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LEISURE LETTER (05/23/2014)

Tickers: HK.0027, IGT, MGM, OEH, PEB, CCL 


  • May 23 - Codere 1Q 2014 10am
  • May 27 - Aristocrat 1H 2014 11pm (, Passcode: 9068797)


Galaxy Entertainment Group - (Macau Business Daily) According to Michael Mecca, President, Galaxy could record “high single digit growth in VIP gaming revenue this year”

TAKEAWAY: High single digit VIP gaming revenue growth would exceed investors' current expectations.  We've been consistently modeling 7% VIP growth for 2014.


Genting Berhad - The Nevada Gaming Commission found Malaysia-based Genting Berhad suitable to do business in the state as Resorts World Las Vegas. Genting plans to incorporate 80 percent to 85 percent of the Echelon buildings into the Resorts World development. The first phase of RWLV is expected to be complete in 24 to 36 months.

TAKEAWAY: A formality given we witnessed site activity during a recent visit to Las Vegas


IGT - selected Matsui as the exclusive distributor for Electronic Gaming Machines in Korea.

TAKEAWAY: Establishing a relationship to help with the penetration of the developing Korean gaming market.


MGM - will spend more than $450 million to create The Park, an outdoor retail, dining and entertainment complex located between Monte Carlo and New York-New York. The project is anchored by a 20,000-seat sports arena and events center.  MGM Resorts Chairman and CEO Jim Murren said the plans “do not include one single slot machine or table game.”

TAKEAWAY: Betting big on non-gaming amenities.  Casino trends are still not great but we'd like to see the ROI analysis on this.


6460.JP Sega Sammy - Sega Sammy Creation (a division of Sega Sammy Holdings, Inc.) was established in June 2013 as a gaming machine manufacturer, with a focus on large-sized products. This week at G2E Asia 2014, the company unveiled the Sic Bo Bonus Jackpot, with four progressive levels of jackpot. Sega Sammy Creation plans to sell to casinos in Macau, Singapore and the Philippines, once its products are approved by regulators followed by North America and Japan - after gaming legislation is approved. 

TAKEAWAY: Sega Sammy in the mix for Asian slots


OEH - According to the Spanish web-site (www.expansion.com) Marriott is the leading buyer the Hotel Ritz in Madrid. The U.S. hotel giant has offered 130 million euros for the historic property.  OEH owns 50% of the hotel.  OEH purchased the Hotel Ritz with its partner in 2003 for 125 million euros. 

TAKEAWAY: A great price for a low EBITDA generating asset as well as considering industry experts believe the hotel needs between 40 million and 50 million euro capex investment.


PEB - acquired the 160-room Prescott Hotel, located in Union Square in San Francisco for $49 million or approximately $306,000 per key.  Pebblebrook indicated it will undertake a comprehensive renovation and repositioning of the hotel sometime between 2015 and 2016, including all guest rooms, bathrooms and public areas

TAKEAWAY:  By our math, we estimate PEB will spend an additional $8 million to renovate the property with the hope of doubling ADR and RevPAR.  Assuming the majority of the incremental revenue drops to EBITDA, we estimate a 20% return on total invested capital for shareholders – but this is predicated on significantly higher ADR.


CCL - (Cruise Critic, Cruise Currents, Travel Weekly) Arnold Donald commentary:

  • Carnival brand had record bookings over past few months. Public perception has improved.
  • Most of China do not know about cruising
  • Holland America's new ship will replace the lost capacity from the transfer of two older ships to Australia
  • Need to convey the cruise product and value compared to a land vacation. 
  • MSC 2 new ships 
    • Would have only a "tiny percentage" impact on industry
    • Risk that “psychological pricing” which could be introduced by MSC to fill its extra capacity could have a negative impact on rival lines 
    • Should create incremental demand and "soften the beachhead" to attract new-to-cruise customers
  • CCL is the 5th largest purchaser of air travel in the wrold.

TAKEAWAY:  Mostly positive commentary ahead of earnings in June but we do worry about industry supply growth.


CCL - (TTG) CLIA 2014: Commission remains an 'ongoing debate' 

Carnival UK’s chief commercial officer, Gerard Tempest, has conceded that remuneration still “continues to be an ongoing debate”.  Tempest insisted there were no immediate plans to alter the current 7% commission levels, which were increased in December last year, but added: “Never say never”.  Tempest also conceded that late discounting remained an issue for the sector which, like all cruise lines, he is keen to tackle.  “We are in an ongoing dialogue about our pricing strategy to see what we can do about some late discounting

TAKEAWAY: Still cautious on price discounting.  On a fleetwide basis, CCL commissions as a % of gross revenues have been steady in 2012-2013 at 15.1%.


Singapore Changi visitation - handled 4.38 million passenger movements in April, +3.4% YoY.  Thailand and China traffic registered declines of 15% and 8.0% respectively. 


LEISURE LETTER (05/23/2014) - MACAU23


TAKEAWAY: The slowdown in Thai and Chinese travel is a worrisome trend. 


Macau visitation -  attributable to the Easter holidays, visitor arrivals increased 10% YoY to 2,636,614 in April 2014.  Visitors from Mainland China increased by 14% YoY to 1,743,776, coming primarily from Guangdong Province (685,796), Fujian Province (72,282) and Hunan Province (63,972).  Mainland visitors travelling under the Individual Visit Scheme totaled 707,085, sharing 41% of the total from Mainland China.  Visitors from Hong Kong (585,824) and the Republic of Korea (33,975) increased by 9% and 11% respectively.  The average length of stay of visitors remained unchanged from a year earlier at 1.0 days.


LEISURE LETTER (05/23/2014) - MACAU12


TAKEAWAY: Good visitation numbers from Mainland China and Hong Kong.


Culinary Local 226 Workers to strike – against nine Downtown Las Vegas hotels/casinos beginning June 1. Upward of 2,000 restaurant workers, hotel housekeepers, cocktail servers, bartenders, and other members of the unions plan to walk off their jobs and picket outside the D, Four Queens, Binion’s, Fremont, Main Street Station, Plaza, Las Vegas Club, El Cortez and Golden Gate.  However, union leaders still have meetings with El Cortez and Boyd Gaming Corp., which owns Fremont and Main Street Station casinos, scheduled before the strike date.

TAKEAWAY: We expect the remaining operators to reach agreement with the Union and avoid the disruptions of a worker strike.


Las Vegas Withdrew from 2016 GOP Convention Process - The Las Vegas 2016 Host Committee sent the withdrawal letter to the Republican National Committee because the Las Vegas Convention Center would have trouble “clearing enough days in the June 2016 calendar” to set up and host the presidential nominating party as well as lacked VIP sky boxes required for the event. Additionally, despite strong support from Sheldon Adelson and Steve Wynn, the city also was having problems guaranteeing $60 million to $70 million to hold the event.  Denver, Dallas, Cleveland and Kansas City, are the remaining contenders. 

TAKEAWAY: A mild negative for Las Vegas.


Macau Resident Payouts - The government says it will begin paying this year’s cash handouts in the first week of July. Executive Council spokesman Leong Heng Teng says that between July and September the government will share MOP5.65 billion (US$707.46 million) among about 650,000 people. Over 590,000 permanent residents will each receive MOP9,000 (MOP1,000 higher than last year) and over 61,000 temporary residents will each receive MOP5,400.

Additionally, the government will make a MOP7,000 deposit directly into the retirement fund for each eligible residents and a smaller MOP5,400 contribution for non-permanent residents.  The amounts to be paid are the biggest ever since cash handouts began in 2008.  

TAKEAWAY: The residents share in the gaming profits. 


Avian Flu - the National Health and Family Planning Commission of China notified the World Health Organization (WHO) of four additional laboratory confirmed cases of human infection with avian influenza A (H7N9) virus.

TAKEAWAY: Not much to worry about at this point.


China Immigration - Guangdong authorities received at least 10,000 applications on the first day of the E-permit pilot scheme.

TAKEAWAY: Strong early applications for a "e-passport" which will reduce border crossing immigration processing time from 30-45 seconds to 8-10 seconds. 


Lodging Transaction - The St. Regis Monarch Beach Resort has been sold to KSL Capital Partners LLC, a Denver-based private equity firm, by an affiliate of Washington Holdings. No transaction details were disclosed.  

TAKEAWAY: Great timing on the acquisition and better timing on the sell.


China Residential Real Estate- according to the Shanghai Securities News report that the Ministry of Housing will ease property restrictions for 30 non-first-tier cities, especially in those that have an over-supply of homes. While the ministry has decided on the policy, there remains no concrete timing for implementation, and first-tier cities will likely be excluded due to continuous signs of rising home prices.

TAKEAWAY: Anything to stem the macro decline


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.


No Volume

Client Talking Points


As #InflationAcclerating slows US growth, confidence flows right back to slow-growth bonds – this week’s flows into Fixed was +$3.9B (versus the year-to-date weekly average of +$2.1B) whereas Equity fund outflows of -$1.0B (versus YTD average weekly inflow of +$3.1B) are starting to explain why there is no volume to chase the up days.


Yields don’t seem to care much about the US equity short-covering conniption consensus tends to have on up-days for spoos. A 2.55% 10 year is another lower-high and well below our TAIL risk yield line of 2.61% resistance. Buy bonds.


Just on time for the long weekend, WTI crude is higher again at $103.85, testing year-to-date highs – whatever we do, we shouldn’t call these real-world realities inflation, because the Fed said. so. Energy (XLE) stocks still look great. Buy inflation.

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


AUSTRALIA: +0.2% for the ASX to end the wk at +5.3% YTD and we continue to like that equity market @KeithMcCullough


"If you learn from defeat, you haven't really lost." - Zig Ziglar


Barclays Bank has been fined 26 million pounds ($43.8 million) by UK regulators after one of its traders was discovered attempting to fix the price of gold.  (BBC)

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Muscle Hamsters

This note was originally published at 8am on May 09, 2014 for Hedgeye subscribers.

“Your job is to coach the team I give you.”

-Sonny Weaver Jr.


That’s a Kevin Costner quote from the new NFL movie my wife and I went to see on date night a few weeks back called Draft Day. The movie is somewhat contrived but, at the same time, somewhat real. Sort of like a nickname.


Imagine your nickname was the Muscle Hamster? As I was watching the actual NFL Draft last night with some of Hedgeye’s former college football boys (Casey Flavin, Darius Dale, and Ryan Fodor), they were trying to explain to me why they call him the hamster.


Like most things in life, I don’t totally get it until I see it. One pic of #22 RB for the Tampa Bay Bucs, Doug Martin, says 1,000 words. The dude is 5’9 and weighs 215lbs. He might not like the nickname, but he definitely looks like it.


Muscle Hamsters - 55


Back to the Global Macro Grind


If you’re a levered long high-multiple-growth-momentum-chaser, you may not like the complexion of the US stock market this year, but that doesn’t change what it’s become – a slow-growth-yield-chaser.


If we’ve shown you this pic 100 times in 2014, it probably feels like 1,000:


  1. Utilities (XLU) are +13% YTD
  2. Consumer Discretionary (XLY) stocks are -5% YTD


If you don’t like the Sector Variance that’s developing out there, here’s another pic:


  1. Russell2000 is -9.1% from its all-time-bubble-peak in March…
  2. Whereas the SP500 is only -0.8% from her all-time-twitter-muscles-but-but-the-market-isn’t-down-yet peak


Or you can #SnapChat some of the dirtier growth pics:


  1. Twitter (TWTR) -49%
  2. FireEye (FEYE) -37%
  3. Amazon (AMZN) -28%
  4. Yelp (YELP) -23%
  5. Zulily (ZU) -20%


No one likes to be called dirty. I know. I am sorry. But the truth is that some of these charts are filthy.


In reviewing all the tapes, the Draft Day Hedgeye Playbook remains the same:


  1. A Down Dollar Policy To Inflate ultimately drives #InflationAccelerating
  2. As real-world inflation accelerates, real (inflation adjusted) consumption growth slows
  3. And, as 71% of GDP (consumption) slows, US growth slows


“So”, if you want to win this year, you’re chasing the muscle-hamster-wheel that the Fed has trained you on and praying that no one knocks the entire cage of interconnected risk over. That would suck; especially since we’re all in this #YieldChasing thing together.


Yep, we’re all out in the open doing things we naturally wouldn’t do (hamsters are crepuscular, which means that if they weren’t centrally planned to run around in a cage, they’d stay underground in order to avoid being eaten).


And since doing what you shouldn’t naturally do only works if you genuinely believe that this time is different (try buying the company with no earnings at 15x sales again), you just have to get on that damn performance chasing wheel and run!


Run, muscle hamsters, run!


Because, as long as you can outrun the 80% of funds that can’t beat a bloated SP500 beta anymore, you will live to pay peak cost of living in America for another day!


Our immediate-term Global Macro Risk Ranges are now (today, in brackets I have our intermediate-term TREND signal as well):


UST 10yr Yield 2.56-2.64% (bearish)

SPX 1861-1888 (bullish)

RUT 1087-1118 (bearish)

Nikkei 14004-14348 (bearish)


VIX 12.96-14.52 (neutral)

USD 79.01-79.74 (bearish)

EUR/USD 1.37-1.39 (bullish)

Pound 1.68-1.70 (bullish)


WTIC oil 98.99-102.27 (bullish)

NatGas 4.52-4.81 (bullish)

Gold 1280-1315 (bullish)

Corn 5.05-5.25 (bullish)


Best of luck out there today,



Muscle Hamsters - Chart of the Day

Real World Education

“If I had learned education, I would not have had time to learn anything else.”

-Cornelius Vanderbilt


If you want to be humbled in this good life, study economic #history. The more I read, the less I realize I know. Given that our economy is centrally planned by people who have no financial incentive to un-learn failed policies and re-learn from the past, that often scares me.


Real World Education - 44


Then I’ll go back to a book, read some more, and find that light of American progress. While it may be dimming, it’s always there. We don’t put two feet on the floor for our families and firms every morning thinking about what government can do for us.


I think about what we can build to change a failed status quo. That’s not easy. I don’t want it to be. My education provides me with the context of its frailty. If I wasn’t paid to read and write to you every day, I wouldn’t be so optimistic that there’s a much better way.


Back to the Global Macro Grind


New ideas scare a certain type of people; especially people whose failed ideas you are challenging. “So”, let’s do that this morning and challenge 3 of the most widely held academic economic dogmas of America’s 21st century:


1. Money Printing (Dollar Devaluation and Debt Monetization)

2. The American Dream (everyone has to own one, right? #Housing)

3. Yield Chasing (you have to invest in bubbles, or you don’t get paid)


Fair Enough. You can go back to school and write a Ph.D. disproving each of these and I’ll see you in the 22nd century. In the meantime, you’ll have to use A) common sense and B) real-time market data:


1. Fed’s Balance Sheet (Money Printing) update – up +$929 beeelion dollars year-over-year to $4.3 TRILLION and now the NY Fed’s Bill Dudley (formerly of The Goldman Sachs, who helped bail out the banks) is saying $1.7 TRILLION of that (MBS –Mortgage Backed Securities) never has to be sold, unwound, etc. I’m still digging through the Constitution to find who made him god.


2. US #HousingSlowdown (The American Dream) update – post whatever the “weather bounce” was supposed to give us (oh, and rates falling, fast), both supply and demand numbers released for April Housing were not good yesterday.


A) Housing Demand – existing home sales released by the NAR (National Assoc. of Realtors) were down -6.8% year-over-year in April (vs. -7.5% y/y in March) and the Northeast (which was really supposed to have the weather bounce) saw existing home sales down -6.3% in April vs. -4.8% in March.

B) Housing Supply - #drumroll… saw its biggest sequential (month-over-month) ramp, ever. Yes, by our proprietary calculations, ever is a very long time. In percentage terms, existing homes inventory ramped +16.8% in April versus March. I’ll circle back on this colossal failure of the government trying to reflate a bubble that already blew up once at the end of this note.


3. Fixed Income vs. Equity Fund Flows (#YieldChasing) update – since the un-elected and unprecedented ideology that “rates on savings have to be 0% forever” has many unintended consequences, let’s just focus on the most obvious one – forcing investors to chase a yield (a rate of return to live on) greater than the risk free rate (of 0%).


A) Fixed Income Fund flows accelerated to +$3.9B in weekly INFLOW (versus the YTD weekly avg of $2.1B)

B) Equity Fund flows saw their 3rd wk of OUTFLOW in 2014 at -$1.0B (versus the YTD weekly avg INFLOW of +$3.1B)


“So”, in hash tag-less English that an “educated” person can’t obfuscate with big words:


1. Money Printing – the Policy To Inflate (but not calling it that) causes US consumption growth (71% of the economy) to slow

2. Yield Chasing – i.e. buying bonds and anything that looks like a bond (selling growth stocks) takes hold as the economy slows

3. The American Dream – yeah, baby!


Oh, yeah, baby!


Damn those free-market American Capitalists (Vanderbilt, Carnegie, Rockefeller, etc.) of the 19th century and/or anything that looks like them – and go lever yourself up and buy an unproductive asset (a house). Then sit on it, and rotate, until the Fed bubbles its price up.


Janet Yellen is having a bird right now because The American Dream that she and her boy Barney (Frank) drew up just isn’t working. As interest rates fall and the redo of the housing bubble takes hold… newsflash: first time buyers can’t afford to buy a house.


First time buyers of US homes represented 29% of demand in April. That’s down from 30% in March and testing 10 year lows. Rents, meanwhile, are hitting all-time highs in America. I know – that’s not inflationary. It’s not the American progress they planned for either.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.61%


RUT 1086-1121

VIX 11.84-14.01

WTI Oil 102.45-104.36

Gold 1

Copper 3.10-3.20


Best of luck out there today and enjoy your long weekend,



Keith R. McCullough
Chief Executive Officer


Real World Education - No Bounce

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