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LEISURE LETTER (08/19/2014)

Tickers: MGM, LVS


  • Aug 19-21:  Hedgeye Cruise Pricing Update
  • Aug 19:  Galaxy Entertainment Group 2Q results 5 am
  • Aug 26:  Horseshoe Baltimore Opening
  • Aug 27:  BYI 2Q earnings
  • Aug 28:  Hollywood Dayton Raceway Opening
  • Sept 1/2:  Revel closes


MCP:PH & BEL:PM – Melco Crown (Philippines) Resorts Corp announced a partnership with The Ault Group, a U.S.-based nightclub-consulting firm led by established club operator Michael Van Cleef Ault. The deal will bring two of Ault Group’s nightclub brands – Pangaea and Chaos – into the City of Dreams Manila casino resort. Pangea would be able to host up to 400 guests a night in more than 730 square metres (7,858 square feet) of space, including VIP areas. The Chaos nightclub will feature a dance club and private karaoke rooms and will be spread across two levels covering approximately  3,000 square metres (32,392 square feet) with capacity for more than 2,000 customers. Both clubs will be situated in City of Dreams Manila’s Fortune Egg, described by Melco Crown Philippines as “an architecturally-unique dome-like structure, which will be accented with creative exterior lighting design

Takeaway: Nightclubs are a more popular form of entertainment in Manila than Macau.


GENS:SP (GGRAsia) The governor of Jeju Island, Won Hee-ryong, is resisting the construction of a casino resort by Ramjung Jeju Development Corp, a joint venture between mainland China real estate developer Landing International Development Ltd and Genting Singapore Plc. Mr Won ordered a review of the project for allegedly having exceeded the agreed planning permission. The comments by Mr Won, a member of the ruling New Frontier Party, clash with last week's announcement by the South Korean national government that it planned to reduce regulatory barriers faced by developers of integrated resorts that contain gambling facilities.

Takeaway: Could it be that the Governor of Jeju Island Mr. Won simply wants greater concessions and revenue sharing?


GTK:IM – as expected, the State of Illinois cancelled its contract with its lottery manager (Northstar, owned by Gtech) seven years ahead of schedule for failing to meet financial targets. 

Takeaway: Illinois is not the easist state to conduct business. 


MGM (Bloomberg) CEO Jim Murren toured Tokyo's Tsukiji fish market in March and is considering the 57 acre location as a potential integrated resort site. Tokyo may sell the property after the market relocates. The relocation is due to the preparation for the Tokyo Olympics in 2020 as the road to the Olympic village is currently planned to pass directly under the fish market.  Land prices in the Tsukiji area cost about 1.39 million yen per square meter, while the cost of property in Odaiba, on reclaimed land in Tokyo Bay, is about 956,000 yen per square meter. Ed Bowers, MGM’s senior vice president for global gaming development, said the company would need at least 30 acres to build a casino resort.

Takeaway: Pulling out all stops to find a suitable site. In Springfield the company considered three different locations prior to settling on their current location.


LVS & 1928:HK (Macau Daily Times) Sylvester Stallone and Arnold Schwarzenegger, will be in Macau on Friday to attend Asia’s only VIP screening event for the opening of “The Expendables 3” according to the Venetian Macao. The integrated resort is hosting the event in celebration of its seventh anniversary. The VIP screening for the action film will take place in the 1,800 seat Venetian Theater.

Takeaway: Officials in Macau cite such events as an acknowledgement of the increasing role Asia (and China) play in the global entertainment business. Venetian, as always, leading the way in non-gaming entertainment.


HOT - announced the Sheraton Centre Toronto Hotel will under go a $90 million renovation of all 1,371 guest rooms and suites to debut in 2015. The completed renovation will include full guestroom and suite refurbishment, as well as replacement of all floor and wall finishes in public corridors and hallways. As a part of the re-design, the hotel will add two new guest rooms bringing the total room count up to 1,373. After completion of the renovation all guestrooms and suites will feature new case goods, seating, lighting, mirrors and window treatments.

Takeaway: As one of the larger "owned" hotels, could this announcement signal HOT was unable to sell this asset?



Macau Chief Executive to Operators – (Macau Business Daily) In an effort to support Macau's small and medium enterprises, Chief Executive Fernando Chui Sai On said, once he is re-elected, he will try to make gaming companies and government departments buy supplies that are made in Macau, whenever possible.

Takeaway: This is a very concerning statement to us because we believe such a policy would be a negative on margins and could cause inflation.


Macau 24 Hour Border Crossing (Macau Daily Times) The Macau delegate of the Chinese National People’s Congress, Liu Yiliang, suggested the mainland authorities are considering opening the border checkpoint at the Zhuhai-Macau Cross Border Industrial Zone to mainland non-resident workers between midnight and 7 a.m. However, he suggested such a proposal involved altering the function of the zone, which would require the approval of the central government.

Takeaway: While discussed as a positive for workers, a 24 hour border checkpoint would also benefit Macau gaming operations.


Meadowland Casino (NY TImes) The Meadowland Regional Chamber of Commerce is touting recent poll results (76% of 93 respondents said they preferred the East Rutherford complex over other destinations, including Sussex County/Vernon Valley and the Jersey City waterfront) to renew its call for a redevelopment of the Meadowlands Sports Complex. A 3-year-old version of the plan calls for a 130,000-square-foot casino with 100 table games, 3,000 slot positions and an on-site hotel. The chamber says that it could be the most successful casino in the world, sitting northeast of MetLife Stadium, next to the planned American Dream shopping mall (the previously failed Mills Meadowlands Xanadu complex with an indoor ski hill) water park and amusement park.

Takeaway: Everybody wants in on the action. Poor, poor, pitiful Atlantic City.


Atlantic City's Showboat – various media outlet report Atlantic Properties Group is interested in buying Showboat and discussions between Atlantic Properties and Caesars (CZR) are ongoing. 

Takeaway: Given the on-going cost of maintaining a shuttered property versus cash in hand, we'd take some, any cash.


Aussie VIP Traction (Bloomberg) Crown Resorts Ltd has spent US$100 million (MOP800 million) on improving its fleet of private jets. Sydney casino operator Echo Entertainment Group Ltd is considering buying a golf course for another casino-resort, near Brisbane. As such, gaming operators are reinvesting heavily into programs aimed at attracting Chinese gamblers to Australia's casinos rather than casinos in Macau.

Takeaway: Oz - is this where the Chinese VIPs are gambling?


Iceland Volcanic Activity Prompts Warning – Iceland warned airlines that there may be an eruption at one of the island’s largest volcanoes located underneath Vatnajokull, Europe’s biggest glacier. The alert level at Bardarbunga was raised to “orange,” indicating “heightened or escalating unrest with increased potential of eruption,” following a swarm of earthquakes over the past 48-72 hours. 

Takeaway: Recall the April 2010 eruptions of Eyjafjallajoikull, while small by comparison, resulted in a massive ash cloud covering a large area of norther Europe which in turn disrupted and cancelled most air traffic from April 14-20 for 20 countries and affected about 10 million travelers. 

Lodging GSA Releases New Per Diem Rates for FY 2015

Since FY 2005, Government Services Agency rates have been based on Average Daily Rate (ADR) data from the lodging industry, which GSA obtains through a contract with a leading provider of lodging industry data.  


As in previous years, GSA still uses:

  • Only "fire safe" properties; GSA is required by law to use only properties that are certified as being in compliance with the Hotel & Motel Fire Safety Act of 1990.
  • Properties that fall within the mid-price range.
  • Data from the prior 12-month period. For FY 2015, this is from April 2013 through March 2014;
  • Business travel week data (Monday through Thursday)

Of note, the GSA per diems for

  • New York City:  $304/night Oct, Nov & Dec 2014; $197/night Jan & Feb, $268/night Mar - June, $235/night for July & Aug and $304/night for Sept 2015 while the meal per diem is $71/day. 
  • Washington DC:  $222/night in Oct, $177/night Nov & Dec 2014 as well as Jan & Feb 2015; $229/night March - June; $162/night July & Aug; and $222/night in September 2015 while the meal per diem is $71/day. 

Full details can be found here.


Takeaway: A modest positive for lodging but the lack of GSA rate growth may overhang corporate group negotiations currently in progress.


Cruise Industry in the Caribbean (Cruise Critic) In the 2014 cruise season, 235 ships, with more than 367,000 beds sail Caribbean itineraries up from 212 ships in 2011, according to Cruise Line International Association.  And 2015 looks to have even more Caribbean capacity, as 239 ships with a total of 378,256 beds are scheduled. The glut of ships this year forced many lines to drop their prices to fill cabins, particularly during the summer and fall low season. On Cruise Critic's Find-A-Cruise tool, eight-night Eastern Caribbean trips in September cost as little as $41 per night. A week on the world's biggest cruise ship, Royal Caribbean's Allure of the Seas, can be booked throughout the fall for less than $100 a night.

Takeaway: Good for Caribbean cruise passengers, not so good for cruise line operators.  Stay tuned, the Hedgeye GLL team will have an update to our proprietary cruise pricing survey shortly.


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.


August is tracking a little below last year month to date. Mass business under scrutiny.




Last week’s Macau table revenues were HK$5,425 million (6 days) – an amount that has occurred frequently over the past 2 years.  However, we believe the number is close to actual.  On a per day basis, table revenues were slightly below the recent trend - averaging $904 million, down 9% from the comparable period last year.  Month to date average daily table revenues fell 4% from last year.  The early chatter indicates that VIP hold percentage may actually have been high last week, so volumes were potentially even more disappointing.  We expect full month August gross gaming revenues (GGR) to be slightly down YoY.





Following July’s sharp deceleration in YoY Mass growth to +17% (in line with our Mass Decelerating call), all eyes are on this high margin segment.  While we continue to believe that YoY Mass growth will decelerate from 1H 2014, August should look a little better than July. However, we remain concerned with Premium Mass margins and a question from an analyst seemed to indicate that the business is getting more competitive.  Galaxy denied that they are more aggressive with Mass rebates but wouldn't deny that it is happening in the market. We highlighted this as a risk and noted that competitive pressure in Premium Mass may have been a factor in across the board disappointing Q2 margins. We're concerned.  



The previously mentioned high market hold seems to be concentrated on Cotai.  We're hearing LVS and MPEL's City of Dreams held well thus far in August.  Indeed, both market shares increased relative to trend, with LVS up dramatically. Galaxy remains below recent trend thus far in August and we think it may be VIP volume related.  Remember that Galaxy's VIP share in Q2 jumped dramatically due to higher volumes so the comp is difficult.



The Hedgeye Daily Outlook

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

As we look at today's setup for the S&P 500, the range is 27 points or 1.10% downside to 1950 and 0.27% upside to 1977.




The Hedgeye Daily Outlook - chart 1 macro risk ranges


The Hedgeye Daily Outlook - chart 2 etf levels




The Hedgeye Daily Outlook - chart 3 equity sentiment




  • YIELD CURVE: 1.96 from 1.98
  • VIX closed at 12.32 1 day percent change of -6.31%


MACRO DATA POINTS (Bloomberg Estimates):




• Alaska holds primary to choose GOP Senate candidate; Wyoming also holds primary

• 2pm: Federal Open Market Cmte issues minutes from July 29-30 meeting

• U.S. ELECTION WRAP: Alaska Primary; National Party Fundraising




• Wal-Mart bid for Family Dollar said to be unlikely

• TPG Capital offers fee breaks to lure investors to $10b fund

• Standard Chartered said to approach N.Y. with controls deal

• Verizon regains title of fastest U.S. wireless from AT&T

• New Sprint CEO doubling data available for shared plans

• BofA’s Montag becomes sole COO; Darnell taking new role

• Owners of Vevo said to end effort to sell co.: New York Post

• Starbucks to send food trucks to college campuses: CNNMoney

• Microsoft’s cloud service Azure had 5-hour outage yday

• Solar demand surge means first panel shortage since 2006

• Visa sees Russia as priority market as govt prepares new rules

• Bank of China profit growth slows on bad-loan provisions




  • Home Depot (HD) 6am, $1.44 - Preview
  • Elizabeth Arden (RDEN) 6:59am, ($0.34)
  • Medtronic (MDT) 7:15am, $0.92 - Preview
  • Dick’s Sporting Goods (DKS), 7:30am $0.65 - Preview
  • TJX Cos (TJX) 8:28am, $0.73 - Preview




  • Real Goods Solar (RGSE) 4:05pm, ($0.09)
  • La-Z-Boy (LZB) 4:10pm, $0.21
  • Photronics (PLAB) 4:30pm, $0.08
  • Youku Tudou (YOKU) 4:30pm, ($0.07)




  • Default Shadow Ebbs in Commodity Trade Rebound: Corporate India
  • Greener Pastures Signaling U.S. Beef Supply Rebound: Commodities
  • Gold Rises in New York as Palladium Trades Near 13-Year High
  • Corn to Soybeans Fall on Prospects U.S. Rain Will Aid Production
  • Deckhands Paid Like Bankers Threaten Biggest Iron Ore Port
  • Aluminum Rises Most in Two Weeks Before U.S. Construction Report
  • BHP’s Metal Discards Poised to Become Biggest Mining Spinoff
  • MORE: CME Hires Ex-Morgan Stanley’s Zhang as Asia Metal Director
  • Western Australia Crop Growing Conditions Favorable: Rabobank
  • Ill-Disciplined Gold Miners Deal Industry Loss: Chart of the Day
  • Deal Success Has China Metal Miner Seeking More Overseas Targets
  • China Mills May Restock Iron Ore Over Next Two Weeks, ANZ Says
  • COMMODITIES DAYBOOK: WTI Crude Rises Before Supply Data
  • Rain Relieving Thirsty Crops in China Complicates Glut Reduction



The Hedgeye Daily Outlook - chart 4 commodities



The Hedgeye Daily Outlook - chart 5 FX




The Hedgeye Daily Outlook - chart 6 global 1 day


The Hedgeye Daily Outlook - chart 7 global YTD




The Hedgeye Daily Outlook - chart 8 Europe




The Hedgeye Daily Outlook - chart 9 Asia




The Hedgeye Daily Outlook - chart 10 middle east


The Hedgeye Macro Team

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Long-Wave Rope

This note was originally published at 8am on August 05, 2014 for Hedgeye subscribers.

“When we hang the capitalists, they will sell us the rope.”

-Joseph Stalin


That wasn’t a very nice thing to say. But Stalin wasn’t nice; especially to economists! “In 1930, Stalin arrested Nikolai Kondratieff and shipped him off to Siberia. His crime: daring to defy the most linear of ideologies – Marxism – by suggesting that the long-term performance of market economies is cyclical.” (The Fourth Turning, pg 110)


Kondratieff died in the gulag, but his “long wave” cycles will live on for as long as gravity does (let’s hope someone isn’t empowered to centrally plan that away!). For longer-term risk managers, they are also called super-cycles (45-50 years). They are a tad longer than the monthly performance chasing thing you see your peers wrestling with in an oversupplied asset management industry today.


If you aren’t into the 45-50 year thing, how about 20-25 years? This is what demographer and economic historian Neil Howe calls a “turning” within your saeculum (lifetime). Like the Four Seasons, there are roughly four turnings in your life. I had a Real Conversation @HedgeyeTV with Neil about this recently that you can watch here: https://www.youtube.com/watch?v=h6vYv9O0dEM


Long-Wave Rope - EL chart 2 


Back to the Global Macro Grind


Now if you don’t want to think about a long-term US economic cycle (which is 62 months into an expansion) rolling over, you can always ditch the 25 yr demographic reading for a 50-day moving monkey (chart). When those break, oh baby do the emotions kick in!


Obviously, using a 1-factor point-and-click model that my 4 year old daughter could figure out isn’t a multi-duration, multi-factor, interconnected Global Macro risk management process, so let’s move on…


What I wake up trying to do every morning is identify the intermediate-term-cycles within longer-term ones. Trust me, I don’t read a non-fiction book every 10-days for kicks and giggles. I do it in order to make myself less dumb. And that’s not an easy thing to do!


Not to be confused with an economic cycle, when considering the shorter-term market cycle within the “long-wave”, a really basic 3-factor model I use is:


  1. PRICE


Therefore, if I am looking at something like the Russell 2000 (IWM)


  1. PRICE – is -7.0% in the last 2 months and below my intermediate-term TREND resistance line of 1175
  2. VOLUME – accelerates on the DOWN days and decelerates on the UP ones (yesterday’s was -18% vs its 3 mth avg)
  3. VOLATILITY – is breaking out on the front-month, undergoing what we call a bearish to bullish phase transition


And if I want to be long the upside down of that #GrowthSlowing message (long the Long Bond):


  1. US Treasury 10yr Yield of 2.49% this morning remains well below my intermediate-term TREND level of 2.81%
  2. Fund Flows have turned back to bullish on the “safe” side of Fixed Income (after being bearish in 2013)
  3. Implied volatility in being long TLT (+12.5% YTD) vs Russell 2000 (IWM) -3.4% YTD is as low-stress as it gets


If you want a proverbial rope to hang yourself with in this game, start calling your best performing long ideas (on a lag) “low-stress.” Before you know it, you’ll be having a nervous breakdown.


One thing that starts to stress me out is being bullish on something macro that the crowd starts to dog pile (50-day moving avg is intact, bro!). So one place I watch very closely on that sentiment score is futures and options positioning.


Yesterday I wrote about how there was a net SHORT position of -41,210 contracts SP500 (SPX Index + Emini) that consensus short sellers (those who cover high and short low) built into Friday’s close being a catalyst for a bullish no-volume “bounce.”


We got that. But how about in the things I like (like Gold, Pounds, and Bonds)?


  1. Gold = net LONG position of +122,092 contracts (vs. its 6 month avg of +100,747)
  2. British Pound = net LONG position of +31,046 contracts (vs. its 6 month avg of +34,681)
  3. UST 10yr = net LONG position of +7,090 contracts (vs. its 6 month avg of -40,094)


In other words, Consensus Macro is:


  1. Too long Gold (after it’s up +7.4% YTD) so I should sell some
  2. Too bullish on what’s been the best major FX position vs USD for the last year, but not wacky bullish
  3. No longer short, but not yet Bullish Enough on longer-term UST Bonds


So, provided that our longer-wave economic cycle call is giving us confirming evidence (both sequential data and market prices), we just say “buy more” long-term bonds on all pullbacks to @Hedgeye TRADE and TREND lines of support.


As far as the history of socialists vs. capitalists is concerned, Stalin’s followers can eat their own ropes. One of the few things I agree with him saying is that “print is the sharpest and strongest weapon of our party.” That’s why I like to print our #process, every day.


Our Immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.54%

SPX 1916-1960

RUT 1109-1139

VIX 13.84-17.82

Pound 1.68-1.70

Gold 1281-1303


Best of luck out there today (and Happy Anniversary, Laura),



Keith R. McCullough
Chief Executive Officer


Long-Wave Rope - Chart of the Day

Italy, Commodities and the Russell 2000

Client Talking Points


The first major European Equity market to snap my 21,311 (MIB Index) TREND line in June is the first to roll over at lower-highs this morning – in Real-Time Alerts I haven’t signaled re-short Italy, France, and Portugal (yet) but if they fail here, that call is coming.


Best consumption news of the last month is deflating what was our #InflationAccelerating call from JAN-JUN; CRB Index is now only +3% YTD and bearish TREND (295 resistance); only commodity I like long side right here is Gold w/ upside to $1321 resistance

Russell 2000

It’s now only -0.5% YTD so everything is fixed, right? Sell it. Consensus hedge funds shorting the lows and covering the highs is providing for quite the year of fading beta. Sell the high end of my risk range and cover the low (1115-1161); stay with the process 

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. We believe activist investor Sandell has identified significant, largely feasible, opportunities to enhance shareholder value.  Particularly, we see tremendous upside value in selling the foods business, transitioning to an asset light model and refocusing capital allocation.



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


“ASIA: another strong session for stocks - China and India remain two that we like, long side” -- @KeithMcCullough


Success is liking yourself, liking what you do, and liking how you do it. -- Maya Angelou


65, The number of yards Cleveland Browns’ quarterback Johnny Manziel threw for in last night’s highly anticipated preseason NFL game against the Washington Redskins.

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