Daily Trading Ranges [Unlocked]

This note was originally published July 02, 2014 at 07:42 in Daily Trading Ranges

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LEISURE LETTER (07/02/2014)



GTech Spa – said it would undertake a share repurchase programme to fulfil management stock incentive plans. The company’s board approved the buyback of up to 1,782,426 of its own shares. Based on Monday’s closing price of EUR17.85, GTech would pay about EUR$31.8 million (US$43.6 million) for approximately 1 percent of its share capital. 

Takeaway:  Approved a previously announced buyback 


CZR – announced that it would invest $223 million toward revamping the 2,256-room Quad Resort & Casino and rebrand it as the Linq Hotel & Casino. Reservations under the new name are on sale and the transition to the Linq brand is scheduled for completion on Oct. 30. The company is introducing the revamped property with $89-a-night room rates.

Takeaway: CZR trying to keep pace its competitors and room renovations and the resulting lift in ADR to $89/night.


LVS – COO John Caparella sold 22,840 shares on Friday, June 27th at an average price of $76.24 and now owns 15,680 shares.

Takeaway: Interesting sale as we don't often see insiders selling at this company.


PENN – Hollywood Gaming at Mahoning Valley Race Course took delivery Monday of the first of what will be a total of 850 video lottery terminals. Approximately 24 VLTs from manufacturer Multimedia Games arrived at the Austintown site. Additional shipments are scheduled over the next several weeks from leading manufacturers including Bally Technologies, Konami Gaming, Aristocrat and WMS.

Takeaway: Opening with 850 VLTs


BEE – announced it closed a $120.0 million limited recourse loan secured by the Four Seasons Washington, D.C. hotel. The loan bears interest at a floating rate of LIBOR plus 225 basis points and has a three-year initial term with two, one-year extension options available to the Company The financing replaces the $130.0 million financing previously encumbering the property. 

Takeaway: As expected and a slight savings on interest expense.


HOT – in Dubai, Starwood Hotels & Resorts has officially taken over a two-tower property which previously housed the 260-room Kempinski Grand and 200-room Ixir Hotel, reflagging the towers under the Le Meridien and Westin brands respectively as of July 1 under an agreement signed in April. 

Takeaway: Continuing to build the brand network via international conversions.


HST – announced it amended and extended its existing $1 billion revolver scheduled to mature in 2015 and its $500 million term loan scheduled to mature in 2017. The amended facility will extend the final maturity for both the revolver and term loan to 2019 (including extensions) and reduce pricing to reflect current market conditions.  At the new pricing level based on our present credit rating, the all-in pricing was reduced 30 basis points on the revolver and 32.5 basis points on the term loan.  Therefore, U.S. dollar denominated borrowings today would result in an initial all-in rate of 1.35% and 1.28%, respectively.  Today, approx. $220 million is outstanding under the revolver and $500 million under the term loan.

Takeaway: Reshaping the corporate credit facility...could a large acquisition be in the near future? 


CCL – Carnival offers agents triple point booking opportunity through July 31 (Travel Agent Central)

In celebration of the launch of Carnival Freedom's new schedule from Galveston, TX kicking off in February 2015, Carnival is offering travel agents a special triple point booking opportunity in its Travel Agent Rewards Program.  Beginning today through July 31, travel agents may earn 450 points (compared to the standard 150 points for new online bookings) through 2016 for all “Fun Ship” departures from Texas.

Takeaway:  Galveston has been a trouble spot for CCL for bookings and pricing in 2014.


NCLH – Norwegian Gem schedule tweaked to avoid strengthening storm Arthur (Seatrade Insider) 

Norwegian Gem is calling at Nassau on Tuesday instead of at Great Stirrup Cay as planned. Gem is due to depart at midnight and begin its return to New York City to stay ahead of the storm in more pleasant weather.  Arthur is expected to be a hurricane by Thursday.


Imported workers make up nearly 40% of workforce (Macau News)

According to the Human Resources Office (GRH), Macau’s number of imported workers (commonly known as blue-card holders) reached a record 159,299 at the end of May, 33,699 more than a year earlier.  Month-on-month, the number of non-resident workers rose by 3,091

Takeaway:  Labor issues will be in the spotlight as we get closer to the new Cotai openings.


Saipan Gaming Expansion – Imperial Pacific International Holdings Ltd, a Macau junket investor, disclosed via a HKSE filing it would distribute cash vouchers totaling US$10 million among all locally born adults in the U.S. Pacific territory of the Commonwealth of the Northern Mariana Islands if the company were to win a casino license.  Based on 2010 United States Census Bureau data, 53,833 people lived in Northern Mariana Islands and 74% (39,836) are estimated to be aged 15 or over. 

Takeaway: This distribution won't make locals "rich" as the distribution represents about $250/person over age 15. 


South Korean Gaming Dispute (Chosun Ilbo) Four Chinese tourists staged a protest at Jeju airport in May after a casino on the island refused to pay them baccarat winnings of KRW1.1 billion (US$1.09 million) because of suspicions that they cheated. The four individuals were customers at a casino hotel in the tourist resort of Seogwipo and racked up the ‘winnings’ in little more than two hours of play at the baccarat tables.  But management at the casino – a venue not named by the police – suspected the Chinese tourists had colluded with casino staff, possibly by asking a dealer to use sleight of hand to swap cards coming out of the card shoe with ones hidden on the dealer’s person. The incident, which allegedly occurred in May but has only just been reported, is now the subject of litigation between the players and the casino.

Takeaway: Interesting controversy as well as timing given Gentings recent announcement to delay the Jeju groundbreaking. 


South Korea Replacing Macau – (Xinhua) Chinese tourists no long need to bring a large amount of US dollars when traveling in South Korea, as they can choose to use China UnionPay, or even renminbi in cash in some stores. China is the first source of tourists for South Korea.  From January to May this year, Chinese tourists exceeded 2 million. South Korean banks have also witnessed a large amount of renminbi deposits since the second half of last year, with the total volume reaching US$11.3 billion at the end of May. South Korea expressed its intent in April to build up renminbi offshore trading markets. 

Takeaway: Some Chinese VIP gamblers could be going to South Korea rather than Macau...


Massachusetts Gaming Support(WBUR) a new WBUR poll indicated 56% of respondents approve of locating casinos in Massachusetts, while 38% disapprove and 6% don’t know, or refused to answer.  

Takeaway:  So far, the pro-casino side has the lead.


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.


Client Talking Points


$1.71 vs USD this morning (signaling immediate-term TRADE overbought within a bullish TREND) after another excellent economic data point (UK Construction PMI 62.6 for June vs 60.0 in May), which is unlike the U.S. data (which isn’t showing much as the USD declined in June). #StrongPound is winning.  


UST 10YR yield of 2.55% didn’t particularly care for the SPX short squeeze (in fact, day over day, it hasn’t moved) = in line with the sequential slowing in both the June PMI and another bad U.S. Home Price report (June Core Logic Home Prices down to +7.7%year-over-yeary vs +10% in April); buy bonds.


We sent out the cover signal on June 12th and the sell signal again yesterday at 1208; that’s my line, for now (it’s the all-time closing high from March 4th); from a style factor perspective, much prefer being long inflation and slow-growth #YieldChasing to US domestic consumption growth.

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


Update to maternity model pointing to acceleration.  $MD $HCA



"Concentration is the secret of strengths in politics, in war, in trade, in short in all management of human affairs."

- Ralph Waldo Emerson


19, the age of Australia’s Nick Kyrgios who was victorious against Rafael Nadal yesterday in the fourth round of Wimbledon. Kyrgios became the first player in 22 years ranked outside the top 100 to beat the number one player in the world.

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CHART OF THE DAY: $DFRG = Castle-in-the-Air

Takeaway: We believe we’ve identified one of Wall Street’s current darlings and recently added it to the Hedgeye Best Ideas list as a short.


CHART OF THE DAY: $DFRG = Castle-in-the-Air - new

A Castle-in-the-Air

“Dreams of castles in the air, of getting rich quick, do play a role – at times a dominant one – in determining actual stock prices.”

-Burton G. Malkiel


For the past several days, I’ve been reading a gem of a book recommended by my colleague, Howard Penney.  Malkiel’s A Random Walk Down Wall Street is a timeless, thought provoking piece that most curious investors would enjoy reading poolside on a beautiful summer day.  I certainly did.  After all, restaurant research isn’t limited to cheeseburgers and fries.  In fact, a large part of our job pertains to understanding both human and market psychology.  The castle-in-the-air theory, which concentrates on the psychic values of investors, serves as a constant reminder of this fact. 


For those unfamiliar with its origin, the castle-in-the-air theory was popularized by John Maynard Keynes in 1936.  While we tend to disagree with Keynes’ and his disciples on a number of economic issues, the notion that stocks trade off of mass psychology is widely appealing.  Accordingly, some investors attempt to front run this onslaught of groupthink, not by identifying mispriced stocks, but rather by identifying stocks that are likely to become Wall Street’s next darling.  All told, this can be a profitable strategy – until it’s not.  


A Castle-in-the-Air - castle


Back to the Global Macro Grind...


We believe we’ve identified one of Wall Street’s current darlings and recently added it to the Hedgeye Best Ideas list as a short.  Del Frisco’s Restaurant Group (DFRG) owns and operates three distinctly different high-end steak chains.  After coming public in July 2012, the stock has gained over 114%; quite impressive, by any measure.  More importantly, however, we believe cheerleading analysts and the subsequent madness of the crowd have propelled the stock during this time.  Is it reasonable to call a company whose adjusted EPS declined 7% in 2013 one of the greatest growth stories in the restaurant industry?  We think not. 


As Malkiel goes on to say:


“Beware of very high multiple stocks in which future growth is already discounted, if growth doesn’t materialize, losses are doubly heavy – both the earnings and the multiples drop.”


Beware indeed.

The truth is, the company currently screens as one of the most expensive stocks on both a Price-to-Sales and EV-to-EBITDA basis in the casual dining industry.  While we’re not insinuating DFRG is the beneficiary of a “get-rich quick speculative binge,” we are confident the stock is severely dislocated from its intrinsic value.


Part of the hype has been driven by the company’s positioning within the restaurant industry.  Del Frisco’s caters to the high-end consumer; a cohort that the stock market would suggest is doing quite well.  While this may be true, we believe the high-end consumer has been slowing on the margin as inflation in the things that matter (food, energy, rent, etc.) continues to accelerate.  Contrary to popular belief, high-end consumers can feel the pinch too and two-year trends at the company’s hallmark concept, Del Frisco’s Double Eagle Steakhouse, would suggest the same. 


Admittedly, the Double Eagle Steakhouse, though slowing, is a healthy concept.  But it’s only 25% of the overall portfolio.  The other 75% consists of a fundamentally broken concept (Sullivan’s) and an unproven growth concept (Grille).  Naturally, the Street is discounting an immediate turnaround at Sullivan’s and a flawless rollout of the Grille, neither of which we see materializing.  In fact, we continue to expect restaurant level and operating margin deterioration throughout 2014.  This has less to do with all-time high beef prices (32.8% of Del Frisco’s 2013 cost of sales) and the recent wave of minimum wage increases (25% of Del Frisco’s restaurants have exposure), than it does with the fact that the company is systematically growing at lower margins and, consequently, returns.


More broadly, there are a number of red flags that the Street is unwilling to acknowledge right now including decelerating same-store sales and traffic trends, declining margins, declining returns, increasing cost pressures, expensive operating leases, peak valuation, positive sentiment and high expectations.  We simply refuse to give the company credit for what it has not proven and while we can’t hit on all the minutiae of our thesis in this note, we do have a 67-page slide deck that does precisely that (email for more info).  In short, our sum-of-the-parts analysis suggests significant downside.


You can delay gravity, but you can’t deny it.  Needless to say, we don’t expect this particular castle-in-the-air to stay there much longer.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.50-2.59%


RUT 1169-1208

VIX 10.61-12.74

Brent Oil 111.51-115.43

Gold 1 


Stay grounded,


Fred Masotta



A Castle-in-the-Air - new


Seeing Stars

This note was originally published at 8am on June 18, 2014 for Hedgeye subscribers.

“Measure what is measurable, and make measurable what is not.”

-Galileo Galilei


According to legendary theoretical physicist Stephen Hawking, Galileo likely bears more responsibility for the birth and development of modern science than anyone. This is a heady compliment from one of the most prominent physicists of the modern era. In terms of measuring accomplishments, Hawking is probably right.


Seeing Stars - 44


While he was well versed in physics and mathematics, Galileo (like the artist Banksy, Galileo was known mononymously) was best known for his work in astronomy.  Among other things, he confirmed the phases of Venus, discovered the four largest satellites of Jupiter, and discovered sunspots.  Galileo could literally see in the stars things that his contemporaries could not.


As insinuated in the quote at the beginning of this note, Galileo was truly one of the first modern thinkers to establish and vigorously defend the idea that laws of nature are governed by mathematics.  In other words, if it could be measured, Galileo measured it. And if it could be counted, Galileo counted it.


This lesson of measuring and counting can also be applied very directly to a less scientific profession, that of investing.  The more we can quantify any investment, the better decisions makers we become.  Anecdotes are convenient shortcut for the less informed.  Math doesn’t lie, people do.  As Galileo also advised:


“If I were again beginning my studies, I would follow the advice of Plato and start with mathematics.”


Wise advice, indeed


Back to the Global Macro Grind...


Speaking of outer space, an increasing macro risk we see, especially heading into the summer driving season, is that oil prices are potentially “going to the moon” due to the heightened conflict in Iraq.  Iraq currently produces about 3.3 million barrels per day, but it is the second largest exporter after Saudi Arabia in OPEC. 


On a percentage basis, over the next five years Iraqi is projected to see the most production growth globally.  Net-net, Iraq is the key global swing producer and also has the fifth largest reserves.  In the world of commodities, what happens on the margin matters and the Iraq oil industry plays squarely on that margin.


Seeing Stars - 06.18.14 Chart of the Day


Of course, to the punditry that is arguing commodity inflation is temporary in nature, this adds fuel to the fire.  The heightened tensions in Iraq are clearly “temporary” in nature.  Currently, the CRB index is up +10.5% in the year-to-date and 16 of 19 of its key components are up as well.  For those of us that, like Galileo, like to count things, that means that 84% of componentry of the CRB index is up on a “temporary” basis this year.


As well, for those of us that work in the hallowed halls of Wall Street, or for those that eat iPhones, this might not matter much.  But for the median American consumer who has pre-tax income of $47,000, you can be damn skippy it does matter.  Assuming those consumers also drive, then accelerating oil prices are only going to accelerate the vise like grip that commodity inflation has on their pocket books.


Coincident with accelerating commodity prices domestically is the fact that real weekly earnings, released yesterday morning, turned back to negative in May.  At down -0.10% year-over, this is the worst reading, assuming you believe negative earnings growth is bad, since January of 2013.  Food, energy and shelter prices are inflating and real income is turning negative.  Clearly, this is an elixir for a strong economy (#SarcasmAlert).


Luckily enough, given the high correlation between many  commodities and the U.S. dollar, our policy makers do have a choice, which is to implement strong dollar policy.  Seemingly, this has worked for the United Kingdom, where its rational, and Canadian, central banker Mark Carney has protected the currency and the pound is now up 8% year-over-year versus the U.S. dollar.  Subsequently, the U.K. economy has outperformed.


Sadly, about the only meaningful move we can expect out of the Federal Reserve later today is that they will once again have to take down their U.S. GDP estimates.  Nothing new there though as the Federal Reserve’s economic projection have been about the best lagging, or some instances just wrong, economic projections that devalued U.S. dollars can buy.


Clearly, though, any concerns we may have are misplaced.  In fact, this morning, Portugal is selling 12-month t-bills at 0.364% versus the prior level of 0.617% and 3-month t-bills at an average yield of 0.18% versus the prior yield of 0.432%.  The Spanish government even got a better deal, selling five year paper at a yield of 1.402% with a bid-to-cover of, are you ready for this, 2.32x!  Aye carumba!


Meanwhile, in the most recent U.S. Investor’s Intelligence poll, a mere 22.3% of respondents expect a correction in U.S. equity markets . . . but, hey,  the Utility subsector of the SP500 is up +12.7% on the year-to-date, that must be healthy for the U.S. economy.  Right? Or maybe the hockey heads at Hedgeye are just seeing stars.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.66%

SPX 1914-1955

VIX 10.73-13.21

Pound 1.68-1.70

Brent Oil 110.23-113.98

Gold 1259-1290 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research