VIDEO | Macro Notebook 4/16: USD OIL UST10YR


April and Q2 gaming revenues should be better than bad following an awful Q1.  BYD and PENN probably guided low enough for Q1.



Call to Action:

Catalysts are lining up positive for PENN and BYD with potential in-line to slightly better Q1 earnings and sequentially better Q2 gaming revenues.  PNK Q1 looks at risk.



Investors have been waiting a long time for regional gaming revenues to improve.  On the heels of a disastrous December performance, we had many winter storms and brutally cold weather plus a March that surprised many folks (not us) to the downside.  With Louisiana and Mississippi still to report, SS revenues are tracking right in-line with our projection of -7% for March (see our note: ANOTHER REGIONAL REVERSAL?, 4/2/2014).  We expect Louisiana and Mississippi to report mid single digit declines in revenues for March.


The good news is that analysts have already lowered Q1 estimates for PENN and BYD.  While there should be a few more stragglers, we think current estimates reflect reality – BYD provided its last guidance update on March 1st and PENN was necessarily conservative when it reported Q4.  PNK seems to be the company most at risk for Q1.  We’ll see when Louisiana releases estimates but consensus Q1 estimates of $0.42 looks $0.05-0.10 too high.  For PENN and BYD, we wouldn’t be surprised with an in-line to slight beat.


This may not be the most compelling investment thesis ever, but going forward, regional gaming revenues look better than bad – still negative but decidedly less so as seen in the following chart.



LEISURE LETTER (04/16/2014)



Wednesday, April 16

  • HTZ at BAML Auto Summit

 Thursday, April 17

  • Iowa Racing & Gaming Commission Meeting - scheduled to decide whether it will grant Cedar Crossing Casino a state gaming license, which would make the facility the 19th casino in Iowa.
  • GE 1Q14 Earnings – 8:30 am Conf Call – real estate comments?
  • BX 1Q14 Earnings – 11 am Conf Call PIN 149 943 55 – lodging comments & color?
  • TZOO  Earnings – 11 am Con Call
  • DIS – Investor Day – cruise & parks commentary?

Monday, April 21

  • Genting Singapore – Annual General Meeting

Tuesday, April 22

  • IGT FQ2 earnings:  5 p.m. Conf Call   , Passcode: IGT

Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529


PENN - Continental Real Estate Cos, based in Columbus Ohio, is negotiating with PENN to buy and redevelop the Beulah Park property, which will cease to be a racetrack in May. Beulah Park will hold its final thoroughbred horse races on Derby Day, May 3, and then will close. PENN will transfer the site's gaming license to Hollywood Gaming at Mahoning Valley (Youngstown).

TAKEAWAY: The monetization of a hidden asset on PENN's balance sheet.


DRH - sold the 386-room Oak Brook Hills Resort for $30.1 million, including $4.0 million of seller financing or approximately $78k/key.

TAKEAWAY: Seems to be a very low price per key, but deferred capex likely a hurdle to getting a better price.



Macau table/slot count Q1 2014 DICJ  Gaming tables sequentially declined from 5,750 in Q4 2013 to 5,700 in Q1 2014.  Slot machines sequentially rose from 13,106 in Q4 2013 to 13,232 in Q1 2014.

TAKEAWAY:  The slight table decline in Q4 is a little surprising given all the fuss over lack of tables.


LEISURE LETTER (04/16/2014) - mm


VIP Player Scrutiny - The Treasury Department is seeking to enforce Article 31 of the Bank Secrecy Act, which was enacted over 10 years ago. The Treasury Department claims Las Vegas Strip casinos are years behind other financial institutions in handing over their data and customer lists.  Fred Curry, a partner with Deloitte Financial Advisory Services, says it is only “a matter of time” before such information is going to be handed over.

TAKEAWAY:  Clearly not a positive for the casino industry, this could also lead to increased audits by the Internal Revenue Service based on suspicious activity.


Japan Gaming Congress -

TAKEAWAY:  The Yumeshima annoucement yesterday shows Japan interest is heating up. This conference is held before the May debate on a possible casino bill.


Macau Infrastructure - the China high speed train between Beijing and Guangzhou will be delayed from 2015 to 2016 and expected to open for passenger services in 2017.

TAKEAWAY:  A near term negative for the mass segment growth.


Vietnam Gaming - Casino operator Donaco International cleared the final regulatory hurdle in its bid to open a new hotel and casino in Northern Vietnam with a focus of attracting Chinese gamblers in the bordering Yunnan province.  The company is run by Joey and Ben Lim who are nephews of casino magnate K.T. Lim, the founder of Malaysian conglomerate Genting Berhad.  Genting Hong Kong, which is part of Mr Lim's empire, has a strategic stake in casino operator Echo Entertainment Group.  The five star 428-room hotel and casino is now slated to open in a "soft launch" on May 18th.

TAKEAWAY: This is a foreigners only casino.  Vietnam's upcoming pilot project ($7BN Van Don Casino), which would be open to locals, is the real prize.


Atlantic City Property Comp – based on company filings by Bally’s Atlantic City casino, TJM Properties, the buyer for the former Claridge Casino/Hotel in Atlantic City paid $12.5 million for the property.

TAKEAWAY: Another low transaction price in a fading market.



China - Q1 GDP growth: +7.4% YoY vs +7.3% consensus and +7.7% YoY in prior quarter

TAKEAWAY: A beat off of a lowered number


China 1Q14 Home Sales Decline - (Bloomberg) home sales fell and new property construction declined 25% in Q1, as credit remained tight, adding to signs of a slowdown.  The value of homes sold fell 7.7% year/year to 1.1 trillion yuan (US$177 billion) and the last time home value sales dropped in 1Q2012.

TAKEAWAY: A key metric that bodes poorly for China


China Shadow Banking (Business Times) - Chinese companies that have lent money to other companies are facing a potential wave of defaults, with several firms reporting missed loan repayments, including Sainty Marine and Qiaqia Food Co.  According to Chinese Central Bank data, the shadow banking industry granted a net 2.55 trillion yuan ($411 billion) in so-called entrusted loans last year, nearly double the total for 2012, making them the second-biggest source of domestic credit behind bank loans.

TAKEAWAY: No doubt Chinese government is keeping a close watch on shadow loan defaults. Could impact Macau VIP


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.


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Economic Kings

“My name is Ozymandias, king of kings:

Look on my works, ye Mighty, and despair!

Nothing besides remains.  Round the decay

Of that colossal wreck, boundless and bare

The long and level lands stretch far away.”



The excerpt above is from one of my favorite poems, “Ozymandias”, written by Percy Shelley.  As you might have been able to decipher, the poem (well sonnet really) is about the inevitable decline of all leaders and the empires they build based on personal pretensions to greatness.


The economic and military history of the world is replete with examples of great empires that have been built and then suffered decline.  The most notable to us in the west is likely the British Empire, and rightfully so.  At its peak the British Empire covered more than 13,000,000 square miles, or ¼ of the earth’s surface.


The second largest empire in the history of the world was the Mongol Empire.  The origins of the Mongol empire were admittedly modest and started when a young boy named Temujin vowed in his youth to bring the world to its feet.  Genghis Khan, as he would later be known, did that and more.  The Mongol empire, although almost impossible to manage, stretched from Vietnam to Hungary and was the largest contiguous empire in history.


In modern days, empires are more commonly measured by economic output. Currently, the top three economic empires in the world are the United States with a $16.8 trillion GDP, China with a $9.2 trillion GDP, and Japan with a $4.9 trillion GDP.  Collectively, these behemoths make up almost 40% of the global economy.


If history tells us anything, to the point of Shelly’s sonnet, emperors will decline.  Or as a quant might say, revert to the mean.  The challenge for us as stock market operators is to find opportunities in this tectonic economic shift and to be on the right side of global economic empire building and subsequent declines.

Back to the global macro grind . . .


The mighty empire of China reported some critical economic numbers last night.  My colleague Darius provided a quick summary of the results below:

  • APR MNI Business Indictor: 51.1 from 53.4… G -1
  • 1Q Real GDP: 7.4% YoY from 7.7% vs. a Bloomberg consensus estimate of 7.3%... G -1
    • QoQ: 1.4% from 1.7% vs. a Bloomberg consensus estimate of 1.5%
  • MAR FAI: 17.6% YoY from 17.9%... G -1
  • MAR Retail Sales: 12.2% YoY from 13.6% in DEC (most recent release)... G -1
  • MAR Industrial Production: 8.8% YoY from 9.7% in DEC (most recent release)…   G -1

As you can see from his short hand notation, “G -1” (growth decelerating), broadly speaking the data was incrementally bearish for growth.  


In the Chart of the Day, we take a look at year-over-year Chinese growth by quarter going back ten years.  As the chart highlights, it is really no secret that Chinese growth has been declining and also no surprise that the Chinese stock market is basically shrugging off the data this morning. 


Most pundits are now vocal on the fact that Chinese growth has slowed and is slowing.  Meanwhile, Chinese policy makers are of the view that this is the bottom in China’s economy (in as much as an economy growing 7%+ can be considered bottomed).  Given that policy makers have the ability to stimulate and an early, inside look at the data, at a minimum, we’d probably not short China here.


Or as Genghis Khan said:


“If you’re afraid – don’t do it, if you’re doing it don’t be afraid.”


Speaking of being afraid, what scares me and should scare most stock market operators are the mysterious projections that many strategists of the Old Wall come up with.  As an example, yesterday we took a look at the projections for real GDP growth in the U.S.  From Q2 2014 to Q2 2015 the real GDP quarterly growth rate is projected as follows:

  • Q2 2014 – 3.0%
  • Q3 2014 – 3.0%
  • Q4 2014 – 3.1%
  • Q1 2015 – 3.0%
  • Q2 2015 – 3.0%

Clearly, Herding 101 was a well attended class by most of these sell side economists in PH.D. school . . .


We are not ready to call for the decline in the United States economic empire just yet, but we are wise to note that the Emperor, namely the U.S. dollar, continues to weaken and, in our view, is likely front running a more dovish tone by the Fed.  In that vein, the U.S. 10-year yield is down again this morning (albeit small) as well after failing to participate in the late day, low volume exuberance in equities yesterday.


For those of you that do watch the Fed closely, Grandma Yellen, I mean Chairperson Yellen will be speaking at 12:15pm this morning in beautiful New York.  Our friends at Goldman Sachs are out this morning saying it will be pertinent to interest rates, and the market seems to be agreeing with (or maybe front running) that view.  


Finally this morning on the inflation front, and this is a point we highlighted in our recent themes deck, we are starting to see some tightness in the labor market.  According to an article from Bloomberg, businesses in some US cities are raising wages and adding benefits to attract employees as metropolitan jobless rates have fallen below the 5.2% to 5.6% level considered full employment.  The article noted that 49 of the 372 metro areas reported rates below 5% in February, while four years ago just two cities were below that level.   This has the potential to build what we call #StructuralInflation and it is prudent to keep your hedgeyes on this trend.


Our immediate-term Global Macro Risk Ranges are now:



Russell2000 1093-1151

Nikkei 136

USD 79.11-80.03

EUR/USD 1.36-1.38

Brent 107.99-110.76


Good luck empire building today!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Economic Kings - Chart of the Day

Getting Crushed by Inflation

Client Talking Points


Burn baby burn. US Dollar Index continues to front-run (as rates do) what I think will be a more dovish Fed (on the margin versus tapering) come summer time. Inflation slows growth, and the Fed gets easier (i.e. devalues Dollars) when growth slows – consumer stocks (XLY) are down -6% versus slow-growth-yield-chasing Utilities (XLU) up +12% year-to-date.


Now the only thing US consumer bulls ping me on (oil not going up) is going up. Both Brent and WTIC (up +1% and +0.7%, respectively, this morning) are confirming bearish to bullish Hedgeye TREND reversals. Love those…but the consumer doesn’t. Inflation is an unlegislated tax that will continue to matter to the 80% of America getting crushed by it (see our Q2 Macro Themes slide deck for details).


The 10-year yield at 2.64% is down a beep in the last 24 hours (i.e. they might have bounced the Nasdaq and Russell off two-month lows on no-volume yesterday), but that didn’t change what the FX, Bond, and US Equity markets are pricing in – slower growth sequentially into Q314.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


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.

Three for the Road


EUROPE: 2014 YTD leaders leading this morning's rally - Italy +2% (+12% YTD), Denmark +1.3% (+12% YTD) @KeithMcCullough


"Do not look where you fell, but where you slipped." - African Proverb


President Barack Obama plans to announce an expansion of job-training and apprenticeship programs with a $600 million effort intended to equip workers with the skills sought by employers. The first initiative is a $500 million competitive grant program for community colleges linked with businesses to create programs to teach the specific skills needed for open jobs. (Bloomberg)

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