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LEISURE LETTER (11/07/2014)

Tickers:  MGM, WYNN, HLT, NCLH

EVENTS

  • Nov 10
    • CZR Q3 earnings 4:30 pm , pin 20797507
    • SNOW FYQ1 earnings 5pm
    • SJM Q3 earnings 5:30am
  • Nov 11
    • Galaxy Entertainment Q3 earnings: 3:15am
    • Genting Singapore Q3 earnings:  5am
    • Stations Casino Q3 earnings: 4:30pm
  • Nov 13-16
    • Macau Grand Prix
    • Hedgeye Cruise Pricing Survey
  • Nov 16-18
    • Quantum of the Seas cruise to nowhere

COMPANY NEWS

MGM/WYNN – Officially awarded MA licenses.  Both companies intend to break ground next year and have the casinos open by 2017.  WYNN paid its $85 million license fee up front while MGM will pay its fee on November 17. Also, the MA gaming commission voted to extend the southeastern region deadline from December 1 until the end of January. 

Takeaway:  ROI is the question

 

HLT – (Ithaca Journal) Ithaca Common Council unanimously endorsed proceeding with a land transaction for a new hotel in the block immediately east of the Commons. Council on Wednesday voted to authorize transfer of city ownership of a 32-space parking lot at 320-324 E. State/Martin Luther King Jr. St. to the city’s community-development arm. The resolution also authorized the Ithaca Urban Renewal Agency to enter formal negotiations with Lighthouse Hotels for the city-owned property at the site. Lighthouse proposes a 120-room, seven-story Hilton Canopy hotel. The $19 million project would have a cafe-bar and a restaurant.  

 

http://www.ithacajournal.com/story/news/local/2014/11/06/ithaca-hilton-canopy-agreement/18594349/

 

Takeaway: Hilton's first openly discussed Canopy - a brown-field redevelopment and at cost per key of approximately $158,000.

 

WYN – announced it completed a term securitization transaction involving the issuance of $325 million of asset-backed notes. Sierra Timeshare 2014-3 Receivables Funding LLC issued $255 million of A rated notes and $70 million of BBB rated notes.  The notes were backed by vacation ownership loans and had coupons of 2.30% and 2.80%, respectively, for an overall weighted average coupon of 2.41%. The advance rate for this transaction was 88.5%.

Takeaway: Slightly higher interest rates (5-10 bps) than VAC's recent securitization.

 

NCL – priced $680m senior notes at par (5.25%) maturing Nov 2019

 

Insider Transactions:

CCL – CEO Gerald Raymond Cahill sold 25,002 shares of the stock on Monday, November 3 at an average price of $40.09 and now directly owns 87,337 shares in the company.

 

CHH - COO Patrick Pacious sold 33,947 shares on Monday, November 3 at an average price of $53.25 and following the sale and now directly owns 99,211 shares.

INDUSTRY NEWS

Grand Prix – Macau Grand Prix Committee coordinator Costa Antunes revealed that this year’s sale of Grand Prix (Nov 13-16) tickets has exceeded expectations, with tickets for the main stand already sold out. The organizer of the 61st Macau Grand Prix has also predicted that the event will attract more people to Macau this year.

http://macaudailytimes.com.mo/grand-prix-ticket-sales-beat-expectation.html

 

 Takeaway: Shouldn't impact visitation that much

 

California – North Fork Rancheria may still offer Class II games or it may ask the Bureau of Indian Affairs to approve Class III games, despite a failed Nov referendum.  Station Casinos was to manage the casino.

 

http://www.indianz.com/IndianGaming/2014/028440.asp

 

 Takeaway:  Persistence can pay off

 

 

MACRO

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.


It's Still 'Crash Mode' for Treasury Yields

Takeaway: The UST 10YR Yield is at 2.38% this morning, it remains in crash mode for 2014.

It's Still 'Crash Mode' for Treasury Yields - 77

 

The UST 10YR Yield is at 2.38% this morning. It remains in crash mode for 2014 (down -21% from 3.03% where it started the year), so today’s jobs report really matters – if only because there’s so much asymmetry in SPY vs. everything else in the world.

 

Immediate-term downside risk in the UST 10YR Yield to 2.22% as outlined in Daily Trading Ranges - we remain very bullish on the Long Bond (TLT, EDV, etc).

 


November 7, 2014

November 7, 2014 - 1

 

BULLISH TRENDS

November 7, 2014 - Slide2

November 7, 2014 - Slide3

November 7, 2014 - Slide4

 

BEARISH TRENDS

November 7, 2014 - Slide5

November 7, 2014 - Slide6 

November 7, 2014 - Slide7

November 7, 2014 - Slide8

November 7, 2014 - Slide9

November 7, 2014 - Slide10

November 7, 2014 - Slide11


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Global Macro Complex Signaling #Deflation

Client Talking Points

YEN

The Yen has a wacky wide risk range (which is the leading indicator for volatility) at 111.55-117.39 as the Japanese and Europeans battle it out, burning their respective currencies – USA gets #StrongDollar out of that, but don’t confuse that with a growth signal (you’d need #RatesRising too!)

RUSSIA

The Russian stock market continues to crash -27.8% year-to-date (Brazil down another -2% yesterday too), but no worries, the USA is going to “decouple” from 6 of the top 7 economies in the world accelerating their respective slowings (until the “chart” of the S&P 500 looks like it did on Oct 13th).

UST 10YR

The UST 10YR Yield is at 2.38% this morning, it remains in crash mode for 2014 (-21% from 3.03% where it started the year), so today’s jobs report really matters – if only because there’s so much asymmetry in SPY vs. everything else in the world. Immediate-term downside risk in the UST 10YR Yield to 2.22% - we remain very bullish on the Long Bond (TLT, EDV, etc.).

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 27% INTL CURRENCIES 3%

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

Got questions for @KeithMcCullough? He'll answer them live on @HedgeyeTV at 830 ET. You can watch live here: http://youtu.be/6INbR_YqY68

@Hedgeye

QUOTE OF THE DAY

Be steady and well-ordered in your life so that you can be fierce and original in your work.

-Gustave Flaubert

STAT OF THE DAY

“Gas prices” represent only 6.4% of the median consumer’s budget.


CHART OF THE DAY: #Bubble's Birthday [Price Paid > Value Received] $SPY

"On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born," CEO Keith McCullough wrote in today's Morning Newsletter. "It was the most humbling, yet inspirational moment of my life...Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that."

CHART OF THE DAY: #Bubble's Birthday [Price Paid > Value Received] $SPY - 11.07.14


My Bubble's Birthday!

“Today you are you! That is truer than true! There is no one alive who is you-er than you!”

-Dr. Seuss

 

On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born. It was the most humbling, yet inspirational moment of my life. While he won’t quite get what that means until he reads this many years from now – I’ll give him a big hug when he wakes up this morning and thank him for it anyway.

 

At the time, I thought Jack inspired me to say goodbye to a life in the hedge fund business that was very good to me. Little did I know that my goodbye (to the head hunter community) was more like a “top of the risk management morn” hello to all of you.

 

So I just wanted to thank all of you this morning too. I started building this company 7 years ago with only 1 thing in mind – being true to who I am. To do that, I could only build alongside teammates and business partners who share the same principles and purpose. While we may not get everything right, today I can still say that we are who we are, truer than true.

 

My Bubble's Birthday! - 80

 

Back to the Global Macro Grind

 

Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that.

 

Today’s all-time #bubble high in the SP500 is approximately +30% higher than that one was…

 

And while I haven’t been explicitly bearish on the SP500 this year (my focus has been much more on the small/mid cap illiquidity #bubble that was the Russell 2000, which is still -3.1% from its all time high), I’m obviously getting there!

 

What a long, strange, but thoroughly enjoyable trip…

 

What’s the same between now and November of 2007?

 

  1. They were both all-time SPY highs – and in both cases, all-time was/is a very long time
  2. As we hit all-time highs, in both cases, both local and global growth was already slowing
  3. In both cases, there were/are a myriad of “it’s different this time” perma bull cases being made

 

Away from that – this day of November 2014 versus that in 2007 are entirely different.

 

How so?

 

  1. This time, every major central planning agency considers itself some version of a gravity bending god
  2. There are fewer hedge funds that are actually hedged for a crash (hedge fund correlation to SP500 beta = +0.9)
  3. Where I am most bearish (Russell 2000), this market is way more expensive (55x trailing earnings) and illiquid

 

I’m also grayer and fatter, but you already know that.

 

What we don’t know now is similar to what they didn’t know then (with they being those who bought them at the all-time high). There is a buyer and seller at every cost basis don’t forget.

 

I am the way I am, partly because I am a Canadian hockey player, but largely because I’ve never lost money in a down US stock market (2000, 2001, 2002, 2008).

 

While I think I was as bullish as anyone on small/mid cap US growth stocks in both 2009 and 2013, but I’m definitely not the guy who is going to give you reasons to buy #bubbles. At least 90% of the Old Wall can get you that call this morning (for a brokered fee!).

 

So don’t expect that from me today and/or on Monday if the jobs report is magically “better than expected” this morning either. The main reason for that isn’t an ideology or a marketing model – it’s a risk management process.

 

My catalyst in both 2007 and 2014 was/is the same. It’s called the economic cycle. Whether naval gazing US stock market consensus is forced to acknowledge it today, next week, or next month isn’t the point.

 

Long-term Bond Yields, Oil, Gold, Japan, Russia, Brazil, Europe, Emerging markets, Russell 2000, etc. have already confirmed it.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22-2.40%

SPX 1

RUT 1121-1181

Nikkei 148

VIX 13.29-17.14

WTI Oil 76.23-79.92

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

My Bubble's Birthday! - 11.07.14


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%
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