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LEISURE LETTER (08/11/2014)

Tickers: BYI, IGT, MGM, MPEL, WYNN, RCL

EVENTS

  • Aug 11:
    • HPT 2Q 1pm:
    • CZR 2Q 430pm: 844.231-441, pw: 55917191
    • STN 2Q 430pm
    • HTHT 2Q 9pm: , pw 7103 4558
  •  Aug 12:
    • HMIN 2Q 9pm: , pw HOME INNS
  • Aug 14:
    • GENTING SINGAPORE 2Q earnings
    • Revel Auction Proceedings

COMPANY NEWS

IGT – GTECH S.p.A. announced the U.S. antitrust authorities have granted early termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to GTECH’s pending acquisition of International Game Technology (IGT), thereby satisfying one of the conditions required to finalize the transaction.  The transaction, which has been approved by the boards of directors of both companies, is currently expected to be completed in the first or Q2 of 2015.

TAKEAWAY:  A faster than expected clearance of a significant hurdle.

 

MGM / MGM China – (Macau Daily Times) the Company reportedly received the license approval for the full MGM Cotai building plan and now expects the new property to open mid-2016 – albeit potentially in phases.  

TAKEAWAY:  Licensing approval, but does the Company hold the construction permit to erect steel and build the superstructure above ground?

 

880:HK – late on Friday, Forefront of Macau Gaming announced the labor organization would protest and picket against SJM, its latest target. Previously, Forefront of Macau Gaming targeted labor actions against both Sands China and Galaxy.

TAKEAWAY:  Forefront of Macau Gaming is simply moving from operator to operator demanding higher pay for casino floor workers – despite the operators voluntarily increasing worker compensation.

                                  

BYI – launched a new 50 line, 5 line video slot game titled “Aloha Island”.  The slot title features tropical island symbols such as parrots, pearls, boat and more while also playing gentle island music.  The game allows for bets from $0.01 up to $100.

TAKEAWAY:  Another new game but for an industry facing strong demographic headwinds.

 

MPEL - The Taipei District Prosecutors Office charged the Taipei branch of MPEL with deliberate violation of foreign exchange controls and failure to maintain financial oversight when the Company transferred more than $NT5.4 billion ($194 million) between its Taiwan office and City of Dreams and Altira casinos located in Macau.

TAKEAWAY:  Could be an overhang on the stock.

                                  

WYNN – is coming under scrutiny for a $200,000 donation last winter to the Republican Governors Association, an organization that is now supporting Charlie Baker’s run for Massachusetts governor.  Massachusetts gambling law prohibits applicants for casino licenses from donating, directly or indirectly, money or in-kind contributions to “any group, political party, committee, or association organized in support” of a Massachusetts candidate. The association is a major funder of a television ad that is currently airing in the Boston market supporting Baker’s candidacy.

TAKEAWAY: Thus far there is no evidence of any wrongdoing by WYNN.

 

MGM – (Bloomberg) – Renew NJ license

According to CFO Dan D'Arrigo, MGM expects to renew its NJ gaming license soon.  MGM will keep 50% ownership of Borgata.  MGM’s license renewal will be considered by New Jersey regulators next month.

TAKEAWAY: A definite positive, but expected.

 

Melco International Development MelcoLot, controlled by Melco International Development Ltd, said on August 6, it was informed by Spanish authorities that BCN Integrated Resorts 2’s bid had passed to the second phase of the tender process, “which consists of preparation and assessment of detailed development proposals and granting of authorisations for the installation and exploitation of casinos”.  It is expected that BCN World will include casinos, hotels, convention centres, leisure centres and residential areas. Each casino licensee would have to invest a minimum of EUR300 million (US$403 million) in BCN World.

TAKEAWAY:  An interesting opportunity that has received little interest from the investment community. Gaming tax rate needs to be low.

 

RCL (Cruise Critic) – Celebrity Cancels 2015 Round-Japan Sailings Due to Charter  

Two 2015 sailings to Japan on Celebrity Millennium have been canceled and another changed, due to a private charter.  The charter affects passengers who booked on the 14-night Japan cruises for September 27, 2015 and October 11, 2015.  The September 11, 2015 sailing is also affected and will end in Shanghai instead of Tokyo.

TAKEAWAY:  The complications with sailings in Japan continues. 

 

RCL – delayed the float out of Quantum of the Seas until Tuesday, August 12, 2014 at 4 p.m. local time.  According to RCL, the delay was the result of the poor weather forecast at the Meyer Werft dockyard.

TAKEAWAY:  Minor delay

INDUSTRY NEWS

New Jersey gaming (NJ.com) – Christie vetos sports betting bill 

Christie's office announced that he nixed a bill (S2250) that would have allowed New Jersey to circumvent the 1992 federal law that bans sports betting in most states, after New Jersey’s challenges to the law in court failed.  The bill would have repealed the state’s ban on sports betting and made it legal in casinos and at racetracks.

TAKEAWAY:  Atlantic City needs help badly and Christie shot down an opportunity.

 

Maryland Live – On Saturday at 11 p.m., Maryland Live opened a $1 Double Gold million slot machine which requires gamblers to bet $500 per spin for a chance to win the $1 million jackpot.

TAKEAWAY: Maryland Live attempting to generate big media coverage prior to the opening of the Horseshoe casino in two weeks. 

MACRO

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: PIIGS Sovereign CDS Widens

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 .

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European Financial CDS - Outside of Banco Espirito Santo, which tightened by 318 bps to 344 bps on the week, swaps were nominally wider across Europe last week (+2 bps). Russia's Sberbank continued to widen (+3 bps to 355 bps) though at a slower pace than in recent weeks.

 

European Banking Monitor: PIIGS Sovereign CDS Widens - chart 1 financials cds vf

 

Sovereign CDS – Sovereign swaps widened across the board over last week. The usual suspects, Italy, Portugal and Spain, widened by 16, 17 and 9 bps, respectively. Meanwhile, German and US sovereign swaps widened by 1 bp. Japan was a notable mover on the week, widening by 7 bps (+19%) to 43 bps. 

 

European Banking Monitor: PIIGS Sovereign CDS Widens - chart 2 sovereign CDS

 

European Banking Monitor: PIIGS Sovereign CDS Widens - chart 3 sovereign CDS

 

European Banking Monitor: PIIGS Sovereign CDS Widens - 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 was unchanged at 15 bps.

 

European Banking Monitor: PIIGS Sovereign CDS Widens - chart 5 euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


Just Charts – Earnings Season Winding Down

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 – Earnings Season Winding Down - chart1

 

EVENTS THIS WEEK

 

8/11/14 DF Earnings Call 9am EST

8/11/14 SYY Earnings Call 10am EST

8/12/14 FLO Earnings Call 8:30am EST

8/14/14 VPCO Earnings Call 10:30am EST

8/15/14 EL Earnings Call 9:30am EST

 

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples rose 0.9% week-over-week versus the broader market (S&P500) at 0.3%.  XLP is up 2.1% year-to-date versus the SPX at 4.5%. XLP is the third worst performing sector in the ytd, ahead of Industrials -0.2% (XLI) and Consumer Discretionary -0.7% (XLY).

 

Positive Divergence:  SAM 6.7%; MNST 6.5%; SMG 5.9%; THS 5.4%; TAP 5.2%

Negative Divergence:  NUS -18.7%; POST -16.7%; IFF -3.4%;  SODA -3.2%; ENR -2.2%

RECENT NOTES 

 

From a quantitative set-up XLP is broken its immediate term TRADE duration and bullish over the intermediate term TREND duration.

 Just Charts – Earnings Season Winding Down - chart2

 

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

 Just Charts – Earnings Season Winding Down - chart3

 

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 19.2x)
  • 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, and fell to 36.2 versus 36.3 in the prior week

Just Charts – Earnings Season Winding Down - chart4

Just Charts – Earnings Season Winding Down - chart5

Just Charts – Earnings Season Winding Down - 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 – bearish TREND resistance = 110.04

Just Charts – Earnings Season Winding Down - chart7

 

DEO – bearish TREND resistance = 125.48

Just Charts – Earnings Season Winding Down - chart8

 

KO – bearish TREND resistance = 40.66

Just Charts – Earnings Season Winding Down - chart9

 

PEP – bullish TREND support = 87.71

Just Charts – Earnings Season Winding Down - chart10

 

GIS – bearish TREND resistance = 52.68

Just Charts – Earnings Season Winding Down - chart11

 

MDLZ – bearish TREND resistance = 37.03

Just Charts – Earnings Season Winding Down - chart12

 

KMB – bearish TREND resistance = 109.95

Just Charts – Earnings Season Winding Down - chart13

 

PG – bullish TREND support = 79.40

Just Charts – Earnings Season Winding Down - chart14

 

MO – bullish TREND support = 40.59

Just Charts – Earnings Season Winding Down - chart15

 

PM – bearish TREND resistance = 84.78

Just Charts – Earnings Season Winding Down - chart16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


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%

MONDAY MORNING RISK MONITOR: MIXED SIGNALS

Takeaway: The signals remain bearish on an intermediate term duration but are more balanced in the short-term.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 19

 

Key Callouts:

Following the impressive correction two weeks ago, last week actually saw the XLF gain 0.7% bringing the YTD move to +2.4%. The outlook is fairly mixed at the moment. Based on our Financial Risk Monitor Summary below, there is a roughly even mix of positive and negative signals in the short-term but more red than green in the intermediate term duration.

 

Here are a few of the notable callouts on the week:

 

* High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -4 bps tighter than a week ago. 

 

* CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4% 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

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

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

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 15

 

1. U.S. Financial CDS -  Overall it was a fairly uneventful week for US Financials as roughly half the complex widened modestly while the other half tightened. On balance, there was a net change of 0 bps.

 

Tightened the most WoW: RDN, AON, CB

Widened the most WoW: GNW, AIG, MET

Tightened the most WoW: AGO, MBI, RDN

Widened the most MoM: GNW, MET, PRU

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 1

 

2. European Financial CDS - Outside of Banco Espirito Santo, which tightened by 318 bps to 344 bps on the week, swaps were nominally wider across Europe last week (+2 bps). Russia's Sberbank continued to widen (+3 bps to 355 bps) though at a slower pace than in recent weeks.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 2

 

3. Asian Financial CDS - Indian and Chinese bank swaps were slightly tighter on the week with Bank of China tightening the most (-7 bps to 128 bps). In Japan, the picture was mixed as Daiwa tightened by 5 bps but Nomura, Sumitomo and Mizuho all widened by 2 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 17

 

4. Sovereign CDS – Sovereign swaps widened across the board over last week. The usual suspects, Italy, Portugal and Spain, widened by 16, 17 and 9 bps, respectively. Meanwhile, German and US sovereign swaps widened by 1 bp. Japan was a notable mover on the week, widening by 7 bps (+19%) to 43 bps. 

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 18

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 3

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1873.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 6

 

7. TED Spread Monitor – The TED spread fell 0.3 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.51 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 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 was unchanged at 15 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 16 basis points last week, ending the week at 3.04% versus last week’s print of 3.196%. 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: MIXED SIGNALS - 10

 

11. Chinese Steel – Steel prices in China rose 0.3% last week, or 8 yuan/ton, to 3139 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: MIXED SIGNALS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ON THE MARGIN

Client Talking Points

CHINA

After having another +0.4% week (with all of Europe getting smoked) last week, Shanghai Comp added to its recent gains +1.4% overnight to +8.3% year-to-date. On the margin the Shanghai Comp is the most improved equity market in the world in the last 6 weeks.

EUROPE

Europe, on the margin, is the biggest mess in global equities in the last 6 weeks, so they’re trying to bounce them this morning but they’re nowhere near challenging their 1st lines of @Hedgeye resistance (Greece was -9.9% last wk, and is +2% here).

UST 10YR

The bond market couldn’t care less about people getting whipped around in spoos – 2.43% this morning with an immediate-term risk range of 2.40-2.50% (lower-highs and lower-lows being signaled) and Yield Spread at its year-to-date lows.

Asset Allocation

CASH 46% US EQUITIES 0%
INTL EQUITIES 14% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 8%

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.

Three for the Road

TWEET OF THE DAY

INDIA (our fav Eastern Equity market) +0.8% to +22.2% YTD $EPI

@KeithMcCullough

QUOTE OF THE DAY

The farther back you can look, the farther forward you are likely to see.

-Winston Churchill

 

 

STAT OF THE DAY

Today in 1929, Babe Ruth became the 1st player to hit 500 homers (in Cleveland, Ohio).


CHART OF THE DAY: 3% GDP? Seriously?

CHART OF THE DAY: 3% GDP? Seriously? - Chart of the Day

 

In a Wall Street Journal poll on Friday, 43 economists agreed to agree that US GDP growth will magically be 3% in the back half of 2014. That looks almost impossible.


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