LEISURE LETTER (10/07/2014)

Tickers: HST, MAR, CCL, RCL, MTN


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


27:HK – (GGRAsia) During September 2014, Galaxy Entertainment Group retook top market share with 22.9% of GGR for the month.

Takeaway: Galaxy is our preferred operator for clients seeking long exposure to the Macau gaming market due to the early 2015 opening of Galaxy Macau Phase 2.


HST – announced the sale of Tampa Marriott for $199 million and the acquisitions of B2 Miami Downtown Hotel for $57.5 million and a 90% interest in Grand Hotel Esplanade Berlin for Euro 81 million via the European JV. 

Takeaway: HST continues to reposition its portfolio in its focus/core markets.


MAR – priced $400mm 7yr. senior unsecured notes at 99.314, Series N at 3.125% = Treasuries +110 bps. The offering was upsized from $300m and better than original pricing terms of T+120-125 bps. JPM, WFC, DB were joint book running managers.

Takeaway: Better than expected terms - an upsized offering at a lower coupon - a hoteliers dream and easy debt.


CCL – extended its 'Reuniting for Fun' group promotion through the end of October based on travel agent response. With the promotion, an initial deposit is not required for group bookings on departures between March 1, 2015, and April 30, 2016. In addition, Carnival is offering travel agents one free cruise berth for every 10 full fare passengers berthed, compared to the line’s current policy of one free cruise berth for every 15 full fare passengers. As a special bonus, Carnival is offering one free cruise berth for every eight full fare passengers berthed on select five- to 14-day sailings from a number of US homeports, including Galveston, Baltimore, New York, San Juan and Port Canaveral.


CCL –Holland America Line canceled Veendam's Oct. 11 cruise and is sending the ship to drydock in Philadelphia to complete repairs to one of the propellers. This was the third cruise cancellation for Veendam after a problem was identified while the ship was in Québec last weekend and it was been determined that a complete repair can only be made in a drydock. Passengers will receive a full refund of their fare plus a future cruise credit of 100% equal to the fare paid. In addition, HAL will reimburse non-refundable expenses such as missed tours and excursions that were purchased through the line.

Takeaway: Another unfortunately delay for this vessel.


RCL – Oasis of the Seas, The Royal Caribbean International vessel arrived in Rotterdam last week and will stay in dry-dock for almost two weeks for a planned five-year routine maintenance update before departing from Rotterdam Cruise Terminal on October 14 for a 13-night trans-Atlantic cruise to Port Everglades, including a UK stopover in Southampton to pick up passengers on the following day.

Takeaway: Retooling just prior to peak sailing season.


MTN – snow is in the forecast!  According to rain and snow showers are in the extended forecast for late Saturday evening, Sunday and Sunday evening for Vail and Breckenridge, Colorado.

Takeaway: Let it snow, time to dust-off and wax up the skis! 


Macau Smoking Rooms Confirmed (GGRAsia) Macau’s Health Bureau has confirmed the 12 gaming venues that have received official approval for smoking lounges for their main casino floor patrons, including: the casino at StarWorld, operated by Galaxy Entertainment Group Ltd; the casinos at Sands Macao, the Venetian Macao and Sands Cotai Central respectively, operated by Sands China Ltd; and the casino at Wynn Macau, operated by Wynn Macau Ltd.  However, that means some of Macau’s biggest and most profitable casinos have main floors that are currently entirely smoke free.  Those venues with no approval as of Monday night for mass floor smoking rooms are: Galaxy Macau, run by Galaxy Entertainment; Altira Macau and City of Dreams run by Melco Crown Entertainment Ltd; MGM Macau, operated by MGM China Holdings Ltd; and Casino Grand Lisboa and Casino Lisboa run by SJM Holdings Ltd.  VIP areas – though not premium mass areas – have been excluded from the smoking ban.

Takeaway: We are also hearing the Plaza Casino at Sand China Limited's Four Seasons is also entirely non-smoking as no smoking parlors were installed.


Macau Golden Week GGR (GGRAsia) Average daily revenue (ADR) in Macau casinos rose to more than HKD970 million in the first five days of the week-long Chinese national holiday, compared to HKD870 million in the final weeks of September. The early look on ADR translates into nearly a 40% YoY decline GGR during the period. 

Takeaway: Significantly slower ADR growth is consistent with our VIP and mass deceleration thesis.


Japan Gaming Enabling Legislation (Jiji Press) The fate of a bill aimed at lifting a ban on casinos in Japan remains uncertain as even ruling coalition lawmakers are concerned that the measure will increase gambling addiction and organized crimes. Chief Cabinet Secretary Yoshihide Suga told a press conference on Friday that the government will "make all-out efforts" to enact the bill during the ongoing Diet session set to end late next month. The bill was submitted to the Diet in December last year by a group of lawmakers including those from Abe's ruling Liberal Democratic Party.

Takeaway: Never a done deal until the party leaders agree and say so.


Revel Auction Unsettled (Press of Atlantic City) Glenn Straub, the losing bidder in a bankruptcy court auction for Atlantic City’s former Revel Casino Hotel plans to challenge the result at Tuesday’s hearing in Camden. Among Straub's main complaints is that Revel improperly accepted a bid from Brookfield after a specified deadline, that Revel’s attorneys reneged on an agreement to share information with him on competing bids, and that six hours of closed-door meetings on what was supposed to be the first day of bidding was improper. Straub is considering whether to make an offer exceeding $110 million at the hearing, which the lawyer says the judge has the power to accept.

Takeaway: LIke all real estate transactions, big egos fill the room.


Illinois Gaming Expansion (Chicago Daily Herald) A year long debate over whether Arlington International Racecourse should have slot machines and Lake County and Chicago should have casinos is likely to continue under the next governor, no matter who it is. Both Democratic Gov. Pat Quinn and his challenger, Republican Bruce Rauner, told the Daily Herald editorial board they are open to the idea of adding more gambling options in Illinois, including in the suburbs.

Takeaway: Good for the equipment manufactures. 


Precursor Wave Season Sale – all major cruise lines (CCL, NCLH, RCL, DIS, HAL, etc.) are are taking part in Cruise Lines International Association's biggest annual consumer promotion, now called CLIA Cruise Week. The Oct. 6-13 event offers deals aboard more than 200 ships, including those belonging to river and specialty operators.

Takeaway: More early season discounting to drive early occupancy and load factors.

Italian Cruise Tourism – Italy is facing another year of declining ship calls and cruise passengers, according to Francesco di Cesare, president of Risposte Turismo research and consulting company. According to di Cesare’s figures, calls at Italian ports this year will be down 8.97% and passenger numbers 9.36%, compared to 2013. These translate to 10.3m passengers and 4,676 calls - the lowest in the last four years.

Takeaway: High water in Venice partially contributing to lower traffic.


Lodging Transaction – Carey Watermark Investors (CWI) just grabbed the Sawgrass Marriott Golf Resort & Spa, a 511-unit golf resort and spa in Ponte Vedra Beach, FL. CWI acquired the asset from an affiliate of Goldman Sachs and Petra Capital Management. Financial terms of the deal were not disclosed. The resort last sold in 2006 for $220 million. The resort saw a $20.3 million renovation in early 2014. CWI plans to invest an additional $25 million to further to improve the property.

Takeaway: Another upper-upscale property located in South Florida crosses the market.


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.

Macro Notebook 10/7: USD | UST 10YR | Russell 2000


Takeaway: VIP and Mass slowing continues, we expect additional mass deceleration owing to increased margin pressures

The GGR decline of 12% was only part of the story


  • Expectations for September market wide GGR ratcheted lower following August’s details, as a result September’s GGR decline of 12% was in line with recently revised lower expectations.  
  • Mass revenue growth was 15%, confirming our Mass Decelerating thesis for 2H 2014 and we expect additional deceleration during Q4 2014 and Q1 2015.
  • We remain concerned with the potential for continued margin pressure as labor costs continue to escalate and player reinvestment rates rise. 
  • While stock valuations look attractive but we don’t see any positive catalyst on the near term horizon.
  • We remain cautious on the Macau stocks with the exception of Galaxy.



Macau Market:

  • As already known, GGR fell 12%
  • What was not known was that VIP growth was -26%, a further deceleration from August’s -17% and -16% contraction for the prior three months.
  • Mass YoY growth only +15%, slightly above August’s increase of +14% and the third month of mid-teens Mass growth as compared to 1H 2014 growth of +36%.
  • Our Mass Decelerating theme (first espoused in June) of 2H 2014 is continuing and we expect additional mass deceleration during Q4 2014 and Q1 2015 – at a faster (slower growth) rate than even we thought.
  • VIP hold was close to normal for the market and slightly higher than last year
  • Rolling Chip volume declined 19% YoY – the second sequential month of such a decline and the worst performance since early 2009
  • Galaxy & MGM performed well while LVS was below trend.




  • Market share dropped to 21.8%, 110bps below the 6 month average driven by very high hold
  • VIP revenues declined nearly 14% YoY, while hold was higher than expected at almost 3.6% a 15 bps improvement YoY.
  • Disappointing GGR growth was driven by Rolling Chip volume that fell 39% YoY, worst in the market
  • Mass revenue grew 15%


  • Market share increased 20bps above the 6 month average due strong Mass revenues
  • Wynn’s VIP hold percentage fell about 60bps on a YoY basis but was respectable near 3.1%
  • GGR fell 16% YoY due to lower VIP hold but Mass revenue grew at 29%
  • Rolling Chip volume dropped 19% in line with the market


  • Galaxy’s GGR share was 22.8% an improvement of 190 bps from August and 240 bps above the 6 month average
  • Galaxy’s estimated VIP hold improved 35 bps YoY and was near 3.55% for September
  • YoY GGR growth of 9% led the market based on market leading VIP growth of 9% and Mass growth of only 10%
  • Galaxy remains our favorite stock in the group given its ability to drive VIP revenue growth amid a difficult environment and the likely earlier than expected opening of Phase II on Cotai.  We think Phase II could operate for 6-9 months as the only new property on Cotai


  • MPEL’s GGR share was 12.6% a decline of 30 bps over the 6 month average
  • GGR dropped more than 19% due in part to lower VIP hold and a nearly 35% decline in Rolling Chip volume
  • While below last year, MPEL’s September VIP hold was a slight below normal and down almost 50 bps on a YoY basis
  • Mass revenues declined 20%


  • MGM GGR share was 11.1% an increase of 180 bps over the 6 month average and 230 bps above July and August details
  • YoY GGR driven by high hold near 3.4% an increase of 70 bps YoY
  • Market leading Mass revenue growth was +36%
  • Rolling Chip volume declined 26%
  • Mass share was slightly better than the 6 month average

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KSS - The Risk In 'KSS Rewards'

Takeaway: Decoupling KSS Credit from the Rewards Program is fine. But 57% of revs and $1.24 in EPS is dependent on Credit. KSS shouldn't disrupt this.

Yesterday KSS announced an 'official' change to its rewards program. We think this represents more of a risk than anything else.


Here's the Release

Kohl’s Pioneers New Approach to Customer Engagement with Launch of Yes2You Rewards Loyalty Program



What It Is: Put in simple terms, this is a decoupling of KSS' credit card from its loyalty program. Previously, anyone that wanted to enroll in the 'rewards program' also had to have a KSS Credit Card. 


Why It's Not New: This was largely a press release to the general public -- not to Wall Street. Earlier this year KSS decoupled its rewards program from its credit card in Pittsburgh, Milwaukee, and most markets in Texas and California. The company said that it would change up the rest of the US in the back half of the year -- which it just did.


Why We're Concerned

  1. First off, in our recent survey, 18% of people said that they are members of KSS rewards program, which is the highest rate of any department store in our survey (ie might not go much higher). The interesting thing is that 57% of KSS Sales flow through the credit card -- up from 47% 5-years ago.
  2. This is a program with CapitalOne, switched three years ago from Chase. It's worth noting that the median credit scores for CapitalOne's portfolio range from 600-650 compared to Chase at 700-750. So it's safe to assume that the last 700bp in KSS sales bought on the store card came from a consumer with lower credit quality, and presumably is in a less enviable financial position.
  3. While it's possible that Kohl's 'Pioneered Approach to Customer Engagement' increases customer loyalty, we'd actually wonder if this gives an outlet for current rewards members to no longer use the KSS card. KSS flowed $407mm in credit card income through its P&L as an offset to SG&A last year -- that's 9.5% of total SG&A, or $1.24 per share in earnings. That's probably headed down, not up. 

KSS - The Risk In 'KSS Rewards' - 10 7 kss1


KSS - The Risk In 'KSS Rewards' - 10 7 kss 2

Daily Trading Ranges, Refreshed [Unlocked]

Takeaway: This is a complimentary look at our proprietary buy and sell levels on major markets, commodities and currencies for Tuesday October 7, 2014

This note was originally published October 07, 2014 at 07:45. Click here to learn more and to subscribe to Daily Trading Ranges.

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Dollar, UST 10YR and Russell

Client Talking Points


If you didn’t know macro markets are highly correlated to USD correlation risk, now you know. USD correlations to big stuff like Gold and Oil are running -0.8-0.9 on 60-90 day correlations right now; yesterday’s up move in Gold is just the upside down of what’s been an epic EUR/USD meltdown.


UST 10YR Yield dropping to 2.41% after some hoped that Friday’s jobs report was going to mean they got paid on the short side of bonds – not so much as the UST 10YR Yield moves back toward crash mode (-20% year-to-date); the Long Bond remains our best Macro Long Idea for 2014.


The Russell 2000 was down another -0.8% yesterday taking its draw-down to -9.4% from its all-time #bubble high established on July 7th, 2014; next support is 1079, but that’s just an immediate-term level – intermediate-term there’s no support down to 1015 ish.

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


Our Ace, Todd Jordan @HedgeyeSnakeye  has been making the bear call on Macau since June - reiterating SELL $LVS today



The four most dangerous words in investing are: “this time it’s different.”

-Sir John Templeton



Merger and acquisition activity has jumped this year, the total M&A volume is now $1.29 trillion in 2014 on pace for a record, according to data provider Dealogic.

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