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Takeaway: Clearly, the Republicans will gain ground in this election, but will it be as drastic as many pundits believe? We don’t think so.

Yesterday we hosted a call with highly regarded political pollster Scott Rasmussen to discuss today’s midterm elections.  In the link directly below, we’ve included a replay to the call as well as the presentation that Rasmussen prepared for the event.






Rightfully, Rasmussen argued that elections are always about the fundamentals.  Accordingly, one of the most relevant fundamental drivers in any national level election is the approval rating of the President.  Currently, President Obama’s approval rating is as close to as low as it has been since he was elected.  According to an aggregation of polls from Real Clear Politics, Obama’s approval rating is 41.9% and his disapproval rating is 53.4%. To put that in perspective, Obama’s approval rating is very similar to that of President Bush prior to the 2006 mid-terms.




As a result of President Bush’s low approval, among other factors, the Democrats saw broad based success in the 2006 midterms.  In aggregate the Democrats gained a net +31 seats in the House to take control, they gained a net +5 seats in the Senate with one Democratic getting elected as an Independent to effectively take control of the Senate, and they won a plurality of the 36 state governorships that were up for grabs.  As a whole, 2006 was a very convincing victory for the Democratic Party across the board.

Given that approval ratings for President Obama and President Bush were very comparable, there is no question that this race will be incrementally positive for the Republicans.  As goes the approval rating of the President, so too goes the fortunes of his or her party.  By and large, this is also what the consensus media outlets are reflecting.   Below are some of the headlines from around the country:


“On Election Day, GOP Confident, Voters Sour” – New York Times


“Where Did Obama Go Wrong?” – Washington Post


“Obama Will Leave the Dems in Shambles” – DC Examiner


The list could go on, but broadly speaking the mainstream media and consensus is extrapolating a sentiment reading from Obama’s approval data and predicting a dour night for the Democrats.  To some extent, the election will play out this way.  The question of course, as Scott Rasmussen raised on our call yesterday, is how motivated the anti-Obama vote becomes.  In essence, will the disapproval of Obama motivate Independents to vote against Republicans, or just discourage them from participating at all?

The generic polling data actually suggests the latter.   According to the Generic Congressional poll (a poll that asks the voter to simply choose between a party for their congressional votes) aggregated from Real Clear Politics, the Republicans currently have a +2.4 point lead.  To put this in perspective, in 2006, the year of the Republican bloodbath, the Democrats had a lead of +11.5 points going into the midterms.   




The other key fundamental data point to consider is that motivation among eligible voters does seem low.  According to a Gallup poll taken in late September, the percentage of people “extremely motivated to vote” sat at 32%, which is well below 50% in the same poll from 2010 and 45% in 2006.  There is no reason to believe that voters have become more motivated in the last month.

The takeaway, if there is one, is that while this will be a long night for the Democrats, it may not be quite as long as the herd in the consensus media is projecting.  Undoubtedly, the Republicans will gain seats in the House and likely win the Senate, but it may be a tighter margin than many expect as voting seems likely to fall across party lines with a broadly unmotivated electorate.  

So, could the so called “October Surprise” be the Democrats faring better than expected? Perhaps, although it is more likely that this is will conclude as a non-event election resulting in the Senate shifting to the right and no decisive mandate emerging for the Republicans.

As we head into the election tonight, there are three key battlegrounds that will provide early indications:


1. New Hampshire Senate – The polls in New Hampshire close at 7:00pm, and the Senate race here is currently in a dead heat.  While Scott Brown is enduring the “carpet bagger” label, he also has momentum on his side as he has narrowed the margin in every poll taken over the last six months.   If Brown wins this seat, it will be a very long night in the White House and for Democrats nationally.


2. North Carolina Senate – The polls in North Carolina close at 7:30pm, and this race is currently too close to call based on the polls. However, it has similar dynamics to the NH race in that Thom Tillis has been consistently closing in on incumbent Senator Kay Hagan over the last six months and likely has the benefit of momentum.


3. Georgia Senate – The Georgia polls close at 7:30pm eastern, and currently the Republican candidate for this open seat, David Perdue, has a lead of +3.0 points, which suggests he is likely to win this seat.  The read-through from this race will likely be his margin of victory.  If Perdue looks likely to win by a lot more than +3 points, it is likely indicative of broad based national Republican momentum.


If the Republicans do well in those three races, you can probably head to bed early.  If not, it may be a long and very interesting night.


Daryl G. Jones

Director of Research


BABA: The Good Before the Bad (F2Q15)

Takeaway: F2Q15 results look good at face value, but confirm our concerns of mounting risks within its model, which may become more evident shortly.


  1. QUARTER LOOKS REALLY GOOD AT FACE VALUE: BABA beat both top and bottom line estimates, with revenue growth accelerating across each of its segments.  Gross Merchandise Value (GMV) also accelerated on a y/y basis alongside accelerating growth in the TTM total in Active Buyers on its sites. 
  2. BUT CONFIRMS OUR CONCERNS WITH THE MODEL: GMV/active buyer declined on a y/y basis for the first time in its reported history, alongside an acceleration in the percentage of Mobile GMV transacted on its sites.  We believe these two factors are related, and correspond to the rise of the weaker Chinese e-commerce consumer.  As we mentioned in our most recent note (below), if GMV/Active buyer is on the decline, then the average buyer (and their ad clicks) are worth less to the vendors on BABA’s sites who are advertising to them.  That means growing pricing pressure across its core marketing business (~60% of total revenue). 
  3. WITH A NEW CONCERN EMERGING: The only thing that is keeping us on the sidelines on the short side is the migration of GMV from Taobao to Tmall, which is a massive tailwind for the company since BABA collects commissions on Tmall transactions.  While commission revenues remained strong (nearly doubled y/y) with Tmall GMV % up 5 percentage points y/y, that percentage remained relatively flat over the past two quarters.  We’re not sure what the ceiling is for Tmall GMV %, but unless we see a material uptick from here, commission revenue growth will slow precipitously; making the growing pressure in its marketing segment more evident.

BABA: The Good Before the Bad (F2Q15) - BABA   GMV per buyer 3Q14

BABA: The Good Before the Bad (F2Q15) - BABA   Mobile GMV   3Q14

BABA: The Good Before the Bad (F2Q15) - BABA   Tmall GMV   3Q14


For more detail on our bearish long-term thesis, see link below.  Let us know if you have any questions, or would like to discuss in more detail.


BABA: Leaning Short, But...

10/21/14 07:02 AM EDT




Hesham Shaaban, CFA


Keith's Macro Notebook 11/4: Yen | Oil | Sectors

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Takeaway: HPI deceleration is beginning to flatten out. Coupled with easing demand comps, this development makes us less bearish on the margin.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 




Today's Focus: September CoreLogic Home Price Report

CoreLogic released its monthly home price report for September earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index, CoreLogic is a single month index released on a one-month lag. Essentially, it gives you information 2-3 months more current than what you get from Case-Shiller. 


Corelogic reported home price growth slowed -20bps sequentially to +5.6% YoY in September vs. +5.8% in August.  There are a few notables in the release worth highlighting:


  • Volatility:  The now serial volatility in the data extended into September as July was revised to 6.4% (from 6.8%), August was revised to 5.8% (from 6.4%) and the September actual of +5.6% YoY came in almost a full percentage point below the econometric projection issued last month. 
  • Projection:  The projection for the national series is for a 0.1% MoM increase in October which equates to a sequential acceleration in prices +6.0% YoY.  They have been making a false prediction of acceleration in their projection for a few months now.  In contrast, the Ex-Distressed series is projected to decline -0.8% MoM (largest sequential slowdown since 2011) with the YoY decelerating -60bps to +4.6%
  • ROC:  September marks the 7th consecutive month of deceleration in HPI from a rate of change perspective.  However, the rate of change in the second derivative (ie. the 3rd derivative) in HPI is slowing – whereas the monthly decelerations were on the order of -100bps from February to June, they have slowed to just -60bps and -20bps in the last two months, respectively.   
  • Slope Surfing:  While a slowing macro environment remains a discrete risk to the housing market, a fledgling stabilization in HPI alongside easy demand comps and significant YTD underperformance for housing related equities has us significantly less bearish currently than we were 10 months ago when we turned negative on the complex








About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Christian B. Drake

Retail Callouts (11/4): KORS, FL, ICSC

Takeaway: KORS harping on weak mall traffic (strengthening brands don’t say that) + Hicks leaving FL + weak ICSC = bearish points about margin cycle.



Retail Callouts (11/4): KORS, FL, ICSC - 11 3 chart2B




Takeaway: These numbers are just bad. Period. This is the first time the ICSC reading has been under 2% year/year since Spring. The 2 and 3-year trends are just as bad.

Retail Callouts (11/4): KORS, FL, ICSC - 11 4 chart1




KORS 2Q15 Earnings


Takeaway: The $1.00 print was spot on with our estimate vs. consensus at $0.89, but a 16.5% comp wasn't enough -- not by a long shot. The company repeatedly talked about 'weak mall traffic' and a 'conservative consumer'. That's simply not something that a brand with significant runway talks about. In fact, we wonder how many times KORS cited traffic as a headwind in the past four years compared to the past 2 quarters.

Retail Callouts (11/4): KORS, FL, ICSC - 11 4 KORS


FL - Foot Locker CEO Ken Hicks to Retire



Takeaway: This has implications not only for FL, but says a lot about the state of retail. We moved FL up from our Short Bench to our Core Short list. See details in the link to this mornings note: FL - THE LAST STRAW


Malls Fill Vacant Stores With Server Rooms



  • "The Internet is moving to a shopping center near you."
  • "In Fort Wayne, Ind., a vacated Target store is about to be home to rows of computer servers, network routers and Ethernet cables courtesy of a local data-center operator. In Jackson, Miss., a former McRae’s department store will get the same treatment next year. And one quadrant of the Marley Station Mall south of Baltimore is already occupied by a data-center company that last year offered to buy out the rest of the building."


Retail Callouts (11/4): KORS, FL, ICSC - 11 4 bricks click


Takeaway: Interesting read about how demand is nearly nonexistent for B- and C mall properties. We continue to think that while these anchor tenant spaces are the most obvious to be shuttered for marginal retailers, they will ultimately stay open in order to help fuel the e-commerce business given our research that shows how bricks and clicks are inextricably linked. To close marginal stores means risking e-commerce sales to the customers around those stores. Unfortunately, that will put the supply/demand balance even more off kilter, which will put pressure on aggregate productivity. See our recent Department Store deck for details.




Los Angeles Port Talks Hit Snag



  • "Negotiations to finalize a key labor contract for the West Coast ports hit a major setback as the association representing the waterfront employers charged the longshoremen’s union with orchestrating slowdowns in Seattle and Tacoma in the middle of the peak holiday shipping season."
  • "The Pacific Maritime Association claimed on Monday that the International Longshore and Warehouse Union targeted select terminals in Tacoma on Friday and expanded to more terminals in that port and also in Seattle throughout the weekend. Together, the ports handle about 16 percent of cargo arriving on the West Coast."
  • "The association estimated that the slowdown reduced productivity at the terminals by more than 40 percent."


JCP, M, KSS - J.C. Penney tries to one-up rivals with even earlier Thanksgiving opening



  • "J.C. Penney said on Monday it would open its stores for Black Friday shopping at 5 p.m. on Thanksgiving Day, an hour earlier than its closest competitors Macy’s, Kohl’s and Sears, and three hours earlier than it did last year, in the latest upping of the ante in the holiday sales wars."


SHLD - Kmart to stay open for 42 hours straight, starting at 6 a.m. on Thanksgiving



  • "Sears Holiding Company joined the growing list of retailers with extended shopping hours on Thanksgiving and Black Friday."
  • "Sears and Kmart stores will open on Thanksgiving Day, with Sears opening at its earliest time ever: 6 p.m, two hours earlier than last year. Kmart will open its doors for 42 hours straight, from 6 a.m. on Thanksgiving to midnight on Black Friday."


Primark Shrugs Off Weather Impact



  • "Discount fashion retailer Primark has enjoyed a strong start to its new financial year despite warm autumnal weather that has prompted rivals to warn on profits."
  • "George Weston, chief executive of Primark owner Associated British Foods, said Tuesday that Primark's sales and profits had risen over 10 percent in the first six weeks of its 2014-15 financial year, which started on Sept. 14."
  • "'I'm really not concerned (by the weather) and we haven't had to delay or cancel any orders,' he said."
  • "'Yes, there's been an (weather) effect, but ... every year you get unseasonal weather at some point.'"

LEISURE LETTER (11/04/2014)



  • 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 10am .
    • HPT Q3 earnings 1pm
    • AWAY Q3 earnings 5pm
  • Nov 6:
    • MPEL Q3 earnings 8:30am , pw MPEL
    • PNK Q3 earnings 10am , code 27759617
    • BEL Q3 earnings 10am , ID 12457691
    • DIS Q3 earnings 5pm , pin 38177041
  • Nov 10:
    • CZR Q3 earnings 4:30pm , pin 20797507
    • SNOW FYQ1 earnings 5pm
    • SJM Q3 earnings
  • Nov 11
    • Genting Singapore Q3 earnings


DON:AU – signed an exclusive term sheet to acquire “a significant gaming and hospitality business in Cambodia” Donaco said it would fund the deal via existing cash reserves and new debt facilities, together with an equity component for the vendor. The final acquisition price has not yet been set. Donaco International operates the recently-opened, Aristo International casino hotel in Vietnam which is a brand new 5 star hotel with 428 rooms, up to 50 gaming tables, 62 slots (max 150), and max 150 electronic table games.  As background, Donaco International was founded in 2001 by MD Joey Lim Keong Yew and his late grandfather, Tan Sri Lim Goh Tong (founder and chairman of the Genting Group)

Takeaway: Joey Lim Keong Yew and Benjamin Lim Keong Hoe appear to be emulating their uncle, Genting Chairman and CEO Tans Sri Lim Kok Thay, but thus far on a smaller scale.  A new Asian regional competitor for NagaCorp?


LVS – filed a mixed securities shelf of indeterminate size with Use of Proceeds " General corporate purposes may include future construction and development projects, additions to working capital, capital expenditures, repayment of debt, the financing of possible acquisitions and investments or stock repurchases."  The filing can be viewed here 

 Takeaway:  Raising money but for what? Tender offer coming?

MGM (LVRJ) The National Finals Rodeo plans to stay at UNLV’s Thomas & Mack Center for another decade rather than move to the MGM Resorts International/AEG arena.  The 10-year agreement is expected to be signed before the 10-day rodeo opens on Dec. 4. One of the key reasons for remaining at Thomas & Mack was reportedly because Thomas & Mack has two symmetrical tunnels, which allows Thomas & Mack to efficiently handle timed rodeo events such as steer wrestling and team roping.  


SGMS – announced it has signed a new contract to continue as the exclusive provider of instant games and related services for the Tennessee Education Lottery Corporation.  The new contract, which was awarded through a competitive procurement process, continues the successful relationship Scientific Games and the Lottery have shared since 2003.  The contract will begin January 1, 2015 with an initial term of seven years plus seven one-year extension options.

Takeaway: A strong renewal for SGMS and its lottery business.


GTECH - sharesholders approved cross-border merger of GTECH into Georgia Worldwide ("NewCo").  The court-convened shareholders’ meeting of NewCo to approve the Merger will be held on December 15, 2014.  Furthermore, here is the Q/A document: http://www.gtech.com/sites/default/files/Q%26A%20ENG.pdf


HLT – investment banks on behalf of Blackstone placed 90 million shares (103.5 million with the green shoe) at $25/share.

Takeaway: Modestly higher than HLT's September 30 closing price of $24.63/share.


RCL – repurchased 3.5 million shares of common stock held by Awilhelmsen AS (Awilhelmsen).  The repurchase price per share will be$67.45, which is equal to the price paid by a financial institution to Awilhelmsen in connection with its sale of 3.5 million shares conducted yesterday November 3, 2014 pursuant to Rule 144 of the Securities Act.  The repurchase is expected to close on November 6, 2014.

Takeaway:  While the sale is only 1.6% of RCL's outstanding shares and has a positive penny impact on 2014 EPS, it was a surprise and we wonder if Awilhelmsen will continue to unwind its 16% RCL ownership in the months ahead.  Awilhelmsen doesn't seem to imply that in its 'diversification purposes' comment but why would they admit its intention to completely unwinde? This also raises speculation that RCL and its Board may put in an official share repurchase program soon.


RCL (CruiseLawNews)  Royal Caribbean Explorer of the Seas was hit with rough weather. The cruise ship is sailing on its 14 night re-positioning cruise to Port Canaveral.  Two lifeboats on deck 4 were reportedly dislodged and water crashed through glass doors and flooded the interior of the ship. Allegedly the water temporarily disabled the aft elevators. 


Macau October GGR & Market Share (DICJ & GGRAsia) totaled HKD27.209 billion, a decrease of 23.17% YoY and up 9.63% sequentially.  According to sources, the market shares are as follows:

  • Sand China 23.7% 
  • SJM 23.4% 
  • Galaxy 21.4%
  • Melco 14.3%
  • Wynn Macau 8.9% 
  • MGM China 8.2%.

Takeaway:  MGM and WYNN were the clear laggards in October, probably due to low VIP hold. We will have the October details later this week. 


Japan (DailyMail) According to sources, Japanese lawmakers are set to indefinitely postpone legalizing casinos as Prime Minister Shinzo Abe, whose cabinet has been hit by a series of scandals, lacks the political leverage to pass a bill this year, sources directly involved in the process said.


Pro-casino lawmakers intend to push back a vote on the bill instead of trying to pass it in the current parliamentary session ending this month, three people directly involved in pushing the casino bill said.  Although they aim to keep the bill on the table, the sources said there was a considerable chance it would not come up for discussion even in 2015.  Higher-priority bills, including those related to national defense, are likely to take up debate time in the next parliament session, they said.  "If they can't pass it now, I doubt whether they'll ever be able to pass it," one of the sources said.


Another source said there was a chance legislation could be delayed by three or four years, meaning actual casino development may have to wait until around 2024.  Toru Mihara, who teaches at the Osaka University of Commerce and was one of the architects of the casino bill, said failure to pass the bill in this session would be a "total loss of face" for Abe's cabinet.  He also said the bill will be difficult to pass next year, as newer topics come up in parliament. 

Takeaway:  After all the hoopla, this happens. This year had the best chance for passage.  Now the outlook for Japan gaming is much more murky. A big potential catalyst for LVS, WYNN, and MGM is likely gone.


Chinese Corruption Crackdown(Xinhua) China will establish a new anti-graft body to further strengthen pressure on "unprecedentedly serious" corruption issues, deputy Procurator-General Qiu Xueqiang has said. Qiu said that the plan for a new anti-graft agency was put forward by the Party committee of the Supreme People's Procuratorate (SPP) and was approved by the central authority.

Takeaway: Corruption to remain the focus of Mainland Government enforcement - a persistent headwind for Macau.


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.

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