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THE LEISURE LETTER (3/6/2014)

LVS, WYNN, MGM, MPEL, CZR, MTN, H, HLT

EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES 

 

TODAY, March 6

  • Todd in Boston       

Friday, March 7

  • Employment Report for February 

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Monday, March 11

  • CZR 4Q 2013 conference call

Tuesday, March 12

  • MTN FY2Q 2014 conference call

Friday, March 14

  • Hyatt Investor Day

COMPANY NEWS

LVS:  Las Vegas Sands executive Chris Cahill resigning 
LVS executive vice-president of global operations, Chris Cahill, is resigning.  Cahill oversees the company’s property operations, corporate marketing and human resources, among other things.  LVS gave him a 5-yr contract in April 2012. 

 

Takeaway: We're not reading anything into yet but other companies seem to be poaching some LVS personnel.  

 

OEH: Selling an asset 

The Inn at Perry Cabin, featuring 78 rooms, will be sold for $39.7 million. 

 

Takeaway:  We applaud managements efforts to sell an asset, not officially listed for sale, and we expect any cash proceeds will be used to reduce outstanding debt. 

 

HLT: Announced additional hotel in Saudi Arabia

Hilton Worldwide announced a signing agreement with Al Jazeera Group, for a new 180-room Hilton Al Ahsa, Kingdom of Saudi Arabia is expected to open in 2016.

 

Takeaway:  Continues the company's plan to increase the non-US hotels and room count. 

 

 

INDUSTRY NEWS

JAPAN:  Bill delayed 
One of the legislators, Takeshi Iwaya, spearheading the bill to legalize casinos in Japan says passage might be delayed.  Iwaya said he is extremely worried the bill might not get passed mid-year despite cross-party support because of procedural issues.  Iwaya did comment on potential projects, saying ideally foreign casino operators would join forces with local Japanese companies on projects.   Japan needs the expertise and knowledge of foreign companies, but foreign operators might have trouble adapting to Japan’s particular characteristics, he said.

 

Takeaway:  We believe such statements are merely efforts by Japanese officials to "save face" while also reaffirming the keiretsu business structure.  However, it seems that Japan is a huge focus for investors and expectations are high for passage of favorable legislation this year.

 

MACAU:  Work on new border crossing to start in 2015
Work on the new border crossing in Ilha Verde will start halfway through next year and should be complete in 2016.  The new crossing will be open 24 hours a day. 

 

Takeaway:  One of many transportation infrastructure developments that should help the Mass business 

 

BERMUDA: May pursue online gaming

Finance Mister David Burt suggested Bermuda establish a legislative committee to examine rules and laws for creating an on-line gaming industry.  Bermuda, home to many corporate headquarters as well as the reinsurance industry, is a preferred corporate domicile due to its favorable tax laws and positive business environment.  

 

Takeaway:  Bermuda with its strong infrastructure (telecom and data centers), coupled with favorable tax laws has the potential to become the next Cyprus for online gaming.  Additionally, the easy air travel access is a major advantage as compared to Cyprus.  

 

MACRO 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning 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.


Sell Baby, Sell

Client Talking Points

RUSSIA

The bear is back in Russia. That one day bounce for Vladimir Putin’s stock market? It has ended. Abruptly. That puts the Russian Trading System down -1.6% this morning to -19.5% year-to-date. Policies have consequences.

UST 10YR

Both the US currency and bond markets are baking in US #GrowthSlowing. The 10-year yield of 2.70% this morning is A) bearish versus our Hedgeye TREND resistance of 2.80% and B) has an immediate-term downside to 2.59%. What does this mean? Buy bonds.

FINANCIALS

If you agree with our macro call (inflation slowing US growth), then you sell Financials (XLF) on the open. Any downside pressure on bond yields from here on out pressures the Yield Spread, (10s minus 2s) which is signaling lower-highs. Incidentally, despite another US #GrowthSlowing data point yesterday (ISM non-manufacturing), we’re still at all-time highs on the S&P 500. #Sell.

Asset Allocation

CASH 31% US EQUITIES 3%
INTL EQUITIES 10% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

FX: Euro and Pound continue to signal solid vs Burning Buck @KeithMcCullough

QUOTE OF THE DAY

“An intellectual is someone whose mind watches itself.” - Albert Camus

STAT OF THE DAY

Wal-Mart just announced price cuts on the Samsung Galaxy S4, as well as Apple's 16-gigabyte iPhone 5s and 5c, for customers signing two-year contracts with AT&T and Verizon. A Galaxy S4 is now $49, down from $99. The 16-gigabyte 5s is dropping from $145 to $119, while the 5c is now $29, down from $45. In addition, customers who purchase any Samsung phone with a two-year contract between March 9 and March 22 will receive a free $50 Wal-Mart gift card. The move will fuel speculation Apple is planning a new iPhone release this spring, rather than its usual fall launch. (CNN)


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 80.65%
  • SHORT SIGNALS 78.63%

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up

Takeaway: Equity mutual funds had $4.9 billion in inflow this week, in-line with the YTD average but bond inflow trends were higher than the '14 mean

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean:

 

Total equity mutual funds produced another strong week of inflow with $4.9 billion of net subscriptions, a slight deceleration from the $5.8 billion inflow the week prior. The $4.9 billion inflow had a domestic bend during the most recent 5 day period, with $3.1 billion flowing into domestic equity funds and $1.8 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 26th with $2.3 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $1.6 billion into taxable products and a $667 million inflow into tax-free or municipal products, the 7th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $751 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $5.8 billion in net inflow with bond ETFs experiencing flat-ish trends with just $458 million of inflow. The 2014 weekly averages are now a $2.2 billion weekly outflow for equity ETFs and a $2.1 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 1 png

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 2 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 3 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 4 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 5 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 6 png

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 7 png

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 8 png

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - Just an Average Week for Equities but Bond Trends Starting to Pick Up - ICI chart 9 png 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 



Rose Colored Bubbles

“What’s in a name? That which we call a rose by any other name would smell as sweet.”

-William Shakespeare

 

What’s in a bubble?

 

I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.

 

Rose Colored Bubbles - bub

 

At the all-time highs, they just look sweet.

Back to the Global Macro Grind

All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.

 

Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.

 

What’s in the cost of living?

  1. Shelter
  2. Food
  3. Transportation

Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…

 

What’s in the all-time high in American “inequality”?

  1. The Housing Bubble
  2. The Commodity Bubble
  3. The Bond Bubble

One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.

 

Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night.  He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”

 

As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.

 

So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.

 

In other news, inflation slowed US consumption growth again in February:

  1. USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
  2. The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
  3. US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB

No worries though, it’s all “weather.”

 

If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.

 

I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.

 

As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.

 

Our immediate-term Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.75%

SPX 1

VIX 13.01-15.64

USD 79.86-80.43

Brent 107.31-110.02

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rose Colored Bubbles - San Fran HPI

 

Rose Colored Bubbles - rta7


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