LEISURE LETTER (05/20/2014)

Tickers: DRH, SHO, WOLF, CCL


Tuesday, May 20 - Wednesday 21

  • East Coast Gaming Congress

Tuesday, May 20 - Thursday May 22

  • G2E Asia - The Venetian Macao


 Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call



DRH - Director Gilbert T. Ray sold 15,797 shares on Friday, May 16 at an average price of $11.88. Following the transaction, Mr. Ray now directly owns 43,653 shares in the company, valued at approximately $518,598.

SHO - SVP, Treasurer & Secretary Lindsay Newton Monge sold 7,521 shares of Sunstone Hotel Investors stock on Monday, May 19 at an average price of $14.22. Following this transaction, Mr. Monge now directly owns 90,841 shares in the company, valued at approximately $1,291,759.

Takeaway: There is clearly a wide dichotomy between the view from the C-Suite (bottom of the fifth inning in the lodging cycle) told to investors and how C-Suite insiders trade their company stock. Recent insider activity for lodging is clearly biased to the "sell" side.  

WOLF - will break ground Wednesday on a new Great Wolf Lodge in Garden Grove, CA (near Disney) that will feature a 121,000-square-foot indoor water park – the company’s largest – along with a 603-room hotel and conference center.  The $250 million development is scheduled to open in late 2015.

Takeaway: New competition for the "happiest place on earth"...


CCL –  (Seatrade Insider) Holland America Line will transfer the 1,258-passenger Ryndam and Statendam to P&O Cruises Australia in November 2015, making the company the biggest year-round operator in Australasia by increasing its fleet from three to five ships.  Stein Kruse, CEO of Holland America Group, said these ships are definitely not replacement vessels for Pacific Dawn, Pacific Jewel and Pacific Pearl.  He insisted P&O Cruises Australia will be a five-ship company ‘for the foreseeable future.’  Kruse said Australia is ‘far away from overcapacity’ and believes the additional ships will increase the number of fly-cruise passengers from the US, Europe and Asia.  Holland America Line’s 99,500gt Pinnacle-class ship for 2,660 passengers, due for delivery in February 2016, will replace the capacity of the two ships moving to Australia.

Takeaway:  Another bold decision that could bring dividends.  Although the demographics are not as favorable (54% of Australia's ~23 million people are between the ages of 25-64), CCL is exploring the newer cruise markets to make room for the new HAL ship.   


CCL – Power Failure Strands Costa Cruise Ship in Port Cruise Critic

 Costa Deliziosa had a power failure in Valencia and will remain in port until the cause of the outage is identified and fixed.  The blackout lasted for "a few hours" before technicians managed to restore power and essential services.  Although it remains unclear exactly how long repairs will take, Costa has told passengers scheduled to sail on an upcoming 13-night Eastern Mediterranean cruise from Civitavecchia (for Rome) on May 20, that the ship will not sail as scheduled.

Takeaway:  Get your act together Costa, you're having a decent year


China to pilot digital exit-entry permit to HK, Macau Macau News

According to the Ministry of Public Security of China, China will issue smart cards to gradually replace the current paper permits for those commuting between the mainland and Hong Kong and Macau.  The ministry plans to pilot the new permit in Guangdong, a province in south China adjacent to Hong Kong and Macau, and local police agencies will accept applications for the e-permit starting May 20.

Takeaway: Anything that smooths the transfer of people is good for Macau.

Illinois Gaming Expansion – Illinois Democratic Representative Bob Rita of Blue Island sent a letter to House Speaker Michael Madigan and Republican leader Jim Durkin looking to gain support for his plan – the first proposal adds five casinos (including one in Chicago) and slots at horse tracks; while the second calls for a mega-casino in Chicago.  Illinois faces an estimated $1.8 billion revenue shortfall unless lawmakers make permanent an income tax increase that is scheduled to roll back in January.

Takeaway:  More talk, no action


Massachusetts Gaming Expansion - Foxwoods Casino Resort and the investment group Crossroads Massachusetts LLC are upping the ante and betting on finding 120-acres of waterfront property to expand their proposed destination resort project by more than three times its present size. Fall River and Foxwoods are taking advantage of an extended deadline of Sept. 23 to submit an application for the license to work on a better project and host community agreement.

Takeaway: Sounds like Foxwoods is attempting to compete with the proposed Wynn Everett development.  


AAA survey –  36 million Americans, +1.5% YoY, will travel 50 miles or more for Memorial Day.  The travel period in the report covers Thursday, May 22, through Monday, May 26.  Gas prices are expected to stay the same as last year's national average of $3.63 per gallon.

Takeaway: Good news for leisure travel and bookings


Asia Unrest

  • Vietnam/China - the territorial dispute and protests over China's decision to move an oil rig into disputed waters of the South China Sea spiraled into riots last week in which foreign-owned factories were burned and looted.
  • Thailand - Thailand's army declared martial law nationwide on Tuesday to restore order after six months of street protests that have left the country without a proper functioning government

Takeaway:  Global geopolitical unrest is increasing.  Some Chinese travel agents have already suspended Vietnam tours.  China also at territorial odds with Philippines and Japan and curbing tourism to Malaysia/Singapore.


Singapore - Q1 2014 GDP of 4.9% missed consensus estimates of 5.5%.  The expansion in GDP during the January-March period was lower than the government's initial estimate of 5.1%. 

Takeaway: Not encouraging news for the mass gaming segment


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.


Shockingly Low Volume

Client Talking Points


Yesterday’s UP-day volume was shockingly low. The total US Equity market volume was down -21% and -41% versus its one- and three-month averages, respectively. TREND remains no-volume on UP-days versus accelerating volume on DOWN-days.


The Russell2000 bounced on no-volume yesterday to A) lower-highs, but B) below both my TRADE (1133) and TREND (1155) lines of resistance – at -4.4% year-to-date into the fifth month of the year, that’s not good. Neither is US #GrowthSlowing.


The ex-dividend drop in Italian stocks yesterday sees follow through this morning as most European Equity markets continue to make a series of lower-highs. Inflation finally ticked up in the UK too (that’s new) – thanks (ECB President) Mario Draghi.

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.



Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


OIL: higher again this morning as Brent holds $108.60 support #InflationAccelerating @KeithMcCullough


"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." - Charles Darwin


Target cut about $8 million from former CEO Gregg Steinhafel's 2013 pay package after ousting him from the job. But he is still making $13 million for his work last year and walking away with a severance package totaling $15.9 million. (CNN)

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Ironic Inflation?

This note was originally published at 8am on May 06, 2014 for Hedgeye subscribers.

“Irony is just honesty with the volume cranked up.”

-George Saunders


Since I won’t see any of our competitors on the Old Wall write about anemic stock market volume or US #ConsumerSlowing today, I stretched and cited an American short story writer from Texas. Since you don’t have a lot of time this morning, I’ll keep it tight.


“When I’m explaining something to you, if I’m being long-winded, and twisty… I could make you feel vaguely insulted. And you’d have a right to be.”

-George Saunders


Back to the Global Macro Grind

Ironic Inflation? - Sell in May 05.05.2014

The irony in talking about the truth on Wall Street today is that more and more people agree with it. If they didn’t, there wouldn’t be a net short position in the SP500 (Index + Emini futures and options contracts = net short position of 10,057 contracts coming into the open yesterday).


If buy-side pros weren’t getting real on #InflationAccelerating slowing US growth, you wouldn’t be seeing every hedge fund in America that was running +60-80% net long on January 1 tightening up their net exposures to the growth side of the US stock market either.


Yesterday’s no-volume +0.19% bounce to lower-highs on the SP500 (Russell2000 was -0.3% on the day) had the following volume readings:

  1. Total US Equity Volume was DOWN -26% versus the 1-month average yesterday
  2. Total US Equity Volume was DOWN -40% versus the 3-months average yesterday

In other words, next to Easter Monday, it was the lowest volume Monday we have witnessed all year (and it wasn’t Easter Monday!). So what was it? Was it the weather? When the weather is nice on the East Coast, does everyone take Monday’s off?


You’d be hard pressed to convince me that as a country socializes its downside (and in doing so limits its upside) that its people don’t get lazier. Before you know it, it’ll be cool to work less than they do in France. Ah, la belle Providence, RI!


Enough of my opinion on this no-trust-no-volume-rally-to-all-time-bubble-highs. I’m sure everyone will be able to get out, at the same time. Here’s what else was happening in the real-world of #InflationAccelerating yesterday:

  1. Wheat prices up another +1.9% to +18% YTD
  2. Corn prices up another +1.9% to +16% YTD
  3. Coffee prices up another +0.9% to +77% YTD

I know, I know. If you back all this stuff out, there’s no inflation. Got it. If you can find me an employer who dynamically adjusts your paycheck to real-time food, shelter, and energy, let me know. I’ll short his stock.


BREAKING:Ruble Plunge Hitting Russians” –Bloomberg


Unlike some of Mike’s inflationary Big Government Intervention policies in NYC, that headline from his mother ship of market storytelling is economically accurate. When a government burns the purchasing power of its people (its currency), its poor people get hit, hard.


BREAKING: “US Dollar Hits Fresh YTD Lows, Hammering Americans” –NY Times



The NY Times, CNBC, and/or any of its government access offspring wouldn’t dare put what helped JFK get elected (“Strong Dollar, Strong America” on the cover of the NY Times #1960s). That would incriminate Obama for having a Down Dollar policy that is pulverizing America’s poor.


With the US Dollar Down for the 3rd consecutive week:

  1. The Euro is punching a fresh YTD high up at $1.39 (vs USD)
  2. The British Pound continues to crush it (+6% vs USD in the last 6 months) to a fresh YTD high of $1.69
  3. The Yen continues to signal bullish TREND in our model (vs USD) at +3% YTD

And that’s with these Japanese dudes printing what, 60-70 TRILLION Yens a year? Hooowah! Gotta love the irony in America’s domestic currency policy when compared to that.


In our government PIG model (our GIP – Growth, Inflation, Policy model, bass-ackwards), using the weapon of mass inflation (P – Policy) there are 2 big things the government can use to drive the value of your hard earned currency:

  1. FISCAL policy (to spend moarrr, or not, remains the question)
  2. MONETARY policy (to print, print, print, or to tighten, remains the question)

On the fiscal side, as US growth slows, you can bet your Madoff that Obama is going to spend. On the monetary side, as Janet realizes it’s not just the weather that the US Consumer is eating this summer, I think she’ll get easier (or rhetorically un-taper).


That’s Dollar Bearish, Rates Bearish, and real US Growth Bearish. Since the Policy To Inflate cranks up your cost of living. There’s no irony in that.


Ironic Inflation? - Chart of the Day


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


UST 10yr Yield 2.56-2.67%

SPX 1856-1890

RUT 1099-1140

USD 79.05-79.74

EUR/USD 1.37-1.39

Pound 1.67-1.69

Natural Gas 4.59-4.85

Gold 1273-1318

Corn 5.01-5.31


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

The Old Smoke Wall

“You might as well hit a brick wall as hit that man on the head.”

-Yankee Sullivan


Yep. They used to settle things in this country the old fashioned way. More commonly called “Old Smoke” by NYC’s finest mid-19th century gang members, John Morrissey (Member of Congress), could deflate #MoBro Twitter muscles, fast.


In 1864, a crowd of con men from Manhattan (three-card-monte artists) stepped off the train at Saratoga. Morrissey sauntered up to them with his white flannel suit and quietly told them to leave town. They did.” (The First Tycoon, pg 399)


150 years later, the US stock market’s volume feels like that. After indicting some of our hedgies for insider trading and then going after the machines, central planners are quietly telling people to not trust a game they perpetuated. Evolution, baby.


Back to the Global Macro Grind


It was Victoria Day in my homeland yesterday, so I guess half of America decided to take another Monday off. Who needs to work full-time in an industry where losers who lie and cheat only have to pay a fine with other people’s money anyway?


Total US Equity Volume was down -21% and -41% versus its 1 and 3 month averages, respectively, yesterday. We’ve been hitting you with this DOWN-volume-UP-day thing square in the head this year. Contrary to popular “there’s been no volume for 5 years” thing, the complexion of 2014’s US stock market volume is signaling serious liquidity risk.


To review how we think about liquidity (volume) risk:


  1. Like most things we analyze, rate of change is what matters most
  2. When DOWN-day (down price) volume is accelerating and…
  3. UP-day (up price) volume is decelerating across multiple durations (1 month, 3 month, etc.)

That is not good.


There is a subtlety to analyzing a body of non-linear interconnected risk this way – it’s called hard work. You have to mundanely write down and/or register every day’s PRICE/VOLUME data, then overlay it with implied volatility assumptions across multiple durations.


I know. If you do math, it’s not as complicated as having a strategist tell you “but the market is up.” But we Street fighters on 2.0 weren’t born into just knowing what markets are going to do next, so we have to #grind for each and every data point. #process


“So” what if this PRICE/VOLUME signal is doing this and the market isn’t “up”?


  1. The Russell 2000 bounced on no-volume to yet another lower-high of 1114 yesterday
  2. At -4.3% YTD, the Russell2000 is still bearish on both our immediate-term TRADE and intermediate-term TREND durations

That’s really not good.


And if you dare saunter on over to the three-card-monte-perma-bulls and tell them that the Russell 2000 breaking down is a bearish growth signal, prepare for them to:

  1. Get a little uncomfortable as they rattle off lagging economic indicators
  2. Make a few snide remarks about what the market has done since they missed calling the last 10-20% decline
  3. Then leave the room before you show them a chart of bond yields

*hint (the charts of the Russell growth index and growth-slowing 10yr bond yields are the same)


Once we get rid of those guys, the real debate starts (the one between real-time market price, volume, and data). What is causal to driving slow-growth in both the Russell and bond yields? What’s causal and correlating? What is neither?


Almost 6 months into 2014, what is clearly causal to slowing US consumption growth is #InflationAccelerating. But if you live in the real-world, you already know that. What’s less obvious are the 6 month correlations between currency and commodities:


  1. CRB Commodity Index (19 commodities) inverse correlation to US Dollar Index is -0.77
  2. Soybeans have a 6 month inverse correlation to the USD of -0.75
  3. Corn and Wheat have 6 month inverse correlations to USD of -0.74 and -0.70, respectively
  4. WTI Crude Oil has a 6 month inverse correlation to USD of -0.66
  5. Gold has a 6 month inverse correlation to USD of -0.64

In other words, if you get the purchasing power of The People (USD) right, you’re probably going to get the rate of change in inflation/deflation right. And if you get the slope of inflation right, you’re probably going to get the rate of change in real-growth right.


As to why traditionally trained Keyensian economists who have missed calling every US consumption slowdown since Q1 of 2000 don’t get these very basic points right, no worries. You may as well bang your head against the Old Wall.


Our immediate-term risk ranges are now as follows (we have 12 of Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):


UST 10yr Yield 2.47-2.58%


RUT 1089-1125

USD 79.31-80.21

Brent 108.60-110.45

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Old Smoke Wall - Chart of the Day


TODAY’S S&P 500 SET-UP – May 20, 2014

As we look at today's setup for the S&P 500, the range is 32 points or 1.07% downside to 1865 and 0.63% upside to 1897.                                                           













  • YIELD CURVE: 2.19 from 2.20
  • VIX closed at 12.42 1 day percent change of -0.16%


MACRO DATA POINTS (Bloomberg Estimates):


  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 12:30pm: Fed’s Plosser speaks in Washington
  • 1pm: Fed’s Dudley speaks in New York
  • 4:30pm: API inventories



    • Water Resources bill H.R. 308 may be taken up on House floor as House-Senate conference report
    • Finra annual conf. in Washington; speakers include SEC Commisioner Dan Gallagher
    • 9am: Natural Products Assn CEO Dan Fabricant at BGov conference
    • 9:30am: House Oversight/Govt Reform subcmte hearing on misspent Medicare funds
    • 10am: House Appropriations subcmte FY15 budget bill markup for Agriculture Dept, FDA, related agencies
    • 10am: Senate Appropriations  mark up Military Construction and Veterans Affairs bill spending bills
    • 10:30am: FCC Chairman Tom Wheeler  before House Energy & Commerce panel on agency oversight
    • 3:30pm: House Fin Svs Cmte’s Hensarling at Heritage Foundation
    • U.S. Senate holds procedural vote on Fischer Fed nomination
    • Ark., Ga., Idaho, Ky., Ore., Penn., hold primaries
    • U.S. ELECTION WRAP: Primaries; Senate Outside Ad Buys



  • Cobham to buy Aeroflex for $895m to grow in civil market
  • Pfizer’s $117b AstraZeneca hunt said likely to fail
  • Investcorp said to tap JPMorgan for $1.1b Esmalglass sale
  • Credit Suisse agrees to plead guilty in tax case, pay $2.6b
  • Apple, Samsung blame the other for blocking settlement talks
  • America Movil unable to buy significant part of AT&T stake
  • Visa, MasterCard forced to weigh Russia exit as elections loom
  • Twitter said to be discussing music deals including SoundCloud
  • T. Rowe’s Twitter bullishness wanes; firm dumps 26% of stake
  • LSE in exclusive talks with Russell parent company
  • Cisco, WWE, Jarden CFOs speak at Bloomberg conference
  • BP faces billions in spill payments after court upholds deal
  • RSA to sell Canadian broker to Arthur J. Gallagher
  • U.K. inflation up more than forecast on transport costs
  • China suspends cybersecurity cooperation after U.S. charges
  • Thai military declares martial law, seeks to quell protests
  • Microsoft hosts new product event in NYC
  • BlackRock CEO Fink speaks at ICI meeting



    • Apollo Investment (AINV) 7:30am, $0.21
    • Dick’s Sporting Goods (DKS) 7:30am, $0.52
    • Donaldson Co (DCI) 7am, $0.47
    • Home Depot (HD) 6am, $0.99 - Preview
    • Medtronic (MDT) 7:15am, $1.12 - Preview
    • Stage Stores (SSI) 6am, ($0.38)
    • Staples (SPLS) 6am, $0.21 - Preview
    • TJX (TJX) 8:28am, $0.67 - Preview



    • Analog Devices (ADI) 4:05pm, $0.56
    • Heico (HEI) 5:14pm, $0.40
    • Intuit (INTU) 4pm, $3.50
    • (CRM) 4:05pm, $0.10 - Preview
    • Tidewater (TDW) 4:03pm, $0.63




  • Gold Demand in India Seen Climbing as Government May Ease Curbs
  • WTI Trades Near Four-Week High on Cushing Supplies; Brent Steady
  • Stumpy Brazil Cane Crop Signals World Sugar Deficit: Commodities
  • Nickel Drops on Speculation Supplies Are Adequate to Meet Demand
  • Gold Consumption in Thailand Drops in Q1 as Bar Demand Slumps
  • Wheat Rises Most in Two Weeks as U.S. Crop Ratings Deteriorate
  • Palm Oil Drops to 4-Month Low as Malaysian Exports Seen Slowing
  • Port Hedland Engineers Union Set to Continue Talks with Teekay
  • Commodity Assets Said by Barclays to Fall $2 Billion in April
  • U.S. LNG Won’t Replace Russian Gas as Europe Seeks Options
  • Ukraine Must Show Will to Pay Before Gas Talks, Medvedev Says
  • Europe Has 28-Year Shale Gas Rebuff to Russia: Chart of the Day
  • Japan Triples Oil Imports, Boosts LNG 23% on Nuclear Shutdown
  • Gold Demand Little Changed as Jewelry Counters Lower Investment

























The Hedgeye Macro Team