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LEISURE LETTER (07/17/2014)



  • 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)


590:HK – Luk Fook Holdings Ltd saw its same store sales growth drop by 54% in Macau and Hong Kong in the first quarter of 2015 (a period between April 1 and June 30, 2014, according to a filing with the Hong Kong Stock Exchange) over that of the same period a year earlier. Same store sales of gold products declined 65%, gold sales by weight dropped 63%, while gem-set jewellery dropped 20% for the group’s stores in Macau and Hong Kong. At the end of June, Luk Food Holdings had 1,290 licensed stores around the world, an increase of 22 stores year/year, of which 83 were in mainland China, 44 in Hong Kong and 10 in Macau. 

Takeaway: Confirmation of a Chinese spending slowdown and slower Macau trends.


LVS & 1928:HK – Macau Boxing Card Set, Filipino boxer Manny Pacquiao will fight Chris Algieri, an American junior welterweight titleholder, on November 22 at the Venetian Macao’s Cotai Arena.

Takeaway: Setting the stage for a big weekend in Macau.


PENN & GLPI – Argosy Sioux City filed an appeal with the Iowa Supreme Court to keep the riverboat casino from closing next Tuesday. Attorneys for Argosy parent Penn National Gaming Co. asked the Supreme Court for an immediate, emergency stay of a District Court judge's ruling Monday that affirmed a state gaming regulatory order to shutter the gambling boat. Argosy argues the district court order, like the IRGC ruling it affirmed, "is based on errors of law and is not supported by substantial evidence."

Takeaway: Last and final legal option to keep the property open. We are skeptical the Supreme Court will "take up" the case and the filings contain no new arguments for keeping the property open.


CCL –  (TTG Digital) Cunard reports post-World Cup booking spike  

Cunard has reported a 36% increase in bookings on Monday July 14 and Tuesday July 15 compared with the same two days the previous week.  It added high street agents were also seeing a boost in footfall numbers and it is hoping to drive more business with the summer sale running for the rest of July for holidays departing from September 1, 2014, to June 30, 2015.

Takeaway:  With all the bad commentary surrounding the World Cup, it's good to hear someone benefited.


NCLH – Norwegian Cruise Line is offering free balcony upgrades and up to $200 credit for select sailings booked by Saturday, July 19. These "Sun & Fun Free for All Bonus Days" price breaks can be applied on top of other discounts,

Takeaway:  Incentives keep coming.


Macau Slot Monitoring – Macau’s Gaming Inspection and Coordination Bureau (DICJ) is considering asking casino operators to provide enhanced surveillance – via video security camera – of slot machine jackpot displays

Takeaway: More regulations for an already highly regulated industry.


Hengqin Island Land Allocation to Macau – The Guangdong Province governor, Zhu Xiaodan, revealed during yesterday’s annual Guangdong-Macau Cooperation Joint Conference that a “Macau area” measuring 10 square kilometers will be established on Hengqin Island. However, no details of cooperation were disclosed. Mr Zhu suggested that the project would have to wait until the land is reclaimed before any concrete negotiations can begin.

Takeaway: We expect to see the gaming operators begin selling reasons why they should be allocated a portion of this land to support their Macau base of operations.


Resorts World Manila – Travellers International is a joint venture between Philippines-based Alliance Global Group Inc and Genting Hong Kong Ltd, a subsidiary of Malaysia’s Genting Bhd confirmed the second phase of Resorts World Manila, which includes the expansion of the Marriott Hotel Manila and the addition of 227 rooms, should be ready by the end of 2015.

Takeaway: On time opening


Ho Tram Strip – Private equity firm NewCity Capital LLC is to be a “new financial partner” in the Ho Tram Strip beachside casino development according to Asian Coast Development (Canada) Ltd (ACDL) but further details were not disclosed. NewCity Capital, founded by American investor Chien Lee, is investing via a vehicle called NewCity Ho Tram Investment Co. It has also set up an entity called The GrandNewCity. Full build-out of the Ho Tram development is a US$4-billion project with up to five integrated resorts, encompassing 9,000 five-star rooms, and 180 tables and 2,000 electronic gaming machines in two casinos. 

Takeaway: Maybe this project finally gets off the ground?


Georgia Casino Boat Runs Aground – the Escapade, a casino boat ran aground off the Georgia coast during its maiden voyage on Wednesday. The 174-foot-long Escapade was still stranded about 1.8 miles off the north end of Tybee Island, a popular beach destination east of Savannah, in the Calibogue Sound near Hilton Head, South Carolina. The Escapade is a casino ship operated by Florida-based Tradewinds Casino Cruise. After being stranded for more than 15 hours, about 90 of The Escapade's 96 passengers and 27 crew members arrived at the dock shortly after 4 p.m., nearly a full day after the boat left for the maiden voyage of its operator's new Savannah service Tuesday night. Four people were ferried ashore by helicopter

Takeaway: First day operational challenges.


Texas Gaming Expansion – The Texas Gaming Commission begins weighting slot machine type devices at racetracks. The issue came before the commission last month, proposed by the industry, and members decided to let Texans weigh in on the issue. A 30-day public comment period continues until July 27, and the issue could come before the commission for a vote as soon as Aug. 12. This electronic racing, which would be displayed on machines similar in size and appearance to slot machines, would randomly replay races that have already been held but stripped of any information — such as horse names, dates, location — that could identify which race it was. Any expansion of Texas gambling would require approval from two-thirds of lawmakers in both chambers of the legislature — as well as from Texans. Commission officials say they have looked into the issue and a rule change to allow instant gaming isn’t an expansion of gambling.

Takeaway: Could this be the first step forward for legal gambling in Texas? The long-term threat to Louisiana and PNK persists.


Insider Transactions:

ISLE - CFO Eric L. Hausler sold 6,200 shares on Monday, July 14th via a 10b5-1 plan at an average price of $8.57 and now owns 54,733 shares


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.


Estimates going lower but sell side clinging to the healthy mass thesis.  We’re worried about decelerating 2H mass growth, more competitive market conditions for premium mass, and the difficult Singapore macro environment.




We remain negative on the Macau operators as a whole based in part to our mass decelerating theme -  the bad VIP/good mass thesis is so yesterday.  The LVS release highlighted additional issues facing the operators.  Mass margins were disappointing and we wonder if the premium segment is getting more competitive – a thesis put to us by more than one source during our June Macau tour. Promotional expenses were higher than expected. Labor expenses are likely to rise as Macau unemployment remains extremely low in the face of a lot of new supply.  LVS  initiated a “preemptive strike” but retention bonuses may become the norm. Finally, MBS is facing a very difficult macro environment which wasn’t discussed on the call but should result in lower EBITDA estimates going forward.



Our earnings preview highlighted that LVS was the Macau company we thought would miss even reduced expectations and they didn’t disappoint – well, they did disappoint the overwhelmingly bullish Street.  In fact, LVS missed our below-the-Street projections across the board.  How did they do it?  They double dipped on revenues and margins.  Revenues missed the Street by $175m (Hedgeye by $72m) and EBITDA fell $83m below the Street (-$45m vs Hedgeye).


As we pointed out, in our 07/15/14 note, "SINGAPORE: MALIGNANT MACRO" the deteriorating Singapore environment was likely to pressure MBS volumes in Q2 – it happened – and going forward as well.  We’ll see where the Street shakes out but we lowered our projection.  More surprising were the lower margins in Macau which management blamed on mass mix shift to lower margin premium mass.  We’ve been worried about the potential for lower margins in premium mass as mass revenue growth decelerates and the competitive environment escalates.  Could we be seeing that already?  The upcoming earnings releases by LVS’s competitors will be telling.





We remain below the Street for 2H 2014 in Macau and Singapore.  Our full year company EBITDA estimate is $5.39 billion while EPS checks in at $3.68.



Marina Bay Sands

Marina Bay Sands reported Gross Gaming Revenues of $785m, a 1% YoY increase thanks to high hold of 3.45%.  We computed on a hold-adjusted basis that EBITDA would have been $365m.  Based on our analysis of trends in reported betting taxes, we believe Singapore GGR was flattish in Q2.  Thus, we expect Resorts World Sentosa to also report flattish GGR on slightly higher hold. 

But we are concerned about MBS and Singapore on several fronts:

  • As we pointed out in our note, “SINGAPORE: MALIGNANT MACRO” (7/15/14), the macro environment have deteriorated significantly in the city-state. 
  • VIP rolling chip volume has plunged for three straight quarters.  Adelson’s comment about higher hold has some validity but probably not overly material.  Just look at Q4 2012 when MBS only held at 1.92%, whereas VIP volumes fell 17% YoY.  Or check out Q1 2012 when MBS played very lucky at 3.58% on top of 26% growth in VIP volumes.
  • Mass volume dropped for the 2nd straight quarter.  Mass has been stuck in the $1.1-$1.2bn roll.
  • Q2 REVPAR declined for the 1st time QoQ due in part to more rooms
  • Tightening of VIP credit
    • While provision for doubtful accounts was ok in Q2 at $33m or 4.2% of GGR, it may pick up as lending dries up.
  • Continued government scrutiny over local casino visitors 


Here are some interesting details regarding LVS’s other properties:


Las Vegas

  • Table drop fell 20% YoY, its worst performance since Q2 2002
  • Rebates as a % of GGR fell to 3.6%, lowest since Q4 2012

Sands Macau

  • Despite 170 less slot machines, slot volume continued to do well, hitting a new quarterly record of $832m in Q2 2014
  • Mass volume beat our estimate by 13%, rising 32% to $1.08 bn
  • Mass hold fell to 17.5%, the lowest hold since 2005
  • Fixed costs rose 49% YoY

Venetian Macau

  • Although mass volume slipped 7% QoQ, it was better than what we estimated
  • Fixed costs were $12m higher our estimate, contributing to a 80bps margin decline
  • Promotional expenses as a % of non-gaming revenues was 29%, unchanged from Q1 2014 and the highest level seen at the property

Four Seasons

  • Surprisingly, slot volume fell 6% to $170m, which was offset by higher slot hold (6.5%)
  • Mass volume skyrocketed for the 5th straight quarter, +97% YoY.
  • Mass hold was 21.9%, the lowest level since 2008
  • VIP revenue missed our estimate as VIP hold was 3.08% for Q2, with an estimated 19% of Direct VIP volume

Sands Cotai Central

  • Mass came in a little lighter than expected
  • Mass hold has been steady since ramp in Q2 2012
  • Added 33 tables in the quarter to 495 tables


Client Talking Points


Yield straight back down to 2.51% this morning and remains in what we call bearish TAIL risk mode – no support to the year-to-date closing lows and from an intermediate-term perspective closer to 2.21%. Keep buying bonds and equities that look like bonds versus U.S. #ConsumerSlowing.


Same story as bond yields – Russell 2000 is back to down year-to-date and bearish TREND (our TREND resistance line = 1175) and this is a much purer (and profitable) hedge on U.S. domestic consumption growth than SPY.


Bond yields down, Russell down, Gold up – call us crazy, but in our opinion this all rhymes with slowing growth expectations. For Gold to make a run for its year-to-date highs, we think we need to see a breakout above $1324 – stay tuned.

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


Kinder Morgan Energy Partners reports Q2 distributable cash flow $561M vs. FactSet consensus $588M @HedgeyeEnergy


You’ve got to look for tough competition. You’ve got to want to beat the best.

-Grete Waitz


6, the number of years since Tiger Woods won his last major golf tournament. Woods is playing in the British Open at the Royal Liverpool Golf Club in England, which begins today. 

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.

CHART OF THE DAY: $Yelp or Shareholder Friendly Tech? Your Call.

Takeaway: Stay away from YELP. Stick with companies in the semiconductor space that will increase dividends.


CHART OF THE DAY: $Yelp or Shareholder Friendly Tech? Your Call. - Chart of the Day

Vacant Minds

“If you leave the smallest corner of your head vacant for a moment, other people’s opinions will rush in from all quarters.”

-George Bernard Shaw


Perhaps the most challenging part of the investment business is to control your own views.  After all, the world today is replete with conflicting opinions and research.  Some of it is very insightful, but the vast majority of these opinions are what we would characterize as the noise, versus the signal.


One point most of us can agree on is that when successful investors speak with conviction, it's worth giving them a little room in our ever so full minds.  In this vein, we thought that Stan Druckenmiller of Dusquesne and Soros Capital fame, had some apropos comments at the Institutional Investor “Delivering Alpha” conference yesterday.


Here are a few of Druckenmiller’s best quotes:


“I am fearful that today our obsession with what will happen to markets and the economy in the near term is causing us to misjudge the accumulation of much greater long term risks to our economy.”


“I hope we can all agree that once-in-a-century emergency measures are no longer necessary five years into an economic recover.”


“There is a heated debate as to what a 'neutral' funds rate would be. We should be debating why we haven't moved more meaningfully toward the neutral funds rate if for no other reason so the Fed will have additional weapons available if the outlook darkens again.”


His last point is perhaps most spot on.  Five years into the “recovery”, why are we still at extreme, once in a century emergency policy measures?  And given that, what, if any, options do policy makers have if the economy does sour?


Inquiring and non-vacant minds want to know Dr. Yellen!

Vacant Minds - Fed bubbles cartoon 07.09.2 14


Back to the Global Macro Grind...


To her credit, even if she didn’t give us any real insight on her strategy as it relates to monetary policy, Dr. Yellen did give us some decent stock advice in her recent congressional testimony.  Specifically, she said that she believed valuations for biotech and social media stocks were stretched.


While we would never recommend shorting a stock on valuation (sorry Dr. Yellen!), we absolutely agree with her call that certain social media stocks are overvalued.  In fact, our top pick on the short side is and continues to be YELP.


On that front, yesterday a key risk to the short idea disappeared as Yahoo effectively indicated they would use much of their Alibaba proceeds to return cash to shareholders.  While the company didn’t specifically say they wouldn’t buy YELP, buying YELP would certainly be inconsistent with returning cash to shareholders (to say the least).


Speaking of returning cash to shareholders and technology, we recently launched our newest sector, Semiconductors, led by Craig Berger.  A key theme of his launch was that there is a subset of semi-conductor stocks that have been returning cash to shareholders and will continue to aggressively do so.


Yesterday, Intel (INTC) reported strong numbers, which was capped with an additional $20 billion added to its stock buy back program. Intel, certainly, knows what to do with the Fed’s low interest rates!  While Berger remains cautious on the outlook for INTC because of the PC market (in effect: can things get better from here?), he continues to like this theme of owning companies in the semiconductor space that will increase dividends.


In the Chart of the Day below, we highlight this very investable theme with a slide from our Semiconductor launch presentation, which shows the companies that historically have returned the most cash back to shareholders. If you’d like to see Craig’s proprietary analysis on which companies are going to raise dividends next, or to set up a time to chat with him, please email .


Getting back to the global macro grind, a key derivative play of semiconductors doing well is of course to be long Taiwan on a country basis. My colleague Darius wrote the following back in early June and it holds today:


“While it’s hard to argue in favor of the predictability of YTD gains, Taiwan does have idiosyncratic country risk factors that support allocating capital to this market at the current juncture. Specifically, improving GIP fundamentals support chasing Taiwanese equities up here – particularly amid heightened prospects for M&A activity in the global semiconductor space. It’s worth noting that the Tech sector accounts for a whopping 46% of TAIEX market cap, with semiconductors alone accounting for 23%. 


Contrary to Brazil, it’s particularly difficult to find a meaningful economic indicator in Taiwan that isn’t accelerating on both a sequential and trending basis. While headline inflation is indeed accelerating, it’s accelerating off of extremely low levels and does not warrant any attention from the central bank – especially with WPI trends being so subdued.”


While Taiwan has been a strong market in the year-to-date, this morning might actually offer an opportunity to get in at a discount as Taiwan Semiconductor is trading down almost 6% on news that it is likely to lose some next generation chip orders in 2015 from Apple and Qualcomm.


Before you head off into the trading day and eventually the weekend, we did want to offer one last quote that goes back to the start of our note and that we hope will find a spot in your mind:


"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson] signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill."

-Charles A. Lindbergh, Sr. , 1913


Indeed Mr. Lindbergh, indeed.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Vacant Minds - Chart of the Day

Changing With The Times

This note was originally published at 8am on July 03, 2014 for Hedgeye subscribers.

"Show me a hero and I'll write you a tragedy."   

- F. Scott Fitzgerald


Along with the likes of T.S. Elliott and Ernest Hemingway, F. Scott Fitzgerald is widely regarded as one of the most recognized young American writers of the “Lost Generation” of young Americans who fought in and emerged disillusioned out of WWI.


Changing With The Times - fscx


With the time-tested truths of human nature, we are forced to accept the unconscious anchoring biases and contextual frame of references shaped by our experiences. We then observe and perceive through this ever-changing lens. 


Consequently, Fitzgerald’s frame of reference stems out of some epic undulations in popularity and wealth:

  • Two world wars
  • Jazz Age (a term he coined)
  • Currency and Wealth Destruction:
    • Great Depression
    • Weimer Republic Collapse; followed by
    • Ascension and destruction of Hitler’s rule


Without searching for self-proclaimed similarities between the two of us, I can say without a doubt Fitzgerald and I have one thing in common:


We spent a large part of our early years in a cold climate. 


Walking across Notre Dame's campus during my junior year for a morning Econometrics class (the subject matter of the class reserved for a future "Early Look"), making a stop for breakfast and coffee was a ritual. Unfortunately, in the dead of winter in South Bend, Indiana, this stop required a small detour, and it was cold! 


Now I've heard it was even colder this winter. Even so, convincing me I would not have taken a detour this past winter for a little breakfast and coffee given the colder weather is highly unlikely.


Back to the Global Macro Grind


Here we are at the midpoint of 2014, a year that has been full of surprises relative to consensus expectations moving into the year.


  • Growth (miss): -2.9% Q1 final GDP revision (miss and seventh consecutive year of downward revision from the Fed)
  • Inflation (surprise): Headline CPI +0.4% vs. +0.2% expected for May
  • Yield Spread: -50 bps (Net Short contracts in the ten-year down to 2.4K from 175K in the first week of January)
  • Commodities: CRB (+9.6%); CRB Food (+23.3%)
  • VIX: 10-handle; Hovering at all-time lows  


So where do we go from here?


The Financial Times published an article yesterday on Hedge Fund beta tracking at all-time highs. Hedge Funds are levered long and yield chasing. Our team consumes and analyzes high-frequency data points across the globe to generate alpha. Alluding to the risks inherent in the market does not mean we are preparing for an epic crash. Sure it could happen, but front-running the sector variances that manifest as growth slows and inflation accelerates is the goal.


  • XLU (+13%); CRB (+9%); GLD (+10%) YTD
  • XLY (+1.08%); IWM (+3.2%) YTD
  • SPX (+7%)


Rather than predicting third and fourth quarter consequences, we absorb the ever-changing landscape and re-adjust the inherent risk across durations in real-time. As 2H growth comps indicate a consensus miss to the downside, we believe the following sequence of events is a probable in today’s centrally-planned environment:


  • A Fed revision for 2014 full-year GDP from 3.0% to 2.1 - 2.3% at the last FOMC meeting will likely face a further downward revision after a -2.9% Final Q1 print last week (hint: not weather-related)
  • The Fed gets more dovish with the data
  • The bond market adjusts for growth expectations and the prospect for future dollar devaluation perpetuates the yield spread compression
  • Commodities as a complex, which are priced in U.S. dollars globally, face continued pressure to the upside net of unpredictable external factors


As the outlook changes, we will contextualize the data and be forced to change. After all, we are paid to be right on both sides of the tape.


With growth DECELERATING and inflation ACCELERATING central planners will try to convince you there’s no inflation in our everyday consumption habits. That coffee and breakfast would have been more expensive this year, but we all have to eat (bad weather or not). Just last year, the central bank adjusted its model for allowing a longer grace period for wage growth to catch up with commodity inflation. Now this seems like a rather convenient way to keep the accommodative power at the expense of the middle class.


F. Scott Fitzgerald could probably pencil quite a symbolic ending to this story. Give Janet Yellen a break for her nervousness. She is new to the scene. However, as you can see in today’s Chart of the Day below, the ECB's Mario Draghi has mastered that red carpet stoicism.  


Our immediate-term Global Macro Risk Ranges are now:


SPX 1948-1977

RUT 1170-1208

VIX 10.61-12.81

USD 79.71-80.27

WTI Oil 104.01-107.12

Gold 1310-1330



Good luck out there today and Happy 4th!


Ben Ryan



Changing With The Times - Dradhi VIX Chart

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