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Fund Flows, Refreshed

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

Editor's Note: This research note was originally sent to subscribers on May 8, 2014 by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan & Josh on Twitter @HedgeyeJC and @HedgeyeFIG.  

Fund Flows, Refreshed - OB IB046 1pay04 G 20100405173327  

ICI Mutual Fund Data & 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). 

 

Exchange traded funds (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. 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.   

 

Fund Flows, Refreshed - 1.3

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - 2

 

Fund Flows, Refreshed - 3

 

Fund Flows, Refreshed - 4

 

Fund Flows, Refreshed - 5

 

Fund Flows, Refreshed - 6

 

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

 

Fund Flows, Refreshed - 7

 

Fund Flows, Refreshed - 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). 

 

Fund Flows, Refreshed - 9.2 

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Monday Mashup: BOBE Replay, JACK Reports on Tuesday

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 1

Recent Notes

05/05/14  Monday Mashup: YUM, BOBE and More

05/08/14  Video: Conversation with YUM CFO Pat Grismer

05/12/14  BLMN: Still Bearish

 

*BOBE Best Ideas Call

Events This Week

05/14/14  KONA Annual General Meeting

05/14/14  DFRG Annual General Meeting

05/15/14  JACK Earnings Call 11:30am EST

05/15/14  BKW Annual General Meeting 9:00am EST

05/15/14  PBPB Annual General Meeting 9:00am EST

05/15/14  CMG Annual General Meeting

05/15/14  YUM Investor & Analyst Conference 12:30pm EST

05/16/14  MCD Investor Meeting 11:00am EST

Chart of the Day

We snagged this from our recent slide deck running through the bull case on BOBE.  The chart pretty much says it all – therein lies a major opportunity.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 2

Recent News Flow

Monday, May 5th

  • CBRL upgraded to market perform at Raymond James.
  • CMG upgraded to outperform at Raymond James with a $560 PT.
  • DIN Applebee’s unveiled four new dishes (including the New Grilled Vidalia Onion Sirloin), a refreshed beverage line and under 600 calorie lunch combos. 

Tuesday, May 6th

  • BJRI announced its newest restaurant opening in Orlando, FL.

Wednesday, May 7th

  • THI declared a $0.32 dividend payable on June 5,2014 to shareholders as of May 22, 2014.
  • CMG upgraded to buy at Longbow Research with a $641 PT.
  • PZZA upgraded to buy at Feltl and Company.
  • PNRA upgraded to buy at Bank of America Merrill Lynch with a $185 PT.

Thursday, May 8th

  • MCD reported +1.2% global comps in April.  The U.S. business was flat, despite a free coffee promotion and the launch of the Bacon Clubhouse.  APMEA (+2.9%) led the way, while Europe (+0.3) was up modestly.
  • DRI Starboard sent a letter to Darden’s Board urging them to immediately provide notice of a Special Meeting.  In the letter, Starboard called the Board’s “casual and dismissive attitude toward the Special Meeting [disturbing].”
  • SONC upgraded to outperform at Oppenheimer with a $25 PT.

Friday, May 9th

  • BWLD initiated underperform at Buckingham with a $116 PT.

U.S. Macro Consumption

The XLY (-0.6%) underperformed the SPX (-0.1%) last week.  Both casual dining and quick service stocks underperformed the broader XLY index.  The Hedgeye U.S. Consumption Model turned bullish, flashing green on 8 out of 12 metrics.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 3

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 4

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bearish on an intermediate-term TREND duration.

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 6

Casual Dining Restaurants

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 7

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 8

Quick Service Restaurants

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 20

 

Monday Mashup: BOBE Replay, JACK Reports on Tuesday - 10

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


European Banking Monitor: CDS Continues to Tighten

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  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.  

 

European Banking Monitor: CDS Continues to Tighten - chart 1 euro cds

 

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).

 

European Banking Monitor: CDS Continues to Tighten - chart 2 sovereign cds

 

European Banking Monitor: CDS Continues to Tighten - chart 3 sovereign cds

 

European Banking Monitor: CDS Continues to Tighten - 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 widened by 1 bps to 17 bps.

 

European Banking Monitor: CDS Continues to Tighten - chart 5 euribor ois spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Just Charts: Flashing Green!

Just Charts: Flashing Green! - chart1

 

Consumer Staples outperformed the broader market last week, rising 0.7% versus the S&P500 at -0.1%. XLP is up 3.7% year-to-date vs the SPX at 1.6%.

 

Earnings Calls (in EST):

 

Monday (5/12):  RDEN (4:30pm)

Wednesday (5/14):  SFD (8am); SODA (8:30am)

Thursday (5/15):  FLO (8:30am)

 

For the last two months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

 

Just Charts: Flashing Green! - 2

 

The Hedgeye U.S. Consumption Model has shown steady improvement over the past three weeks, from only 3 of the 12 metrics flashing green to now 8 of 12.

 

Just Charts: Flashing Green! - 3

 

Despite the bullish quantitative and consumption set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.4x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 37.1 versus 37.9 in the prior week

Just Charts: Flashing Green! - 4

 

Just Charts: Flashing Green! - 5

 

Just Charts: Flashing Green! - 16

 

Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  HAIN 5.4%; TAP 5.3%; HSH 3.9%; SJM 3.3%; BUD 2.6%

Negative Divergence:  NUS -13.55; POST -9.1%; TSN -7.6%; BNNY -7.3%; SAM -7.1%

 

Last Week’s Research Notes

 

Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

BUD – bullish big-cap-low-beta breakout (style factor working, big time, in US Equities right now) continues; intermediate-term TREND support = $104.99

 

Just Charts: Flashing Green! - 6

 

 

DEO – finally joins the style factor fun and recaptures bullish TREND support of $124.89, barely

 

Just Charts: Flashing Green! - 7

 

 

KO – big breakout from mid-April continues to hold; slow-growth-big-cap-low-beta continues to work; $39.52 TREND support

 

Just Charts: Flashing Green! - 8

 

 

PEP – bullish intermediate-term TREND continues as all the style factors this stock holds remain well bid; $84.09 TREND support

 

Just Charts: Flashing Green! - 9

 

 

GIS – this name has been singing cheerio to us since the TREND breakout in FEB 2014; $51.88 TREND support

 

Just Charts: Flashing Green! - 10

 

 

MDLZ – straight up after solidifying its TREND base at $35.03

 

Just Charts: Flashing Green! - 11

 

 

KMB – one of the least overbought on the list, but still one of the best looking longs; TREND support = $107.78

 

Just Charts: Flashing Green! - 12

 

 

PG – intermediate-term TREND breakout from APR 2014 confirmed; TREND support = $80.84

 

Just Charts: Flashing Green! - 13

 

 

MO – getting exhausted on the upside but remains bullish TREND ($38.38 support) nevertheless

 

Just Charts: Flashing Green! - 14

 

 

PM – bearish to bullish TREND reversal confirming itself in the last few weeks; what was TREND resistance is now support at $83.14

 

Just Charts: Flashing Green! - 15

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN

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

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 19.2

 

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

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 15

 

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

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 1

 

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.  

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 2

 

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.  

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 17

 

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).

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 18

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 3

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 4

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 5

 

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

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 6

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 7

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 8

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 9

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 10

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 12

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 13

 

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.

 

MONDAY MORNING RISK MONITOR: EUROPE CONTINUES TO TIGHTEN - 14.2

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


LEISURE LETTER (05/12/2014)

Tickers: CZR, KNM, PEB, HOT, CCL, NCLH

EVENTS TO WATCH 

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

COMPANY NEWS

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?

INDUSTRY NEWS

GAMING      

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

MACRO

China

  • 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.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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