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LEISURE LETTER (10/27/2014)

Tickers: ISLE, LVS, MGM, MAR


  • Oct 28:
    • HEDGEYE EBOLA CALL 1 pm , code 651216#
    • GLPI Q3 earnings 10 am
    • HOT Q3 earnings 11:30 am , code 10325720
    • WYNN Q3 earnings 4:30 pm , pw 16870074
    • MAR Q3 earnings 5 pm , ID 59390131
  • Oct 29: H Q3 earnings 11:30 am code 95150754
  • Oct 30:
    • HST Q3 earnings 10 am
    • NCLH Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw 6307991
    • BYD Q3 earnings 5 pm , pw 8021592
  • Oct 31: HLT Q3 earnings 10 am , ID 11936190
  • Nov 3:
    • BEE Q3 earnings 11 am , pw 37266467
    • SHO Q3 earnings 12n , ID 75906336
  • Nov 4: RHP Q3 earnings 10 am
  • Nov 6:
    • PNK Q3 earnings 10 am , code 27759617
    • BEL Q3 earnings 10 am , ID 12457691


Trump – Trump Entertainment has dropped its November 13 deadline to close the Taj, its last remaining casino, but CEO Bob Griffin says it still might close this year.

Takeaway:  The posturing continues. Our bet is that the Taj will not permanently close


ISLE (Waterloo Cedar Falls Courier) The Isle Casino Hotel Waterloo has settled a long-running dispute over the value used to set its property tax bills. The settlement covers the 2011, 2012, 2013 and 2014 assessment years and slashes the assessed value on the city's second largest taxpayer from $64.8 million to $54.4 million retroactively to 2011. The Isle's current $2.5 million annual property tax bill will drop to $2.1 million. The city of Waterloo alone stands to see this year's tax revenue from the casino fall more than $178,000 on top of the estimated $551,700 it may be responsible to cover for the past three years of over payments.

Takeaway: One time gain for ISLE during Q4 2014 as well as a small reduction in overhead going forward.


LVS & 1928:HK – announced David Fleming, the firm’s secretary and general counsel, will retire with effect from April 1, 2015. Mr Fleming, 67, has served in these roles since January 2011. Mr. Fleming is also the authorized representative of Sands China and the alternate director to Michael Leven since 2011. Sands China said it would engage Mr Fleming as a consultant from July 1, 2015.


MGM – The Harmon Hotel defects trial is set to begin in Nevada District court and the trial is expected to last nearly one year. The case stems from the construction of CityCenter, MGM Resorts International’s 67-acre development on the southwest corner of the Strip and West Harmon Avenue. The Harmon Hotel is the only portion of the $9 billion project that was never completed. Work stopped on the Harmon after construction defects were found in 2008. A structural engineer hired by MGM Resorts determined the building was unsafe and could topple if an earthquake of a magnitude of 7.7 were to hit Las Vegas. Construction on the planned 47-story tower was stopped at 26 floors.


NagaCorp 3918:HK– Mark Brown, who was appointed chief operating officer of NagaWorld in December 2013, has tendered his resignation as chief operating officer of NagaWorld Ltd with effect from October 26. Naga indicated Mr Brown “has confirmed that he has resigned to pursue other opportunities”, but gave no further details. Prior to his move to NagaWorld, Mr. Brown was senior vice president for strategic development at Wynn Resorts Ltd’s Encore Las Vegas facility. From April 2006 to April 2009, Mr Brown, headed Las Vegas Sands Corp’s operations in Macau, Mr. Brown's recent responsibilities at NagaCorp included overseeing the initial stages of NagaCorp's casino project near Vladivostok, in Russia.

Takeaway: Could there be a delay in the opening of  Naga's Vladivostok casino?


MOHEGAN (The Columbian) In a pivotal development in a years long fight to build a casino in Clark County, the Cowlitz Tribe was notified Wednesday they’ll receive 152 acres west of La Center in January or within 30 days of a federal court ruling in their favor, whichever comes first.


In April, a tentative tribal-state compact was released by the state gambling commission.  The compact allows for two gaming facilities. One could have as many as 75 gaming tables, and a second could have up to 50 tables. Initially, the wager limit would be set at $250, but after a year the limit could increase to $500. The tribe could also have as many as 3,000 “tribal lottery player stations,” with as many as 2,500 in one facility.  Any terminals beyond the tribe’s allotted 975 terminals would have to be leased from other tribes, however.

Takeaway:  A 2017 event for the slot suppliers if the hurdles are crossed.


MAR – plans to expand its footprint in India with an additional 49 hotels, which will take the total operational properties to around 70 by 2018. 

Takeaway: Building it's global footprint.


China's Corruption Crackdown to Never End(Xinhuanet) Senior leader of the Communist Party of China (CPC) Wang Qishan said the CPC's anti-graft campaign and its efforts to build a clean government will never be concluded.

Takeaway:  We expected full enforcement efforts to continue - which is a headwind for Macau GGR. 


Macau Smoking Ban Enforcement(GGRAsia) At least 41 people in Macau had been fined for smoking on casino main floors by October 24. The Health Bureau’s statement added that among those fined, 30 were tourists. The bureau said that since the new rules were enacted, it conducted over 61 site inspections to a total of 40 gaming venues, including casinos and slot-machine parlors.

Takeaway: The Department of Health steps up enforcement efforts.


Macau Health Bureau Weighs in on Premium Mass Smoking (Macau Business) The Health Bureau says it is worried by reports that some casinos are allowing smoking in areas reserved for premium mass-market table gaming. The bureau issued a written statement saying it is “very concerned”.

Takeaway: We understand the DICJ recently approved smoking in one City of Dream's previously designated premium mass rooms (Grand Hyatt) with the condition that premium mass tables were "converted" to direct VIP.  A turf battle could be in the works between the DICJ and the Department of Health. When we were in Macau we heard the Bureau was responsible for the last minute smoking ban in premium mass.


Macau Secretary for Economy & Finance to Retire –Francis Tam Pak Yuen announced he will step down as the Secretary for Economy and Finance once Chief Executive Chui Sai On’s first term in office ends in December. Lionel Leong Vai Tac, a well-known businessman here and an Executive Council member, is rumored to be one of the likely candidates to take over the post. One of the biggest challenges Mr. Chui and his administration face during his second term in office is the renewal of casino concession licenses, which are up for discussion next year.

Takeaway: Tam was a "friend" of the gaming industry. With a new Secretary for Economy & Finance, could the Macau government make greater demands on the gaming operators to give back to their employees? 


Changi – Singapore's Changi airport passenger movement fell 0.6% YoY in September to 4.256m.

Takeaway:  Singapore's mass visitation continues to be flat this year.


LEISURE LETTER (10/27/2014) - c

Pacquiao To Fight in Macau(theboxingvoice.com) Boxing promoter Bob Arum said Manny Pacquiao will fight at the Cotai Arena because boxer likes the Arena as well as the the significantly lower tax rates.


Mainland China Lottery Sales(GGRAsia) Lottery sales in mainland China rose 25.2% in year-on-year terms to RMB32.25 billion (US$5.3 billion) in September.  During September, sales of welfare lottery tickets stood at RMB17.47 billion, up by 19.6%, while sports lottery sales rose by 32.5%, to RMB14.78 billion.

Takeaway: As the corruption crackdowns continue, it would seem Chinese punters are challenging luck more with the lottery than at casinos.


Vietnam Graft Crackdown – Police in Vietnam have arrested a prominent businessman and one of the country’s richest men on suspicion of lending fraud, as authorities step up their crackdown on financial crimes in a bid to clean up the debt-ridden banking sector. Ha Van Tham, former chairman of the board of the private Ocean Bank, was taken into police custody in Hanoi on Friday for “violating lending regulations,” the Ministry of Public Security said on Friday.


Sri Lanka Casino (GGRAsia) Sri Lankan President Mahinda Rajapaksa has proposed to impose a US$100 entrance fee for the country’s casinos and raise the gaming levy to 10% (up from 5%) of turnover. The proposals were set out in the 2015 budget announced on Friday. The budget document did not give any further details on the casino entry levy, including whether it would apply only to Sri Lankan residents or also to foreigners. Crown Resorts Ltd, chaired by Australian gambling tycoon James Packer, plans to build a casino resort in Sri Lanka. 

Takeaway: Sri Lanka with a 5% tax on GGR seemed too good to be true.


Las Vegas McCarran Airport Traffic – passenger traffic increased 2.7% in September versus +3.4% during August.

Takeaway:  McCarran passenger growth has risen for 13 straight months.


Montage Hotels Lifestyle Brand – announced the launch of Pendry Hotels, the company's new lifestyle brand that will marry the culture of service for which Montage is renowned with an inspired, fashion-forward and design-driven approach to hospitality. Pendry Hotels will sit at the crossroads of lifestyle and luxury hospitality. Pendry San Diego, which broke ground on October 8, is scheduled to open in 2016 and will feature 317 guest rooms, including 36 suites, a rooftop pool, two uniquely designed restaurants, an ultra-lounge, a beer hall, a spa and energizing fitness facility, and over 22,000 square feet of meeting space. In launching Pendry Hotels, the company intends to significantly expand its portfolio of hotels and resorts which today includes five distinctive Montage-branded properties in Laguna Beach and Beverly Hills, California; Deer Valley, Utah; Kapalua Bay, Maui, Hawaii; and Palmetto Bluff, South Carolina.

Takeaway: Feels to us like the lifestyle brand could ultimately push supply up similar to what happened in the late 1990s with the limited service/extended stay construction boom.



Macau (Un)Employment Rate & Earnings - According to Macau's Statistics and Census Service indicated that both the unemployment rate (1.7%) and the underemployment rate (0.3%) for July-September 2014 held stable as the previous period (June-August). Total labor force increased to 398,700 and the labor force participation rate reached 74.0%. Median earnings of those engaging in Gaming and the Construction sector amounted to MOP17,000 and MOP13,000 respectively. 


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.

Retail Callouts (10/27): Hedgeye Retail Idea List, W, NKE/AAPL, VFC, WMT

Takeaway: Hedgeye Retail Idea List. W premium to RH hard to reconcile. NKE wearables plan on track with AAPL. VFC Frisk timing questionable.


Retail Callouts (10/27): Hedgeye Retail Idea List, W, NKE/AAPL, VFC, WMT - 10 27 chart1B

No changes this week.




Tuesday (10/27)

CROX - Earnings Call: 5:00pm


Tuesday (10/28)

COH - Earnings Call: 8:30am


Wednesday (10/29)

RL - Earnings Call: 9:00am

HBI - Earnings Call: 4:30pm


Thursday (10/30)

SHOO - Earnings Call: 8:30am

COLM - Earnings Call: 5:00pm





W - Wayfair Comes off Post-IPO Research Restriction


Takeaway: Eight out of Nine initiations are 'Buy', which is not a big shocker given that the stock is trading 13% below the IPO price, and 34% below where it closed on the first day of trading.  But even after the massive sell-off, the stock is still trading at a slight premium to RH. We're looking at price/sales (1.9x vs RH at 1.8x). There's no way we could justify the two names trading anywhere in the same ballpark. RH has a real brand, a plan to triple its business, and double its margins. Wayfair largely caters to the middle market with a 'kayak-like' technology that might or might not ever be profitable. 


NKE - Nike and Apple to create wearable that has ‘more stealth’ and is ‘more integrated’



  • "Despite Nike having shut down its FuelBand fitness-tracking bracelet and the team that created it, wearables will still be 'a big part of the future', Nike chief executive Mark Parker has insisted."
  • "'Speaking in an interview with Bloomberg TV, Parker said that teaming with Apple for the creation of wearables allowed Nike to  'do things together that we couldn’t do independently'."
  • "He added that the plan for the company was 'to expand the whole digital frontier in terms of wearables, and go from what we say is tens of millions of users – right now there’s 25 million Nike+ users – to hundreds of millions.'"


Takeaway: Remember the press reports noting that we should expect to see a NextGen Nike Sportswatch in 1H14 at a price point just below $400 to compete with the Adidas ($399) offering? That was set to be a meaningful upgrade from the current Nike SportsWatch, which sells for $150. But 1H14 came and went without a peep from the Nike Timing team. Why? It was clear that something was up when Nike fired its FuelBand team in April.  Apple's Tim Cook sits on Nike's Board, and Nike knew full well about Apple's iWatch plans. We're also inclined to think that Tim Cook said something to the extent of "You're going to come out with a hi-tech sportswatch that's priced $50 above what Apple is launching? That's a big mistake".  It was probably a pretty simple decision for Nike's Mark Parker to back off that initiative, and piggyback onto the iWatch with a partnered fitness app that promotes Nike's core product in a more commercial way. 


VFC - Timberland’s Frisk leaves to be CEO of Canada’s Aldo Group



  • "Patrik Frisk, who headed VF Corp.’s Timberland business, is leaving the company to become chief executive officer of the shoe retailer Aldo Group Inc."
  • "'After over 10 wonderful years at VF Corporation, I have decided to move on and take on a new challenge,' Frisk said Thursday in an e-mail. 'From November, I will be based in Montreal, Canada, leading the Aldo Group.'”


Takeaway: That's two C-Suiters hitting the road within the past 30 days. Shearer certainly earned some R&R after 28 years in the seat, but this Frisk announcement is a little bit puzzling. Just 6 months after being named Coalition President of Outdoor Americas and a month and half removed from the Timberland analyst day (where he outlined the $3.1bil plan) he jumps ship for Aldo? If there is any company that can absorb this type of turnover its VFC. We're not questioning the company's bench strength, but in light of the company's first two quarterly misses in a 12 month period since 2009 the timing raises an eyebrow.




WMT - Wal-Mart names veteran exec as India COO



  • "Wal-Mart Stores Inc. has named Murali Lanka as COO of its Indian operation effective Dec. 1. Lanka has held various positions with Wal-Mart and Sam’s Club since 1989 and served as head of operations of Wal-Mart India from 2008-2013, and most recently held the position of regional general manager for Wal-Mart in Texas."


AAPL, RAD, CVS - Apple Pay Faces Challenge as CVS, Rite Aid Reject System



  • "CVS and Rite Aid are among 220,000 U.S. merchants that already have technology in place to read the short-range wireless signals that enable customers of Apple Pay or similar services to make a purchase by waving their smartphones. The retailers weren’t among those specifically named as accepting Apple Pay when the iPhone maker revealed its system last month."
  • "The drug retailers, which are part of a consortium developing a competing payment system, stopped Apple Pay last week, said a person familiar with the situation who asked not to be named."


Takeaway: Sum of the Parts (OpCo + PropCo) = Higher Implied Share Price


Convergence of recent and future events makes a Hilton REIT spin-off event more likely. We have no edge on timing but this transformative event could increase shareholder value to $29-$34/share. Furthermore, a split would enhance both companies’ (OpCo and PropCo) growth prospects in addition to the obvious tax efficiency gains. 



Please see our note  http://docs.hedgeye.com/HE_HLT_REIT_10.27.14.pdf

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.


Client Talking Points


The front-month volatility was down -26% last week, but +17% for the year-to-date – which is next into more U.S. #GrowthSlowing data like you had with New Home Sales on Friday? Immediate-term risk range of 14.34-27.86 now for the VIX; there’s a ton of asymmetry in that.


Don’t look now, but into and out of the official #ChinaSlowing GDP report the Shanghai Comp is down for 5 consecutive days and the Hang Seng remains bearish TREND @Hedgeye – no matter what they do with European Equities this morning, global #GrowthSlowing remains clear.


After another -1.3% week for WTI, you get another small bounce of +0.2% this morning – that’s not going to do anything other than remind you that #Quad4 deflation is bad (it felt really bad on Oct 14th, so let’s learn from that).

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


For the first time in three years I'm not bearish into a $COH print.



A lot of people seeking new beginnings have never finished with the past.

-Byron Pulsifer


OPEC’s largest producer, Saudi Arabia, receives 85% of its export earnings from the oil and gas sector.

Don't Call It Bad!

“Don’t call it a beachhead…”

-Adolf Hitler


That’s what Hitler told his field marshals after the Allies took the beaches of Normandy in 1944. He called it the “last French soil held by the enemy… and that Cherbourg was to be held at all costs.” (The Guns At Last Light, pg 105)


Evidently, it was a beachhead.


Don't Call It Bad! - EL chart 2


Back to the Global Macro Grind


A reporter from Marketwatch pinged me this morning asking what I thought the “biggest lie is that investors are telling themselves?” After reading a few consensus Bloomberg headlines that “deflation is good” my answer was simple:


The biggest lie US stock market centric investors are telling themselves right now is that the bond market has it wrong, and US growth isn’t half of what they thought it would be 10 months ago.


But , whatever you do, don’t call it bad. The same consensus that said the upside surprise in #InflationAccelerating from JAN-JUN was “good for stocks” are now saying that the #Quad4 deflation of that inflation is “good” too.


Like two bad golfers who are staring down breaking bogey puts from 9 feet in the rain and wind, it’s all “good, good.”


Back to reality…


Is 1 up week in the last 5 for the SP500 good? How about 2 in the last 8 weeks for the Russell 2000? What about both bond yields (10yr -25% YTD) and Oil prices crashing -25% since June? Oh, and 3 of the 4 BRICs falling like the real ones (Brazil,  Russia, China) - all good?


You show me one of the many consensus economists, strategists, etc. whose 2014 call for - 3.25% on the 10yr; +10-15% on the Dow, SP500,  Russell; and +3-4% GDP growth – was based on worldwide #deflation, and I’ll send them a Hedgeye hat.


Confirmation bias in being bullish on growth all of the time is what it is, but it’s not getting people paid this year. Looking at last week’s #Quad4 deflations (that continued, despite the Russell 2000 bouncing +3.4% to down -3.9% YTD):


  1. WTI crude Oil -1.3% to -12.6% YTD
  2. Russian Stocks -3.4% to -28.1% YTD
  3. Brazilian Stocks -6.8% to +0.8% YTD


And with Dilma Rousseff winning Brazil’s presidency this weekend (stock market indicated down another -5-6% pre-open), it appears that the anti-dog-eat-dog-socialist contract #deflation in that part of the global demand construct isn’t good either. It’s bad.


In Hedgeye #process speak:


  1. Quad 1 (inflation slowing and growth accelerating) is good
  2. Quad 4 (both inflation and growth slowing, at the same time) is bad


That’s it. We’ve already constructed a framework to talk about these trivial matters so that the people I used to pay on the sell-side can be held to account. If both growth equity bulls and bears agree that inflation is deflating, the only debate left is on growth.


If you’re in the #Quad4 camp (and you have to buy stocks) there are only 3 S&P Sector allocations you’d be net long of right now:


  1. Healthcare (XLV)
  2. Consumer Staples (XLP)
  3. Utilities (XLU)


And I’d weight them in that order. Since Healthcare stocks (XLV) led last week’s rally (+6.6% on the week to +17.6% YTD vs. something like the Dow which was only +2.6% on the week to +1.4% YTD), that was only confirmation that we are in #Quad4.


If we were in Quad 1 (and growth was accelerating again), early cycle stocks like housing and consumer discretionary would be leading to the upside (and big things like Retail Sales and New Homes wouldn’t be missing). Consumer Discretionary (XLY) lagged last week and is still down -0.7% YTD.


I’m not saying we’ll never be in Quad 1. That’s where markets went in the 1st half of 2009 and there were very few macro strategists who shifted from bearish on #deflation to bullish on consumption back then. Most were forced to call #Quad4 bad, after missing it the whole way down. Timing matters.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.31%


RUT 1055-1127


VIX 14.34-27.86

WTI Oil 80.05-83.78


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer



Don't Call It Bad! - Chart of the Day