LEISURE LETTER (10/22/2014)



  • Oct 22: ALGT Q3 earnings 4:30 pm
  • Oct 23:
    • RCL Q3 earnings 10 am
    • PENN Q3 earnings 10 am
    • LHO Q3 earnings 10 am "LaSalle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am
  • Oct 28:
    • GLPI Q3 earnings 10 am
    • HOT Q3 earnings 11:30 am , code "10325720"
    • MAR Q3 earnings 5 pm , ID "59390131"
  • Oct 29: H Q3 earnings 11:30 am code "95150754"
  • Oct 30:
    • HST Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw "6307991"
    • BYD Q3 earnings 5 pm , pw "8021592"


CZR(GGRAsia) wants to build what one of its executives calls “the world’s first fly-in integrated resort” next to Manila International Airport (pictured) in the Philippines. Steven Tight, president, international development for Caesars, said the firm is willing to spend US$1 billion on the project. According to Mr. Tight, “What I think is most exciting about the opportunity is to create what I suppose would be the world’s first ‘fly in’ integrated [gaming] resort, where you could fly your plane right onto the property and have access directly to the resort, without having to deal with the traffic and other complications of Manila itself.” The resort would be aimed at VIPs and premium mass players, with an element of non-gaming targeted at locals, Mr Tight said.

Takeaway: CZR desperately needing an international presence. While not a 'fly in' casino, Resorts World is already right next to the airport.


PENN & GLPI– Nearly two weeks after leaving Sioux City, the former Argosy riverboat casino arrived safely at its new home, Mike's Inc., on Monday in Wood River, Illinois. A subsidiary of Penn National Gaming Co. then sold the boat and its other Sioux City assets, including two barges, to Mike's Inc. 

Takeaway: Despite removing the vessel from the Sioux City riverfront, the clean-up and deconstruction continues.


H ( is close to selling two additional hotels, including the 346-room Toronto Park Hyatt and the 644-room Hyatt Regency Vancouver.  

Takeaway:   We estimate the potential sale price of the Toronto Park Hyatt at $180-$200 million and the Hyatt Regency Vancouver at $270-$300 million for a combined sales price of $450-$500 million.  Kudos to Hyatt for their aggressive pursuit of the asset light strategy and selling assets to willing buyers and supportive capital markets.


MAR – Atlantis Paradise Island in Nassau, Bahamas, can now be booked through Marriott International's booking channels. Atlantis in July joined Autograph Collection, Marriott's upscale collection of independent hotels. The 3,400-room Atlantis is the largest hotel in the collection.

Takeaway: We look forward to commentary from MAR management regarding the booking trends at this very large, destination asset and the power of the MAR booking channel.


RLH – announced the launch of a new upscale hotel conversion brand targeted for the top 80 U.S. urban markets. Hotel RL is a full-service, lifestyle brand. RLHC anticipates announcing the first addition to Hotel RL before the end of the year and plans to open or convert more in 2015.

Takeaway: Every hotel operator must have a lifestyle brand these days. 


Macau Inflation (DSEC) The annual rate of consumer price inflation was 5.82% in September, the lowest in 8 months. The slowdown in food and non-alcoholic beverage prices was the cause.  This, despite another record increase in housing and fuel costs for the citizenry.

Takeaway: CPI remains stable but labor costs will go higher, much higher.


New Jersey Examining Real Money Skill-Based Gambling (Courier Post) The state Division of Gaming Enforcement says it is seeking game developers’ proposals to conduct real-money gambling on skill-based games, which would make New Jersey a nationwide laboratory for a betting phenomenon many have predicted will become the next big thing. Game developers would have to partner with one of Atlantic City’s eight casinos, in the same way that Internet gambling providers must do. And like online gamblers, players of real-money skill games must be physically located within New Jersey’s borders. (New Jersey can approach other jurisdictions about multi-state gambling compacts if there’s enough interest.) Nevada is considering a similar plan, and other countries, including England and Mexico, are testing similar technology.

Takeaway:  We've consistently highlighted the demographic headwinds for regional gaming and the slot companies.  Skill-based gaming has been the solution we've often pointed to and we'll be monitoring this closely.


NY Online Gaming ( A new online campaign called Let NY Play, which urges lawmakers in the Empire State to legalize online poker for cash, originated with MGM. 

 Though the games are still illegal, the pot is huge:  a study by MGM estimated that New Yorkers bet as much as $110 million in illegal online poker games. If the games were legalized, the study said, it could mean $50 million to $80 million in annual taxes for the state, and an additional $80 million from selling licenses to operate the sites.

Takeaway: MGM trying to get a share of NY gaming without a brick and mortar casino. 


Obama to Host Tribal Nations Conference– President Barack Obama will host the 2014 White House Tribal Nations Conference at the Capital Hilton in Washington, DC on Dec. 3. The conference will provide leaders from the 566 federally recognized tribes the opportunity to interact directly with the President and members of the White House Council on Native American Affairs. Each federally recognized tribe will be invited to send one representative to the conference. This will be the sixth White House Tribal Nations Conference for the Obama Administration, and continues to build upon the President’s commitment to strengthen the government-to-government relationship with Indian Country and to improve the lives of Native Americans

Takeaway: Expect a push for faster processing times of requests for tribally owned, but off-reservation land to be placed in trust -- which then affords the opportunity for additional off-reservation casino development.  


US Travel Trends in Q4 2014 – Booking data from Expedia shows that 21 million Americans are expected to fly from October through December. Of the top 10 destinations for air travel, 50% are warm-weather destinations and 30% are cold-weather. The most highly-shopped hotel destinations during the 2014 holiday season can be found in warm-weather destinations, including:

  1. Orlando, Florida;
  2. Cancun, Mexico;
  3. New York City;
  4. Riviera Maya, Mexico; and
  5. Punta Cana, Dominican Republic.

Takeaway: Sun and sand remain hot go-to destinations and nice to see renewed interest in New York City. Las Vegas is outside the top ten.


Countries Barring Income Travel from Ebola-stricken Counties – A number of Caribbean countries are moving to prohibit incoming travel from Ebola-affected countries including Liberia, Sierra Leone and Guinea, including the Federation of St. Kitts and Nevis, St. Lucia, Jamaica, Trinidad and Guyana.

Takeaway: Setback for these destination locations.


Chinese Home Prices - He Keng, former deputy-director of the NBS and legislator with the National People's Congress, said China should avoid mortgage-backed securities because they were at the heart of the US subprime crisis. He also noted Chinese home prices should be allowed to fall an average 30% before the government steps in.

Takeaway: Hedgeye's Macro Team noted most Chinese mortgages are at LTV's of 30% to 40%.  Regardless, a 30% drop in residential real estate would certainly dampen consumer spending and economic growth and negatively impact Macau.


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 Quad4 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: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. The persistence of #Quad4 deflationary pressures in the commodity complex and China's impact on this trend
  2. Why this is a GREAT spot to short U.S. equities 


Best of luck out there,


Darius Dale

Associate: Macro Team

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Conflations and Incongruencies

This note was originally published at 8am on October 08, 2014 for Hedgeye subscribers.

“History is just one thing after another.”


I’m not sure who the attribution for the above quote goes to, but it does offer a nice little existential change of pace for the early AM global macro hombres.


The macro practitioners’ grind is just one data point and price tick after another.


If we’ve successfully employed our “communication tool” over the last six years, you’re gainfully aware that, at its core, our macro process operates as a hybrid model with our fundamental macroeconomic research dynamically informing our quantitative view of markets.


Reciprocally, as my colleague Darius Dale highlighted yesterday, we apply those top-down quantitative signals – which often front-run reported fundamental inflections - in a reflexive manner to our bottom-up qualitative analysis (e.g. our Growth/Inflation/Policy framework) in order to generate actionable investment ideas and themes.


Most of the time the fundamental and the quantitative are in accord, or harmonize on a small lag.


More rarely, the incongruency persists for an extended period. In those instances we default to the price/quantitative signal – in recognition that market prices are real-time leading indicators and that the market and the economy are not the same thing, particularly over shorter durations.


Theoretically, corporate earnings should reflect economic growth with the high end of sustainable earnings growth capped at potential GDP and the value of the stock market reflecting GDP, corporate earnings as % of that GDP, and the multiple investor’s put on those earnings. But that certainly doesn’t hold in the short run and it’s only approximately true over the long-term.


It’s the conflation of perceived fundamental trends into a convicted market call where economists turned strategists most often go awry.


Conflations and Incongruencies - 15


Back to the Global Macro Grind


In covering the domestic macro economy, the quasi-persistent discontinuity between the research (fundamental) and the risk management (quantitative) signals has been my reality for the last couple months.


Juxtaposing the current domestic labor market data (positive) against the prevailing price signals (bearish) provides a timely and tangible case study:


INITIAL CLAIMS: Rolling Initial Jobless Claims were just under 295K in the latest week, matching the best levels of the post-recession period. As we’ve highlighted, over the last two cycles rolling SA claims have run sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007. We are currently in month seven at the sub-330K level in the present cycle. Further, over the last half century, the trough in initial claims has led the peak in equities and the peak in the economic cycle by 3 and 7 months, respectively. At present, we are still putting in the trough – with cycle precedents suggesting the economic peak is not yet imminent.


NFP: Monthly NFP gains have been solid on balance and, due to seasonal artifacts, even sequential slowdowns in net monthly payroll gains have been characterized by flat to rising employment growth on a year-over-year and 2Y average growth basis. At +1.93% YoY in September, Nonfarm Payrolls recorded their fastest rate of improvement since April 2006 and are in-line with peak growth in the last cycle. Similar to initial claims, peak monthly NFP gains lead the economic cycle by ~7 months. Whether the May-July NFP gains represented peak improvement remains to be seen.


JOLTS: Total Job Openings made a new 13 year high and the quits rate held at cycle highs in the August report released yesterday. Total hires moderated sequentially alongside the dip in NFP gains reported for August but is likely to re-accelerate to new highs in the September release. Historically, the Job Openings data leads accelerations in wage growth by about a year. The relationship has been muted vs previous cycles but with the NFIB’s compensation index making new highs, the share of short-term unemployed continuing to rise and labor supply (total available workers per job opening) tightening to pre-recession averages, wage inflationary pressures are percolating.


INCOME: The confluence of an accelerating employment base and flattish wage growth has driven an acceleration in disposable personal income growth over the last 5 months. Indeed, aggregate private sector salary & wage growth is currently running at +5.8% and holding at its best levels of the recovery outside of the peri-fiscal cliff period.


CREDIT: Consumer revolving credit declined at a -0.3% annualized pace in August according to Federal Reserve data released yesterday. The sequential decline wasn’t particularly surprising given the comps (the increase in July was the 2nd largest in 6.5 years) and the already reported retreat in spending on durable goods ex-defense and aircraft (ie. the stuff the average household buys). On a year-over-year basis, growth in credit card spending decelerated just -5bps from the 6 year high recorded in July.


In a Keynesian economy, total spending is cardinal, and income and credit is predominate. You can spend what you make (income) and you can spend what you don’t make (credit) and, with both income and credit accelerating presently, the underlying trends in both are positive.


The caveat has been that while the capacity for consumption growth has improved alongside accelerating income growth, actual household spending has not because the savings rate has shown a commensurate increase.


So, while reported consumption growth remains middling, it’s hard to characterize accelerating income growth, a rising savings rate and moderate credit growth alongside increased investment as fundamentally negative.


Transitioning to the price signals, which paint a contrasting picture for the prospects of forward growth. Keith has hit the boards hard in highlighting these, but to briefly review:


10Y Yields: 10Y bond Yields are down -69 bps YTD (-23%), the yield spread (10’s-2’s) continue to compress and inflation expectations are collapsing – all of which are discretely bearish growth signals.


Russell 2K: The Russell is down -7.5% YTD with the rotation out of growth style factors and small Cap Illiquidity accelerating over the last month+ - again, not a growth-accelerating signal . The Russell 2000 is immediate-term TRADE oversold around 1076, but remains in a Bearish Formation.


Consumer: The XLY is the worst performing sector YTD (-1.84%), underperforming the S&P500 by 6% as real median income growth continues to trend negative and the bottom 60% remain very much income constrained. Also in Bearish Formation.


Housing: The ITB is down -9.1% YTD with housing sitting as one of the worst performing asset classes globally. We have been bearish on housing since the end of 2013 and continue to believe housing related equities underperform, trading sideways-to-down, alongside ongoing deceleration in HPI trends.


ROW: The EU and Japan are in discrete deceleration, China is not an upside catalyst, EM markets are flagging alongside dollar strength and the US is already past the mean duration of expansions over the last century. The IMF marked its (still too optimistic) global growth forecast lower yesterday and growth estimate revision trends over the last quarter across both developed and EM markets have been almost universally negative. Further, the disinflationary trends prevailing globally only add to the Feds Sisyphean fight towards sustained, above target CPI and core PCE inflation.


From a Hedgeye modeling perspective we are entering Quad #4 which is characterized by both growth and inflation slowing from a 2nd derivative perspective and a generally dovish policy response. A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 is almost as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14. Whether that manifests into a protracted slowdown domestically remains TBD.


Markets are discounting an increasing probability of a more enduring deceleration and are, at the least, refuting consensus’ laughably linear straight-lining of 3% growth into perpetuity.


May the wind be always at your back.

May the sun shine warm upon your face.

May your fundamental and quantitative signals always be in accord.


Our immediate-term Global Macro Risk Ranges are now: 


UST 10yr Yield 2.35-2.46%

RUT 1072-1100

DAX 9026-9367

VIX 15.67-17.58

USD 85.05-86.64
WTI Oil 86.92-91.39


To cognitive dissonance, its ubiquity and successful management,


Christian B. Drake

Macro Analyst


Conflations and Incongruencies - Complacency

No Bullish Signals

Client Talking Points


European equities showing 0% follow through to the latest “communication tool” (read: hope); Portugal -1.1% leads losers this morning (-19.9% year-to-date) as liquidity traps remain obvious; Russian collapse remains a credible threat as the stock market continues to crash -23.7% year-to-date.


The front-month volatility went from 10.32 (July 7th when the Russell #Bubble topped) to 26.25 on Oct 15th, then back to 16.08 – yeah, that’s normal! But what is born out of that is an immediate-term risk range of 15.09-28.26 – enjoy.

S&P 500

Since implied volatility’s range is wicked wide now, so is the risk range for SPX at 1830-1947 (i.e. -4.6% downside vs +0.3% up); my dynamic (non-linear) model hasn’t seen risk ranges widen like this since NOV 2007 (when the SPX closed -6.6% on the month).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


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


OIL: wti up small; trending weakness remains pervasive as #Quad4 deflation dominates




“Each of us has a fire in our hearts for something. It’s our goal in life to find it and keep it lit.”

-Mary Lou Retton, winner of gold medal at 1984 Los Angeles Summer Olympic Games


The share of first time homebuyers remains anemic, coming in at 29% in September. First time homebuyers have been sub-30% now for 17 of the last 18 months. The share of first time homebuyers was generally above 40% from 2001-2008 and briefly hit 50% in 2010 in response to the government's homebuyer tax credit programs.


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