Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 27 basis points last week, ending the week at 2.23% versus last week’s print of 2.5%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged




1. U.S. Financial CDS   Swaps tightened for 14 out of 27 domestic financial institutions. The Global US banks saw little change, with only Morgan Stanley moving by more than one basis point, widening from 71 last week to 73 this week. The specialty finance companies we track were tighter on the week and on the month with the largest move coming from mortgage insurer MTG (-10 bps). The US insurers were little changed aside from GNW, where swaps widened out 7 bps over the week.


Tightened the most WoW: AXP, COF, MTG

Widened the most WoW: GNW, AIG, ACE

Tightened the most WoW: PRU, AGO, MTG

Widened the most/ tightened the least MoM: BAC, SLM, ALL




2. European Financial CDS  Almost all European bank swaps tightened last week. Most of the 31 swaps that tightened did so by a notable amount. On average, Belgian swaps tightened by 15 bps, German by 6 bps, Greek by 31 bps, Italian by 7 bps, Portuguese by 11 bps, and Russian by 26. Only Hannover Rueckversicherung, National Bank of Greece, and DNB widened, and by just 1, 3, and 2 bps, respectively.  




3. Asian Financial CDS – Last week Chinese banks tightened marginally, by an average of 1 bps. Most Japanese banks saw no change over the week, with only Mizuho widening by 3 bps. All Indian swaps widened, by an average of 3 bps w/w.  




4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.6% (-14 bps to 153 ) and US sovereign swaps tightened by -3.4% (1 bps to 17).








5. High Yield (YTM) Monitor – High Yield rates fell 4.9 bps last week, ending the week at 5.53% versus 5.58% the prior week.




6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1866.




7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 20.1 bps this week versus last week’s print of 20.49 bps.




8. CRB Commodity Price Index – The CRB index fell -1.6%, ending the week at 305 versus 310 the prior week. As compared with the prior month, commodity prices have decreased -1.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.




9. 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 widened by 1 bps to 17 bps.




10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 27 basis points last week, ending the week at 2.23% versus last week’s print of 2.5%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.




11. Chinese Steel – Steel prices in China fell 0.8% last week, or 27 yuan/ton, to 3310 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.




12. 2-10 Spread – Last week the 2-10 spread widened to 224 bps, 8 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.




13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 1.6% downside to TRADE support.




Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

LEISURE LETTER (05/12/2014)



Monday, May 12

• DRH Q1 earnings – 10am , Passcode: 66393516

• HMIN Q1 earnings – 9pm


Tuesday, May 13

• SNOW FQ3 earnings – 5pm

• HTHT Q1 earnings – 9pm , Passcode 28722442


Nomura Global Gaming & Lodging Conference in New York

• 8am WYN

• 3pm RHP

• 4:30pm HOT

According to Norumra's website, confirmed companies include: CCL, STAY, GLPI, HLT, HST, MAR, MGM, NCLH, PENN and  Industry Experts: Smith Travel Research, Inc. and International Casino Institute (Japan Gaming)


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

• 11:40am PNK

• 12:20pm IGT

• 12:20pm CHDN

• 1pm BYD

• 1pm MGAM

• 1:40pm PENN

• 2:25pm BYI

• 5:05pm SGMS

• 5:05pm Seminole Gaming

• 5:50pm GLPI

• 5:50pm Golden Nugget

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


Wednesday, May 14:

• Altantic City April Revenues

• Japan Gaming Conference thru Friday, May 16

Three senior and influential politicians including: Takeshi Iwaya, Chief Secretary of IR GIREN and Member, House of Representatives, Liberal Democratic Party; Koichi Hagiuda, Member, House of Representatives, Liberal Democratic Party; and, Sakihito Ozawa, Member, House of Representatives, Japan Restoration Party.


Thursday, May 15

• Japan Gaming Conference thru Friday, May 16


CZR – is rumored to have offered Britney Spears a two year contract extension for $12 million to continue her Las Vegas show until at least Christmas 2016,

Takeaway: The Emperor tries to lock down a high demand ticket as a means to drive casino floor traffic.


KNM – will unveil "Dungeons & Dragons" themed slot machines at this year's Southern Gaming Summit and National Indian Gaming Association Gaming Show on Tuesday May 6

Takeaway:  Konami had a good fiscal year 2014.  Let's see if the momentum can continue.

Hard Rock – Don Marrandino appears to be in discussions to join the Hard Rock Las Vegas in lead role responsible for booking music & comedy entertainment. Recent conversation have included reps from AEG.  Marrandino's most recent position in Las Vegas was for Harrah's Entertainment as President of Flamingo, Harrah's, Imperial Palace, Bill's Gamblin' Hall & Saloon and O'Shea's until August 2009 when he charged with heading up the company's Atlantic City hotels: Caesars Atlantic City, Bally's Atlantic City, Showboat Casino Hotel and Harrah's Resort Atlantic City.

Takeaway:  It is now looking like HardRock is putting the pieces in place to drive revenue growth in anticipation of a potential IPO 


PEB – appears to be buying the 331 room, Nines Hotel in Portland. The Nines hotel had been in financial straits this week until the Portland Development Commission decided to accept an $11.5 million buyout on $18.2 million in debt. The hotel's management company, Sage Hospitality indicated another publicly traded company was planning to take over the Nines, but would not disclose that company's identity. On May 7, a Pebblebrook Hotel Trust subsidiary filed an application to take over the liquor license of the hotel and its restaurants.  

Takeaway: Adding to its West Coast and Portland presence. Based on a quick internet scrape, we understand average daily room rates are $149 to $339 per night. We await the financial details of the acquisition.


HOT – Renowned Excelsior Hotel Gallia in Milan will join The Luxury Collection portfolio in Nov 2014.  It will mark The Luxury Collection's 7th hotel in Italy, as the brand remains on track to surpass 100 hotels globally in the next 5 years.  The hotel will offer 235 elegant guest rooms and suites, a signature restaurant and a roof-top bar with panoramic views of the city, an elegant lounge bar and cigar room, plus 1,000 square metres of wellness facilities including a spa, indoor swimming pool and fitness center. 

Takeaway:  Off balance sheet growth.


CCL – Costa Serena will sail year-round from Shanghai starting April 2015, making CCL the first global cruise company with four ships based in China.  This would increase CCL's capacity in China by 140% over a 2-yr period.  Costa Serena will join Costa Victoria, Costa Atlantica and the seasonal Sapphire Princess.  Princess Cruises brand will officially introduce Sapphire Princess to China on May 21.  The move will increase Costa's overall capacity in Asia by 74%.  CCL believes China could become the 2nd largest cruise market in the world by 2017. 

Takeaway:  CCL adding competition on the heels of RCL's recent Quantum announcement.  China is a big risk and opportunity for CCL/RCL.  The cruise companies haven’t gotten it right yet in China but they are slowly beginning to realize the importance of having Asian-centric ships to best cater to the Chinese consumer i.e. more gambling options, predominately Asian cuisine.  From an itinerary perspective, they need to focus on cruising around Chinese cities, not around their Asian neighbors as there is less interest. China may make waves in 2015 and will be a focal point.


NCLH – the cruise line is roiling relations with local vendors in the Bahamas.  NCL has apparently prohibited straw crafts from being brought back on its cruise ships in Nassau for the past several weeks. Local vendors are complaining that NCL cruise passengers are saying that anything they buy in the straw market will be confiscated by cruise ships guards when they return to the ship. Nassau-based Bahamian officials say the ban was connected to the infestation of the palm mite in the Caribbean. However, the Bahamas has no incidents of palm mite infestation according to the tourism officials. Furthermore, the officials also say the straw in the Bahamas is cured anyway.   The issue shows how dependent the Bahamas is on cruise ship tourists. NCL sails nearly 15,000 passengers to Nassau on a regular basis on five cruise ships - the Breakaway, Gem, Pearl, Sky, and Getaway.

Takeaway:  Is NCL looking for a larger piece of the local purchases from the vendors?



Macau – in response to the United States Department of State's request to lower the threshold for reporting gaming-related financial transactions from US$62,500 to US$3,000, the Gaming Inspection and Coordination Bureau (DICJ) and the Financial Intelligence Office (GIF) dismissed the suggestion and noted the current reporting limit is "adequate".

Takeaway:  We first noted this request in our March 12 Leisure Letter and believe everyone involved in gaming understand the sanctity and importance of keeping a clean reputation especially with concession renegotiations in the not too distant future. 


Macau – Transit Visa reform (Macau Daily Times).  The government intends to reduce the number of days that visitors are permitted to stay in the region when in transit to another destination. According to Secretary for Security, Cheong Kuok Va, the government is undertaking discussions with mainland authorities regarding how best to reduce irregularities in the way visitors arriving from China enter the MSAR.  Cheong Kuok Va’s statement follows a report conducted by the Chinese state media CCTV, which revealed that around a million people are estimated to have entered the region last year using a travel loophole.

Takeaway: This reform was widely discussed last week but dismissed by MPEL.  Given the short average length of stay (one day), we doubt this change will impact GGR.

Macau – Heavy rain caused delays at Macau airport.  The poor weather conditions over the past few days have caused inconvenience to travelers at the Macau International Airport with many flights delayed or canceled. Delays of up to four hours were common. 

Takeaway:  News flash - it rains a lot in Macau, this is nothing new.    


Japan – with the Japan Gaming Congress this week, various media outlets are reporting the Japanese Integrated Resort Promotion Law outline may be presented as early as next week.  Early reports indicate the Promotion Law may include a two plus two formula with 2 big integrated resort licenses targeted for each of Tokyo and Osaka, and up to 2 small integrated resort licenses targeted for smaller markets, including municipalities or prefectures that have already expressed interest like Hokkaido, Nagasaki, Nagoya and Okinawa.

Takeaway:  Most investors expected two large integrated resorts.  However, the two additional smaller resorts are a bonus.


Japan – According to the Chicago Tribune, Neil Bluhm's Rush Street Gaming will pursue the Osaka gaming license and is interested in partnering with a Japanese firm for a US$4-$5 billion casino.  Osaka with 2.8 million residents is located 155 miles northeast of Tokyo.  The Kensai Keizai Doyukai believes land costs in Osaka will be one-tenth the cost as compared to Tokyo.

Takeaway:  As expected but still as unlikely that Bluhm gets a concession.


Saipan – Macau junket investor First Natural Foods Holdings Ltd will invest at least US$2 billion (16 billion patacas) in a casino-hotel resort in a Western Pacific Ocean island, if it acquires an exclusive casino license there. First Natural Foods Holdings Ltd via its wholly-owned subsidiary, Best Sunshine International Ltd, submitted a business plan to the authorities of the island of Saipan in the Northern Mariana Islands bidding for the sole gaming license. First Natural said it aims to build ‘four luxury hotels and villas in four stages’ on the island, which is a commonwealth territory of the United States.  The firm will make an ‘initial investment of at least US$2 billion… to include a casino and an integrated resort which will include the construction of 2,000 guest rooms’ as the statutory requirements of acquiring the gaming license.  Saipan officials noted two companies have applied to the authorities for the license, including First Natural. Marianas Stars Entertainment Inc, 25% of which is owned by Hong Kong-based Mega Stars Overseas Ltd, is the other applicant.

Takeaway: We remain skeptical of this project as current visitation does not support such a large scale development.


Indiana –  (Evansville Courier & Press) Indiana lawmakers this summer could consider how to address declining revenue from the state's riverboat casinos.  Indiana Gaming Commission figures show the money the state collects from casino taxes has dropped from a peak of nearly $876 million in 2009 to about 752 million in fiscal 2013.  Increased competition from new casinos in neighboring states is a big factor in the drop. Senate President Pro Temp David Long said he supports assigning the issue to a summer study committee when they are set up later this month.

Takeaway:  We will save Indiana the $100,000 cost of the study: yes the reduction in Indiana GGR and gaming tax collections is due to demand declines, but much more due to an increase in supply.  Namely, increased competition from surrounding jurisdictions (new casinos in Ohio and new VGMs in Illinois) have resulted in the degredation of Indiana's gaming revenues.


LEISURE LETTER (05/12/2014) - o1 


Cruise politics – Blumenthal, Rockefeller, Markey call on Coast Guard to Make Cruise Ship Inspection Information Available to Public



  • April new yuan loans
    • C¥774.7B vs. consensus C¥850B and C¥1.050T in March.
    • Loan growth +13.7% y/y vs +13.9% in March
  • Total social financing C¥1.55T vs consensus C¥1.65T and C¥2.07T in March
  • Money Supply:
    • M0 +5.2% y/y vs +5.2% in March
    • M1 +5.5% y/y vs +5.4% in March
    • M2 +13.2% y/y vs consensus +12.2% and +12.1% in March

Takeaway:  Missed expectations. Credit issues could seep into Macau's VIP business.


Chinese Politics

  • Chinese President Xi Jinping said the nation needs to adapt to a "new normal" in the pace of economic growth and remain "cool-minded" amid slowdown in expansion.  
  • PBOC Governor Zhou Xiaochuan says no big china stimulus coming
  • PBOC Deputy Governor Liu Shiyu urges tougher rules to rein in shadow banking

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.

VIDEO | Keith's Macro Notebook 5/12: USD COPPER INDIA

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Stronger Currency Works

Client Talking Points


After last week’s +0.4% bounce off its year-to-date lows, the US Dollar has no follow through buying this morning. Both the Euro and Pound look good on the long side vs USD – so does the Yen, which is scary.


Big rip of +1.7% this morning to $3.13/lb after Chinese stocks closed up +2.1%. Copper’s immediate-term TRADE breakout line = $3.06/lb and consensus remains short of it (-17,289 net short position in futz/options).


Another solid session for Indian stocks as Dr. Raj proves to the world that a stronger currency works. The BSE Sensex is up +2.2% to +11.2% year-to-date, trouncing the Russell2000 which was down another -1.9% last week to -4.8% YTD.

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


Swiss Retail Sales +3% y/y in March, despite the "weather" @KeithMcCullough


"A ship is safe in harbour, but that's not what ships are for." - William Shedd


The NFL's top draft pick Jadeveon Clowney just landed around a $22 million contract with the Houston Texans. But while Clowney -- and hundreds of other NFL rookies -- know a lot about football, they know little about managing money. Many are likely to end up bankrupt. Just two years after their athletic careers end, 78% of former NFL players are bankrupt or nearly there. (CNN)

The Era of The Common Man?

This note was originally published at 8am on April 28, 2014 for Hedgeye subscribers.

“One man with courage makes a majority.”

-Andrew Jackson


The broad based economic progress of the 1794-1847 period in American free-market-capitalist #history remains unrivaled. In the thick of it, many called Andrew Jackson’s 1828 sweep to become the 7th President of the United States, “the era of the common man…”


Jackson represented the victory of an expanded electorate, a rebuke of the old elite… To many Americans, the president embodied the energy, mobility, and enterprise that they believed defined their nation.” (The First Tycoon, pg 84)


Shocking, I know. The People didn’t need the Federal Reserve to believe. In fact, leaders with courage ran against it; shutting down initial iterations of a US central bank, twice! On Friday, Janet Yellen said there “may be a flaw in how the Federal Reserve forecasts inflation.” Believe her. Until we abandon this un-elected US Policy to Inflate, the common man, woman, and child in America is going to eat it.

The Era of The Common Man? - Yellen03.20.2014


Back to the Global Macro Grind


Eat it? Yep. Chow down, rinse it back with some coffee and OJ, and like it.


If you back out your rent, food, gas, education, etc. (cost of living), you may not have noticed the following last week:

  1. Corn prices up another +2.4% last week to +17.3% YTD
  2. Nickel prices up another +2.4% last week to +31.5% YTD
  3. Coffee prices up another +1.4% last week to +79.8% YTD
  4. Orange Juice up another +1.3% last week to +16.1% YTD

If you want to call that cherry picking, fine. Eat some of those too. But inflation continues to slow US consumption growth. And all 3 major US market intermediate-term TREND signals (currencies, stocks, and bonds) continue to agree with the same. On that score:

  1. US Dollar Index was down -0.1% to -0.4% YTD (and remains well below our long-term TAIL risk line of $81.17 resistance)
  2. US Consumer Discretionary (XLY) and Growth (Russell 2000) stocks were -0.5% and -1.3% last wk to -5.1% and -3.5% YTD, respectively
  3. US 10yr Treasury Bond Yield dropped another 6 basis points on the week to 2.66% (down -37 bps YTD)

Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.


On Wednesday the US will release GDP for the 1st quarter, and it will likely:

  1. Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
  2. See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low

In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:

  1. INFLATION = will be accelerating
  2. GROWTH = will be slowing

More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).


This is the 3rd time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth, with the other two being:

  1. Q1 of 2008
  2. Q1 of 2011

Yep, it’s cyclical. And the ways to measure it in real-time are manifest. But if you want to throw a little Putin on top of your inflated corn flakes this morning (Oil prices accelerating), here are moarrr of them:

  1. US Treasury 5yr breakevens (Bernanke used these until they went against his ideology) +5bps last week and +17bps YTD
  2. CRB Foodstuffs index = +21.5% YTD and Treasury Inflation Protection (TIPs) testing YTD highs
  3. Slow-Growth #YieldChasing sub-sector styles of the US stock market like Utilities +13.5% YTD

What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!


Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be. You are in the 20% of America that A) has savings to invest into #InflationAccelerating and B) doesn’t have to eat it like the common man does.


In other news, not only is Bill Gross way late in getting bullish on US Growth, but consensus bear hedge fund bets in the bond market are. Last week’s net short position (CFTC non-commercial net futures/options contracts) in the 10yr Treasury Bond ramped to -93,722 contracts. If you have courage, you’ve been long consensus being wrong on #RatesRising all year long.


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


UST 10yr Yield 2.59-2.71%

SPX 1837-1890

Nasdaq 3996-4147

WTIC oil 99.98-105.61

Gold 1276-1324

Corn 4.98-5.18


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Era of The Common Man? - Chart of the Day

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