LEISURE LETTER (05/28/2014)



  • Monday, June 2 - Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 


G13 Genting Singapore – up eight wholly owned subsidiaries in Japan. the Japanese companies – each with a nominal registered capital of JPY2.00 (2 US cents) – include Resorts World Japan Co Ltd, Resorts World Tokyo Co Ltd and Resorts World Osaka Co Ltd, and “will be principally engaged in investment holding, leisure and related businesses”.

Takeaway: Setting the stage to be ready for the casino legislation.


9766.JP Konami – once Japanese casino legislation is approved, the company will establish a subsidiary through which it would take a minority stake in casinos in partnership with operators. 

Takeaway: Foreign operators with local partners seems to be the direction this is going.


LVS/1928:HK – Waddell & Reed Advisors announced a simultaneous sale of Sands China Limited (1928.HK) and purchase of Las Vegas Sands (LVS) of 16,963,601 shares via Merrill Lynch. 

Takeaway: It would appear Waddell & Reed is seeking exposure to the emerging and growth opportunities of Japan and Korea which would be best expressed via LVS rather than 1928.


BEE - commenced a 34M share secondary offering and to use the net proceeds from the Offering to fund the acquisition of the 63.6% ownership interest in the Hotel del Coronado that it does not own from its joint venture partner, to redeem all of the issued and outstanding shares of its 8.25% Series C Cumulative Redeemable Preferred Stock, and for general corporate purposes. Management estimates the to-be-acquired 63.6% interest in the hotel is projected to generate an incremental $19M to $21M of EBITDA for the remainder of 2014. In Q1 of 2014, RevPAR grew 11% at the property resulting in 21% EBITDA growth. 

Takeaway: In February 2011, BEE sold the 63.6% interest to Blackstone as a way to unwind the $630 million loan on the property.  At that time, the del Coronado was valued at $590 million below BEE's acquisition price of $745 million in 2005.


RCL - last week, the bailiff in the fjord-side city of Ålesund boarded and seized Independence of the Seas, citing the owner, Royal Caribbean's, failure to pay pilot fees from the previous year. According to The Norwegian Coastal Administration (NCA), which ordered the boat to be seized, Royal Caribbean owed the NCA about 600,000 Norwegian kroner which should have been paid in mid-October last year. Following the seizure, the ship's captain contacted Royal Caribbean immediately and the money was paid to NCA within an hour.

Takeaway: Never mess with the taxing authorities.


RCL - entered into an agreement with The Port Authority of New York and New Jersey for RCL to develop the next phase of Cape Liberty Cruise Port in Bayonne, N.J. The $55-million project will include the construction of a new, guest terminal, with 125,000 square feet of check-in, customs and immigration and luggage processing space, as well as a 900-car parking structure and pier improvements. The new facilities will be built adjacent to the terminal currently used to welcome guests and will accommodate the cruise company’s ships, including the Quantum of the Seas and Anthem of the Seas, each to start service at Cape Liberty in November 2014 and 2015, respectively. The new terminal is scheduled to be completed in November 2014.


Australia Gaming Expansion – subject to final environmental and planning approvals, Tony Fung's A$8.15 billion (US$7.53 billion) Aquis project near Cairns and ASF Consortium's A$7.5 billion Broadwater Marine Project on the Gold Coast will receive gaming licenses to build multi-billion-dollar mega-casinos in Queensland. Plans for the Aquis project, which will be 13 kilometers (eight miles) north of the Great Barrier Reef gateway city of Cairns in Yorkeys Knob, include the construction of a casino, nine luxury hotels with 3,750 rooms, and one of the world's largest aquariums.  ASF Group, a Chinese-Australian investment firm listed on the Australian Securities Exchange which was joined in its bid by two state-owned Chinese companies, said its Gold Coast proposal included a waterfront eco-park and a cruise ship terminal.

Takeaway: More competition for the SE Asian gambler, good for new slot sales and we await the highly anticipated Brisbane integrated resorts licenses award as well. 


McCarran Airport Traffic - increased 1.7% in April on year-over-year basis as compared to +2.8% in March.

Takeaway: Bulls will blame the slowdown on the Easter calendar shift.  Traffic declined 0.2% YoY in April 2013.


McCarran Airport New Service - Frontier Airlines, which currently averages six round trips a day between Denver International and McCarran International airports, will add flights from Washington’s Dulles International Airport and Cleveland. Nonstop service between Washington, D.C., and Las Vegas begins Sept. 8 with four flights a week. Frontier will run those flights Mondays, Thursdays, Fridays and Sundays. Frontier’s Cleveland service will begin Sept. 11 with two flights a week, Thursdays and Sundays. Frontier will fly the routes with 168-passenger Airbus A320 twin-engine jets. Frontier’s current schedule of 39 flights a week to Las Vegas ranks it the 12th busiest carrier at McCarran. The airline flew 137,100 passengers in the first quarter of 2014.

Takeaway: We like to see expansion of long-haul service as such gamblers typically spend more time in Las Vegas as compared to short-haul service from the West Coast.

Iowa Gaming Expansion – The Iowa Racing and Gaming Commission will meet Thursday in Jefferson to visit the site of a proposed new casino, hear a formal presentation and take public comments. A decision won't be made until the commission's June 12 meeting. The proposed project would be a $40 million casino resort with restaurants, a conference center and a hotel on the north edge of Jefferson.

Takeaway: A low probability event, awarding a new license, as Iowa already has 18 commercial casinos and the IRGC recently voted down a proposed casino in Cedar Rapids due to canabalization concerns. 


Greektown Casino, Detroit – more than a year after Cleveland Cavaliers owner and Quicken Loans founder Dan Gilbert took control of the casino, the new owner plans to scale back a $150 million renovation plan to work totaling $25 million to $50 million. Greektown is the smallest of the three Detroit casinos by revenue, at 24 percent of the market.

Takeaway: A mature market with little hope for new growth, so minimizing capex makes sense. 


Lodging Transcation – Accor announces that its HotelInvest business has agreed to purchase two real-estate portfolios representing 86 and 11 hotels respectively (12,838 rooms) for a total consideration of about €900 million or approx. US$1.228 billion. The first portfolio, representing 86 hotels and 11,286 rooms across Germany (67 hotels) and the Netherlands (19 hotels) has been operated by Accor since 2007 and includes ibis (29 hotels), ibis budget (31 hotels), Mercure (17 hotels) and Novotel (9 hotels) for €722 million. The second portfolio, 11 hotels and 1,592 rooms in Switzerland, Accor has entered into exclusive negotiations with Axa Real Estate. This portfolio has been operated by Accor since 2008 and includes ibis (5 hotels), ibis budget (2 hotels), Novotel (3 hotels) and MGallery (1 hotel) for €188 million.

Takeaway:  One of the first lodging companies to adopt the asset light strategy getting more real estate intensive.   


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.



Takeaway: Mortgage purchase applications dropped for the third consecutive week amid a generally favorable rate environment.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.




Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended May 23. Mortgage purchase application volume slid further this week dropping another -1.1% w/w. This brings the streak of negative sequential prints to three in a row on the purchase side. And while 2Q14 is tracking higher vs 1Q14 by 3.5%, it remains down year-over-year by just over -15%.


Activity cooled off on the refi side as well. After recording a few good prints (+4% w/w last week and +7% w/w in the previous week), mortgage refinance application volume was down -1.4% this past week in spite of low rates.  


As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.


Trends in housing demand tend to lead price trends by 12-18 months and, as the first chart below shows, demand recently peaked in 2Q13 and has fallen significantly since. Admittedly, 2Q14 is tracking up vs 1Q14 by 3.5%, but relative to the -19% decline since mid-2013 (and the positive shift in weather) this bounce remains quite minor.


The prevailing weakness in demand suggests that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.













About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.


Joshua Steiner, CFA


Christian B. Drake

Stay Long Bonds

Client Talking Points


The yield faded fast on yesterday’s no-volume US equity squeeze (total US Equity market volume down -29% versus its three-month average) and has ticked down again this morning to 2.50% (down -20 basis points month-over-month) ahead of the 2014 US GDP consensus forecasts that need to come down. Stay long bonds. 


Forcing consensus to cover/chase, the II Bull/Bear Spread is now re-testing five-year highs (to the bullish side) at +4,100 basis points wide (58.3% Bulls, 17.3% Bears). That and front month VIX with an 11-handle on it is not the all systems go chase-high signal. Sell/short IWM and KRE.


As the Swiss Franc ripped, so did Swiss Exports and GDP (Swiss exports and GDP up +2% year-over-year in Q1 – but what about the weather?). It’s a good thing Keynesian policy makers begging for weak currencies aren’t held accountable to data like this or the UK’s.

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


COMMODITIES: correction day (yesterday) sees no follow through selling this morning @KeithMcCullough


"Being challenged in life is inevitable, being defeated is optional." - Roger Crawford


40 and 10, the number of points and assists, respectively, from Oklahoma City Thunder basketball star Russell Westbrook last night in his team’s 105-92 victory over the San Antonio Spurs in the NBA’s Western Conference Final. That best-of-seven series is now tied at two games apiece.

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Truth and Good?

This note was originally published at 8am on May 14, 2014 for Hedgeye subscribers.

“Today, I want to tell you about an investment opportunity with potential high cash flow, a superior structure, a unique sharing agreement, and low risk.” 1983 Prudential-Bache Energy Income Fund marketing video

Between 1983 and 1991 Prudential-Bache Securities raised $1.4 billion from the sale of 35 “energy income fund” limited partnerships to more than 130,000 individual investors.  The yield chase was on as interest rates fell in the wake of the early ‘80s inflation scare, and Wall Street was eager to fill the demand with new products that commanded high fees and commissions.  Prudential-Bache brokers touted the limited partnerships to their retail clients as high-yielding, tax-advantaged, low-risk investments…


Truth and Good? - kevpru


Of course, what seems too good to be true proved to be just that.  By the late ‘80s distributions began to trail false promises as hefty fees ate into the income and asset values fell.  Some of the partnerships borrowed money to maintain the payouts, but it wasn’t a sustainable solution.  Eventually, most of the partnerships slashed distributions and collapsed.


In the class action lawsuits that followed, the plaintiffs alleged that Prudential-Bache “misrepresented and omitted material facts concerning cash distributions to investors by creating the appearance that the partnerships were distributing monies derived from operating income when in reality the distributions were returns of capital…




I traveled to Omaha, Nebraska two weeks ago to pitch the bear case on Master Limited Partnerships to a group of value investors.  Buffett couldn’t fit me into his schedule, but I was lucky enough to meet with seasoned money managers cut from the same cloth. 


These guys understood the MLP basics – tax-exempt energy companies with high current yields, etc. – but not much more.  So I walked through a few of the more surreptitious aspects of the story: the enormous “incentive” fees that many MLPs pay to their General Partners; the conflicts of interest and limited fiduciary duties; the gimmicky accounting; the serial capital raising; and the valuations.


I was showing the group how, since its inception, retail-favorite LINN Energy (LINE) has lost more than $1.4 billion while paying out $3.1 billion in distributions, when a salty Australian in the back blurted out, “The whole thing seems like a big Ponzi scheme to me.”  I shrugged, “My compliance officer doesn’t let me use that word.”


MLPs are essential to the build-out of energy infrastructure that’s needed to support the recent US hydrocarbon production boom – the story is real – but that doesn’t mean all will profit.  The building of the American railroads in the late 19th century was ripe with self-dealing and stock schemes.  James Surowiecki of “The New Yorker” called it, “one of the biggest cons the country has ever seen, with huge losses for investors and huge fortunes for the moguls.  Still, we ended up with a national transportation system.”


It’s been said that there are no new eras, only new errors – most things in finance are cyclical.  We look at the fees that some of the largest MLPs are paying to their GPs today and wonder if this time will be different.  How long can a business that pays two-thirds of its income to its manager survive?

It’s a unique instance of information asymmetry.  MLPs are mostly owned by retail investors – not surprising given the exorbitant fees that they hand over to the wealthy individuals and institutions that own their GPs.  A well-informed investor is unlikely to give his money to a hedge fund manager who defines his own performance, collects a 50% performance fee, and owes limited fiduciary duties to his investors.  Would you invest in that fund?  I hope not.  Giving your money to that hedge fund is a liability, but with the Alerian MLP Infrastructure Index currently trading at 2x the earnings multiple of the S&P 500 (see the Chart of the Day below) despite lower returns on equity (~8%) and higher leverage (~42% debt/capital), that’s still way out-of-consensus.


But we’re OK with that.  It’s a lonely view but we’re not contrarian merely for the sake of it – there’s ample justification for being negative on certain MLPs, and perhaps the timing is right as we enter the later innings of the US infrastructure growth boom, and the Federal Reserve weans markets off of the morphine drip.


Over the past year, we’ve expressed this view with reasonable success with negative calls on the E&P MLPs (most notably, LINN Energy), Kinder Morgan Energy Partners (KMP), and Boardwalk Pipeline Partners (BWP), while the MLP indices marched to new all-time highs.  Our most recent work delves into the numerous issues of Atlas Energy LP (ATLS) and its limited partnerships (ping to see that research).  In the first conference call after we published our note, one Atlas executive declared that because his stock has not fallen, “Truth and good have prevailed!” 


Of course, I’m the bad guy.  Well, for now at least…


Kevin Kaiser

Managing Director


Truth and Good? - Chart of the Day


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%

SPX 1873-1901

RUT 1094-1133

VIX 11.99-14.32

Pound 1.67-1.69

WTIC 100.85-102.81

Gold 1280-1315 


What We Don't Know

“Only when we admit what we don’t know can we ever hope to learn it.”

-Ed Catmull


That’s another fantastic leadership quote from a new book I introduced in yesterday’s Early Look – Creativity Inc. Overcoming The Unseen Forces That Stand In The Way of True Inspiration.


“The best managers acknowledge and make room for what they do not know – not just because humility is a virtue but because until one adopts that mindset, the more striking breakthroughs cannot occur… They must accept risk… and engage with anything that creates fear.” –Ed Catmull


I can tell you that I wake up every morning living in fear of one simple thing – losing. I hate losing. And I refuse to allow my team to lose for extended periods of time. If and when we are wrong, we either double down or change our mind. We get paid to take a line and be held accountable to it.


Back to the Global Macro Grind…


Being long slow-growth and #YieldChasing in 2014 (i.e. being long bonds and/or anything equities that looks like a bond) has not only been the winning position YTD, but it was yesterday too.


With SP500 busting out (on no volume – US Equity Volume -29% vs the 3mth avg) to all-time-bubble highs intraday, bonds reversed from opening down to closing at their highs of the day. The 10yr UST Yield has ticked down yet again this morning to re-test a fresh 2014 low of 2.49%. Bond bears are losing.


But, but, Biotech (IBB) +2.5% yesterday was winning. Yep, nice trade. I just hope you didn’t own it the whole way down, because that “growth” sub-sector of the SP500 has been a certified train wreck this year. Most things high-multiple, high-beta have been.


“So” do we buyem because they were up?


Let’s get real here folks. I left Career Risk Management Inc. in 2007 so that on days like this I could double-down on my team’s hard work and process. If you want to beat a monthly bogey, great – chase the wabbit. If you want to win a championship in 2014, stay with the fundamental trends.


In the US, here are the big intermediate-term TRENDs that have been winning for the last 5-6 months:


1. US #InflationAcclerating

2. US #ConsumerSlowing

3. US #HousingSlowdown


Winning being defined as the score:


1. CRB Commodities Index, Food, and Oil +8-22% YTD #InflationAcclerating

2. US Consumer Discretionary Stocks (XLY) = DOWN -2.1% YTD #ConsumerSlowing

3. US Housing Stocks (ITB)= DOWN -3.0% YTD #HousingSlowdown


That’s not to say that I didn’t feel like the NY Rangers last night. However magical a playoff run they’ve had, getting lit up for 7 goals in Montreal feels like I did at yesterday’s market close. Kreider went to de penalty box in the first minute of the game. Canadiens scored. He felt shame.


“So” why shouldn’t I change our entire Macro Theme Deck (6-12 month view) and positioning this morning?


1. Why isn’t it “different this time” (i.e. bond yields going down aren’t an explicit sign of US growth slowing)?

2. Why isn’t it time to giddy up and buy stocks like Facebook, Twitter, and Yelp that blew up into the thralls of April?

3. Why isn’t it time to pretend that no-volume and an 11 VIX doesn’t matter as a risk management signal anymore?


Why Mucker? Why can’t you just change everything you and your team have done YTD and join a crowded consensus long-growth US Equity Multiple Expansion (and bearish on inflation and bonds) view that almost everyone else on the sell-side has?


What would change my mind? That’s easy. Going back to what we loved about our US #GrowthAccelerating call in 2013:


1. #StrongDollar

2. #RatesRising

3. #DeflatingTheInflation


In fact the Swiss have some of that this morning. As the Swiss Franc ripped to new highs, Swiss Exports ramped +2% year-over-year and so did Switzerland’s GDP growth rate. Sound familiar, Mr. Krugman? Same thing happened this year in the UK. #StrongCurrency tax cuts for The People.


“So”, other than a lot, what else don’t we know that could be driving spooos higher with the Russell 2000 -1.9% YTD?


1. How many hedge funds came into 2014 levered long growth, got smoked, then shorted the April lows?

2. How many people have Yellen and Bernanke whispered to that if growth continues to slow, that they go Qe6?

3. How many one-legged ducks can avoid swimming in a circle?


What we do know is that with the VIX at 11.51 (testing YTD lows) and the II Bull/Bear sentiment spread at its YTD highs (58.3% Bullish, 17.3% Bearish = +4100bps wide to the Bull side) that the buy in May, chase performance, and pray thing is alive and well.


Our immediate-term risk ranges are now (12 Global Macro Ranges are in our Daily Trading Range product):


UST 10yr Yield 2.48-2.60%

SPX 1888-1924

RUT 1089-1144

VIX 11.09-13.79

WTIC Oil 102.99-105.27

Gold 1261-1315


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


What We Don't Know - Chart of the Day

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