VIDEO | Keith's Macro Notebook 5/16: UST 10YR XLF COMMODITIES

LEISURE LETTER (05/16/2014)



Friday, May 16

  • Japan Gaming Conference thru Friday, May 16

Tuesday, May 20- Wednesday 21

  • East Coast Gaming Congress 

Tuesday, May 20 -Thursday May 22

  • G2E Asia - The Venetian Macao


BYI – CEO/President and board member Ramesh Srinivasan to step down; the Board of Directors appointed chairman Richard Haddrill CEO, effective May 23, 2014.  Previously, Handrill was the company’s Chief Executive Officer from 2004 to 2012. Handrill served as a member of the board since 2003 and Chairman of the board since 2012.  Additionally, David Robbins, who has been serving as the board’s Lead Independent Director, has been appointed Chairman of the board effective May 23, 2014. Robbins also served as Chairman from 1997 to 2010. Ramish Srinivasan is no longer an employee of Bally Technologies.

TAKEWAY:  The sell side explanations don't seem to hold much water. The company's hands are probably tied in terms of what they can say but we wonder if there was some kind of incident with Srinivasan. Conduct standards for executives are high these days especially for highly regulated companies in gaming.  That said, we don't have any inside information but we're not sure there is anything to worry about regarding BYI's operations.


BX – will acquire Cosmopolitan from Deutsche Bank for $1.73 billion in cash for ~16.7 times 2013 EBITDA of $103m.  In a related data point, Cosmo Q1 gaming revenues increased 20.2% while hotel revenues jumped 18.8% to  $75.7 million on stronger group traffic which in turn drove ADR $303

TAKEAWAY: Private equity now fully involved in the gaming industry, could more gaming acquisitions be in the offering?


FLL – cancelled its agreement, announced in March, to purchase 507-room Fitz Tunica Casino & Hotel from The Majestic Star Casino LLC for US$62 million. Full House revealed in its recent earnings report that “the company will not likely be successful in obtaining financing for the purchase. As a result, we have requested Majestic Star to consider termination of the agreement.”



PENN – Greenlight Capital disclosed via 13F filing a 100% increase in shares owned in PENN at a current 2 million shares vs 1 million shares previously.

TAKEWAY: Betting on new casino growth and a regional reversal


PENN / GLPI – Penn National Gaming the parent company of Argosy Sioux City filed for Chapter 11 bankruptcy for the property.  As part of the reorganization, PENN is asking bankruptcy court to allow it to continue operating. PENN’s justification for filing for Chapter II is that it would lose its entire $110 million investment in the market if it loses its license. And that license is part of the bankruptcy estate, meaning bankruptcy court has authority over it, the company contends.  PENN is suing in court to retain its license, but that trial does not begin until autumn.

TAKEWAY: Given PENN's admission that the company recognized it failed to renew its gaming license, this seems like an extreme action.


MGM – “We’re absolutely considering an IPO in Japan, but not initially,” MGM Chief Executive Officer James Murren, 52, said in an interview in Tokyo yesterday. “The best model is to put together an ownership group, finance through equity partners, open the facility, generate a strong track record of performance. We did that in Macau.”

TAKEWAY:  MGM still a longer shot in our opinion.  


WYNN - is “actively looking” for equity partners for a planned integrated resort in Japan and would eventually list the venture, according to comments made by President Matt Maddox at the Japan Gaming Congress.  Additionally, Wynn Resorts intends to conduct an initial public offering if awarded a gaming license for a planned Japan resort with the offering intended to increase the company’s profile in Japan.

TAKEWAY: "We'll list too if it helps us get a license..."


WYNN MACAU, 1928.HK – denies it lets triad-linked junket operators promote VIP gaming .  Wynn Macau has denied accusations leveled by a union boss Jeff Fiedler in a letter to the Macau Gaming Inspection and Coordination Bureau (DICJ) director yesterday (15-May in Asia).  Wynn Macau called Mr. Fiedler's accusations "those of a bitter, unsuccessful union boss who lost representation of employees in Steve Wynn's prior company, Mirage Resorts (SCMP)

TAKEWAY:  Mr. Fielder was the founder of the CasinoLinks web-site that attacked casino companies doing business in Macau. Additionally, Mr. Fielder has strong ties to the Democratic Party and Democratic Leader Nancy Pelosi so there is a political angle here against Steve Wynn. These allegations have been made repeatedly against WYNN by Fielder and CasinoLinks over the years so nothing new.  


HOT – has listed for sale the five-star Sheraton on the Park Sydney, which would continue to be managed by Starwood.  Sheraton on the Park Sydney is situated opposite Hyde Park in the central business district, close to Sydney’s luxury retail precinct. The hotel comes with 557 guest rooms and suites, a restaurant, a tea lounge, a bar, extensive conference and function space, leased retail space and a range of recreational facilities.  JLL's Hotels & Hospitality Group has been appointed to market the freehold hotel. Expressions of interest are welcome until June 20.

TAKEWAY:  Finally, a company owned asset listed for sale.  Could an expanded repurchase program be forthcoming as a result of the asset sale(s)?


MAR - EVP Anthony Capuano sold 4,000 shares of MAR on Monday, May 12th at an average price of $59.45, for a total value of $237,800.00. Following the sale, the executive vice president now directly owns 62,463 shares of the company’s stock, valued at approximately $3,713,425.

TAKEWAY:  Insider selling becoming prevalent in hotel stocks. Will Blackstone in June contribute to the trend (HLT)?




LEISURE LETTER (05/16/2014) - TR


TAKEWAY: Small player (RCL JV) who reaffirmed its turnaround outlook on European cruise industry 


ClubMed - reported 1H results which were in line w ith expectations but offered commentary on current trends with included comments about cumulative summer 2014 bookings as of May 10 with bookings (3.0%) impacted by a strong downturn in the Europe-Africa region, in particular over the last eight weeks at (16.3%), and a slowdown in Asia.  In the Americas, bookings were up 11.5%, mainly driven by the sustained momentum of sales in 
North America.

TAKEAWAY: European slowdown seems to be more company specific (closure of 2 managed short-haul villages) and the Easter shift but the decline in reservations in Asia was due to China/Malaysia rifts.  US bookings were strong.


Macau Smoking Ban - full smoking ban on mass floors beginning Monday, October 6, 2014.

TAKEAWAY: Given the recent Labor Day protests in Macau and the smoking debate, this policy outcome seemed an inevitable conclusion.  We're hearing VIP rooms and Premium Mass will be excluded.


Macau Airlift - Starting 1 July 2014, AirAsia will increase the number of flights it operates between Macau and Manila, Philippines. from its existing 3 flights per week services between Manila and Macau, to 7 flights per week.

TAKEAWAY: Can't hurt.


China Lending - Nonperforming loans rose by 54 billion yuan ($8.7 billion) in the three months through March to 646.1 billion yuan, the highest level since September 2008, based on data released by the China Banking Regulatory.  Non-performing loans accounted for 1.04% of total lending, up from 1% three months earlier.  The 10th straight quarterly increase in defaults adds to concern banks’ profitability may slip as they build buffers to cover loan losses.

TAKEAWAY: Chinese banks had the biggest quarterly increase in bad loans since 2005 as a slowdown in the world’s second-largest economy causes defaults to rise. Not yet a worry for Macau but we're starting to get a little concerned.


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.

Stay With the Program

Client Talking Points


The yield finally crashes after our TAIL riskline of 2.61% on the 10-year signaled the point of entropy was pending. I see nothing but backpedaling from people who are still positioned for what they should have been last year (#RatesRising). Consensus needs to come our way as inflation slows real growth.


Back into the red for 2014 year-to-date, and they should be – Down Rates = Yield Spread Compression = Financials Down. It still looks very 2011 stagflation to me – as inflation slows growth, you get equity market multiple compression (and bond market multiple expansion).


The CRB Commodities Index is up +9.6% year-to-date versus Growth (Russell2000) down -5.9%. #timestamped. Meanwhile, if it ain’t broke, don’t change it – stay with the long inflation, short US growth program.

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


Portugal -1.6% looking more and more like the roundtrip Greek stocks have been @KeithMcCullough


"If opportunity doesn't knock, build a door." - Milton Berle


Swiss voters go to the polls this weekend in a nationwide referendum on whether to introduce what would be the highest minimum wage anywhere in the world. If approved, employers would be obliged to pay workers a monthly minimum of 4,000 Swiss francs ($4,470) - which works out as just over $53,600 a year. (BBC)

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“Only the wisest and stupidest of men never change.”



I’ve been on vacation for most of the last two weeks.  My first child is projected to be born on June 1st , so I figured it was best to take vacation now.   This was based on the sage advice from some of the more seasoned fathers at Hedgeye.


I’m not always good at unplugging on vacation, but this time I did a decent job. As I was getting caught up last night, the most interesting article I read was from Business Insider.  It seems while I was gone they anointed Hedgeye the most polarizing firm in finance! 


Polarizing - polarizing


I have to admit, even though Business Insider’s journalistic standards aren’t the highest, I thought that was kind of cool.   When we started the firm more than six years ago, our sole intention was to shake things up.  And it seems we have done so.  So far, at least, mission accomplished.


Back to the Global Macro Grind...


So, the big question now that I’m back in the proverbial saddle is: what did I miss? Based on the return of the SPY, I’d say not too much.  When I left for vacation on May 5th, the S&P 500 closed at 1,884.2. Yesterday it closed at 1870.85.  For those that don’t have their HP-12C handy, that is a negative return of roughly -0.7%.  Nothing to write home about to be sure. 


Thankfully, my colleagues were keeping busy despite the lackluster performance in U.S. equities.  Over the last two weeks on the idea side, we added two longs to our Best Idea list: Bob Evans Farms (BOBE) and Och-Ziff (OZM).  Both ideas, though certainly very different, are very compelling.


Bob Evans Farms, as many of you may know, is a smallish cap restaurant company.   Although our Restaurant Sector Head, the sage Howard Penney, has been more cautious than not on his sector, BOBE is one company he likes on the long side.  


According to Howard the thesis is as follows:


  • STODGY, OLD COMPANY: As you know, we are big supporters of change at DRI and feel that BOBE is in a very similar situation. BOBE is a stodgy, old company that has flown under the radar for far too long. It has a history of mismanagement evidenced by flawed strategic rationale, excessively bloated cost structures and severe underperformance relative to peers. Its poor operating performance presents a tremendous opportunity.
  • UNLOCKING SIGNIFICANT SHAREHOLDER VALUE: We believe Sandell has identified significant, largely feasible, opportunities to enhance shareholder value. In our view, the opportunities are endless. More particularly, we see tremendous upside value in separating the foods business from the restaurant business, transitioning to an asset light model to capitalize on its vast real estate holdings, and attacking the middle of the P&L.
  • THE OTHER SIDE OF THE TRADE: We have a ton of respect for Sandell and the work they’ve done. In fact, we believe that, over time, they have uncovered far more than they originally set out to. As a result, there is now an opportunity for them to capture bountiful, low hanging fruit that will immediately impact the company for the better. We believe in Sandell’s resolve and while the street is seemingly betting against them, we’ll gladly take the other side of the trade.


I’m not going to steal all of Howard’s thunder, but if you’d like more details, please email .  Incidentally, another of Howard’s top ideas, Darden (DRI) announced this morning that they are selling one of their divisions, Red Lobster, to Golden Gate Capital for $2.1 billion.  Oh snap!


More broadly though, and other than a few alpha generating idea, those of us that vacationed for the first half of May didn’t miss a whole lot from return perspective.  In the Chart of the Day below, I’ve highlighted our daily U.S. quant screen and for the month-to-date the worst performing SP500 sector is the Utilities, which is down 2.78%.  Meanwhile, the best performing sector is Materials, which is up +0.13%. 


On some level, that is actually new.  Specifically, in May the worst performing sector is actually the best performing sector on the year.  Currently, Utilities are up an impressive 10.6% for the year-to-date.  Who would’ve thunk it?


Switching gears, on the global macro front this morning , the United Nations released a 37-page report on the human rights situation in the eastern Ukraine.  On a serious note, that is actually not news, but does exemplify the ineffectiveness of the U.N. and its ability to deal with Vladimir Putin and the gong show in the Ukraine.   But, at negative -13.4% on the year, the Russian stock market seems to be dealing with him appropriately. 


Meanwhile, on the bond front, the bears seemingly just won’t give up.  According to Bloomberg, the ProShares Ultra 20+ Year Treasury ETF (TBT) has seen inflows of 21.6% this year.   This comes despite the ETF falling almost 21.6%.  In addition, there are 1.12MM short contracts of treasury futures on the Chicago Board of Trade, which compares to the five year average of 713K. Further, a recent survey of economists expects the 10-year yields to rise 75 basis points by year end.  Didn’t know what consensus in Treasury land was, now you know! 


And as our nemesis John Maynard Keynes famously said:


“Markets can remain irrational longer than you can remain solvent.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49%-2.61%


RUT 1086-1112

VIX 12.14-14.52

USD 79.11-80.26

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones


Polarizing - DQ 051514

I'm Boorish!

This note was originally published at 8am on May 02, 2014 for Hedgeye subscribers.

“He is illiterate and boorish; austere and offensive.”

-The Mercantile Agency, May 1853


In some of Americas most formative years of free market capitalism and innovation, the authorities of perceived wisdom wrote that about one of the greatest wealth creators in US history – Cornelius Vanderbilt.


His response:


It is said that I am always in opposition, and that the same spirit of resistance which has often hitherto governed my action has influenced it now… I have only to say that this is the same spirit which founded this great Republic.” (The First Tycoon, pg 161)


And that’s all the man needed to say about that.


Back to the Global Macro Grind


In this day and age, the more real-time market illiterate a politician is, the more offensive (to me at least) he becomes. Other than the brilliant financial market mind that is Maxine Waters, these characters are usually he’s by the way – we men think we know everything.


While I can’t comprehend how consensus economists are getting to a +3-4% US GDP ramp in the coming quarters, I guess I’ll just have to be all boorish for the next few months and reiterate how ridiculous the Old Wall’s linear forecasting process has become.


On a cheerier note, it’s jobs Friday! And while I am sure everyone wants to know what Steve Liesman has for his NFP guess, my boy, Mr. Bond Market, has already front-ran the entire circus:


  1. US 10yr Yield got smoked yesterday to 2.63%, taking it DOWN 40 basis points YTD! (consensus is still short Treasuries)
  2. US 10yr minus 2yr Yield (The Yield Spread, which is a growth proxy) compressed another 3bps day-over-day
  3. As our long bond position (TLT) ripped to fresh YTD highs, anything equities that looked like a bond did too

NEWSFLASH (to those waiting on the next qualitative “survey” from our competitors): Bonds rip when growth is slowing.


Anything that looks like a bond is called #YieldChasing (they’re ripping too):


  1. Utilities (XLU) up another +0.5% yesterday (with the SPX flat) to new YTD high of +14.3%!
  2. REITS (VNQ) punched another fresh YTD high too up at +13.5% YTD

As for the 80% of America that is going to eat both inflation and growth slowing:


  1. US Consumer Discretionary Stocks (XLY) are still down -4.1% YTD
  2. US Housing (ITB) is still sucking wind at -4.9% YTD

For the style-factor illiterate who gets on TV and says ‘but the market is up’ (even though both the Nasdaq and Russell are down YTD), in mathematical terms we call this risk developing underneath the US stock market’s hood SECTOR VARIANCE. In chaos theory speak, variance rises when major macro factors are undergoing the initial stage of what physics fans call a PHASE TRANSITION.


Phase transitions (like water approaching a waterfall) are really cool, because consensus doesn’t realize what’s happening a foot below the visible surface… Then kabooom! A proactively predictable point of entropy occurs. Variance, Phase Transition, Entropy – offensive terms for those who haven’t evolved their process = excellent defensive strategies for you to deploy.


If you want to consistently beat beta in this game, you have to know A) when to go on defense and B) how to rotate offensively from that defensive position. More commonly known as sector rotation, you get what I mean. Our process takes the sector rotation idea up another 10,000 feet because we go all cross-country-cross-asset-class on you.


At the beginning of Q2, on the long side here’s where we continued to rotate to (Investment Conclusions – slide 48 of our Q214 Global Macro Themes deck, which all of our Institutional Research customers can get an updated copy of anytime):


  1. Bonds (BND)
  2. Long-Term Treasuries (TLT)
  3. Gold (GLD)
  4. Agricultural Commodities (DBA)
  5. Utilities (XLU)
  6. REITS (VNQ)
  7. India (EPI)
  8. Brazil (EWZ)

No matter what this jobs report says today, we want you to keep doing more of this because A) it’s still nowhere in the area code of consensus and B) it’s working.


Instead of calling us bearish, bullish, or boorish, I say you call us flexible. This is the opposite position our process suggested you be in at this time last year. Having resistance versus a broken consensus isn’t easy. But being a capitalist in America today isn’t either.


Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with a TREND overlay are in our Daily Trading Range product):


UST 10yr Yield 2.59%-2.70%

Russell2000 1106-1145

Nikkei 14156-14601

VIX 12.96-14.72

USD 79.31-79.91

Gold 1279-1309


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I'm Boorish! - Chart of the Day

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