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LEISURE LETTER (12/03/2014)

Tickers:  IKGH, PENN, IHG, L, LQ, FCH


  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 8: Golden Nugget Lake Charles Opening
  • Dec 12: Trump Taj Mahal Closing
  • Dec 14: City of Dreams Manila Opening
  • Dec 17:  Upstate NY Casino Decision


China Conducts Immigration Sweep in Macau – through our local contacts in Macau, we understand Mainland Chinese immigration officials recently conducted an immigration sweep through Macau bars, restaurants and casinos and rounded up several thousand Chinese nationals who had overstayed their visas.  Chinese officials then returned the nationals back to mainland China

Takeaway: Combined with yesterday's news of the new Transit Visa scheme, the sweep indicates that Macau/China are serious about the cleaning up Macau before the China President's visit in a few weeks.  VIPs are likely to stay away this month which could dampen GGR even more than the 20-25% YoY decline we're forecasting.


GENS.SP – Genting Singapore today repurchased 10 million shares (43.7% of today's trading volume) for S$11.284 million, following Monday and Tuesday's similar repurchase activity of 10 million shares each day. Cumulative shares repurchased year-to-date = 97,665,000.  Following today's share repurchase, the total shares outstanding = 12,150,371,480

Article HERE


IKGH – acquiring small junket operators in Macau is one of its main opportunities to grow its business. 

Article HERE

Takeaway:  While this could be a good growth strategy for IKGH given the likely low valuations, it would be a risky one. The smaller junkets are in difficult financial positions right now. #riskreward 


PENN – Hollywood Casino in Lawrenceburg is laying off “a limited number” of employees this week in response to a weak gaming market in Cincinnati. The company has not confirmed how many employees are being let go this week but its total employment after this week's cuts is 450 less than its 1,400-person head count after a big round of layoffs in 2012.

Article HERE

Takeaway:  Not surprising given steep revenue declines and suffocating competition e.g. OH, WV, MD


L & IHG – Loews Hotels & Resorts has a new CEO, and it's Kirk Kinsell, who is currently president of the Americas for InterContinental Hotels Group. He is replacing Paul Whetsell, who was held the top job at Loews Hotels since 2012, with the charge to expand the brand's footprint, which he did mostly through acquisitions and conversions.

Takeaway:  We knew Kinsell in some of his roles at IHG. Looks like a good hire.


LQ – announced Mit Shah was appointed as Chairman of the Board. Mit Shah has served on the boards of directors of La Quinta and its predecessor entities since 2013 and is currently Chief Executive Officer and Senior Managing Principal of Noble Investment Group, which he founded in 1993 and which specializes in making opportunistic investments in the lodging and hospitality real estate sector.


Silversea–  Silversea Cruises designated 31 cruises as part of its 2015 Silver Wave program, which provides a suite upgrade and up to $1,000 in onboard credits as a booking incentive.  The offer, which expires Dec. 31, applies to both Silversea’s traditional luxury cruises and its expedition ships. It is capacity controlled and subject to availability, Silversea said.

Article HERE

Takeaway: Rare luxury promotion. 


Insider Transactions:

FCH – Tom Corcoran Jr. Chairman of FelCor Lodging Trust sold 75,000 shares in two non-option related sales of 72,100 at an average price of $10.2535/share and 2,900 at an average price of $10.2089/share on December 1 and 2, respectively.  Mr. Corcoran now directly owns 417,215 shares as well as 32,847 shares indirectly.

Takeaway: Not a lot of insider buying in hotel stocks these days


Chinese Corruption Worse in 2014 than 2013 – Despite this year's well-publicized campaign to combat graft and crack down on corrupt public officials, China was labeled more corrupt this year than it was in 2013. China posted one of the worst rises in corruption of any country in this year's "Corruption Perceptions Index" by lobbying group Transparency International. The country dropped to 100th out of 175 countries, from 80th in 2013.  

Article HERE  and HERE

Takeaway: This report will not likely sit well with the CPC officials in Beijing given the CPC's efforts to improve transparency and accountability by party officials.  


Macau Economic Recession – The gaming slump will deprive the industry of MOP60 billion (US$7.51 billion) in revenue and the government of MOP20 billion in direct gaming taxes in the 12 months ending next June and the shortfalls mean the economy will contract for four quarters in a row, thus causing a recession.

Article HERE

Takeaway: We noted yesterday Macau GDP contracted by 2.1% in Q3 2014. Given Q4 2014's sickening GGR contraction, we'd bet Q4 GDP will also be negative.  Two consecutive quarters of negative GDP is a recession.


Pachinko Arrives in Hong Kong – following the successful HKSE listing by Dynam Japan Holding (6889.HK) at least four additional pachinko-hall operators are considering similar HKSE listings.

Article HERE


Atlantic City Casino Tax Relief – Atlantic City's eight surviving casinos would get a break on taxes and the city would get help making up for lost revenue under a rescue plan unveiled by two New Jersey state senators. The plan, introduced in the Legislature late Monday and announced on Tuesday by State Senate President Steve Sweeney and Sen. James Whelan, would let the casinos collectively pay $150 million in lieu of taxes for two years. It would redirect an investment alternative tax, currently used for redevelopment projects, to help pay off $25 million to $30 million of Atlantic City's debt a year.

Article HERE

Takeaway:  This would be an important lifeline for the AC casinos and would help stem their losses. $BYD and $CZR


Group Hotel Bookings Uptick in November – According to TravelClick North American Hospitality Review, new group hotel reservations increased 10.5% during November 2014.  Additionally, for the first quarter of 2015, group hotel bookings experienced an increase in ADR of 2.6% and increase in occupancy of 4.3%. 

Article HERE

Takeaway: Strong Group lodging segment fundamentals provide a positive look through for RHP as well as HLT. 


China November PMI data

Official services PMI 53.9 vs 53.8 in October

HSBC services PMI 53.0 vs 52.9 in October

Employment 49.5, fifth consecutive month below 50

New orders rose at quickest pace in 2 1/2 years


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.



Takeaway: Below we highlight the ongoing weakness in domestic consumption data and debate a potential inflection in Chinese economic growth.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares MSCI European Monetary Union ETF (EZU)
  2. iShares MSCI France ETF (EWQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



Quick Check-In w/ the U.S. Consumer: While it’s been nothing shy of fascinating to watch the legacy financial media [positively] spin poor Black Friday and disappointing Cyber Monday results, the data was actually brutal – both from a rate of change perspective and relative to the Consensus Macro “falling gas prices” narrative. While I can spend the next 20 minutes ranting about how embarrassing such mischaracterizations are to our profession, you are probably already well versed in our disappointment with the #OldWall and its bull market marketing appendages. Sparing you from that diatribe, we thought we’d take a second to highlight recent consumer spending data, which remains unequivocally negative from a 2nd derivative perspective on both a sequential and trending basis. Friday’s Jobs Report is the next major data point; will the trend of deceleration inflect or will it continue as U.S. corporations increasingly opt for inflating shareholder returns at the expense of American job growth? As we detailed in our November 26th edition of the Macro Playbook, we still think it pays to wait on rotating into early-cycle consumer exposure.








“I Bout ‘Em Because China Told Me To”: To borrow a key excerpt from our 11/21 note titled, “CHINA: WHY DID THE PBOC CUT? WILL IT EVEN MATTER?”: “From a forward-looking perspective, this [rate cut] a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now… In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.”  Again, Chinese economic growth continues to slow precipitously and the rate cut only confirms our bearish bias on the Chinese economy (i.e. NOT its stock market). If, however, we see continued stabilization in China’s property market and a continuation of more aggressive policy support, it is likely that China joins the U.S. in #Quad1 in 1Q15, which would, in fact, support recent optimism among U.S. equity investors. The next few weeks of guidance out of Beijing are crucial in that regard. All told, if you bought ‘em on the Chinese rate cut news, we hope you allocated capital to the right sectors. In a hypothetical game of 8-on-8, #Quad4 is clearly winning the U.S. equity market; the top-8 VAMDMI readings are all sectors and style factors that tend to outperform in #Quad4, while the bottom-8 are those that tend to deflate in #Quad4.






THE HEDGEYE MACRO PLAYBOOK - China Iron Ore  Rebar and Coal YoY vs. GDP






***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Golden Headfakes (12/2)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


QE Conundrums – Draghi’s Misguided Intervention? (11/26)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

Japan, Eurozone and the U.S.

Client Talking Points


The Nikkei was +0.3% overnight, taking its centrally planned ramp to +22% since Oct 17th, and now (into the FX event in Europe tomorrow) the Yen is signaling immediate-term TRADE oversold at $119.56 (and, not surprisingly, the Nikkei is signaling immediate-term TRADE overbought). If there was a spot to play for a short-term reversal, we think this is it…


Especially when you have serial money torchers running the show, you need a catalyst to do something like cover Yen – so why not a bounce off the $1.23 EUR/USD line? How much ECB President Mario Draghi can do tomorrow vs. what a lot of shorter-term U.S. based investors think he’ll do remains the question…


The UST 10YR bounced to yet another lower-high of 2.29% into A) ECB meeting and B) U.S. jobs report Friday – if A and/or B disappoint, we can see 2.16% on the UST 10YR, fast – and that’s what we would be setting up for. Long the Long Bond in the U.S. remains our best Macro long idea in 2014 as Italian 10s break below 2.0% this morning.

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


Check out @KeithMcCullough today on Fox Business with @MariaBartiromo for the full hour at 10am. Always a great show.



If we did all the things we are capable of doing we would literally astound ourselves.

- Thomas Edison


Russian stock market crash update, down -0.3% to -33.4% year-to-date.

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Mortgage Apps | Less Bad Is Good

Takeaway: Purchase apps rose modestly during the holiday week. Bigger picture, more evidence emerges that housing is shifting from bad to less bad.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.


Mortgage Apps | Less Bad Is Good - Compendium 120314


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended November 28th. 


The -7.3% decline in the Composite Index belied more sanguine growth on the purchase side where demand rose +2.5% sequentially.


  • Purchase demand rose +2.5% WoW and the YoY rate of decline improved to -4.9% from -11% prior as the index held above the 170-level for the 3rd straight week – the longest streak at that level since June.  We don’t take a convicted view of holiday week data in isolation but the multi-week trend has been one of modest improvement.  Compares ease further into the last few weeks of the year and take a second dive into the end of 1Q15. 
  • Refi activity declined -13.4% sequentially despite the retreat in rates with the holiday/seasonals providing some measure of distortion. Rates on the 30Y FRM contract dropped -7bps to 4.08% - the lowest rate YTD and lowest since May of last year. 


In short, “stabilization” remains the apt characterization for current HPI and purchase demand trends.  Housing, like most things Macro, is more about better/worse than good/bad and while the data remains soft on an absolute basis, from a rate of change perspective, less bad is good. 


Mortgage Apps | Less Bad Is Good - Purchase 2013 v 2014 


Mortgage Apps | Less Bad Is Good - Purchase   Refi YoY  


Mortgage Apps | Less Bad Is Good - Purchase LT w Summary Stats 


Mortgage Apps | Less Bad Is Good - Purchase Qtrly 


Mortgage Apps | Less Bad Is Good - Composite LT w Summary 


Mortgage Apps | Less Bad Is Good - 30Y FRM 



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


CHART OF THE DAY: Glacial Cascades: Are You Prepared?

CHART OF THE DAY: Glacial Cascades: Are You Prepared? - 12.03.14 Chart


Editor's note: The excerpt below is from CEO Keith McCullough's introduction in today's Morning Newsletter.


If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.


But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?


I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.

Glacial Cascades

“The key to wealth preservation is to understand the complex processes and to seek shelter from the cascade.”

-James G. Rickards


If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.


But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?


I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.


Glacial Cascades - 55


Back to the Global Macro Grind


Yesterday I used the snow-pack metaphor to discuss market risk factors that have a rising probability of cascading into asset class draw-downs. The idea was inspired by my friend Jim Rickards, who wrote an awesome chapter called “Maelstrom”:


“An avalanche is an apt metaphor of financial collapse. Indeed, it is more than a metaphor, because the systems analysis of an avalanche is identical … An avalanche starts with a snowflake that perturbs other snowflakes, which, as momentum builds, tumble out of control… The dynamics are the same, as are the recursive mathematical functions used in modeling the process.”

-The Death of Money, pg 265


Unless they are just looking at “charts”, I think almost everyone who gets paid real money to pick stocks, bonds, commodities, etc. has a bottom-up process to analyze securities. In fact, some are quite impressive. But how impressed are you with the systems of analysis our profession uses, from a top-down perspective?


Going on 16 years into this, my experience has been a learning one. The more I read, the less I know. But the more I observe how consensus thinks about top-down macro risks that are developing in this dynamic ecosystem of market expectations, the more opportunity I see in learning more of what not to do, out loud.


You see, while I certainly don’t make the same “money” I used to make on the buy-side, I am making a difference in my learning experience. When you open yourself up to the critique of the crowd (daily), you’re actually forced to learn faster.


In terms of big bang losses of wealth (draw-downs), the lessons, unfortunately, tend to be more expensive for the many, and profitable for the few. That’s why I think making money at the all-time highs in asset price inflation becomes next to impossible, without protecting for the downside risks associated with an avalanche (deflation) like the one we just saw in Energy markets.


Moving along…


Never mind snowflakes, there are two big snowballs that are going to hit you square in the forehead on Thursday and Friday:


  1. Thursday: European Central Bank (ECB) decision by Draghi
  2. Friday: US Jobs Report for November


In isolation, even for people who don’t do macro (but have a macro opinion on everything!) both of these events probably matter. From an interconnectedness perspective, fully loaded with time/price for both Euros and Yens relative to where European and Japanese equity markets are right here and now, these events matter as much as any we’ve seen in months.


Here’s the system’s setup:


  1. Japanese stocks (Nikkei) are signaling immediate-term TRADE overbought with a risk range of 16,945-17,741
  2. European Stocks (EuroStoxx 600 Index) are signaling immediate-term TRADE overbought with a risk range of 337-351
  3. Both the Euro and Yen are signaling immediate-term TRADE oversold vs. USD at $1.23 and $119.56, respectively


In other words, measuring the system’s risk within a “risk range” (where being at the top and/or bottom end of the range increases the probability of a short-term reversal), the probability is as high as it’s been of seeing a big macro reversal.


There’s that word again, probability…


If you’ve never gone heli-skiing on a mountain with identifiably risky snow-pack factors, try it and you’ll get my point. I’m not saying you are going to break your leg going down a certain path – I’m saying some paths/situations have higher probabilities of that happening than others!


Whether you are skiing, or risk managing your portfolio alongside already cascading asset class paths (like high-yield Energy stocks, Silver futures, Brazilian stocks, etc.), you should always be asking yourself a lot of questions:


  1. What if Draghi doesn’t deliver the drugs?
  2. What if Japanese election sentiment forces Abe to tone down the currency burning?
  3. What if the US Jobs reports misses, and the Dollar corrects from its overbought highs?


There are obviously a lot of questions to ask yourself, all of the time – and maybe that’s why some people don’t “do macro” the way we do. It requires a ton of rinse/repeat systems analysis, yes. But, more importantly, it always puts you at the epicenter of the uncertainty of the system… and stock picking tends to “feel” more certain than that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.30%

SPX 2032-2078

Nikkei 161

EUR/USD 1.23-1.25

Yen 117.41-119.56

WTI Oil 64.55-70.36


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Glacial Cascades - 12.03.14 Chart

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