LEISURE LETTER (08/14/2014)



  • Aug 14:
    • Revel Auction Proceedings
  • Aug 19-21:
    • Hedgeye Cruise Pricing Update
  • Aug 19:
    • Galaxy Entertainment Group 2Q results 5 am


BYI – Foxwoods Resort Casino announced it will implement Bally Technologies award-winning mobile concierge platform to offer its patrons a feature-rich mobile app.

Takeaway: a small but important mobile platform win for BYI.


IGT – IGT and Macau-based casino multi-game manufacturer LT Game Ltd announced a three-year distribution agreement for North America and Macau whereby IGT will distribute LT Game’s live and electronic table game systems in the U.S. and Canada, while LT Game will serve as distributor for IGT’s slot machines in the Macau market, Paradise Entertainment Ltd, the parent company of LT Game, said.

Takeaway: IGT has under performed in Macau and Asia


MGM – announced plans to spend "HKD800 million each year for the next two or three years to renovate MGM Macau".  The renovations involve a total of 27 separate projects over the next three years, including the creation of a new smaller an more intimate upper level gaming space, expand the retail space as well as the food and beverage section, while 600 rooms in MGM will also be refurbished.

Takeaway: Looks like maintenance capex to us in the face of the new Cotai supply. 


SGMS – announced an extension of its contract with the Minnesota Lottery to continue as a provider of instant lottery games. Under the agreement, the Company will continue as the secondary instant game provider to the Minnesota Lottery for two additional years beginning July 1, 2014.

Takeaway: a positive contract extension for SGMS.


FCH – filed an indeterminate amount mixed shelf offering for common, preferred stock. depository shares and warrants.

Takeaway: Seems like a standard operating procedure and not a precursor to an offering given the company's plan to sell assets and pay down debt.


PCLN – announced a proposed private offering up to $1 billion principal amount of Convertible Senior Notes due 2021 to qualified institutional buyers pursuant to Rule 144A. The Company plans to use the net proceeds from the offering of the notes to repurchase up to $375 million of its outstanding common stock in privately negotiated, off-market transactions, and remaining net proceeds will be used for general corporate purposes, which may include repaying outstanding debt, repurchasing additional shares of the Company's common stock and corporate acquisitions.

Takeaway: At the end of Q2 2014, PCLN had $3.5 billion of cash on its balance sheet, but subsequent to quarter end on July 24th PCLN completed the acquisition of OpenTable for $2.5 billion and borrowed $995.0 million under the revolving credit facility. As of June 30, 2014, PCLN had $654.5 million remaining on its currently share purchase authorization.


Macau Non-Gaming Development (Macau Business Daily) Paramount Hotels and Resorts is considering Macau for a new hotel and resort development. On May 7th, Paramount Hotels and Resorts began the brand and logo registration process in Macau. Paramount Hotels and Resorts was founded in April 2012 after company chairman Ghassan El Aridi acquired the rights to create it from the Viacom group, parent of Paramount Studios, in March 2012. Currently, the company is involved in four resorts: in Hainan (China), Dubai (United Arab Emirates), Langkawi (Malaysia) and Riyadh (Saudi Arabia). The company, however, is planning to expand its operations further in the near future.

Takeaway: We found it interesting the Paramount Hotels and Resorts web-site includes many subtle references to Asian culture.


Japan Gaming Expansion – Genting Singapore categorically denied ever talking with USJ regarding a partnership to develop and integrated resort in Japan and namely Osaka.

Takeaway: A very loud denial from a very quiet company and CEO.


Manila Junkets – Recent market commentary indicated a number of the Manila casinos are offering junkets 50% versus 40% or 42.5% revenue share in Macau.

Takeaway: Such arrangements do however carry more risk for junkets than traditional rolling chip commission if the players have sustained wins, and both sides to the deal must also cover expenses including any taxes and player reinvestment costs


Singapore - Genting Singapore sounded cautious in its forward looking commentary on the earnings conference call.  Excluding a large impairment charge, Genting's EBITDA was better than expected.  However, the outlook was not rosy and writing off VIP bad debts should always cause some concern.

Takeaway: Marina Bay Sands (LVS) is much more conservative on VIP credit so not much of a read through there.  However, Genting's outlook suggests difficult market conditions will continue.


Atlantic City Summit – New Jersey Governor Chris Christie will convene a bipartisan summit of state and local leaders on September 8th to address the future of Atlantic City. The summit is expected to bring together a group representing a mix of state and local policymakers and stakeholders and officials, including state legislative and Christie administration officials, county and local government officials, Atlantic City’s casino industry and labor representatives, and nonprofit organizations dedicated to the city’s revitalization. Individuals with experience and expertise of New Jersey’s gaming, sports and entertainment issues will also be part of the summit, a news release stated.

Takeaway: Too little too late.


Nevada Foreclosures – During July 2014, mortgage lenders filed 1,037 notices of default to begin foreclosure proceedings, an increase of 128% year-over-year.  This compares to foreclosure starts of 284 to 708, during the first six months of 2014. Anecdotally, Southern Nevada's negative equity rate has dropped from 70% in 2012 to 35% in July 2014 as median home prices have appreciated. 

Takeaway: A headwind to the locals recovery and in line with our July 16th note, "LV LOCALS: THE MIRAGE OF A RECOVERY", which covered the potentially deteriorating Las Vegas housing situation.


Venice Bans Cruise Ships – Italian officials have again ordered a halt to large cruise ship traffic in Saint Mark's basin and the Giudecca Canal in Venice. According to regulations passed in 2013, no cruise ships over 96,000 tons will be permitted to sail in the Venetian lagoon, and the number of cruise ships weighing 40,000 tons or more must be reduced by 20% of the current volume.  About 650 cruise ships call on Venice annually.

Takeaway: A negative for Mediterranean itineraries due to ship reroutings. Officials reversed the March 2014 ruling which suspended restrictions banning large ships.


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


This is the first time both USA and Europe have slowed (in rate of change terms) at the same time since 2011. German GDP has now fallen to the annualized rate of change the USA had in 1H of 2014 (+0.8-0.9%). The DAX, CAC, and MIB index = all remain bearish TREND signals @Hedgeye.


When U.S. rates fall, you buy Gold and usually win. Question now is whether or not Gold can breakout above our long-term TAIL signal line of $1323. For now, it’s doing its job for you in your portfolio on down USA/European Equity days = Gold +9.4% vs Russell (IWM) -2% year-to-date.


India is still our favorite Equity market in the world as Eastern Equities continue to diverge (positively) vs Western ones – this happened in 2011 as well don’t forget. India’s wholesale inflation ticked down to 5.2% vs 5.4% last. Raising rates, Dr Raj is crushing it with BSE Sensex +25.1% year-to-date.

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.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


The biggest apparel retailer in the US (sans $WMT and $TGT) misses on the same day US Gov't Retail Sales disappoint. Not a good combo. $M



Growth is never by mere chance; it is the result of forces working together.

-James Cash Penney


Headline retail sales were disappointing – rising 0.0% month-over-month (missing estimates & worst since January) and decelerating on both a 1-year and 2-year basis.

CHART OF THE DAY: Is Long High-Yield a Strong Hand?

CHART OF THE DAY: Is Long High-Yield a Strong Hand? - 08.14.14 COD


In today's Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is literally at its widest of the year. 


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The Strong Hand

“The odds are six to five that the light in the end of the tunnel is the headlight of an oncoming train.”

-Paul Dickson


Whether it be hockey (which no doubt many of you are tired of us writing about!), card games, or chess, it's critical to put yourself in the best position possible to win.  In effect, you want to play the strong hand.   Most games involve some level of probability in which playing the odds can improve your chance of success meaningfully.


For example, in chess there are few basic rules of thumb that even the novice chess player should know and follow, such as:


  1. Use the center pawns to gain space on the opening
  2. Control the center of the board
  3. Secure your king early
  4. When ahead in material, force exchanges
  5. And perhaps the most important . . . never fight a land war in Asia.


Obviously, the last rule of thumb is not for chess, but was reputedly advice given by General MacCarthur to President Kennedy and then popularized in the 1987 movie, “The Princess Bride”.   As rules of thumb go, given America's lack of success in the four Asian land wars post World War II, Korea, Vietnam, Afghanistan, and Iraq, the last point may be the most accurate rule of thumb.


The Strong Hand - mac


As it relates to global macro investing and asset allocation, a couple of rules of thumb we have recently been reminded of are: 1) be on the right side of liquidity (It’s all about the flows, bro!) and 2) it’s the fundamental changes on the margin that matter.


Back to the Global Macro Grind...


In the Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is at its widest of the year.


Some strategists have been flagging this as an opportunity to wade back into the high yield market, an entry point if you will.  One point that gives us pause on this line of thinking is the risk of illiquidity in the high yield market.  In some ways, this time IS different on the liquidity front.


According to Lipper, fund flows in high yield bond funds have experienced outflows of some $13 billion over the past four weeks.  Rightfully, you might push back and say that is a smidgen of the size of the entire high yield market, which according to recent data from Barclay’s is north of $1.2 trillion in the U.S. alone.  So based on those rough numbers, we are looking at only about 1% of the entire market in outflows, but the kicker, again, is liquidity.


Since April 2013, the New York Fed has started to break out dealer inventories of high yield bonds and they currently stand at about $8.2 billion.  So even as the high yield market has ballooned from $660 billion in 2007 to almost double that now, liquidity, as facilitated by the dealers, has been shrinking.   This then is the unintended consequence of government regulation and tighter capital rules: dealers have a more limited ability to facilitate an orderly rush for the exit.


The other rule of thumb we noted above is that fundamental changes on the margin matter.   Europe is on the sell side in our current macro themes deck and that position is seeing the benefit of more slowing economic data from Europe this morning.  A few points to highlight from this morning’s data:


  • Eurozone GDP slows to +0.7% year-over-year in Q2 2014;
  • German GDP contracted sequentially by -0.2%; and
  • France cut their GDP forecast in half again to +0.5% for 2014.


For Germany, this is the first sequential contraction since 2012.  Given this, it no surprise then that the German Bund hit a record low of 1.0% this morning and has also been front running this slow down.  Clearly, low reported inflation is leaving the door open (some might say wide open!) for incremental easing in Europe (a point the German bund market is front running).


Incidentally for those that have been watching, the U.S. 10-year yield is ticking lower again this morning.  The contrarian Hedgeye call that 10-year yields may touch 2.3%/2.2% may happen sooner than even we anticipate!


And conversely in a sign today that this time truly isn’t different, Reuters is reporting that mortgage lenders are again offering stated income mortgages in an attempt to facilitate mortgage activity.  When combined with excesses in the auto loan market and a spike in subprime credit card issuances, perhaps there is more than just liquidity that is making the credit markets shake.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.39-2.48%

RUT 1109-1148


VIX 11.84-15.55

WTIC Oil 96.60-98.26

Gold 1

Copper 3.09-3.15 


Keep your head up and pawns in the middle,


Daryl G. Jones

Director of Research


The Strong Hand - 08.14.14 COD

Short HAIN Call Today @1PM

We recently added short HAIN to the Hedgeye Best Ideas list.



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Conference Code: 181449#






The organic food industry is the only place in the consumer staples sector that investors can find real growth.  That being said, the last five years have been great for organic stocks – especially HAIN.  The past 12-months, however, have been more challenging with evidence mounting that industry headwinds will keep some stocks within the organic segment under intense pressure.  With HAIN being the 700 pound gorilla in the room, it has the potential to feel the most pain.


We’ve recently seen early signs of maturation in the organic segment of the food space.  This is despite several companies seeing above-average organic volume growth. 


Our call on HAIN will focus on the following issues:

  • Acquisition fatigue – the “roll up” story is looking tired
  • Brand management and lack of disclosure
  • Slowing top line trends
  • Margin pressure
  • Signs of financial stress
  • Positive sentiment
  • Frothy valuation

Newsflash, It's Q3

This note was originally published at 8am on July 31, 2014 for Hedgeye subscribers.

“For a fee, the exchange will flash information.”

-Michael Lewis


That’s a simple quote (from Flash Boys, pg 44) to a simple problem that RBC’s Brad Katsuyama faced in 2009 – being run over by getting late information. This is why Raj @Galleon paid such a premium for inside information. Front-running information flow? Yep. There’s big money in that.


There’s also lots of moneys in not losing other people’s moneys by chasing macro headlines that are taken out of context. Yesterday’s newsy Q2 2014 US GDP report was a fantastic example of that: “US Equity Futures and Bond Yields Surge on +4% GDP!”


Newsflash: it’s Q3.

Newsflash, It's Q3 - GDP cartoon 07.30.2014


Back to the Global Macro Grind


To be fair to the 2014 US Growth Bulls who are looking for +3-4% GDP and a 10yr Yield > 3%, with a Q2 +4% bounce off of one of the worst Q1s since World War II (see our Chart of The Day for context), on an annualized basis, 1st half of the year GDP in the US wasn’t negative. It was +0.87%. #Booyah


“So”, 62 months into a US economic expansion, as the intermediate-term TREND in US economic growth slows, you want to be buying that flash of Q2 “bounce” information, right? Wrong. US Equity futures reversed in a hurry yesterday and are now indicated down another 13 handles.


Spooo-hoo. What else can US consumer (XLY, XLP), housing (ITB), or early cycle industrial (XLI) perma bulls blame this morning?


  1. Europe? Sure, most of it, actually – Italian youth unemployment = 43.7% (whatever it takes!)
  2. China? After one of its best 2-week stock market moves in 4 years, not so much
  3. How about Israel or Putin, or something like that? #BlameCanada


I can flash you bullish information. Manufacturing that is easy. Twitter actually made-up user information using robots! It’s funny - if we write anything remotely USA bullish an entire community seems to cling to that like we’re going to enter the next 62 month expansion without ever leaving the first one!


According to one reading that I would characterize as one of the best contra-indicators of late 2007 (the Conference Board’s qualitative consideration of US consumer confidence), everything is just peachy. Problem is that you sell a cyclical (the US economy) when goldilocks is feeling peachy.


The best 2015 bull case (sorry, it’s still 2014) for the average American consumer that I have read to-date is one that our own Darius Dale wrote about yesterday (ping for his note) – reversing the bearish #InflationAccelerating call we have had since January.


That thesis goes as follows:


  1. US Dollar rips again (after it already ripped to overbought YTD highs)
  2. Commodities collapse (like they did in 2013)
  3. And the US consumer starts spending his and her brains out


If only 80% of America got DD’s flash report from us in their gmail boxes this morning… The poor bastard making $48,000/year with peak all-time cost of living would wake up feeling rich again!


Obviously real world wages and consumption patterns don’t work that way (or did you get a rent reduction and discount at Chipotle this morning?). Markets aren’t economies either. If they were, the Argentine stock market wouldn’t have been +7% to +67.3% YTD yesterday.


Markets are non-linear and constantly being barraged by multiple risk factors, across multiple durations. Meanwhile investors are constantly being tested by their confirmation biases and emotions. That’s why, as I get older and fatter, I like to wait and watch.


I also like to ask myself a lot of questions. I genuinely enjoy reading my analysts research views too. If they are doing their job, they’re constantly in flux, weighing each data point within the context of both the last and our forward looking TREND.


Is the US Dollar “strong” (US Dollar Index is +0.4% over the last 6 months, -0.5% over the last year) because the US economy is strengthening, sequentially (from Q2 to Q3) or is the Euro (vs USD) simply weak because the European recovery is weakening?


If Europe’s recovery slows in 2H 2014 like the USA’s did in 1H 2014, what does that mean for US listed multi-national consumer staples and industrial stocks? Fortunately the answers to these questions won’t be in a “survey.” They’ll be marked-to-market, flashing as new time/price information on our screens.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.56%

SPX 1960-1978

RUT 1134-1154

DAX 9508-9753

VIX 12.21-14.41

USD 81.61-81.57

EUR/USD 1.33-1.35

Gold 1291-1323

Copper 3.17-3.27


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Newsflash, It's Q3 - Chart of the Day

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