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Restoration Hardware: Stealth Revenue Driver

Takeaway: The company's new financing program plus growth in in-house interior design gives us greater confidence in our long-term revenue model.

This note was originally published October 03, 2014 at 09:04 in Retail

Last night (Thursday night) RH announced a long-term financing program that we think is positive news for its top line. The company already offers a credit card, but that carries a much higher interest rate (24.99%) and is a shorter-term financing bridge for consumers. With the new RH program, consumers can finance purchases at 5.99% for a duration ranging from 24 months to 7-years.


Restoration Hardware: Stealth Revenue Driver - chart1 10 3 14


There's no question for us that this is a positive for RH's top line. In our latest RH consumer survey, we asked 1,000 consumers how important it is for a furniture store to offer store credit -- on small, medium and large purchases.  Interestingly, it is 'Very Important' to only 13.6% of consumers for 'Small Purchases' and only '18.8% for 'Medium Purchases'. But once we get into the 'Large Purchase' classification, it is 'Very Important' for 41.7% of customers. Even 33.4% of the $100k+ demographic said that it Very Important to their purchasing decision.


Restoration Hardware: Stealth Revenue Driver - chart2 10 3 14


An interesting note is the screen shot below that 'advertises' consumers to meet with RH designers. This is the first time we EVER saw this advertised by the company. Approximately 40% of RH's business comes from designers, but they are largely third party designers. These are people that are hired by a customer and shop dozens of stores, where they pick and choose assortments that work -- maybe including RH, maybe not.


Restoration Hardware: Stealth Revenue Driver - CHART4 10 3 14


But now RH not only has a massive product assortment (i.e. 3,300 pages), but a stepped-up in-house Interior Design team AND  a superior long-term financing program. Add all that up and you get a stealth revenue driver that will build meaningfully.  We're not taking up our estimates (which are already high on the street by a country mile) but these factors give us more confidence that the company will get there.

Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


The Sugar, Soybeans, and Coffee markets experienced the most BULLISH relative positioning change in the CRB week-over-week.

The Cotton, Silver, and Copper markets experienced the most BEARISH relative positioning change in the CRB week-over-week:


Commodities Weekly Sentiment Tracker - chart1 CFTC Net Fut. and Options


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The Corn, Natural Gas, and Live Cattle markets are positioned for HIGHER PRICES near-term
  • The Lean Hogs, RBOB Gasoline, and Silver markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis


3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.


  • The Corn, Wheat, and Sugar markets are positioned for HIGHER PRICES in 1-year  
  • The Lean Hogs, Live Cattle, and WTI Crude Oil markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot  1yr basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 Aggregate Open Interest         


Ben Ryan



LEISURE LETTER (10/06/2014)



  • Wed Oct 8 & Thurs Oct 9:  Todd Jordan in Macau
  • Wed Oct 8    HT Investor Day


GTK:IM & IGT – announced an extraordinary GTECH shareholders’ meeting has been called for November 4, 2014, to approve the common cross-border merger of GTECH and Georgia Worldwide - which will then set the stage for Georgia Worldwide to acquire IGT. 

Takeaway: Merger appears to be moving toward closing faster than the anticipated Q1 2015 closing.


GENS:SP – (Singapore Business Review) Genting Singapore is struggling to stay afloat as its ultra-rich gamblers vanish, with the article noting the casino's VIP volumes are driven mainly by mainland Chinese. However, these players are disappearing due to the lack of junkets in the island, who extend credit and collect debt from VIPs.

Takeaway: Recently touted as a relatively safe haven investment opportunity by some sell-side analysts, Singapore looks risky to us with macro economic pressure on Mass and shrinking VIP volumes. 


MGM, 2282:HK, 27:HK and 880:HK (Macau Business Daily) Some 800 gaming SJM Holdings Ltd., MGM China Holdings Ltd. and Galaxy Entertainment Group workers participated in industrial action on Friday and Saturday. Following a series of protests and movements demanding a lift in their wages yet not met, these workers, primarily dealers and supervisors, decided to walk off the job by taking collective sick leave and working to rule during National Day Golden Week, according to Cloee Chao, secretary general of the gaming labor union Forefront of Macau Gaming. Ms. Chao told Business Daily that half of the workers are from SJM’s Grand Lisboa, while some 200 are from MGM, with the remaining from the StarWorld Hotel of the Galaxy Group.

Takeaway: We understand that despite the industrial action, casino floor activities continued without interruption.


LVS – Sands Bethlehem is embarking on a two-year expansion plan that looks to double its hotel to 600 rooms, add a convention center that can handle 500 people and bring in a Bass Pro Shops that will draw up to 3 million visitors a year. More immediate, the restaurants will be reprogrammed with a new celebrity chef offering to compliment the current Emeril Lagasse programming. Additionally, new policies will be implemented to reduce the loitering by bus riders from the Asian neighborhoods of New York.

Takeaway:  Mr. Juliano reprogramming Sands Bethlehem in an effort to make Bethworks more appealing as new casinos threaten to cannibalize patrons and revenues.


PENN & GLPI – The former Argosy Sioux City casino has been sold to an Illinois company that plans to move the riverboat down the Missouri River next week to Wood River, Illinois.  Financial terms were not disclosed. 

Takeaway: The final end to this embroiled riverboat.


HLT – announced it has entered into an agreement with Anbang Insurance Group Co. Ltd. (“Anbang”), under which Anbang has agreed to purchase the Waldorf Astoria New York for $1.95 billion. As part of this long-term strategic partnership, Anbang will grant Hilton Worldwide a management agreement to continue to operate the property for the next 100 years, and the hotel will undergo a major renovation to restore the property to its historic grandeur. Hilton Worldwide intends to use the proceeds from the sale to acquire additional hotel assets in the U.S. in one or more transactions as part of a like-kind exchange under Internal Revenue Code Section 1031. These acquisitions will be finalized and announced at a later date. Hilton disclosed LTM EBITDA of $59 million and Adjusted EBITDA of $61 million as of June 30, 2014.

Takeaway: In an unexpected move, Hilton management sells the Waldorf New York for >30x EBITDA.  While removing a growthy development opportunity, the sale appears to be the right financial decision - a huge multiple while retaining a management contract.  


MAR – while protesting the ruling, MAR announced it was fined $600,000 for violating the FCC's open airwaves rules when it protected its Wi-Fi network at Gaylord Opryland, while using FCC-authorized equipment to protect the property's network from external, cyber-attacks and identity thefts.

Takeaway: Not material to MAR nor RHP as the equipment was previously removed, the fine was fully reserved, an no other legal actions are pending.


NCLH – Crystal Cruises, one of the world's top-rated cruise lines, has announced that one of its ships, the Crystal Serenity, will traverse the fabled Northwest Passage on this Pacific-to-Atlantic voyage, beginning from Seward, Alaska, through the north part of mainland Canada and the Arctic Ocean to New York City. The cruise sails from Aug. 16 to Sept. 17, 2016, will cover 900-miles during the 32-day luxury cruise and fares start at $19,975 double occupancy.

Takeaway: Any one interested in sailing over the North Pole?



RCL – asked permission to keep the casinos, souvenir shops and other services open after the cruise ships dock at Vietnamese ports. Royal Caribbean is planning to increase its business in Vietnamese ports.  They are aiming to bring 25,000 cruisers a year with bigger cruise ships visiting Chan May Port in Thua Thien – Hue province. After cruise ships dock at Vietnamese ports, many passengers opt to stay on the ship and the cruise line would like to offer more entertainment onboard.

Takeaway: RCL attempting to capitalize on Asian's wanting to challenge their luck rather than disembarking for a land tour.


Macau Gross Gaming Revenue for September 2014  – according to the DICJ total GGR was HKD24.819bn, down by 11.74% year-over-year and and down 11.47% versus August 2014. On a year-to-date basis, total accumulated Gross Gaming Revenue was HKD267.904bn, an increase of 5.87% year-over-year.

Takeaway: Modestly better than last week's indicated down 13% year-over-year


Macau Golden Week Visitation – total visitation through October 5th was 775,913, an increase of 14.4% year-over-year while total visitors from Mainland China were 632,646 an increase of 13.9% year-over-year. 

Takeaway: Decent increase in visitation but far short of prior year's 20%+ year-over-year increase in Mainland visitation. 


Macau Smoking Ban (GGRAsia) Only 12 of Macau’s casinos and slot-machine parlors are offering smoking lounges on their mass floors to gamblers, the government confirmed in a statement over the weekend. That means 16 gaming venues have had to adopt a default position - to go completely smoke-free on their mass floors, including the so-called premium mass areas, at 12.01 am on Monday.

Takeaway: The start of a new day in Macau gaming.


Europe Slowing – on September 16th, Thomas Cook Group commented that despite strong late summer 2014 booking, the firm was seeing recent weakness in consumer confidence across Germany.  Today, Disney commented that 2014 results for the company will be negatively impacted by lower attendance at Euro Disney.

Takeaway: Another warning salvo that Europe is/could be slowing. Not good for CCL and RCL.


Massachusetts Gaming Referendum – (Boston Globe) a recent poll by the newspaper indicated widespread gaming support and opposition to repeal gaming legislation by 53% oppose repeal and 38% support repeal.

Takeaway: Would appear voters are siding with WYNN, MGM, and PENN - most positive for PENN since their new casino is scheduled to open early next year in Plainville.


Mohegan Sun at Pocono Downs Expansion – in an effort to attract more visitors and make the property more of a family destination, the company is planning an expansion to include The Ultimate Sports complex that will have two large indoor sports domes with seven artificial turf fields and a  snow park will feature snow-flex skiing and snowboarding mountain. A timetable for the project has not yet been established, the expansion is expected to be completed within the next three to five years.

Takeaway: Competition to become more family friendly as well as programming to drive non-gaming visitation.

Ski Resort Consolidation – Deer Valley Resort near Park City announced Friday in a news release that it has agreed to buy Solitude Mountain Resort in Big Cottonwood Canyon. Deer Valley will take over the resort in 2015. Terms of the sale were not disclosed. Deer Valley officials said they will continue to allow snowboarding at Solitude. Deer Valley is one of only three U.S. ski resorts that bans snowboarding.

Takeaway: No bid from the publicly traded operators.


Slowing Mergers & Acquisitions Graton Resort & Casino has decided not to pursue its opportunistic refinancing, citing market conditions. Bank of America, Wells Fargo, and U.S. Bank had shopped a $950 million loan package for Graton Resort, including a $500 million, six-year TLB that was talked at L+425-450, with 1% LIBOR floor, offered at 99. The debt package also included a $100 million revolver and $350 million A term loan that was talked at L+350, offered at 99.5. Graton wasn’t facing any near-term maturities. The issuer in 2012 placed a $375 million, six-year term loan that cleared at L+750, with a 1.5% LIBOR floor, along with $450 million of 9.625% secured notes due 2019. Graton Resort & Casino, which opened in November 2013 outside of Rohnert Park, Calif., is owned by the Federated Indians of Graton Rancheria and is operated by Station Casinos. It is an upscale Las Vegas-style casino and entertainment destination catering to the San Francisco-area market. A 200-room hotel is being added to the site.

Takeaway: The large SGMS loan may have flooded the market and doused demand. 


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.

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U.S. and Europe

Client Talking Points


UST 10YR Yield is down another -9 basis points week-over-week, now down -19.5%, for 2014 year-to-date. Total Return of the iShares 20yr Bond Fund (TLT) is up +18% (vs. Russell 2000 -5.1% year-to-date). Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield), it compressed another 8 basis points to +188 basis points wide (-77 basis points year-to-date).


With the U.S. Dollar up another +1.2% last week, the CRB Commodities Index is down -1.4% on the week to down that much now for the year-to-date. Oil (WTI crude) was down -4.1% on the week to -3.9% year-to-date. Gold dropped another -1.9% on the week to -1.1% year-to-date.


After another -2.1% down week for the EuroStoxx600, European stocks are trying to bounce today. Russian stocks continued to crash, -5.5% on the week to -24.3% 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


Morgan Stanley upgrades $BKW; downgrades $MCD...  not sure I understand this move



I believe that good things come to those who work.

-Wilt Chamberlain


Front-month coffee is up 8.3% this morning and up +16.6% 5-Day, moisture in Brazilian Coffee Belt is 70-85% below normal.

October 6, 2014

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European Banking Monitor: Financials CDS Holds Flat on the Week After Widening

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




European Financial CDS - Swaps were mixed in Europe last week, but little changed overall. We've been keeping a close eye on Sberbank as our proxy for overall geopolitical risk. After rising steadily for several weeks, it cooled off notably this past week dropping 65 bps w/w to 315 bps. 


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart1 Financials CDS


Sovereign CDS – Sovereign swaps were little changed on the week with most countries moving 0-1 bps. Portugal and Japan were the outliers at +3 bps each. 


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart2 sovereign cds

European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart3 sovereign CDS

European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 11 bps.


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart5 Euribor OIS Spread


Matthew Hedrick



Ben Ryan


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.