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VIDEO | Macro Notebook 5/1: POUND UST 10YR USD

A Terrible, Horrible, No Good, Very Bad GDP Report

Client Talking Points


If you really want to buy #GrowthAccelerating, stay with our Hedgeye playbook and only buy countries with #StrongCurrencies like the Pound. The UK PMI accelerates (again) to 57.3 in April versus 55.3 in March and the FTSE looks solid. Yes – currencies matter.


If I’m right, and inflation continues to slow U.S. growth in Q2, then 2.66% for the 10-year yield looks primed to test my TAIL risk line of 2.59%. It’s great news if you are long slow growth yield chasers (Bonds, Utilites, REITS, etc). Not so great if you’re long the Russell 2000 (IWM) etc.


The US Dollar is on its knees (at year-to-date lows) following the massive GDP miss – if all the weather experts nailed the weather, why didn’t they nail the number? Looks like both the currency and bond market is front-running a Yellen “un-taper” in May to me. Guess we’ll see.

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


Denmark's unemployment rate drops to 4.0% (and to think they didn't need the Fed) @KeithMcCullough


"Every worthy act is difficult. Ascent is always difficult. Descent is easy and often slippery." - Mahatma Gandhi


One out of three Americans now live in a housing market where rent for a three-bedroom home eats up more than 30% of the monthly median income, the traditional threshold for affordability, according to RealtyTrac. Big demand for rental housing has helped push rents more than 21% higher since the housing market peaked in 2006. (CNN)


Pay no mind to EPS - top of the EBITDA guidance range isn’t bad. Non-recurring online costs, high income taxes, and a comp expense adjustment prevented a beat. Borgata looking much better for Q2.




We like the setup here for BYD, assuming the economy behaves.  Q1 would’ve been much better, if not for some non-recurring items.  Instead, the stock is indicating down based on a headline EPS miss.  Despite the items, EBITDA still fell at the high end of company guidance and in line with consensus.  The upcoming catalysts look favorable: 

  • a much better April at the Borgata
  • potential breakeven operations as soon as April for online
  • compensation expense normalizing
  • much easier comps
  • a potentially very material property tax rebate in Atlantic City
  • a lower go forward property tax rate that could add $15-20 million annually to Borgata EBITDA – 13-17% boost to our current Borgata estimate
  • a series of potential debt refinancings beginning in August that could generate $0.15-0.20 in incremental EPS 



The headlines read that BYD missed on EPS.  However, Q1 EBITDA of $144.5 million was in line with consensus and at the high end of management’s guidance of $140-145 million.  Moreover, bad weather impacted the quarter by $2m more than guidance, Borgata online suffered a loss of $3m of which $2m was due to non-recurring start-up costs, a stock compensation adjustment hurt pre-tax income by another $2m, and income taxes were unusually high.  The first two items hit EBITDA while the remaining were below the EBITDA line.  Q1 was a solid quarter relative to expectations.


By region, we suspect BYD posted better results everywhere with the exception of Borgata due in part to the online losses but also very bad weather which seemed to impact the hotel and F&B more than gaming.  Good cost controls helped the LV Locals business post YoY EBITDA growth but the lack of revenue growth remains frustrating.




2014 EBITDA guidance of $600-620 million bracketed the consensus EBITDA projection of $610 million.  Management forward commentary was similar to the PENN and PNK conference calls that April was soft.  We would note that our research indicates that April will be much better than Q1 and March in terms of YoY growth and we are projecting accelerating trends for May and June.  Borgata, in particular, looks much better both on land and in cyber space.  We should be getting New Jersey’s April gaming revenues on May 14 and we suspect Borgata did well.  Borgata’s online operations – a major drag on Q1 – could move into the black sometime in Q2.


Comps look very easy for the back half of 2014 and BYD should post solid growth.  Upside to guidance could come from top line growth in Las Vegas and more cost cutting in other markets.  The big prize will be a favorable resolution to the property tax dispute in Atlantic City.  We don’t think investors have focused on how important this development could be for BYD.  Here is the rundown:

  • In July, a judge will hear the city’s appeal of a favorable court ruling for BYD that awarded the company $54m in rebates and interest for 2009/2010. 
  • In September, a judge will hear for the first time, BYD’s contention that they are due a similar rebate for 2010-2012 totaling $75m.
  • Prospectively, BYD is negotiating all along similar lines for lower property taxes that could result in $15-20m annually in incremental EBITDA for Borgata.
  • Combined, these property tax adjustments would generate $1.75 to $2.00 per share in value to BYD stockholders.



Headline EPS be damned, Q1 and guidance were solid.  Positive catalysts are out there.  Overall, there is a lot of value in BYD, particularly if the company can continue to make operational changes to improve its underperforming margins or pursue any real estate related transactions.  

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

LEISURE LETTER (05/01/2014)



Thursday, May 1

  • HST Q1 – 10am
  • OEH Q1 – 10am , Passcode: 22074904
  • FCH Q1 – 12pm , Passcode: 28469900
  • WYNN Q1 – 430pm , Passcode:  17666834
  • BYI FQ3 – 430pm
  • EXPE Q1 – 430pm

Friday, May 2

  • April Employment Report
  • HT Q1 – 9am , Passcode: 1398938

Monday, May 5

  • Genting Singapore Q1 – 6am 

Tuesday, May 6

  • RHP Q1  – 10am , Passcode: 25122491
  • SHO Q1  – 12pm
  • TRIP Q1  – 430pm
  • DIS FQ2  – 5pm , Passcode: 36995300

Wednesday, May 7

  • STAY Q1  – 830am
  • STN Q1 – 4pm
  • CZR Q1 – 5pm , Passcode: 20337702

Thursday, May 8

  • PCLN Q1 – 730am
  • MPEL Q1 – 830am , Passcode: MPEL
  • CAR Q1 – 830am , Passcode Avis Budget
  • BEE Q1 – 10am , Passcode: 10895989
  • SGMS Q1 – 430pm , Password: SGMS

Friday, May 9

  • HLT Q1 – 10am , Passcode: 25981567
  • AHT Q1 – 11am


MGAM – Multimedia Games is buying PokerTek for $1.35/share or $13m.  MGAM expects the transaction will be neutral to diluted EPS in FY2015 and accretive to FY2016 EPS.  Merger will be completed in CY 2014.

Takeaway: E-tables is where the growth lies for the suppliers


Parx – (Allentown Morning Call) Parx Casino has won a legal victory that could lead to a tax reduction.  PA Supreme Court ruled that Parx's prizes given out in 2006/2007 such as cars, sports tickets and gift cards will not be taxed, saving Parx $1.1m.  The ruling might have set a precedent for all PA casinos but it is unclear whether the casinos can file appeals for past years

Takeaway:  Potential positive for PENN

WYNN – another Universal Entertainment defamation criminal complaint filing against Mr. Wynn

Takeaway:  Nothing new


HOT – announced Vasant Prabhu resigned as Vice Chairman and CFO to join NBC Universal as CFO.  During the transition, Vasant will continue with Starwood through May 30.  Alan Schnaid, currently SVP, Finance and Chief Accounting Officer, will serve as interim CFO effective immediately

Takeaway: Now we should find out who was holding back the stock buy back.


NCLH -  Launching a buy one, get one free deal.  From April 30 through May 11, guests who book on Getaway or Breakaway will receive a voucher for a complimentary 3-4 day bahamas cruise on Sky.

Takeaway:  A desperate promotion.  Norwegian is lucky to have some additional cost cuts in the bag; otherwise, net yields could have been a disaster this year.


MSC - 'We're not giving up on North America' USA Today 

According to Ken Muskat, executive vice president for Sales, PR & Guest Services at the European line's U.S. division, the redeployment of MSC Divina to Europe in 2015 was a function of significant weakness in pricing for summer cruises in the Caribbean that is affecting the entire industry.


"The summer continues to be a bloodbath for everybody" in the Caribbean.  We had planned for the ship being (in Miami) year-round. We had planned for it being in the Caribbean next summer, but given (the weakness in Caribbean pricing) one thing we strongly had to consider was do we want to stay in the Caribbean in the summer and be a (discount) price leader,"  Muskat commented.

Takeaway:  Telling of the severity of Caribbean discounting if MSC can't stay in the Caribbean market as a discount price leader.


NJ - According to a survey by CAMS, only 42-46% of credit cards used by players in the US accept online gaming accounts.  The low acceptance of credit cards is the single biggest holdback growth in New Jersey, said CAMS CEO Matt Katz said.

Takeaway:  Payment issues continue to plague the on line ramp in New Jersey but there are solutions.  

Internet Gaming - there is an increasing clamor regarding Native American tribes creating an interstate alliance to pursue internet gaming.  Outside California, many of the 255 tribes in the lower 48 states believe interstate alliances are crucial to efforts to leverage entry into online gambling and create viable gaming for rural America while also increasing competition for the 425 Indian casinos in 28 states.  California is seeking legislation to legalize intrastate internet poker for its 38+ million residents. 

Takeaway:  A push by Native American tribes to enter online gaming, might just be the event to cause the US Congress to revisit online gaming.

Hotel M&A - Apollo European Principal Finance Fund II bought 18 European hotels from Ivanhoe Cambridge.  Term were not disclosed.  The hotels include 11 in Germany, two in Spain, two in the Netherlands and one each in Austria, Belgium and France.  They operate under the Crowne Plaza banners, Holiday Inn and Holiday Inn Express IHG.

Takeaway:  Now if only HOT could get its act together.


El Niño -  the National Oceanic and Atmospheric Administration reports an increased likelihood of an El Niño during the fall and winter of 2014/2015.  NOAA's specific comment "ENSO-neutral is favored for the Northern Hemisphere spring 2014, with chances of El Niño increasing during the rest of the year, exceeding 50% by summer."

Takeaway: with a >60% probability for El Nino during fall/winter 2014/2015, we could see much easier "weather comp" during Q4 2014 and Q1 2015 - especially for the regional gaming stocks.


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.



Buy In May, And Pray?

“Basically, I’m for anything that gets you through the night – be it prayer, tranquilizers, or a bottle of Jack.”

-Frank Sinatra


Sinatra was a beauty, but he wasn’t a risk manager. And prayer isn’t a risk management process either.


I get it. There’s no need to bring our respective religions into this discussion…


So every time you hear a consensus Old Wall economist tell you to ignore the 0.11% US GDP bomb for Q1 (and that this sucker is going to magically accelerate to 3-4% growth from here), drink.


Buy In May, And Pray? - sinatra


Back to the Global Macro Grind


Imagine being me for a second… This morning I’ll be doing Institutional Investor meetings in my 4th state in 4 days (IN, MN, CT, and NY), and I get to hear all of it. I’ll hear about what all of our competitors selling macro research think. I’ll hear how all these sell side economists knew it was “all about the weather” (but they didn’t know the number would be so bad)… and how everything is really ramping (even though the data isn’t) …


On and on and on it goes…


Empathize with me people! I’ll be like the US Dollar (on its YTD lows post Q1 GDP disaster) and get down on my bloody knees and pray for your forgiveness for having my team think for itself. I must repent!


Serious question - should I, like the bond market (yields falling to 2.66% on the 10yr as growth slows), beg thy overlord at The Fed for an un-taper too? Or will that have to wait until the weather stops being the weather in Alabama this morning?


Enough questions already. Time to show you the wood (US GDP data for Q114):

  1. As inflation accelerated in Q114, US GDP growth slowed, big time, to 0.11% (from 4.12% in Q3 of 2013 – that’s not just weather)
  2. Consumer Growth (focus of our bear #ConsumerSlowing call) slowed from 1.03% in Q313 to 0.08% in Q114
  3. Retail Sales Growth slowed from 2.45% in Q313 (when we were bullish on US growth) to 0.68% in Q114
  4. Fixed Investment (capex) got smoked back into its hole of negative -0.44% (vs +0.89% in Q313)
  5. Exports (which are supposed to magically rise when you burn your currency) dropped -1.07% (vs. +0.52% in Q313)

Pardon? (says the ragingly linear economist who missed last year’s US #GrowthAccelerating as both the US Dollar and rates rose too). Pardon the data, I guess – because it’s not cooperating with Keynesian academic dogma!


Before I get into more of the good stuff (data), consider the following relationships that are driving David (Blanchflower) @Dartmouth right batty right now:

  1. As the UK currency rips to new highs, UK manufacturing PMI (57.3 in APR vs 55.2 MAR) is accelerating
  2. As the US currency gets devalued to YTD lows, US Export demand is falling

Oh, and there’s this other thing going on in US Housing that Janet refuses to address:

  1. As rates fall, US Housing Demand is falling to fresh YTD lows (MBA weekly mortgage demand down another -5.9% this past week)
  2. But let’s not talk or write about that any further, because that’s a Q2 reality and it doesn’t fit the February weather excuse

Back to the tasty data that is both the US government and Fed’s definition of “inflation”:

  1. Allegedly, the GDP Deflator for Q1 was 1.3% (you subtract that from nominal GDP to get a real GDP #)
  2. But MIT’s Billion Prices Project read on inflation (much closer to ours) ripped to +3.9%

So, do the math. If America was using anything in the area code of a real world cost of living proxy (let’s say MIT academic thought is acceptable to a Princeton or Yale economist) US GDP for Q1 of 2014 would have been DOWN over 2%.


But since we’re not going to play a game of gotcha with conflicted and compromised US government data, let’s pretend for a second that it’s the 16th century again and we haven’t learned a damn thing about economic gravity.


Yep, let’s go all Copernicus on the Catholics of Wall Street forecasting, and suggest there is a solar system!

  1. Even if we use the Fed’s definition of CPI or PCE, inflation is going to accelerate against the easiest comps of the last 3 years (Q2 and Q3)
  2. When #inflationAccelerating happens in the data series, there’s a structural headwind to reported GDP (its math)
  3. So, there’s pretty much no way on this side of hell that 2014 GDP is going to be 3-4%, real

To get real, or nominal, remains the question. And as long as we can monitor all of our proxy baskets for US inflation (food, rents, energy, education, wages, etc.) in real-time, even a Mucker can model this in the 21st century.


Buy In May, And Pray? - Chart of the Day


But you don’t need to take my or a dead Polish dude’s (Nicholas Copernicus died in 1543) word for it. You can ask Mr. Macro Market:

  1. Currency market (USD Dollar) says growth continues to slow
  2. Bond market (long-end of the curve) says growth continues to slow
  3. Stock market (Russell 2000 as a proxy for growth expectations) remains down YTD

If you’re going to buy in May, please do more of what you should have been doing since January 1st – be it inflation protection (TIP), food commodities (DBA), or slow-growth-yield-chasers (XLU), it’s all working. If you have been buying Twitter (TWTR) the whole way down on the weather thing, drink.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.63-2.73%

Russell 1109-1155

USD 79.47-79.95

Pound 1.67-1.69

Natural Gas 4.61-4.85

Corn 5.06-5.20


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer