Macro Notebook 11/17: Japan | Oil | UST 10YR


Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.

LEISURE LETTER (11/17/2014)

Tickers:  CZR, WYNN, CCL, RCL


  • Nov 16-18: RCL's Quantum of the Seas investor event
  • Nov 17:  Carnival Corp announcement in afternoon (Source: Seatrade Insider)
  • Nov 18: BEL Investor Meeting Webcast
  • Nov 19: Sega Sammy Investor Meetings
  • Nov 23: Pacquiao-Algieri bout at Venetian Cotai Arena


CZR – Local residents/home owners oppose Caesars Entertainment request to expand the Strip’s Gaming Enterprise District to include a 38-acre parking lot behind The Linq.


1680.HK Macau Legend – The new hotel at Macau Fisherman’s Wharf is ready but not yet open to the public because it lacks an occupancy license. The hotel has no gaming facilities but is connected via skywalks to Babylon Casino. Macau Legend doesn’t have a Macau gaming license in its own right, but instead operates the Babylon Casino at Macau Fisherman’s Wharf and the Pharaoh’s Palace Casino at the nearby Landmark Macau hotel on Macau peninsula under a SJM Holdings Ltd license.

Takeaway: Macau Legend the hotel is ready but no word on the opening of the casino.  Babylon Casino recently was awarded 35 additional gaming table which are expected to be premium mass focused.  The 35 tables are in addition to the 19 current tables and 120 slot machines that are registered as not currently in operation.


WYNN – Mr. Wynn supportive of the new development projects (Resorts World Las Vegas and Packer's project) on the Las Vegas Strip.

Takeaway: While Mr. Wynn supports additional construction, we are concerned about increasing supply in a no growth Strip gaming environment.  


CCL – The 158 passengers and 14 crew members who became ill with vomiting and diarrhea from norovirus were aboard Carnival's Crown Princess, which sailed Oct. 18 from Hawaii across the south Pacific to Los Angeles. The ship had 3,009 passengers and 1,160 crew members. According to Carnival, the Crown Princess was thoroughly disinfected before disembarking Los Angeles for a seven day voyage to Puerto Vallarta, Mazatlan and Cab San Lucas before returning to Los Angeles on Saturday, November 22.

Takeaway:  Usually only an issue when a few of these events are strung together. This incident shouldn't impact bookings or the stocks.


RCL – From a booking perspective, Quantum of the Seas is 'shaping up very nicely in China,' according to Royal Caribbean's international chief, SVP Dominic Paul. The reaction from about 200 Chinese travel agents and media aboard inaugural cruises from Bayonne, N.J.'s Cape Liberty in recent days has been encouraging.


The Chinese trade started base-loading sales a few months ago, and there has been a strong communication program in China. But now that they've had the opportunity to see it, Paul said the ship has "completely exceeded their expectations.'


Quantum will expand the spectrum of the customer base in China, Zinan Liu, regional VP and MD China for Royal Caribbean and chairman, CLIA North Asia, told Seatrade Insider on board the ship. Previously, younger customers might have viewed cruising as too traditional. In fact, it's turning out that the demographic in China skews younger for Royal Caribbean than elsewhere.

Liu said cruises achieve very high satisfaction levels among Chinese cruisers, and Chinese see cruising as an aspirational, lifestyle, experiential thing—like fine wine. They travel as multigenerational families and with groups of friends. And they love the 'Western-ness' of cruising—especially the younger generation.

Takeaway:  The Chinese agents don't have many options to sell so they have to be enthusiastic. That said, the ship is remarkable, particularly if the Wi-Fi integration works well. We will have more commentary on aboard Quantum in the next few days.


Pansy Ho on Mainland China Corruption Crackdown – Pansy Ho speaking at the Global Cafe business forum claimed there was no direct correlation between the slowdown in Macau and the Chinese government’s crackdown on corruption.

Takeaway: Huh? If that's the case then this downturn in Macau VIP is even more troublesome. Suffice it to say, we don't agree with Pansy.   


Chinese Consumer Demand for Gold Drops – According to the New-York based Council, the purchase of gold by the China markets had shrunk by 37% year-on-year to 182.7 metric tons in the third quarter to September, following a slump in demand. The World Gold Council said it expected Chinese demand to be 850-950 tons this year, down from its previous estimate of 900-1,000 tons. Early in the year, the London-based group had said Chinese appetite could even reach 1,100 tons.

Takeaway: Evidence and commentary of a decline in Chinese gold consumption/purchases (jewelry and coins/bars) was discussed on several HK jewelery store calls during Q2 earnings.


Zhuhai International Convention & Exhibition Center – hosted a media tour over the weekend and according to Doris Wan, the Center's public relations executive, the fact that the Zhuhai center is in close proximity to Macau and has strengthened Zhuhai’s competitiveness in terms of hosting meeting, incentive, conference and exhibition (MICE) events, Doris Wan still believes that the two cities are not in competition, but in a complementary relationship, in which both parties will be able to supplement each other. “After all, Macau is limited in terms of the venues and human resources [for MICE],” she said.

Takeaway: We called out the opening of the Zhuhai Center on November 11 in our Leisure Letter and noted how mainland Chinese attending MICE events in Zhuhai would not need a Macau visa.  We doubt this commentary will rest peacefully with the folks at Sand China Limited and the Venetian Macau.


Singapore Condo Sales Rise in October – According to data from the Urban Redevelopment Authority, home buyers bought 765 private condo units during October, an 18% increase over September's 648 units. The result came on the heels of a dismal quarter of sales for the three months to Sept 30, during which developers shifted just 1,596 condo units - the lowest quarterly figure since just 419 units were sold in the fourth quarter of 2008.

Takeaway: A strong uptrend in condo sales during October - could this be the start of an upturn in consumer confidence in Singapore?


Trump Taj Mahal Casino Atlantic City Closing –  Attorneys for Trump Entertainment Resorts said in papers filed in federal bankruptcy court that because the owners of the casino "had not obtained the tax relief and incentives" they had sought, the company's board of directors approved closing it around Dec. 12.

Takeaway: We're skeptical the Taj will go dark but if it does, that's more good news for Borgata and Caesar's.  


Spain – Alfredo Serrano, CLIA's director general for Spain, described a ‘good pace’ in 2015 bookings. He noted that Spain retains its second rank as a European cruise destination, and as the fifth largest source market, despite the country's ongoing economic difficulties.


Adam Sharp, RCCL's Port Services and Guest Port Services for the UK, Northern Europe and Middle East, said that publicity surrounding September's short cruise season in Spain by Oasis of the Seas had produced an unprecedented spike in enquiries and bookings for the Allure of the Seas’ 2015 Mediterranean program.


MSC Cruises ceo Gianni Onorato pointed out in a separate press briefing that his company is increasing its offer in the Spanish market by 66% for 2015, to 6,115 cabins per week aboard four vessels, clearly reflecting confidence in this market. Two ships will sail from Barcelona and one each from Valencia and Palma. He cautioned, however, that Spain still lags behind Italy and France as source markets for fall and winter cruising. 

Takeaway: Optimism on Spain ahead of summer 2015 Wave but FQ4/FQ1 2015 sailings will be challenging.


Virgin Cruises – Bain Capital has agreed to become a major shareholder in Virgin Cruises, the latest in a string of transport ventures set up by Sir Richard. Virgin Group will invest more than US$100 million (£63m) in shares in Virgin Cruises, using funds recycled from the proceeds of the two recent flotations (Virgin Money and Virgin America). Bain will also not be the only external shareholder, with at least one Middle East sovereign wealth fund and a number of family offices and high net worth individuals also believed to be participating, according to private equity sources.

Takeaway:  Potential new competition for the cruise industry longer term


Japan Economic (Recession) Indicators:

Q3 preliminary GDP (0.4%) q/q vs consensus +0.5% and revised (1.9%) in Q2

Annualized (1.6%) y/y vs consensus +2.2% and revised (7.3%) in Q2
Capex (0.2%) q/q vs consensus +0.6% and (5.1%) in Q2
Public investment +2.2% q/q vs (0.5%) in Q2
Consumption +0.4% q/q vs consensus +0.9% and (5.0%) in Q2
Housing investment (6.7%) q/q vs consensus (6.2%)
Deflator +2.1% y/y vs +2.0% in Q2


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:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 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.

Retail Callouts (11/17): RH, HIBB, JCP, KATE, KORS, AMZN, JOEZ, WMT

Takeaway: Retail Idea Bench. HIBB added to Short Bench. JCP pulled from Long Bench. Math on RH Atlanta says 65k ft is conservative size.



Retail Callouts (11/17): RH, HIBB, JCP, KATE, KORS, AMZN, JOEZ, WMT - 11 17 CHART1


This Week's Changes Hedgeye Retail Idea List

  1. Added Hibbett Sports to Short Bench: We don't have enough ammo to short ahead of earnings this Friday. But we have an extremely negative view on the margin implications as HIBB changes its business model to protect its market share.
  2. Removed JC Penney from our long bench. It became clear to us that JCP could achieve its sales goals -- but only if the economy is optimal. The problem is that we're six years into a recovery, and the liklihood of going another four is slim, in our opinion.  We pick four years as the bogey because that's when JCP faces a significant $2.2bn maturity. We're not making the 'donut' call on JCP. But we think that there's just as great a chance that this stock goes to zero as it does going to $15. Not a good risk/reward by any stretch.



Retail Callouts (11/17): RH, HIBB, JCP, KATE, KORS, AMZN, JOEZ, WMT - 11 17 chart2


RH Atlanta

We'll be at the RH Atlanta Design Gallery Grand Opening on Thursday night. This is an important one because the store is 65,000 SqFt -- the first of the '2nd Generation' Design Galleries. Remember that the first wave of Design Galleries averaged at about 20,000 feet. The Street 'gets it' that the economics in these stores are significantly better than in the legacy 9,000 ft stores, but there are massive questions (and doubts) about the economics associated with a mega-store like what RH is building in Atlanta.


A couple of reasons why we think this store size makes sense for RH in Atlanta.

1.  As we outlined in our RH Real Estate Deep Dive, you need to look at market size of every single store -- which we define as home furnishings spend for consumers earning over $100k.  We did that in every single region RH operates.
2.  Our math suggests that there are 22 existing RH locations that could support a store of 60,000 or greater. This assumes 2018 market share of 10%, and sales productivity of $1,200.
3.  Of these 22 locations, Atlanta is #3 on the list, behind New York and Houston. Our math suggests RH could have a store size as great as 90,000 feet.
4.  The rent economics work. Relative to RH's existing store in Atlanta, we think that occupancy math lines up well with the Denver store, which will open in 2015 (See math below).


RH remains our top idea in Retail.


Retail Callouts (11/17): RH, HIBB, JCP, KATE, KORS, AMZN, JOEZ, WMT - 11 17 chart3


Retail Callouts (11/17): RH, HIBB, JCP, KATE, KORS, AMZN, JOEZ, WMT - 11 17 chart4




AdiBok - ESPN Anchor Blames adidas Shoes for Derrick Rose's Injuries



H&M - October Sales +14% vs Last Year



WMT - Walmart workers plan Black Friday protests over wages



  • "A group of Walmart employees pushing for higher wages said on Friday they were planning protests at 1,600 Walmart stores nationwide on Black Friday."


KATE - Ad of the Day: Anna Kendrick Makes Something Out of Nothing in Kate Spade's Holiday Ad



AMZN - Amazon chief Jeff Bezos takes long-term view



  • "Last week, Mr Bezos gave a textbook demonstration. He abandoned a long-running and very public spat with French publisher Hachette over ebook pricing. Amazon appeared to make some big concessions. The bookseller gave up its right to sell ebooks at any price it chose – essentially the way it sells the physical product now."


KORS - Michael Kors' Instagram Adds 'Buy'



  • "Facebook and Twitter are instrumental in inspiring fans and helping in the shopping process, but finding a way to 'shop' Instagram was a necessity, the company said."


JOEZ - Joe's Jeans Defaults on Term Loan



  • "Joe’s Jeans Inc. declined 21.2 percent to close at 75 cents in Nasdaq trading, after the company reported that it had fallen out of compliance with the profit requirements of its Garrison Loan Agency term loan and was seeking waivers and adjustments."

Daily Trading Ranges

20 Proprietary Risk Ranges

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Monday Mashup: LOCO, BLMN and More

Monday Mashup: LOCO, BLMN and More - 1111


Recent Notes

11/10/14 Monday Mashup: Covering CHUY

11/10/14 MCD: October Sales Weak

11/13/14 PLKI: World-Class Quarter


Events This Week

Tuesday, November 18th

  • Morgan Stanley Global Consumer & Retail Conference: CAKE, SONC, JACK
  • PZZI Annual General Meeting

Wednesday, November 19th

  • Morgan Stanley Global Consumer & Retail Conference: MCD, DPZ, NDLS, TSN, DNKN, GMCR
  • JACK earnings call 11:30am EST
  • GMCR earnings call 5:00pm EST

Thursday, November 20th

  • ZOES earnings call 5:00pm EST


Chart of the Day

Monday Mashup: LOCO, BLMN and More - 2


Recent News Flow

Monday, November 11th

  • RRGB announced it is two weeks away from opening its newest restaurant in Tracy, CA, in the state's Central Valley.
  • BLMN announced a secondary public offering of common stock, as Bain Capital Partners sold an aggregate of 18,307,782 shares of the company's common stock to Goldman, Sachs & Co.

Tuesday, November 12th

  • DRI upgraded to buy from hold at KeyBanc with a $62 PT.
  • CAKE announced the opening of its newest restaurant at the CoolSprings Galleria in Franklin, TN, a suburb of Nashville.  The new store is approximately 8,700 square ft. and accommodates approximately 215 guests.
  • CBRL downgraded to hold from buy at Miller Tabak with a $120 PT.

Wednesday, November 13th

  • BBRG announced the commencement of a modified "Dutch auction" tender offer to purchase up to $50 million in value of its common shares.  This tender offer will be financed from borrowing under BBRG's new, five-year $100 million senior secured credit facility.

Thursday, November 14th

  • BJRI announced the opening of its newest restaurant in Laurel, MD, on Monday, November 10th.  The restaurant is approximately 7,300 square ft. and accommodates approximately 225 guests.
  • LOCO celebrated the opening of its newest restaurant in Roseville, CA.  This is the 17th El Pollo Loco in the Sacramento area and the third opening in the last months.  LOCO is targeting 8-10% unit growth annually in Sacramento, which it considers a key expansion market.
  • DRI announced it will terminate its shareholder rights plan, effective November 28th, as part of its corporate governance reform.  It also announced several changes including, but not limited to: termination of the "poison pill," majority voting standard for election of directors, a 10% voting threshold to call a special meeting, and elimination of supermajority vote for certain charter amendments.


Sector Performance

The XLY (+1.9%) outperformed the SPX (+0.4%) last week.  Both casual dining and quick service stocks, in aggregate, underperformed the XLY.


Monday Mashup: LOCO, BLMN and More - 3

Monday Mashup: LOCO, BLMN and More - 4


XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: LOCO, BLMN and More - 5


Casual Dining Restaurants

Monday Mashup: LOCO, BLMN and More - 6

Monday Mashup: LOCO, BLMN and More - 7


Quick Service Restaurants

Monday Mashup: LOCO, BLMN and More - 8

Monday Mashup: LOCO, BLMN and More - 9


Howard Penney

Managing Director


Fred Masotta


Japan, Oil and The UST 10YR

Client Talking Points


Weimar Nikkei drops -3% on the session as the Yen stops going down (+0.3% vs. USD to $115.90 – so just a little bit of correlation risk there!) as Bloomberg breaks that “Japan unexpectedly falls into recession” – unexpected by those who thought Abenomics was working maybe -  but this is getting panicky, faster.


WTI Oil is down another -1.2% to $74.9 despite the USD down (on Yen up), which is just nasty given that it was down -3.4% last week; BOE’s Carney called it “huge disinflationary pressures” (i.e. our #deflation call) and this should continue to weigh on illiquid energy stocks/bonds with bad balance sheets (i.e. MLP like Linn Energy w/ 5x leverage).


The UST 10YR Yield remains in crash mode (-24% year-to-date), falling back down to 2.29% this morning as it becomes less believable by the day that the U.S. will “decouple” from either growth or inflation expectations slowing, globally; long the Long Bond (TLT, EDV, etc) remains our highest conviction macro idea for 2014.

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).


The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


Yield Spread (10yr minus 2yr - good leading indicator for growth) drops back to its YTD lows = 179bps @KeithMcCullough


A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.

-John F. Kennedy


Energy Stocks (XLE) led U.S. stock market sector losers, -1.8% on the week to -2.6% year-to-date.

CHART OF THE DAY: Keep Moving (And Selling the Russell 2000) | $IWM

"While risk often moves slowly, then all at once… sometimes it doesn’t move at all," wrote CEO Keith McCullough in today's Morning Newsletter. "Last week, our least preferred of the major US stock market indices (Russell 2000) did absolutely nothing."


"Oh, and it was unchanged in the week before that too. I guess that’s what they call a 'bull market' - something that doesn’t go down! After going down hard (-15% from its all-time #bubble high in July, to its October low), the Russell is +0.9% YTD.


“So,” keep selling that (IWM) against The Perfect Idea during what we call #Quad4 Deflation = Long the Long Bond (in TLT, EDV, etc.). And de-stress yourself a little as the macro market stresses about both growth and inflation slowing."


CHART OF THE DAY: Keep Moving (And Selling the Russell 2000) | $IWM - 11.17.14 Chart

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