LEISURE LETTER (06/25/2014)

Tickers: IGT, RCL, HOT, MAR


IGT – BWIN.PARTY agreed to integrate IGT's mobile and online game offerings into BWIN's US and European web-site portals.

Takeaway:  Licensing royalty deal for IGT


RCL – announced a sale featuring 50% off 2nd guest (excludes taxes, fees, port charges) for select 2015 and 2016 sailings. This offer ends July 15, 2014.

Takeaway: This (Buy One Get One) 50% deal was extended from May's promotions.


Insider Transactions

HOT – CEO Frits D. Van Paasschen sold 51,435 shares on Thursday, June 19th at an average price of $81.01/share and now owns 246,915 shares. The shares represent 25% of an equity award covering 102,870 shares which vested in four equal installments beginning 2/28.2009.  The cost basis of the security was $48.61/share.


MAR – J W. Marriott, Jr. sold 200,000 shares on Friday, June 20th at $63.47/share and now directly owns 188,229 shares.

Takeaway: As we've repeatedly written, if the lodging industry fundamentals are so strong and the industry is only in the fifth inning, why is insider selling increasing? 


IVS - Macau, Beijing in talks on Individual Visit Scheme (GGRAsia)

Macau’s Secretary for Social Affairs and Culture, Cheong U, and mainland China officials have discussed whether changes should be made to the Individual Visit Scheme (IVS).  The scheme allows mainland passport holders to visit Macau and Hong Kong as independent travellers rather than as part of a tour group. 


Local residents have expressed concerns in mainstream and social media about the growth in visitor arrivals. Some tourism experts and tourism industry insiders have called for a strategic plan to ascertain the city’s capacity to receive more visitors.


Takeaway:  Visitation hasn't been off the charts lately so it would seem odd to change the IVS program. 


Pokerstars - could be live in NJ by autumn (EGR Magazine)  

Takeaway:  While we don't know how the NJ Division of Gaming Enforcement will handle the Pokerstars acquisition by Amaya, they could take over the NJ I-gaming market if allowed by DGE.  Pokerstars would use the Resorts Casino license.


Macau Infrastructure – The Pac On ferry terminal faces more delays.  Currently, only a temporary terminal is in operation, with a limited number of sailings per hour. 

Takeaway: More delays 


Philippines Tourism – Short-term travel movements to and from the Philippines by Australian residents increased 11.6% year-over-year to 67,300 in the four months to April 30, according to the Australian Bureau of Statistics. 

Takeaway: Would appear to be a shift away from Thailand and Malaysian destinations toward the Philippines and could serve a broader customer base for the Manila casinos. 


Nevada Online Poker – Peppermill Resorts launched "Ultimate Online Poker" an online poker offering with a system run by Ultimate Gaming, a Station Casinos controlled company.  Peppermill is the fourth online gaming offering in Nevada, joining Stations Casinos, Caesars and South Point.

Takeaway: Slow and steady expansion of online poker. 


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 are down 18% YoY. The only recovery in housing at this point is the new and high end market ($1M+).

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 June 20. 


The spring slump gives way to the summer slump with purchase demand leading the composite index lower for the week ending 6/30. Yesterday’s May New Home Sales figures were encouraging, but the best forward indicator on demand volume continues to signal slowing momentum.


* Composite Index:  Down 1.0% WoW to 348.1 on the index, the second lowest print YTD


* Purchase Apps:  Down -1.2% WoW with the YoY worsening 280bps sequentially to -17.9%.  The second quarter finishes up +3.2% QoQ. 


* Refi;  Down -0.9% WoW with the YoY “improving” to -56.5% from -58.4%. 


* Rates:  30Y Rates dropped -3 bps to 4.33%.  Notably, mortgage rates were -2.9% YoY in the latest week – the 1st time the 30Y FRM contract has been negative on a YoY basis since 5/13/2013


Taken in conjunction with the previous week's 4.7% w/w decline in purchase applications, this week's -1.2% drop continues the erosion of the post-holiday bounce and returns the index to 176.4.


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.


Our expectation remains that the back half of this year and the first half of 2015 should see steady downward pressure on the rate of home price appreciation.











MAY FLOWERS SUCCUMB TO JUNE MOWERS - Composite Index LT w Summay Stats 





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


Client Talking Points


So far so good – it’s not different this time. The VIX has never held below 10 and it stopped going down this time at 10.61 (June 18); +14.3% from there, if front month VIX can start to make a series of all-time-higher-lows, this should get interesting, faster.


WTI crude continued higher this morning, then backed off small – higher-lows and higher-highs continue to signal there’s going to be one heck of a tax hike at the pump in the summer months for U.S. consumers; bond yields agree.


UST 10YR yield back down to 2.58% and the Yield Spread (10s minus 2s) continues to compress (down to 209bps wide this morning, breaking down to fresh year-to-date lows, which is an explicit #GrowthSlowing signal).

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


I published an updated deck on $DRI yesterday - the issues will never be fixed unless the company’s vision changes.




“There is far more opportunity than there is ability. “

-Thomas A. Edison


On June 20th the most-traded gold option the previous day was a $1,350 August call. The contract surged more than four-fold to $8.60, from $1.80 the previous day - the biggest gain since at least November 2012. (Bloomberg)

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CHART OF THE DAY: The Pinch of Rising Inflation

Takeaway: Got #InflationAccelerating yet? Hedgeye reiterates the Street high on inflation expectations for 2014 and slowing US growth.


CHART OF THE DAY: The Pinch of Rising Inflation - Chart of the Day

The Fourth Turning

“That which hath been is now; and that which is to be, hath already been”



That’s the opening volley in one of the most recommended books Institutional Investors have offered up to me in the last year: The Fourth TurningWhat Cycles of History Tell Us About America’s Next Rendezvous with Destiny. I’m finally reading it on my family vacation this week in the homeland.


The Fourth Turning - flag


Back to the Global Macro Grind


One of the best ways to insure yourself against groupthink is not anchoring on a confirmation bias that “it’s different this time.” That’s why so many thoughtful buy-siders like The Fourth Turning. Its main premise is pretty much the only protection against long-term risk – mean reversion.


In order to contextualize mean reversion risk, I think you need to:


  1. Study #History (so that you can contextualize where you are)
  2. Understand #Math (2nd derivative moves and how they are a leading indicator for mean reversions)
  3. Embrace Uncertainty (from a #Behavioral perspective, accept that risks happen fast, and slow)


Or at least that’s what my ongoing studies (which started with being immersed in linear-supply/demand Keynesian Economics @Yale in 1995) and risk management experience in real-time markets has led me to believe, so far…


If it is indeed, “different this time” (as the Ben Bernanke’s and Mohammed El-Erian’s of the world would lead you to believe), I’ll be dead wrong on my fundamental #history #math #behavioral framework. But none of us will know that until I’m long gone anyway.


That’s one of the most humbling points William Strauss and Neil Howe make in The Fourth Turning about cycles. They are long. And by the time you read enough #history to know that you just happen to be alive within one of them, you’ll wish you had read more, sooner.


What was America like 80 years ago?


We were proud as people, but modest as individuals…” –Strauss/Howe


How important are you, personally, to this world today?


Fewer than two people in ten said yes when asked around WWII… Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled.” –Strauss/Howe


That’s page 1 of the book. Since it was written in 1997, I’m betting that 7, 8, or 9 in ten central planners think of themselves as the epicenter of the universe today. How else could someone at the Federal Reserve wake up every morning fundamentally believing that they can bend economic gravity?


Gravity? How do Strauss/Howe define cycles?


Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:


  1. The First Turning is a High
  2. The Second Turning is an Awakening
  3. The Third Turning is an Unraveling
  4.  The Fourth Turning is a Crisis


The good news is that after a decade of Bush/Obama inflation policies slowing real-consumption growth and perpetuating “inequality”, we’re already solidly in The Fourth Turning in America.


You’ll get the updated US GDP report for Q114 to remind you of that today. Inclusive of the central-planners making up that US inflation is only running in the “low 1%” range, real (inflation-adjusted) GDP growth will be revised to negative, yet again.


The only way out is time.


Eventually, time runs out on broken policies. Sometimes this happens slowly; sometimes it happens all at once.


Now that US equity volatility (VIX) has made another all-time-higher-low at 10.61 (June 18th, 2014), we’ll see if it really is different this time – or if the crisis phase of US growth being infected by Federal Reserve Policies to Inflate is to be what it hath already been.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.46-2.64% (bearish)

SPX 1 (bullish)

RUT 1155-1195 (neutral)

India’s BSE Sensex 246 (bullish)

USD 80.17-80.51 (bearish)

Pound 1.69-1.71 (bullish)

WTIC Oil 105.71-107.28 (bullish)

Gold 1 (bullish)


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Fourth Turning - Chart of the Day

Self-Evident Brats

This note was originally published at 8am on June 11, 2014 for Hedgeye subscribers.

“We hold these truths to be self-evident: that all men are created equal.”

-Thomas Jefferson


A big government central planning bureaucrat got his butt whipped down in the heartland of American Constitutionalism last night. Not unlike in the 1970s, when Nixonian Republicans and Cartering Democrats all started to sound the same on economic matters, Americans voted for change.


If Eric Cantor doesn’t make your skin crawl, you and I probably won’t be having beers at the Rangers/Kings Stanley Cup tilt tonight in NYC. This guy isn’t a free-market-liberal-conservative like me. On economic matters, he is a raging Keynesian.


Bring on the self-evidence that is the Policy To Inflate crushing at least 80% of Americans via cost of living and The Dave Brat. The winner of the 7th District of Virginia is a free-market economics professor! How cool is that? On days like this, even this proud Canadian wants to be American.


Self-Evident Brats - brat


Back to the Global Macro Grind


This is not a political statement. I don’t support the Tea Party inasmuch as I don’t support either the Republican or Democrat parties. This is an economic statement that is ringing as true in the United Kingdom today as it did in the Unites States of America in 2013. Strong Currency; Stronger Country.


If you have a Policy To Inflate (weaken your currency via both monetary and fiscal policy), you get what Harvard’s Marty Feldstein finally explained (WSJ Op-Ed yesterday) to the central planning wonks at the Fed: #InflationAccelerating.


And when you get inflation accelerating the cost of living in America to all-time highs, you aren’t going to get re-elected by lying to people and telling them otherwise. The truth is self-evident.


BREAKING: World Bank Cuts US GDP Growth Forecast




Finally someone, somewhere, in the land of officialdom-nod took their US GDP forecast closer to Hedgeye Risk Management’s. While the World Bank didn’t cut its GDP outlook by enough, the point is they had the spine to do what Consensus Macro research won’t, until it’s too late.


To review our call on US GDP Growth slowing into Q3 of 2014 – it’s math:


  1. Top line (GDP) acceleration in US GDP growth peaked in Q3 of 2013
  2. Inflation (the Deflator, which you subtract from nominal GDP) bottomed in Q2/Q3 of 2013


In other words, the year-over-year comparisons put Q3’s probability of inflation slowing US consumption growth at its highest level since Q1 of 2008.


“So”, don’t ask a linear-economist who missed calling either the Q1 of 2008 or Q1 of 2011 US #InflationAccelerating calls for their Top 10 reasons why they are still using the same models that haven’t proactively predicted real-world consumption slowdowns. Ask the bond market.


At 2.64% on the 10yr US Treasury Yield (down hard from 3.03% on January 1st, 2014), the entire construct of #OldWall consensus still thinks “it’s different this time” (i.e. that they were only wrong on both rates and GDP rising in Q1 because of the weather).


Every time the bond market sells off to higher-lows, you buy it. Every time US domestic consumption growth gets bid up to no-volume-lower-highs, you sell it. That is the Hedgeye Macro Playbook for US stocks vs bonds investing in 2014, and we are sticking to it.


Another way to position for what I just wrote is as follows:


  1. Buy Bonds via TLT, BND, or anything equities that looks like a bond (XLU, VNQ, etc.)
  2. Sell US Domestic Growth like Consumer Discretionary (XLY) and Housing (ITB)


If you didn’t buy puts on Cantor’s political message, you could have bought #InflationAccelerating via Oil and Gold futures too.


In other news, the SP500 had its 38th day of not moving more (+/-) 1% yesterday. That’s the 2nd longest streak of compressed complacency in 15 years. No worries though, everyone will be able to get out, at the same time, because “this time is different.”


In case you aren’t yet convinced that it is different this time:


  1. Fear (VIX) has never held below 10, ever (it’s at 10.99 this morning)
  2. II’s Bull/Bear Spread (survey) just hit fresh YTD highs at +4540 basis points wide to the Bull side
  3. One legged ducks still swim in a circle


Whether you are a bond bull, US growth bear, or a Brat from Virginia this morning, we stand together fighting the tyranny of mediocre minds trying to centrally plan us into thinking we need their inflation policies to live freely. We hold these free-market truths to be self-evident. They always have been.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.65%

SPX 1935-1959

RUT 1136-1184

VIX 10.78-13.34

Pound 1.67-1.69

Brent Oil 109.10-110.96

Gold 1240-1273


Best of luck out there today,



Self-Evident Brats - Chart of the Day

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