LEISURE LETTER (10/23/2014)

Tickers: LVS, MGM, LHO


  • Oct 23:
    • RCL Q3 earnings 10 am
    • PENN Q3 earnings 10 am
    • LHO Q3 earnings 10 am "LaSalle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am
  • Oct 28:
    • GLPI Q3 earnings 10 am
    • HOT Q3 earnings 11:30 am , code "10325720"
    • MAR Q3 earnings 5 pm , ID "59390131"
  • Oct 29: H Q3 earnings 11:30 am code "95150754"
  • Oct 30:
    • HST Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw "6307991"
    • BYD Q3 earnings 5 pm , pw "8021592"


27:HK Galaxy (Macau Business) Galaxy Entertainment Group Ltd has scrapped its plan for a four-star apartment hotel to form part of its expanded Galaxy Macau casino-resort. The Official Gazette indicates that the company will use the land once allotted for the apartment hotel for a bigger five-star hotel. Galaxy Entertainment has said it intends to open the second phase of the Galaxy Macau in the first half of next year.

Takeaway: Opting for five-star, more luxury programming - likely to support the gaming operations.


LVS & 1928:HK(Macau Daily Times) Sands new integrated resort, The Parisian Macao, is set to open in late 2015, and tenancy commitments for the new property have reached 85% of its retail area, according to the casino operator.

Takeaway: We'll take the over on that opening date. 


MGM – Newly installed photovoltaic (solar) panels on 20 acres of Mandalay Bay convention center rooftop will generate 5 megawatts of electricity, enough to supply Mandalay Bay with about 20% of its electricity load. The array is owned by energy company NRG, which built it using federal grants that paid for about 20% of the panels.

Takeaway: With water levels on the Colorado River falling, both fresh water for consumption and electricity from Hoover Dam will likely become more expensive. MGM seeking other means of lowering it's operational expenses.


LHO – announced very strong Q3 results with FFO/share of $0.85/share exceeding consensus by $0.06/share and reported RevPAR was 11.5%, well above the high end of guidance +5.5% to +8.5% with ADR up 10.2% while occupancy increased 1.1%.  Comparable hotel margins rose 211 bps versus guidance of flat to +125 bps. New full year RevPAR guidance is now 8.75% to 9.25%, up from 6.5% to 8.0%.

Takeaway: A strong beat and raise for this lodging REIT with assets in Washington DC, Boston, Chicago, Los Angeles, San Diego and San Francisco.  The strong results bode well for Lodging C-Corps (HOT, HLT, H and MAR) and Lodging REIT HST as well as BEE, PEB and SHO.


MSC Cruises – raised commission on its shore excursions from 5% to 15%. 

Takeaway: Shore excursions are becoming more popular on the UK itineraries. MSC is trying to maintain their edge by raising commissions.


China's 4th Plenum Adjourns – The Central Committee of the Communist Party of China, elected by the National Congress of the Communist Party of China, convenes at least one plenary session every year. The fourth session concluded today with no major policy announcements.

Takeaway: Like all things in China, we await the official government commentary regarding the outcome of the 4th Plenum actions.


Macau Visitor Arrivals – During September, visitor arrivals increased 3% year-over-year with Mainland China arrivals increasing 6% to 1.6 million visitors.

LEISURE LETTER (10/23/2014) - Macau

Takeaway: A significant slowdown in total visitation as well as Mainland China visitation which are headwinds to Macau mass growth.


Mainland China Banks Tightening Credit – According to data compiled by SNL Financial, the five biggest lenders in China saw their non-performing loans (NPL) increase in the first six months of the year - a trend that is worsening and results in increased selectivity which in turn reduces credit for gamblers and junkets in Macau. The Industrial and Commercial Bank of China saw its NPL ratio increase from 0.94% in December 31 to 0.99% in June 30. Currently, China’s largest bank has 150 billion yuan at risk of never being paid. But the situation is similar throughout the Chinese financial system. Agricultural Bank of China has a NPL ratio of 1.24%, China construction Bank 1.04% and Bank of China 1.02%. The problem with NPL is also that each country has its own system of calculating them, making it harder to get the real picture

Takeaway: Another headwind for Macau gaming and GGR growth.


Taiwan Open Skies (Macau Business) Taiwan expects its open skies agreement with Macau, signed in February, to come into effect this year, according to the director-general of the Taipei Economic and Cultural Office in Macau, Lu Chang-Shui. Mr Lu says the agreement is now being considered by island’s legislature. The agreement will allow airlines to carry unlimited numbers of passengers and amounts of freight between Taiwan and Macau.

Takeaway: Potentially allowing for increased visitation, especially if a low-cost carrier flies the route which would in turn be a positive for Macau gaming.


Singapore World's Top Destination in 2015 – Lonely Planet, in its latest guidebook, Best in Travel 2015, call Singapore the World's #1 Destination for 2015 and noted that Singapore is "always celebrating something" with new attractions like the National Art Gallery and Singapore Sports Hub next year in time for its Golden Jubilee. 

Takeaway: Increased tourism to Singapore is welcomed, but will the tourists gamble at either casino?


Las Vegas Strip North Development – Jackie Robinson (cousin to the baseball player) held a groundbreaking on Wednesday at a vacant 27-acre site off Paradise Road between the SLS Las Vegas and Turnberry Towers to mark the construction start of a $1.4 billion arena, 500-room nongaming hotel, with retail outlets, a grocery store, movie theater, offices, underground parking and a plaza as parts of the project. The location can be seen here. Robinson’s privately funded arena scheduled to open in early 2017 will cost $690 million, and he has lined up an arena management heavyweight — Philadelphia-based Comcast-Spectacor — to schedule programming and manage the 22,000-seat retractable-roof arena.

Takeaway: The center of gravity on the Las Vegas strip will shift north as Resorts World Las Vegas and the Crown properties open.


Planet Hollywood Las Vegas & Jennifer Lopez – British tabloids are reporting that Jennifer Lopez will sign a contract to perform a 72 show mini-residency in Axis at Planet Hollywood.

Takeaway: We previously pointed out the reprogramming of Planet Hollywood with key hires in the music and entertainment department.  Furthermore, this could be harbinger of programming for Revel as Brookfield Asset Management owns both Planet Hollywood Las Vegas as well as Revel.


China Flash PMI was 50.4 vs. 50.2 in September and consensus expectation of 50.2 as well.


China Mini-Stimulus - (Xinhua) reported the National Development and Reform Commission approved feasibility reports on five airport and three railway projects, with a total investment of 150B yuan ($24.4B) in a move by the government to boost infrastructure investment in the country's less developed central and western regions to offset slowing growth.


Singapore Inflation for September 2014 increased 0.6% year-over-year reflecting higher costs of food and education & stationery which more than offset lower cost of transport. By comparison on month-over-month basis, CPI in September 2014 dropped 0.1% versus August 2014.


Hedgeye Macro Team remains negative 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 bottoms up slowing in Europe 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. 


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.

YELP: Only Gets Worse From Here (3Q14)

Takeaway: The model is broken. Moving forward, it’s going to get tougher for management and the sell-side to make up stories to the contrary

note summary

  1. 3Q14 BEAT, BUT UNIMPRESSIVE: Much of the upside came on a surprise surge in its Other Revenue Segment.  YELP’s core Local Advertising segment missed expectations on its highest attrition rate since 4Q12.  Despite some noise around some misleading metrics, 3Q14 pointed to further deterioration in its core account metrics
  2. 4Q14 GUIDANCE WORSE THAN THE MISS: Aside from guiding below street estimates, YELP provided segment-specific guidance on the smaller two of its three segments (<20% of revenue).   From there, we can estimate that guidance implies its core Local Advertising revenue growth decelerates from 66% in 3Q14 to 57% in 4Q14
  3. 2015 WILL BE A DISASTER: YELP’s business model is breaking down, which is most evident in new account growth that can’t keep pace with the growth in sales rep hires.  That means hiring more bodies can no longer sufficiently compensate for its attrition issues, and unless you understand that element of the story, you really can’t understand how bad 2015 will be. 



  1. Local Advertising Came in Light, Despite the Beat: The beat came from YELP’s Other Revenue segment, which grew over 150% y/y ($4M q/q), and was largely driven by its new partnership with  However, Other Revenues are expected to decline next quarter.  Local Advertising missed street expectations, as attrition continued to accelerate.  Absolute attrition levels continued to rise, which is to be expected simply because it has more accounts.  However, it attrition rate of 19.1% was at its highest level since 4Q12.
  2. More Noise, No Substance: The customer repeat rate was 75%, same as the prior two quarters, and a historical high.  Remember this is a measure of MIX, not retention.  Also, management stated that its non-deal account growth grew 66% y/y vs. the 51% in Active Local Business Account (ALBA) growth.   However, note that this metric includes SeatMe, which had very few accounts when YELP acquired it late in 3Q13.  The better question is what its ALBA growth was ex-SeatMe?

YELP: Only Gets Worse From Here (3Q14) - YELP   New vs. Lost Accounts 3Q14

YELP: Only Gets Worse From Here (3Q14) - YELP   Attrition Rate 3Q14

YELP: Only Gets Worse From Here (3Q14) - YELP   Customer Mix 3Q14


During the call, management provided segment-specific guidance on the smaller two of its three segments (<20% of revenue).  From there, we can estimate that guidance implies its core Local Advertising revenue growth decelerates from 66% in 3Q14 to 57% in 4Q14.  Management mentioned a challenging 4Q14 comp from the migration of int’l accounts from its Qype acquisition back in 4Q13.  While this is notable headwind for account growth, it is a disproportionally smaller headwind in terms of revenue growth since international is lower ARPU product.  In short, the weakness is much more than just Qype.



YELP’s business model is predicated on aggressive sales rep hires to offset its rampant attrition.  New account growth is failing to keep pace with its growth in sales rep hires, which means its model is broken, and it only gets worse from here.


YELP: Only Gets Worse From Here (3Q14) - YELP   Acct vs. Sales 3Q14


Consensus estimates for 2015 remain outside the realm of reason.  Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates.  YELP will need to produce both accelerating new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth. 


We expect estimates to come in moderately post the print, but likely not enough.  Our bull case is calling for 32%; bear case for 23%.


Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA




Oil, Russia and Europe

Client Talking Points


#Quad4 Deflation remains our call for Q4 – this is much more dangerous to carry trading and commodity price linked equity and debt markets than ebola headlines; intermediate-term risk range for WTI crude is $64.67-86.11 and 26% of the High Yield market is energy related (vs. 10% ten years ago); we held a very bearish call on MLPs yesterday.


Got burning oil petro-dollar risk? Putin does – Russian stocks leading losers this morning, down another -1.6% and continuing to crash at -25.8% year-to-date – will the Russian economy crash? There’s a good case to be made that that’s already happening.


Hope that German manufacturing PMI being better than horrible (51.8 vs 49.9 last month) is just that – headline hope; German Services PMI slowed to 54.7 vs 55.7 and places like France had a train wreck manufacturing PMI print of 47.3 anyway. Reiterating short European Equities, across the board on #EuropeSlowing.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


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


Good top line from $UA. But only 21% EPS growth on 30% revs and just a penny beat might not be enough for a 57x p/e. SG&A up 39% -- big.



The more I practice, the luckier I get. 

-Jerry Barber


Japanese Nikkei is down -0.4% to -5.7% year-to-date and remains bearish TREND on Hedgeye quantitative signals.

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Don't Be Intimidated

“We will not be intimidated.”

-Stephen Harper


I drove up to Maine in the rain yesterday. My ride was a metaphor for macro markets in the last six weeks. I got in the car in the late morning – equities were up, on decelerating volume. There was a faint bid to European equities and Oil. There was some low-conviction selling in the bond market too.


“So”… I did the opposite (in Real Time Alerts) – going right back to our #Quad4 playbook, sending out buy signals in Munis (MUB) and sell signals in stocks with energy price related risks (MLPs like Linn Energy, LNCO). #Bubbles that bounce to lower-highs on no volume don’t intimidate me.


As I drove through New Hampshire in the early afternoon, the US equity markets picked up on the intraday drop in oil prices – and bonds caught a bid. I flipped through a few of the manic media’s channels – they all blamed Canada.


Don't Be Intimidated - EL chart 2


Back to the Global Macro Grind


While it would be nice if we could boil down intraday, weekly, and monthly macro market moves to a single factor like ebola or Canada, that is not how a non-linear and interconnected ecosystem (the market) works.


That’s why we spend so much time grinding through both multi-factor and multi-duration analysis. We will not write to you about risks in the rear-view. We will not be whipped around by newsy headlines either. Our Global Macro risk management process will not be intimidated.


There’s a great complexity theory quote in the WWII #history book I am in the middle of reading that summarizes how the American, British, and Canadian men acted when storming the beaches of Normandy on June 6th, 1944:


“Beset by mischance, confounded by disorder, they had mostly done what they were asked to do.”

-Rick Atkinson, The Guns At Last Light (pg 53)


And while I try to not feel anything when communicating #timing decisions in markets, I do want our analytical troops to feel confident that, instead of being glued to the screens and emotions of the moment, they can do what they were trained to do. #Process


To be clear, the process is dynamic and flexible. That means that if the economic facts and/or market read-throughs change, we are both equipped and tasked to change alongside those changing factors. If they don’t change, we double down on the #process.


In asset allocation terms, here’s what we did (before the morning part of that drive!) yesterday:


  1. CASH – took it down small, deploying assets to a region of the market that likes #Quad4 (Municipal Bonds – MUB)
  2. FIXED INCOME – took it up, in kind, to a 26% allocation (which is 78% of what I consider my max, 33%, to any asset class)
  3. EQUITIES – stayed the course with the “net zero” exposure, adding to the bear side of energy related shorts like LNCO


For those of you who are new to reading my rants, the Hedgeye Asset Allocation Model is basically like my p.a. (personal account). It’s not what a long-only fund with a mandate to be fully invested has to do. It’s not a hedge fund either. It’s simply what I would do with my money - not being intimidated!


“So”, when I say “net zero” that means that if I had to be in something like US Equities, at a minimum, I’d hedge (with alpha oriented shorts) out the market risk and have a beta-adjusted net exposure to that asset class of 0%.


That’s why, on the morning of October 17th, in the Early Look you saw an asset allocation to US Equities of +3%. After a stiff selloff, I signaled “buy” in #RealTimeAlerts in 1 of the 2 S&P Sectors that are LONGS in our #Quad4 playbook – Consumer Staples (XLP). Then I took us back to net zero, on the bounce.


I know. It’s not easy trying to communicate a process that the Old Wall doesn’t use.


Commercializing how I think about risk has been as much a communication learning process for me as it has been for those of you trying to learn it alongside me. I appreciate your open-mindedness. These are still the early days of our changing parts of a profession that needs changing.


Back to what is really crushing market expectations (it’s not Canada – it’s #Quad4 deflation):


  1. Oil prices got smoked for another -2.8% loss yesterday, taking WTI to down -18.2% YTD
  2. Bullish to Bearish Phase Transitions in both Energy prices and their related stocks/bonds is #on because Oil is crashing
  3. Alongside a -25% drop in WTI Crude since June, the Russian stock market has crashed (-25.8% YTD)


That’s also why the Canadian Stock Market (TSX) went from bullish to bearish TREND @Hedgeye. Not because some whacko loser started killing people in Ottawa yesterday. In chaos (or complexity theory) speak, that was simply the grain of sand that knocked over the interconnected sand-pile.


In our playbook, terrorism doesn’t have a quadrant; #deflation does. If our quantitative signal is right, and the price of oil remains in an intermediate-term TREND risk range of $64.67-86.11:


  1. Both Oil & Gas (XOP) and Energy (XLE) related equities are going to be bearish TREND
  2. MLP related stocks and bonds are going to start discounting distribution (dividend) cuts
  3. Kevin “The Bear” Kaiser is going to look really right on his Best Short Ideas!


Instead of listening to more than 3 minutes of market spew on the radio yesterday, on that same drive up to Maine’s coast, I smoked  a cigar (don’t tell my wife!) and listened to Kaiser’s Institutional Research call on MLPs from 1-2PM. It was awesome.


And I’m not just saying that because the man is on my team. I am telling you what it is to hear a world class analyst not be intimidated by institutional group-think and stay with a fundamental call that companies who don’t have the cash flow to pay out future promises are shorts.


Stocks that he doesn’t like (VNR, LNCO, etc.) got hammered intraday. If you’d like access to the replay of his call and 40 slide deck, please ping .


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.34%


RUT 1037-1119

VIX 15.09-28.26

WTI Oil 79.43-82.63

Natural Gas 3.59-3.79


Best of luck out there today,



Don't Be Intimidated - Chart of the Day


Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. How our Tactical Asset Class Rotation Model (TACRM) quantitatively combines Complexity Theory,  technical analysis and Behavioral Economics into unparalleled global financial market color and how we use that color to make informed risk management decisions
  2. How today's broad-based, global asset price deflation is similar to the setup that precipitated QE3 and why QE4 has be the bull case for anyone grossing up their exposure to risk assets here
  3. Why we think the bounce is Homebuilder stocks (via the ITB) is very shortable


Best of luck out there,


Darius Dale

Associate: Macro Team

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