LEISURE LETTER (11/19/2014)



  • Nov 19: Sega Sammy Investor Meeting
  • Nov 23: Pacquiao-Algieri bout at Venetian Cotai Arena


BYD – The first renovation is now complete -- the Suncoast opened The Game, a sports bar and grill near the property’s race and sports book that replaced a TGI Friday's.  The Game is being positioned as a new concept with more than two dozen craft beers from local brewers and a menu that includes spicy barbecue chicken wings, build-your-own hamburgers, fish tacos and flatbread artisan pizzas.

Article HERE

Takeaway:  BYD following through on Q3 conference call assertions to revamp restaurant offerings. Probably an improvement but a sports bar at a casino is pretty much par for the course at locals casinos these days. 


Station Casinos – disclosed the pending sale of 101 acres of land in the southeast quadrant of the Mount Rose Highway-South Virginia Street junction in Reno Nevada to an undiscloser buyer for approximately $2.0 million and recognized an impairment loss of $11.7 million to write down the carrying amount of the land to its fair value less cost to sell. 

Article HERE


CZR – Philippine Amusement and Gaming Corp received a concept proposal for a casino resort from Caesars Entertainment Corp, but the country’s gaming regulator says it will wait for a “substantial completion” of Entertainment City before deciding on new licenses.

Article HERE

Takeaway:  According to sources, CZR says a Philippines project is still viable despite upcoming bankruptcy proceedings.


BEE – announced the Company signed an agreement to acquire the 210-room Four Seasons Resort Scottsdale at Troon North from an affiliate of Walton Street Capital, L.L.C. for $140.0million, which includes 13.8-acres of developable land zoned for an additional 88 hotels keys and potential incremental residential usage. Management has valued the land parcels at $6.0 million. The acquisition, which is expected to close during the fourth quarter of 2014, remains subject to customary due diligence, closing conditions and working capital adjustments. The Company forecasts the property will contribute approximately $10.0 million of EBITDA and $8.0 million of NOI in 2015. The purchase price, net of the allocated land value, represents a 13.4 times multiple on forecasted 2015 EBITDA and a 6% cap rate on forecasted 2015 NOI.

Takeaway: We would like to know what is the property's LTM EBITDA as compared to management's expectations for 2015 EBITDA -- regardless, it is a full price on "forward" EBITDA multiple. Interesting to us is the implied $628,570 price per key versus the $90,900 per key for the developable land.


CLDT – announced it completed the previously announced acquisition of a 52-hotel, 6,976-room portfolio from Inland American. The combined total purchase price was approximately $1.1 billion, before deal costs and funding of escrows.


HOT – announced the sale of the 229-room Sheraton Ambassador Monterrey hotel to FibraHotel. Specific transaction details were not disclosed. The hotel will be operated by Starwood through a long-term management agreement.

Takeaway: We don't expect any material net proceeds from this asset sale as the press release noted Fibra's total investment including capex would be $12.5 million over two years.


MTN – Specialty Sports Venture, the retail division of Vail Resorts Inc., is searching for sites in several suburbs with plans to open three or four more Hoigaard's stores.

Article HERE

Takeaway: Not large enough to move the revenue nor earnings lines at Vail Resorts.


MSC Cruises Agents are struggling to sell MSC Divina in the Caribbean despite incentives given by MSC. MSC’s decision last week to offer 18% commission on groups for the Divina’s 2015-16 season in the Caribbean. No other cruise line pays such a high commission.

Takeaway:  Higher commissions are not enough to sell a bad product.

Insider Transaction:

BEE – EVP, General Counsel & Corporate Secretary Paula Maggio sold 17,493 share of stock (non-options related) at $13.0245 on November 18 (immediately following the acquisition announcement) and now owns 219,087 shares.

Takeaway: As we noted late week, despite C-Level executives telling us BEE's stock was undervalued during meetings at NAREIT, insiders continue to sell, and sold prior to this acquisition announcement.


Macau Visitor Expenditure Survey for 3Q 2014  – total spending (excluding gaming expenses) of visitors in 3Q 2014 reached MOP15.5 billion, up by 5% YoY. Visitors from Mainland China spent an average of MOP2,220, or -4% YoY, and spending of those travelling under the Individual Visit Scheme (IVS) was MOP2,758.

Article HERE

Takeaway: The wealthy Chinese are not only gambling less, but their non-gaming spend is also lower.

Border crossing between Macau and Hengqin Island should start operating on a 24-hour basis and the move will be announced at the commemorations of the 15th anniversary of the Macau Special Administrative Region, according to Chinese media.  The Chinese-language newspaper “Ou Mun Iat Pou” (Macau Daily News) reported that the building works at that checkpoint are progressing apace “in order to be completed before that date.” 

Chinese media in Macau reports that China’s government is expected to announce the opening of the “Lotus Flower” border crossing in time for the celebrations of the 15th anniversary of the establishment of the MSAR, which is marked on 20 December.

Article HERE

Takeaway: Rumors of the 24-hr crossing opening has been well communicated. It looks like it will open on December 20 - also the day of the Chinese Premier visit


Border record – Macau border registers new record of 515,000 people in one day. The feat was achieved on November 15, 2014 (1st day of Grand Prix).

Article HERE

Takeaway: Visitation seems to be doing ok but how many of them are gambling significantly?


Macau's 2015 Municipal Budget & Gaming Taxes – Secretary for the Economy and Finance Francis Tam Pak Yuen expects revenue from direct taxes on gaming to be MOP115.5 billion (US$14.46 billion) next year, about the same as this year and enough to cover the government’s spending plans. Mr Tam told the Legislative Assembly that the absence of growth in revenue from direct taxes on gaming would reduce only the budget surplus, not government spending.

Article HERE


Macau Wages Rising – Small and medium enterprises intend to increase the pay of their employees by 5% to 6% next year, according to Macau Small and Medium Enterprises Association vice-president Daniel

Article HERE

Takeaway: SME's raising employee wages commensurate with inflation (the average annual rate of consumer price inflation in the 12 months ended September was 6.03%) but below the gaming sector wage increase.


Japan's Integrated Resort Legislation Delayed Again – The bill to legalize casinos in Japan will face new delays and might even be scrapped as PM Abe called a general election for mid-December, says Kazuaki Sasaki, assistant professor at the Nihon University College of Economics and director of IR (Integrated Resorts) Gaming Academy in Japan.


“This could be a setback for the casino legislation in Japan. While it definitely means new delays, it may even be that the IR bill could be scrapped. In the best case scenario, the Diet [Japanese parliament] may revisit this bill around this time [November] next year,” Sasaki added.  

Article HERE

Takeaway: Very little hope for Japan as recession and more pressing issues than gaming take precedence. 


Philadelphia Second Casino License Awarded – The Pennsylvania Gaming Control Board awarded a license to a joint venture of Cordish Companies and Greenwood Gaming and Entertainment. The casino will be the fourth in the Philadelphia area and the 13th in the state, and will be named "Live! Hotel & Casino Philadelphia".  The property will feature 2,000-slot and 125-table casino as well as a 250-room hotel. 

Takeaway: More competition for Atlantic City  


Golden Nugget Lake Charles to open – The Golden Nugget Lake Charles announced it is taking hotel reservations beginning on Monday December 8 with a promotional rate as low as $139/night.

Article HERE or HERE

Takeaway: While we are able to book a room via the web-site (found in the above link), the company's toll-free reservation number 844-777-GOLD was inoperable. Watch for the cannibalization impact to PNK's L'Auberge Lake Charles. 


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.

TGT – Quick Take – It’s All About 2015

Takeaway: The real issue seems to be whether or not TGT will need to guide down for 2015 in another 1-2 quarters. We think more likely than not.

The accountability pants are fitting pretty snug for us on TGT today. We’ve been on the wrong side of a 15% spike over the past month, which is a lot for a low beta name like Target. Any time an event goes against us like this, we always step back and re-evaluate our positioning. But the way we look at it, the thesis here still holds. Consider the following…


This is one of the most expensive names in retail relative to its underlying growth. We’re looking at 20x ’15 earnings and 9x EBITDA. If you assume that Canada losses go away entirely, and that TGT gets a billion in cash for the leases, it is still trading at 16.5x EPS and 8x EBITDA. While valuation is hardly a catalyst, barring an acceleration in the US Consumer or a rebound in the Canadian business, we can’t see TGT pushing all-time highs and peak valuations when we’re in year 6 of a retail margin expansion cycle.


Let’s consider the dramatic change in expectations. Back in August when TGT was trading at $60, the company lowered full year guidance by $0.50 to about $3.20 for the year (midpoint). Since then, the stock has gone up by $10 (outperforming the market by 14%), the company is de-leveraging lackluster sales growth into a year/year earnings decline. Could TGT come in a nickel ahead of sandbagged guidance in 4Q? Sure. But it will still be earning $0.40 (11%) less than when the stock was $10 lower.  


People like the big guide-down the company offered up three months ago as it serves as a cushion heading into the holiday for TGT to be more aggressive in discounting, offering free shipping, and ultimately taking share – even if it’s earnings dilutive. In fact, this quarter, sales were up +2.7% and yet EBIT was -3.4%, despite an improvement yy from Canada.


We think next year is key. The Street is at $3.80. TGT hasn’t given any guidance there yet. If we assume Canada gets 25% better next year (i.e. it gets back about $0.20 in earnings that it cost this year), then it suggests that the Street is looking at 12% earnings growth in the core business. With no square footage growth, a prescedent for buying comp, virtually no reason to think that gross margins will improve, and Brian Cornell likely to invest more SG&A to accelerate share gain in the outer years, we simply can’t get close to the Street’s numbers.  It seems to us that Canada has returned to being the key variable in the earnings


TGT – Quick Take – It’s All About 2015 - 3q 14 earnings

TGT – Quick Take – It’s All About 2015 - tgt sigma

A Growing Sell List

Client Talking Points


Price/volume/volatility – that’s our quantitative signal, and we’re sticking to it. Total U.S. Equity Market Volume was -5% and -26% vs. its 1 month and year-to-date averages yesterday – that provided the immediate-term TRADE Overbought signal for the SPY as trending volatility continues to signal bullish (not bearish like it was all of 2013).


Bank of Japan Governor Haruhiko Kuroda “reiterated his upbeat assessment of the economy” overnight – seriously… with household spending -6% year-over-year and the economy in recession. Apparently fin media can parrot central planners from Russia to Japan lying to the world on economic matters. The Yen is burnt right through $116.94 support vs. USD to $117.57.


Down Yen, Up Dollar, Down Oil – and a big % of the high yield energy market continues to see spread risk widen inasmuch as oily (and levered) illiquid upstream MLP stocks do; Oil testing a breakdown of $74 this morning – that’s big time #deflation, down -31% since June.

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


TREASURIES: old faithful Long Bond continues to perform as Global Growth Slows, 10yr 2.32% $TLT @KeithMcCullough


We learn more by looking for the answer to a question and not finding it than we do from learning the answer itself.

-Lloyd Alexander


The National Weather Service said Tuesday afternoon that some parts of Western New York could get nearly 6 feet of snow by Thursday from a lake effect snow storm.

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CHART OF THE DAY: Sell the S&P 500 | $SPY

"It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD)," wrote CEO Keith McCullough in today's Morning Newsletter. "So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be."


CHART OF THE DAY: Sell the S&P 500 | $SPY - SPX Levels refreshed normal

Cut To Pieces

“Believe on this day that I will have been cut to pieces, and you not much later than I…”



That’s a quote from the latest leadership, strategy, and #history book I have started to read. It’s one of the Greek classics that I’ve been wanting to study for a long time – Xenophon, The Anabasis of Cyrus.


It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD). So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be.


The SPY is the most widely shorted equity security in US history. In all of her manifestations you’ll find hedge fund victories and defeats. While I’ve been on the “short the Russell” road for most of this year, now I’m here, saying sell it. That is #timestamped.

Cut To Pieces - Crazy bull cartoon 08.19.2014


Back to the Global Macro Grind


I’ll get to the fundamental research view in a minute (both growth and inflation slowing, at the same time), but first I will draw my price, volume, and volatility sword on this matter:


  1. PRICE – SP500 signaled immediate-term TRADE overbought yesterday with no support to 2002
  2. VOLUME – Total US Equity Market Volume was -5% and -26% vs its 1-month and YTD averages yesterday
  3. VOLATILITY – front-month VIX closed at 13.86, well above my bullish TREND line of 11.34 support


In other words, even if I was a raging bull on US growth equity fundamentals (like I was in 2009 and 2013), I’d still have signaled sell into yesterday’s no-volume-short-covering-capitulation-overbought highs.


Back to the fundamentals – here are the Top 3 things confirming our bearish view on US domestic GROWTH:


  1. US GDP growth 2.3% (we model it year-over-year, not sequentially) continues to slow from Q413’s peak
  2. US 10yr Bond Yield = 2.32%, continues to crash (-23% YTD) alongside growth expectations
  3. Russell 2000 = 1170, still -3.1% from its all-time #bubble high (July 7th) and signaling bearish TREND


And here are the Top 3 things confirming our bearish view of INFLATION expectations:


  1. Oil continues to crash this morning, -31% since June
  2. CRB Commodities Index (19 commodities) down another -0.6% to 266 is -5% YTD now and making lower-lows
  3. Both TIPS (5Y Breakeven Rate) and Fed 5Y-5Y Forward Breakeven Rates are breaking down to fresh YTD lows


Then there’s sentiment (which I could give you a hocus pocus “survey” on) or use the only one that back-tests as a legitimate contrarian indicator in my 15 years of notebooks (the II Bull/Bear Spread):


  1. Bull’s ramped to 56.4% (from 55.5%) this morning
  2. Bear’s remain at 14.9% (just off their all-time lows)
  3. Bulls minus Bears = Bull/Bear Spread of +4160 basis pts, to the bullish side!


To put that Bull/Bear Spread in context:


A)     That’s +103% from where it was when perma equity bulls were in the fetal position on October 13th

B)      That’s just inside of the all-time wide to the bullish side


#Agreed. All-time is a long time. And that’s precisely why I’m willing to be cut to pieces by anyone who wants to put their own money (not other people’s) on the naked long side of SPY, from here until I say stop.


I’d be happy to publish your bull case to all readers of the Early Look. Remember though, your cost basis is going to be yesterday’s SPX close of 2051. This is the arena of accountability. My timing may prove to be fatal, but there’s no place I’d rather be.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.28-2.35%
SPX 2002-2055

RUT 1151-1187

Yen 115.72-117.61

WTI Oil 73.34-76.62

Gold 1130-1205


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cut To Pieces - SPX Levels refreshed normal


TODAY’S S&P 500 SET-UP – November 19, 2014

As we look at today's setup for the S&P 500, the range is 53 points or 2.43% downside to 2002 and 0.16% upside to 2055.                                 













  • YIELD CURVE: 1.82 from 1.81
  • VIX closed at 13.86 1 day percent change of -0.93%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 14 (prior -0.9%)
  • 8:30am: Housing Starts, Oct., est. 1.025m (prior 1.017m)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC minutes released



    • 10am: Senate Banking Cmte hears from FHFA Director Mel Watt on balancing stability, growth, affordability in mortgage mkt
    • 10am: SEC open meeting on adopting Regulation SCI standards that would require exchanges to improve technology systems
    • 10am: Senate Homeland Security Cmte hears from CDC Director Tom Frieden on Ebola response
    • 10am: House Energy and Commerce Cmte hearing on development of medical products in wake of Ebola
    • 1pm: CFTC media briefing to unveil national consumer protection campaign
    • 5pm: Permanent Subcmte on Investigations releases information in advance of hearing on Wall St bank involvement with physical commodities               



  • Obama Said to Include Tech Visa Expansion in Immigration Plan
  • FOMC Minutes Guide: From Job Mkt Gains to ‘Considerable Time’
  • Ackman Said to See Need for Significant Cost Cuts at Zoetis
  • Paramount Raises $2.3b in Record IPO for U.S. REIT
  • KKR, CD&R Said Preparing PetSmart Bid of >$7.5b: Reuters
  • Wells Fargo, U.S. Said No Longer Hopeful About Mortgage Pact
  • Wells Fargo to Start Europe Infrastructure Fund: Reuters
  • Buffett Creates Company to Buy Homes in Spain: El Economista
  • FTC May Need Dollar General to Divest Over 4k Stores: NYP
  • New Takata Air-Bag Case Prompts U.S. Demand for Natl. Recall
  • Ford, GM Demand Seen Buoying Takata Amid Congress Probe
  • Apple Sticking With Arizona Jobs Plan After GT Advanced Falters
  • Amazon Warehouse Worker Forces Changes as Labor Board Settles
  • Darden Executives to Retire Amid Cost Savings and Job Cuts
  • Music Mogul Azoff Demands YouTube Drop Pharrell, Eagles Songs
  • Hilton Said to Seek A$400m From Sale of Sydney Hotel
  • Netflix to Expand in Australia, New Zealand From March 2015
  • Senate Rejection of Keystone XL Measure Sets Up 2015 Showdown
  • United, Orbitz Sue Travel Site Over ‘Hidden City’ Ticketing
  • CBS Says Dish May Black Out Network at Contract End Nov. 20
  • WhatsApp Encrypts User Messages, Following Google, Apple
  • Putin Said to Back War on Corruption as Sanctions Bite
  • India Quarantines Man Cured of Ebola as Semen Contains Virus



    • E-House China (EJ) 6:25am, $0.17
    • JM Smucker (SJM) 7am, $1.53
    • Lowe’s (LOW) 6am, $0.58 - Preview
    • Mallinckrodt (MNK) 7am, $1.41 - Preview
    • Metro (MRU CN) 7am, C$1.27
    • Stage Stores (SSI) 6am, ($0.21)
    • Staples (SPLS) 6am, $0.36 - Preview
    • Target (TGT) 8am, $0.47 - Preview



    • Copa (CPA) 4:43pm, $2.00
    • Hillenbrand (HI) 4:24pm, $0.61
    • Keurig Green Mountain (GMCR) 4pm, $0.77
    • L Brands (LB) 4:30pm, $0.40
    • Real Goods Solar (RGSE) 4:04pm, ($0.13)
    • (CRM) 4:05pm, $0.13
    • Semtech (SMTC) 4:30pm, $0.44
    • Williams-Sonoma (WSM) 4:10pm, $0.63



  • Brent Oil Rises Most in Three Days on Car Bomb in Kurdish City
  • Iron Ore’s Rout Seen Relentless by SocGen as Miners’ Stocks Drop
  • Brace for Thanksgiving Traffic as Car-to-Plane Gap Grows: Energy
  • Gold Trades Below 2-Week High as Dollar Gains Before Fed Minutes
  • Nickel Advances as Indonesia Adheres to Ban on Exports of Ore
  • Cocoa Seen Extending Drop on Signs of Ebbing Chocolate Demand
  • Copper Prices Seen Rising as Mining Costs Increase: Codelco CEO
  • Europe-U.S. Oil-Product Cargo Flow Rises 67% in Broker Survey
  • Arabica Coffee Futures Rise for Second Day; Cocoa Also Gains
  • ICAP in Talks to Combine Shipbroking Unit With Howe Robinson
  • EUROPE OIL PRODUCTS: Gasoline Crack at 7-Week High; Gasoil Gains
  • Six Feet of Snow Buries Upstate New York a Month Before Winter
  • Senate Rejection of Keystone XL Measure Sets Up 2015 Showdown
  • Corn Drops to One-Week Low as U.S. Farmers Harvest Record Crop


























The Hedgeye Macro Team



















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