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Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case

Takeaway: Take a few minutes to read Izabella Kaminska's article on Kinder Morgan and MLPs.

An excellent, must-read piece on Kinder Morgan (KMI) by Izabella Kaminska on FT Alphaville today. She writes:


The $44bn self-acquisition of Kinder Morgan has been heralded by some as a great deal for shareholders.

But is it? Is it really? At least for the ordinary investors?

We’ve already wondered about the motivation for the deal.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - km9


Kaminska goes granular questioning the ongoing spectacle with MLPs, CEO Rich Kinder’s financial alchemy and more.


As you may have already guessed, Hedgeye energy analyst Kevin Kaiser figures prominently in the story.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - kaiser


Click here to read on FT.


Takeaway: Builder confidence hits its highest level in 7 months with "optimism" and the largest MoM increase ever in the Midwest driving the upside.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.




Today's Focus: August NAHB HMI (Builder Confidence Survey)

This month (August), the NAHB’s HMI, which measures builder confidence, rose to 55, a gain of two points from July’s print of 53 (which was not subject to any revision), marking the highest reading in seven months and the second month above the improvement demarcation line of 50 on the Index.

  • Sub-Indices:  All 3 sub-indices increased MoM for a 3rd consecutive month with balanced gains across Current Sales (+2pts), 6M expectations (+2pts) and Current Traffic (+3pts)  
  • Mid-West Mojo: Builder Confidence declined modestly in the West and South while rising modestly in the Northeast.  Notably, the Midwest region saw its largest MoM increase ever, increasing +13 pts from July to August


Prognostic or Pollyanna? Last month’s gain in Builder Confidence was led by rising optimism with the forward expectations component registering a disproportionate increase.  This month saw a commensurate increase in current sales and forward expectations, leaving the “optimism spread” at its highest level since 3Q12.   


Perhaps the modest, ongoing improvement in the labor market is buoying stakeholder confidence in the housing market but, in relation to the preponderance of demand and HPI data (purchase apps, new home sales/start, pending home sales), builder confidence continues to decouple from the reality of actual new construction activity.  


We’ll get the housing starts/permits data for July tomorrow, but with permits running largely flat with flagging Starts figures YTD (& declining in the latest month) the upside for single family construction over 2H appears somewhat constrained.


COMMENTARY:  After recurrent flip-flopping on the chosen spin the last few months, the August commentary was expectedly balanced and largely canned:


NAHB Chairman Kevin Kelly had this to say on the August reading: 


“As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market...However, builders still face a number of challenges, including tight credit conditions for borrowers and shortages of finished lots and labor.”


NAHB's Chief Economist, David Crowe, added this:  


“Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring…Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”

















About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


Retail Callouts (8/18): FDO, DG, DLTR, TGT, WMT

Takeaway: DG will ‘win’ FDO. But at much higher price. Good for FDO. Bad for DG. Neutral for DLTR. Horrible sign for quality of growth in US retail.



Monday (8/18)

  • URBN - Earnings Call: 5:00pm


Tuesday (8/19)

  • HD - Earnings Call: 9:00am
  • DKS - Earnings Call: 10:00am
  • TJX - Earnings Call: 11:00am


Wednesday (8/20)

  • SPLS - Earnings Call: 8:00am
  • LOW - Earnings Call: 9:00am
  • PETM - Earnings Call: 10:00am
  • TGT - Earnings Call: 10:30am
  • AEO - Earnings Call: 11:00am


Thursday (8/21)

  • DLTR - Earnings Call: 9:00am
  • BONT - Earnings Call: 10:00am
  • GPS - Earnings Call: 4:00pm
  • GME - Earnings Call: 9:00am


Friday (8/22)

  • ANN - Earnings Call: 8:30am
  • FL - Earnings Call: 9:00am
  • HIBB - Earnings Call: 10:00am




DG, FDO, DLTR - Dollar General Makes Proposal to Acquire Family Dollar for $78.50 Per Share



  • "Dollar General today announced it has made a proposal to acquire Family Dollar Stores, Inc. for $78.50 per share in cash, in a transaction valued at $9.7 billion. The proposal was conveyed this morning in a letter to Family Dollar's Board of Directors. This transaction would deliver increased consideration and immediate liquidity to Family Dollar's shareholders and represents a compelling opportunity to create value for Dollar General shareholders."


Takeaway: First, before even considering which two companies are a better fit, we think that the most glaring observation is that we're talking about STARTING a bidding war for a company as poor quality as FDO in between 11x-12x EBITDA. Again, let's let this one digest…11.6x EBITDA for a dollar store.  Whether FDO is looking to aggressively sell itself, or DLTR and DG are finding it critical to chase after poor quality growth, it does not send a great signal about the their collective view of the US economy.


Second, this is far from over. You (DG) don't go into a bidding process only 5.5% above the prevailing bid -- even if the deal is all cash vs 80% cash/20% stock for DLTR -- expecting to win the deal outright, especially when you're going hostile against an otherwise friendly merger.


Third, this deal probably makes more strategic sense for DG even at a slightly higher multiple. The $78.50 price per share implies a 11.6x EV/EBITDA forward multiple. Given the assumed synergies  for a combined DG/FDO at $550mm-$600mm on an annualized basis compared to DLTR/FDO at $300mm. That takes the 2016 multiple down to 6.1x for FDO and 7.5x for DLTR.


Our Prediction: DG walks away with this one. But it's going to be expensive. Our bet is that FDO is bought for $85, or nearly 13x EBITDA. That's great for FDO shareholders. Bad for DG. And an even worse sign about how hard it is to find quality growth in US retail today.




TGT - Target to Keep Some Stores Open to Midnight in Push for Traffic



  • "Target Corp. TGT is keeping its doors open later at more than half of its U.S. stores, hoping to snag guests who are putting off shopping until well after dark and might have gone elsewhere."
  • "The chain's nearly 1,800 U.S. stores had typically opened at 8 a.m. and closed at 10 p.m. on weekdays and Saturdays and at 9 p.m. on Sundays. The new hours will keep stores open until 10 p.m. or 11 p.m. on Sundays and until 11 p.m. or midnight on other days."


WMT - Wal-Mart makes holiday ‘checkout promise,’ pledges to staff every register



  • "A day after announcing a disappointing second quarter, Wal-Mart Stores has made an aggressive holiday promise to its customers: the world’s largest retailer says it will staff every cash register from the day after Thanksgiving through the days just before Christmas during peak shopping times."
  • "Wal-Mart’s 'checkout promise' is aimed at addressing lengthy waits in checkout lines."


GME - NCAA Legal Controversy Leads to a Slow Summer for Video Games



  • "... industrywide revenue from new video game software was down 15 percent in July, to $178 million, compared with a year earlier. Sales of newly launched games were down almost 70 percent, which was almost entirely the result of the lack of a new version of NCAA Football, according to NPD."


Jones Group - Exclusive: Shoe retailer Stuart Weitzman to go on auction block - sources



  • "Women's shoe retailer Stuart Weitzman is preparing to launch a sale process and has tapped investment banks Goldman Sachs Group Inc and Citigroup Inc to assist with the effort, people familiar with the matter said."
  • "The New York-based retailer could fetch a price well below $1 billion, two of the people said this week. Others said the ultimate sale price could be around $800 million."
  • "Sycamore Partners, the New York-based private equity owner of Stuart Weitzman, acquired the brand as part of its $2.2 billion purchase of Jones Group Inc earlier this year."
  • ansion into Canada are shoe stores, auto parts stores, and lingerie, swim and bridal stores."


JD.com Quarterly Revenue Rises 64%



  • "JD.com Inc, China's second-largest e-commerce company, reported a 64 percent rise in quarterly revenue as the number of its active customers nearly doubled."
  • "However, net loss widened to 582.5 million yuan ($93.9 million)"


AdiBok - Adidas unveils Bayern Munich 2014-15 third official jersey



  • "adidas and Bayern Munich are excited to announce the launch of the new official third jersey for the 2014/2015 season, a kit that seeks both to celebrate the club´s extraordinary legacy in the UEFA Champions League and also its unique team spirit."


Austria’s Signa buys Karstadt department store chain for just €1



  • "Karstadt, the struggling German department store chain, is being taken over by Austria’s Signa Group, ending weeks of speculation over the company’s future after the shock departure of its chief executive in July.
  • Signa, founded by Austrian investor René Benko, will pay just €1 for the lossmaking chain, whose 83 stores across Germany employ 17,000 people. The Austrian group will also take over the remainder of Karstadt Premium department stores and KarstadtSports, after buying a 75.1 per cent stake in the groups last year."

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LEISURE LETTER (08/18/2014)

Takeaway: CZR, MGM, RCL, MTN

Tickers: CZR, MGM, RCL, MTN


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


BEL:PM (GGRAsia) Belle announced on Monday the company has hired Hong Kong-based brokerage firm CLSA Ltd to “study the feasibility” of the company selling “a portion” of its current equity ownership in Sinophil Corp (soon to be called Premium Leisure Corp) “at some future date, subject to market conditions”.  Recently, Belle disclosed it was looking to increase the public float in Sinophil/Premium Leisure Corp, the unit that will hold its gaming investments. The firm controls close to 90% of Sinophil’s shares and is looking to reduce its ownership to 67% to 70%.

Takeaway:  Time is money, Belle appears anxious to monetize its investment in Sinophil/Premium Leisure Corp. 


880:HK SJM (Macau Business) SJM Holdings Ltd’s chief executive, Ambrose So Shu Fai, has said he is unworried by the possibility of the government limiting the size of the gaming industry. “Slowing down the growth will not affect us,” but Mr. So also said he was against the granting of more gaming licenses because more casino operators would increase demand for the limited supply of labor and “make the problem of human resources worse”.


Separately, in reaction to Chief Executive Fernando Chui Sai On’s proposal that casino operators would be made responsible for housing migrant workers they employed, Ambrose So Shu Fai “Well, this is something I’ve heard for the first time; of course, we’ll keep dialogue open with the government to know exactly what their policy is and whether we can cope with the situation,” said So, adding that “at the present moment, we do offer housing allowances to non-resident workers.” However, So thinks that if the government requires the gaming operators to build homes for its imported workers, then the government should provide land to the operators. 

Takeaway:  Looks like there will be more non-gaming issues to consider this year. 


3918:HK(GGRAsia) disclosed the Company signed two junket operators from Macau and will formally launch the marketing agreements in September.  Naga disclosed during Q2 2014, it purchased 3 previously used, Airbus A320s for $44.423 million during the quarter. To increase visitation to NagaWorld, the Company purchased two Airbus A320 which will be leased to an independently operated airline. The airline will, through collaboration with key Chinese travel agents, increase flights to Phnom Penh targeting the Mass Market players with packaged accommodation in NagaWorld. The Company also intends to use these aircraft, in addition to the private jets, to fly VIP players from various parts of Asia targeting destinations which do not have direct flights to Phnom Penh.

Takeaway:  Naga attempting to maximize the production of its casino via the use of junkets and private aircraft, while also raises the maximum wager limit.


CZR – The High Roller, which became the world's tallest observation wheel when it opened in late March, will end its summer pricing on Monday, Sept. 1.  As such, a daytime ride will be $24.95 for adults, up from a $19.95 summer special announced in June. Nighttime rides were not reduced for the summer and will remain $34.95. Tickets for children ages 13-17 will remain at $14.95 during the day and $24.95 at night. Younger children are free. The best deal for families of four is a $49.95 family pack during the day or $79.95 at night. Finally, the High Roller has also been running other promotions, including a $69 Groupon promotion that includes two rides (day or night), two-for-one drinks and two-for-one souvenir photos.

Takeaway: Raising the price of admission while trying to generate incrementally more free cash flow.


CZR – Caesars New York will hold a ceremony today to mark the opening of its office in the town of Woodbury located in the Orange County, New York. Caesars wants to build a casino near the Woodbury Commons shopping center about 50 miles from New York City.

Takeaway: The local media and public relations blitz intensifies over the battle for the Upstate New York gaming licenses. 


MGM (Las Vegas Review Journal) ran a story touting MGM Resorts International turnaround story since the recession and the Company's equity trading in single digits.

Takeaway: When the news becomes the topic of Main Street discussions, this usually "marks a top" in stock prices.


DIS – Disney changed the structure of its non-commissionable fare (NCF), thus raising the amount of fare excluded from commission on most cruises. The new NCF structure creates a sliding based on cruise length. Currently, the NCF is a flat $20 per person, per day. Starting next week, the line will deduct $25 per person, per day on voyages of six days or less, and $30 per person, per day on trips between seven and 10 days. However, Disney is leaving the amount at $20 for cruises of 11 days or more.  Also beginning today, tour operator Adventures by Disney will no longer pay commission on the air portion of packages. It will continue to book air arrangements.

Takeaway:  Raising NCF may not be consumer friendly but helps margins


RCL – announced a five-day WOW Sale taking place from Aug. 16 through 20, 2014, designed to help consumers plan for their next vacation. During the WOW sale, vacationers can receive up to $200 onboard credit per stateroom when making a new booking on itineraries through spring 2016 aboard Royal Caribbean’s currently sailing fleet.  For all new individual U.S. and Canadian bookings made from Aug. 16 through 20, 2014, vacationers will receive $50 onboard credit per stateroom for five-night or shorter itineraries; $100 onboard credit per stateroom for six- to nine-night itineraries; and $200 onboard credit per stateroom on 10-night and longer itineraries. As part of the WOW Sale, vacationers also can make a reservation with only a 50 percent reduced deposit, starting as low as $50 per guest, based on double occupancy. The offer is applicable to staterooms that are part of group space booked by U.S. and Canadian travel agents, provided those staterooms become named berths during the offer window, and excludes Quantum of the Seas and Anthem of the Seas.

Takeaway:  This is a special WoW Sale ahead of Labor Day holiday. RCL continues to give out onboard credits.


MTN – In its filing with the Utah Superior Court overseeing the litigation with Vail Resorts, Park City Mountain Resort indicated it shouldn’t have to pay more than $1 million a year for the 3,000 acres that constitute most of the skiable acreage on the mountain.  However, Vail Resorts counter filing is not immediately available.

Takeaway: We wait for Vail Resorts' counter filing.


Insider Transactions:

MGM – Director Rose Mckinney-James sold 10,000 shares of the stock on Monday, August 11th at an average price of $24.83 and now owns 100 shares. The shares were Stock Appreciation Awards granted 5,000 shares on June 15, 2011 and June 14, 2012 with expiration dates of June 15, 2017 and June 14, 2018. 


RHP – Directors Edward Gaylord, Ralph Horn and Michael Rose acquired 361, 581 and 361 shares of stock respectively on August 15th at $48.35/share.  Each director has elected to receive cash compensation for service on the Company's Board of Directors and Committees in the form of restricted stock units, which are convertible on a one-to-one basis, into shares of common stock. The director has elected to defer receipt of this award until either (1) a specified date or (2) until termination of his service as a director.


VAC J. W. Marriott, Jr. sold 22,780 shares of Marriott Vacations Worldwide Corp on Thursday, August 14th at an average price of $59.61. The shares were stock options acquired for $9.52/share with an expiration date of November 12, 2014. Following this transaction, Mr. Marriott has options on an additional 12,000 similar termed options. Mr Marriott owns an additional 313,463 shares as well as more than 2.5 million shares held in other family trusts.


Macau Chief Executive's Agenda – Chief Executive Fernando Chui Sai On’s agenda for his re-election campaign includes efforts to curb the growth of the gaming industry with a view to making the economy more diverse. Additionally, he suggested the government would stick to its policy of allowing only Macau residents to work as croupiers and he put forth a proposal that casino operators would be made responsible for housing and transportation for the migrant workers they employed.

Takeaway:  A more divisive tone from the Chief Executive.


Macau Hotel Construction (Macau Daily Times) Statistics released by the Land, Public Works and Transport Bureau (DSSPOT) revealed that there were 18 hotel projects under construction in the second quarter of this year. Among the 18 projects, nine of them were in the Macau Peninsula, five in Cotai, three in Taipa and one in Coloane. The DSSPOT estimated that the projects will provide around 9,800 hotel rooms after completion. 7,500 of them will be in Cotai and 1,000 in Macau.  Additionally, the DSSPOT authorities are evaluating 28 projects that were estimated to provide almost 15,800 rooms, with 12,000 of them in Cotai.

Takeaway:  The growth of new hotel rooms is well understood by the investment community.


Manny Pacquiao Promotion Tour – The eight-time weight division world champion will be fighting for the second time at the CotaiArena on November 23 and is scheduled to take on American Chris Algieri in Clash in Cotai II.  Pacquiao and Top Rank CEO Bob Arum will attend a press conference in Macau on August 25.  Macau is the first leg of a six-city promotional tour that includes Shanghai, San Francisco, Las Vegas, Los Angeles and New York

Takeaway: LVS and Sands China beginning their marketing campaign in support of the Champ.  His opponent is relatively new to the boxing world.


Japan Gaming(GGRAsia)  “Under the bill, step one will be for the Japanese government to select the appropriate IR area from the municipal bodies that put themselves forward as candidates. Step two will see the selected municipal body publicly tender and select a private IR/casino operator,” said Mr Fukuda (a partner at Nagashima Ohno and Tsunematsu, one of the ‘Big Four’ law firms in Japan) wrote in a paper submitted to the specialist publication International Financial Law Review.

Takeaway: More clarity on the process. 


Revel Atlantic City – The New Jersey Division of Gaming Enforcement approved an earlier closing of the property.  Revel will close the hotel at 11:00 a.m. on Monday, Sept. 1 and the casino at 5:00 a.m. on Tuesday, Sept. 2.


Separately, it was disclosed Revel asked the New Jersey Division of Gaming Enforcement for permission to close today - Aug 18.  However, the Division of Gaming Enforcement denied that request.  Revel and lender Wells Fargo, which has provided financing to the company to get it through bankruptcy court, had asked for permission to shut down on Aug 18 because the weeklong delay of a bankruptcy court sale for Revel triggered a default under its financing agreement for missing a key deadline. 

Takeaway:  Dashed hopes for a 23rd hour bid and buy-out.


Dania Casino & Jai-Alai – a mere six months after its opening, Dania Casino & Jai-Alai plans to close on October 15, 2014, for at least one year. Dania Casino officials say they'll reopen in a year, after spending $50 million on bars, restaurants, and an expanded slot floor to make their venue competitive with four other casinos in south Broward County.  Dania Casino is averaging $65 per day on each of the machines, Gulfstream $150 and Mardi Gras $139. The average at Florida's eight racinos for the fiscal year ending June 30 was $176 per machine. As a side note,  the four Argentine businessmen who own Dania Casino also own 27 casinos in their home country.

Takeaway:  The revamp process is known but the closure is a surprise. 


China New Home Prices decreased 1.1% during July on a MoM comparison but increased 2.9% YoY.  The YoY growth rate slowed from +4.9% in June. During July new home prices fell in 64 cities as compared to 55 cities in June.


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.

India, Europe and Oil

Client Talking Points


Starting with the really bullish stuff this morn, India’s stock market is up another +0.9% to fresh YTD highs of +26.2% after showing waning inflation last week (Dr. Raj wants a stronger currency, higher rates, and stronger purchasing power for The People – love that)


“Weaken ze Euro to stim ze exports, eh?” Sorry guys, that isn’t going to work in these consumption economies; DAX leads the bounce +1.4% this morning, but it, CAC, MIB Index, Portugal, etc. all remain bearish TREND @Hedgeye.


One of the uglier big macro charts in my notebook right now as Brent is seeing another -1.3% down day on the heels of a -2% down week; finally a modest consumption tax cut for consumers who have been getting smoked from a real earnings perspective in 2014.

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


“Carney saying he doesn’t have to wait for wage inflation to raise rates – I like it #StrongPound” -- @KeithMcCullough


“It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.” – Paul “Bear” Bryant


59, the score that Champions Tour golfer Kevin Sutherland shot in the third round of this weekend’s Dick’s Sporting Goods Open. It’s the first time a golfer shot 59 in a Champions Tour event.