Tickers: CZR, LVS, VAC
- Oct 15: LVS Q3 earnings 4:30 pm , pw 12611335
- Oct 16: Hedgeye cruise pricing survey (mid-October)
CZR – appointed Keith Causey as chief accounting officer. Mr. Causey replaced Diane Wilfong, who left the company “to pursue another opportunity”, Caesars said in a press release. Mr Causey will have responsibility over all corporate accounting and internal audit functions for the parent. He joined Caesars from U.S. car maker General Motors Corp, where he served as executive director, global business services – finance.
Takeaway: Accounting personnel changes are rarely a positive but we're not hearing of any accounting issues.
CZR – Rio All Suites Hotel & Casino Las Vegas To Close? rumors are circulating Las Vegas that Caesar's sold the Rio for $400 million. We do know that Caesar's advised employees in late September of the transition to a new owner and offered current employees opportunities to transfer elsewhere with the Caesar's organization. However, neither CZR's nor the buyer has advised the Nevada Gaming Commission any ownership changes or closure, nor have WARN letters been received by current Rio employees.
Takeaway: As part of the overall restructuring, something will happen with the Rio.
LVS – outgoing President and Chief Operating Officer, Michael Leven, will become Georgia Aquarium CEO on January 1, 2015. Mr. Leven previously served as CEO of the Aquarium in 2008-2009.
AC.FP – (Les Echos) As previously reported, Starwood Capital is attempting to sell Louvre Hotels Group. Accor estimated the value of Louvre at about 1.2 to 1.5 billion euros based on ten times the operating Louvre Hotels EBITDA (EUR 110 million) - a lower price based on Lourve's exposure to the economy and budget lodging segments. However, Accor could face anti-trust issues. Also, Louvre Hotels partner since 2011, Chinese Jinjiang Inn made an offer which was less than 1 billion euros, but it was rejected by Starwood Capital.
Takeaway: Sounds to us like the call for "last, best and final offers" so expect the winning bid announcement soon.
VAC – announced today the completion of a securitization of a pool of approximately $250 million of vacation ownership loans. Two classes of Notes were issued by the Trust: approximately $216 million of Class A Notes and approximately $24 million of Class B Notes. The Class A Notes have an interest rate of 2.25% and the Class B Notes have an interest rate of 2.70%, for an overall weighted average interest rate of 2.29%.
Takeaway: The capital markets remain very favorable for time share securitizations with very low risk premiums - a positive tailwind for HLT and WYN.
Macau Health Officials All Indoor Spaces Smoke Free– (GGRAsia)
Macau’s Health Bureau confirmed in a statement that its aim is “totally banning smoking in all enclosed spaces open to the public in the city”. The casino industry has always argued that VIP gambling rooms in Macau are not “open to the public”. As a result such areas have so far been exempted from tobacco restrictions imposed in phases on the main floors of Macau’s casinos since January 2013. Under the latest rule changes on October 6, smoking on casino main floors is only allowed in enclosed smoking rooms that do not contain any gaming tables or slot machines. Nonetheless, the principle of VIP room smoking in Macau seems to be under increasing pressure. “The Health Bureau will continue to collect data and opinions to enhance policy control,” it said in the statement. It said it will also “collect opinions from the general public, the gaming industry and its staff” before proceeding to revise the law on smoking in 2015. The Health Bureau said that it aims “to achieve the goal of totally banning smoking in all enclosed spaces open to the public in the city.”
Takeaway: During our visit to Macau last week, a few of our contacts indicated it was inevitable that the VIP rooms will ultimately be smoke free.
Macau Hotel Occupancy Falls During Golden Week – (Macau Business) The average occupancy rate of Macau’s more expensive hotels during The golden week of National Day holidays was lower this year than last, the Macau Government Tourist Office says. The office’s data show that between October 1 and 7 the average occupancy rate of three-star, four-star and five-star hotels was 87.2%, 1.5% points less than in the corresponding period last year. The data show the average room rate in such hotels fell to MOP1,892 (US$236.80), or 2.2% less than a year earlier.
Takeaway: Golden Week, not so Golden for Macau gaming operators.
Chinese Mainlanders Spend 70% Less During Golden Week – (Chinese News Services) Consumer spending by mainland tourists on luxury goods in Macau, Hong Kong and Taiwan during the National Day Golden Week recorded a drop of 70%, accounting for only 5% of total expenditure by mainland tourists on high-end products beyond the Chinese border. Total spending by mainland tourists on luxury goods across the border declined by almost 22% year-on-year, amounting to US$3.2 billion from the US$4.1 billion of the same period last year, according to a report by the World Luxury Association.
Takeaway: Slower consumer spending the result of slower economic growth or crackdown on luxury spending?
China's Corruption Crackdown Continues
(People's Daily) Three former senior officials in central China's Hubei Province were expelled from the Communist Party of China (CPC) and sacked from their public posts for corruption, said the provincial CPC discipline watchdog on Saturday. The three were Zhang Qinyun, former member of the party committee and general manager of Hubei Daily Media Group, Xing Jinghua, former head of the CPC Publicity Department of Jingzhou City and Wang Hongqiang, former deputy director of the standing committee of the People's Congress of Yichang City. The three were all accused of accepting huge sums in bribes and have seriously violated discipline, said the Hubei Provincial CPC Discipline Commission.
(Global Post) Zhao Shaolin, former member of the standing committee of the Communist Party of China (CPC) committee of east China's Jiangsu Province, is being investigated for "suspected severe disciplinary and law violations," according to the top anti-graft body.Zhao was also secretary-general of the provincial Party committee, said a statement released Saturday by the CPC Central Commission for Discipline Inspection on its official website.
(Shanghai Daily) Thousands of Party and government officials have been punished for offenses related to gambling since the middle of last year, according to a central government report. The 7,162 officials were from more than 30 cities and provinces, with east China’s Zhejiang and Guangdong in the south reporting the most cases — 1,575 in Zhejiang and 1,127 in Guangdong. Punishments ranged from warnings to administrative punishments but no further details were released. A crackdown on gambling by officials has become a major thrust of the government’s anti-corruption campaign.
Takeaway: No slowdown in corruption campaign although a crackdown on illegal gambling outside of Macau could be a positive for Macau.
Universal Parks & Resorts Beijing – (channelnewsasia.com) US entertainment firm Universal Parks & Resorts will invest more than US$3 billion (S$3.8b) in a joint venture with Chinese partner Beijing Shouhuan Cultural Tourism Investment Co, to build a 120 hectares (296 acres) movie theme park in Beijing, scheduled to open in 2019. The park, which will feature characters and scenes from Hollywood blockbusters such as Harry Potter and the Transformers franchises, will be located in the city's eastern district of Tongzhou. The project has been approved by the National Development and Reform Commission, China's top economic planner. The Beijing project will become Universal's fifth theme park after Los Angeles, Orlando, Osaka and Singapore. It is expected to rival a Disney park in Shanghai, which has been under construction since 2011 and is scheduled to open next year.
Takeaway: Universal Parks going to Beijing, making an integrated resort bid in Japan increasingly unlikely.
Tropical Storm Gonzalo – maximum sustained winds are near 60 mph with higher gust, strengthening is expected during the next 48 hours and Gonzalo is forecast to become a hurricane tonight or Tuesday. A hurricane watch is in effect for Puerto Rico, Vieques & Culebra, U.S. Virgin Islands, and British Virgin Islands while a tropical storm warning is in effect for Guadeloupe, St. Martin, St. Maartin, St. Barthelemy, Barbuda, Antigua, St. Kitts, and Monserrat.
Takeaway: Expect significant cruise rerouting.
China Growth Target (21st Century Business Herald) reported a number of Chinese government officials think 7% is an appropriate target for GDP growth next year. Both a PBoC and MoF officials voiced support for a 7% growth target in GDP at a Chinese Academy of Social Sciences meeting. The paper estimated the M2 growth target would be 11% next year, given a 2% inflation target.
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis.
Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad Four set-up. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.
Takeaway: Lots of red on the risk monitor again this week. We've been flagging rising risk for the last few weeks. The outlook remains negative.
Current Best Ideas:
Our last two weekly risk monitors have been titled:
"Don't Get Complacent" - 10/6/14
"Risk is Rising" - 9/29/14
Our Risk Monitor note was born in 2011 out of the recognition that - as Dan Och famously once said - "If you don't do macro, macro will do you". Its relevance obviously waxes and wanes depending on the environment, but the point of the product has never changed. It's intended to be an early (or at least concurrent) warning system as it measures a number of high-level macro signals across asset classes and geographies.
For the last few weeks we've been flagging rising risk dynamics across the complex of indicators we track and last week we finally got a material sell-off. The XLF dropped 3% last week and is now down 3.5% on a month-over-month basis. This week, the risk monitor looks similar to how it has the last few weeks: Red. Red permeates the summary table below suggesting it's not just a recent US equities phenomenon but rather a multi-asset class/geography problem. In other words, correlations are rising globally as the sell off gathers momentum.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged
1. U.S. Financial CDS - Swaps widened for 19 out of 27 domestic financial institutions. The widening was modest at +4 bps, on average, but that brings the month-over-month change up to +9 bps, on average. The large cap banks are higher by 7 bps (+11 %) on the month now. We'll see what earnings season has in store beginning tomorrow.
Tightened the most WoW: ACE, AON, XL
Widened the most WoW: TRV, SLM, C
Tightened the most WoW: ACE, XL, MMC
Widened the most MoM: SLM, WFC, BAC
2. European Financial CDS - Swaps were notably wider across Spanish Banks and Russia's megabank, Sberbank. We are intrigued with Russia as falling oil prices coupled with the effects of ongoing Western sanctions appear to having a significant weakening effect on Russia's economy. The average CDS profile across the EU bank complex is moving in the opposite direction of Euribor-OIS, our preferred gauge of systemic risk for the European banking system. In other words, while the systemic risk measure appears to be declining, the average individual risk measure across European banks is rising. Stay tuned.
3. Asian Financial CDS - Indian banks saw swaps tighten on the week, as did two out of three of the big Chinese banks. Much of Japan was unchanged on the week, except Mizuho which widened +4 bps to 56 bps.
4. Sovereign CDS – Sovereign swaps were mixed with Spain widening the most at +6 bps to 79 bps. On balance, however, the average change for the week was just +1 bp.
5. High Yield (YTM) Monitor – High Yield rates rose 17.4 bps last week, ending the week at 6.12% versus 5.95% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1862.
7. TED Spread Monitor – The TED spread fell 0.3 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 22.36 bps.
8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 276 versus 278 the prior week. As compared with the prior month, commodity prices have decreased -2.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 3 basis points last week, ending the week at 2.56% versus last week’s print of 2.53%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China rose 0.1% last week, or 4 yuan/ton, to 2921 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 186 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.2% upside to TRADE resistance and 1.7% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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TODAY’S S&P 500 SET-UP – October 13, 2014
As we look at today's setup for the S&P 500, the range is 64 points or 1.16% downside to 1884 and 2.20% upside to 1948.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.86 from 1.86
- VIX closed at 21.24 1 day percent change of 13.22%
MACRO DATA POINTS (Bloomberg Estimates):
- 12:30pm: Fed’s Evans speaks in Indianapolis
- U.S. Rates Weekly Agenda
- FX Weekly Agenda
- Govt offices closed for Columbus day
- U.S. ELECTION WRAP: Oil in La. Runoff; Marriage in N.C.; Ebola
- Washington Week Ahead
WHAT TO WATCH:
- Steris to Buy Synergy Health for $1.9b in Move to U.K.
- Fed Officials Warn Slowing World Growth Could Delay Rate Rises
- Canadian Pacific Said to Be Rebuffed in Merger Overture to CSX
- Fiat Chrysler Trades in New York as Challenger to Detroit Two
- Ackman Targets Stake in U.S. Firm as Pershing Square IPO Drops
- Deutsche Bank Falls on Report May Boost Legal Cost Provs. 30%
- Sears’s Kmart Offers Free Credit Monitoring After Cyber Attack
- Salesforce Unveils Wave Cloud Product for Data-Analytics Market
- U.S. equity markets open, bond markets closed for Columbus Day
- China Exports Rise More Than Estimated
- Dallas Health Worker’s Ebola Raises Concern of Caregiver Safety
- Mobs Confront Hong Kong Protesters Near Business District
- Bayer Faces U.S. Legal Campaign Over Xarelto Blood Thinner: FAZ
- GE Plane Leasing Unit Weighs Bid for Milestone: WSJ
- Google’s YouTube ‘Monetizing’ Unauthorized Content: FT
- Saudi Prince to Buy Shares in Euro Disney Rescue: Daily Mail
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Iraq Follows Saudi Price Cuts as Brent Slides With WTI Crude
- Malaysia Seeks to Boost Palm Oil by Extending Tax-Free Shipments
- Hedge Funds Miss Gold Gains After Cutting Wagers: Commodities
- Top Rubber Trade Groups Pledge to Boost Prices From 2009 Low
- Gold Advances to Four-Week High on Haven Demand as Silver Rises
- Copper to Nickel Advance as China Trade Figures Top Estimates
- China Copper Ore Imports Jump to Record as Smelters Boost Demand
- MORE: China Vegetable Oil Imports Fall to Lowest Since May 2011
- Rebar Rises Most in 2 Years as Spot Prices Gain Amid Output Drop
- Tripartite Rubber Council May Meet in Early November: Uggah
- Iron Price War Deepens Crisis in Ebola-Stricken Sierra Leone
- U.S. Gasoline Falls to Lowest Since November, Lundberg Says
- China Nickel Depletion Fuels LME Stockpile Growth, Norilsk Says
- Speculators Push Oil Into Bear Market as Supply Rises: Energy
The Hedgeye Macro Team
This note was originally published at 8am on September 29, 2014 for Hedgeye subscribers.
“There are far too many great men in the world; there are too many legislators.”
Today in 1789, the 1st United States Congress adjourned. There were no political parties in Congress back then. Members of US Congress were grouped (informally) according to their voting records. There was at least some peer review and accountability in that.
As far as who was a “great” man back then, I personally can’t tell you for sure. My only certainty is that the more I try to understand #history through the lenses of different perspectives (books), the less I know.
I can tell you with 100% certainty that, of all the great men and women I know, not one is a legislator. The thing about great leaders is that they embrace their own imperfections and rarely feel certain about anything. Find me that in today’s political media and I will happily reconsider. Sadly, the deflation of my expectations continues to accelerate on that front.
Back to the Global Macro Grind…
Deflation and depression aren’t cool feelings. I guess that’s why the Bush/Obama politicians who perpetuated the most recent decade of US economic growth surprising on the downside call the recession a #Great one.
There’s always spin from political incumbents who aren’t telling you the truth about economics. The Federal Reserve is going to be spinning its wheels with a conflicted “World Economic Think Tank” from Germany called the Kiel Institute this week.
Their topic: “The Labor Market After The Great Recession.” Their problem: that both the US and Germany may very well be entering their next recessions. Yep. So let’s make sure US legislators get told what to do by left-leaning German states in preparation for that…
Back to real world leading economic indicators in Global Equity markets, here’s what happened last week:
- The illiquid small-cap #bubble component of the US stock market continued to deflate
- The Russell 2000 was down another -2.4% on the week and is now down for 4 consecutive weeks
- The more liquid (and “cheaper”) Dow and SP500 were down -1.0% and -1.4%, respectively
- US Industrial Stocks (XLI) led losers, falling -2.1% on the week and have lagged for the last 3 months
- REITS (MSCI Index) corrected another -1.9% as deflation in real estate prices continues in #Quad4
- Emerging Markets deflated another -2.7% and -4.2% on the wk for the MSCI EM and LATAM indexes, respectively
In what we call FICC (Fixed Income, Currencies, and Commodities), here’s what Mr. Macro Market said last week:
- Draghi’s (un-elected) Devalued Euro move continues with the EUR/USD down another -1.1% on the week
- US Dollar Index added to its most deflationary move since 1997, closing up the same that the Euro was down
- Canadian Dollars dropped -1.7% in kind, and the Japanese Yen fell another -0.2% on the week to $109.29 vs USD
- Commodities (CRB) Index held the 280 line (where it started 2014), closing +0.3% on the week
- Gold and Copper were +0.1% and -3.7% on the week, respectively (YTD: Gold +1% vs Copper -10%)
- UST 10yr Bond Yield dropped another -5 bps to 2.53%, down -17% YTD (or down 50bps)
That last thing (10yr yield falling) is one thing that the perma-US-growth-bulls have had a very hard time explaining (especially overlayed with the Russell). Since US #history tells you that falling bond yields are never a sign of accelerating growth, that’s for good reason.
Much like the politically partisan, perma-growth-bulls are very good at seeking data that confirms their bullish biases. Instead of talking about early cycle-stocks like Housing (ITB), Regional Banks (KRE), and Consumer Discretionary (XLY) being down for 2014 YTD, they’re now all experts on #Strong Dollar and “falling oil prices” (even though WTI crude was +2% last week to flat on the YTD).
I like #StrongDollar, but only as a leading indicator of US economic #GrowthAccelerating when long-term interest rates are RISING at the same time. Let me write that one more time in these terms: Dollar Up, Rates Up = Hedgeye Bullish On Growth!
That, of course, was why we loved US growth stocks in 2013 and had an equal amount of joy shorting the US bond market. This year, being the only decisively bi-partisan bull/bear risk managers you pay, we have had precisely the opposite position.
I’ll go through the why on Dollar Up, Rates Down (it’s called #Quad4 deflation) on our Q4 Global Macro Themes call this Thursday afternoon at 1PM EST. Institutional Investors, please ping sales@Hedgeye.com for access.
I’d like to extend an invite to any Member of The 113th US Congress who would like to learn something about where economic risks are going (rather than where they’ve been). I don’t hang with them, so I’d appreciate it if you passed it along to your local central planner.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.48-2.58%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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