Client Talking Points
After testing Bull patience for a few weeks, both the EuroStoxx50 and EuroStoxx600 have recovered Hedgeye TREND supports. Over in Germany, the DAX has too this morning (TREND support = 9315) as EUR/USD holds $1.37 TRADE support. Short USD versus long EUR.
VIX front-month is toying with all-time-SPY high emotion here this morning. And it should. While my model says Volatility makes a lower-high on the selloff, the breakdown through 14.72 TREND support is bullish for another SPY ramp to overbought highs. #PainTrade.
I love that Goldman Sachs is saying $1,050 gold, because nothing in my notebook agrees with that. Nothing. Gold tested and tried $1,318 support (TREND support underpins that at $1,278) and held it like a champ (long). The 10-year yield is < 2.81% TREND resistance.
|FIXED INCOME||19%||INTL CURRENCIES||22%|
Top Long Ideas
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
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.
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.
Three for the Road
TWEET OF THE DAY
TREASURIES: no follow through to the 1-day ramp in bond yields this wk, 10yr = 2.76% (buy bonds) @KeithMcCullough
QUOTE OF THE DAY
"Nothing is a waste of time if you use the experience wisely." - Auguste Rodin
STAT OF THE DAY
Mt. Gox said it found 200,000 "forgotten" bitcoins on March 7, a week after the Tokyo-based digital currency exchange filed for bankruptcy protection, when it lost nearly all the 850,000 bitcoins it held ($500 million at today's prices). The exchange said the bitcoins were found in an old-format online wallet which it had thought no longer held any bitcoins, but which it checked again after its bankruptcy filing. (Reuters)
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TICKERS: BYI, LVS, MGM, WYNN, WYN, NCLH, RCL
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
Friday, March 21
Monday, March 24
Tuesday, March 25
- CCL to report earnings pre-market, conf call at 10 a.m. EDT
Wednesday, March 26
- PENN at TAG Spring Consumer Conference
- Melco Crown Extraordinary General Meeting
- Melco Crown Board Meeting
Thursday, March 27
Friday, March 28
BYI – the company’s wholly owned subsidiary, Shuffle Master Entertainment (Asia) Limited was cleared of two patent infringement charges alleged by LT Game Limited Macau, LT Game Limited Hong Kong and Paradise Entertainment. The patent investigation was conducted by the Macau Public Prosecutor, who found no evidence that Shuffle Master Entertainment engaged in any wrongdoing.
LVS – asked Singapore authorities for more land to increase count by nearly 60%. Marina Bay Sands request includes an additional 1,500 rooms to the 2,563-room, plus meeting rooms, ballrooms and exhibition spaces.
Takeaway: Having visited MBS many times, this was always the plan. However, MBS needed the City of Singapore to finish construction of the subway rail and Marina Bay station, as well as the surrounding street and highway infrastructure. We expect the additional hotel towers will be located southwest of Tower 1 and across Sheares Link, between Bayfront Avenue and Sheres Avenue. More rooms would be a huge positive for this capacity constrained property.
LVS – Sands Casino Resort Bethlehem has named Douglas S. Niethold its interim president following the departure of Robert DeSalvio, who left Sands Bethlehem for Wynn Resorts.
Takeaway: We continue to believe LVS is looking to exit Bethlehem via a sale of the property.
MGM – According to the Massachusetts Gaming Commission, Thursday is the last day for MGM Resorts International to hash out the terms of surrounding community deals with Longmeadow and West Springfield in regards to its plan to develop an $800 million resort casino in Springfield's South End.
Takeaway: We expect MGM to reach an agreement with all the communities as the development of Springfield means too much to MGM in the long-term versus a few hundred thousand dollars.
WYNN – published its Annual Meeting and Shareholder Proxy Statement which notably includes a renegotiated Executive Compensation for Mr. Wynn. Mr. Wynn’s $4 million base salary will drop to $2.5 million, so that a higher proportion of his compensation is attributable to variable, at-risk components that drive stockholder value. He will now pay annual rent of $525,000 for his Wynn Villa and will reimburse the Company for certain expenses for his personal use of Company aircraft. Finally, a significant portion of Mr. Wynn’s 2014 annual incentive award will be payable in equity.
Takeaway: Still not ideal but certainly a more shareholder friendly compensation structure
WYN – completed a $425 million asset-backed notes securitization. Sierra Timeshare 2014-1 Receivables Funding LLC issued $328 million of A rated notes and $97 million of BBB rated notes. The notes were backed by vacation ownership loans and had coupons of 2.07% and 2.42%, respectively, for an overall weighted average coupon of 2.15%. The advance rate for this transaction was 88%. Sierra Timeshare 2014-1 Receivables Funding LLC is an indirect subsidiary of Wyndham Vacation Ownership. The transaction was completed in reliance upon Rule 144A and Regulation S as a placement of securities.
Takeaway: As the economic cycle progresses, investors are pushed to go out the risk/credit spectrums for higher yields. As a result, we are not surprised by this securitization which we view as a positive for the timeshare industry. We expect additional timeshare securitizations this year.
CCL - released details of its return to Norfolk, Va. in 2015, saying it will offer two- to seven-day voyages out of the city on the 3,006-passenger Carnival Splendor. Taking place in May and October 2015, the seasonal sailings will include five-day Bahamas cruises calling at Nassau and Freeport, and a six-day Bahamas cruise that adds the private island of Half Moon Cay. A seven-day Bermuda cruise. The company also said Carnival Splendor will sail seasonally out of New York and Miami in 2015 as well.
Takeaway: CCL is constantly testing markets for demand as well as pricing. As additional ships (capacity) come on-line, we expect older ships will be based in secondary markets such as Norfolk.
MSC Cruises – signed a letter of intent with shipbuilder STX France for the construction of two 167,600-ton vessels for delivery in 2017 and 2019. MSC says the ships, its largest ever, will represent a new class at the line and have a capacity for up to 5,700 passengers a piece. They'll have 2,250 cabins. The deal also includes an option for two more of the ships.
Takeaway: Keeping up with the its bigger competitors as well as positioning itself for a likely IPO as the new ships will be the "growth story".
NCLH – The first piece of steel was cut at Meyer Werft in Papenburg, Germany for the construction of Norwegian Escape, the first of two new Breakaway Plus Class ships for Norwegian Cruise Line, set for delivery in fall of 2015. The Norwegian Escape will homeport year-round in Miami following her delivery in late 2015 and sail a seven-day Eastern Caribbean itinerary starting November 14, 2015
Takeaway: Economic recovery, coupled with modestly better pricing always results in new ship construction.
RCL – announced that the 5,400-passenger Allure of the Seas will redeploy to Fort Lauderdale in November 2015 from Barcelona, where she will be based from May to October 2015. From Fort Lauderdale, Allure will resume alternating, seven-night sailings to the Eastern and Western Caribbean. Eastern Caribbean sailings will feature calls in Nassau, Bahamas; St. Thomas; and St. Maarten. Western Caribbean sailings will feature calls in Falmouth, Jamaica; Cozumel, Mexico; and Labadee, Royal Caribbean's private beach area on the north coast of Haiti.
Attempts to Ban Online Gaming Nationwide – A bill proposing to ban online gaming throughout the United States, “The Internet Gambling Control Act” alleged authored by Congressman Jason Chaffetz (R-Utah), was found to be the work of Darryl Nirenberg (an anti-gaming lobbyist who represents Sheldon Adelson and Las Vegas Sands Corporation) aims to ban all forms of Internet gambling, including online poker, state lotteries and sports betting but not horse racing.
Takeaway: The bill is unlikely to pass. The future is on line poker and we don't think that can be stopped even if it is just through interstate efforts.
New Jersey Gaming Expansion not likely – State Senate President Stephen Sweeney dismissed any possibility for legislative discussion on the idea of a Meadowlands casino for another two years because the agreement he made with Governor Christie to give the struggling Atlantic City casino industry five years to try to rebound would not expire until Feb. 2016.
Takeaway: Hope springs eternal for Atlantic City, while the New Jersey gaming revenues continue to experience cannibalization by surrounding states.
Boston Mayor Walsh plays thug – Boston Mayor Martin Walsh is seeking greater power and influence in evaluating the Mohegan Sun casino project at Suffolk Downs in Revere and Wynn Resorts proposal on the Mystic River waterfront in Everett. The Mayor declared Boston is entitled to hold a referendum on each proposal, to negotiate massive compensation packages with the developers, and, if it so chooses, to block a casino from being built. Walsh’s administration made the assertion in two letters to the state gambling commission Wednesday in which the city declares that it is a host community, under the 2011 casino law. The gambling commission will address Boston’s assertions at a meeting Thursday. If the commission does not accept Walsh’s declaration, an obvious option for the city would be to file a lawsuit challenging the panel’s interpretation of the casino law.
Takeaway: Seems like old-time, back alley Boston politics. Boston officials had their chances to host the potential casino but played hardball with the operators and now likely regret that tactic.
Wisconsin Tribal Expansion – The Lac du Flambeau Indians and the city of Shullsburg have finalized an agreement for a $132 million casino. The off-reservation casino project still hinges on both approval from the state and federal governments. The proposal also is the second attempt for a Shullsburg casino. More than 10 years ago, federal and state officials rejected a plan that included a 300-room hotel, golf course and water park. Tribal members said the new proposal would be constructed in phases and include a hotel.
Takeaway: Located 28 miles from Dubuque, Iowa, the proposed Shullsburg casino would cannibalize BYD's Diamond Jo Dubuque and the Mystique Casino to most, while ISLE's Lady Luck in Marquette and Wild Rose Clinton (in Clinton) would likely experience some lost revenues as well.
Airbnb – is seeking to raise $400 to $500 million via private equity. Airbnb, founded in 2008, allows individuals to rent out couches, rooms, apartments and homes through an online marketplace of more than 600,000 current listings. Hosts set a nightly rate, and Airbnb collects guest payments, keeping a portion of the fees for itself. The equity raise, if successful, is estimated to value Airbnb at $10 billion.
Takeaway: We remain skeptical of this business model and view Airbnb as a portal for the low-budget, back packing, hostel segment and don't view the business as competitive threat to the traditional lodging industry. By comparision, AWAY has an equity market cap of approximately $3.83b billion.
European RevPAR – February RevPAR increased 6.1%, better than +4.8% in January. During February, occupancy was up 3.3% while ADR upticked +2.7%. February RevPAR on a country basis included: France -2.9%, Germany +6.1%, Spain +5.9% and the UK +9.5%.
Takeaway: The recovery across Europe continues. HOT is a major European player.
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.
“A penny saved is a penny earned.”
I co-chaired the Bipartisan Policy Center’s dinner/debate on America’s Personal Savings Rate in NYC on Wednesday and one of the most thoughtful portfolio managers I know outlined the following to Senator Kent Conrad (ND) and Jim Lockhart (W.L. Ross):
“My wife and I were in the military… we raised our 3 kids teaching them discipline and hard work… my kids all have savings accounts, jobs, and allowances… and my son did pretty well this winter shoveling snow. So I took him to the bank last weekend to make his cash deposit – he looked at his statement and said “Dad, I made 2 cents – why do we do this?”
Very good question, son. With an un-elected Federal Reserve mandate of 0% Rate of Return on American Savings accounts, what is the incentive for the next generation to save?
Back to the Global Macro Grind…
Other than the bond and stock market bubbles blowing up, what is your incentive to be in cash this morning? As I was drawing down the cash position in our asset allocation model yesterday, I reminded myself to say my prayers before bedtime last night.
While prayer is not a risk management process, neither is a country destroying both the credibility of her youth’s hard earned currency and savings rate. As you can see in the Chart of The Day, the relationship between the US Dollar’s value and the ratio of personal savings to after-tax income is as obvious as the sun rising in the East.
Now back to dropping my Cash position to 20% yesterday. Damn the long-standing American principle of Franklin Frugality, Ben Bernanke and Janet Yellen have to be proud of me. With return on savings pinned at 0% and #InflationAccelerating, I’m going to go chase myself some hard core nominal yield!
What does chasing yield mean?
- The “risk-free” rate of return = 0%
- #InflationAccelerating > 2% means your real-rate of return owning 0% is negative
- You have to buy stuff (literally anything) that “yields”> 2%, just to break-even
Otherwise known as a Policy To Inflate, this un-elected and un-constitutional tax policy in America pays the debtor and pulverizes not only the saver, but the poor (hint: inflation is an unlegislated tax). And what does the NY Fed have to say about this? Go eat a REIT.
Seriously, let’s go through what you were forced to do in 2011 one more time, because that’s precisely what I am suggesting you do right now (until one day I say, I’m out, and go to 100% under-my-mattress beast mode):
- FOREIGN CURRENCIES (22%) – with a Down Dollar policy, buy other country currencies vs the US Dollar (Pounds, Euros, etc.)
- COMMODITIES (20%) – since most commodities correlate inversely to USD, buy Gold, Silver, Food – love Coffee!
- FIXED INCOME (19%) – yep, if it’s got a yield greater than 1-2%, giddy-up Bernanke Bond Bubble
- INTL EQUITIES (10%) – we like #StrongCurrency countries. Period.
- US EQUITIES (9%) – slow-growth Utilities, REITS, etc. - love Yield Chasing
Oh, that’s not the asset allocation pie-chart that the Banker-of-bailed-out-America-thundering-turd-high-net-worth-yield-chaser, slash “advisor”, has you in right now? I’m shocked.
With pick-toggles, junk bonds, and MLPs trading near all-time historical multiple highs, I don’t know why the Mucker doesn’t just go whole hog on this asset allocation strategy and go 30% Gold, 70% Kinder Morgan (KMP)!
As long as you realize that investing under this Bernanke/Yellen regime has nothing to do with reasonable valuations for anything that looks like a bond, you’re all set.
Back to the MLP bubble Bernanke will have on his #history watch:
- The US Equity market cap of MLPs 10 years ago was around $50B
- The all-time-bubble-high market cap for MLPs in 2013 was more than 10x that (over $500B)
- The all-time-bubble high in something like Kinder’s KMP in 2013 was 40x earnings
This is why someone like Rich Kinder should be considered a genius – he front-ran both Fed policy and the predictable behavior of human beings being forced to chase yield versus ZIRP (Zero Percent Rate Policy); not to mention the 50% rake he pulls from his LPs.
So, back to the NYC Portfolio Manager – what should we tell his son?
I say we tell him to roll-up some capital intensive assets (snow plows?), play around with the non-GAAP numbers, and collect massive fees from yield-chasing retail investors. Forget long-term principles of frugality and foresight in America. Pay me now. Beats 2 cents.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today – enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
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