LEISURE LETTER (07/10/2014)

Tickers: GPI, IGT, WYNN


  • July 15-17 Pre-RCL 2Q earnings Hedgeye Cruise pricing survey


GTECH/IGT – (Reuters) GTECH owners have authorised management to make an all-cash 4-billion euro offer for IGT, La Repubblica said.  The offer should be presented soon, it said. The interest came to light in June.

Takeaway: We don't doubt the interest but the rumored offer price is too low and not realistic - trial balloon?


GPI – Gaming Partners International announced the resignation of CFO Michael Mann. GPI chairman Alain Thieffry was appointed interim CFO until a replacement for Mr. Mann is hired. GPI is a US-based casino equipment supplier and recently announced the acquisition of GemGroup, a US manufacturer of playing cards, casino chips and table layouts for US$19.75 million.

Takeaway: Mr. Mann's tenure was very short - he signed on to the roll less than a year ago, in September 2013. Our sources tell us that the GemGroup acquisition is not paying off as expected.


IGT (GGRAsia) reporting an increased interest by gaming operators in IGT's newest Asian themed games including San Xing Bao Xi, Azure Dragon and Great Zodiac Race.  On a side note, IGT recently unveiled games related to Tokidoki lifestyle brand - which it licensed earlier this year.

Takeaway: IGT is finally targeting Asian gaming markets with Asian themed games.  We saw the new games in Vegas a few weeks ago and it was clear that management is targeting this market where it's share is very low.


WYNN (GGRAsia) The revamping of two VIP rooms at hotel casino Wynn Macau has had a negative impact on the property's VIP overall market share. 

Takeaway: This has certainly contributed to lower share in Q2 for the property and probably helped boost Galaxy's share which has been trending higher.


New Jersey Gaming Expansion (PIX11) Venture capitalist and developer of Liberty National Golf Course (Jersey City), Paul Fireman, is in discussion with the State of New Jersey to build a 95 story casino-hotel-condo development on the bank of the Hudson River across from Liberty National Golf Course.

Takeaway: A property located just across the Hudson River from Manhattan would negatively impact the RWNY, Empire City at Yonkers, as well as Mohegan Sun and Foxwoods and of course Atlantic City.


Macau Cotai Water Jet – announced additional daily sailings effective July 16, 2014 with a 0630 sailing from HK's Macau Ferry Terminal to Macau's Taipa Ferry Terminal as well as a 1930 sailing from Macau Taipa to SkyPier at HKIA.

Takeaway: We have heard repeated commentary that the high speed ferries are often sold out in advance of sailing time.  As a result, the casual walk-up mass gambler will often need to wait 2-4 hours for ferry transit on a non-soldout ferry.


Missouri Smoking Measure – Gov. Jay Nixon signed a bill that could shield St. Charles' Ameristar Casino from any future countywide smoking ban. The measure, passed by the Legislature earlier this year, adds St. Charles to a list of cities exempt from county health rules if they set up their own municipal health departments. St. Charles Mayor Sally Faith, who sought the bill, worries that millions of dollars in city tax revenue from the casino would be reduced if smoking is prohibited and attendance dropped. Under current law, cities with at least 75,000 residents with their own health agencies are exempt from county rules "to enhance the public health." The bill adds St. Charles, which had 65,794 residents in the 2010 census to that category.

Takeaway: Good news for Ameristar St. Charles in a challenging, demand environment.


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.


We're mostly above the Street but we suspect Q2 earnings season could mark a near term top in the stocks



Very strong Q2 RevPAR translates into upside revenue and EBITDA revisions for the lodging operators and REITs, but could Q2 earnings season represent the near-term peak in the stocks?


During Q2, US RevPAR growth developed slowly due to the April calendar shift vs the prior year.  However, the April showers transitioned to a robust May and June. May posted Upper Upscale RevPAR growth 7-8% while June moderated slightly.


We believe HLT and H have the most upside versus current consensus estimates and even we might be conservative.


Despite the optimism by lodging management teams surrounding the recovery of the Group travel segment, their 2014 annual guidance commentary and expectations remained somewhat muted.  However, the strong Q2 RevPAR results should contribute to an earnings season of EBITDA and EPS beats.  We believe the street will revise lodging estimates higher over the coming weeks.


When we reach “the news” (the Q2 earnings releases), expectations should be elevated.  Going forward, there are some warning signs that Q2 earnings and higher 2H estimates could represent the near term peak of sentiment. 


Namely, we are concerned by the sizable insider selling across lodging c-corps and REITs during Q2 – despite “fifth inning commentary”.  Next, our Hedgeye Industrial team is warning of slowing airline operating metrics in June – a trend our counterpart expects to continue into 2H14.  Third, we are mindful of somewhat higher consumer prices, which act as a tax on consumer spending and a headwind for all consumer discretionary stocks.  Indeed, the head of tourism marketing for New York City was recently quoted as saying that spending by NYC tourists was not as robust as he expected.


Don’t get us wrong – we like the hotel fundamentals and business spending remains strong.  Our long-term outlook (and very near term) remains positive.  However, for traders and investors looking to take some profits, late July/early August might be an opportunistic time.


Our Q2 estimates as compared to the street are as follows:






Client Talking Points


Stocks are seeing follow through from the immediate-term TRADE breakdown signals we’ve been issuing for the last few weeks. Eurostoxx50 and DAX are both trading below both our TRADE and TREND lines now, illiquid equity markets like Portugal down -3% this morning to -4% year-to-date.  


India is not Europe – and it didn’t trade like most of Asia last night either, it was up +1.3% to +22.7% year-to-date with Nikkei down -0.6%. On pullbacks the BSE Sensex remains one of our favorite equity markets in the world. Below is a Real Conversation VIDEO Keith hosted with Jim Grant on India, Gold, etc.


Love the Down Dollar, Down Rates, Up Gold move – that lagging economic report (Thursday’s jobs report) sucked a lot of people into doing precisely the opposite of what we’ve wanted you to do all year - Buy Gold Bond as U.S. growth slows sequentially (and the Fed gets more dovish) in Q3..

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


Norwegians rejoice as consumer price inflation (CPI) goes negative -0.2% y/y (JUNE).

@Keith McCullough


“Never confuse motion with action.”

- Benjamin Franklin


The EIA estimates that Oil and Gas make-up 70% of total annual exports in Russia of around $515 billion.

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Managing the Eccentric

“Prepare. Perform. Prevail.”

-Dave Tate, EliteFTS 


In what feels like a lifetime ago now, I owned a human performance and nutritional consultation company.  The work was rewarding, but not from a pecuniary perspective.   


Designing transformative programs for dedicated collegiate athletes and prospective professional athletes, bodybuilders and Olympians was certainly gratifying.   Rep counting for middle-aged housewives (in what invariably devolved into pseudo-therapy sessions)…not so much.   


Unfortunately, only one of those demographics generally had the discretionary dollars to spend to keep us a going concern. 


Because broke college kids don’t have much in the way of a food or supplement budget and certainly can’t afford high frequency, hormonal profiling, we had to resort to a little empirical “bro-science” to gauge recovery and the subsequent prescription of workout intensity.


Q:  How do you know if cortisol levels are muted, the central nervous system is piqued, and the overall hormonal milieu is primed for hardcore training and positive physiological adaptation…in ~5s and at no cost?

A:  Wake up and pick up something heavy.


If your grip strength is there right out of bed, it’s almost assured the body is recovered and ready for positive stress.  


Another underused training technique effective at jumpstarting progress in advanced lifters is targeted use of eccentric training.  The eccentric part of a lift can generally be thought of as the “down” part of the lift  (think lowering the bar when bench pressing)  


Managing the Eccentric - bench

Muscle contraction during the eccentric portion is stronger, allowing you to use more weight – resulting in greater muscle soreness and, if employed correctly, faster strength & hypertrophy gains.  


The majority of lifters and coaches only focus on the concentric portion of the lift – which, in investment speak, is analogous to simply being long beta.  Learning when and how to manage the eccentric (down) part of the lift cycle is where training alpha is generated. 


Back to the Global Macro Grind...


In our 3Q Macro Themes call tomorrow we’ll lay out the detailed case under our expectation for a sequential slowdown in consumption growth in 3Q.   The punditry of the Early Look prose typically carries a tendency towards intentional overstatement, so it’s worth emphasizing that we’re not making a recession call or even a call for an overly protracted deceleration (yet).   


As the current expansion matures, however, occasional detachment from the myopia of every market moment and consideration of where we are in the longer cycle can be a useful exercise. 


Because we have a self-imposed 900 word limit on the morning missive and alliteration has yet to steer me wrong, we’ll use the 3-D’s of Duration, Demographics, & Deleveraging as the conceptual framework for contextualizing the prospects for the present cycle:


Duration (of Expansion):   The mean duration of expansions over the last century is 59 months.   Inclusive of July, the current expansion stands at 62 months.  We continue to think the reality of the ticking expansion clock weighs into the Fed’s current policy calculus  – they need to get out of QE if only to give themselves the opportunity to (credibly) get back in if need be.   Stopping QE while the fundamental data is supportive implies that QE was (at least in part) effective in its objective.  Perma-QE, however, is a de facto admission to the market of its ineffectivenss, leaving it largely impotent as a forward policy tool. 


Demographics:  Growth in the working age population peaked circa 2000 and won’t turn again for another ~10 years and the aged dependency ratio (the >65YOA population in relation to the 16-64YOA population) will continue to rise well beyond that.  With labor supply in secular deceleration, productivity gains will have to shoulder an increasing share of the load to support trend growth in real gdp/potential gdp.  Real Wage Growth may benefit from tighter labor supply and productivity driven demand for labor - but that remains an “if” and, either way, higher entitlement spending and debt service costs will likely sit as an offset to gains in real income.


Deleveraging:  Household debt-to-GDP currently sits at 77.2%, down from the March 2009 peak of 95.6% according to the latest Fed Flow of Funds data.  Rates remain pinned at historic lows, for now, and debt growth remains below income growth so (assuming borrowers want to borrow and creditors lend) credit could support consumption growth over intermediate term.  However, given the initial debt position and zero bound rates, we certainly aren’t in position to jumpstart a repeat of the prior credit based consumption cycle. 


The simple reality of the last 30+ years is that, with the Baby Boomers (born 1) entering prime working age (24 – 54) alongside the secular increase in female labor force participation, we had the largest bolus of people ‘ever’ matriculating through their peak years of discretionary income with peak leverage on that (peak) income – all of which also happened to occur on the right side of a multi-decade interest rate cycle which provided a steady tailwind to asset values (via lower discounting) and offered self-reinforcing support to the credit cycle as rising collateral values supported capacity for incremental debt. 


No central bank liquidity deluge can effectively replicate that.


So, is it time to start managing the eccentric part of the macro cycle? 


Probably not quite yet.  Viewing economic cycles as periodic functions, balance sheet recessions are generally characterized by longer periods (slower recoveries) with lower amplitude.    So, it’s probable the muddle continues for a while longer with recurrent, short-cycle oscillations in growth for the Macro Marauders of Hedgeye to continue to attempt to front run.   


The “3D” style thinking above isn’t particularly new or novel,  but there’s a lot of economic gravity embedded in those realities.  Their recapitulation also provides an effective counterbalance to the latest Fed projections which call for GDP to grow in excess of potential output for the next 2.5 years – which is effectively a call for an accelerating recovery over the next 30 months and an implicit expectation for the 3rd longest expansionary period in a century.  


Do you take their word for it or are we #PastPeak in the current cycle?


We don’t know, exactly, but our model is dynamic and data dependent… and our 4Q Macro themes are still up for grabs.


In the meantime, we’ll continue to work to evolve and fortify our process for risk managing the eccentric.


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


UST 10yr Yield 2.49-2.59% (bearish = bullish for bonds)

RUT 1165-1189 (bearish)

USD 79.64-80.19 (bearish)

Pound 1.70-1.72 (bullish)

Brent Oil 107.23-111.37 (bullish)

Gold 1 (bullish)


Winter is Coming!  Prepare. Perform. Prevail.


Christian Drake

Macro Analyst


Managing the Eccentric - Boomer Dependency

Creative Mistakes

This note was originally published at 8am on June 26, 2014 for Hedgeye subscribers.

“Creativity is allowing yourself to make mistakes.  Art is knowing which ones to keep.”

 -Scott Adams


As you may already know, Scott Adams is the creator of the cartoon "Dilbert." The cartoon makes light of the corporate world and was originally created in the early 1990's as Adams was being "downsized" from a major corporation.  Even though Adams isn’t a professional investor like most of you reading this, his quote above is remains rather apropos to the investing world.


Most great portfolio managers and analysts are also incredibly creative.  They are creative in the types of analysis they employ and they are creative in their questions for management. But perhaps most importantly, they are creative in idea selection.  The true skill, of course, then comes in knowing which creative ideas to keep.  Some call this risk management.


We hired a cartoonist recently here at Hedgeye. Cartoons are a great way to communicate our often contrarian investing ideas and themes.  Take for example the cartoon posted below that we included in our 100-page deep dive short call on United Airlines (UAL) earlier this week.


The cartoon emphasizes the craziness (at least from our perspective), of UAL’s accounting policies.  Not unlike our short calls on certain stocks in the Master Limited Partnership (MLP) sector, we have a difficult time reconciling the valuation with UAL with its underlying cash flows.  That said, we also know, to paraphrase Keynes, that the market can remain irrational longer than many investors can stay solvent.


As it relates to airlines, and specifically UAL, longer term we much prefer Warren Buffet’s maxim on the industry. That is, the best way to become a millionaire is to start a billionaire and buy an airline!


Creative Mistakes - United Airlines cartoon

Back to the Global Macro Grind...


Our research team has been busy generating some very contrarian and well researched investment ideas lately.  This morning I wanted to highlight a few.  (As always, if you want more details on the idea and would like to review the more detailed work, please email for details on how to subscribe.)


First up on the runway is naturally United Airlines (UAL).  The core of thesis per our industrials sector head Jay Van Sciver is as follows:


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.


In our Chart of the Day below, we highlight this free cash flow deficit versus its peer group.  As the chart shows, UAL appears to have severely disadvantaged economics as compared to its peers.


The second idea I wanted to highlight is Lululemon (LULU), a contrarian long idea.  For many a thoughtful short seller, LULU has been one of the better short plays in retail of late. Rightfully so.  Management appears to be making one misstep after another and doing virtually everything in its power to ruin what is actually a solid brand and product.  The core of our long thesis according to our Retail sector head Brian McGough is as follows:


“There’s a massive bifurcation between the growth potential at this company, and the lack of a plan to execute on it. If management continues to execute in a sub-par way, we see downside to about $31 (stress testing our model at 10x EBITDA). Not pleasant (18% downside), but not the end of the world from its current price ($37.61). If the company/Board adds the operational depth that is necessary, then the discussion returns to this company doubling or tripling its top line, and realizing $3.00-$4.00 in earnings power.  Pick whatever multiple you want, but the stock price on $3.50 in earnings will push it through its all-time high of $82.”


Finally, the last idea (and probably most controversial idea I wanted to highlight) is our short call on YELP.   From a stock price perspective, on the short call we’ve been early, but we are getting increasing confidence in our thesis the more work we do.  Our Internet sector head Hesham Shabaan actually had a call recently with the chief financial officer of YELP to discuss, which is at the core of our short thesis.  This was his takeaway from that call:


“Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.


The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”


This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).”


Clearly, Hesham didn’t get a lot of clarity on attrition in his discussion.


As always, let us know if you have any questions on these or any other creative investment ideas you may be working on.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.64%

SPX 1932-1973

India’s Sensex 24873-25617

VIX 10.61-12.97

USD 80.02-80.47

Gold 1297-1343  


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Creative Mistakes - 77

Early Look

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