ECB Cut Delivered. Strong EUR/USD Call Remains as Euro-style QE Still Distant

Going into today’s call we positioned ourselves to be long the EUR/USD, positing that Draghi would likely underwhelm the market’s loft expectations for easing (see yesterday’s  Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement; and (5/23) Buying the Euro (FXE). Our call appears to be the right one: the cross maintains our $1.35 support level and bounced higher following Draghi’s press conference as equities rose in tandem.


While the main interest rates were trimmed nearly in line with consensus (44 of 50 economists baked in a negative deposit rate with 56 of 58 expecting a cut in the benchmark rate), no QE was announced. Given, we think the setup portends a dovish monetary response by the Federal Reserve as growth surprises to the downside, which should continue to support our weak USD, strong EUR call.

ECB Cut Delivered. Strong EUR/USD Call Remains as Euro-style QE Still Distant   - a. eur heut


We applaud Draghi’s issuance today of a new lending program to the “real” economy, named the Targeted Longer Term Refinancing Operations (TLTRO). While we witnessed little to no transmission to the “real” economy from the former LTRO programs, if in fact the TLTROs can be conditionally strong on lending requirements, we’re bullish on them for the Eurozone’s growth outlook.  That said, we don’t see the program shifting either the European equity or currency markets in a material way. 


Draghi offered a confident tone that today’s interest rate policies moves and the TLTROs could boost the inflation rate to the target of 2.0% (his main concern going into the meeting), yet he did not rule out a potential asset-purchase program as one of several non-traditional alternatives should today’s measures not achieve inflation targets.  Interestingly, the Bank’s staff inflation forecasts see inflation only inching up to 1.5% at the end of 2016 – we expect Draghi to keep his back pocket loaded with QE should he need to manufacture higher inflation. 


What was delivered in cuts?

  • Benchmark Rate: cut from 0.25% to 0.15% (0.10% est.)
  • Marginal Lending Facility: cut from 0.75% to 0.40% (0.60% est.)
  • Deposit Facility: cut from 0.0% to -0.10% (-0.10% est.)


Draghi on the terms of the TLTRO?

  • TLTROs will begin issuance in SEPT and DEC of this year with a maturity in SEPT 2018
  • Draghi says intent is to improve credit to the private (non-financial) sector with the ultimate view of price stability that transfers to real economy
  • There are provisions that require additional disclosure on use of TLTRO funds; for example, if not compliant with lending to the “real” economy, institution will be forced to repay entire loan after 24 months
  • TLTROs not to be used for loans to households for house purchase


Draghi Hints that QE-type Program Targets Asset Backed Securities (ABS)

  • Simple (no CDS, CDS squared, CDOs etc.)
  • Real (non-derivatives)
  • Transparent (all market participants easily understand)


Updated ECB Staff Macroeconomic Projections Head to the Downside

  • Growth Projections:  in 2014 +1% vs +1.2% seen in March; 2015 +1.7% vs +1.5%; 2016 +1.8% unchanged from March.
  • Inflation Projections:  in 2014 +0.7% vs +1% seen in March; 2015 +1.1% vs +1.3%; 2016 +1.4% vs +1.5%; 2016 Q4 +1.5% vs 1.7%.


Matthew Hedrick



Ben Ryan



June is likely to be another soft month in Macau – watch out for week 2



Macau stocks face an uphill battle over the near term.  June should be another single digit growth month and July may be only marginally better.  In this note we look at the weekly June comparisons.  We caution investors that week 1 could be a head fake as the 1yr/2yr comparison quickly progresses to the most difficult in week 2.  We are cautious on the Macau stocks but most favorably disposed toward WYNN for safety reasons and the property’s ability to ratchet up its VIP business in a flat market.



June is a tough comp and we were already projecting 9-11% before May’s softness emerged.  The weekly progression is quite interesting.  As can be seen on the following chart, the first week is a relatively easy comp followed by a very difficult comp in week 2.  Whether the Dragon Boat Festival timing shift (6/12/13 to 6/2/14) is important is debatable.  What is clear is that – assuming normal hold – week 2 and 2H of June numbers are likely to look pretty weak on a YoY basis and could further erode investor sentiment.  Weeks 3 and 4 individually cannot be relied upon in our opinion since week 3 contained a “placeholder” revenue number in both 2012 and 2013 so week 4 was a catchup in each June.  However, combining the weeks is instructive and shows a tough 2H comparison.





  • The Data:  Headline claims increased +8K WoW to 312K with the 4-wk rolling average declining another -3K sequentially to +310K.  Non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, came in at -10.8% YoY (vs. –13.8% prior) with the 4-wk rolling average improving 160bps sequentially to -11.3% YoY.  
  • Context:  The rate of change in year-over-year, rolling non-seasonally adjusted claims improved to its best level in seven weeks and is near its best level YTD while rolling SA claims hit their lowest level since June 1st 2007.   As a reminder, we typically look at the slope of improvement as our indicator on the prevailing trend in the labor market.  Historically, however, the 300K level has served as the lower bound in seasonally adjusted claims during expansionary periods.  At this weeks reading of +310K we continue to converge towards that frictional lower bound and expect the rate of year-over-year improvement to slowly converge towards 0% as well.   






On balance. the domestic macro data has been better sequentially QoQ, but outside of the discrete ramp in Auto Sales in May (more on that below), there hasn’t been much evidence of material deferred demand from 1Q coming back in 2Q. 


The national and regional manufacturing surveys have been ‘good’ and the labor market data (ADP was soft but the trend in claims remains positive) has been stable-to-better. 


However, April retail sales were weak, consumer spending in April was particularly soft (see: #GRAVITY: April Consumer Spending), the trade balance for April was worse than estimates (with March revised lower, taking 1Q GDP further negative), and the housing data remains in conspicuous deceleration (see yesterday’s note:  Housing: 4th consecutive week of decline in demand).  


From a policy read-through perspective, the positive momentum in the labor market along with the broader, sequential improvement in the domestic macro data off the 1Q14 weather distortion suggests the inertia is still with continuing on the present policy course (June FOMC meeting is June 18th).   


The improvement in claims also bodes well for the May employment report.  While SA claims reported during the BLS survey period (conducted during the pay period including the 12th of the month) were less good than the most recent two weeks, on balance, the May claims data is supportive of a good NFP print.  




A Quick Note On Auto Sales:  


Total vehicle sales jumped to 16.7M in May (vs. 16.1M est. and 15.98M prior) and auto financing remains one of the only consumer loan categories showing positive growth.  However, ongoing loan growth in combination with loosening of credit standards and increasingly aggressive financing options places auto financing (& those levered to it) near the top of the prospective bubble list.  


Jeff Williams, CFO of America’s Car-Mart, aptly captured the reality of today’s auto lending dynamics in his comments on 5/27: 


“We believe that our customers have never been more stressed financially and, at the same time, have never been presented with more aggressive financing options for their vehicle"


…keep the ongoing auto credit munificence somewhere on your monitoring list. 


Enjoy tomorrow mornings manic employment release myopia, May edition.



Christian B. Drake


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VIDEO | Keith's Macro Notebook 6/5: EURO COMMODITIES UST10YR


As you already now, May gross gaming revenues (GGR) increased only 9% YoY.  Hold was not a factor but lower than expected VIP volumes were the main culprit to the soft month.  We believe the timing shift of the Dragon Boat Festival and May’s rainy weather played a role but not enough to explain the shortfall.  June looks like another high single digit growth month to us – probably not a catalyst for share appreciation.


The bad news is that VIP revenues grew only 2%.  May VIP hold percentage of 2.93% (adjusted for direct play), compared with 2.90% last May.  The good news is that Mass performed exceptionally well, up 36% YoY and 6% MoM.  Galaxy was the big winner, massively outperforming the market on VIP (despite near normal hold) and a stable mass business.  On the other hand, MGM massively underperformed across their VIP, Mass and Slots businesses.


Here are some takeaways:



  • Mass revenues grew 36%, slightly below the average growth for the last 12 months.
  • VIP Rolling Chip (RC) volume and VIP revenues both decreased 2%
  • RC volume grew at the slowest rate since October 2012 when RC volume contracted 5
  • Slot revenue increased 6%, up from +4% in April but below the 9% average for the last 12 months.
  • Assuming consistent hold in both periods, GGR would’ve grown 9% YoY




  • GGR grew 21% YoY, up from 13% in April but slower than the 32% growth for the last 12 months.
  • VIP revenues increased 4% and RC dropped 13% YoY as compared to VIP revenue growth of 18% and RC growth of 15% for the last 12 months.
  • The LVS properties held just above normal on VIP
  • Mass grew 45%, the highest of any gaming operator during May
  • Market share was above trend in Mass and Rolling Chip volume



  • GGR dropped by 4%, significantly slower than the 14% growth for the last 12 months.
  • VIP revenues decreased 16% and RC dropped 17% YoY as compared to VIP revenue growth of 11% and RC volume growth of 16% for the last 12 months.
  • The RC contraction of 17% has not occurred since the 22% contraction in March 2013 and the 18% drop in July 2012.
  • WYNN held high on VIP
  • Mass growth was 36%
  • Slot revenue grew 29%, the market leader in May



  • YoY GGR growth dropped a shocking 11%, a rate not seen since the 18% contraction in October 2012
  • VIP revenues decreased 22% also the lowest since October 2012
  • RC declined 15%.  MGM’s RC business could be under more pressure if Wynn Macau decides to get more aggressive on commissions advancement to junkets
  • MGM held low in VIP
  • Mass growth was 31%
  • Slot revenue dropped 11%, the worst performance among the operators.
  • The weak VIP business pushed market share below recent trend



  • GGR dropped 1% YoY and follows April’s 4% decline, a two consecutive month contraction not seen since July and August 2012.
  • VIP revenues contracted 17%, due to weakness at Altira
  • Held low on VIP
  • RC volume contracted 23% following April’s down 21% – we’ve been hearing decreased play from “casual” junkets
  • Mass grew 35%, just below the market



  • GGR increased 24% YoY
  • VIP revenues increased 25%, based on market leading results from Galaxy Macau
  • Rolling chip volume increased a massive 30%, again driven by Galaxy Macau
  • VIP hold was almost normal
  • Mass grew 28% - as compared to 37% for the last 12 months.
  • Slot revenues dropped 8%


LEISURE LETTER (06/05/2014)

Tickers:  ALL.AX, IGT, HST


  • Thurs June 5: REITWeek, New York, NY
  • Thurs June 5: Russian Gaming Week 2014
  • Thurs June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Thurs June 5 - 4:30 pm MTN earnings
  • Mon June 9 - HTZ earnings
  • Tues June 10 - HLT lock-up expiration
  • Tues June 10 - Thurs June 12: Bally Systems User Conference
    Mohegan Sun
  • Thurs June 12 - Blackstone Investor Day 8:00 am


Aristocrat – installed their Oasis 130 Casino Management System, which replaced a competitors system, at the Mono Wind Casino located in Auberry, California.

Takeaway: Good win for Aristocrat, likely a loss for IGT


BYI – announced it has entered into a definitive agreement to acquire Dragonplay Ltd., a leading online social casino company headquartered in Tel Aviv, Israel, with top-grossing applications for Android, as well as a significant presence on Facebook and Apple iOS. Total consideration includes approximately $51 million in upfront cash, plus the amount of net working capital, payable to Dragonplay’s shareholders in exchange for all of the issued and outstanding equity, and approximately $49 million in additional earn-out consideration and employee retention payments over the next 18 months subject to Dragonplay meeting certain financial performance targets. Bally expects to fund the transaction from cash on hand and proceeds from its revolving credit facility.

Takeaway: We now know why BYI recently increased the size of its corporate credit facility.

IGT – the Company's DoubleDown Casino launched a soccer-themed slot game, Final Goal, featuring a customizable game experience, where players select their favorite soccer team based on one of sixteen country flags, fifteen paylines, a soccer-themed bonus and scatter symbols, and 3x5 spinning reels in the bonus spins game. Players can collect free spins and multipliers by shooting at the goal line. The penalty kick bonus game is triggered by spinning three, four, or five bonus symbols.

Takeaway: DoubleDown continues to increase content and deepen its market reach. Dare we say that DD is turning out to be a solid acquisition. 


Bloomberry - Manila's Bloomberry in talks with Japan firm on casino tie-up (Reuters)

According to CEO Enrique Razon, Bloomberry is in talks with a potential Japanese partner for a license if and when a Japanese gambling law is passed. for what could be the company's maiden overseas venture.  


Razon also said the company is studying opportunities in Macau, which may open application for new licenses in 2020.  The company is also considering further expanding its Solaire casino-resort in Manila to include three new hotel towers with 1,500 rooms and a 15,000-seat events area.  The planned expansion, which is subject to market demand, would raise Solaire's gaming tables to 650 from 360 and nearly double its electronic gaming machines to 3,000, making it the largest integrated resort worldwide.  Solaire is set to open in November its $400 million expansion featuring more VIP gaming sections and a mall, theater and another hotel, with the extension having a total gross floor area of 200,000 square metres.

The company will add 1,300 staff for its new phase, as it expects to increase its share of foreign junket operators to 70% given the opening.

Takeaway: Another player in Japan.  By expanding, Solaire is preparing for CoD Manila's entry during Oct Golden Week.


HST – is asking Chicago for a zoning amendment that would allow development of 750,000 square feet of new office space and a 3,000-space parking garage, on owned land adjacent to the Chicago Marriott O'Hare. Host's plans show three office buildings of up to 18 floors surrounding the parking structure, all of which would be built along the west side of the hotel. Last year, Host completed a $40 million renovation of the Chicago Marriott O'Hare, in which it eliminated 211 rooms.  An outdated portion of the existing hotel likely would be razed to create extra land for the office development, according local real estate contacts. A Host predecessor acquired the Chicago Marriott O'Hare in 1997 as part of a six-hotel, 3,054-room portfolio deal, paying a total of about $240 million for the portfolio properties.

Takeaway: The surburban office vacancy rate in the O'Hare submarket was 24.5% during Q1 2014.  So, unless this all three of the proposed office buildings are build-to-suit rather than speculative development, we are skeptical of the immediate ROIC to shareholders. 


LEISURE LETTER (06/05/2014) - Host Ohare Marriott

Image: Google Maps 


Insider Transactions:

MAR – J W. Marriott, Jr. sold 20,834 shares of stock on Monday, June 2nd at an average price of $61.38 and now owns 188,229 shares.


SHO – CEO Kenneth Edward Cruse purchased 4,000 shares of stock on Tuesday, June 3rd at an average price of $14.79 and now owns 671,430 shares.


WYN – VP Nicola Rossi sold 4,000 shares of the stock on Monday, June 2nd at an average price of $74.10 and now owns 11,069 shares.


RCL – COO Adam M. Goldstein sold 4,869 shares on Monday, June 2nd at an average price of $55.14 and now owns 370,724 shares.


Macau Money Laundering(SCMP) a story about the illegal cash transfer business directly reports ICBC and Bank of China were involved in the acceptance of illegal cross border dirty money on behalf of Macau based merchants.  The illegal cross border cash transfer transactions violate three laws:  1) related to the use of mobile payment devices not registered in Macau but in the mainland; 2) when a third-party company in the mainland clears the transaction; 3) when a state-run banks give “the green light” and accept funds coming from the mainland through these POS machines.

Takeaway: Now we know the reason for the crackdown on the illegal handheld devices. 


Macau Smoking Ban – the Macau Government released dispatch 141/2014 which outline the new smoking ban rules.  The dispatch indicates gaming operators can ask the Gaming Inspection and Coordination Bureau and the Health Bureau for authorization to establish smoking lounges "in areas that are of limited access to specific games and gamblers".   However, the Gaming Inspection and Coordination Bureau has yet to define "limited access" and thus it is unclear if this terminology applies to VIP as well as premium mass gaming areas. The smoking ban will begin on October 6, after October's Golden Week holiday.

Takeaway: The burden falls back on the Gaming Inspection and Coordination Bureau to decide if premium mass will be non-smoking.


Hong Kong Gaming Boat to be sold – Macau casino investor Success Universe Group Ltd has indicated it will sell its 55% interest in M.V. Macau Success, a casino cruise ship that operates out of Hong Kong, due to rising costs. The cruise ship business posted a profit of approximately HK$0.5 million in 2013 compared with approximately HK$2.9 million in 2012. The M.V. Macau Success is a nine-deck cruise ship, operating on a daily basis from Hong Kong to international waters. The cruise ship was built in 1974 and motors under a Bahamian flag. It features a casino and entertainment facilities, with a total capacity for 660 people and more than 200 passenger rooms.

Takeaway:  Old, costly ship being sold


Outbound Chinese Tourism – Business Monitor International (BMI) forecasts Chinese tourists will rise 50% between 2014 and 2018, growing at a rate of 10% per year. The actual and already huge market of 88.1 million mainland tourists traveling abroad will stretch to 122.5 million in 2018. BMI forecasts In 2018, Hong Kong will receive more than 60 million mainland tourists, 50% more than the 41.6 million estimated for this year.  Hong Kong will capture more than half of all Chinese tourists traveling outside the country in 2018, while Macau will attract 22 million mainlanders in the next five years, around 20% of all the Chinese outbound traveling market.

Takeaway: Strong long term trends for the mass business in Macau. 


Only 1% of norovirus outbreaks are on cruise ships, says CDC (Travel Weekly)

According to the Centers for Disease Control and Prevention (CDC), norovirus outbreaks most often makes headlines when they happen on cruise ships, but these only account for about 1% of all reported outbreaks.

Takeaway:  Does CNN know about this?


China GDP – the IMF cut its 2015 economic growth forecast for China to about 7%, but urged authorities to avoid further stimulus measures and concentrate on curtailing financial risks instead


China Macro – HSBC services PMI 50.7 in May vs April's 51.4, the May result was the lowest in four months


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.

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