McCullough: “Big Bubbles Right Here” in the U.S.

Keith's Macro Notebook 9/26: Russell 2000 | UST 10YR | China

LEISURE LETTER (09/26/2014)



  • Today:  Nevada August revenues
  • Sept 29 - Oct 2: G2E Las Vegas
  • Tuesday: Sept 30: Frontline video on Macau 
  • Tuesday: Sept 30
    • JPM Securities: FCH, AHT
    • DB Leveraged Finance: WYNN, MGM, CHH, FCH, RHP
    • TAG Fall Consumer Conf: LVS, WYN, MTN
  • Wednesday: Oct 1
    • DB Leveraged Finance: PENN, BYD, SGMS
    • TAG Fall Consumer Conf: LVS, WYN


LVS & 1928:HK – (Bloomberg) Advanced hotel rooms booking is “close to 100 percent” for the week-long Chinese holiday starting Oct. 1, Sands China spokeswoman Mabel Wu said.  The company had more than 9,200 hotel rooms in Macau at the end of last year, more than any other operator, she said.

Takeaway: News flash, hotels on the Macau and Cotai peninsulas are always sold out during Golden Week.  Unlike prior years, we wonder about the "quality" of the player planning to visit Macau and Cotai this year. 


GLPI – announced via 8K flin, the Company entered into an Agreement of Sale (purchase by GLPI) with Wyomissing Professional Center Inc. (WPC) and acquired certain land in an office complex known as The Wyomissing Professional Center Campus, located in Wyomissing, Pennsylvania, in exchange for the payment of $725,000.00 in cash to WPC, plus taxes and closing costs. In addition, the Company reimbursed WPC approximately $270,000 for site work and pre-development costs previously completed per the acquisition agreement  Peter M. Carlino, the GLPI’s Chairman of the Board of Directors and Chief Executive Officer, is also the sole owner of WPC. In addition, Mr. Carlino’s son owns a material interest in the Construction Manager.

Takeaway: Raising the ire of a related party transaction.


MGAM – PokerTek, Inc. today announced that the Nevada Gaming Commission  has approved the application of Multimedia Games Holding Company, Inc. (MGAM) to acquire PokerTek.


MGM & 2282:HK – Fitch Ratings Inc has upgraded MGM Resorts International’s rating to ‘B+’ from ‘B’ and subsidiary MGM China Holdings Ltd’s rating to ‘BB’ from ‘BB-’ while the rating outlook remains positive. MGM China’s stand-alone credit profile is close to investment grade. But since MGM Resorts controls 51 percent of MGM China, Fitch links the rating of the Macau-based casino operator to the parent’s rating.  Fitch estimates that MGM Resorts will need to access to additional US$1 billion to US$1.5 billion in capital to meet its funding needs through 2016.

Takeaway: The ratings upgrade seems a little rear-view mirroresque.


SGMS – announced it signed a full extension of its contract with the Delaware Lottery to continue as a provider of instant lottery games and a Cooperative Services Program (CSP). Under the agreement, the Company will continue to provide instant games to the Delaware Lottery for three additional years beginning February 1, 2015. Scientific Games will also continue to provide CSP services including instant game design, marketing services, warehouse management, inventory control and retail distribution.

Takeaway: Positive contract extension for SGMS.


WYNN – in an 8K fling, amended its Articles of Organization by filing a Certificate of Amendment to Articles of Organization (“Amendment”) with the Nevada Secretary of State. The Amendment permits the Company to make any distribution of profits and contributions that otherwise would be prohibited by Section 86.343(1)(b) of the Nevada Revised Statutes (the “NRS”).

Takeaway: possible special dividend?


RCL – Pullmantur chief sees recovery in Spain, strength in France, opportunity in Latin America and another ship in 2016 (Seatrade Insider)


According to Pullmantur CEO Jorge Vilches, the Spanish market is showing signs of recovery, French demand is clipping along at a double-digit growth rate and Latin America presents great promise for cruise development.  "Spain is showing some signs of recovery," Vilches said, while also noting growth depends on supply and the industry has been taking capacity out of Spain.


According to Vilches, currently 50% of the business is coming from Latin America, including the Caribbean and Brazil, 25% is from Spain and 25% from France.

 Takeaway: We are glad to see Pullmantur continue its recovery but it is a small player compared with RCL's other brands.


Junkets on a losing streak (WSJ)

  • "The anticorruption campaign has caused a lot tighter governance on the large amount of money leaving China," and "investors are hesitating to invest in the junket industry due to the situation," says Hoffman Ma, deputy chief executive of Macau's Ponte 16 casino.
  •  At the start of this year, many casinos raised the minimum amount of business that junkets must bring in to retain their dedicated tables and VIP rooms, according to Kwok Chi Chung, president of a junket trade group. He says the minimum value of wagers rose 50% to HK$300 million ($38.7 million) a month for each gambling table. "It's quite difficult to maintain that," he says.
  • According to Kwok, LVS told junkets operating in its Macau casino to provide personal information about their clients earlier this year.  Kwok says junkets refused because giving it away would hurt their businesses and violate a local data-privacy law.  A spokesman for Sands says it didn't ask junkets to give it patron information but just to make sure they were collecting the data themselves.
  • MGM recently demanded that junket executives produce their Hong Kong police records, which are used by casinos for vetting their own staffs.  When Charles Heung, one of the most powerful figures in the junket business, didn't do so, MGM asked junket Suncity Group to remove him as a guarantor of MGM's loans to it, say people familiar with the matter. The junket did so, according to these people.
  • Though the minimal regulation may have benefitted junkets in years past, this now is seen as a reputation handicap as some try to become more professional.  "In a lot of ways they're becoming more like us," the CEO of MGM Resorts' China unit, Grant Bowie, said last month.
  • Some junket executives fret that casinos have used junkets as a stopgap until the casinos can establish their own VIP networks in China. Junkets are "tired of being a wedding dress"—used once and set aside—says Tony Tong, a junket investor and consultant.

Takeaway:  In light of recent revenue weakness, junkets are thrown into the spotlight.  Frontline video next Tuesday. 



Macau Golden Week Visitation (GGRAsia) Cheng Wai Tong, deputy director of the Macau Government Tourist Office, expects an increase in the number of tourists visiting the city during the National Day Golden Week Holiday, from October 1 to October 7.  Without providing an official forecast, Cheng told reporters that the growth in the number of visitors during the Golden Week period usually is in line with the average increase seen throughout the year. 

Takeaway:  Most of the Golden Week visitors are families, not big VIPs.  Overall Macau visitation has been the lone bright spot this year.


Macau Smoking Ban Implementation (GGRAsia) Macau’s Gaming Inspection and Coordination Bureau (DICJ), the city’s casino regulator, on Friday said that the upcoming smoking ban on casino mass floors has not led to an increase in requests by gaming operators to set up more limited access gaming areas. “Prior to the new regulations, the set-up of ‘areas of limited access to certain games and certain players’ already had to be approved by DICJ,” the statement said. The note explained this included not only VIP rooms but also restricted access high-limit gaming areas. The statement comes after representatives from three casino labor activist groups last week claimed casino operators were converting portions of their mass-market floor areas, namely high-limit gaming areas, into limited access areas to allow smoking and gambling inside.

Takeaway: The DICJ is attempting to quell to outcry from the unions with regulatory facts


Manila Bay Resorts Opening Date Questioned – In a strange battle of new stories and quoting company officials, the opening date of Kazuo Okada's Manila Bay Resort is now in unclear.  GGRAsia wrote the first phase opening should take place late next year and then offered the following quote “We are still doing our utmost to be open by the end of 2015,” by Matt Hurst, executive vice president of gaming operations and marketing.  However, is suggested an opening date in 2016 citing Tiger Resort Leisure & Entertainment Inc officials who told reporters on Wednesday night that the launch of the $2-billion Manila Bay Resorts may happen by end-2016. The first phase of the casino resort will have about 500 gaming tables and 3,000 slot machines, Mr Hurst told local media. The property will also have two hotels managed by the company, nightclubs and restaurants. Phase two should see the retail area expanded to 70,000 square metres.

Takeaway: Sounds like a delayed opening for Manila Bay Resorts.


U.S. RevPAR Outlook – Hospitality Asset Managers Association released the results of a survey of 114 asset managers, of which 52% believe U.S. RevPAR growth in 2015 will be between 4% and 6% while 39% predict growth between 6% and 8%. Nearly half (49.1%) believe RevPAR growth will be driven 80% by ADR. Further survey results revealed:

  • Three-quarters believe the lodging industry is in the middle innings of the current real-estate cycle.
  • 70% believe the 2016 presidential election cycle will not spawn a business slowdown akin to the 2012 election.
  • 86.8% believe hotels will find alternative ways to operate room service.
  • 47.4% say free guestroom Wi-Fi will be the norm within two years.
  • 65.8% think mobile check-in also will be the norm within three years.

Takeaway: A ground up assessment of the continued strength in the lodging cycle as well as our conviction in the sector.


Los Angeles Hotel Workers (LA Times) The City Council voted 12 to 3 on Wednesday to impose the higher minimum wage, at least $15.37/hour, on large hotels employees. The wage boost will go into effect in July for hotels with at least 300 rooms, expanding a year later to hotels with at least 150 rooms. The measure is expected to cover at least 40 hotels and, depending on the analysis, anywhere from 5,300 to 13,500 workers. Hotels that have a unionized workforce can be exempted from paying the $15.37 hourly wage, if workers agree in their contract to relinquish that opportunity. Business groups have threatened to sue over the plan, saying the new ordinance appears to violate the state and federal equal protection clause by unfairly targeting one industry.

Takeaway: Given the positive economics of the lodging cycle, we expected more union outcry for "sharing" the profits.  The outcome of this wage increase remains unclear given the likely judicial appeal.

Ski Resort Transactions (LA Times) Starwood Capital Group, owner of the Mammoth Mountain ski resort, has signed a $38-million deal to acquire the Bear Mountain and Snow Summit resorts near Big Bear Lake in the San Bernardino Mountains. The slopes may not be the main focus of the deal. Starwood Capital already has plans to build vacation homes on the land around the newly acquired Southern California ski resorts.  Bear Mountain and Snow Summit, about 100 miles east of Los Angeles, are operated by the Snow Summit Ski Corp. The deal to buy Snow Summit Ski Corp. includes a golf course, a driving range and several parking lots, totaling 136 acres of private land, as well as rights to 438 acres of skiable land owned by the U.S. Forest Service. Mammoth Mountain will sell an annual pass that covers Mammoth Mountain and June Mountain, plus Bear Mountain and Snow Summit, for $689, unchanged from last year's price. 

Takeaway: Interesting that apparently neither SNOW nor MTN had an interested in either of these "regional" destination resorts and the guest base for cross-selling season tickets.


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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Best of luck out there,


Darius Dale

Associate: Macro Team

Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME

Takeaway: NKE - revenue engine white hot, could GM hit 50%. FINL - basketball miss is sign of bigger trend. SKX refutes POS data



NKE - 1Q15 Earnings


Takeaway: Revenue engine revving hotter than people expect, and it will last far longer as well. But whether GM% could approach 50% is key = $8 EPS.


Link to full note: NKE - COULD GROSS MARGIN HIT 50%?


Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME - 9 26 chart2


FINL - 2Q15 Earnings


Takeaway: For FINL to call-out Basketball as the reason for the comp miss in the quarter is notable for two reasons. 1) FINL is much more tied to the running segment than FL, and 2) Basketball as a category continues to be white hot. Clearly there is more going on here than management cares to comment on. We think that comes at the brand level. NKE last night printed revenues up 70% and DTC up 30%. UA and Adi followed suit in earlier reports - with revenues up 38% and 59% respectively. While brands may claim that this growth doesn't cannibalize business from wholesale partners…we find it hard to believe that argument. We don't think this is specific to FINL either as it is one of the key reasons we added FL to our Short Bench in mid-August.


Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME - 9 26 chart1


SKX - SKECHERS Comments on State of Business Following Buckingham Research Group Report



  • "We respect the SportScan data released every Wednesday on the footwear business, but when not looked at in its entirety or analyzed over periods of time, and understanding that some key accounts—including Amazon, Zappos, Kohl’s and Finish Line/Macy’s, are not currently reporting and are projected based on the balance of the sector, the data can be misinterpreted or skewed,' began David Weinberg, SKECHERS COO and CFO."


Takeaway: It's not often that you see a company issue a press release mid-quarter to refute research. But, we have to agree with management's conclusions. The fact is that POS data is becoming less and less relevant, dare we say accurate, as company's expand distribution through fully owned DTC channels and pure play e-commerce sites in the US. Those are black boxes that the NPD and SportScan's of the world can't access. Add international to the mix and you have a data set that is far less representative of the global landscape than it was 5 years ago.




SHLD - More problems for Eddie Lampert's empire: Sears Canada CEO quits



  • "On Tuesday, Sears Canada said its CEO, Doug Campbell, was quitting after only a year on the job: bad timing given its parent company is trying to sell off the Canadian unit to raise urgently needed cash. Earlier this week, the New York Post reported that the auction for Sears Canada, in which Sears has a 51% stake, had stalled."


SHLD - Sears Investor Fairholme Says Unit Steps Back From Loan



  • "Sears Holdings Corp. shareholder Fairholme Funds Inc. said its affiliate St. Joe Co. backed away from providing as much as $100 million in financing to the retailer after a second lender materialized."


L’Oréal Acquires Sayuki Custom Cosmetics



  • "L’Oréal has added to its cache of West Coast beauty brands by acquiring Laguna Hills, Calif.-based Sayuki Custom Cosmetics."
  • "A spokesman for L’Oréal confirmed the acquisition Thursday, but did not provide further comment or disclose the terms of the deal. Industry sources estimate the company paid $150 million for Sayuki, which joins a growing list of West Coast pick-ups for L’Oréal that include NYX Cosmetics, Clarisonic, Urban Decay and Baxter of California."


GME - GameStop gears up for the holidays



  • "GameStop plans to hire approximately 25,000 employees nationwide as the company prepares for the upcoming holiday shopping season — nearly double the number of people it hired last year."


WTSL - The Wet Seal taps new chief digital officer



  • "The Wet Seal is welcoming back Jon Kubo, this time as EVP and chief digital officer, a newly created position. Kubo will oversee e-commerce, digital marketing and the information technology organization to integrate digital consumer experiences across all business touch points."

Bubbles, Bonds and China

Client Talking Points


The Russell 2000 is down -4.2% since the BABA #bubble was issued, taking its draw-down from its all-time #bubble high (July 7th) of 1208 to -8.1%; yesterday’s close of 1110 was a lower-closing-low than August; keep selling bounces.


The UST 10YR is straight back down to 2.49% this morning after failing at both our TRADE and TREND lines of resistance; with it -18% year-to-date, and the Fed primed to get dovish on the margin if jobs and/or GDP miss, keep buying Long Bond dips.


China is up for the last 3 days making a fresh year-to-date closing high of +14.6% on the Shanghai Comp, evidently Chinese locals couldn’t care less about the liquidity bubble in small cap U.S. stocks imploding. Interesting divergence. We like it.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


The whole Chinese iron ore/steel thing seems even uglier now.



Never let the opinion of another affect your opinion of yourself.

-Teresa Mummert


Nike reported a blow out quarter coming in at $1.04 (the Street at $0.88) futures looked outstanding at 11%, with a 400bp sequential turn higher in North America to +15%.

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