LEISURE LETTER (07/11/2014)



  • July 14: AC June revenues
  • July 15-17: Pre-RCL earnings Hedgeye Cruise pricing survey
  • July 16:  LVS 2Q call (430pm)
  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
  • July 25:
    • PEB 2Q call (9am)


PNK expects its 2Q Consolidated Adjusted EBITDA and Income (loss) from Continuing Operations to include unusual expense items that aggregate to a range of $8-10 million.  The unusual expense items relate to the rollout out of the Company's my choice player loyalty program at its Ameristar branded properties, Colorado lobbying expenses, and severance expense.

Takeaway:  PNK had mentioned on its Q1 conf call that it expects a $5m charge only related to the loyalty program integration at its ASCA properties.  At some point, analysts will have to start including these regularly occurring "non-recurring" expenses in EBITDA.  No wonder margins continue look better. 


ISLE – after the close, the Company announced a strategic realignment including the departure of Dale Black, who served as CFO since 2007, replaced by Eric Hausler, who currently serves as Chief Strategic Officer, a role that will be eliminated going forward. Executive Chairman Jim Perry will step down and Robert Goldstein, currently the Vice Chairman of the board, has been named (non-executive) Chairman of the board. ISLE expects these actions to reduce annual corporate expense by approximately $2.5m exclusive of severance costs.

Takeaway:  If the company were about to be acquired, one would think C-Level management would stick around for the vesting and higher take-out value on their equity interests. This also signals the need for ISLE to reduce expenses further.


PENN & GLPI – District Judge Eliza Ovrom on Thursday extended her stay of an Iowa Racing and Gaming Commission order to close the casino until she rules on Argosy's appeal.  Previously, Judge Ovrom granted the casino a 10-day stay, which allowed it to stay open past the July 1 deadline until Thursday. At the conclusion of a hearing Thursday morning, Ovrom said she hoped to issue a ruling early next week.

Takeaway: Positive for PENN as this is not included in guidance


LVS – CEO Sheldon Adelson has continued his anti-online gambling crusade by hiring former GOP congressman Connie Mack of Mack Strategies to lobby against Internet gambling legislation. Mack will go to bat for Adelson and his Coalition to Stop Internet Gambling and will be tasked with lobbying in support of the Restoration of America’s Wire Act, the federal bill introduced by Sen. Lindsey Graham (R-S.C.) and Rep. Jason Chaffetz (R-Utah) over three months ago. Mack joins a lobbying lineup that includes Steptoe & Johnson, Capitol Counsel, The Keelen Group and the Lincoln Policy Group.

Takeaway: Mr. Adelson's battle against online gaming continues.


BYI (SHFL) – Macau’s Court of Second Instance dismissed an appeal from SHFL Entertainment (Asia) Ltd, which sought an injunction against Paradise Entertainment Ltd and its subsidiaries’ assertions of monopolistic rights over “multi-gaming” in the Macau market. The injunction sought to prevent Paradise Entertainment and its subsidiaries from claiming monopoly rights over multi-game electronic table game products in Macau and to restrain them from any unfair competition.


WYNN & 1128:HK (GGRAsia)The head of Macau's Commission Against Corruption confirmed the agency is "analyzing some details" about land granted to Wynn Macau for its Cotai project after U.S.-based International Union of Operating Engineers called on the Macau authorities to investigate how Tien Chiao Entertainment and Investment Co Ltd secured rights to Cotai land before it was granted to Wynn Macau. While WYNN says it hasn't been contacted by authorities, and it doesn't anticipate any delay to the Cotai project, which is scheduled to open in H1/16.  

Takeaway:  More scrutiny behind a complicated Cotai deal but Wynn is apparently not a part of the investigation.


Chinese Money Laundering (Xinhua) China's central bank is looking into allegations by a state broadcaster that Bank of China, the country's fourth largest lender, has been laundering money offshore for clients. 

Takeaway: Could money laundering by Chinese big banks be the next area of Chinese Central Government crackdown?


Margaritaville Tulsa (Tulsa World)  Construction on the Muscogee’s $355 million Margaritaville casino is running behind schedule, and is now on track to open sometime in 2016 rather than mid-2015.

Takeaway:  Even fewer new slots for 2015


Gaming in California's Wine County – A group of Native Americans, the Mishewal Wappo Tribe of Alexander Valley, filed a federal lawsuit in 2009 asking for recognition of their tribal status. The group's 350 members, most of whom live in Sonoma County today, say they are descendants of the Wappo people, who once inhabited parts of Sonoma, Lake County and much of Napa Valley, and that they were unfairly stripped of tribal status. Tribal leaders insist they simply want recognition. But winemakers worry such status would allow the tribe to petition for lands and eventually build a casino in Napa County. If the tribe wins, it would become a sovereign nation, and any lands they were granted by the federal government or that they purchased would be exempt from local land-use and zoning restrictions. Motions to dismiss the Wappo's claim have been denied. Last July a federal judge affirmed a ruling that Napa and Sonoma counties had no standing to fight recognition of the tribe, escalating widespread apprehension that a casino could find a home in Napa’s agricultural region

Takeaway: Nearly 3 million people visited Napa Valley in 2012 and visitors spent an average of $714 per day, including $260 on lodging, $148 on restaurants and $107 on wine purchased at wineries. Lodging guests typically stayed in the valley for 2.9 days on average. 


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.

Dial-In and Materials: 3Q 2014 Macro Themes Call

Dial-In and Materials: 3Q 2014 Macro Themes Call - HE MT 3Q14


We will be hosting our highly-anticipated Quarterly Macro Themes conference call today at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities. 



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 171487#
  • Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)



  • #Q3Slowing:  Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.  
  • #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish. 
  • #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.


Ping for more information.


Client Talking Points


Risk happens slowly, then all at once - front month VIX went from its long-term asymmetry point (buy it at 10!) to immediate-term TRADE overbought yesterday after crashing (to the upside) on a +24% four-day move. Risk range for VIX is now 10.32-12.67, so use that as a beta backboard.  


Russell 2000 is both below our TREND resistance line of 1173 and DOWN for 2014 YTD (bull market). Its risk range is now 1155-1173; above 1173 bullish; below it bearish – with a lot of emotion in between.


We learn a lot more from the bounce than the breakdowns – and this morning’s European Equity bounce is rather pathetic; DAX and FTSE only +0.2-0.3% and are now both trading below TRADE and TREND lines; Portugal is +2% but would need to be up another 1,000 points on the PSI 20 to recapture TREND support.

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


GOLD: not giving it back to the bears this morning - and I like that = +11.1% YTD

@Keith McCullough


“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.”

- John F. Kennedy


The Japanese Nikkei has been down every day this week and is down -6.1% year-to-date.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

Pepé Le Pew

This note was originally published at 8am on June 27, 2014 for Hedgeye subscribers.

“Keep it simple. Tell the truth.  People can smell the truth.”

-Steve Wynn, Chairman & CEO of Wynn Resorts


I ran over a skunk on the way to work this morning.  Accidentally, of course. But regardless it still did not smell very good.  That’s the thing with skunks; they sort of surprise you with their malodorous nature. 


For those of you that don’t know him, Pepé Le Pew is a French cartoon character that was first introduced in 1945.  Pepé is a French skunk who strolls around Paris looking for love.  Unfortunately, he has two big things going against him.  First of all, he’s a skunk, so he smells.  Second, he’s a tad bit aggressive and reluctant to take no for an answer.


Pepé Le Pew - skunk2


Now if that sounds a little bit like the U.S. equity market right now, it probably should. As we’ve been flagging here at Hedgeye (somewhat “aggressively” at times) volatility in the U.S. is at a level that is signaling that all is well in the world. Between you and me, that kind of stinks.


I read an interesting article in the Wall Street Journal (Media 1.0) yesterday discussing the volatility and the VIX.  It quoted Robert E. Whaley, a professor at Vanderbilt University’s business school, who is credited with developing the VIX for the Chicago Board Options Exchange in 1993.  Here’s what he had to say about the VIX being literally at an all-time low:


“I wouldn’t be worried about it.”


Indeed.  And if an aggressive skunk happens to be pestering you in Paris, no need to worry about that either.


Back to the Global Macro Grind


While Professor Whaley, aka the “Father of the VIX,” isn’t worried, that’s not necessarily a reason for us not to be worried,  despite the fact that this morning, the global equity markets are decidedly not worried.  China is down -0.11%, Europe is up small, and the U.S. equity futures are down small.  Frankly, the only excitement overnight is that the Nikkei in Japan is down just over a -1%.


So, what gives in Japan? Are you sitting down? Inflation! Yup, Japan, the home of generational deflation, is actually experiencing inflation.  In fact, CPI in Japan accelerated +3.4% year-over-year.  This was the highest pace in 32-years for Japanese inflation. The Japanese bureaucrats wanted inflation. Now they've got it.


The fact of the matter is that the Japanese will tell you that once you factor out the sales tax impact, there was actually a slight drop in CPI.  That said, even the Japanese labor market is showing inflationary signs as the jobs-to-applicants hit a 22-year high at 1.09.  In theory, a tight labor market should lead to increased wages and eventually more purchasing power for the consumer. Translation? Organic inflation.


Ultimately, the challenge with either inflation driven by a tight economy or, conversely, driven by overly dovish monetary policy is that inflation slows growth.  In the U.S., the counter argument to our view that inflation will slow grow is that even though the CRB Commodities index is up double digits on the year, commodities are a relatively small portion of the consumer’s annual spend. In part this is true, although much less so in emerging economies.


In fact, the WSJ this morning referenced the “fragile five” economies of Turkey, India, Indonesia, South Africa, and Brazil as economies that are particularly subject to the negative impact of commodity inflation.  The challenge with trying to fight inflation for the central banks in these countries is that growth is not at abnormal levels, so any rate hikes would slow it even more. Yes, indeed, monetary inflation stinks!


Speaking of inflation, the Fed’s balance sheet continues inflating at an almost staggering rate:


  • Holdings of US Treasury securities were $2.4T on 25-Jun, +$5.5B w/w and +$469B y/y;
  • Holdings of mortgage-backed securities were $1.7T on 25-Jun, ($4.5B) w/w and +$456B y/y; and
  • Holdings of federal agency debt securities were $43.7B on 25-Jun, unch. w/w and ($27B) y/y.

In total, the Fed’s balance sheet is at an astounding $4.4 trillion.  Certainly, tapering is slowing the growth of these assets on the Fed’s balance sheet, but what, exactly, happens when the Fed starts to sell these assets?  At over 25% of GDP, it is worth sniffing around this question.


As it relates to GDP, my colleague Darius Dale wrote a very thoughtful note earlier this week that again emphasized that the Fed is “always wrong on growth.”  Specifically, since 2012 the Fed has been wrong on growth by an average of 113 basis points.  No small potatoes. The takeaway from the Fed (and virtually all of Wall Street) being wrong on growth is that Fed may actually surprise us with its dovish policy.  As Darius writes:


“As it relates to actual macroeconomic analysis, the doves are definitely starting to cry at the Fed. In a fantastic article today, Reuters journalist Howard Schneider walks though the current debate being held amongst members of the Federal Reserve and its regional banks. Specifically, the Yellen-led institution is openly debating pushing out their forecasts for labor market tightness, citing both new and old analyses in the process.


The key takeaway is that the FOMC is setting up to surprise both buy-side and sell-side consensus to the downside with respect to tightening monetary policy. A less-tight labor market in the interim means the Fed can remain “accommodative” for longer – which is exactly what is being priced into the interest rate markets. Expectations for a 2015 Fed Funds Rate hike are down -27% on average, across the curve, from when we correctly introduced this bold prediction back in JAN.”


Slowing U.S. growth… accelerating inflation… low volatility… Yup, it might make sense to your nose right now.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.60% (bearish)

SPX 1934-1971 (bullish)

VIX 10.61-12.94 (neutral)

USD 80.01-80.45 (bearish)

Brent Oil 112.38-115.49 (bullish)

Gold 1289-1345 (bullish)


Keep Your Head Up,


Daryl G. Jones

Director of Research


Pepé Le Pew - Chart of the Day

CHART OF THE DAY: Long Big Government Via the Slammer

CHART OF THE DAY: Long Big Government Via the Slammer - Chart of the Day


Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1920-2014. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.


Incarcerating Investors

“Who wouldn’t invest in that?”

-Matt Taibbi


That’s what Matt Taibbi (of Rolling Stone fame) asked about incarcerated Americans. I read his recent rant of a book, The Divide, while I was on vaca last week and he made an interesting point: “the very brokest people in America, Hispanic immigrants, are one of America’s last great cash crops” (pg 217).


Incarcerating Investors - taibbi thedivide c10a7d26a1bcacd568ecc9eec422a64d3df77b32


Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.


On that score, alongside my six man Jedi Macro Team, I’ll be presenting our Q314 Macro Themes of #Q3Slowing, #DollarDevaluation, and #Volatility’sAsymmetry at 11AM EST today. Ping our team if you’d like access to the slide deck and conference call. I’m inviting Ed & Nancy.


Back to the Global Macro Grind…


With Utilities (XLU) up to +13.7% YTD in a sea of mo bro red yesterday, those who are long of US domestic consumption growth (from an investment style factoring perspective) have been incarcerated by beta again. After dropping -4% this week, the Russell 2000 is down YTD. Not a bull market.


In all seriousness, I should probably have Christian Drake write the Early Looks for the rest of the year, because I’m running out of both Fed jokes and investment ideas. If I couldn’t get you to buy Gold Bond on any of its down days for the last 6 months, I’m probably not going to get you to buy it this morning.


Actually, you shouldn’t buy Gold or Bonds or anything equities that looks like a slow-growth #YieldChasing bond this morning anyway. On a relative basis to both beta (Russell 2000) and volatility (front month-VIX), the Gold Bond trade is as immediate-term TRADE overbought as the VIX is.


To review this week’s slammer move:


  1. VIX crashed to the upside (+24% in a straight line) after holding a line (10) that it’s never held below, sustainably
  2. Russell 2000 backed off like Brazilian ballers from its all-time-bubble-high of 1208 (March 4th, 2014)
  3. Gold broke out above our long-term TAIL risk line of $1324 (intermediate-term TREND support = $1272)
  4. Bond Yields resumed their bearish TAIL risk (for a US growth breakdown) after failing at 2.81% TREND resistance
  5. US Consumer (XLY) stocks moved back to flat YTD; Financials (XLF) and Industrials (XLI) broke my TRADE support lines


Sure, away from US momentum stocks getting put back in jail on Mon-Tue (i.e. the days Portugal wasn’t the latest weather excuse) there were some other things going on in the world. Japan, which has incarcerated its people with centrally-planned stagflation, was down every day this week.


But this sounds way too bearish for a man in a room who wants you to be right bullish on the bearishness of it all. Remember, if I am right, and US growth slows from Q2 throughout Q3, there is a ton to do on the long side:


  1. Buy Fixed Income
  2. Buy Foreign Currencies vs Burning Bucks
  3. Buy #InflationAccelerating via Gold, Oil, Energy Stocks, etc.


Heck, you can even probably think about buying Malaysian Equities (EWM) at this point! (*Emerging Markets do wonderfully when America is burning its currency credibility at the global stake – see 2011 for details)


Instead of putting me in commission jail (we don’t have a trading desk) for being bullish on bearishness, let me cherry pick some good news for you this morning instead of poking Portugal (pathetic bounce for the Portuguese PSI 20 this morning btw, still bearish TREND @Hedgeye):


  1. Malaysia was the 1st country in Southeast Asia to RAISE rates in 2014
  2. Malaysia hasn’t raised rates for their hard working Savers in 3yrs, so this is #cool for consumers
  3. Malaysia’s stock market only pulled back 0.5% on that, which looks like a buying opportunity


Newsflash to the US politicians who have incarcerated your savings and paid themselves in size with your tax dollars: when a country has the spine to raise rates, it gets ole school Ben Franklin frugality savers paid. And when we Can-Am ole school guys get paid on our savings, we can do crazy stuff like invest, hire, etc.


Yep. If you want me to get downright bearish on Gold, Bonds, etc. like I was last year – get your unelected gravity bending agency to raise rates. Dollar Up, Rates Up, Hiring Up, Capex Up – 1980s and 1990s style America. Who wouldn’t invest in that?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%


RUT 1155-1173

BSE Sensex 25034-26170

VIX 10.32-12.67

Pound 1.70-1.72

WTI Crude 101.76-104.31

Gold 1


Best of luck out there today – and go #Argentina!



Keith R. McCullough
Chief Executive Officer


Incarcerating Investors - Chart of the Day

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