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LEISURE LETTER (08/22/2014)

Tickers: BYI, CZR, IGT, PNK, H, CCL


  • Aug 26:  Horseshoe Baltimore Opening
  • Aug 27:  BYI 2Q earnings
  • Aug 28:  Hollywood Dayton Raceway Opening
  • Sept 1/2:  Revel closes


BYI – Launched and connected its "Cash Connection" wide-area progressive slot link across Nevada and New Jersey. As a result of the interstate progressive linked slot machines, jackpots should reach larger amounts more quickly and thus offer more excitement for players. The multi-state link features Bally’s hit games including TITANIC, The Magic of David Copperfield, Betty Boop’s Fortune Teller, Jackpot Empire, Hot Shot Progressive, and other titles.

Takeaway: A small but much needed catalyst for higher yields.


IGT – announced Nevada joined IGT's Powerbucks commercial multi-state Wide Area Progressive link as such Powerbucks networked games in Nevada casinos are now linked with casinos located in New Jersey and Deadwood, South Dakota.

Takeaway: All efforts to make slot machine gaming more exciting despite demographic headwinds.


PNK – Belterra Park reduced its slot floor by 35 slots in July.

Takeaway: A very disappointing opening for the racino.  PENN should fare better in Youngstown and Dayton though as both racinos will open in much less competitive geographies.


H – Hyatt Hotels Corporation is now offering access to the transportation service Uber through its app for iOS and Android. Uber, a service that allows riders to connect with transportation on-demand, is present in more than 100 cities worldwide and can be accessed through a dedicated Uber button located beneath the 'My Reservations' section in the Hyatt app. According to the Wall Street Journal, the Hyatt app also estimates trip prices for each Uber segment while also automatically storing the guest's hotel address for future use.

Takeaway: Hyatt trying to fully integrate transportation into its guest reservation process.


CCL – Princess Cruises is offerings savings on more than 150 cruise vacations to sunny destinations such as the Caribbean, Tahiti, Hawaii, Panama Canal and Mexico. The “Endless Summer Sale” runs through September 10, offers guests the chance to save up to $1,400 on select cruises departing between November 2014 and February 2015. In addition to special cruise fares, guests booking balcony staterooms or above will receive an onboard credit of $200 (for cruises 11 days or longer) or $150 (seven- to 10-day cruises); and those booking interior or oceanview staterooms can get credits of $150 (cruises 11 days or longer) or $100 (seven- to 10-day cruises).

Takeaway: More discounting in the Caribbean and Mexico.  


SLS Granted License – The Nevada Gaming Commission approved licensing for the SLS Las Vegas, setting the stage for the opening of the $415 million redevelopment of the former Sahara.  The SLS has been reconfigured to include a 56,000-square-foot casino with nearly 800 slot machines, 74 table games and a high-limit gaming area. A sports book will be operated by William Hill.

The nine restaurants and three nightlife venues include many SBE signature brands, including Umami Burger, the Mediterranean-themed Cleo, Japanese-themed Katsuya, 800 Degrees pizza and The Sayers Club entertainment lounge.

The three former Sahara hotel towers, all built in different decades, have been reconfigured under new names — Lux, World and Story — and are aimed at different markets: the luxury customer, the tour and travel market and the younger crowd looking for a “Vegas weekend.”

Takeaway: Given the SLS' overall programming, other operators risk losing younger guests as well as the California drive-in guests to the old-meets-new SLS.


Tuberculosis at Two Tunica Casinos (Clarion Ledger) The Mississippi Department of Health has confirmed two recent cases of tuberculosis (TB) at two Tunica casinos. One employee each at the Horseshoe Tunica Hotel and Casino and the Gold Strike Casino Resort were diagnosed. The employees are not currently at the casinos. TB is an airborne infectious disease caused by the bacterium Mycobacterium tuberculosis. Last year, 65 cases of TB were confirmed in Mississippi. TB is curable and preventable, though some drug-resistant strains of TB are more difficult to treat. Treatment for TB infection can from 12 weeks to nine months

Takeaway: As if the general public needs another reason to avoid casinos.

Indiana Casinos to remain boat based – Indiana Governor Mike Pence announced he opposes the transition of casinos from riverboats to land-based properties.  Governor Pence's comments follow recent commentary by Tropicana in Evansville to transition to a land-based operation.

Takeaway: Indiana stands to lose play to neighboring states with newer land-based casinos - as if the environment wasn't tough enough.


Resorts World Manila (Philippine Daily Enquirer) Genting’s Philippines-based Resorts World Manila (RWM) is spending about US$650 million (RM2.06 billion) to double its gaming and hotel capacity. RWM chief operating officer Stephen Reily said on an average day, some 18,000 patrons visited RWM but the number increased to between 32,000 and 34,000 during “busy days”

Takeaway: Genting trying to keep its programming current as new competition from City of Dreams Manila is about to open.

Universidade de Macau – The University of Macau (UM) will start its 2014/2015 school year next Monday on the newly developed campus on Hengqin Island.  About 4,000 students will live in the Residential College in the new campus. There will be more than 9,000 students in the new school year, including 1,700 freshmen. The full move to the new campus will be complete by November as portions of the laboratory facilities have yet to be transferred. The Macau Government announced that the university’s current campus will be reserved for higher educational purposes. In addition, a one-year temporary measure of lending and renting the old campus’ dormitories to three local universities will commence in the new school year.

Takeaway: Could the old college dormitories serve as casino worker housing for the Cotai casino operators?  Such a plan would appease the Chief Executive. 


Hurricane Season (Finally) Heading Up – According to the National Hurricane Center, current satellite data indicate an area of low pressure located over the Leeward Islands which has a 60% chance of forming a tropical depression over the next 48 hours and a 80% change over the next five days. Environmental conditions are expected to be more conducive for development when the disturbance moves near or over the southeastern Bahamas on Saturday, and a tropical depression is likely to form over the weekend or by early next week.

Takeaway: Potential for cruise disruptions and reschedulings across South Florida, the Bahamas and the Caribbean.  


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 22, 2014














  • YIELD CURVE: 1.92 from 1.94
  • VIX closed at 11.76 1 day percent change of -0.17%


MACRO DATA POINTS (Bloomberg Estimates):              

  • No major economic reports scheduled
  • 10am: Fed’s Yellen at Kansas City Fed symposium at Jackson Hole, Wyo.
  • 1pm: Baker Hughes rig count
  • 2:30pm: ECB’s Draghi speaks at Jackson Hole



    • President Obama on vacation on Martha’s Vineyard
    • Senate, House out on August recess
    • U.S. ELECTION WRAP: McConnell on Shutdowns; Ernst Policies



  • Labor market at Jackson Hole forefront before Yellen speech
  • Theory of tech replacing workers overblown: MIT J.H. paper
  • Lew Says business tax reform best for addressing inversions
  • Family Dollar said open to Dollar General deal with changes
  • BofA seeks to prove Buffett’s call right after settlement
  • Citigroup faces curbs on hedge fund sales after deal: WSJ
  • Enbridge avoids U.S. review with plan to boost oil sands flow
  • GM legal dept. investigated by U.S. on recall delay: WSJ
  • Co. to halt production at Russian plant for 4 periods
  • Home Depot U.S. president Menear to succeed Blake as CEO
  • IBM never stopped server sales to Chinese banks: China Daily
  • GE says reports of FAA grounding of Air India 787 incorrect
  • Keurig 2.0 to go on sale from Aug. 24: WSJ
  • Aeropostale considers closing additional 175 stores
  • Disney unveils new Star Wars game for mobile: NYT
  • Lockheed meets with suppliers on lower F-35 costs: Reuters
  • U.S.GDP, Housing, Ukraine, Tennis, Emmys: Wk Ahead Aug. 23-30



    • Ann Inc. (ANN) 7:31am, $0.69
    • Foot Locker (FL) 7am, $0.54 - Preview
    • Hibbett Sports (HIBB) 6:30am, $0.31
    • Royal Bank of Canada (RY CN) 6am, C$1.57 - Preview



  • WTI Oil Set for Longest Weekly Slide Since November; Brent Drops
  • Gold Advances From Two-Month Low Before Central Bankers Speak
  • Palm Oil Drops Below 2,000 Ringgit First Time Since 2009 on Glut
  • Too Much Corn With Nowhere to Go as U.S. Farmers Plan for Record
  • Chinese Zinc Threatens Biggest Jump in 5 Years: Chart of the Day
  • Pacific Tropical Storm Marie May Strengthen to Hurricane Today
  • Wheat Rises as World Supply Seen Less Ample on Lower Canada Crop
  • MORE: Shanghai Exchange Copper Stockpiles Drop by Most Since May
  • Copper Rises to Two-Week High on U.S. Home Sales: LME Preview
  • Copper Set for Weekly Gain as U.S. Housing Data Beats Estimates
  • WTI Crude Seen Rising on Falling Inventories in Analyst Survey
  • First Crude Tanker Departs From Hound Point After Maintenance
  • Gold Traders Most Bearish in Seven Weeks on U.S. Rate Outlook
  • EU Natural Gas Traders Most Bullish in Six Weeks on Ukraine Risk


























The Hedgeye Macro Team
















Observable Theories

This note was originally published at 8am on August 08, 2014 for Hedgeye subscribers.

“It is the theory that decides what can be observed.”

-Albert Einstein


I have a theory about performance that I developed running my own fund: it’s the score in your P&L that counts. I also have a theory about market theories: your positions reflect your theories.


We can theorize about the relationship between inflation and growth. We can highlight immediate-term market observations within their longer-term trends. We can write and rant too – but, at the end of the day, taking your position in macro is what matters.


In 2014, we’ve had a contrarian theory that as US growth expectations slow, US interest rates will fall, and both Gold and Long-term Treasury Bonds will rise. We’re not changing that theory this morning. We’d like you to keep that position.


Observable Theories - EL chart 2


Back to the Global Macro Grind


But, but… you said that if the Dollar goes up and inflation expectations fall, the consumer gets a tax cut and consumption growth can accelerate. Yep, but I said that before we were 62 months into an economic expansion (in 2009 and again in 2013), not at the end of it.


Year-over-year, the US Dollar is down -0.4%. With US cost of living barely coming off her all-time highs, that isn’t going to make me tell you to run on out there and buy-the-damn-bubble in US stocks. Sorry.


If the US Dollar were to breakout from here, and crude oil were to drop to $80/barrel – now that might get me interested. But there’s this thing called #timing that we need to consider when we theorize about getting long.


In the meantime (we’re net short in Real-Time Alerts terms) and here’s the score:


  1. US Dollar Index stopped going up this morning (because the Euro stopped going down)
  2. US 10yr Yield of 2.36% is hitting a fresh YTD low of 2.36% (crashing -22% YTD)
  3. US Equities (SPX) have only had 1 up day in the last 11 (dip buyers #underwater)


Bull market, baby (in the Long Bond)! 2014 Score: Long Bond (in TLT terms) +15.1% vs Gold +9.6% vs Russell 2000 -3.9%.


Digging into the Sector Style performance of the SP00:


  1. Consumer Discretionary (XLY) leads losers at -2.2% YTD
  2. Industrials (XLI) aren’t far behind at -1.6% YTD
  3. Financials (XLF) are 3rd worst (of 9 Sectors) at +1.4% YTD


Digging deeper, you can see the real wins and losses (sub-sectors within the S&P’s major sectors):


  1. Housing (ITB) is -10.6% YTD
  2. Regional Banks (KRE) are -7.4% YTD
  3. REITS (VNQ) are up +15.3%


REITS are a way to be long A) slow-growth #YieldChasing and B) US Rents hitting all-time highs. Yep, we have a theory that you can check with your landlord on that too: he’s not reducing your rent tomorrow due to Russia or ebola.


You see, in theoretical-land, as our #InflationAccelerating theme from Q114 stops going straight up into the right (Coffee prices dropped -3.6% yesterday, but are still +66.2% YTD), real-world inflation still sticks. Starbucks (SBUX) isn’t cutting prices today.


Inflation (especially the cyclical stuff like wage inflation and rent), is a late-cycle economic indicator. So is unemployment. Got early cycle? That’s easy. Consumer, Housing, some Industrials, and Regional Banks.


The reason on Regional Banks is really simple. As the bond market prices in slower growth, the long-end of the bond yield curve falls, and net interest margins (i.e. how banks make money off your deposits - long-term rates minus shorter-term ones) compress.


This is called Yield Spread Compression. And it’s part of this fancy theory called gravity. I have a perverse theory that as the Q3 US Growth data slows, the Fed will get easier (on the margin), and that the long-end of the curve will perpetuate moarrr compression.


As growth slows, not only do net interest margins at banks compress, but equity market multiples do. All the while, you’ll see multiple expansion on long-term Treasury bonds.


Since there’s no long-term support to 1.70% on the 10yr, maybe we should all start theorizing about that. The observable score says that’s more likely than seeing the consensus theory of 3.25% anytime soon.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.35-2.51%

SPX 1891-1927

RUT 1105-1128

VIX 15.45-18.89

USD 81.06-81.73

Gold 1298-1323


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Observable Theories - Chart of the Day

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 80.51%
  • SHORT SIGNALS 78.32%

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