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LEISURE LETTER (07/15/2014)

Tickers: CZR, AHT, NCLH, CCL, HOT

EVENTS

  • 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)
    • AWAY 2Q call (430pm)
  • July 25:
    • PEB 2Q call (9am)

COMPANY NEWS

CZR (Las Vegas Review Journal) An FBI-led raid has shut down a multi-million dollar illegal sports betting operation at Caesars Palace that authorities say was run by Malaysian and Chinese nationals who were taking wagers on the World Cup soccer tournament. Caesars Palace was not a target of the Las Vegas investigation and cooperated with authorities. The Nevada Gaming Control Board and the U.S. Department of Homeland Security assisted the FBI in a raid last week at the Strip resort. It was unclear how much money the illegal bookmaking ring took in here. All eight defendants were each charged with one count of illegal transmission of wagering information and one count of operating an illegal gambling business, both felonies.

Takeaway: Another illegal World Cup gambling operation. 


AHT – signed a definitive agreement to acquire the 357-room Fremont Marriott Silicon Valley hotel.  The Fremont Marriott Silicon Valley features 357 guestrooms and approximately 15,000 square feet of meeting space.  Ashford intends to finance the property with $37.5M of non-recourse mortgage debt.

Takeaway: Interesting to us was the lack of any details regarding actual purchase price as well as trailing 12 month NOI or EBITDA.  As of March 31, 2014, AHT had more than $154 million of cash and cash equivalents on its balance sheet as well as more than $33 million of marketable securities. These amounts do not include the additional $88 million in proceeds from the early April equity offering.

 

NCLH – reached an agreement with Meyer Werft to build two new Breakaway-Plus class cruise ships for delivery in 2Q 2018 and 4Q 2019.  Each ship will be 164,600 gross tons and include 4,200 passenger berths.  The contract price for both ships is approximately euro 1.6 billion. The Company has export credit financing in place for each ship, arranged and underwritten by KfW IPEX-Bank GmbH of Germany.

Takeaway: The cost/berth is ~US$259k per new ship, a 15% premium over Escape/Bliss.  By historical standards, this seems like a long lead time for delivery.  Maybe they just want a taste of the public frenzy from RCL's new ships.

 

CCL – (Seatrade Insider) Cunard offers NA agents 5% bonus for Med bookings on Queen Victoria.  

 

Insider Transaction

HOT – Director Bruce W. Duncan sold 21,813 shares on Thursday, July 10th at an average price of $84.36 and now owns 37,684 shares.

Takeaway: Another Starwood insider selling shares.

INDUSTRY NEWS

Chinese Lottery Sales – According to the Chinese Ministry of Finance, Lottery sales in mainland China reached RMB178.41 billion (US$28.74 billion) in the first six months of the year, up 19.2% YoY.  The growth was partially fueled by a jump of 45.7% YoY in lottery sales during June, to MOP36.05 billion due to a 83% YoY rise in sports lottery sales to RMB19.24 billion, fuelled by the FIFA World Cup.

Takeaway: Could Chinese lottery sales benefited at the expense of June Macau GGR?

 

Philippines e-Gaming Parlors – Premiere Horizon Alliance Corp said its shareholders had approved Leisure & Resorts World’s offer to buy all of Premiere Horizon’s stake in Digiwave Solutions Inc. Digiwave operates Pagcor-licensed e-Games outlets in Metro Manila and nearby provinces. e-Games outlets are parlors or cafes dedicated to online casino-style games and are licensed by the Philippine Amusement and Gaming Corp (Pagcor).  

Takeaway: The build up of Leisure & Resorts World continues.

 

China Infrastructure Catastrophe – A portion of the (currently under construction) 710 kilometer tunnel, known locally as the Funing No 1 tunnel which will Kunming with Nanning collapsed on Monday trapping 15 workers who are trapped in the debris from the collapsed railway tunnel.

Takeaway: If the Chinese government conducts a full scale investigation and concludes safety measures were not followed, this could result in a delayed completion of the North/South high speed railway - which would be a negative for Macau mass play.

 

Philippines Weather – Typhoon Rammasun’s a Category 3 storm with sustained winds of 115 mph made land fall this morning in the eastern Philippines and is expected to impact Manila later today and will be over the capital by tomorrow before moving into the South China Sea through either Bataan or Zambales province in the northwest. Rammasun will be out of Philippine territory by Thursday, moving toward southern China.

Takeaway: Rammasun could cause property damage to the Manila-based casinos.

 

MACRO


China June New Yuan Loans – CNY1.08T vs consensus CNY950B and CNY870.8B in May for loan growth +14.0% year/year vs +13.9% in May

Takeaway: The improved credit trends could be a harbinger of better VIP play in Macau in six to nine months from now. 

 

Singapore 

  • 482 new home units were sold in June, compared to 1,806 in June 2013 and 1,488 units in May 2014. Government data indicates about 4,500 units sold in the first six months of 2014. 
  • Q2 prices of private residential property dropped 1.1% YoY, following a 1.3% drop during Q1 2014. 
  • Singapore hotel RevPAR dropped 4% to SGD240.85 based on occupancy falling 2.5% to 82.5% and a 1.5% reduction in average daily rate to SGD291.79. Singapore room supply increased 2.8% year/year.

Takeaway: More macro headwinds for Singapore market

 

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’ll Gladly Take the Other Side of Goldman Sachs on Gold $GLD

Takeaway: Buy more Gold.

Editor's note: This is an excerpt from Hedgeye morning research by CEO Keith McCullough. Click here to learn more and how to become a subscriber.

 

We’ll Gladly Take the Other Side of Goldman Sachs on Gold $GLD - ben gold

 

Goldman Sachs grabbed headlines yesterday reiterating what’s been the wrong call (bearish on Gold) in 2014. Gold futures/options contract volume was +27% versus the 5-day average on that, but neither my TRADE line of $1301 support, nor implied volatility (still -2% on a 1 month basis) confirmed the 1-day fear.

 

In other words, buy more.

 

Incidentally, if you asked the bond market about Goldman’s call on Gold, or consensus US growth acceleration hopes in Q3, it doesn’t care – the 10-year yield is right back to 2.53% this morning with immediate-term downside to 2.49% into Janet Yellen’s testimony.

 

We’re sticking with #GoldBond.

 

We’ll Gladly Take the Other Side of Goldman Sachs on Gold $GLD - Gold Bond cartoon 07.10.2014

 


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 80.28%
  • SHORT SIGNALS 78.51%

Retail Callouts (7/15): ICSC, NKE, JWN

Takeaway: ICSC - good sign for retailers as they close out 2nd quarter. NKE salutes Jeter.

EVENTS TO WATCH

 

Wednesday (7/16)

EBAY - Earnings Call: 5:00pm

 

Friday (7/18)

VFC - Earnings Call: 8:30am

 

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway:  Yet another huge week of growth as measured by the ICSC Index. We're coming against some really ugly numbers last year, so it's appropriate to look at the 2-year comp, which is in the second chart below.  All in, trends are very consistent with prior weeks, running just north of 3%. While that's far below the absolute 1-year weekly reading, it's still very respectable by any means. Definitely a good sign for retailers as they close out the second quarter.

 

Retail Callouts (7/15): ICSC, NKE, JWN - Chart1 7 15 2014

Retail Callouts (7/15): ICSC, NKE, JWN - Chart3   ICSC 2yr 7 15 2014

 

COMPANY HIGHLIGHTS

 

NKE - Nike Says Farewell to Jeter in Showcase of Biggest Athletes

(http://www.bloomberg.com/news/2014-07-14/nike-says-farewell-to-jeter-in-showcase-of-highest-paid-athletes.html)

 

  • "What does $120 million a year in Nike-sponsored talent look like?  Just watch the shoe company’s new commercial, which commemorates the final season of Derek Jeter’s professional baseball career. The ad, called 'RE2PECT,' serves as a showcase for other athletes with Nike Inc. endorsement deals, including top moneymakers Michael Jordan and Tiger Woods."
  • "Other than Michael Jordan himself, Jeter has had more Jordan Brand shoes than any athlete."

 

Takeaway: Classy move by Nike in honoring one of its highest-profile yet lowest-beta athletes ever. It's so rare for an athlete to earn such tremendous respect from fans (and even many Yankee haters), and sustain it over an entire career without blowing it like we've seen from so many other athletes (Lance, Tiger, Kobe -- even Jordan has had some moments he'd like to forget). We'd like to think to think that the highlight of Jeter's endorsement career with Nike is when they brought him into a room full of analysts and investors in 2000 on his birthday, where the gnarly looking group of analysts sang Happy Birthday to him. He then fielded questions, and yes, someone asked him about SG&A. He answered it like a champ ("Not sure if I know what SG&A is, but I know Nike needs to spend more money on athletes.").

 

OTHER NEWS

 

JWN - Nordstrom in Talks to Buy Trunk Club, a Men’s Personal Shopper Service

(http://recode.net/2014/07/14/nordstrom-in-talks-to-buy-trunk-club-a-mens-personal-shopper-service/)

 

  • "The Seattle-based, high-end retailer has recently held acquisition talks with Trunk Club, an e-commerce company that offers a personal styling service for men, according to people familiar with the talks."
  • "Trunk Club customers consult with a stylist and then receive a mailing that contains an array of clothing options, such as jeans, shoes and blazers. Customers keep and pay for the items they want and mail the rest back for free." 

 

Retail sales growth slows sharply in June - BRC

(http://uk.reuters.com/article/2014/07/15/uk-britain-retail-brc-idUKKBN0FJ2O920140715)

 

  • "British retail sales growth slowed in June to one of its weakest rates in three years, possibly in response to fears of higher interest rates, industry figures showed on Tuesday, adding to recent lackluster economic data."
  • "The British Retail Consortium said total retail spending in June was just 0.6 percent higher than a year before, the lowest growth rate since May 2011 if annual volatility caused by the timing of Easter is excluded."

 

BBBY - Bed Bath & Beyond Inc. Prices $1.5 Billion Of Senior Unsecured Notes, Announces Planned $1.1 Billion Accelerated Share Repurchase And Planned $250 Million Revolving Credit Facility

(http://phx.corporate-ir.net/phoenix.zhtml?c=97860&p=irol-newsArticle&ID=1947350&highlight=)

 

  • "Bed Bath & Beyond Inc. today announced the pricing of three series of senior unsecured notes for an aggregate principal amount of $1.5 billion."
  • "The Company also announced it intends, subject to business and market conditions, to enter into an accelerated share repurchase agreement to repurchase an aggregate of $1.1 billion of the Company's common stock following the closing of the notes offering."

China Policy Hits Cotton Prices

(http://www.wwd.com/markets-news/textiles/china-policy-hits-cotton-prices-7799222?module=hp-market)

 

  • "China is unwinding its massive stockpiles of cotton and readying to implement direct-farmer subsidies, potentially depressing global prices of the raw material.

 


Burger Time!

This note was originally published at 8am on July 01, 2014 for Hedgeye subscribers.

“I still eat a burger at a counter with ketchup dripping down my face.”

-Scarlett Johansson

 

Like being long #InflationAccelerating and slow-growth #YieldChasing in 2014, that sounds #tasty.

 

My Mom makes yummy burgers on the barbee too. Today we’ll be pounding those back (amongst other things) as we celebrate Canada Day out here on the Big Lake they call Gitchee Gumee in Thunder Bay, Ontario.

 

Back in Connecticut, it’s going to be Berger Time as well. The Craig Berger, that is – our long-awaited head of Technology Research @HedgeyeBerger who will be launching his Best Semiconductor Ideas  today at 11AM EST (Dial-in: 1.800.434.1335; Conference Code: 859426#).

 

Burger Time! - HE SC launch

 

Back to the Global Macro Grind

 

We surprised some of our Institutional Subscribers when we added Semiconductors (SMH = +16.6% YTD) to the long side of our Global Macro Themes deck in Q2. With Berger on board, we’ll really be able to augment our top-down macro call. It goes something like this:

 

  1. As US growth slows (and European + Emerging Market + Asian demand stabilizes/strengthens), we like global instead of local demand
  2. With the US Federal Reserve fear-mongering disinvestment (0% rates), US capex and inventory growth will continue to disappoint
  3. With tight inventory and low-capex, obvious ways for companies to grow faster are through A) pricing and B) M&A

 

Yep, just one more way you can be long a slowing US domestic consumption cycle.

 

There’s a solid article in the FT today reminding you that those who were bullish on the “US capex cycle” have been direly disappointed in 2014 YTD. Newsflash: you aren’t going to get a real mid-1990s capex cycle until you let interest rates rise.

 

Ideological central-planners don’t get the career-risk adjusted decision making process of execs inasmuch as their Keynesian textbooks don’t get how a country like the UK can see manufacturing demand accelerate (PMI for June 57.5) as the value of the UK currency does (Pound $1.71 vs USD today).

 

Why on earth would a public CFO sign off on his or her CEO ramping capex (and hurting peak margins, because that’s what happens in the short-term when you invest) when he or she can just fire people (cut costs), take price, and/or buy someone and do the same all over again?

 

Back to Berger time…

 

He and I are going to have some fun together creatively destructing some of the old ways of #OldWall research. You see, our edge isn’t what some of NYC and CT’s finest hedgies went to jail for. It’s working as a team, using a differentiated top-down and bottom-up research process.

 

If you’re still reading my rants, you probably have a feel for what I do. What Berger does is born partly out of his industry experience (worked at Intel, INTC) and partly from doing his time working for firms that also loved doing banking and brokering (we don’t plan on doing either).

 

We do un-conflicted, un-compromised, independent research. If we don’t have Research Edge that helps investors generate alpha, we don’t get paid. We’re really looking forward to marrying the top-down signaling process of Global Macro with Craig’s detailed financial models and industry analysis.

 

Here’s a looksy at slide 10 of Berger’s 52 slide Global Semis deck:

 

1.       Chip Sector now a Dividend + Cash Return Story: Div yield leaders include STM (4.2%), INTC (3.0%), MXIM (3.0%), MCHP (2.9%), ADI (2.7%)

 

2.       Large Dividend Hikes (and/or share buybacks) Possible: from SNDK, QCOM, BRCM, NVDA, MRVL, ALTR, AVGO, POWI, VSH, SWKS

 

3.       Acquisitions in Chip Sector Heating Up: Consolidation trends should continue with CAVM, ISIL, SLAB, POWI, MLNX, AMCC, IPHI, EZCH our top acquisition targets

 

In other words, if you’re into slow-growth #YieldChasing + M&A, you should still be into semis.

 

If you’d like to throw some more inflation ketchup on that tasty Hedgeye-Style factored burger, stay with long inflation via my homeland too. Largely a play on commodity #InflationAccelerating, Canadian Stocks (TSX) are +12.9% YTD. Beats banging your head against that Old Wall Dow, doesn’t it?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.49-2.59%

SPX 1938-1967

VIX 10.61-12.79

Pound 1.69-1.71

WTIC Oil 104.76-106.94

Gold 1312-1342

Copper 3.13-3.21

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Burger Time! - Chart of the Day


BUY MORE

Client Talking Points

GOLD

Newsy call by Goldman yesterday reiterating what’s been the wrong call in 2014. Gold futures/options contract volume was +27% versus the 5-day average on that, but neither our TRADE line of $1301 support, nor implied volatility (still -2% on a 1 month basis) confirmed the 1-day fear. Buy more!  

UST 10YR

If you ask the bond market about yesterday’s Goldman Sachs’ call on Gold or consensus U.S. growth acceleration hopes in Q3, it doesn’t care – 10yr yield right back to 2.53% this morning with immediate-term downside to 2.49% into Yellen’s testimony.

EUROPE

Lines of immediate-term TRADE resistance that matter to us most are EuroStoxx50 = 3241, DAX 9855, and FTSE 6788. We are happy to let the market tell us which way to go in European equities for July and August.

Asset Allocation

CASH 14% US EQUITIES 8%
INTL EQUITIES 10% COMMODITIES 22%
FIXED INCOME 24% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

LM

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

TWEET OF THE DAY

Reynolds American To Acquire Lorillard In Transaction Valued At $27.4 Billion, or $68.88.

@HedgeyeStaples

QUOTE OF THE DAY

The way of the pioneer is always rough.

-Harvey S. Firestone

STAT OF THE DAY

Despite yesterday’s sell-off in Gold the shiny commodity remains up +9% year-to-date and the UST 10yr Bond Yield is down -17% year-to-date.


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