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Just Ugly Charts #EuropeSlowing

This market does not trust Draghi’s Drugs!

 

Below we show recent data points that are supportive our Q4 Macro Theme #EuropeSlowing.  Here’s an update on the latest Eurozone experiment:

  • Draghi’s policy to inflate has only resulted in deflation (France and Italy CPI in September fell 10bps to 0.4% Y/Y and -0.1% Y/Y, respectively)
  • BOTH the periphery and the core are contributing to the regional slowing
  • The gap between Germany’s fiscal policy stance and France and Italy is widening
  • There remains no singular voice from the ECB on the merits of its policy actions to produce sustainable economic growth

We’ll let the recent data from the region’s economic heavyweight speak for itself, #EuropeSlowing:

  • The German Government lowered its GDP forecast (leaked on Friday) to 1.2% in 2014 (vs 1.8% prior); and 1.3% in 2015 (vs 2.0% prior)
  • Germany ZEW Economic Growth Expectations in October hit a 2 year low
  • German Exports in August (down -5.8% M/M) largest fall in more than 5 years
  • German Factory Orders fell -1.3% in August Y/Y
  • German Industrial Production in August weakest reading in more than 5 years
  • German Bunds are making all time lows @ 0.855% and down 101 bps Y/Y

For a comprehensive review of our outlook on the Eurozone, we encourage you to read #EuropeSlowing – Austerity Is Dead?  From an investment position, we are recommending shorting French (EWQ) and Italian (EWI) equities and the EUR/USD (FXE).

Just Ugly Charts #EuropeSlowing - z. ZEW Germany

Just Ugly Charts #EuropeSlowing - z. germnay exports imports

Just Ugly Charts #EuropeSlowing - zz. factorders

Just Ugly Charts #EuropeSlowing - zz. German Indust

Just Ugly Charts #EuropeSlowing - z. Germany 10YR yield

Just Ugly Charts #EuropeSlowing - z. cpi falling

 

Matthew Hedrick

Senior Analyst


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LEISURE LETTER (10/14/2014)

Tickers: MGM, DRH, HLT, NCLH

EVENTS

  • Oct 15: LVS Q3 earnings 4:30 pm , pw 12611335
  • Oct 17: Hedgeye cruise pricing survey (mid-October)
  • Oct 23: PENN Q3 earnings 11 am
  • Oct 23: LHO Q3 earnings 11 am "La Salle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am

COMPANY NEWS

MGM & 2282:HK (Bloomberg) MGM China has approached existing lenders to refinance HK$15.6b ($2.01b) 5 year facility signed in July 2012; considers increasing loan size.  Existing loan pays LIBOR +150 bps under current margin matrix.

 

DRH – announced that it amended its existing approximately $170.4 million mortgage loan secured by The Lexington New York City (the "Hotel"). The loan bears interest at an initial floating rate of LIBOR plus 275 basis points, but features a pricing grid that will further reduce the spread to as low as 175 basis points upon achieving certain hotel cash flow hurdles. The reduced borrowing costs are expected to save the Company between $1.5 million and $2.0 million in annual interest expense.  The amended loan also benefits the Company by extending the potential term of the loan by approximately 30 months to October 2019. 

Takeaway: Nice blend and extend.

 

HLT (newsday.com) U.S. Government officials say that security issues are playing into their review of Hilton's sale of the New York Waldorf Astoria to Anbang Insurance Group, since a renovation could aid Chinese spying efforts, and the US Ambassador to the UN lives at the hotel. U.S. law allows the department to rent the ambassador's residence for a term of 10 years or less. The current lease expires next year with an option to renew it for one or two years. Kurtis Cooper, a spokesman for the U.S. Mission to the United Nations commented "We are currently in the process of reviewing the details of the sale and the company's long-term plans for the facility." He and other officials said decisions about the future of the U.S. relationship with the Waldorf would be made based on cost, Anbang's long-term plans for the hotel, and the government's needs and security concerns.

Takeaway: Time to start the process of finding a new home.

 

NCLH – announced that hospitality veteran Drew Madsen has joined as president and COO of NCLH.  Madsen has more than 30 years of leadership experience in the hospitality and consumer products industry, most recently as president and COO at Darden Restaurants.

Takeaway:  We're not big fans of this hire.  DRI has not been a well managed company. 

 

NCLH (Seatrade Insider) –The acquisition of Prestige Cruises International is moving forward and will likely close by mid-November, said CEO Kevin Sheehan.

INDUSTRY NEWS

Occupy Hong Kong Barricades Removed – Police with power tools tore down Occupy Central protesters' barricades on Queensway in Admiralty this morning, following a dawn operation to remove some barricades in Causeway Bay.

Takeaway: Still not a lot of protest spillover into Macau.

 

Chinese Officials Detail Occupy Hong Kong Protesters (Sinosphere) According to estimates by activists and foreign diplomats, between 50 and 100 people have been detained, some subsequently released but others held, in mainland China since the “Occupy Central" demonstrations began in Hong Kong in late September. 

 

China Corruption Crackdown

(China Daily) He Jiacheng, executive vice-president of the Chinese Academy of Governance, and Zhao Shaolin, former secretary-general of the Jiangsu provincial Party committee, are being investigated on suspicion of graft, the Central Commission for Discipline Inspection said on its website.

 

(Xinhua News) A former senior official of south China's Guangxi Zhuang Autonomous Region was sentenced to 15 years in prison for taking bribes by a local court in northeast China's Jilin Province on Monday.  Li Daqiu, former vice chairman of the Guangxi Zhuang Autonomous Regional Committee of the Chinese People's Political Consultative Conference, was stripped of political rights for four years by the Intermediate People's Court of Yanbian Korean Autonomous Prefecture in Jilin. His property, worth 2 million yuan (326,435 U.S. dollars), was also confiscated.

Takeaway: Crackdown activity notably increasing prior to the Fourth Plenary Session.

 

Atlantic City Mark to Market (philly.com) Philadelphia developer Bart Blatstein says he and casino architect Paul Steelman agreed to buy the four-story, 300,000 sq. ft., half-empty Caesars Pier shopping center in Atlantic City for a small fraction of its construction cost.  A person familiar with the deal said Blatstein and Steelman agreed to pay $2.8 million, less than 2% of the $200 million plus that developer Taubman Centers Inc., of suburban Detroit, and other investors plowed into the center in the mid-2000s, according to company filings. The partners hope to close the deal later this year.

Takeaway: The lower price on the property sale is a precursor to lower property real estate taxes which in turn will pressure Atlantic City's municipal budget.

 

Orlando Timeshare Property to be Auctioned– A vacant 890-unit resort in west Orange County, called the Grande Palisades, is set to be auctioned at 11 a.m. in Orlando today. Construction on the massive resort began in 2005 in an area of west Orange that was largely undeveloped but is about 6 miles from the entrance to Walt Disney World.  

Takeaway: Five years after the Global Financial Crisis, the final white elephant is about to find a new home. Will VAC or WYN step-up for this redevelopment opportunity?

 

Florida Keys Remain Hot – With the volume of tourist visits climbing by six percent annually—there are an anticipated 2.9 million visitors on the way this year—the Keys have taken their place among the best-performing tourism markets in the country. Hotels in the island chain have seen their revenue per available room (RevPAR) returns jump 15 percent in 2013 to $218 per room, nearly 20 percent stronger than Miami’s $183. Through June of this year, the Keys’ RevPAR climbed even further to $234.38.  Twenty-three properties, representing 27 percent of the market’s inventory, have changed hands since 2011. That produced $853 million in sales volume, or roughly $375,000 per key on average.

Takeaway: America's Caribbean - just a short drive from MIA or FLL airports.

 

Gonzalo scrambles half a dozen Caribbean itineraries Seatrade Insider

Hurricane Gonzalo, moving out over the Atlantic after passing through the Caribbean's northern Leeward Islands, is expected to continue strengthening into a major hurricane Tuesday. Carnival Cruise Lines and Royal Caribbean International have modified half a dozen itineraries between them.

MACRO

Singapore GDP – expanded 2.4% in the third quarter from the year-ago period, a slower-than-expected, missing a forecast for a 2.8% expansion and following a increase of 2.4% during Q2 2014.

Takeaway:  From a macro standpoint, S'pore has been a mixed picture in Q3.  

German Economic Sentiment Falling – Oct ZEW Economic Sentiment Indicator (3.6) vs consensus 1.0 and prior 6.9, Germany Oct ZEW Current Situation 3.2 vs consensus 18.0 and prior 25.4, Eurozone Oct ZEW Economic Sentiment Indicator 4.1 vs consensus 7.1 and prior 14.2

Takeaway:  Negative German sentiment is not good. Keep an eye on AIDA (Carnival brand) pricing 

 

Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottom-up slowing in European cruise pricing in our monthly survey.  Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis.  To a lesser extent, HOT and HLT are also exposed to European weakness.

 

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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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MACAU: NO REBOUND IN WEEK 2

Takeaway: Remain negative on Macau stocks following another poor week of revenues

Week 2 average daily table revenues (ADTR) fell 25% from the comparable period last year. Month to date ADTR is down 26% YoY, worse than we expected.  Given the 2nd straight disappointing week, we’re lowering our full GGR October YoY growth forecast to down 20-25% from down 15-20%.

 

MACAU: NO REBOUND IN WEEK 2 - m1

 

Some market participants and investors have been expecting a better turnout from VIPs this past week with the theory that they were escaping the Golden Week limelight.  From the numbers, it is apparent that many VIPs continue to stay away altogether.  We’ve received reports of weak casino traffic this past weekend which isn’t surprising post Golden Week.  Hold percentage was likely more normal this past week but still likely below normal for the first half of October given the results from week 1.

 

In terms of market share, MPEL and LVS are performing well above trend while Wynn and Galaxy remain below.  We wouldn’t read into the early month market shares as hold percentage is the likely culprit for the shifts. 

 

SJM benefited this past week from a couple of large VIP punters.  Overall, the Peninsula properties seem to be outperforming Cotai partially due to disappointing mass volumes. 

 

MACAU: NO REBOUND IN WEEK 2 - M2 

 

We remain negative overall on the Macau stocks as revenues remain under pressure and Street estimates do not appear to account for the significant margin pressure we are expecting.  We were in Macau last week so if you’d like an update on our findings please don’t hesitate to reach out.


THE HEDGEYE MACRO PLAYBOOK

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. In today’s edition, we highlight:

 

  1. The pervasive weakness across the DM Equities space and how the pool of style factor and/or country exposures for cautious investors to "hide out" in has all but evaporated
  2. Sell domestic mega caps (OEF), which are also breaking down, on the bounce

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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