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LEISURE LETTER (07/18/2014)

Tickers: LVS, H, PEB, WYN, MTN


  • 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)


LVS & 1928:HK (Jornal Tribunal de Macau) The Macau government's Land, Public Works and Transport Bureau halted construction on Sands China Ltd’s Parisian casino-resort in Cotai. Construction ceased because the developer has permission only to undertake earthworks on the site. However, the contractor has already built a structure 10 or more floors in height.

Takeaway: As highlighted during the LVS 2Q earnings call, the reason for the the construction halt is now known. LVS emphasized that Parisian remains on target to open in late 2015.  However, our sources are skeptical that the property will be up and running in 2015.


H – the Company and Playa Hotels & Resorts B.V. announced plans to introduce the Hyatt Ziva brand to Cancun. Formerly Dreams Cancun, the resort’s multi-million dollar renovation began June 1, and it is expected to reopen in late 2015 as Hyatt Ziva Cancun. The resort will be managed by Playa Resorts Management, the operational component of Playa Hotels & Resorts. 


In addition to Hyatt Ziva Cancun in Mexico, Playa is scheduled to open Hyatt Ziva Puerto Vallarta in late 2014. In the Caribbean, Hyatt Zilara Rose Hall and Hyatt Ziva Rose Hall in Montego Bay are scheduled to open in late 2014. The two new resorts will be co-located on Jamaica’s most romantic beach, formerly home to The Ritz-Carlton. Hyatt Zilara Rose Hall will offer an adults-only all inclusive experience that will be separate, but connected to, Hyatt Ziva Rose Hall, which will cater to guests of all ages.

Takeaway: Building the new brands, one asset at a time.


PEB – announced the acquisition of 331-room luxury, The Nines hotel in Portland, OR for $127.0 million. PEB noted (during the next 12 months), the company currently forecasts that the hotel will generate EBITDA of $12.0 to $12.6 million and NOI of $10.4 to $11.0 million.  As well as, in conjunction with the acquisition, the company is assuming three secured, non-recourse loans totaling $50.7M, which are subject to a weighted average interest rate of 7.4%.

Takeaway: We highlighted this yet-to-be-announced acquisition in our May 12 Leisure Letter based on a May 7th application by a Pebblebrook Hotel Trust subsidiary to take over the liquor license of the hotel and its restaurants.


WYN – announced it completed a term securitization transaction involving the issuance of $350 million of asset-backed notes. Sierra Timeshare 2014-2 Receivables Funding LLC issued $277 million of A rated notes and $73 million of BBB rated notes.  The notes were backed by vacation ownership loans and had coupons of 2.05% and 2.40%, respectively, for an overall weighted average coupon of 2.12%. The advance rate for this transaction was 91%

Takeaway: Very good terms for a consumer receivable securitization.


MTN – Air Canada recently informed Eagle county airport officials that it would need a $115,000 revenue guarantee to continue even scaled-back service to the valley. Without the guarantee, the flights wouldn’t be scheduled for the coming ski season. Eagle County Director of Aviation Greg Phillips took that news to the Eagle County commissioners, who quickly approved reserving the entire amount in order to keep the flight. EGE Air Alliance, a local group dedicated to bringing more service into the airport, is focused on two main projects: maintaining the guarantees for a summer flight from Houston — which requires about $450,000 in guarantees — and work on a probable 2015 ballot issue to provide a still-undecided form of tax funding for future flights.  The Vail Town Council voted unanimously to approve — a contribution of $25,000, with another $14,000, if it’s matched dollar for dollar by Vail Resorts as well as the Beaver Creek Resort Company.

Takeaway: The truth about airline lift subsidies into EGE airport are now becoming public information. Such subsidies are not discussed by MTN management. 


Macau Junkets Capital Infusion (GGR Asia) Hong Kong-listed China Star Entertainment Ltd is to loan HKD200 million (US$25.8 million) to an unnamed Macau junket promoter, only identified as ‘Junket Company 3′. The loan is via a China Star Entertainment subsidiary registered in the British Virgin Islands called Classic Champion Holdings Ltd and is spread across 24 months at an annual interest rate of 10%. The filing said the junket firm concerned currently promotes 46 tables at an unnamed casino in Macau. China Star, which runs Casino Lan Kwai Fong in the Macau Peninsula under the gaming licence of SJM Holdings Ltd, added that the junket promoter had generated rolling chip turnover of approximately HKD357.38 billion for the 18 months to June 30. China Star reported in its 2013 annual results to December 31 that Casino Lan Kwai Fong operated a total of 84 gaming tables, targeting VIPs and mass-market customers, and 128 slot machines. China Star said in late June there was a delay in its move to buy an equity interest in the profit stream from another junket promoter at the casino hotel called Eight Elements Entertainment Ltd

Takeaway: More liquidity can't be bad.


Macau Junket Acquistion (GGR Asia) International Entertainment Corp (IEC), a Hong Kong-listed company that in January announced it was interested in buying a 70% economic interest in Macau junket investor Suncity International Holdings Ltd, says in its annual report that the deal has not yet been concluded.  International Entertainment describes its current main activities as “hotel operations, and leasing of properties for casino and ancillary leisure and entertainment operations”. On January 9, IEC it said it had entered into a term sheet with Suncity International – the potential vendor – and Alvin Chau Cheok Wa, the sole beneficial owner of the vendor – about acquiring a 70% economic interest in the business. It was to be effected via purchase of a 70% equity interest in Suncity International, which in turn International Entertainment said was entitled to all the net profit from gaming promotion operations by Sun City Gaming Promotions Co Ltd. In January the deal was described as worth HK$7.35 billion (US$948 million), to be settled in cash and through the issue of new shares at HK$5 each, representing up to 29 percent of the enlarged share capital of International Entertainment.

Takeaway: Could the recent VIP challenges result in "recast" transaction terms?


South Korea Gaming Expansion (GGR Asia) The provincial government of South Gyeongsang in South Korea on Wednesday signed a deal with an international consortium to develop a movie-themed park based on 20th Century Fox’s films. The project, to be part of a larger entertainment complex featuring a casino, will be located near the city of Busan, in the south of the country. The partners in the movie-themed park project include Fox Consumer Products Inc, the marketing and licensing arm of 20th Century Fox group, and Village Roadshow Theme Parks Ltd, one of Australia’s largest theme park operators, with interests in China and the United States. The site is forecast to open by the second half of 2018. The entertainment complex will be built in a 2.8-million-square-metre (30.1 million sq feet) site in Changwon, according to media reports. The entertainment complex will also include a six-star hotel, a water park, a cinema, retail areas and a golf course. The theme park will be its centrepiece, featuring more than 25 rides and attractions with characters and story lines from 20th Century Fox’s movies.


The reports gave no details about the casino component. Local authorities expect the entertainment complex to attract around 10 million foreign and local tourists a year. They believe it will benefit from the fact there are more than 60 cities with a population in excess of one million within three-hours’ flying time of Busan’s international airport.

Takeaway: More casinos coming in S Korea


Slot System Failure (stltoday.com) Lumière Place technology officials worked Thursday to determine what caused a slot machine failure that forced a temporary casino shutdown. State gaming regulators ordered the casino closed at 11:45 p.m. Wednesday, about four hours after the problem surfaced. The casino reopened about 6:30 a.m. Thursday, said spokeswomen for Lumière Place and the Missouri Gaming Commission.  Lumière Place officials said in a statement that “a system failure” of the slot machines began just before 8 p.m. The casino began manually paying customers their slots winnings as workers tried to fix the problem.  

Takeaway: Technical glitch at Lumiere won't have an impact.  


Hard Rock Hotel Planned for Lake Tahoe – Officials for the Las Vegas-based Warner Hospitality and the Tahoe-based Park family that owns the former Horizon Casino Resort at Stateline say the $60 million renovation and reprogramming will convert the former Horizon property to the Hard Rock Hotel & Casino Lake Tahoe and will include more than 500 hotel rooms and a 25,000-square-foot casino.

Takeaway: Could be a handful of new slots for this property.  


China Real Estate – The average prices of new homes in 70 major cities fell 0.5% in June from the previous month, accelerating from May’s 0.2% monthly drop based on data issued by the National Bureau of Statistics.  Prices in Shanghai and the southern city of Guangzhou fell 0.6% each from May, the biggest drop since January 2011.


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.


Client Talking Points


+41% front-month move in less than 2 weeks reminds us that the 10 VIX line is the most asymmetric there is for reasons you’ll only be able to explain on a revisionist basis – what was TREND resistance (12.11) is now @Hedgeye TREND support - bad for mo mo stocks (we prefer being long slow-growth yield chasers).


Down -6.2% since July 7th and with a +41% move in volatility, that probably felt more like a 10% correction for some. We think bond yields and the Russell have the domestic consumption Q3 #GrowthSlowing call right.


2.48% continues to signal a series of lower-highs and lower-lows – consensus can only blame everything other than the consumer for so much longer. We expect consensus to start cutting its Q3 growth expectations as some of the companies do.

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


EUROPE: Eurostoxx50 and DAX both red and remain below @Hedgeye TREND resistance



Laughter is an instant vacation.

-Milton Berle


Long-term Treasuries (TLT) were up +1.1% on the day Thursday, hitting fresh year-to-date highs as bond yields re-tested year-to-date lows.

CHART OF THE DAY: Snap Goes Growth Via Russell 2000 $RUT!

Takeaway: The relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who has been following Hedgeye.


CHART OF THE DAY: Snap Goes Growth Via Russell 2000 $RUT! - Chart of the Day

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“A remarkable aspect of your mental life is that you are rarely stumped.”

-Dan Kahneman


Lightning struck over 3,000 times in less than 2 hours in the UK last night. Thank God I got out of London in the morning! As I landed in New York, US stock market fear was crashing to the upside (VIX +41% < 2 weeks). Perma stock market bulls on my contra-stream (Twitter) were stumped.


The aforementioned quote comes from one of the forefathers of #behavioral finance (Kahneman wrote Thinking Fast, And Slow) and it’s cited in a book I was reading on the plane by Chip & Dan Heath called Decisive. It’s all about #process and how you make risk managed decisions.


Did you buy Gold Bond before your recent overseas flight? Did you sell the momentum stocks on the June bounce like you should have at the beginning of the year? Everything we do in both business and in life is a decision. It’s a lot easier to read about fighting your emotions and confirmation biases than it is to implement it in your risk management process. But neither life, nor this profession, is easy.


Stumped? - Gold Bond cartoon 07.10.2014


Back to the Global Macro Grind


Decisive is a relatively new book, but the risk management concepts in it don’t deviate much from how we roll here at Hedgeye. In Chapter 3, the Heath’s introduce the strategy of “multi-tracking.”


“When you consider multiple options simultaneously, you learn the shape of the problem.” (pg 67)


In other words, widen your scope. As I was reading this I realized this is the number one thing that has improved my #process since starting the firm. The more macro I’ve gone, and the more research analysts we hire, the more options I have. There are always bull and bear markets somewhere.


From a risk management perspective, I call our #process multi-factor, multi-duration. This stops me from naval gazing at US equities on a simple moving average, 1-factor (price), chart. It also helps me get bullish when I’m right bearish on US growth – bullish on Gold and Bonds, that is…


In addition to the rip in the VIX yesterday (see our recent Q3 Macro Deck on Volatility’s Asymmetry):


  1. Gold and Silver ripped +1.5-1.7%, compounding their absolute and relative 2014 gains
  2. Long-term Treasuries (TLT) had a +1.1% day, hitting fresh YTD highs as bond yields re-tested YTD lows
  3. Inflation Protection (TIP) had another up-day, moving to +5.1% YTD


Beats being long the Russell growth index.


But the relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who is reading my rants. While it took 62 trading days to give the SP500 a -1% down day (longest streak since 1995), the Russell has already lost -6.2% since July 7th and is -2% YTD.


Consensus Macro can blame the weather, trains, planes, and automobiles at this point … but the reality is that it’s almost August now and excuse making is not where the performance is.


If the only reason why the US stock market was down yesterday was a Malaysian plane crashing in the Ukraine, why did both Chinese and Indian stocks close UP on the session overnight?


Other than the Down Bond Yields, Down Russell, Up Gold move, what else happened yesterday?


  1. Housing Stocks (ITB) -2.5% after a horrendous week of housing data (mortgage purchase applications continue to crash)
  2. Bank Stocks (KRE) -2.3% as the lead indicator for net interest margin (Yield Spread) collapsed to YTD lows
  3. Biotech Stocks (IBB) -2.2% after the entire edifice of the social-no-earnings thing made lower-bubble-highs vs FEB 2014 peaks


Put another way, what worked and didn’t work yesterday was pretty much the same thing that’s leading and lagging on the 2014 scorecard. If you are bearish on rates, the US consumer, US housing, and high-multiple-bubble stocks with no earnings, you’ve been rarely stumped.


Our immediate-term Global Macro Risk ranges are now:


UST 10yr Yield 2.46-2.55%


RUT 1123-1155

BSE Sensex 259

VIX 12.53-14.99

WTI Oil 102.01-104.83

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stumped? - Chart of the Day

July 18, 2014

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TODAY’S S&P 500 SET-UP – July 18, 2014

As we look at today's setup for the S&P 500, the range is 21 points or 0.47% downside to 1949 and 0.61% upside to 1970.                                               













  • YIELD CURVE: 2.01 from 2.00
  • VIX closed at 14.54 1 day percent change of 32.18%


MACRO DATA POINTS (Bloomberg Estimates):

  • 9:55am: UofMich Consumer Sentiment Index, July prelim., est. 83 (prior 82.5)
  • 10am: Leading Economic Indicators, June, est. 0.5% (prior 0.5%)
  • 1pm: Baker Hughes rig count



    • House, Senate out
    • 12pm: Congressional Internet Caucus Advisory Cmte holds panel discussion on NSA surveillance programs
    • UN Security Council holds emergency meeting on MH17 crash, may take place at 3pm
    • U.S. Election Wrap: Colo. Dead Heat; Immigration Concerns



  • Ukraine, Russia point fingers over downed Malaysia plane
  • United Nations Security Council to discuss MH17 crash
  • Israeli forces carry out Gaza entry via land, sea
  • AbbVie to buy Shire Pharmaceutical for $55b in cash, stock
  • Line said to seek U.S. IPO with confidential SEC filing
  • McDonald’s workers claim co. fired them for union activity
  • American Apparel investor said to be close to buying loan
  • DoJ alleges FedEx role in delivering misbranded drugs
  • SEC looking at 10 firms in probe of high-speed trading
  • Microsoft job cuts provoke Finnish demands of worker support
  • Energy Future lenders gang up to force talks on rival plan
  • Amazon considering subscription service for e-books: NYPost
  • Union plans more strikes at 9 German Amazon sites: Bild
  • Petsmart talking with investment banks amid activism: WSJ
  • Twitter to roll out 4 new metrics with earnings: WSJ
  • CBS interested in CNN purchase if channel becomes available
  • DirecTV offering NFL package via web at 10 universities
  • IMF, Home Sales, Apple, Facebook, Ifo: Week Ahead July 19-26



    • Bank of New York Mellon (BK) 6:30am, $0.57
    • First Horizon National (FHN) 7am, $0.16
    • General Electric (GE) 6:30am, $0.39 - Preview
    • Honeywell Intl (HON) 7am, $1.36 - Preview
    • Huntington Bancshares (HBAN) 5:55am, $0.18
    • Interpublic Group (IPG) 7am, $0.25
    • Johnson Controls (JCI) 7am, $0.83
    • Kansas City Southern (KSU) 8am, $1.17
    • Laboratory of America (LH) 7:03am, $1.77 - Preview
    • VF Corp. (VFC) 7am, $0.35 - Preview



  • WTI, Brent Set for First Weekly Gain in a Month on Ukraine, Gaza
  • Gold Declines as Investors Weigh Dollar Against Global Tensions
  • Cocoa Grinding in Asia Climbs as Demand for Chocolate Increases
  • Glencore’s Woman Director Marks Progress for Mining: Commodities
  • ANZ Tightened China Commodity Financing Processes ‘A Little’
  • WTI Crude Seen Rising in Survey on Falling U.S. Supplies
  • MORE: Shanghai Exchange Copper Stockpiles Rise 29% to 108,851 Mt
  • Ban on U.S. Oil Exports Seen Dying One Ruling at a Time: Energy
  • Corn Volatility Rises as Options Traders Bet on Price Rally
  • Wheat Set for Weekly Climb as Investors Assess Black Sea Outlook
  • Buzzard Field Power Restored After July 13 Outage, Nexen Says
  • Colorado Governor Says He Opposes Measures Restricting Drilling
  • Kurdish Oil Grab Fuels Independence Dream as Iraq Unravels
  • Copper Traders Bearish for a Second Week as Supplies Seen Ample


























The Hedgeye Macro Team
















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