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LEISURE LETTER (09/05/2014)

Tickers: LVS, PENN, GLPI

EVENTS

  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8:  MAR Analyst Meeting
  • Sept 9: 
    • BofAML Gaming & Lodging Conference
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference

COMPANY NEWS

BEL:PM (GGRAsia) Philippine casino investor Belle Corp informed the Philippine Stock Exchange it has not decided on the “timing or size of any potential secondary offering” for its shares in Sinophil Corp.

Takeaway: Interesting commentary since CSLA was allegedly pre-marketing the offering earlier this week? Could investor demand for this placement be tepid?

 

LVS & 1928:HK (GGRAsia) the Macau Land, Public Works and Transport Bureau confirmed Sands China has only received the permits for foundation works and construction of the podium area of the Parisian Macao casino resort.  As a result, the construction of the US$2.7 billion Parisian Macao casino resort is still partially suspended

Takeaway:  We could still see a delay in the opening date - early 2016 is our guess.

 

PENN & GLPI – A federal judge in Pennsylvania on Thursday dismissed a bankruptcy case involving the former Argosy Sioux City. Argosy said it is in the final stages of negotiating a contract with an unidentified third party to purchase the boat and two barges on the Missouri River and demolish the dockside facilities. Argosy is required to remove structures from the city-owned riverfront by the end of September.

Takeaway: Potentially a small residual value for GLPI.

 

 

MSC – (Travel Weekly) MSC Cruises unveiled a new pricing structure that bundles cabin categories, dining choices and onboard amenities in four commissionable packages.  Ken Muskat, executive vice president of sales, outlined the four packages that range from a la carte to all-inclusive. The packages will be available for sale starting Sept. 23, for cruises departing on or after Oct. 18.

Takeaway:  Cruisers have been promoting more bundled and all-inclusive deals this year.

INDUSTRY NEWS

Singapore Highest monthly visitor arrivals to Singapore this year in July Channel News Asia

The number of international visitors to Singapore saw a 19.2% spike in July relative to June, representing the highest monthly arrival figure for the year. July visitor arrivals was 1,407,078, up from June's 1,180,533 - which was the lowest for the year.  This was aided by a rebound in visitors from mainland China, with July's 180,487 visitors almost double that of June's 91,422.  Hong Kong visitor numbers, too, were strong at 80,715, 71.2% higher than June's. 

Takeaway:  Positive surprise out of Singapore. 

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.


Relative Speak

This note was originally published at 8am on August 22, 2014 for Hedgeye subscribers.

“There’s a lot of cash on the sidelines!”

-Anonymous Pundit


Outspoken hedge fund manager Cliff Asness of AQR recently remarked “Every time someone says, ‘There’s a lot of cash on the sidelines’ a tiny part of my soul dies. There are no sidelines.”

Relative Speak - sidelines

Asness' pet peeve for this common saying implying “this is why the market still has room to run” based on absolute historical fund flows and equity valuations is based on a slightly different interpretation than we prefer to reference. Yet we absolutely agree with his disdain for this statement at face value (although maybe not as pointedly).

 

With all global market participants attempting to front-run the RELATIVE positioning of each monetary authority, finding the right RELATIVE positioning across asset classes is the key starting point for global macro risk management in today’s environment. We strongly believe that our implication of the POLICY metric into our quantitative model for pinning the convexity of growth and inflation is a key differentiator.  Sticking solely with a strategy that seeks fundamental value through historical, absolute metrics has been a difficult task during the second half of this 6-year bull market.

 

In an interview discussing his pet peeves and preferable investment strategy, Asness went on to say that in his opinion, two of the main strategies that have worked over the long-term, are value and momentum investing and that combining those works much better than either one.

 

Value with a catalyst as we prefer to call it?

 

Back to the Global Macro Grind...

 

This is only his high level opinion about what works, but when we look at our own process, we believe it’s plausible to back into our own process from this simple statement. We describe our process as “a multi-factor, multi-duration model that utilizes a fundamental and quantitative approach to global macro risk management.”  The quantitative sequence for buying or selling a single security is as follows:

 

  1. Is the slope of growth and inflation in those economies under the guise of central banks with the ability to print money accelerating or decelerating RELATIVE to consensus expectation as reflected in market prices?
  2. What is the fiscal and monetary response RELATIVE to the other central banks of the “reserve currencies” who, with the confidence of all global participants for now, tighten their credit spread by printing more money? What emerging market economies benefit or suffer?
  3. What do the effects of a stronger or weaker domestic currency mean for real domestic growth based on the componentry of its growth dynamics? How is this observed to confirm or discredit the tendencies in markets?
  4. Now with this overlay, what is fundamentally happening in a domestic economy to strengthen or weaken the outlook for growth?
  5. Which sectors perform better or worse under each scenario (see all four below)?
  6. With this sector bias, pick your long-short ideas
  7. MOST IMPORTANTLY, how do you execute this fundamental call (HINT: Some form of momentum?)
  8. By studying our intermediate-term duration, we can observe key levels of support and resistance to observe the overall TREND in the market.
  9. If in fact the fundamental and TREND signals match up we manage the risk of the range by buying on red and selling on green on the signals.                 

 

Generating alpha in a market that has gone straight up for the last two years is no easy task. Our best way to seek outperformance begins with #1 above. There are simply four main scenarios in our GIP model (GROWTH, INFLATION, POLICY) for real economic expansion, and front-running the inflection points allows us to pick SECTORS that outperform under each scenario:

 

  1. Growth accelerating, inflation decelerating
  2. Growth accelerating, inflation accelerating
  3. Growth decelerating, inflation accelerating 
  4. Growth decelerating, inflation decelerating

 

The monetary response to each scenario and the implications for the strength of an economy’s real purchasing power is predictable in our opinion, but in this never-before seen monetary experiment, front-running the RELATIVE policy response when the centrally-planned machines of different monetary authorities are confronted with the same scenario is difficult. We believe the best- way to front run the big turns is to take in the relevant economic and market data on a day-to-day basis, and position accordingly.

 

Janet Yellen’s commentary on Wednesday was perceived as more hawkish than the market expected. We weren’t “trading the speech” or hanging on every word, but we didn’t get any indication she is taking a hawkish turn.

 

Across the pond, Europe has turned severely weaker out of a strong first-half, and the market over the last month has indicated an expectation for a RELATIVELY more dovish Draghi. The tone in his most recent speech reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program) immediately if given the authority.

 

Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters and the FX and gold markets are expecting a relatively more dovish Draghi.

 

  • The EUR/USD has backed off 1.5% bps over the last month
    • USD breakout vs. EURO breakdown in our model
    • Gold (USD and POLICY-denominated) is down 3% over the last month

 

CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately we don’t possess a crystal ball, but our domestic view on overly optimistic growth expectations for the full-year remains intact as it has for all of 2014.

 

Don’t be afraid to take up your USD exposure and put a little cash on the sidelines (When the USD is going up!)

 

Have a great weekend.

 

Ben Ryan

Analyst 

 

Relative Speak - COD


What's Next?

Client Talking Points

EURO

One way to keep the USD up is to have an un-elected central planner burn the Euro as the elected ones in Japan do the same to the Yen. Don’t confuse these unprecedented and coordinated currency devaluations with the next global economic expansion, but DAX did recover our 9648 TREND line!

UST 10YR

Tepper (David Tepper, founder of Appaloosa Management) talk gave those who haven’t been long the Long Bond one more chance to buy them on sale yesterday. The UST 10YR Yield backs off again this morning to 2.44% with no support to 2.32%. We’re one bad employment report away from Yellen looking like Draghi has for the last month.

VOLUME

Yes! It came back (sort of) on yesterday’s down move (that’s when we get volume accelerations, on the down moves) with Total U.S. Equity market volume up +29% and +21%, respectively, vs. its 1 and 3 month averages. Biggest risk to U.S. small and mid cap stocks remains liquidity (on the way down).

Asset Allocation

CASH 52% US EQUITIES 0%
INTL EQUITIES 16% COMMODITIES 2%
FIXED INCOME 26% INTL CURRENCIES 4%

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.

BOBE

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. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.

TLT

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

TWEET OF THE DAY

CHINA: in a down wk for US stocks, Chinese stocks ripped higher to +13.3% YTD (Russell is flat YTD)

@KeithMcCullough

QUOTE OF THE DAY

While you’re sitting there thinking about it someone else is out there doing it.

-Rodger Halston

STAT OF THE DAY

It only takes $10,400 to be richer than most millennials (Wall Street Journal).


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September 5, 2014

September 5, 2014 - Slide1

 

BULLISH TRENDS

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September 5, 2014 - Slide6

 

BEARISH TRENDS

September 5, 2014 - Slide7

September 5, 2014 - Slide8

September 5, 2014 - Slide9

September 5, 2014 - Slide10



Gunning For Tepper

“Too close for missiles, I’m switching to guns.”

-Top Gun

 

As a Thunder Bay boy with a lot of testosterone growing up in the 80’s, there weren’t many movies that beat Top Gun. Admittedly, I’m a little competitive, so pardon my passion this morning – “Goose, it’s time to buzz the tower.”

 

“The son of a bitch cut me off!” in telling the world my call on the Long Bond (TLT) is wrong yesterday.  I don’t know the guy, so it’s not personal. I just flat out disagree. That guy, you know – the New Jersey Consensus TV folks love him. His name is Tepper.

 

Tweeters say that David Tepper A) has a lot more money than me and B) has killed it on the levered long side since 2009. He also flamed out in 2008 (down -29.61%), so on his rising rates call, I think he’s beatable. “I think I’ll go embarrass myself with Goose now.”

 

Gunning For Tepper - tg1

 

Back to the Global Macro Grind

 

What we need in this game is more head to head debate. Pro to pro. When someone flips me off with the other side of my position, I want to crush him. I don’t care how much he’s worth or what he’s wearing. I wear a $29.99 watch from WalMart, and I like it.

 

While I’d love to debate Tepper live on interest rate risk (which I still think is to the downside), the reality is that probably won’t happen. (if you know him and he’s game however, I have a nice little 2.0 studio in Stamford called @HedgeyeTV).

 

Debating big macro topics isn’t personal. It’s what those of us who want to be the Top Gun wake up thirsting for at the top of every risk management morning. Last year I was making the call that rates would rise alongside both US growth expectations and the Fed being forced to taper. This year I reversed the call saying that rates would fall as y/y #inflationAccelerating slowed real US growth.

 

Yeah, sweet call Mucker. “Take me to bed or lose me forever.”

 

Seriously?

 

God didn’t call me with the rates call. My team and I made this call the old fashioned way, using our own models and process. When it comes to what other players out there think, we respect their airspace, but when we get in tight in a dog fight like this, we aren’t going to back down.

 

Here are 10 things to think about in terms of why rates are going lower (bonds higher) from here:

 

  1. US GDP growth slowing sequentially in Q3 vs Q2 of 2014
  2. US GDP growth continuing to slow, year-over-year, in 2014 versus the Q3 2013 #GrowthAccelerating top
  3. US GDP entering an early cycle slowdown (bearish on Housing, Consumer, Regional Banks)
  4. US Housing demand not responding to the downside surprise in interest rates
  5. All of Europe slowing in 2H 2014
  6. Japan slowing Q4 2014
  7. Japanese and German 10yr yields of 0.53% and 0.96%, respectively
  8. Institutional Fund Flows reverting back to their slow-growth mean (into bonds, out of stocks)
  9. US 10yr Yield immediate-term TRADE resistance = 2.51%
  10. US 10yr Yield intermediate-term TREND resistance = 2.81%

 

The biggest differentiator in our models versus those who were bearish on rates in 2013 (and bullish on them in 2014) is our rate of change forecasts on both growth and inflation.

 

I have stopped calling it our Growth, Inflation, Policy Model and renamed it our PIG model (same factors, in reverse). Why? Because un-elected central planners are pigs when it comes to devaluing the purchasing power of The People in exchange for asset inflation.

 

To review how all 3 (Fed, ECB, BOJ) of these central planning committees think:

 

  1. When growth slows, they get easier (print money, or threaten to do “whatever it takes”)
  2. As they get easier, their currencies fall, and the real cost of living in their countries rises
  3. As cost of living rises, real consumption growth falls faster, and they ease again

 

Sound familiar?

 

Top 2 headlines on Bloomberg (Economy Go!):

 

  1. “Draghi Sees Almost 1 Trillion in Stimulus”
  2. “Aso Signals Japan Prepared To Boost Stimulus”

 

Aso, as in the one who tore the Japanese people a new one via the Abenomics Policy To Inflate that took Japanese Real Wages to -4-5% year-over-year. Then they blamed the weather. #Nice

 

If the USA shows as much as a sniffle in this morning’s jobs report, what do you think Yellen’s response is going to be? Tighter or easier? We’re one or two bad labor headlines away from the US doing exactly what Draghi just did.

 

Unlike Tepper, I fly commercial. But I can still change my position whenever I want. For now, if I am right on growth slowing and the Fed’s proactively predictable reaction to it, Janet is going to be my Japanese wing-woman on bonds.

 

Out immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.32-2.46%

SPX 1

RUT 1151-1181

VIX 11.34-13.65

EUR/USD 1.29-1.32

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gunning For Tepper - 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 80.64%
  • SHORT SIGNALS 78.61%
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