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It’s Almost Mathematically Impossible to Get to Consensus Macro GDP Estimates.

Takeaway: The Great American Economic Muddle continues...

The big rip in oil prices all but ensures a big U.S. #ConsumerTax hike this summer. At $106.90/barrel this morning, WTI Crude is up +9% for the year-to-date now. This very much augments our U.S. #ConsumerSlowing Macro Theme.


Meanwhile, CRB Commodities Index (19 commodities) are up +1.6% for the week and +10.3% year-to-date.


In other words, it’s almost mathematically impossible to get to Consensus Macro GDP estimates for Q314 if the Deflator reflects #InflationAccelerating.


It’s Almost Mathematically Impossible to Get to Consensus Macro GDP Estimates. - drake22


LEISURE LETTER (06/13/2014)

Tickers: IGT, PENN, GLPI


  • Tues-Thur June 17-19: Todd in Singapore & Macau for meetings
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released


IGT – S&P announced Cimarex will replace IGT in the S&P 500 after the close on June 20, 2014.

Takeaway: This event was entirely expected by the Hedgeye team as on March 28, 2014 in our "IGT: Another Shoe to Drop?" we highlighted IGT's likely removal from the S&P 500 Index due to a market cap shortfall.  


PENN / GLPI – A federal bankruptcy judge denied PENN's request to stop the Iowa Racing and Gaming Commission from closing Argosy Sioux City on July 1.  PENN is expected to file motions in Iowa requesting an emergency stay of the July 1 closing.

Takeaway: Is this really the highest and best use of shareholder capital?  Given the mounting legal costs, we expect a one-time charge related to the closing of Argosy Sioux City.  Recall, it is illegal for a casino to operate without a valid gaming license and were the casino to operate without a license, such an event would set-off events leading to forced property closures in other jurisdictions. 


Insider Transactions

H - Director Pamela M. Nicholson purchased 1,600 shares of Hyatt stock on Tuesday, June 10th at $60.97/share and now owns 3,010 shares.


Iowa Gaming Expansion – The Iowa Racing & Gaming Commission voted 3-2 to approve a 19th commercial casino license for the development of a 525 slot, 14 table casino and adjoining 71-room hotel by Wild Rose Entertainment (WRE) in Jefferson, Iowa.  WRE owns and operates two other properties in Iowa, the 527 slot, 14 tables games WRE Emmetsburg as well as the 544 slot, 12 table WRE Clinton.

Takeaway:  Getting crowded in Iowa but a few more slots for the suppliers.  We found the 3-2 decision interesting in that the IRGC voted 4-1 two months ago to decline the license application for the 840 slot, 30 table games Cedar Crossing Casino in Cedar Rapids, Iowa on the basis of cannibalization of neighboring casinos.  


Macau Ferry Accident – a high-speed ferry carrying 220 people crashed into a breakwater in the Macau harbor earlier today injuring 22 people. The Shun Tak Holdings operated ferry departed Hong Kong and hit the breakwater at about 9:30 am Macau time.  This was the second accident involving a Turbo-Jet ferry over the past month - the prior Turbo-Jet accident occurred on May 22 when a Macau-bound ferry collided with a cargo ship injuring more than 30 passengers.

Takeaway: This second accident may result in increase government oversight. 


Illegal World Cup Betting – Police seized more than HK$20 million in illegal World Cup bets during the first day of the World Cup across the Hong Kong SAR on Thursday.

Takeaway: The first of many headlines, we expect.


Cyprus Gaming Expansion – Nicosia, the capital of Cyprus, yesterday launched its big push to secure the license for the island’s first-ever casino resort, and like each of the other main districts, says the capital is the only location that makes the most business sense. The Cypriot government announced last month the gaming licenses would be awarded in Spring 2015 would include an integrated resort in one district plus two more branches, or satellite casinos in two other districts.

Takeaway: The political and public relations sparring begins.


Russia Gaming Expansion (GGR Asia) Russian President Vladimir Putin did a U-turn and he now supports the creation of a gambling zone in Sochi, which in February hosted the 2014 Winter Olympics. Mr Putin had previously talked against the idea saying the Black Sea city would lose its traditional holidaymakers if it had casinos.  Recall, in April, Mr Putin submitted a draft law to the Russian parliament to establish a gambling zone in Crimea, which would be the fifth in the country.

Takeaway: A potential new jurisdiction and large integrated resort...would be incremental slot equipment demand. 

Australian cruise market (Cruise Currents) In 2013, the number of Australians setting sail increased by a record 20%, a larger increase in cruise passengers than any other market in the world.  In addition to a 20% growth rate, a record number of 3.6% of Australians chose a cruise vacation last year, beating North America’s 3.3%.  


Recently, Carnival Cruise Lines deployed their first ship to the region, the Carnival Spirit, which will soon be joined by sister ship Carnival Legend this coming September.  Both ships will sail year round from Sydney, offering sailings to the South Pacific.  RCL also recently announced it will begin sailing from Brisbane, offering a variety of Australia and South Pacific sailings aboard Legend of the Seas beginning in 2015.  The line is also opting to increase capacity in the region, replacing the smaller Rhapsody of the Seas in Sydney with the larger, newer Explorer of the Seas in 2015.

Takeaway: Bodes well for a potential growth market


China May Home Sales - (Bloomberg) China's home sales fell 11% y/y in May amid slowing demand. The value of homes sold declined to 446B yuan ($72B) from 503B yuan in the same month last year. The value of sales from Jan to May fell 10.2% y/y to 1.97T yuan. 


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.



The consensus sell-side call: buy the stocks of the Macau gaming operators on weakness due to strong mass growth.  What happens when mass decelerates?


While the sell-side has caught up to the VIP slowing thesis, the analysts remain mostly positive on the Macau gaming stocks due to “continued strength in the mass segment”.   Well friends, we again send up the warning flare – this time we call attention to the imminent deceleration in the mass segment.  It’s mostly the math and the lapping of a significant rise in table minimums but also, VIP and mass revenue have historically shared a correlation coefficient of 0.56.  Moreover, if recent reports are correct, premium mass may be susceptible to the upcoming smoking ban (VIP rooms will be exempt).  While certainly a contrarian call, could the on the margin strategy be to stay away from the Mass centric stocks (LVS, Sands China, SJM, MPEL)? 

the SET-UP

As early as March 10, we pivoted to the sidelines when we removed LVS from our Best Ideas list, see our note “LVS: REMOVING FROM INVESTING IDEAS” and shortly thereafter warned investors about junket issues, the Dept of State request to lower the threshold for reportable financial transactions, UnionPay, money laundering scrutiny, as well as the extreme sentiment indicator with the massive “buy” rating skew on MGM, LVS, WYNN, and MPEL.  (see chart below).




We were incorrect in thinking May GGR growth would be the last positive catalyst for the Macau stocks over the intermediate term.  Obviously, that catalyst failed to materialize and May growth disappointed.  But looking ahead, we still only see negative catalysts:  continued weak VIP driving monthly GGR growth into single digits, the smoking ban impact on premium mass, and potentially most important, decelerating Mass growth.


Long-term, exposure to the mass segment will be advantageous but relative to sentiment, it may be where the risk lies over the near/intermediate term.  The following table details mass revenue as a percentage of total GGR on a trailing twelve month basis as of the end of May 2014.  Sands China (LVS) is the most exposed to the mass segment with more than 44% of revenues, followed by SJM with 35%, MPEL with more than 31% and Galaxy with almost 26%.  The least exposed to mass is Wynn Macau (WYNN) with 22.1% and MGM China (MGM) at 23.1%.  Our point here is that with all the investor concern surrounding VIP, stocks may have adjusted already for those issues, but maybe not for the upcoming mass deceleration.




The sell-side continues to reaffirm their conviction in the Macau gaming stocks based on continued growth in the Mass segment.  Last week, one sell-side analyst wrote, “We believe mass market growth can continue to pace around 30% this year.”  Another firm wrote, “We maintain a positive outlook on the sector, as mass, which is the key driver for EBITDA growth, remains robust.”


We believe in bold, intellectual honesty and insightful research with a focus on timing.  As such we are compelled to enlighten our subscribers that growth in the Mass segment has probably peaked and the second derivative is about to go negative!  


During Q1 2014 earnings conference calls, we heard a lot of talk from gaming operators regarding “yielding up” the mass segment.  While visitation has increased, we believe the largest driver of the growth in the mass segment has been rising revenue per visitor.  The big increase in table minimum bets and the changing mix toward tables with higher than minimum bets helped push that metric upward. 


As an example, if a casino operated 500 mass tables but 400 tables had a HK$25 minimum bet while 100 tables had a HK$250 minimum bet, the effective yielded minimum was HK$70.  Fast forward, this casino now “yields up” (increases minimum bets) so that the casino floor is now 250 mass tables with a HK$300 minimum bet and 250 mass tables with a HK$500 minimum bet, the effective yielded minimum is now HK$400. 


So, while not increasing the number of visitors nor the speed of play, the casino has now effectively increased volume by 5.7x assuming the same number of hands played at the same speed.  Thus, the growth in the mass segment could in fact be driven entirely on “yielding up” rather than increased visitation.  Obviously, casinos cannot do this forever.  

When we review mass segment baccarat table minimums, we notice a significant increase (or yielding up) occurred during July and August of last year.  Said differently, the mass segment is about to anniversary more difficult average table minimums, thus making year-over-year growth more difficult.




When we put all our quantitative and qualitative analysis together, we forecast a slowing of the mass segment on a market basis – from >35% growth to 19-20% by the end of the year.  We don’t believe investors fully appreciate the impact of yielding up, more difficult comps, and the resulting slowing second derivative of the mass segment.  As a result, we see additional negative earnings revision and valuation risk to the Macau gaming operators – beyond what is currently expected in the market.




We remain very constructive regarding the long-term outlook for Macau operators, particularly those with a well defined mass strategy and mass exposure.  However, with all the focus - and rightly so - currently on the VIP issues and overwhelmingly bullish sentiment surrounding mass, we caution investors that mass deceleration is likely and could further pressure the stocks.

This Summer’s #ConsumerTax In Full Effect

Client Talking Points


Big rip in oil prices all but ensures a big U.S. #ConsumerTax this summer; at $106.90/barrel this morning WTI Crude is +9% for the year-to-date now and this very much augments our U.S. #ConsumerSlowing Macro Theme.


CRB Commodities Index (19 commodities) +1.6% for the week (vs Russell and Bond Yields down) and +10.3% year-to-date – it’s almost mathematically impossible to get to Consensus Macro GDP estimates for Q314 if the Deflator reflects #InflationAccelerating.


Down to 2.59% this morning with our TAIL risk line now = 2.64% and @Hedgeye TREND resistance above that at 2.81%; we still think the Fed is going to be more dovish than consensus has baked in at next week’s meeting; still bullish on bonds.

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


Q: Is inflation ok if it's expected? Volcker: "This kind of stuff that you're being taught at Princeton disturbs me." http://tinyurl.com/mkxe74f



“Without leaps of imagination or dreaming, we lose the excitement of possibilities. Dreaming, after all is a form of planning.”

-Gloria Steinem


Volatility (VIX) has risen over +17% from its bombed-out lows last Friday.


Throwing the Torch

This note was originally published at 8am on May 30, 2014 for Hedgeye subscribers.

“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%

SPX 1895-1926

RUT 1089-1146

VIX 11.03-13.69

Gold 1249-1295 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Throwing the Torch - Complacent

June 13, 2014

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