LEISURE LETTER (12/04/2014)

Tickers:  IGT, MGM, HLT, HST, CCL


  • Dec 4: Normua Investment Forum - MPEL, WYNN & Genting Singapore
  • 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 soft opening
  • Dec 17: Upstate NY Casino Decision

Today's Headline Story

Mainland China Official: Macau Too Reliant on Gambling– Li Fei, deputy secretary general of the National People’s Congress Standing Committee, on Wednesday said the Macau SAR government should address its over reliance on the gaming industry and to put more effort into economic diversification and take into account the interests of mainland China. Mr Li, who is also chairman of the Basic Law Committee, was in Macau on Wednesday to take part in a seminar on Macau’s Basic Law, which came into effect following the city’s handover from Portuguese administration in 1999. 

Article HERE

Takeaway:  We have heard similar comments from the Chinese government in the past but we expect more discussion on this particularly in the face of declining GGR.


GENS.SP – Genting Singapore today repurchased 12 million shares (35.3% of today's trading volume) for S$13.338 million. Cumulative shares repurchased year-to-date = 109,665,000.  Following today's share repurchase, the total shares outstanding = 12,123,371,480.

Article HERE

Takeaway:  Thus far, Genting has completed 8.9% of the total authorized shares.  They are authorized to purchase up to 10% of ordinary shares.


IGT & GTK.IM – The merger of the two companies could increase NewCo's EBITDA by as much as $280 million. In an IGT filing on behalf of GTech to Nasdaq in New York, management said “industrial efficiencies” could have a positive EBITDA impact of US$85 million; with “overlapping corporate activities” accounting for a US$125 million positive impact; and a further US$20 million improvement from “optimized” research and development spending. GTech added that what it called “natural revenue enhancements” from sales in Italy – GTech’s home base – plus benefits from cross selling and “mobile exploitation” could produce a further US$50 million positive impact on EBITDA.

Article HERE

Takeaway: It's good to be optimistic on revenue and cost synergies. 


MGM – MGM Resorts International asks Obama Administration to proceed with caution before granting federal recognition to Pamunkey Native American tribe of Virginia.

Article HERE

Takeaway: MGM seeking to prevent potential competition from a Native American casino at its MGM National Harbor project under development.


HLT – welcomed The Franklin Hotel Chapel Hill to its growing global brand, Curio – A Collection by Hilton. Selected for its strong connection to the community and tradition of excellence among guests, The Franklin Hotel Chapel Hill offers travelers the local discovery and authentic travel experiences at the core of the Curio brand.


HST - authorized a regular quarterly cash dividend of $0.20 per share and a special dividend of $0.06 per share on the Company's common stock.  The total dividend of $0.26 per common share is payable on January 15, 2015 to stockholders of record on December 31, 2014.

Takeaway: HST had mentioned on its 3Q call that a special dividend was possible in 4Q.

CCL – Princess Cruises is celebrating 50 years of cruising and kicking off its Wave season with the cruise line's biggest sale ever featuring savings on vacation destinations around the globe. Guests can save up to $500 per person on all cruise vacations seven days and longer, sailing between May and December 2015. In addition to these special savings, guests will enjoy free dining for two at one of the line's specialty restaurants and receive up to $200 per stateroom of free onboard credit to be spent as they wish, including on commemorative 50th anniversary keepsakes, a rejuvenating massage at the Lotus Spa, or an in-depth cultural experience on a Princess shore excursion.


Guests can also bring along friends and family and save up to 50% on third and fourth guests in a stateroom. They can additionally reserve their cruise with a reduced, refundable deposit of only $100 per person.

Takeaway:  Wave Season promotions are generally early this year.


Virgin Cruises – the Branson family- owned branded investment group, today announced the formation of Virgin Cruises, its new cruise line business, as well as the appointment of a CEO and its lead investment partner, Bain Capital.  
Proven industry leader Tom McAlpin will join Virgin Cruises as CEO and will head the management team. Most recently, Tom has been President and CEO of The World, Residences at Sea. Tom also served as President of Disney Cruise Line having joined as part of the founding management team. 
Virgin Cruises will be headquartered in the Miami/Fort Lauderdale area and plans to design and construct two new world class cruise ships.

Article HERE


Jeju - Jeju's casinos have opened offices in China to tout for gamblers there. One agent has organized 53 gambling trips to Jeju for Chinese gamblers over the last 2 years. In some instances, Chinese tourists have turned to loan sharks on the resort island, have their passports confiscated and commit suicide when their luck refuses to turn.

Article HERE

Takeaway:  The gaming world is becoming more sensitive to negative media articles. This time, it's South Korea.

Macau International Airport Traffic +9.5% in November – During November, passenger volume was recorded at over 450,000, +9.5% YoY. Aircraft movements posted over 4,600, an increase of 11.5% YoY from 4,400.

Article HERE

Takeaway: Strong airport traffic not translating into casino revenues. Some of the increased airport traffic could be MICE attendance. 


Macau Residential Real Estate Prices Drop 10% – A slump in gaming revenue, the mainland crackdown on corruption and competition from nearby Hengqin Island in Zhuhai have combined to drive home prices in Macau down 10%, and the fall is expected to extend into the new year, according to property agents. 

Article HERE


Hong Kong-Macau Organized Crime Crackdown – A joint crackdown organized by police in Guangdong Province, Hong Kong and Macau has busted 38 cross-border criminal gangs, Guangdong police said. The crackdown focused on guns, drugs, prostitution, money laundering and illegal border crossings, said Lin Weixiong, director of the criminal investigation bureau of Guangdong Pubic Security Department. Over 470 suspects have been arrested in the joint operation, Guangdong police said. More than 180 guns and one ton of drugs were found.

Article HERE

Takeaway: Mainland China cleaning up both Hong Kong and Macau.


Blackstone Group Closer to Closing The Cosmopolitan Acquisition – Yesterday the Nevada Gaming Control Board recommended that Blackstone Group be licensed to acquire the 4-year-old Strip hotel-casino. The Nevada Gaming Commission will take up the matter on Dec. 18. Blackstone representatives told the Control Board it planned to make changes at The Cosmopolitan, including adding another restaurant and renovating areas of the casino to improve revenue. The Cosmopolitan’s Strip frontage may get a new look.

Article HERE


Clark County Nevada Class A Slot Machine License Amended – Clark County commissioners on Wednesday approved regulations affecting slot machine operations in taverns. The new ordinance requires taverns to operate a full-service kitchen and embed more than half of the location’s slot machines into a bar top. If that requirement isn’t accomplished, the taverns must show that slot machine revenue is 50% or less than other revenue. If a tavern is unable to accomplish at least one of those requirements, it must reduce the number of slot machines from 15 to seven. The ordinance is effective immediately for future tavern applicants.

Article HERE


European Low Cost Airline Results Strong But Outlook Uncertain – Ryanair raised its profit forecast for the second time in a month on Thursday after passenger numbers jumped 22% in November. Ryanair said that despite increasing its seat capacity by 13% during November, as a result of opening new routes designed to appeal to business customers, it also increased its load factor by 7% to 88%.  However, the company also indicate its final full-year profit would still be heavily reliant on bookings and fare yields in the January-March quarter over which it said it "presently has very little visibility".

Article HERE


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.


BABA: Model Facing Secular Pressure

Takeaway: We expect a weaker consumer to pressure GMV growth; turning one of BABA's core growth drivers into a secular headwind.


  1. GMV DRIVES BABA’S MODEL: Marketing & Commissions represent ~80% of BABA’s revenues.  Both are driven off its GMV, which we expect to decline precipitously through F2017 as weaker consumer pressure average spending.  See link below for more detail. 
  2. MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  The bigger issue is Marketing Revenues (~60% of total), which is facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We’re already seeing this in BABA’s financials today.


Below is a quick review of BABA’s core segments and drivers.  In short, GMV drives roughly 80% of its model.

BABA: Model Facing Secular Pressure - BABA   GMV Model Impact 

  • Marketing Revenues (~56% of total): sourced from vendors on BABA’s sites advertising to BABA’s consumers, vying their GMV.  Roughly 75% of BABA’s marketing revenues come from P4P ads, which require users to click the ads for BABA to get paid.  BABA’s ad prices are determined through on online auction platform, which means its vendors set the price based on expected ROI.  In short, the same factors that drive GMV also drive its marketing revenues. 
  • Commission revenues (~23% of total): generated as a percentage of the GMV transacted on its Tmall platform specifically settled through Alipay (BABA’s equivalent to Paypal).  The commission rate ranges between 0.3% and 5.0%. 

We expect GMV to decline precipitously through F2017.  The key theme is that user growth will come from a much weaker consumer who can’t afford to spend as much.  In turn, GMV will grow at a disproportionately lower rate than user growth since average spending/GMV will be on the decline; reversing what was a considerable tailwind into a headwind.  We detailed our GMV analysis in the note below. 


BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]



model facing secular pressure

Naturally, slowing GMV bodes poorly for commissions.  The bigger issue is BABA’s Marketing revenues (~56% of total).  Our concern here is secular pricing pressure.  BABA’s new user growth will come from less-affluent consumers who must be more selective with their purchases.  Ultimately, that means that a vendor’s advertising ROI will decline as ad conversions (transactions) are inhibited by the average user’s waning ability to spend on its platform (as measured by average GMV). 


In essence, the value of advertising on BABA’s platforms is directly linked to its average GMV, which we expect to decline through F2017, pressuring ad rates along the way.  We already saw signs of this in its F1Q15 quarter ending 6/30/14 (comparable data isn't available for its most recent quarter).  BABA attributed the F1Q15 decline in cost-per-click to a higher proportion of mobile marketing services, "for which our vendors currently pay a lower cost-per-click"  


 BABA: Model Facing Secular Pressure - BABA   P4P pressure 2



BABA’s ad prices are determined through on online auction platform, which means its vendors set the price. We suspect the reason why mobile rates are lower is because mobile is the low-cost vehicle for internet access in China.  Put another way, mobile is how China’s less affluent access the internet.  BABA’s reported metrics suggest as much, given that its mobile users spend less on average (mobile represents the majority of its shoppers, yet the minority of its GMV).


BABA: Model Facing Secular Pressure - BABA   Mobile vs Total


Mobile will likely remain the primary source of both new internet users and new BABA shoppers moving forward.  New user growth will come a progressively weaker consumer moving forward; meaning the pricing pressure that BABA is already seeing in its marketing business is actually as secular headwind.




See the link below for a broader summary of our thesis.  Let us know if you have any question or would like to discuss in more detail.  


BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

[click here] 


Hesham Shaaban, CFA




Takeaway: In today's Macro Playbook, we show how central bank-induced asset price inflation is a MAJOR headwind to the active management industry.


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



So Easy An ETF Can Do It: Since the end of October, one of the topics we’ve been hitting on fairly consistently is the slow-but-steady share shift away from active management in favor of passive management. From our perspective, this trend is primarily a function of incessant central bank intervention in markets, which tends to depress both the variance and volatility needed for active managers to outperform their benchmarks and justify their fees (click HERE and HERE for more details). Well, unfortunately for everyone involved (including us), recent data is supportive of this trend.




Per Jonathan Casteleyn of our financials team this AM: “In the most recent 5 day period, mutual fund activity was subdued with investors continuing to prefer exchange traded funds. All ETFs took in over +$12.7 billion (both fixed income and equity) versus the total take for all mutual fund products at  just +$1.5 billion. Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds (with $122 billion netted by equity ETFs versus just $47 billion inserted into equity mutual funds).” To the extent you’d like to review his weekly deep dives on fund flows and their associated investment implications, please reply to this email and we’ll get you squared away with that...




Moving along, recent performance data also supports a continuation of the aforementioned trend. On the equity mutual fund side, only 9.3% of active managers are beating their benchmarks per Wharton Research Data Services; the previous annual low was 12.9% in 1995. On the equity hedge fund side, the YTD performance of the HFRX Equity Hedge Index is a mere +197bps, which remains on pace for the third-worst annual return ever (2008 and 2011). Again, the value proposition for active managers is being dramatically reduced amid central bank-induced asset price inflation, calling into question the perverse nature of investors broadly cheering on #GrowthSlowing data.


THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return




***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.

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Euro, Yen and Oil

Client Talking Points


The risk range for the Euro is 1.23 to 1.25. The market is pricing in a potent dose of ECB President Mario Draghi drugs, but what if he doesn’t deliver? European (EuroStoxx 600) equities are overbought. France's unemployment rate accelerates to 10.4% - in case you didn’t know Draghi's drugs aren’t doing anything for the real economy.


The risk range for the Yen is 117.03 to 119.99, we signaled a buy for FXY (Yen) in Real-time Alerts yesterday. In the immediate term Japanese (Nikkei) equities are overbought and the Yen is oversold, the market is pricing in an ultra-smooth election bid for Abe.


If the Euro and the Yen bounce you could easily see the price of oil bounce. Watch for the counter-trend move here USD Down = Yen (and/or Euro) UP = Nikkei Down = Oil Up = High Short International Energy Stocks Up. The risk range for WTI Oil is 63.76 to 71.72.

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


Seems like Western Canadian oil sands and LNG projects are the first ones feeling the heat with lower prices. COS cuts its div. nearly 50%



Winners make commitments, losers make promises.



Purchase demand rose +2.5% week-over-week and the year-over-year 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.

December 4, 2014

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CHART OF THE DAY: U.S. Housing ... Less Bad?

CHART OF THE DAY: U.S. Housing ... Less Bad? - Compendium 120314


Editor's note: The excerpt below is from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.


Housing, like most things Macro, is more about better/worse than good/bad.  From a rate of change perspective – how we measure/contextualize data – less good is bad, less bad is good, and the successful front-running of second derivative inflections remains the sangre vital of macro alpha generation.


As it relates to housing, while the macro environment remains a discrete risk, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015. 


In other words, the downside asymmetry that existed at the beginning of the year has largely collapsed and, from a rate of change perspective, demand and price trends are showing a nascent inflection that looks likely to continue as comps ease progressively into 2H15.   


We’ll be hosting a conference call on December 11th updating our outlook for housing in 2015.  Institutional subscribers can ping for call details/access.

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