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LEISURE LETTER (11/03/2014)

Tickers: MPEL, HLT, HOT, NCLH, CCL, RCL

EVENTS

  • Nov 3:
    • BEE Q3 earnings 11 am , pw 37266467
    • SHO Q3 earnings 12n , ID 75906336
  • Nov 4: 
    • Gaming Referendums: 
      • Massachusetts Question 3 (repeal casino law)
      • Colorado Amendment 68 (allow casinos in Mes, Pueblo and Arapahoe counties)
      • California Proposition 48 (veto gaming compact with North Fork Rancheria for off-reservation casino in Madera)
      • Rhode Island Question 1/2 (operate table games at Newport Grand)
    • RHP Q3 earnings 10 am
  • Nov 6:
    • MPEL Q3 earnings 8:30 am , PS MPEL
    • PNK Q3 earnings 10 am , code 27759617
    • BEL Q3 earnings 10 am , ID 12457691

COMPANY NEWS

MPEL – (Macau Business) The government could fine the City of Dreams casino up to MOP100,000 (US$12,519) for failing to prohibit smoking in a part of the casino where the law bans it, Health Bureau deputy director Cheang Seng Ip says. The bureau says the Melco Crown Entertainment Ltd casino turned part of its mass-market gaming floor into a smoking area without official authorization.

Takeaway: A proposed penalty of pennies. 


CWN:AU – announced that the Victorian Commission for Gambling and Liquor Regulation has determined to amend the Melbourne Casino Licence to give effect to the Agreement between the Victorian Government and Crown announced on 22 August 2014. The amendments to the Melbourne Casino Licence will take effect from today. These amendments will help boost Victorian tourism and create new jobs as they will allow Crown Melbourne to compete more effectively in interstate and international markets. Under the Agreement announced on 22 August 2014, Crown must now pay to the State AUD$250 million within seven days.

Takeaway: Crown has sufficient resources to readily pay the AUD$250 million levy.  As of June 30, 2014, Crown Resorts' total liquidity, excluding working capital cash of AUD$110.9 million, was AUD$1,140.0 million, represented by AUD$66.9 million in available cash and AUD$1,073.1 million in committed undrawn facilities.

 

3918:HK NagaCorp(GGRAsia) says it is considering a public offering to help fund its “US$369-million” casino project in the Russian Far East.

Takeaway: Could a separately listed structure be a result of NagaCorp's desire to "box in" or ring-fence the risks associated with operating a casino in Russia?

 

880:HK SJM Holdings (Macau Business) SJM Holdings chief executive Ambrose So Shu Fai, said the company would put 10 more gaming tables in its Grand Lisboa casino. Separately, executive director Angela Leong On Kei has denied that the casino operator has anything to do with a Macau company’s project to build a Hello Kitty theme park just over the border on Hengqin island. Ms Leong had previously spoken of putting a theme park on land she owns in Cotai. She has declined to confirm or deny whether one theme of the Cotai park will be the Japanese cartoon cat.

Takeaway: More tables for Grand Lisboa while the fate of the Hello Kitty Entertainment Park remains uncertain.

  

HLT– announced today that certain selling stockholders affiliated with The Blackstone Group L.P. have commenced a secondary offering of 90,000,000 shares of Hilton Worldwide common stock. The underwriters will have a 30-day option to purchase up to an additional 13,500,000 shares of common stock from the selling stockholders.  Hilton Worldwide is not offering any shares of common stock in the offering and will not receive any proceeds from the sale of shares in this offering. In addition, none of Hilton Worldwide’s officers or directors are selling any shares of common stock beneficially owned by them in the offering.

Takeaway: We cautioned investors of a potential BX secondary offering last week Thursday in our note titled "Hilton: Trick or Treat - a Little of Both". Overhang could be an entry point.


HOT – introduced SPG Keyless, the hospitality industry’s first mobile, keyless entry system allowing guests to use their smartphone as a key. Rolling out to Aloft, Element and W Hotels around the globe, SPG Keyless enables guests to bypass the front desk (where available), go directly to their room and unlock their stay with a simple tap of their smartphone.

Takeaway: Previewed on last week's Q3 2014 earnings call, the app is now live.

 

NCLH –  proposing to issue $680 million aggregate principal amount of senior unsecured notes due 2019 to fund a portion of the Prestige acquisition. NCLH intends to finance the remaining portion of the Prestige acquisition, as well as to refinance Prestige's Oceania and Regent Credit Facilities and satisfy and discharge the indenture governing Prestige's Regent Senior Secured Notes using $1.05 billion of borrowings under its New Term Loan A and New Term Loan B facilities (the "New Term Loans"), available cash and an additional share issuance.  The Offering and the New Term loans are expected to close concurrently with the Prestige acquisition.

Takeaway:  The unsecured notes financing portion for Prestige was lower than previously estimated. This should help interest expense in 2015.

 

CCL – Carnival Corporation has unveiled the cruise industry's first-of-its-kind hybrid wireless network known as WiFi@Sea™.  Once completed, the integrated network will seamlessly switch among its various technology solutions to give passengers the highest available bandwidth capacity and strength of signal. The network will be capable of providing Internet connectivity speeds that can be roughly 10 times faster than those previously offered on Carnival Corporation's ships. Following the initial launch in 4Q Caribbean, CCL is scheduled to rollout the technology globally. The technology will eventually be available on all nine of the company's leading global brands.

Takeaway:  This is important capex to counter recent changes to RCL's high-speed internet offerings, particularly on Quantum.

 

RCL - (TTG Digital)  RCL Vice-president Dominic Paul said he sees Anthem remaining in Southampton for the foreseeable future.  Paul defended the decision to up prices for Anthem, insisting that demand remained strong for the ship, despite the higher cost. “It’s selling well – we’re seeing strong demand for 2015 in general, but in particular for Anthem – there seems to be a real desire to try the ship.”  He also said he was unconcerned by fears about the extra capacity being put into Southampton next year.  “When [the 4,300-passenger ship] Independence came to the UK people said it was a really big ship to fill, but it’s got a really strong following now. People have sailed on it time and again – it’s been highly successful.”  Asked whether the line would hold its nerve and maintain the pricing, Paul replied: “We didn’t significantly discount this year – we had a very successful season in Europe.  

Takeaway:  It's usually the case to be optimistic ahead of Wave. We will see if Anthem can hold its pricing (and premiums) through 2015. 

 

INDUSTRY NEWS

Singapore Tourism (GGRAsia) Easing visa restrictions for tourists from key markets including China, India and Russia could help Singapore attract 358,000 to 504,000 more visitors in 2016 than under current policies, suggests a report by the World Travel and Tourism Council and the World Tourism Organization, an agency of the United Nations.

Takeaway:  This would result in a small bump on the base of more than 15.5 million tourists during 2013.

MACRO

China GDP Growth now a Six-Handle - a report from the China Securities Journal, which noted that Liu Shijin, deputy head of the Development Research Center, said economic growth will slow to 6% to 6.5% in the coming two to three years and stabilize around this range for several years after.

Takeaway:  What happened to the 7% GDP growth target?

 

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.


MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS

Takeaway: The Risk Monitor is now more balanced on a short-term and long-term basis, but looks decidedly bullish across the intermediate term.

 

Current Ideas:

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 19 2 

 

Key Takeaway:

The environment once again looks more constructive for Financials on the long side as green is now dominating our intermediate-term heat map summary table below. The short-term and long-term profiles look more balanced. With earnings season winding down, the next high-level data update will come from the Fed Senior Loan Officer Survey which should be out sometime this week. Historically, the C&I component of that survey has been a good leading indicator for credit quality cycle turning points.   

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

 

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 

 • Long-term(WoW): Negative / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 15 2

 

1. U.S. Financial CDS -  It was a clean sweep in the US as swaps tightened for 27 out of 27 domestic financial institutions. Among the large caps, Goldman was the most improved on the week at -4 bps. US Financial swaps are now tighter on both a w/w and m/m basis. 

 

Tightened the most WoW: TRV, CB, XL

Tightened the least WoW: AON, AXP, MS

Tightened the most WoW: CB, ACE, ALL

Widened the most/ tightened the least MoM: MET, GNW, SLM

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 1

 

2. European Financial CDS - It was a fairly uneventful week for EU bank swaps as they were higher by 1 bp, on average. Greek banks, however, saw swaps rise by 38 bps on the week and are now higher by an average of 114 bps on the month.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 2

 

3. Asian Financial CDS - Chinese bank swaps were tighter on the week while those of Japanese and Indian banks were little changed.  

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week with Portugal the outlier at +19 bps to 209 bps (and now +41 bps m/m). The US also widened, though by a modest +2 bps to 19 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 18

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 3

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 0.9 bps last week, ending the week at 5.82% versus 5.83% the prior week.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 10.0 points last week, ending at 1876.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 6

 

7. TED Spread Monitor – The TED spread fell 0.1 basis points last week, ending the week at 22.4 bps this week versus last week’s print of 22.5 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 272 versus 270 the prior week. As compared with the prior month, commodity prices have decreased -1.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 8

 

9. 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 widened by 2 bps to 9 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 11 basis points last week, ending the week at 2.55% versus last week’s print of 2.44%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 10

 

11. Chinese Steel – Steel prices in China rose 0.2% last week, or 7 yuan/ton, to 3,035 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 184 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM TAILWINDS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


#Deflation Risk

Client Talking Points

USD

Burning Yen = Strong Dollar (2x is a charm for U.S. as consumption and investment growth slows- both Europe and Japan torched their currencies); so now you have an extremely overbought USD with falling interest rates (classic #Quad4 setup = deflation).

OIL

WTIC is down -0.6% to $80.06 this morning and doesn’t like Down Yen = Down Oil; correlation risk here continues to be very high and the translation risk to energy related countries, stocks, and bonds remains very obvious. MLPs closed down -1% last week with equities melting up.

RUSSIA

Russia is one of our preferred country shorts on Oil Deflation, down another -0.8% this morning to -22% year-to-date; we’re doing a lot of work on whether or not Japan and Europe opting to devalue will result in a Russian economic collapse

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

RH

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

TWEET OF THE DAY

GOLD: smashed by Japanese Money Printing Culture Day - risk range = 1167-1220/oz $GLD

@KeithMcCullough

QUOTE OF THE DAY

Float like a butterfly, sting like a bee.

-Muhammad Ali

STAT OF THE DAY

According to a report from the advocacy group Opportunity Nation, around 15% of Americans aged 16-to-24 are considered "idle youth" — they aren't in school and aren't employed.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

CHART OF THE DAY: Got Inequality? Labor Share of U.S. Income vs. Congressional Disapproval

CHART OF THE DAY: Got Inequality? Labor Share of U.S. Income vs. Congressional Disapproval  - Inequality EL


Bootlegging & Banking

“I don’t mind going back to daylight saving time.  With inflation, the hour will be the only thing I’ve saved all year.”

-Victor Borge

 

During daylight savings time, in the fall and winter months, the U.S. Virgin Islands are one hour ahead of East Coast time. 

 

Instead of getting up at 4am everyday, I could get up at 5am…and, you know…..be on an island. 

 

Keith’s in Cali this week.  When he gets back, I’ll try to leverage the jet-lag + daylight savings  brain fog combo and float the “Hedgeye Caribbean” proposal, again….

 

“you miss 100% of the shots you don’t take”

 

Bootlegging & Banking - st1

 

Back to the Global Macro Grind...

 

In our 4Q Macro Investment themes call we profiled a series of bubbles which, among others, included:

 

  • Complacency Bubble: Daily moves of >1% vs. Average VIX level (by year)
  • Inequality Bubble: Labors Share of National Income vs. Congressional Disapproval vs. Gini Coefficient
  • Hedge Fund Correlation To Beta Bubble:  Hedge fund trailing correlation to the SPX vs. Average Relative Monthly Performance
  • Leverage Performance Chase Bubble:  Margin Debt (inflation Adjusted), % of SPX Mkt Cap
  • Expensive Small Cap Illiquidity Bubble:  Russell 2000 Trailing PE vs Average Market Cap Traded (by year)
  • Basement Dwelling Bubble: Real Median Household Income vs. 18-34YOA Homeownership Rate vs. Housing Expense as % of Median Income
  • Spread Risk Bubble:  IG & High Yield Spreads over Treasuries vs. Bond Volatility vs. Total Corporate Debt Outstanding

 

Our timing on the complacency bubble proved particularly prescient (substitute “lucky” if you’d like).  Prior to our themes call, the VIX was trading at its lowest average level in a decade and just 11% of trading days saw moves in excess of 1% in either direction.  Subsequent to our call, the VIX has been higher by ~33% on average and the SPX has had daily moves greater than +/- 1% over 50% of the time.    

 

We expect the Dramamine ride to continue. 

 

Taking a broader view, each of the aforementioned bubbles are, in some magnitude, outcroppings of the larger bubble that is Central Banking. 

 

With the explicit goal of QE initiatives being financial asset price inflation - and the hope for the ultimate trickle down and around effect - asymmetries and inequalities have become more pronounced in recent years.  Such policy manifestations, however, are more an extension of secular trends than neoteric phenomenon. 

 

The financial sector and those tied to it have benefited disproportionately since the turn of the interest rate cycle circa 1980.  From 1980 to its peak in 2006,  the finance industry grew from less than 5% of the economy to ~8.3%, taking share at a rate of ~13bps per annum while the financial sector weight in the S&P500 rose from less than 10% to greater than 20% over the same period. 

 

Industry and activity chase price/profit and the broader reality of the great moderation – which, instead of promoting natural economic cycling, effectively propagated the accumulation of latent risk – is that 30+ years of lower highs and lower lows in interest rates supported a multi-decade run in financial asset price appreciation - a phenomenon exaggerated further by the twin peaks in both demographics and household & corporate leverage. 

 

Alongside that financialization, the gini coefficient in the U.S. increased almost a full decile and the share of total income earned by the top 1% of families more than doubled from less than 10% to greater than 20%.

 

The minority with financial assets and those tasked with managing them - which, coincidentally, became increasingly less mutually exclusive - benefited as bond prices had a historic bull run while the ongoing, incremental lowering of discount rates provided for a perma-juicing of asset values via the Present Value effect.  

 

Q: How much would the median home be worth today if rates were at 10% instead of 4%?

A:  About -45%, or -$110K, less. 

 

Quasi-relatedly, the policy perpetuated asset bubble rotation into housing destroyed a perfectly predictive housing model. 

 

Over the pre-1995 historical period, New Home Sales could be modeled as an almost perfect periodic function.  For the aspirant, part-time quants like myself, who would like to plot the function, here’s what I got on a 1st pass…..

 

f(x) = 241*sin(2Pi/82*x-20.5)+614   ….#CoolButUseless

 

Perhaps as the last of the cumulative displacement from trend burns off in the next few years we can return to a similarly predictable oscillation in new housing demand.     

 

Anyhow, a couple weeks back, Janet Yellen expressed concern over the ongoing rise in inequality that team FOMC itself helped perpetuate. 

 

Janet failed to explicitly address the role of central bank policy in that burgeoning divide but the Fed does hold an appreciation for the lag between Wall Street’s discounting of policy via prices and actual Main Street effects.  And with the normal policy transmission channel left mostly prostrate by the zero bound in rates,  the less potent and longer lagged trickle through of Wall Street wealth to the real Main Street economy has become the hoped for transmission channel detour route. 

 

Ironically, or unfortunately, the problem with that ideology is that the prescription for ineffectual QE becomes more dovishness in the belief that it’s the bottlenecked transmission of policy and not the policy itself that’s core to the problem.  From that perspective, more and/or longer ‘easiness’ remains the most favorable conduit for the (eventual) leak through of policy to the populace.   

 

“You keep going until you can’t turn back. That’s where there isn’t any choice. You don’t know where that is. You don’t know until you pass it. And then it’s too late.”

 

Nucky Thompson epitaphed the bubble in 1920’s Prohibition barbarism and capped the series finale of Boardwalk Empire with that quote.  

 

I suspect there’s some transferable insight in that Boardwalk epiphany. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.35%

SPX 1

VIX 13.31-17.79

USD 84.99-87.11

Yen 108.99-112.98

WTIC Oil 79.47-81.43 

 

To Bootlegging, Central Banking….and kindred spirits...

 

Christian B. Drake

U.S. Macro Analyst

 

Bootlegging & Banking - Inequality EL

 


November 3, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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