LEISURE LETTER (08/18/2014)

Takeaway: CZR, MGM, RCL, MTN

Tickers: CZR, MGM, RCL, MTN


  • Aug 19:  Galaxy Entertainment Group 2Q results 5 am
  • Aug 21:  Hedgeye Cruise Pricing Update
  • Aug 26:  Horseshoe Baltimore Opening
  • Aug 27:  BYI 2Q earnings
  • Aug 28:  Hollywood Dayton Raceway Opening
  • Sept 1/2:  Revel closes


BEL:PM (GGRAsia) Belle announced on Monday the company has hired Hong Kong-based brokerage firm CLSA Ltd to “study the feasibility” of the company selling “a portion” of its current equity ownership in Sinophil Corp (soon to be called Premium Leisure Corp) “at some future date, subject to market conditions”.  Recently, Belle disclosed it was looking to increase the public float in Sinophil/Premium Leisure Corp, the unit that will hold its gaming investments. The firm controls close to 90% of Sinophil’s shares and is looking to reduce its ownership to 67% to 70%.

Takeaway:  Time is money, Belle appears anxious to monetize its investment in Sinophil/Premium Leisure Corp. 


880:HK SJM (Macau Business) SJM Holdings Ltd’s chief executive, Ambrose So Shu Fai, has said he is unworried by the possibility of the government limiting the size of the gaming industry. “Slowing down the growth will not affect us,” but Mr. So also said he was against the granting of more gaming licenses because more casino operators would increase demand for the limited supply of labor and “make the problem of human resources worse”.


Separately, in reaction to Chief Executive Fernando Chui Sai On’s proposal that casino operators would be made responsible for housing migrant workers they employed, Ambrose So Shu Fai “Well, this is something I’ve heard for the first time; of course, we’ll keep dialogue open with the government to know exactly what their policy is and whether we can cope with the situation,” said So, adding that “at the present moment, we do offer housing allowances to non-resident workers.” However, So thinks that if the government requires the gaming operators to build homes for its imported workers, then the government should provide land to the operators. 

Takeaway:  Looks like there will be more non-gaming issues to consider this year. 


3918:HK(GGRAsia) disclosed the Company signed two junket operators from Macau and will formally launch the marketing agreements in September.  Naga disclosed during Q2 2014, it purchased 3 previously used, Airbus A320s for $44.423 million during the quarter. To increase visitation to NagaWorld, the Company purchased two Airbus A320 which will be leased to an independently operated airline. The airline will, through collaboration with key Chinese travel agents, increase flights to Phnom Penh targeting the Mass Market players with packaged accommodation in NagaWorld. The Company also intends to use these aircraft, in addition to the private jets, to fly VIP players from various parts of Asia targeting destinations which do not have direct flights to Phnom Penh.

Takeaway:  Naga attempting to maximize the production of its casino via the use of junkets and private aircraft, while also raises the maximum wager limit.


CZR – The High Roller, which became the world's tallest observation wheel when it opened in late March, will end its summer pricing on Monday, Sept. 1.  As such, a daytime ride will be $24.95 for adults, up from a $19.95 summer special announced in June. Nighttime rides were not reduced for the summer and will remain $34.95. Tickets for children ages 13-17 will remain at $14.95 during the day and $24.95 at night. Younger children are free. The best deal for families of four is a $49.95 family pack during the day or $79.95 at night. Finally, the High Roller has also been running other promotions, including a $69 Groupon promotion that includes two rides (day or night), two-for-one drinks and two-for-one souvenir photos.

Takeaway: Raising the price of admission while trying to generate incrementally more free cash flow.


CZR – Caesars New York will hold a ceremony today to mark the opening of its office in the town of Woodbury located in the Orange County, New York. Caesars wants to build a casino near the Woodbury Commons shopping center about 50 miles from New York City.

Takeaway: The local media and public relations blitz intensifies over the battle for the Upstate New York gaming licenses. 


MGM (Las Vegas Review Journal) ran a story touting MGM Resorts International turnaround story since the recession and the Company's equity trading in single digits.

Takeaway: When the news becomes the topic of Main Street discussions, this usually "marks a top" in stock prices.


DIS – Disney changed the structure of its non-commissionable fare (NCF), thus raising the amount of fare excluded from commission on most cruises. The new NCF structure creates a sliding based on cruise length. Currently, the NCF is a flat $20 per person, per day. Starting next week, the line will deduct $25 per person, per day on voyages of six days or less, and $30 per person, per day on trips between seven and 10 days. However, Disney is leaving the amount at $20 for cruises of 11 days or more.  Also beginning today, tour operator Adventures by Disney will no longer pay commission on the air portion of packages. It will continue to book air arrangements.

Takeaway:  Raising NCF may not be consumer friendly but helps margins


RCL – announced a five-day WOW Sale taking place from Aug. 16 through 20, 2014, designed to help consumers plan for their next vacation. During the WOW sale, vacationers can receive up to $200 onboard credit per stateroom when making a new booking on itineraries through spring 2016 aboard Royal Caribbean’s currently sailing fleet.  For all new individual U.S. and Canadian bookings made from Aug. 16 through 20, 2014, vacationers will receive $50 onboard credit per stateroom for five-night or shorter itineraries; $100 onboard credit per stateroom for six- to nine-night itineraries; and $200 onboard credit per stateroom on 10-night and longer itineraries. As part of the WOW Sale, vacationers also can make a reservation with only a 50 percent reduced deposit, starting as low as $50 per guest, based on double occupancy. The offer is applicable to staterooms that are part of group space booked by U.S. and Canadian travel agents, provided those staterooms become named berths during the offer window, and excludes Quantum of the Seas and Anthem of the Seas.

Takeaway:  This is a special WoW Sale ahead of Labor Day holiday. RCL continues to give out onboard credits.


MTN – In its filing with the Utah Superior Court overseeing the litigation with Vail Resorts, Park City Mountain Resort indicated it shouldn’t have to pay more than $1 million a year for the 3,000 acres that constitute most of the skiable acreage on the mountain.  However, Vail Resorts counter filing is not immediately available.

Takeaway: We wait for Vail Resorts' counter filing.


Insider Transactions:

MGM – Director Rose Mckinney-James sold 10,000 shares of the stock on Monday, August 11th at an average price of $24.83 and now owns 100 shares. The shares were Stock Appreciation Awards granted 5,000 shares on June 15, 2011 and June 14, 2012 with expiration dates of June 15, 2017 and June 14, 2018. 


RHP – Directors Edward Gaylord, Ralph Horn and Michael Rose acquired 361, 581 and 361 shares of stock respectively on August 15th at $48.35/share.  Each director has elected to receive cash compensation for service on the Company's Board of Directors and Committees in the form of restricted stock units, which are convertible on a one-to-one basis, into shares of common stock. The director has elected to defer receipt of this award until either (1) a specified date or (2) until termination of his service as a director.


VAC J. W. Marriott, Jr. sold 22,780 shares of Marriott Vacations Worldwide Corp on Thursday, August 14th at an average price of $59.61. The shares were stock options acquired for $9.52/share with an expiration date of November 12, 2014. Following this transaction, Mr. Marriott has options on an additional 12,000 similar termed options. Mr Marriott owns an additional 313,463 shares as well as more than 2.5 million shares held in other family trusts.


Macau Chief Executive's Agenda – Chief Executive Fernando Chui Sai On’s agenda for his re-election campaign includes efforts to curb the growth of the gaming industry with a view to making the economy more diverse. Additionally, he suggested the government would stick to its policy of allowing only Macau residents to work as croupiers and he put forth a proposal that casino operators would be made responsible for housing and transportation for the migrant workers they employed.

Takeaway:  A more divisive tone from the Chief Executive.


Macau Hotel Construction (Macau Daily Times) Statistics released by the Land, Public Works and Transport Bureau (DSSPOT) revealed that there were 18 hotel projects under construction in the second quarter of this year. Among the 18 projects, nine of them were in the Macau Peninsula, five in Cotai, three in Taipa and one in Coloane. The DSSPOT estimated that the projects will provide around 9,800 hotel rooms after completion. 7,500 of them will be in Cotai and 1,000 in Macau.  Additionally, the DSSPOT authorities are evaluating 28 projects that were estimated to provide almost 15,800 rooms, with 12,000 of them in Cotai.

Takeaway:  The growth of new hotel rooms is well understood by the investment community.


Manny Pacquiao Promotion Tour – The eight-time weight division world champion will be fighting for the second time at the CotaiArena on November 23 and is scheduled to take on American Chris Algieri in Clash in Cotai II.  Pacquiao and Top Rank CEO Bob Arum will attend a press conference in Macau on August 25.  Macau is the first leg of a six-city promotional tour that includes Shanghai, San Francisco, Las Vegas, Los Angeles and New York

Takeaway: LVS and Sands China beginning their marketing campaign in support of the Champ.  His opponent is relatively new to the boxing world.


Japan Gaming(GGRAsia)  “Under the bill, step one will be for the Japanese government to select the appropriate IR area from the municipal bodies that put themselves forward as candidates. Step two will see the selected municipal body publicly tender and select a private IR/casino operator,” said Mr Fukuda (a partner at Nagashima Ohno and Tsunematsu, one of the ‘Big Four’ law firms in Japan) wrote in a paper submitted to the specialist publication International Financial Law Review.

Takeaway: More clarity on the process. 


Revel Atlantic City – The New Jersey Division of Gaming Enforcement approved an earlier closing of the property.  Revel will close the hotel at 11:00 a.m. on Monday, Sept. 1 and the casino at 5:00 a.m. on Tuesday, Sept. 2.


Separately, it was disclosed Revel asked the New Jersey Division of Gaming Enforcement for permission to close today - Aug 18.  However, the Division of Gaming Enforcement denied that request.  Revel and lender Wells Fargo, which has provided financing to the company to get it through bankruptcy court, had asked for permission to shut down on Aug 18 because the weeklong delay of a bankruptcy court sale for Revel triggered a default under its financing agreement for missing a key deadline. 

Takeaway:  Dashed hopes for a 23rd hour bid and buy-out.


Dania Casino & Jai-Alai – a mere six months after its opening, Dania Casino & Jai-Alai plans to close on October 15, 2014, for at least one year. Dania Casino officials say they'll reopen in a year, after spending $50 million on bars, restaurants, and an expanded slot floor to make their venue competitive with four other casinos in south Broward County.  Dania Casino is averaging $65 per day on each of the machines, Gulfstream $150 and Mardi Gras $139. The average at Florida's eight racinos for the fiscal year ending June 30 was $176 per machine. As a side note,  the four Argentine businessmen who own Dania Casino also own 27 casinos in their home country.

Takeaway:  The revamp process is known but the closure is a surprise. 


China New Home Prices decreased 1.1% during July on a MoM comparison but increased 2.9% YoY.  The YoY growth rate slowed from +4.9% in June. During July new home prices fell in 64 cities as compared to 55 cities in June.


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.

India, Europe and Oil

Client Talking Points


Starting with the really bullish stuff this morn, India’s stock market is up another +0.9% to fresh YTD highs of +26.2% after showing waning inflation last week (Dr. Raj wants a stronger currency, higher rates, and stronger purchasing power for The People – love that)


“Weaken ze Euro to stim ze exports, eh?” Sorry guys, that isn’t going to work in these consumption economies; DAX leads the bounce +1.4% this morning, but it, CAC, MIB Index, Portugal, etc. all remain bearish TREND @Hedgeye.


One of the uglier big macro charts in my notebook right now as Brent is seeing another -1.3% down day on the heels of a -2% down week; finally a modest consumption tax cut for consumers who have been getting smoked from a real earnings perspective in 2014.

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. We believe activist investor Sandell has identified significant, largely feasible, opportunities to enhance shareholder value.  Particularly, we see tremendous upside value in selling the foods business, transitioning to an asset light model and refocusing capital allocation.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


“Carney saying he doesn’t have to wait for wage inflation to raise rates – I like it #StrongPound” -- @KeithMcCullough


“It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.” – Paul “Bear” Bryant


59, the score that Champions Tour golfer Kevin Sutherland shot in the third round of this weekend’s Dick’s Sporting Goods Open. It’s the first time a golfer shot 59 in a Champions Tour event. 

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The Hedgeye Daily Outlook

TODAY’S S&P 500 SET-UP – August 18, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.08% downside to 1934 and 0.51% upside to 1965. 




The Hedgeye Daily Outlook - chart 1 major levels


The Hedgeye Daily Outlook - chart 2 sector levels




The Hedgeye Daily Outlook - chart 3 Equity Sentiment




  • YIELD CURVE: 1.94 from 1.93
  • VIX closed at 13.15 1 day percent change of 5.88%


MACRO DATA POINTS (Bloomberg Estimates):


  • 10am: NAHB Housing Market Index, Aug., est. 53 (pr 53)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $29b 3M bills, $25b 6M bills
  • U.S. Rates Weekly Agenda
  • FX Weekly Agenda



  • Senate, House out on August recess
  • Former House Majority Leader Eric Cantor, R-Va., said he will resign from Congress Aug. 18
  • Former CFTC commissioner Scott O’Malia’s first day as chief executive of International Swaps and Derivatives Assn




  • Valeant extends tender offer for Allergan until end of 2014
  • Missouri Gov. Nixon dispatches National Guard to Ferguson
  • Kurdish forces take control of Iraq’s largest dam
  • Banks may lose Fed discount loans as part of living wills: FT
  • Russia widens band on ruble trading vs USD-EUR basket to 9
  • Google buys photo-analysis startup Jetpac; terms not disclosed
  • BofAML said to be selected by Gulf Capital as main IPO adviser
  • Wintergreen exits Berkshire Hathaway stake over Coke pay
  • Fmr. SAC COO Kumin’s firm said to get $400m from Leucadia: WSJ
  • Tesoro refinery explosion case closes; no charges brought
  • Boeing 747 hull said to have been punctured in July collision
  • Twitter to meet Turkish govt Aug. 25 on taxes, grievences: HT
  • IBM says CFIUS approves x86-based server unit sale to Lenovo
  • Target may keep some stores open until midnight: WSJ
  • Judge in GM class-action ignition switch case names counsel
  • U.S. banks see Ireland alternative in case of U.K. move: FT
  • Teenage Mutant Ninja Turtles top box office for second wkend
  • China home prices fall in majority of cities on weak demand
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Materials, Media/Ent, Real Estate
  • North American M&A Agenda
  • Jackson Hole, Yellen, Draghi, Fed Minutes: Wk Ahead Aug. 16-23 


  • Urban Outfitters (URBN) 4pm, $0.48




  • Palladium Advances to 13-Year High in New York as Gold Declines
  • Nickel Drops as Chinese House-Price Slump Fuels Slowdown Concern
  • Robusta Coffee Drops Amid Rains in Vietnam; White Sugar Falls
  • Hedge Funds Extend Longest Soy Bear Run Since 2006: Commodities
  • Shanghai Gold Exchange Said to Plan FTZ Contract for September
  • Refinery Breakdowns Boost Gasoline as Labor Day Nears: Energy
  • OPEC Oil Call May Increase on Economic Growth, Rising Prices
  • Oil Mkt Struggles to Find Buyers to Take Physical Delivery: MS
  • European Naphtha Shipments to Asia Rise to 12 Cargoes in Aug.
  • Copper Charges in China Seen Rising to $120/t as Freeport Ships
  • Potential $60 Billion Mine in Play as Rio Reviews Its Stake
  • Palm Oil Declines to Lowest Level in Five Years on Weak Exports
  • China Plan to Cut Wholesale Power Price May Help Coal Producers
  • Steel Rebar Declines on China Home Prices as Ore at Record Low


The Hedgeye Daily Outlook - chart 4 commodities



The Hedgeye Daily Outlook - chart 5 currencies




The Hedgeye Daily Outlook - chart 6 global equity 1 day change

The Hedgeye Daily Outlook - chart 7 global equity YTD change




The Hedgeye Daily Outlook - chart 8 Europe




The Hedgeye Daily Outlook - chart 9 Asia




The Hedgeye Daily Outlook - chart 10 Middle East


The Hedgeye Macro Team


August 18, 2014

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#Behavioral Front-Running

This note was originally published at 8am on August 04, 2014 for Hedgeye subscribers.

“I am trying to understand the origins of every form of front-running in the history of the United States.”

-John Schwall (Flash Boys)


John, sorry buds - you’re going to have to look a lot deeper than high-frequency-trading. Front-running proactively predictable #behavior on Wall Street is entirely legal, and it can be quite profitable at that!


How do you think about the #behavioral side of this game? Do you spend a lot of time thinking about the other side of your ideas? And/or do you have a process to cleanse the confirmation biases and emotions naturally embedded in your positions?


Front-running what my process is going to tell me to do next is a big part of what I do. I guess I can call it front-running myself. #fun


Back to the Global Macro Grind


After dropping another -2.6% last week, the Russell 2000 is -4.3% for 2014 while one of our favorite ways to be long #Q3Slowing in the USA (long the Long Bond in TLT terms) is +12.8%. It’s definitely a bull market, in long-term Treasury Bonds!


But it wasn’t just early-cycle US stocks that got tagged last week – the selling in most things beta was broad based:

  1. Dow Jones Industrial Index -2.8% to -0.5% YTD
  2. Industrials (XLI) were down -3.7% to -0.9% YTD
  3. Consumer Discretionary (XLY) was down another -1.8% to -1.8% YTD
  4. European Stocks (EuroStoxx600) were down -2.9% to +1.1% YTD
  5. German Stocks (DAX) got tagged for a -4.5% loss (-3.6% YTD)
  6. Portuguese Stocks (PSI 20 Index) dropped -10.1% to -11.6% YTD
  7. Commodities (CRB Index) dropped -2.0% on the week to +4.4% YTD
  8. Oil (WTIC and Brent) was down -3.3-4.1% to +3.3% and -2.8% YTD, respectively
  9. Gold corrected -0.8% to +7.4% YTD
  10. Food (CRB Food Index) corrected -1.1% to +18.5% YTD

I’m not going to surprise you this morning in reiterating why I’d be selling early-cycle US Equities and/or European ones. We’ve been making the call on the former for the better part of the year, and on the latter we have been crystal clear on since the beginning of July.


Where I might surprise you is in taking down our asset allocation to the Commodities component of our 2014 #InflationAccelerating call. On July 7th, when the Russell 2000 re-tested her all time high (+8% higher at 1208), I had a 24% allocation to Commodities. This morning I have 10%.


Why? How about why not? At the beginning of the year it was a contrarian call that even surprised us to the upside. Now, being long commodity inflation is more of a consensus position that is not only correcting, but in some cases breaking my TREND lines on the downside.


What hasn’t broken TREND?

  1. Gold’s intermediate-term TREND line of support = $1271, so we’ll stay with that
  2. Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% YTD, respectively #StrongSide!
  3. And some of the base metals like Copper and Nickel are still bullish TREND

In other words, it’s not so easy that a monkey can do it (like it was in Q1) just buying anything commodities. You need to get into the price/volume/volatility weeds and start front-running some #divergences within the commodities market.


What are #divergences?


They’re risk management-speak for the ole Romper Room, “one of these things is not like the other – one of these things just doesn’t belong…” I.e. China! Yes, Chinese stocks not only flashed a bullish #divergence vs. US and European Equities last week, they did again this morning:

  1. Shanghai Composite Index +2.8% last week (and +1.7% this morning) to +8.2% YTD
  2. Hong Kong Stocks (Hang Seng) +1.3% last week (and +0.3% this morning) to +8.7% YTD
  3. Indian Stocks (BSE Sensex) up another +1% this morning to +23.1% YTD

India isn’t China. Silly Mucker. I know (but we still like India too!). That’s why the Hedgeye Asset Allocation model has a higher allocation to International Equities than it does to Commodities today. While it’s weird to be buying Chinese+ Indian stocks and liking Dr. Copper on the long side vs. short the Russell 2000 (after they bounce it), sometimes weird is what works.


Another thing to think about in #behavioral front-running terms is that the NET SHORT position in SP500 (SPX + Emini) is back, baby! After tilting to a NET LONG position for the first time since Q1, the CFTC Non-Commercial net short position moved back to -41,210 contracts on Friday.


That means hedge funds who covered high on the newsy Q2 GDP report last week, shorted low (again) into the weekend. So SPY (and Russell, IWM) should bounce now. Front-running the #behavior of emotional Consensus Macro hedging has become quite profitable as well.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.54%

SPX 1921-1962

RUT 1110-1141

Shanghai Comp 2156-2241

USD 80.79-81.69

WTIC Oil 96.99-100.61

Gold 1281-1304

Copper 3.19-3.26


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


#Behavioral Front-Running - Chart of the Day

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