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LEISURE LETTER (06/02/2014)

Tickers:  BYI, CZR, BEE, RCL, NCLH


  • Mon June 2: Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference, New York
  • Mon June 2 - Tues June 3: NYU Int'l Hospitality Industry Conference, New York
  • Mon June 2 - Tues June 3: Midwest Gaming Summit, Rosemount, IL
  • Tues June 3 - Thurs June 5: REITWeek, New York, NY
  • Wed June 4 - Thurs June 5: Russian Gaming Week 2014
  • Thurs June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Tues June 10 - Thurs June 12: Bally Systems User Conference
    Mohegan Sun


BYI – amended and restated its Corporate Credit Facility whereby the Company increased the facility by an additional $370 million to a maximum of $1.07 billion, extend the maturity date of the Company’s Term Loan A and revolving credit facility to May 27, 2019, and revise interest rate equal to either the applicable base rate or LIBOR, plus in each case a margin determined by the Company’s consolidated total leverage ratio, with a range of base rate margins from 0% to 1.00% and a range of LIBOR margins from 1.00% to 2.00%.

Takeaway: More buybacks or should we expect a small acquisition? 


BEL:PM - Belle Corp (SINO:PM) – announced its intention to undertake a reorganization of its gaming assets under a separate listed entity.  The Board of Directors of Belle Corporation approved a re-organization under which Belle will inject its 100% ownership of Premium Leisure Amusements Inc (PLAI) and its shares representing 34.5% of Pacific Online Systems Corporation into Sinophil (SINO:PM) Corporation, a subsidiary of Belle that is listed on the Philippine Stock Exchange.  PLAI is part of the consortium that holds the PAGCOR license for "City of Dreams Manilla" to be operated by Melco Crown Philippines and located in PAGCOR Entertainment City. Belle will retain direct ownership of the land and building of City of Dreams Manilla, from which Belle will receive rental income. The reorganization is expected to be completed on or about August 2014.

Takeaway: Belle is a conglomerate and given the highly regulated nature of the gaming business, this separation makes sense.

CZR – Harrah's Tunica will close its doors today.

Takeaway:  Tough market


FB promoted Tarquin Henderson, head of gaming sales for Europe and MEA, to head up the company's real-money gambling project following the departure of former head Will Collins, who departed to start his own gaming consultancy firm. 

Takeaway: Online gaming revenues may not be living up to expectations and early forecasts for FB? 


BEE –  closed on a $120 million limited recourse loan secured by the Loews Santa Monica Beach Hotel.  The financing replaces the $108 million loan previously placed on the property.  The loan carries a floating interest rates of LIBOR plus 225 bps and has an initial three-year term with four, one-year extension options pending certain financial and other conditions. Wells Fargo Bank originated the loan.

Takeaway: As expected but a modestly larger loan amount. 


Equity Inns – American Realty Capital Hospitality Trust (a $2 billion non-traded REIT) announced it entered into an agreement to acquire the Equity Inns lodging portfolio of 126 hotels totaling 14,934 rooms across 35 states for $1.925 billion from subsidiaries of W2007 Grace I, LLC and WNT Holdings LLC - both of which are indirectly owned by one or more Goldman Sachs Whitehall Real Estate Funds. 

Takeaway: Whitehall made a sizable return for its shareholders. Industry veterans will recall Whitehall announced its intention to acquire ENN in June 2007 for $1.27 billion – $23 a share in cash, 19% premium to the previous day's share price and closed on the acquisition on October 26, 2007.  At the time, Equity Inns owned 132 limited-service hotels covering 15,700 rooms.


HLT – announced the launch of Curio - A Collection by Hilton. Curio - A Collection by Hilton (curiocollection.com) is a global collection of distinctive hotels. Letters of intent have been signed for the following properties: SLS Las Vegas Hotel & Casino; The Sam Houston Hotel in Houston, Texas; Hotel Alex Johnson in Rapid City, S.D.; The Franklin Hotel in Chapel Hill, N.C.; and a soon to be named hotel development in downtown Portland, Ore.

Takeaway: Everyone is in the boutique business.


RCL - (Travel Weekly)  Celebrity Cruises will pay commission on what is typically invoiced as noncommissionable cruise fare (NCF) on some cruises sold in June by travel agents in North America.  The extra commission applies to 2015 sailings, if agents book veranda cabins and above.  NCFs can account to 10-15% of the total cruise price. Dondra Ritzenthaler, Celebrity's senior VP of Sales said that 2015 bookings were not notably behind or in need of a boost.  “It’s a 30 day way to say thank you to all of our travel partners who have really supported us through all of our promotions,” she said.

Takeaway:  This short-term promotion could give an early boost for Celebrity 2015 bookings, particularly on the heels of the success of its 123Go! program.


NCLH - Hawaii's Visitor Spending and Arrivals Continue to Dip (Travel Agent Central)

Fewer visitors came by cruise ships (-22.2% YoY) and that led to a slight drop in total arrivals to Hawaii (-0.7%) at 662,553 visitors.  The dip in cruise passengers can be attributed to poor access to Hawaii’s harbors, says Mike McCartney, president and CEO of the Hawaii Tourism Authority.  “We recently issued a request for proposals for maritime vessel scheduling software, which will help to establish an integrated system that will ease vessel scheduling to optimize the use of dock space to accommodate more cruise ships throughout the Hawaiian Islands...Visitor arrivals and expenditures will continue to plateau in 2014, in comparison to the past two record-breaking years," added McCartney.

Takeaway: Could the slowdown in this expensive tourist destination continue?  Hawaii cruise pricing has been dipping as well.  NCLH itineraries have 7% exposure in 2014.


Insider Transactions:

RCL – EVP Harri U. Kulovaara sold 41,985 shares of the stock on Thursday, May 29th at an average price of $54.60, and he now directly owns 32,905 shares. 

SHO – CFO Bryan Giglia sold 15,763 shares of stock on Thursday, May 29th at an average price of $14.61, and he now directly owns 115,449 shares.

Takeaway: More insider selling in the Cruise and Lodging sectors. Buying seems to be on Gaming side.


Japan Gaming Expansion – late on Friday, Japanese Prime Minister Shinzo Abe who had remained silent on the issue of casinos, gave a strong endorsement to legislation that would legalize casino gambling in Japan.  Abe visited both RWS and MBS during his recent trip to Singapore.  The initial gaming legislation is expected to pass the Diet this fall,  at which time, legislation and debate will move on to a second bill concerning concrete regulations, which proponents hope can be passed in 2016.  Allowing for three years of construction prior to the 2020 Tokyo Summer Olympics which open on July 24, 2020 and close on August 9, 2020.

Takeaway: We're hearing as long as Abe remains in power, casino legislation will happen.  There is more than sufficient time to approve the required two-step legislation as well as complete construction prior to the opening of the 2020 Tokyo Summer Olympics.


Zhuhai-Macau-Hong Kong Bridge – The Infrastructure Development Office conceded that it had encountered a serious delay in the reclamation work of urban Zone A just across the waters from Areia Preta, which is a major public infrastructure project linking Macau to the Hong Kong-Zhuhai-Macau Bridge. Zone A, the biggest of the five reclaimed zones, is located across the waters from Areia Preta – the northeastern district of the Macau Peninsula. The 138-hectare zone is to be linked to the Zhuhai-Macau artificial island to its east, where the Hong Kong-Zhuhai-Macau Bridge will land.  The bridge is expected to be in use by 2016

Takeaway:  More infrastructure project delays


Pennsylvania Online Poker Legislation – Pennsylvania State Senator Edwin Erickson announced his intention to formally introduce State Bill 1386 (legislation that would authorize Interactive Gaming in the form of online poker). Gross gaming revenue would be taxed at 14% – less than New Jersey but higher than Nevada.

Takeaway: More support for our contention that legal online gaming will ultimately take the place of interstate online poker.


China Economic Growth - China Manufacturing PMI rises in May to 50.8 versus expectations of 50.7, up from 50.4 in April and February's low of 50.2


LEISURE LETTER (06/02/2014) - ChinaPMI


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.

Just Charts - The Protein Buzz


The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.


Just Charts - The Protein Buzz - 1


Consumer Staples rose +1.9% week-over-week versus the broader market (S&P500) up +1.6%.  XLP is up 4.8% year-to-date versus the SPX at 4.1%.


6/02/14 MNST Annual General Meeting 4pm EST

6/03/14 SAFM Stephens Spring Conference 9am EST

6/04/14 SAM Annual General Meeting 9am EST

6/04/14 BF/B Earnings Call 10am EST

6/04/14 TAP Annual General Meeting 1pm EST

6/05/14 RCO FP Earnings Call 3am EST

6/05/14 SJM Earnings Call 8:30am EST


XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.


Just Charts - The Protein Buzz - 2


The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.


Just Charts - The Protein Buzz - 3


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

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.8x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 33.3 versus 34.1 in the prior week

Just Charts - The Protein Buzz - 4

Just Charts - The Protein Buzz - 5

Just Charts - The Protein Buzz - 6


Positive Divergence:  HSH 47.0%; SAFM 9.0%; TSN 8.5%; HRL 6.3%; REV 5.0%

Negative Divergence:  SAM -3.5%; SODA -2.3%; TUP -1.0%; HAIN -0.7%; DEO -0.6%



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


BUD – bullish intermediate-term TREND intact with @Hedgeye TREND support confirmed at $106.38

Just Charts - The Protein Buzz - 7


DEO – bullish intermediate-term TREND confirmed here as well with TREND support = $125.96

Just Charts - The Protein Buzz - 8


KO – slow-growth big-cap #YieldChasing remains in vogue; TREND support confirmed at $39.93

Just Charts - The Protein Buzz - 9


PEP – rip-roaring #YieldChasing fun last week with PEP breaking out on good volume after holding $84.82 TREND support

Just Charts - The Protein Buzz - 10


GIS – has been one of the best looking stocks on this list for all of 2014; overbought now but bullish TREND w/ $51.71 support

Just Charts - The Protein Buzz - 11


MDLZ – looks as good as it has looked now for the last 6 weeks; intermediate-term TREND support = $35.76

Just Charts - The Protein Buzz - 12


KMB – tested the bulls patience and held intermediate-term TREND support of $108.92 like a champ

Just Charts - The Protein Buzz - 13


PG – worst looking stock on the list but its bullish TREND too; intermediate-term TREND support near last price at $80.36

Just Charts - The Protein Buzz - 14


MO – got slow-growth #YieldChasing? Yep. Overbought last week but remains bullish TREND w/ support = $38.81

Just Charts - The Protein Buzz - 15


PM – bearish to bullish TREND reversal confirmed, big time, as slow-growth Style Factors dominate; TREND support = $84.68

Just Charts - The Protein Buzz - 16



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Weak PMI Numbers in Europe, Rising Oil Prices and a Slowing Consumer

Client Talking Points


Sequential slowdowns pretty much across the board in the PMI data for May (Swiss PMI of 52.5 May versus 55.8 April was the biggest miss), and European Equities aren’t doing much on that yet. The EUR/USD down -0.3%.


After taking a breather last week (CRB Index down -0.9% on the week to +9% year-to-date), WTI crude is back up +0.4% this morning to $103.12 and natural gas is testing another TREND breakout = US consumption taxes.


The yield is down 6 basis points in an up (no volume) US Equity tape last week (month-end) as US consumer spending data slowed (again). Falling bond yields and compressing yield spread continue to signal US housing and #ConsumerSlowing.

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


ASIA: Nikkei finally has a real up day of +2.1%; India rips another +1.7% to +16.7% YTD (China closed) @KeithMcCullough


"I've failed over and over and over again in my life and that is why I succeed." - Michael Jordan


Just 36% of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42% in 2007 and the lowest level since 1982, when the agency began tracking homeownership by age. (CNN)


Heisenberg, Please Explain

This note was originally published at 8am on May 19, 2014 for Hedgeye subscribers.

“Some questions have no answers to find.”

-Niels Bohr


This weekend I changed things up a bit and started re-reading a play called Copenhagen which is based on a meeting of the physics minds of Niels Bohr and Werner Heisenberg in 1941.


Heisenberg, Please Explain - HeisenberBohr1


The timing of the play opening on Broadway (April of 2000 at the top in the US stock market) is interesting. I was a newbie on Wall Street back then. I didn’t know much more than I know now about why this time the bubble is “different.”


Copenhagen’s opening scene starts with four questions exchanged between Bohr and his wife, Margrethe:


Margrethe: “But why?”


Bohr: “You’re still thinking about it?”


Margarethe: “Why did he come to Copenhagen?”


Bohr: “Does it matter, my love? Now we’re all three of us dead and gone”


Back to the Global Macro Grind


But why do bond yields keep going down? Why is Old Wall consensus still expecting 3.32% for the 10yr US Treasury yield for 2014 when it’s currently trading at 2.51? Why did consensus come into 2014 expecting US Growth to accelerate, and inflation to fall? Does it matter, my friends?


These questions obviously have obvious answers – unless you are paid to anchor on estimates that are dead wrong, that is. As #InflationAccelerating slows real US growth expectations for 2014, some serious questions remain as to why Wall Street and Washington have not yet come to agree with gravity.


This is, of course, the upshot of Copenhagen – Heisenberg (not the Breaking Bad dude, but Walter White was named after him):


“No one understands my trip to Copenhagen. Time and time again I’ve explained it. To interrogators and intelligence officers, to journalists and historians. The more I’ve explained, the deeper the uncertainty has become…”


“So” embrace the uncertainty associated with how an unprecedented level of un-elected central planning is affecting the rate of change in both growth and inflation in the US economy. There is nothing linear about this.


In addition to US Bond Yields getting hammered last week, here’s what Mr. Macro Market had to say about US growth:


  1. Growth Stocks (Russell 2000) down another -0.4% last week to -5.2% for 2014 YTD (down -8.8% since March)
  2. Yield Spread (10yr yield of 2.51% minus the 2yr yield of 0.36%) compressed another 8 basis points on the week (-48 basis points YTD)
  3. Financials (XLF) were the worst performing sub-sector of the SP500 at -0.8% on the week to -0.5% YTD


In other words, as the long-end of the curve (10yr yield) dropped -10 basis points on the week (-51 basis points YTD), not only is that a leading indicator for US #GrowthSlowing, but it’s as good a proxy as any for bank earnings (net interest margin tracks the Yield Spread).


But why?


Everyone who has followed market history knows why. There isn’t a person in this profession who can tell you with a straight face that growth stocks, financials, and bond yields all declining at the same time is a bullish growth signal.


Neither can they tell you that food and oil prices accelerating is a consumer tax cut. Here’s the update on that:


  1. Oil price up another +2.3% last week (breaking out above @Hedgeye TAIL risk lines of resistance)
  2. Cattle prices up another +1% last week to +13.5% YTD
  3. REITS up another +0.4% last week to +14.6% YTD


Oh, you mean you don’t eat REITS? But you’re still thinking about chasing some slow-growth yield? Obviously cost of living is ripping in this country, and since 1/3 of Americans rent, they can eat that inflation – and like it, because as Heseinberg explained in Breaking Bad, “I say so.”


The only good news I can give you on the US stock market is that buy-side consensus is starting to figure out the #InflationAccelerating slows US consumption growth theme. Here’s the updated CFTC Non-Commercial net long/short positions in the Big Macro stuff that matters:


  1. SPX (Index + Emini) closed the wk with a net short position of -40,901 contracts (vs. an avg NET LONG position of +16,256 contracts over the last 6 months)
  2. 10YR Treasury has a net long position now of +23,948 contracts (vs an avg NET SHORT position of -81,337 contracts over the last 6 months)


Put another way:


  1. If you were long growth equities and short bonds 6 months ago, you were killing it (but about to get killed)
  2. If you made the turn (out of growth stocks into slow-growth bonds) in the last 6 months, you are still killing it


Just because consensus is moving the way of economic gravity doesn’t mean the move is done. In Breaking Bad, Walter White explained this reality quite effectively to Saul too: “We’re done when I say we’re done.” And that’s all Mr. Macro Market is going to have to explain about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.48-2.61%

SPX 1861-1882

RUT 1089-1111

USD 79.16-80.21

WTIC Oil 101.05-102.97

Gold 1281-1318


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Heisenberg, Please Explain - Chart of the Day

Force Rapid Learning

“There is nothing quite like ignorance combined with a driving need to succeed to force rapid learning.”

-Ed Catmull


With three kids, I’d say that quote pretty much sums up my life right now. It’s also the opening line to chapter 3 of the book I have my nose in these days – Creativity Inc., by one of the founders and leaders at Pixar Animation Studios, Ed Catmull.


When it comes to the market side of my life, it isn’t what it used to be. I have the dubious task of running both my mouth and a company. On the latter, I can assure you that there is no driving force greater than owning it. If Hedgeye isn’t constantly evolving, we’re failing. And that’s not an option.


We’ve built both the risk management process and firm on the same principles. We wake up every morning with our eyes wide open to the reality that we do not know what is going to happen next. Embracing uncertainty forces rapid learning. And we like that.


Back to the Global Macro Grind


If all you did at the start of last week was get rid of the most consensus short position on the planet (short SPX Index + E-minis),  and focused on expressing slow-growth #YieldChasing where at least 66% of hedge funds out there haven’t yet, you’d have liked that too.


With the net SHORT position (CFTC non-commercial futures and options contracts) in the SP500 dropping week-over-week from -114,248 contracts (1yr high) to a net SHORT position of -57,737 this morning, I still wouldn’t be using that consensus “hedge.” Use the Russell.


What is the Russell?


  1. The Russell 2000 is a much purer read-through on US domestic growth than the multinational Dow or SP500
  2. The Russell 2000 (IWM) was down -0.5% in an “up tape” on Friday (SPX closed +0.18% at an all-time bubble high)
  3. The Russell 2000 is down -6.1% from its March 2014 high and -2.5% YTD


The alternative to being levered long US growth and/or social bubble stocks (i.e. the alternative to being down YTD) is:


  1. Being long #InflationAccelerating (CRB Commodities and Food Indexes are +9% and +22% YTD, respectively)
  2. Being long slow-growth via the long bond (10yr yield down another -6bps last wk and -55bps YTD at 2.48%)
  3. Being long anything US Equity #YieldChasing that looks like a bond (Utilities up another +2.3% last wk = +12.6% YTD)


“So” why bang your head against the #OldWall shorting spooos and trying to pick no-volume-v-bottoms in bubble stocks that blew up in March-April, when you can just keep doing more of what’s been a relatively low volatility position to keep?


A: it’s not consensus (yet)


No worries though, as time, price, and economic data change, consensus futures/options positioning changes:


  1. SPX Index + E-mini net SHORT position of -57,737 contracts today (vs. -19,488 net SHORT 3 month avg)
  2. 10YR US Treasury bond net LONG position of +22,876 contracts (vs. -59,080 net SHORT 3 month avg)
  3. Gold net LONG position of 68,393 contracts (vs. +103,404 net LONG 3 months ago)


In other words, 3 months ago (on March 1st):


  1. Hedge funds started getting short the consensus SPX hedge  (after the JAN-FEB drawdown in the SP500)
  2. Consensus still didn’t think bond yields could go down in 2014 (so the 10yr yield crashed)
  3. And consensus momentum players chased being long Gold at $1350




Nothing forces rapid learning faster than doing precisely the same thing (at the same time) as thousands of other money managers and getting plugged.


But please don’t confuse consensus getting whipped around in an oversupplied asset management industry with the US or global economy. They are nowhere in the area code of the same thing.


And I suspect there will be nothing normal about the next three months in global macro risk management either. So have another coffee. It’s Monday June 2nd (Happy Birthday Dad!). Prepare to embrace the uncertainty of what tomorrow will inevitably bring.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.51%


RUT 1090-1154

EUR/USD 1.35-1.37

WTIC Oil 102.19-104.95

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Force Rapid Learning - Chart of the Day

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