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LEISURE LETTER (05/22/2014)



Thursday May 22

  • G2E Asia - The Venetian Macao



Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call


ALL.AX – Some electronic gaming machines (EGM) from Aristocrat Leisure Ltd are down in Macau casinos following a player dispute. The shutdown affects some of Aristocrat’s EGMs, including Yellow Dragon links carrying 5 Dragons and Fa Fa Fa games. The decision to switch off Aristocrat’s EGMs follows new regulation introduced in 2012. Administrative Regulation 26/2012 states that concessionaires should refuse to pay prizes or any accumulated credits if it suspects a malfunction or software glitch in a particular EGM.

Takeaway:  A slip in what will be a great fiscal half for Aristocrat when they report on the 27th.  Maybe a small positive for IGT.


LVS – confirmed Michael Leven, President & COO, will retire at the end of 2014, when his contract expires.  CEO Adelson has no plans to slow down, step back, or relinquish his CEO title and role. 

Takeaway: Mr. Adelson remains fully in-charge.  As we mentioned yesterday, Leven's replacement is a very key hire.


PENN – is now required to buy the 98 acres of land Lakes Entertainment owns adjacent to the Jamul Indian reservation in San Diego County, CA. PENN will pay $5.5 million for the land no later than 10 days after the Jamul opens and PENN will manage.  Recall in 2012, Lakes entered into ten-year option agreement with Penn that granted Penn the right to purchase the 98 acres of land, owned by Lakes adjacent to Jamul’s reservation land for a purchase price of $7 million which increased annually by 1%.

Takeaway: Land crucial to development potential to further the duration of casino management contract.


SGMS priced its $350 million in 6.625% private placement senior subordinated notes due 2021 at 99.321 percent with QIBs.  The proceeds will repay $350 million in 9.25 percent senior subordinated notes due 2019. The tender offer for those notes expires June 17.

Takeaway: That's nearly $0.11/share (pre-tax) of interest expense savings and earnings accretion - should the entire nearly $9.2 million interest expense savings drop to pre-tax net income.


WYNN (GGRAsia) Gamal Aziz, president of Wynn Macau Ltd, told GGRAsia on the sidelines of the opening session of Global Gaming Expo (G2E) Asia 2014 that premium mass players – that theoretically offer superior margins to the house compared to credit-based high rollers – were now being courted more assiduously by his company, via perks traditionally reserved for VIPs including complimentary rooms.

Takeaway: Wynn getting more aggressive in Mass is a positive for market share, revs, and profits.  There remains the potential for Wynn to provide more credit to its junkets to boost VIP in the same way.  These levers provide on leg of our positive thesis on WYNN. 


WYNN – in the competition for the Greater Boston casino license, WYNN's competitor Mohegan Sun announced it reached a surrounding community agreement for the proposed $1.3 billion Mohegan Sun resort casino for Revere.

Takeaway: We have a two horse race and handicapping the exacta bet is too close to call.


RLJ – announced a 7.5 million share offering use the net proceeds from the offering to fund potential acquisitions and for general corporate purposes, and may use net proceeds to repay amounts outstanding from time to time under its unsecured revolving credit facility. 

Takeaway: The share prices of most lodging REITs are +10% to +15% on a YTD basis, the underperforming lodging REITs are flat to +4%, we are not surprised to see equity issuance. 


CCL - will spend up to $400m on installing scrubbers to more than 70 vessels across its brands, up from 32 announced last year. 

Takeaway: An expected announcement to comply with regulations.  Carnival has said prices will be unaffected.


MSC Cruises- (Seatrade Insider) MSC Cruises orders 2 'futuristic' newbuilds 

MSC Cruises signed a contract with Fincantieri for two ships, with an option for one more.  The ships will accommodate up to 5,300 passengers each and are to be delivered in November 2017 and May 2018. They are priced at €700m each, financed by the support of SACE.

Takeaway:  These are big ships.  The 2016-2018 capacity growth is starting to worry us.

MTN – the Third Judicial District Court of Summit County, Utah ruled favor of Talisker (and Vail Resorts) on all matters relating to the expiration of the Park City Mountain Resort lease.

Takeaway: While a positive ruling, PCMR continues to own the base operations and Vail must reach an agreement (very soon) to lease or purchase such operations from PCMR.  Futhermore as we wrote in our April 10, 2014 Leisure Letter, PCMR indicated that if unsuccessful with its lawsuit, PCMR indicated it would dismantle and remove most of the area's chair lifts except for Jupiter, Thaynes, and Motherlode.



MAR - Simon Cooper, President/Managing Director Asia Pacific, sold 10,000 shares of stock on Monday, May 19 at an average price of $58.50/share.  Following the transaction, Mr. Cooper now directly owns 46,315 shares in the company.

Takeaway: More selling by an lodging insider at the same time the managements are telling investors that business trends are accelerating. 



Macau bound ferry accident – More than 30 people were injured late Wednesday night when a Macau-bound high-speed ferry collided with a cargo ship in the waters west of downtown Hong Kong around 11 p.m. local time.  The ferry involved in the accident is operated by Shun Tak-China Travel Ship Management Ltd.

Takeaway: Given the frequency of high-speed ferries between Macau/Cotai and Hong Kong, we are surprised more accidents don't occur.


Macau smoking ban – according to the Macau Health Bureau, premium mass areas located on the mass market floor will have to comply with the the full smoking ban.  Grant Bowie, CEO MGM China, recently commented that in order to have smoking in VIP rooms, the VIP rooms will need to be physically separated from mass market gaming areas.

Takeaway: Bowie says VIP could be somewhat impacted by smoking ban.  We certainly haven't heard that from anyone else.


Macau non-gaming spend - non-gaming spending by visitors in Macau increased 10% to US $1.99 billion in 1Q 2014 while overnight visitors during Q1 spent more on non-gaming items with spending up 8% to $1.653 billion while day trip visitors spending increased 19% to $350.641 million.

Takeaway: Strong growth in non-gaming spend.


Upstate New York Gaming in an unexpected turn of events to applicants, New York Governor Andrew Cuomo spoke up in support of casinos located in Sullivan and Ulters counties versus proposed casinos in Orange County.  The Governor indicated he favors the more economically hard-hit regions of the Catskills/Hudson Valley getting a first crack at jobs-building casinos and will press hard to get the first licenses issued in those areas - which was the intent of Proposal 1.

Takeaway: It seems to us, this was the Governor's intent in floating and supporting Proposal 1.  Additionally, we remind investors gaming will likely come to the downstate zone, which includes the City of New York, Nassau, Suffolk, Westchester, Rockland and Putnam counties seven years after the commencement of gaming activities in the upstate region.



Macau Hotel ADR – The average price of hotel rooms increased by around 10.3% in April YoY.  The biggest increase was by 4-star hotels, where rates increased an average of 1,026 patacas per night from 890 patacas an increase of around 15.3% YoY.  5-star hotels increased by 9.5% YoY to 1,547 patacas from 1,403 patacas a night.

Takeaway: Strong growth in ADR prior to the new properties opening in 2015 and 2016. 


NYC Lodging –  New York Attorney General and Airbnb have reached agreement on information disclosures about short-term New York City apartment rentals in a state investigation of illegal hotels.  The NYAG is seeking information about Airbnb's hosts going back three years, noting many listings appeared to offer unoccupied apartments for very short periods, violating rules against unregulated hotels. The state law prohibits owners or renters of apartments in multi-unit buildings from renting them for less than 30 days unless they remain present. The law permits having boarders or renting rooms.

Takeaway:  Sounds to us like a crackdown on short-term rentals in NYC will happen, which in turn will reduce the number of Airbnb bookings/transaction fees.


China HSBC Flash PMI - May flash PMI picked up from 48.1 in April to 49.7, ending the consecutive decline in the past 6 months. 

Takeaway:  Still falling demand but above expectations


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 Risk Management Hires New Technology Sector Head

Takeaway: Craig Berger will lead Hedgeye's Technology sector build out and research production efforts as it continues to scale its research platform.



STAMFORD, Conn., May 22, 2014 -- Hedgeye Risk Management, a leading independent investment research and media firm, announced today that industry veteran Craig Berger has joined the firm as Managing Director of technology research with an immediate focus on the semiconductor industry. In addition, Craig will also lead the firm’s Technology sector build out and research production efforts as it continues to scale its research platform.


"We are incredibly excited to welcome Craig onto our team during this important phase of our growth," said Keith McCullough, CEO of Hedgeye. "As both Hedgeye and the tech sector continue to grow and evolve in coming years, Craig’s proven track record of experience and expertise will be instrumental to our continued success."


Mr. Berger comes to Hedgeye with over 15 years of industry experience. He was most recently Managing Director of Equity Research at FBR Capital Markets where he provided primary coverage of semiconductor stocks. Before that, he served as Senior Vice President of Semiconductor Equity Research for Wedbush Morgan Securities. He was also a semiconductor analyst at Smith Barney Citigroup after spending several years at Intel Corporation as a senior financial analyst.


A Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA), Mr. Berger received a B.B.A. from the McCombs School of Business at The University of Texas at Austin where he also completed his Master in Professional Accounting degree. He is a fixture in financial media with over 80 live television interviews and is regularly quoted in publications including the Wall Street Journal, Barron’s, Forbes and Bloomberg.



Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Technology, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media. The firm is united around a vision of uncompromised real-time investment research as a service.


Visit www.hedgeye.com for more information.


CONTACT: Dan Holland



Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX

Takeaway: WSM more strength in DTC. Adi-soccer balls and t's to fuel WC growth. SKX ends Hall of Fame endorse run.




  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm


FRIDAY (5/23)

  • FL - Earnings Call, 9:00am




WSM - 1Q14 Earnings


Takeaway: Hard to ignore a 10% comp. The key takeaway from the print, in our opinion, is the strength of WSM's DTC channel. For the first time in the company's history, DTC accounted for over 50% of net revenues and more importantly 80% of EBIT.


We go back and forth on how to handle WSM. We continue to believe that RH will continue to consolidate market share as it reinvents its real estate portfolio and introduces new product offerings to both its category lineup and bigger boxes. The truth is that neither name commands a significant share in the highly fragmented home furnishings market. Still a lot of white space for both to expand before we get concerned about competition.


Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart1 5 22


ADDYY - Adidas sees boost to sales from World Cup



  • "German sportswear company Adidas has given a more precise sales growth target for 2014, amounting to a rise of up to 8 percent, as it gets a lift from the soccer World Cup that starts in Brazil next month."
  • "'This year we will add 1-1.2 billion euros ($1.4-1.6 billion) to operational revenue, with the World Cup playing an important role,' Chief Executive Herbert Hainer told journalists at a briefing in Munich in remarks released for publication on Thursday."
  • "That increase represents a rise of 7-8 percent from the 14.492 billion euros of sales Adidas recorded in 2013. Previously, Adidas had guided for a 'high single-digit' increase in currency-neutral sales in 2014."
  • "'Football is the DNA of our company. We want to clearly show that we are number one in football,' Hainer said, adding Adidas expected to sell significantly more balls than at the last World Cup in South Africa four years ago and about as many shirts."
  • "Hainer acknowledged, however, that Adidas faced a 'head-to-head' race with Nike in the business for football boots, including in Germany, predicting Adidas would sell 2 million pairs of special boots designed for the World Cup."
  • "Adidas is investing a 'double-digit million sum' in advertising associated with the World Cup with a particular focus on social media, he said, with plans for a media room in Brazil to deliver and filter content from its sponsored teams and players."


Takeaway: Pretty damning admission by Hainer. Adi is 'head-to-head' with NKE in the football boots arms race? We would have guessed as much, but NKE is just starting to gain traction in the soccer market. Add UA to the mix and it’s a pretty bleak outlook for Adi. When soccer balls and t-shirts are the key pillar of growth for a footwear company - we get concerned.


SKX - Skechers’ Home Run



  • "Skechers’ Relaxed Fit men’s line is adding former baseball player Pete Rose to its family. Rose will appear in ads this fall for the footwear line. He joins other sports figures including Joe Montana, Mark Cuban and Joe Namath, who have all appeared in the Relaxed Fit marketing."


Takeaway: This officially ends SKX's string of Hall of Fame ex. Athlete endorses.




WMT - Report: Wal-Mart to expand Sunnyvale e-commerce operation



  • "Wal-Mart is reportedly planning to substantially expand its e-commerce operation based in Sunnyvale, California. According to the Oakland Tribune, Wal-Mart intends to add hundreds of staffers to its global e-commerce unit there, bringing the total number of e-commerce employees to about 1,000."
  • "In addition, Wal-Mart will lease a 107,000-sq.-ft. space in Sunnyvale to help house its e-commerce operations. Currently, the retailer employs about 550 e-commerce employees in Sunnyvale at an existing facility it will maintain."


JCP - J. C. Penney Company, Inc. Grants Previously Disclosed Equity Inducement Award to Edward Record



  • "...J. C. Penney Company, Inc. announced that on May 20, 2014, an equity inducement award of 223,964 restricted stock units (RSUs) was granted to Edward Record, the Company's Executive Vice President and Chief Financial Officer, in connection with the commencement of his employment."
  • "The RSUs will vest in thirds on the first, second and third anniversaries, respectively, of the grant date, provided Mr. Record remains continuously employed with the Company through those dates.  The award fully vests if Mr. Record is terminated for any reason other than cause, and if his employment terminates in certain cases within two years following a change of control at the Company."


BrandZ's Most Valuable Global Brands Unveiled



  • "...global research agency Millward Brown...unveiled its 2014 BrandZ Top 100 Most Valuable Global Brands Wednesday."
  • "The ninth release of the study measures consumer brand perception along with financial data to calculate brand value."
  • "Among this year’s top 10 apparel brands, Nike was named the most valuable, stealing the top spot from Zara by increasing 55 percent to a brand value of $24.6 billion. The strongest rise, however, came from Uniqlo, which rose by 58 percent to $7.3 billion, moving up two notches to take the number-four spot. The only decliner in the top 10 was U.S. yoga brand Lululemon, down 13 percent to ninth place and a valuation of $3.3 billion."


Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart2 5 22


Alec Richards


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

VIDEO | Keith's Macro Notebook 5/22: VIX VOLUME EUROPE

A Liquidity Trap

Client Talking Points


The front-month frustration smashed right back to its year-to-date lows (not a buy signal). Last time VIX touched this level was August 2013 – the SPX dropped -3.5% in less than 2 weeks from there.


The giant sucking sound of a liquidity trap continues to manifest. Total US equity market volume was down -9% and -31% versus one- and three-month averages yesterday. TREND continues of volume DOWN on up-days and UP on down-days.


Equities continue to signal lower-highs as the PMI data slowed sequentially – rate of change model matters. Italian stocks (led gainers January-April) now lead losers on down days, down -0.9% this morning for MIB Index, breaking our TREND line.

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


JAPAN: Nikkei +2.1% after being down 5 of the 6 sessions prior - still -11.3% YTD #hooray @KeithMcCullough


"Change your thoughts and you change your world." - Norman Vincent Peale


The Smithsonian's National Zoo is offering an up-close-and-personal visit with its 8-month-old giant panda Bao Bao. For $6,000, zoo-goers can take a behind-the-scenes tour to meet Bao Bao and her mother, Mei Xiang, as a part of the zoo's VIP package for their annual fundraiser.  (USA Today)

So, Challenge Their God

This note was originally published at 8am on May 08, 2014 for Hedgeye subscribers.

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

-New York Sun, April, 1878


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


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


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


Back to the Global Macro Grind

So, Challenge Their God - Titanic 03.31.2014 

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


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


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

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

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


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


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


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

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

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


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


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


So, Challenge Their God - Chart of the Day


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


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%

SPX 1861-1890

RUT 1101-1121

VIX 12.83-14.52

USD 79.01-79.59

EUR/USD 1.38-1.39

Pound 1.68-1.70


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

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