LEISURE LETTER (07/07/2014)



  • July 15-17 Pre-RCL earnings Hedgeye Cruise pricing survey


ALL: AX  Aristocrat Leisure – announced two acquisitions.

  1. Acquired U.S.-based Paltronics Inc, including intellectual property relating to products. Paltronics is a leading supplier of jackpot managers and display systems for casino games - including applications for in-game media windows and bonusing applications for electronic gaming machines, video poker machines and table games.  Paltronics jackpot controllers have been deployed in Aristocrat’s linked progressive products, including its Hyperlink and Xtreme Mystery.
  2. Acquired Video Gaming Technologies, Inc. for total consideration of US$1,283m in cash, subject to certain adjustments and regulatory approvals.  Privately owned VGT is a provider of gaming machines for the leased tribal gaming market in North America.  VGT had an installed base of approximately 20,200 leased machines at the end of last year.  After the acquisition, Aristocrat will have an estimated market share of 31% in the North American tribal leased machine market versus the current 5% well ahead of second-placed IGT, which has a market share of 22%, according to a presentation from Aristocrat.

Takeaway:  Solid acquisitiona as Aristocrat continues to make ground in the North American market.  Aristocrat is unlikely to be a suitor for IGT.


27:HK Galaxy Entertainment Group – Francis Lui sees revenue growing by 10% or more Macau Business
Galaxy's vice-chairman, Francis Lui Yiu Tung, says he expects annual growth of at least 10% in his company’s gross gaming revenue in Macau this year.  Lui also told reporters that he expected the company’s annual revenue from VIP gaming to increase by less than 10% this year.

Takeaway:  Galaxy has been outstanding, particularly on the VIP side.  YTD, GGR at Galaxy is up 24% YoY.


LVS & 1928:HK – announced a “special award” to over 27,000 full time employees who are manager grade and below. The award, equal to one month’s salary, will be paid July 31. In addition, this benefit will also be paid each year together with the July payroll until 2017.

Takeaway: Adelson's response to Wynn Macau's Employee Ownership Scheme.


ISLE – City of Bettendorf approves ISLE's new land-based casino.  The new casino on-land will be around 70,000 square feet. This is about the same size as the current boat.

Takeaway: Construction is expected to begin within 30 days 


MAR – Atlantis Paradise Island in Nassau, Bahamas, will join the Autograph Collection, Marriott International's portfolio of more than 60 independent hotels.

The 3,400-room Atlantis will be Autograph's first resort in the Bahamas and will be the largest hotel in the collection. Atlantis will have access to Marriott International's global sales and reservation system as well as the Marriott Rewards program. Atlantis, owned by Brookfield Asset Management and independently managed, will join the Autograph Collection this autumn. 

Takeaway: An interesting addition to the Autograph collection. Atlantis has experienced operating challenges giving up ADR to drive higher occupancy since the global financial crisis and recession of 2008.


RCL– Celebrity Cruise Ship Departure Delayed due to Mechanical Issue; Skips Port Stop Cruise Critic

A spokesperson from Celebrity said: "Celebrity Reflection's stay in Civitavecchia, Italy was extended in order to resolve a technical issue. The repairs have been completed and the ship departed Civitavecchia at approximately 3:00 p.m. local time. The ship is currently sailing to Athens (Pireaus), Greece, and is expected to arrive on Monday, July 7, as originally scheduled."  Passengers received an unspecified amount of onboard credit as a gesture of good will from the cruise line

Takeaway:  Another Celebrity incident


Celebrity offers agents the chance to earn a cruise TTG Digital

The “Sell and Sail” promotion will enable any agent who makes five Celebrity Eclipse bookings to earn a future cruise certificate for the line worth £1,000.

Agents who make 10 bookings will enjoy £2,000 worth Celebrity Cruises holidays, with £5,000 up for grabs for those who make a 25 bookings.  The incentive applies to all Celebrity Eclipse 2014 sailings between August 16 and November 8, which is the end of the ship’s Southampton-based season.


Hurricane Arthur 

CCL - Forces Cruise Ship Itinerary Change Cruise Critic

Hurricane Arthur has forced Carnival Splendor to call in at Bermuda rather than St. John. 


RCL - canceled stops at CocoCay Cruise Critic

Royal Caribbean canceled stops at its private island of CocoCay, affecting Majesty of the Seas, Enchantment of the Seas, and Grandeur of the Seas. 

 Takeaway:  Doesn't look like Arthur made much impact


Macau VIP Gaming & Smoking Ban (Macau Business Daily) The DICJ has defined the characteristics that a VIP gaming room should have if a casino operator wishes to allow smoking in a VIP gaming room including: 1) “separate areas” or isolate them with “physical or architectural barriers” from the main casino; 2) gamblers using VIP rooms where smoking is allowed must have special passes issued by the casino, and 3) the chips used in such rooms must be different from the chips used elsewhere in the casino.

Takeaway: New regulator pronouncements aimed at "clearing the air".


Egypt Fiscal Reforms, Negative for Cruise Industry – Egypt raised taxes on many consumer products over the weekend, including cigarettes, alcohol, natural gas and gasoline as part of a series of measures to curb the budget deficit and reform the economy as Egypt is trying to reduce its deficit to 10% of gross domestic product in the next fiscal year, from an expected shortfall of 12% in 2013/14.  A Ministry of Tourism official predicts a 100% price rise for cruise services due to the diesel price hike, raised Friday night from EGP 1.10 to EGP 1.8 per liter. The tourism industry consumes 22% of total diesel output in Egypt, amounting to 12.4m tonnes per year, according to a study by the Federation of Egyptian Industries.

Takeaway:  Higher prices for the wrong reason.


Russia Gaming Expansion – Russia’s State Duma passed a new law on Friday, July 4, allowing the establishment of gambling zones in Crimea and Sochi, Russian. Russian legislators inserted a clause into the bill during its second reading that allows for the creation of gambling facilities in Sochi. The bill stipulates gambling venues can only be established in Olympic facilities that were financed by private investors while the bill gives Crimean authorities full jurisdiction over defining the location and boundaries of gambling areas. Russia currently has one gambling zone in operation – on the border between Krasnodar Territory and Rostov region – and three more are being built in Kaliningrad, Altai and Primorsky regions.

Takeaway: Potentially more competition for European gamblers.

Japan Gaming Expansion (Kyoto News) The operator of Universal Studios Japan in Osaka is considering bidding for a license to operate a casino complex in the western Japanese city once gambling regulations are relaxed.  USJ Co., which operates the theme park featuring popular Hollywood movies, is likely to team up with other parties interested in the new business and lead a consortium.  An amusement complex with a casino and a theme park may be placed on an artificial island known as Yumeshima, some 3 kilometers away from USJ, according to a blueprint set by local authorities.

Takeaway: A new and previously unannounced competitor with a strong understanding of local market demographics.


Atlantic City's Gaming Promotions (Chicago Daily Herald) Promotions such as free stays and meals aren't translating into the spending boom that Atlantic City needs, 20 months from the five-year deadline that Governor Chris Christie set for a turnaround. Freebies totaled 26% of gross revenue for casino owners last year as compared to other North American gambling operators averaged 6%.

Takeaway: Operators are attempting to "buy" the business but even the high rate of promotions is not sufficient life support for GGR.


New Jersey Gaming – New Jersey Senate President Steve Sweeney wants a November 2015 referendum asking New Jersey voters to expand gaming beyond Atlantic City.  Recently, Sen. Paul Sarno introduced a bill to allow a casino at the Meadowlands near New York City with a tax on Meadowlands GGR to support the Casino Reinvestment Development Authority.

Takeaway: Finally some rationality from New Jersey and the realization that the expansion of gaming across the northeast is a permanent headwind to Atlantic City and New Jersey GGR. 


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.

Nope, We Do Not Think It's Different This Time $VIX $SPY

Takeaway: A glaring US equity sell signal at VIX 10.32.

Editor's note: This is an excerpt from CEO Keith McCullough's morning research. 


A glaring US equity sell signal at VIX 10.32. It has never sustainably held below 10. Never. That is a long time.


The first SELL signal I issued in SPY since Feb 10, 2014 came on Thursday in conjunction with that front-month vol oversold reading.


Nope, We Do Not Think It's Different This Time $VIX $SPY - Chart of the Day

Unstoppable Ballers

This note was originally published at 8am on June 23, 2014 for Hedgeye subscribers.

“Your love makes me strong; your hate makes me unstoppable.”

-Cristiano Ronaldo


If you’ve been following Team USA in the World Cup and didn’t know who Ronaldo was, now you know. Ronaldo’s sick pass in the final minute of last night’s USA-Portugal match reminded the ladies who is one of the best looking ballers in the game too!


To be fair, while he did get expelled for throwing a chair at his teacher, Ronaldo isn’t exactly a thug. His Mom was a cook and his Dad was a municipal gardener and they named him after Ronald Reagan. In 2009, the young Manchester United star with the flow became the highest paid footballer in the world.


Ronaldo plays for Real Madrid now and gets paid in a strengthening currency – British Pounds. After taxes, he makes 21M Pounds/year. That’s earnings, before-inflation-debauchery-accelerating (EBITDA - i.e. the unstoppable and un-legislated worldwide commodity inflation superimposed on poor people by the Fed).


Unstoppable Ballers - cristiano ronaldo therichest


Back to the Global Macro Grind


Unlike the US Federal Reserve, who knows how to trick people who wouldn’t know otherwise into believing that there is no inflation, after he shocks you with dramatic goals like he did yesterday, Ronaldo says “I don’t think about one trick or the other; they just happen.” #talent


As the Fed weakens the US Dollar, inflation just happens too:


  1. Last week the US Dollar Index was -0.3% to $80.33
  2. The CRB Commodities Index (19 Commodities) was up another +1% week-over-week to +11.8% YTD
  3. CRB Food Index was up another +2.1% on the week to +22.8% YTD


Yep, as Hemingway might have said, at first inflation happens slowly – then all at once. Here’s what some of the sub-components of commodity-inflation-expectations did AFTER the Fed cut its growth forecast and eased last week:


  1. Silver +6.1% on the week to +7.4% YTD
  2. Sugar +5.0% on the week to +10.0% YTD
  3. Gold +3.2% on the week to +9.2% YTD
  4. Nickel +2.7% on the week to +32.3% YTD
  5. Brent Oil +2.0% on the week to +5.8% YTD


True. Brent Oil isn’t really up that much, compared to Nickel. But West Texas Crude is up more than Silver, at +11.5% YTD! And, despite the bearish supply views of Consensus Macro on most things metals, I’m thinking +32.3% is getting someone paid in size being long #InflationAccelerating YTD.


But, but, “the Dow is up” … Uh, ok. It’s up a whopping +2.2% YTD.


If you want to be a real baller and be long the stuff in the US stock market that’s crushing a low-single digit performance # for the YTD, you need to be long of both inflation and the slow-growth it drives into the consumption core of America:


  1. Energy Stocks (XLE) up another +2.6% last week to +14.0% YTD
  2. Slow-growth Utilities (XLU) up another +2.2% last week to +14.5% YTD
  3. REIT stocks (MSCI Index) up another +1.6% last week to +15.8% YTD


Exactly. As long as the Fed won’t call the all-time highs in US Rents “inflation”, just buy exposure to the REIT and/or private equity firm that is going to jam his renters with more of it.


Other than currencies, commodities, and stock style factors, there are of course other ways to monitor what the real-time market thinks about #InflationAccelerating.


Five-year breakevens, for example, were up a full +11bps (basis points) last week to +26bps YTD. You can look at a chart of TIPs (Treasury Inflation Protection, which we continue to be long of on Real-Time Alerts terms too).


Or you can look at things like hedge fund net positioning via CFTC (Commodities Futures Trading Commission) net long and short positions:


  1. Gold’s net long position popped +15,292 to a net LONG position of +66,572 contracts last week
  2. Oil’s net long position ramped to an all-time high of +478,907 net LONGs (+39,087 net longer on the week)


Or you can just call all of this what it is. Because the only thing more dangerous than having the ball on Ronaldo’s foot in the final minutes of a game that is about to go bad is having both Iraq and the Fed come at you on oil inflation, all at once…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.64%

SPX 1926-1968

VIX 10.11-12.98

USD 80.18-80.60

Pound 1.69-1.71

WTI Oil 106.01-107.98

Gold 1285-1325


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Unstoppable Ballers - Chart of the Day

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Volatility, U.S. Dollar and Rates

Client Talking Points


Glaring U.S. equity sell signal at VIX 10.32 (it has never held, sustainably, below 10 – and never is a long time). First SELL signal we issued in SPY since February 10, 2014 came on Thursday in conjunction with that front-month volatility oversold reading.  


At the same time the USD was signaling immediate-term TRADE overbought within its bearish long-term TAIL risk setup on Thursday. Don’t forget that the U.S. unemployment report is a lagging economic indicator – fade it.


0% follow through for rates today as 10yr yield fails at both our TAIL risk and TREND resistance lines. It would need to close above 2.81% for us to seriously question our U.S. #Q3Slowing Theme (we are hosting our Macro Themes Call for Q3 on Friday at 11:00am EDT).

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


INDIA: (one of our fav equity markets) is now +24.3% YTD (Indonesia +18.3% YTD), crushing the Dow

@Keith McCullough


“The best way to predict the future is to create it.”

-Peter Drucker


German industrial production fell 1.8% in May from April, the largest drop in two years, weighed down by sharp falls in the construction and manufacturing sectors.

CHART OF THE DAY: #MarketComplacency $VIX


CHART OF THE DAY: #MarketComplacency $VIX  - Chart of the Day

Moments of Discontinuity

“Each circle of time has a great moment of discontinuity.”

-The Fourth Turning


No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.


In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.


Moments of Discontinuity - clock2


After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.


Back to the Global Macro Grind


On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.


With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:


1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)

2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance

3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)


Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.


But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.


If I’m wrong, well, consensus is going to be really right.


Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:


1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)

2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)

3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)


This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).


To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.


In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.


“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”

-William Strauss and Neil Howe (The Fourth Turning)


And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.50-2.67%


VIX 10.11-11.54

USD 79.73-80.35

Pound 1.69-1.71

Brent Oil 110.03-112.99

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moments of Discontinuity - Chart of the Day

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