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LEISURE LETTER (09/12/2014)



  • Sept 12: SNOW F4Q14 11:30 am
  • Sept 16: Trump Plaza closes
  • Sept 17-18: Hedgeye Cruise Pricing Survey mid-Sept


2282.HK/MGM; 880.HK/SJM  (GGRAsia, Macau Business Daily) A group of casino workers from MGM China is reportedly meeting on Monday (September 15) with the city’s Labor Affairs Bureau to complain about the company’s pay policies.


Another protest by SJM employees will occur on Saturday. The gathering is set for 3:00pm, after which the demonstrators plan to march to the Lisboa and Grand Lisboa casinos.

Takeaway: Labor protests all over the place - labor costs will continue to rise


MAR – announced plans to expand its Autograph Collection portfolio in Europe with new additions in Zurich, Switzerland and Barcelona, Spain in the spring of 2015 with the new 245-room Kameha Grand Zurich and the 83-room boutique hotel, The Cotton House, Barcelona.

Takeaway: Growth via the lower management revenue affiliated properties channel. Barcelona remains one of the top global tourist destinations.


HOT –  announced plans to debut The Luxury Collection brand in California’s famed Napa Valley with Las Alcobas, a Luxury Collection Hotel, Napa Valley that will open in the fall of 2015 following a comprehensive multi-million renovation that will transform the former Grandview Hotel & Spa.

Takeaway: A good property and destination addition to The Luxury Collection for Starwood.


TVPT – Travelport files amended S-1; to offer 30M shares in range of $14-16/share through Morgan Stanley, UBS, Credit Suisse and Deutsche Bank. TVPT's principal shareholders include: Blackstone Funds and TCV Funds. 

Takeaway: "Redefining travel commerce"...more like an equity market bubble in our book. After all, what's new about yield management and SAAS?


MTN – announced that the company has acquired Park City Mountain Resort from Powdr Corp. for $182.5 million in cash, settled all aspects of the prior litigation with Park City Mountain Resort, and expects $35 million in incremental EBITDA in FY2015.

Takeaway: A great acquisition at a very inexpensive EBITDA multiple while also adding a new mountain to the EPIC Pass program.


Insider Transaction:

PNK – EVP, Secretary and General Counsel John A. Godfrey acquired 25,000 shares of the company’s stock (which were part of a stock option award) for $16.92 and then sold the same 25,000 shares for $27 on Tuesday, September 9. The transaction was part of a 10b5-1 plan adopted on March 13, 2014 and following the sale, Mr. Godfrey now directly owns 141,722 shares in the company and 50,000 additional options with an exercise price of $16.92/share that expire on May 16, 2015.


Las Vegas Old is New – Paragon Gaming told the Nevada Gaming Control Board, The Rivera Casino is considering a $100 million renovation. The Riviera opened on April 20, 1955 as the first high-rise and the ninth resort on the Las Vegas Strip. Today, The Rivera has over 2,100 rooms and a 110,000 sq ft of gaming space. Paragon has operated the property for more than a year, following the departure of several Riviera executives. Riviera's ownership group includes Starwood Capital Group. 

Takeaway: The renovation of the north end of the Strip continues. 


China Loan & Money Supply Growth

    • New yuan loans CNY702.5B vs CNY700B consensus and CNY385.2B in July
    • Loan growth +13.3% y/y vs +13.4% in July
    • Deposits +10.1% y/y vs +10.9% in July
    • Total social financing CNY957.4B vs CNY1.130T consensus and CNY273.1B in July
    • M2 +12.8% y/y vs +13.4% consensus and +13.5% in July

Takeaway:  Lending continues to be weak


China Auto Sales – According to the China Association of Automobile Manufacturers, Chinese drivers bought 1.5 million passenger cars in August, an increase from 1.35 million units in August 2013.


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.

Arena or Circus?

This note was originally published at 8am on August 29, 2014 for Hedgeye subscribers.

“Because there is no effort without error and shortcoming.”

-Teddy Roosevelt


That’s one of the best quotes from one of the best leadership speeches in American history – President Teddy Roosevelt’s “The Man In The Arena” (more formally referred to by political types as his “Citizenship in a Republic” speech).


I’m not much of a political type. I’m more of a Mucker in the arena type. Perversely, I love getting smacked around once in a while. I love to fight against consensus. Yes, it can get messy. But working alongside those of you whose portfolios are “marred by dust and sweat and blood” drives me.


Those of you who didn’t get run over buying the tops of the 2000 and 2007 US stock market bubbles get where I am coming from. We are going to do this all over again. And while this time may be different, we know “the triumph of high achievement” … and if we fail, at least we’ll do so “while daring greatly.”


Arena or Circus? - tr


Back to the Global Macro Grind


I obviously love that speech, but I don’t think our call for US #GrowthSlowing as inflation accelerated (from 3 year lows) in 2014 was much of a dare at all. It was a playbook modeling call. Amidst all of the storytelling out there, the easiest US Macro positions to take were:


  1. Long Inflation Assets in 1H 2014 (JAN-JUN)
  2. Long Slow-Growth all year long (Long Bond and anything Equities that looks like a Bond)
  3. Short US Domestic Growth (Russell 2000)


Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)

*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better


But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”


The Dow, btw, is up less than 3% for 2014. Thanks for coming out.


If you’re a hard core perma growth bull, where you should really be long is India. Unlike the Russell 20000, India’s stock market (BSE Sensex) closed the month at its YTD highs, +27.7% YTD. Inflation is falling there – and real consumption growth is accelerating. Sound familiar?


It certainly doesn’t sound like Europe.


European central planning bureaucrats (who are just like the un-elected ones we have here at the Fed) live in perpetual fear of what the general population wants (hint: lower cost of living). Read their conflicted and compromised media headlines this morning:


  1. “Eurozone deflation risk at its highest level since 2009”
  2. “Draghi hints at more stimulus”


This isn’t the arena of real life where real players have a real scoreboard. This is a joke.


For those of you who recall what the Keynesian finance newspaper (The Economist) was trumpeting last year (Abenomics), only 1-year after implementing 60-70 TRILLION Yen in incremental “easing”, here’s what Japan reported for July 2014:


  1. Japanese inflation +3.4% y/y
  2. Japanese Household Spending -5.9% y/y
  3. Japanese Housing Starts -14.1% y/y


In Hedgeye rate of change speak, “y/y” means year-over-year (or what it is now versus last year). And in Japan it’s just plain sad to watch. If you’re blowing up on the golf course this weekend, try it yourself – just keep doing the same things, over, and over, and over again. But don’t expect different results.


“So” Europe definitely needs to do that… definitely, right?


Right, right. And as US growth continues to slow from this fanciful Q2 headline Obama was trying to trumpet yesterday (newsflash: it’s Q3), guess what your central planning committee at the Fed is going to do in the face of that? Must do moarrr easing…


With a few Hedgeye Best Short Ideas going against us (like YELP) right now, I have plenty of issues of my own to deal with, but a broken process is not one of them. If I had a broken process, I would either get fired or mocked.


Where I grew up, they call the place where people who get paid to get mocked a circus. That’s the perfect place for a bunch of unaccountable people who are bought and paid for by governments policies to perform.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.32-2.39%

SPX 1972-2009

RUT 1138-1175

Shanghai Comp 2181-2280

VIX 11.34-13.90

EUR/USD 1.31-1.33


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Arena or Circus? - COD

September 12, 2014

September 12, 2014 - Slide 1



September 12, 2014 - 2

September 12, 2014 - 3

September 12, 2014 - 4




September 12, 2014 - 5

September 12, 2014 - 6 

September 12, 2014 - 7

September 12, 2014 - 8

Bernanke: Yep, He’s Back

Client Talking Points


Yep, he’s back – speaking for fees and making comments that are in line with his forecasting track record on growth #reckless. Allegedly (at a Morgan Stanley lunch yesterday) Bernanke said growth was going to surprise on the upside and he was surprised that the UST 10YR was still < 3%. We think he’ll be dead wrong on this forecast.


We weren’t there, but looking at the intraday, we have no doubt Bernanke was somewhere saying something like that. It’s sad, but we have to risk manage this until Yellen tones it down next week – immediate-term risk range has widened (that’s dangerous – leading indicator for bond market volatility) to 2.33-2.58%.


Basically everything macro is one big correlation trade all of a sudden to Up Dollar, Up Rates (i.e. Down Oil, Down Gold, Up SPX, etc.) – with 30-day correlations vs. USD close to +/- 0.8, there’s huge TREND reversal risk now across macro markets if/when this Bernanke thing is proven wrong and/or Yellen backs the market off the higher rates expectation.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


FX Volatility is officially on again thanks to Draghi and Bernanke



You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.

-Buckminster Fuller


China remains bullish in our model, the Shanghai Composite is up another +0.9%  to 2014 highs of +13.6% year-to-date.

CHART OF THE DAY: The New Fundamental Analysis: Front-Running Fed Leaks!

CHART OF THE DAY: The New Fundamental Analysis: Front-Running Fed Leaks! - Chart of the Day


Bernanke allegedly (and recklessly) told a group of investors during a secret lunch yesterday that US GDP growth was going to surprise to the upside (i.e. be better than 3% consensus) and that he could not believe the 10yr was still trading under 3%. In Fed whisper speak, that’s code for Janet is going to get more hawkish (look at the intraday chart, post lunch) … but is she?

Hydra-Headed Fed

“A monster, a hydra-headed monster…”

-Andrew Jackson


That’s what President Andrew Jackson called the Bank of The United States as he took office in 1829 – a “hydra headed monster equipped with horns, hoofs, and a tail so dangerous that it impaired the morals of our people, corrupted our statesmen, and threatened our liberty.” (Hamilton’s Curse, pg 69)


And that’s what I am going to call Ben Bernanke’s legacy as of this morning – the Hydra-Headed Fed. After doing what he allegedly did at a super secret Morgan Stanley lunch yesterday, that is exactly what this man deserves – someone calling him out on a new and tangible market risk that he just created.


Hydra-Headed Fed - hydra bernanke


Again, allegedly (because I wasn’t there), Bernanke recklessly told a group of investors that US GDP growth was going to surprise to the upside (i.e. be better than 3% consensus) and that he could not believe the 10yr was still trading under 3%. In Fed whisper speak, that’s code for Janet is going to get more hawkish (look at the intraday chart, post lunch) … but is she?


Back to the Global Macro Grind


Notwithstanding the fact that Bernanke was getting paid bank to whisper these sweet nothings into the ears of those with a seat at the almighty’s table, is this what the “transparent” and “accountable” Fed wants? Is Bernanke on the same page as Janet? Or, fully loaded with Draghi talking up the drugs in Europe, is this hydra-headed-un-elected beast out of communication control?


If you don’t think this matters, think again. And think of it in risk terms (i.e. what happens if something like the opposite happens at the Fed meeting next week). What happens if and when Janet Yellen says, ‘hey, I want to be “data dependent” and the recent employment and housing data slowed’?


In real-time market risk management terms what Bernanke’s comment does is:


  1. Widens the immediate-term risk range of the 10yr to 2.33-2.58%
  2. Ups the probability of accelerating bond market volatility
  3. Confirms the recent breakout in foreign currency volatility


In other words, the Hydra-Headed Fed is going to perpetuate the one thing Bernanke trumpeted (both in 2007 and now) as his great success – eviscerating market volatilities.


If you don’t follow it as closely as some of us do, the context of this moment in US central planning history is as critical as it gets. You have to go all the way back to when the Jeffersonians crushed Hamiltonian big government guys (200 years ago) to get what I think The People are really going to get right if the Fed, ECB, and BOJ create the next crisis.


They are going to get that these Policies to Inflate didn’t work.


For the economy, that is…


Now if you ask some of the perma bull economists out there how the economy is doing, it’s just peachy. Yesterday, I think Nancy Lazar wrote that US “consumer confidence is breaking out to the upside.” Maybe Wall Street consumer confidence is… but, please, do not confuse that with the real America’s confidence in negative purchasing power and real wage growth.


By the Federal Reserve’s own admission (they published this research last week), 2/3 of Americans never left being in a recession. Median incomes declined -5% for the bottom 60% of Americans over the 2010-2013 period as the cost of living in the US has ripped to all-time highs.


Oh, but gas prices are going to fall (then rise)… right…


Again, this is where the Hydra-headed monster of market expectations really matters – it’s called correlation risk:


  1. When Fed heads use communication tools to talk up rate hikes (like Bernanke just did) USD and rates rise
  2. When USD and rates are rising, at the same time, commodities, oil, Gold, etc. go down
  3. The machines (quants) then chase macro correlations, and macro markets get overbought/oversold


After the biggest weekly rate of change move for the currency market since 1997 (not a good reference date for globally interconnected macro risks!), on a 6 week duration, here’s the macro market’s current correlation to USD:


  1. Euro vs USD = -0.99
  2. Silver vs USD = -0.93
  3. Gold vs USD = -0.90
  4. Brent Oil vs USD = -0.74
  5. SPX vs USD = +0.72


That’s why I use the word “recklessly” to describe what Bernanke did yesterday. If Yellen doesn’t talk up the US Dollar and Rates (which Americans should love by the way), the entire macro trade dominating markets right now can easily (and quickly) reverse.


Is this normal? Is this acceptable? Was this the America we all like to think of as “free market capitalism”?


If there ever was a day to be scared of the monster of expectations that both the Fed and Old Wall has created, this is probably it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.33-2.58%


RUT 1154-1181

USD 83.66-84.91

EUR/USD 1.28-1.30

WTIC Oil 91.64-95.36

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hydra-Headed Fed - Chart of the Day

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