Wet Kleenex

Client Talking Points


Another no volume rally on our hands – Total US Equity Volume yesterday was down -14% and 34%, respectively, compared to its one- and three-month averages.


Meanwhile, the 2.47% yield on the 10-year continues to signal that real-world inflation is slowing US consumption growth. The CRB Commodities Index (19 commodities) is up +10% year-to-date compared to US Growth (Russell), which is down -2.1%.


In Asia, it was a wet Kleenex response to that no-volume US rally overnight. South Korea was down -0.9% and Indonesia was down -1.8%. In Japan, the Nikkei fell another 0.3% after failing the TREND resist (again) and is now down -9.4% year-to-date.

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


Some days I feel like it’s still the 16th century – no enlightenment. @KeithMcCullough


"The best way to have a good idea is to have lots of ideas." - Linus Pauling


Australian recording artist Iggy Azalea has scored both the number one and two spots in the US Billboard Hot 100 chart, a feat achieved only once before – by The Beatles. (The Telegraph)

Throwing the Torch

“To you from failing hands we throw. The torch; be yours to hold it high.”

-Dr. John McCrae


On Tuesday night I had the pleasure of attending my first hockey game at the Molson Center in Montreal.  While I’m not necessarily a Habs fan, sitting in a seat on ice level next to the penalty box is definitely the right way to watch playoff hockey in Canada, especially in a 7 - 4 “Wild West” shoot out.


Last night, of course, was much different.  The New York Rangers and their all-world goalie Henrik Lundqvist bounced back and New York beat Montreal to advance on to a date with destiny and a chance to win Lord Stanley’s Cup.


Throwing the Torch - rangers canadiens


The last time the New York Rangers won the Stanley Cup was in 1994, exactly twenty years ago.  The last time a Canadian team won a Stanley Cup was actually twenty-one years ago in 1993 when Montreal won.  So if you do the math, in the last twenty years a Canadian team has won the Cup about 5% of the time. This comes despite the fact that 24% of the teams in the NHL are based in Canada.


Interestingly, statistician Nate Silver from ESPN actually ran the numbers on the probability of a Canadian winning the Cup over that period.  According to Silver:


“If a championship team was randomly chosen for each of the 19 seasons the league actually played, the odds of a Cup win for a Canadian team would have been 99.2 per cent. Taking teams’ actual competitiveness into account, Silver estimated the odds of a Canadian win during that time period were 97.5 per cent.”


So, clearly next year is Canada’s year and this unfortunate run is just bad luck. But in the meantime, let’s go Rangers!


Back to the Global Macro Grind . . .


Despite the fanfare for the Ranges in the Big Apple last night, shockingly enough, the global macro markets didn’t react.  The biggest laggard in terms of major equity markets overnight is actually Korea, which is down about 85 basis points. Even there, though, there is not much of a read through other than some profit taking ahead of the Dragon Boat Festival on Monday. (Is your dragon boat ready?)


The takeaway more broadly, of course, is that a general complacency is setting in on global markets.  Two import signals of complacency are the VIX, which measures volatility on U.S. equities, and yields on peripheral sovereign debt in Europe.  In both instances, they are literally at five year lows.


For those of you that are used to winning investing performance Stanley Cups, you get the joke.  Either things are that good and there is nothing to worry about, or they are not and it is time to throw some proverbial caution to the wind by getting shorter and/or selling exposure. 


On the risk front, a major concern we continue to have is that consensus is once again over estimating the potential for U.S. economic growth in the U.S.  For the U.S. to hit consensus GDP growth estimates for the rest of the year, economic growth will have to come in at 4% in aggregate for the next three quarters.  To state the obvious: that’s not happening folks.


My colleague Christian Drake view of Q1 GDP is as follows:


  • Bad But Not A Surprise:  The first revision to 1Q14 GDP came in at -1.0%, missing estimates of -0.5%.  The magnitude of the revision was larger than expected but the negative print and downward revisions to  inventories, exports, & Gov’t spending  was not a surprise as the actual march data came in worse than the BEA estimates embedded in the advance GDP report. 
  • Inventory Drag:  The negative revision to inventories was the biggest contributor to the total revision.  The inventory ramp, which comprised a big portion of reported nominal GDP growth in 2H13, is now reversing as end demand/income growth proved insufficient at expeditiously drawing down that burgeoning stock.  
  • Consumption:  Strength in consumption growth, particularly Services, was the conspicuous positive on the quarter.  Notably, Services consumption was supported by the significant acceleration in healthcare spending.   


Healthcare is indeed the juggernaut of GDP and something to focus on, at least in the reported numbers.  As Christian points on healthcare spending in the GDP report:


Healthcare Spending:  The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   


With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 


Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.   To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend.


Unfortunately, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact.”


So, even as the labor market is showing some tightening, in part aided by people dropping out of the work force, economic activity broadly speaking is far from robust and likely to miss consensus expectations for the remainder of the year, especially with the housing market headwind.  And at a VIX of sub 12, bad news will start to matter.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.51%


RUT 1089-1146

VIX 11.03-13.69

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Throwing the Torch - Complacent

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May 30, 2014

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LEISURE LETTER (05/30/2014)

Tickers: H, RCL


  • Monday June 2: Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 
  • Monday June 2 - Tuesday June 3: Midwest Gaming Summit, Rosemount, IL
  • Tuesday June 3 - Thursday June 5: REITWeek, New York, NY
  • Wednesday June 4 - Thursday June 5: Russian Gaming Week 2014
  • Thursday June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Tuesday June 10 - Thursday June 12: Bally Systems User Conference
    Mohegan Sun


Genting Singapore - Genting Bhd has said the group’s 51.9%-owned Genting Singapore Plc will partner unnamed “Japanese institutions” to bid for an integrated casino resort in Japan.

TAKEAWAY: The only question now is how small of a local minority partner interest can the foreign companies get away with.


Insider Selling:

H – Insider H. Charles Floyd sold 34,996 shares on Tuesday, May 27th at an average price of $59.11. Following the completion of the sale, Mr. Floyd directly owns 156,615 shares.


RCL – CEO Michael W. Bayley sold 19,206 shares Tuesday, May 27th at an average price of $54.08. Following the sale, the chief executive officer now directly owns 53,489 shares.

TAKEAWAY: Continued insider selling in hotel stocks despite strong trends. Gaming insiders remain generally on the buy side.


DPJ nods casino bill talks: but only for lower house (GGR Asia)

Japan’s main opposition party, the Democratic Party of Japan (DPJ), has reached an agreement with the governing Liberal Democratic Party of Japan (LDP) to discuss during the current session of the Diet the issue of legalising casino resorts.  The discussion will only be at Cabinet Committee level in the lower house of Japan’s parliament – known as the House of Representatives.  Mike Tanji, executive advisor for Tokyo-based Gaming Capital Management Inc, said, “Even if that happens, because of the time constraint, the passage of the bill in the Diet – including through the upper house – will likely take place at the Extraordinary Session this fall.”  Tanji added that a reported split in the Japan Restoration Party, which had given 100% backing to an IR bill was unlikely in itself to damage the prospects for the statute.

TAKEAWAY: Now hype will build for Fall 2014


Dragon Boat Festival Delays - (Macau Daily Times) The Sports Development Board (ID) has decided to shorten the Asian Dragon Boat Championships program, and to postpone some races until June 7 and 8, as a mark of mourning for Ma Man-kei. ID president José Tavares has also said that the International Invitational Standard Dragon Boat Races will be cancelled.  

TAKEAWAY:  No impact on GGR


Macau Casino Development (GGR Asia) “After 2016 or 2017, there will be a seven to eight-year period without new properties,” Secretary Francis Tam said. That would allow for some economic consolidation and for society to adapt to the new stage of development.

TAKEAWAY: Not an unreasonable statement given the lack of undeveloped land and huge capacity increases in 2015-2017.


Macau Tourism - The Easter long-weekend in April brought the total number of visitors on package tours to 957,000 for the month, +23% YoY

TAKEAWAY: A positive data point for the Mass segment.


Chinese 'mini' stimulus (Bloomberg) 

China's often-discussed "mini" stimulus is beginning to become sizable.  Central government measures announced at the beginning of April including faster railway spending and tax breaks have multiplied. 

Takeaway: How many minis does it take to make a major?

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.

BNNY: Still A Short, But On A Leash

While we are keeping BNNY on the Hedgeye Best Idea list as a short, it will be on a tight leash.  Annie’s is a strong brand and we believe it will make a nice acquisition for a bigger food company someday.


Annie’s reported a disastrous quarter last night and we still don’t believe the company is on solid financial footing.  While the balance sheet and cash flows are strong, the company continues to struggle to manage its high growth business.


Last night, BNNY missed on sales and margins, but was able to lessen the blow by aggressively cutting SG&A.  To be clear, a growth company aggressively cutting SG&A is a sign of weakness, not strength, and we believe management lacks the infrastructure needed to grow the business.  As expected, guidance for FY15 was well below Street expectations on both the top and bottom lines.


There are numerous ongoing issues the company faces:

  1. It has been unable to deal with the significant inflation in organic wheat.
  2. In an attempt to foster top line growth, management has forced innovation by entering new categories leading to significant inventory obsolescence and lower product mix.
  3. Management has not invested in the human capital needed to manage the business.
  4. Increased trade spending in a competitive retail environment.
  5. Insufficient internal controls.
  6. Increased competition.


Management guided to sales growth of 18-20% (including the impact of the Joplin plant acquisition) versus the Street’s 18%.  However, we’d argue that the Street had not reflected the acquisition in their numbers, so management actually guided down expectations.  Part of the slowing top line (3-4%) is coming from a planned system-wide inventory reduction from UNFI in 1Q15.  Excluding the impact of non-core contract manufacturing revenues related to the Joplin acquisition, adjusted net sales of Annie’s branded products are expected to grow in the range of 14-16% in FY15.  In FY14, consumption of Annie’s grew 21% and 20% in 4Q14.


BNNY continues to have zero leverage in its business model.  In FY15, gross margin is expected to be “comparable” to FY14, while SG&A is expected to be up in part due to higher stock-based compensation and normalizing incentive compensation expense.  Given how little visibility management has, the lack of internal controls, and the investment needed to manage the business, we’d surmise that current FY15 guidance is highly suspect.


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Call with any questions.


Howard Penney

Managing Director


Fred Masotta


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