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MACAU: A BETTER WEEK

Week #2 in July was a better one for the Macau operators with table revenues averaging HK$929 million per day, up 9% over last year.  Our model anticipated a recovery from the weak results from the prior week.  Thus, our full month GGR projection remains at flat to slightly negative YoY growth. 

 

Reports from the ground suggest strong mass traffic all weekend long and recovering VIP volumes as the World Cup wound down.  We think VIP hold percentage is tracking close to normal for the market.

 

In terms of market share, Galaxy, Wynn, and MGM are all tracking above recent trend.  We’re generally cautious on the Macau names with our decelerating mass growth theme but Galaxy looks uniquely well positioned over the intermediate term.

 

MACAU: A BETTER WEEK - macau1

 

MACAU: A BETTER WEEK - macau2


LEISURE LETTER (07/14/2014)

Tickers: CZR, IGT, LVS, WYNN, HOT, RHP

EVENTS

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

COMPANY NEWS

CZR(Bloomberg) Caesars Entertainment Operating Company has hired New York law firm Kirkland and Ellis to help in the reorganization of $17.4 billion in debt. 

Takeaway: Good luck. Bad balance sheets are endemic in gaming.

 

IGT – announced an agreement to install its Advantage 9.1 System Suite along with sbX Media Manager at Northern Quest Resort & Casino. The comprehensive systems solution includes IGT's Point Play and Xtra Credit bonus applications, sbX Media Manager, and IGT's Service Window

Takeaway: Another systems win for IGT.

 

LVS – A former Macau business partner of Las Vegas Sands Corp has accused the casino operator of misappropriating trade secrets during the latter’s successful bid in 2002 for a casino licence in the city.  Asian American Entertainment Corp (AAEC), a company led by Taiwan entrepreneur Marshall Hao Shi-sheng, is suing the company for at least US$5 billion in profits that it says are owed via their joint ownership of copyright related to a casino licence bid. AAEC filed the complaint in U.S. District Court in Nevada on July 9. The case is in addition to two separate, ongoing legal actions in Macau over alleged breach of contract

Takeaway: A repeat of the same, previous lawsuit.

 

WYNN & 1128:HK (Macau Business Daily) In a CNN interview, Linda Chen, Wynn Macau COO said that Wynn is now focusing on expanding the activities offered by Wynn Resort especially as the company gets ready to open it's new Wynn Palace in Cotai. She also said that Steve Wynn will remain in his position for many years.

Takeaway: Touting the Macau DICJ focus for more non-gaming and entertainment amenities.

 

HOT – In an interview with Bloomberg, Matthew Fry, SVP of acquisitions and development for Asia, said: “China is our single-biggest and fastest-growing market in Asia.” Factors like rising urbanization, a buoying middle class, and a mushrooming travel industry make China an attractive travel and tourism market. The company, which already has a network of 133 hotels in the region, is planning to double its footprint in the region by 2015.  It already has 120 properties in the pipeline, with four expected open this year. In second and third-tier cities, Starwood will focus on four-star hotels to cater to the changing demand of the country after the new government’s crackdown on extravagant spending.  Fry also said Starwood plans to add 30 properties to its portfolio of 40 hotels in India, which according to Fry is the company’s second-biggest market in Asia.

Takeaway: Let's hope the ASIA/PAC economies remain strong.

 

RHP – The Metro Historic Zoning Commission recommended approval of RHP's expansion plans for the Ryman Auditorium on the condition the digital billboard be downsized from 236 square feet to 154 square feet. Ryman Hospitality will have its expansion plan for the auditorium considered at the Historic Zoning Commission meeting on Wednesday. The company wants to add a restaurant, new lobby and multimedia history tour, plus renovated box office, restrooms and concessions area. The project, which will extend the non-historic portion of the building all the way to Fourth Avenue, will cost about $14 million.

Takeaway: As expected, RHP is refocusing the Ryman Auditorium programming for the younger country music listener.

INDUSTRY NEWS

Illegal Chinese World Cup Betting – (Xinhua) More than RMB18 billion (US$2.9 billion) changed hands in cases of illegal football gambling detected by the authorities in mainland China during the 2014 FIFA World Cup.

Takeaway: A big number and now with the World Cup over, no more excuses for poor GGR

 

Trump Plaza Casino Atlantic City to close – Trump Entertainment Resorts announced the company “expects that it will terminate the operations of Trump Plaza Hotel and Casino on or shortly after September 16, 2014.”

Takeaway:  With the 3rd AC casino to close this year, incremental positive for Borgata and CZR.

 

Macau Airlift – AirAsia asked Macau's Civil Aeronautics Board for an additional 720 weekly seat entitlements between Macau and the Philippines.  AirAsia's request follows the July 1st service expansion from 4,500 weekly seats to 7,020 current weekly seats.

Takeaway: Strong demand = request for additional capacity.

  

California Online Poker – Online poker may come to California sooner than expected - the Iipay Nation of Santa Ysabel Indians could launch real money online poker in the state as soon as today through its website, PrivateTable.com. The site will only spread real money online poker to California residents 18 years of age and older. Players will be able to make deposits through the Financial Payment Network, or FinPay for short. Deposit options include credit cards, electronic checks, Bitcoin and in person at the tribe’s smoke shop.

Takeaway: With a large potential pool of players, CA remains the prize for on line poker companies.

 

Netherlands Gaming – The Dutch government decided to sell 14 casinos operated by Casino Holland, 10 in an immediate portfolio sale and the remaining four individually during 2015, as well as authorize two new licenses will be granted 2017, and legalize and regulate Internet gaming. The government announced casinos will pay a 20% gaming revenue tax plus 2% for problem gambling programs and to regulators.

Takeaway: An interesting announcement that was under the radar... we are anxious to hear which companies are interested in buying the casinos.  

MACRO

Singapore Economy Unexpectedly Contracts – Gross Domestic Product for the three months to June 30 fell 0.8% on a seasonally adjusted and annualized basis compared with the previous quarter, according to advance estimates by the Ministry of Trade and Industry. This compared with a revised 1.6% increase in the first quarter. The median forecast by seven economists polled by The Wall Street Journal was for 2.2% growth.

Takeaway: Could be another tough quarter for Singapore mass 

 

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.


European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

--- 

 

European Financial CDS - Swaps were wider across Europe's banking complex by an average of 12 bps, led by Portgugal's Espirito Santo which widened by 100 bps to 394 bps. Italian and Spanish banks also widened considerably.

 

Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems? Perhaps more concerning is the fundamental macro slowdown that's taking place in much of the data across Europe.

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart1 european financials cds

 

Sovereign CDS – Sovereign swaps widened sharply around the world, except for in the U.S. Leading the charge is Portugal, where CDS widened 65 bps w/w to 198 bps. Caught in Portugal's undertow were Italy and Spain, where swaps widened 10 and 12 bps, respectively. France and Germany were modestly wider at +3 and +2 bps as well. The U.S. tightened by 3 bps to 16 bps and is now 6 bps inside of Germany.

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 2 sovereign CDS

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 3 sovereign CDS

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 4 Sovereign CDS

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 14 bps.

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK

Takeaway: Europe remains the center of the universe for now, and US banks are starting to get nervous.

Current Best Ideas:

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 19

 

Key Callouts:

Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems? Perhaps more concerning is the fundamental macro slowdown that's taking place in much of the data across Europe.   

 

The US banks are also seeing spreads widen. Citi and Morgan Stanley are wider on the week by 10 bps. We'll be keeping a close eye on Espirito Santo to see whether the situation is inflecting for better or worse.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 9 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 15

 

1. U.S. Financial CDS -  Large cap US banks widened an average of 7 bps last week, as fears around Portugal's crisis rippled across the Atlantic. Citi and Morgan Stanley were 10 bps wider each. 

 

Widened the least/ tightened the most WoW: AGO, TRV, TRV

Widened the most WoW: C, MS, MTG

Widened the least/ tightened the most WoW: ALL, TRV, AON

Widened the most MoM: MBI, AGO, WFC

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 1

 

2. European Financial CDS - Swaps were wider across Europe's banking complex by an average of 12 bps, led by Portgugal's Espirito Santo which widened by 100 bps to 394 bps. Italian and Spanish banks also widened considerably.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 2

 

3. Asian Financial CDS - Bank swaps were slightly wider in China and India and mixed to tighter in Japan.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 17

 

4. Sovereign CDS – Sovereign swaps widened sharply around the world, except for in the U.S. Leading the charge is Portugal, where CDS widened 65 bps w/w to 198 bps. Caught in Portugal's undertow were Italy and Spain, where swaps widened 10 and 12 bps, respectively. France and Germany were modestly wider at +3 and +2 bps as well. The U.S. tightened by 3 bps to 16 bps and is now 6 bps inside of Germany.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 18

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 3

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 9.6 bps last week, ending the week at 5.43% versus 5.34% the prior week.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1884.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 6

 

7. TED Spread Monitor – The TED spread fell 0.9 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 22.51 bps.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 7

 

8. CRB Commodity Price Index – The CRB index fell -3.3%, ending the week at 297 versus 307 the prior week. As compared with the prior month, commodity prices have decreased -3.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 14 bps.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 36 basis points last week, ending the week at 3.3% versus last week’s print of 2.94%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 10

 

11. Chinese Steel – Steel prices in China rose 0.2% last week, or 7 yuan/ton, to 3,132 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Just Charts - Bullish Summer Charts

Investment Ideas

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts - Bullish Summer Charts - cc.z

EVENTS THIS WEEK

7/17/14 PM Earnings Call 9am EST

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples rose +0.4% week-over-week versus the broader market (S&P500) down -0.9 %.  XLP is up 5.3% year-to-date versus the SPX at 6.5%.

 

Positive Divergence:  ADM 4.5%; SAFM 3.8%; TSN 3.0%; LO 2.5%; MO 2.5%

Negative Divergence:  SODA -7.8%; NUS -4.6%; SMG -4.1%; THS -3.4%; HAIN -2.8%

RECENT NOTES 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

 Just Charts - Bullish Summer Charts - chart2

 

The Hedgeye U.S. Consumption Model shows 6 of the 12 U.S. Economic Indicators flashing green.

 Just Charts - Bullish Summer Charts - chart3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 20.0x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.6 versus 36.4 in the prior week

Just Charts - Bullish Summer Charts - chart4

Just Charts - Bullish Summer Charts - chart5

Just Charts - Bullish Summer Charts - chart6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bullish TRADE and TREND w/ TREND support = 109.76

Just Charts - Bullish Summer Charts - chart7

 

DEO – bullish TRADE and TREND w/ TREND support = $124

Just Charts - Bullish Summer Charts - chart8

 

KO – bullish TRADE and TREND w/ TREND support = 40.72

Just Charts - Bullish Summer Charts - chart9

 

PEP – bullish TRADE and TREND w/ TREND support = 86.39

Just Charts - Bullish Summer Charts - chart10

 

GIS – bullish TRADE and TREND w/ TREND support = 52.13

Just Charts - Bullish Summer Charts - chart1111

 

MDLZ – bullish TRADE and TREND w/ TREND support = 36.32

Just Charts - Bullish Summer Charts - chart12

 

KMB – bullish TRADE and TREND w/ TREND support = 110.02

Just Charts - Bullish Summer Charts - chart13

 

PG – bullish TRADE and TREND w/ TREND support = 80.29

Just Charts - Bullish Summer Charts - chart144

 

MO – bullish TRADE and TREND w/ TREND support = 40.28

Just Charts - Bullish Summer Charts - chart15

 

PM – bearish TRADE (86.77 resistance); bullish TREND (84.82 support)

Just Charts - Bullish Summer Charts - chart16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Monday Mashup: YUM On Deck

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

Monday Mashup: YUM On Deck - chart1

Recent Notes

07/07/14 Monday Mashup: Big Week for BOBE

07/09/14 BOBE: Ugly is Beautiful

07/10/14 PBPB: Staying Short

07/11/14 June: The Ugly Duck of 2Q

Events This Week

07/16/14 YUM earnings release AMC

07/17/14 YUM earnings call 9:15am EST

Chart of the Day

We continue to believe 2Q14 consensus SSS estimates are too aggressive.  Knapp and Black Box 2Q14 SSS estimates came in at -0.9% and +0.3%, respectively.

Monday Mashup: YUM On Deck - chart2

Recent News Flow

Monday, July 7th

  • YUM price target was raised to $94 from $87 at UBS.
  • BOBE issued a response to Sandell's latest release.  In the response, the company highlighted the activist's recent "omissions" and reiterated their commitment to finding a settlement solution.

Tuesday, July 8th

  • BJRI introduced a new Peanut Butter S'mores Pizookie.

Wednesday, July 9th

  • PLKI named Todd Burke as VP of Corporate Communications.  Mr. Burke has held prior roles at JetBlue Airways, Trans World Airlines, American Airlines and, most recently, Pacific Gas & Electric Company.  At Popeyes, Mr. Burke "will lead internal and external communications, and the public and government affairs function."
  • PBPB preannounced disappointing 2Q14 earnings and guided down full year estimates.  You can read more about this in our recent note "PBPB: Staying Short."

Thursday, July 10th

  • COSI appointed new CFO Scott Carlock, who will replace current CFO William Koziel.  Carlock comes over from Yum! Brands where he previously served as an executive, holding various finance and accounting roles over the past 13 years.

Friday, July 11th

  • EAT was downgraded to hold at Wunderlich Securities with a $52 PT.

Sector Performance

The XLY (-1.0%) underperformed the SPX (-0.9%) last week.  Both casual dining and quick service stocks, in aggregate, underperformed the narrower XLY Index, with casual dining being the biggest laggard of the two.

Monday Mashup: YUM On Deck - chart3

Monday Mashup: YUM On Deck - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

Monday Mashup: YUM On Deck - chart5

Casual Dining Restaurants

Monday Mashup: YUM On Deck - chart6

Monday Mashup: YUM On Deck - chart7

Quick Service Restaurants

Monday Mashup: YUM On Deck - chart8

Monday Mashup: YUM On Deck - chart9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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