LEISURE LETTER (07/09/2014)

Tickers: CCL, HOT, MAR


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


326:HK –China Star Entertainment Ltd, which controls Casino Lan Kwai Fong on the Macau peninsula, is raising HKD538.5 million (US$69.5 million) to expand its hotel and gaming operations. Planned investments include a shopping and entertainment complex with apartments. Additionally, China Star is in the process of acquiring an equity interest in a junket operator called Eight Elements Entertainment Ltd. The company has agreed to pay HKD800 million for the rights to the profit from the Eight Elements junket operation

Takeaway: An attempt by a small operator to reinvent itself and maintain a small following on the Macau peninsula in the face of new supply and more exciting gaming venues on the Cotai Strip.


Affinity Gaming – the Las Vegas based casino operator with 11 properties in Nevada, Colorado, Missouri and Iowa is warning investors that it expects to default on a portion of nearly $383 million in long-term debt.  However, the company says it's working with advisers and lenders on a possible amendment, waiver or refinancing.

Takeaway: A sign of the fate to come for small regional gaming operators as the gaming revenue pie is skinny-sliced by new competition and bad demographics?


CCL – AIDA announced (CCL brand) said it plans to drop all ports of call in Israel for the next two months, because of security concerns - following shrapnel from defense rockets landing on the deck of AIDAdiva as it disembarked the Israeli port of Ashdod.

Takeaway: Europe tensions rising again


CCL – informed travel agents and guests effective October 9, 2014, smoking will no longer be allowed on the balcony of staterooms and all interior staterooms, suites, and balconies will also be smoke free.  Additionally, the company announced gratuities will be raised from $11.50 a day to $12.00 per day per passenger with all voyages departing October 9, 2014 and onward.  


Insider Transactions:

HOT - CEO Paasschen Frits D. Van sold 51,435 shares of stock on Thursday, July 3rd at an average price of $82.00 and now owns 246,915 shares.


MAR - CEO Arne M. Sorenson sold 150,000 shares of stock on Wednesday, July 2nd at an average price of $65.00 and now owns 420,618 shares.

Takeaway: Our read of the tea leaves is both companies will "beat" earnings estimates. Conversely, we doubt either CEO would be selling stock during "the quiet period" if their company were going to "miss" estimates.


New York Upstate Gaming – according to a recent study by the New York Public Interest Research Group, over the past two years gambling interests have sweetened the pot with more than $11 million in spending to influence state and local lawmakers on the building of casinos. Specifically, casino bidders and their buddies spent $6.7 million on lobbying campaigns and funneled $4.3 million to political committees in 2012 and 2013 with Genting New York spending $2.5 million on lobbying and just over $984,000 on campaign donations.

Takeaway: Gaming can generate significant profits and those with deep pockets will "invest" accordingly to win a gaming license. 


New York City Tourism(NY Times) According to NYC & Company, New York is projected to host 55.8 million visitors during 2014, an increase of 1.5 million over 2013. However, visitors are not shopping, dining and entertaining themselves as voraciously as visitor spending this year is now expected to rise about 7 percent, to $41.3 billion - which translates into an average spend per visitor of $740.14, an increase of only 2% over 2013, the slowest rate of growth over the past 5 years.

Takeaway: Increased visitation is good for NY lodging, but slowing spend per visitor is a headwind for lodging and will force visitors to seek lower cost accommodations. 


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 Fourth Turning

This note was originally published at 8am on June 25, 2014 for Hedgeye subscribers.

“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 1925-1962 (bullish)

RUT 1155-1195 (neutral)

India’s BSE Sensex 24801-25716 (bullish)

USD 80.17-80.51 (bearish)

Pound 1.69-1.71 (bullish)

WTIC Oil 105.71-107.28 (bullish)

Gold 1295-1338 (bullish)


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Fourth Turning - Chart of the Day


Client Talking Points


+16.1% in a straight line in 2-days after bouncing off a generationally low level of complacency (front month VIX has never held, sustainably, below 10 – and we don’t think it’s different this time). The risk range is now 10.32-12.69.  


The RUSSELL 2000 is down -3% in 2 days back to almost flat year-to-date after failing right at the same spot it stopped going up in March. We don’t think portfolio managers who were long U.S. domestic momentum are allowed to live through another March-May, but we’ll see.


Rock solid amidst U.S. domestic growth style factors going haywire. Gold is up another +0.3% this morning to +10% year-to-date. We’ll walk through why Down Dollar, Up Gold remains one of our better Macro ideas on Friday’s third quarter Macro Themes Call.

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


COMMODITIES: inflation, as an investment style, continues to beat growth in 2014.

@Keith McCullough


“Never confuse a single defeat with a final defeat.”

-F. Scott Fitzgerald


Brazil’s 7-1 loss against Germany in the World Cup yesterday matched Brazil’s worst ever international defeat in its celebrated history, and marked its first loss on home soil in 63 competitive matches.

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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CHART OF THE DAY: Expensive Beta

Takeaway: Don’t be average. Fade beta.


CHART OF THE DAY: Expensive Beta - Chart of the Day

Crushed Spirits

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”

-Proverbs 17:22


Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.




Back to the Global Macro Grind


Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.


Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.


I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!


In our Q3 Macro Themes presentation on Friday (11AM EST, ping for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:


  1. Fixed Income Volatility at generational lows
  2. Foreign Currency Volatility at all-time lows
  3. Commodity Volatility at cycle-lows


Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).


Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.


The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).


In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”


So, don’t be average. Fade beta.


#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.


We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.


What is the turn?


  1. When our immediate-term TRADE momentum signal exhausts itself to the upside…
  2. Then you get a sharp move off that high, on accelerating volume and rising volatility…
  3. Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND


Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.


You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.


I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).


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


UST 10yr Yield 2.49-2.60% (bearish = bullish on bonds)

SPX 1 (bullish)

RUT 1167-1190 (bearish)

BSE Sensex 259 (bullish)

VIX 10.32-12.69 (neutral)

USD 79.73-80.37 (bearish)

Pound 1.70-1.72 (bullish)

WTIC Oil 102.63-104.99 (bullish)

Natural Gas 4.17-4.39 (bearish)

Gold 1 (bullish)

Copper 3.20-3.30 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crushed Spirits - Chart of the Day

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