LEISURE LETTER (09/24/2014)



  • Sept 24: 9 a.m. Revel Auction
  • Sept 24: MTN 11:30 am FYE 2014 Earnings Call
  • Sept 24: Hedgeye Snakeye in Las Vegas
  • Sept 29 - Oct 2: G2E Las Vegas


The amount of stock and cash to be paid to IGT shareholders is unchanged. However, the amendment eliminates the option for shareholders to elect an all-stock, all-cash consideration.  All IGT shareholders will receive a combination of $13.69 in cash plus a number of shares in the new GTK, which will be equal to $4.56, divided by the dollar value of GTK shares prior to the deal closing.

Takeaway:  This reduces the regulatory and disclosure requirements needed to complete the merger.


BYD – launched a new sports wagering application for mobile devices, allowing customers in Nevada to bet on college and professional games and events. 

Takeaway: Boyd taking the next step in on-line gaming, but not likely to impact earnings.


IGT –  Maryland has added a new game to its casinos, the "MegaHits" multi-state, progressive jackpot. Maryland is the fifth state approved by the Multi-State Lottery Association to participate, joining Delaware, Ohio, Rhode Island and West Virginia. The game will be available at Maryland Live! in Hanover, the Casino at Ocean Downs in Berlin and Hollywood Casino in Perryville. Megahits is a slot machine game played at selected casinos in the five states. Jackpots range from $100,000 to seven figures, with bets available in penny and dollar denominations.

Takeaway:  The multi-state MegaJackpot link should help IGT


WYNN – Mixed messages regarding the investigation into the Wynn Cotai land transaction.  GGRAsia is resporting “The relevant investigation is still underway,” the city’s Commission Against Corruption told GGRAsia on Wednesday. However, On Tuesday, Steve Wynn said the investigative team was satisfied with the information the company had provided on the deal and he further said he believed the investigation had been concluded. 

Takeaway: In Macau, nothing is ever approved or closed until the governing agency or bureau says so.


HLT – announced Hilton HHonors, the loyalty programme for Hilton Worldwide’s 11 distinct hotel brands, a new partnership with AirAsia BIG. The partnership allows members of both AirAsia BIG and Hilton HHonors to earn BIG points and HHonors points when they stay at any of the more than 4,200 hotels and timeshare properties within the Hilton worldwide portfolio around the globe, said the companies in a joint statement.

Takeaway: Hilton building out its cross marketing relationships in an effort to promote guest visits to its growing platform of Asian hotels.


MHGC – Activist investor Ron Burkle announced his intention to nominate a board member following the resignation of Derex Walker.

Takeaway: Burkle keeping the heat on MHGC.


Cotai Construction Worker Transportation (Macau Business) The Transport Bureau and three unidentified gaming companies are discussing the use of shuttle buses to take construction workers that live in the mainland from the Border Gate to their workplaces in Macau, according to the director of the bureau, Wong Wan.

Takeaway: The gaming operators attempting to make good with the Chief Executive as well as workers.


Macau Smoking Ban Investigation (Macau Daily Times) Lawmaker Lei Cheng I and her colleagues from the Macau Federation of Trade Unions (FAOM) met with department heads from the Health Bureau (SSM) and the Gaming Inspection and Coordination Bureau (DICJ) yesterday to discuss the control of smoking inside casinos. The lawmaker requested government official to personally inspect the casinos and determine if the casino operators are trying to exploit a legal loophole, enlarging their smoking areas by partially converting their mass areas into VIP areas.

Takeaway: More pressure on the Health and Gaming Inspection and Coordination Bureaus to address the smoking ban concerns and safeguard the health of the gaming floor workers.


Hong Kong National Day Tourism (SCMP)  Hong Kong Inbound Tour Operators Association chairman Ricky Tse Kam-ting said the number of bookings so far was only half of last year's total, and assuming some last-minute bookings, he expected the total to be down 30%. The Chairman noted "There are a lot of good hotel deals in Malaysia [after two tragedies involving Malaysia Airlines planes]. The same goes for Thailand, which is rolling out bargains after political turmoil."

Takeaway: Mainland Chinese tourists pulling back on Hong Kong and shopping trips.


Chinese Tourism for Golden Week – (SCMP) The China Tourism Academy predicted that 480 million people would be holidaying during the period, an increase of 13% year-on-year

Takeaway:  A positive trend, but Macau needs to capture some of this increase in tourism. 


Cyprus Casino Draft Legislation – The Cypriot Government published the a draft of the law for a proposed integrated resort which include:

  • The law provides for a casino of international standard, and a hotel or hotels of international standards exceeding the requirements for a five-star establishment under existing laws with at least 500 luxury rooms, at least 100 gaming tables and at least 1,000 gaming machines.
  • Under the provisions, the operator can create four other premises ‘off-site’ with a maximum of 50 gaming machines per premises but no casino games. These premises must be located outside the district where the resort is based but cannot be sold, rented, transferred or assigned to anyone other than the resort operator. The integrated resort can stay open 24 hours a day, seven days a week and smoking will be allowed on the gaming floor.
  • The initial fee for the casino resort will be determined as part of the initial offer for the 30-year license with 15 years of exclusivity for the operator. The annual fee to the state each year for the first four years will be €2.5 million, rising to €5 million for years four to eight, after which it may be reviewed upwards by the Cyprus Gaming and Casino Supervision Authority (CGC).
  • On top of that, the government hopes to pick up 15%, a casino tax, from gross gaming revenues per month.
  • The supply of gaming services – to be defined by inland revenue – will be VAT-free but the rest of the resort’s facilities will not be exempt.

Takeaway: Looks like a decent opportunity for suppliers but may be scaled down.

Singapore Punter Exclusion Broadens (GGRAsia) Twenty-three non-casino gambling operators on Tuesday joined Singapore’s centralized self-exclusion scheme, which now covers social clubs with jackpot machines and sports betting clubs. Twenty-three of the city's seventy-three non-casino gambling operators on Tuesday joined Singapore’s centralized self-exclusion scheme, which now covers social clubs with jackpot machines and sports betting clubs. As of August 31, there were over 500 active non-casino self-exclusions, as compared to the 165,000 active self-exclusion applications covering casinos.

Takeaway:  Singapore taking a stance on problematic gambling beyond the two integrated resorts.  


Singapore Consumer Confidence Slightly Higher – In the latest ANZ-Roy Morgan Singapore Consumer Confidence Index survey, 27% of respondents said their family are better off financially now than a year ago, higher than the 20% in the previous survey, 33% expect their family to be better off financially in a year's time, up from 28% previously; however, 12% of respondents think they are now worse off financially than a year ago, also rising from the 8% in the previous survey.

Takeaway:  While confidence is higher, it may not translate into a higher gaming budget, with so many restrictions surrounding the IRs.


Mixed fortunes for Genoa (Seatrade Insider)

After a record 1,050,085 passengers in 2013, Genoa’s Stazioni Marittime is expecting just over 800,000 passengers on around 200 calls this year.

Takeaway:  European port gives a conservative outlook for 2015.


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.

Retail Callouts (9/24): KSS, BBBY, TGT, WMT, Holiday Sales

Takeaway: KSS Short call at 11am. BBBY finally turns – how long will it last? going heavy on price. Deloitte Holiday survey bullish, as always.



KSS CALL TODAY AT 11am -- Why We Think It's a Short

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Thursday (9/25)

NKE - Earnings Call: 5:00pm


Friday (9/26)

FINL - Earnings Call: 8:30:am





BBBY - 2Q14 Earnings

This is the first solid print for BBBY in a very long time. For those (including us) who missed the event, we'd simply ask...if BBBY could disappoint repeatedly for the better part of two years, why should we assume that the positive turn lasts only one quarter? The company took up numbers, but our sense is that there's a lot more room to go. We're adding this one to our long bench -- need to dig in to gauge additional upside.


Retail Callouts (9/24): KSS, BBBY, TGT, WMT, Holiday Sales - 9 24 chart1



TGT, WMT - Kantar Retail: Target Canada beats Walmart Canada on pricing



  • "Target Canada is aggressively repositioning to drive its price value, according to a basket pricing study by Kantar Retail."
  • "'Target’s price leadership in Canada has clearly shifted,' noted Robin Sherk, director of retail insights, Kantar Retail, and contributor to the study. 'We found that the price of Target Canada’s overall basket was 3.9% less expensive than Walmart’s. In our initial study, the retailers’ basket values were effectively even.'"


Takeaway: This might very well be the right move for Target Canada, as it needs to dramatically improve traffic to it's stores. But we can't shake the concern that a) in the end, Wal-Mart will not lose on price...even if it sells product below cost, and b) winning on price is a strategy of last resort. We want to see Target win on assortment, or value-add, or customer experience, or some other factor that sets it apart from the competition. Once you go become a price leader, or attempt to, there's really no going back.


Deloitte Sees Holiday Sales Rising 4.5% as Incomes Gain



  • "U.S. retail sales may increase as much as 4.5 percent this holiday season, exceeding last year’s gain, as improving incomes and job prospects encourage consumers to open their wallets, according to Deloitte LLP."
  • "Sales, excluding purchases of motor vehicles and gas, may climb to as much as $986 billion in November through January, Deloitte, a New York-based consulting firm, said today in a statement. Holiday sales by that measure rose 2.8 percent last year, according to the company."


Takeaway: These forecasts are interesting, but we can't really use them. Deloitte historically has proven that it does not know how to forecast a sales number outside of a band of 3-5%. It was right in 2012, when sales in Nov/Dec grew by 3.6%. But its' 2013 forecast of 4-4.5% was a bust, with sales only growing 1.9%. Let's not forget that this group is part of the organization that is the auditor for a couple dozen major retailers, including Best Buy, Gap, Sears, Dick's, Nordstrom, Coach and Toys R Us.  We're not saying that results are compromised, but it's certainly not incentivized to tell the world that the holiday sales outlook is bad.





AMZN - In Germany, Amazon Keeps Unions at Bay



  • "German unions are accustomed to wielding formidable influence. Union officials sit on supervisory boards at blue-chip companies. They have a track record of wearing down foreign employers."
  • "Not so at Inc.  For the 16 years the online retailer has done business in Germany, it has shunned the nation's consensus-driven labor model. It ignores trade unions and largely dictates contract terms at its nine German distribution centers, where it employs about 9,000."


BBY - Best Buy Teams With Designers for Tech Accessories



  • "A new line of tech accessories — designed by Nanette Lepore, Anna Sui and Isaac Mizrahi New York — will be sold exclusively at all Best Buy stores.
  • The collections, which include smartphone, tablet and laptop cases, will launch at and Best Buy stores on Oct. 5 and are available for pre-order, beginning today."


Toys'R'Us to bolster workforce with 45,000 holiday hires



  • "As part of its holiday strategy, Toys"R"Us plans to hire 45,000 seasonal employees at its stores and distribution centers nationwide, more than doubling the company's workforce as it continues preparing for the highly contested shopping season ahead."


REI makes executive appointments



  • "REI announced that Annie Zipfel has been promoted to senior VP marketing. With her, REI will not hire a chief marketing officer as previously announced, but instead add a senior creative leader to the company."


EBAY - PayPal in partnerships with Bitcoin processors



  • "PayPal has made its first direct entry into the virtual currency space. The company announced via a blog post that it has entered into agreements with leading Bitcoin payment processors BitPay, Coinbase and GoCoin. The agreements let PayPal’s digital goods merchants in North America accept Bitcoin, with a simple integration through the PayPal Payments Hub."


RSH - Report: Major vendor won’t alter terms for RadioShack



  • "RadioShack Corp. has reportedly so far been unsuccessful in its efforts to convince an unidentified ‘major vendor’ to modify a commercial agreement in a way that could benefit a financial restructuring. According to the Wall Street Journal, RadioShack still has not identified the vendor or exactly what terms it wants to restructure, but has been negotiating with wireless carriers including AT&T and Sprint to ease the terms under which the retailer is allowed to resell equipment."


Victoria Beckham Unveils First London Store



  • "Victoria Beckham has built a dream space on Dover Street in London, her first store and 'second home' in Mayfair, where she can express her vision on the shop floor. The 6,040-square-foot space spans three floors, and has more in common with a contemporary art gallery than a typical London luxury flagship."


Volatility, the Consumer and China

Client Talking Points


Same #process, buy equities at the low-end of their risk range and high-end of volatility’s. The VIX risk range is now 13.13-14.99; this is not for the faint of heart, as total macro volatility comes off its most asymmetric low, ever.


As in Discretionary (XLY) stocks got pounded back to flat for 2014 year-to-date yesterday; this was a sector a lot of people chased on the “down oil” thing, but its down -2.7% for the month – down oil isn’t going to change the all-time high in U.S. cost of living. Commodity deflation is setting in, but pricing is sticky.


The only real good equity news in the last 48 hours was Chinese stocks ripping fresh year-to-date highs, up another +1.5% overnight to +14.4% year-to-date for the Shanghai Comp, running neck and neck with our preferred way to be long of U.S. #GrowthSlowing, the Long Bond (TLT) +14% year-to-date.

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


HOUSING: mortgage demand continues to test fresh YTD lows - MBA weekly purchase apps down another -4.1% $ITB



In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.

-John Kenneth Galbraith


China consumes over 40% of the world’s industrial metals (up from 5% in 1980).

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Adapt and Evolve

“When we are no longer able to able to change a situation – we are challenged to change ourselves.”

-Viktor E. Frankl


As egotistical as many successful stock investors seem on the outside, a common attribute for many of them is, ironically, their ability to change their minds.  Now often some poor analyst in their employ is blamed for the mistake, but when the facts and/or thesis changes, the position is rightfully exited.


Hubris is a dangerous thing and in investing it can be downright deadly.  The ability to adapt to new information and admit mistakes, on the other hand, can be an immensely valuable skill.


The ability to adapt, of course, is hardly new to our species.   A recent article in Smithsonian magazine based on new research actually argues that the ability to adapt is maybe the most important skills and has enabled homo sapiens to thrive over the last 1.85 million years. 


According to this article:


“What results from these analyses is the realization that there is no simple, clear picture; no obvious mechanism as to why the genus we know as Homo came to arise and dominate. What we've long thought of as a coherent picture—the package of traits that make Homo species special—actually formed slowly over time.”


So if it was not our unique skill set that allowed us to thrive, what was it? Well, according to the article, the answer is quite straight forward:


“That early Homo species would have had to cope with this constantly-changing climate fits with the idea that it was not our hands, nor our gait, nor our tools that made us special. Rather, it was our adaptability.”


Adapt and Evolve - dj7


So, of course, it begs the questions: when are the Old Wall consensus economists going to adapt their projections for 3% U.S. economic grow in perpetuity?


Back to the Global Macro Grind...


The 3% growth projection noted above may seem like a non-sequitur, but the comment was actually born of out attending the Bloomberg Markets Most Influential conference earlier this week and comments from William C. Dudley, the President of the New York Fed.  Since Bloomberg radio and TV called him one of the smartest men in the world, it seems only prudent that we pay attention to his comments.


Aside from his comments that all will indeed be well if we hit 3% in growth in perpetuity, Dudley also indicated he doesn’t have a lot of faith in that happening.  We’ve paraphrased below, but a couple of interesting comments from Dudley were as follows:

  • The Fed is difficult to manage as it relates to the economic estimates that come in from various methods (Takeaway: this transparency and democracy stuff related to setting policy may be less effective if the inputs aren’t systematic, which they are not);
  • Dudley said not to overweight the “dots . . . he has a wide confidence interval in his dots (Takeaway: we would agree as the fascination with the dots is reaching near epic proportions, so they are certainly soon to be irrelevant);
  • According to Dudley, the Fed doesn’t care about the dollar per se, but too strong of a dollar is an economic deterrent (Takeaway: the Fed cares about the dollar, and, shockingly still doesn’t get the economic value of a strong dollar policy); and
  • There are reasons to be patient on monetary policy and as an example monetary policy was tightened too quickly during the Great Depression (Takeaway: if you didn’t know whether Dudley was dovish, now you know.  But really Bill, a Great Depression reference?).

On one hand, we certainly appreciate Dudley acknowledging the flaw in forecasting--it shows his adaptability.  Conversely, the Great Depression and strong dollar fear mongering is a little disturbing, but certainly difficult to read much from brief comments on a thirty minute panel!  And who are we to judge...


As for Hedgeye, we don’t know what the Fed is going to do next and frankly despite my comments above, Fed watching is a bit of fool’s errand.  In our analysis, as the data changes, we adapt.  It is that simple.


The most recent change for us recently has been the view that the U.S. economy is now likely in what we call Quad 4, which is an environment in which growth is slowing, inflation is slowing, and monetary policy is loose.  


Especially on inflation, this is an about face for us.  But that fact is that headline inflation is now down to +1.8% for the quarter, which is a deceleration.    Along with that many commodities are now deflating incrementally, and Brent Crude in particular is down more than -12% on the year.


Even as inflation is decidedly decelerating, we do continue to get mixed data on growth (some good, some bad).  But as my colleague Darius Dale recently highlighted, we think it’s important to highlight the risk of #GrowthSlowing given where consensus expectations for growth remain – i.e. out to lunch. Moreover, the lack of dispersion among forecasts remains a key risk.


Specifically, in the previous five quarters, the standard deviation of growth is 0.44% and peak to trough is 122 basis points.   Meanwhile the forward consensus projections for the next five quarters have a standard deviation of 0.02% and peak/trough spread of 18 basis points.  We don’t know much, but we do know those projections will be missed. 


Our immediate-term Global Macro Risk Ranges are now (with intermediate term TREND signal in brackets)


RUT 1115-1149 (bearish)

Shanghai Comp 2 (bullish)

VIX 13.14-14.99 (bullish)

Pound 1.62-1.64 (bullish)

Copper 3.01-3.09 (bearish)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Adapt and Evolve - chart of day


Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document.


Best of luck out there,


Darius Dale

Associate: Macro Team


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