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LEISURE LETTER (12/10/2014)



  • Dec 14: City of Dreams Manila Soft Opening
  • Dec 17:  Upstate NY Casino Decision
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

Hong Kong Authorities Investigate Macau Gaming Boss– The Hong Kong police named Cheung Chi Tai and seven of his privately held companies as respondents to an order to have their assets frozen, according to a notice published Nov. 30. People familiar with the investigation said the order was related to a continuing probe into possible money laundering by Mr. Cheung, who, according to court testimony and people familiar with the matter, has historically been one of the biggest shareholders in one of Macau’s largest junkets, Neptune Guangdong Group. The fact that someone as senior in the junket industry as Mr. Cheung is now the focus of a money-laundering investigation represents another serious blow to a business that has already been crippled by China’s corruption crackdown and a liquidity squeeze, said gambling industry executives.

Article HERE

Takeaway: The hits keep coming for Macau and the junkets are potentially a big target



  • Effective 9-Dec-14, its subsidiary Northstar Lottery Group, LLC (Northstar) entered into an agreement with the Illinois Department of Lottery (the Lottery) to terminate the private management agreement (PMA) for convenience. The PMA went into effect on 18-Jan-11, and is now expected to terminate in approximately 12 months. 
  • As a result of the settlement, Northstar will record an additional charge in Q4 of 2014 that it preliminarily estimates to be $20 million.  
  • GTECH will retain its separate facilities management agreement through June 30, 2021.
  • More details: HERE

Takeaway:  Messy resolution of a long-standing dispute.  The termination was first discussed in mid-August. 


MPEL & MCP.PM – Melco Crown (Philippines) Resorts Corp said it received authorization from the Philippine Amusement and Gaming Corp (Pagcor) to start casino operations at City of Dreams Manila on December 14 2014, with a grand opening of the integrated resort planned before Chinese New Year in 2015. City of Dreams Manila will have six hotel towers from three hotel brands, including Crown Towers, Nobu and Hyatt Hotels and Resorts. It will offer about 380 gaming tables, 1,700 slot machines and 1,700 electronic table games upon opening.
Article HERE

Takeaway:  15 more tables than previously forecasted.


MPEL– Junket operator, Sorte Estrela Entertainment Ltd has opened a VIP gaming room in the Altira Macau casino. An executive director of the junket operator, Fabians Fong, said: “I hope this is the first of three casino VIP rooms the company is going to open within two years.”

Article HERE

Takeaway:  Altira is trying to rebuild its VIP business. 


GENS – Genting Singapore today repurchased 5.9 million shares (39% of today's trading volume) for S$6.55 million. Cumulative shares repurchased year-to-date = 149,483,000 or 1.2% of the outstanding shares.  Following today's share repurchase, the total shares outstanding = 12,098,653,298.  The maximum number of shares authorized for purchase are 1,223,813,684.

Article HERE


U.S. Federal District Court Awards Illinois Casino Damages – A jury awarded four suburban casinos more than $80 million in a federal lawsuit that dates back to disgraced former Gov. Rod Blagojevich's time in office. The jury in federal district court in Chicago on Monday awarded $26.3 million in damages, which then were tripled because the case fell under the civil racketeering statute. Under the order, the Grand Victoria Casino in Elgin was awarded about $27 million in total damages and the Hollywood Casino in Aurora was awarded about $18.4 million. The two Joliet casinos were awarded the rest, according to court documents. However, attorneys are due in court again Thursday and could object to the decision this week. 

Article HERE

Takeaway: If the ruling stands, this is a good win for both PENN and MGM's JV.


United Nations Convention Against Corruption – The fight against corruption is a global concern requiring the broadest possible response to " dismantle its high walls," UN Secretary-General Ban Ki-moon said Tuesday in a message marking the International Anti-Corruption Day. "To dismantle corruption's high walls, I urge every nation to ratify and implement the UN Convention against Corruption," said the secretary-general, underscoring that while the treaty's ground breaking measures in the areas of prevention, criminalization, international cooperation and asset recovery have made important inroads, "there is much more to do."

Article HERE

Takeaway: Anti-corruption gaining center stage attention on a global basis, not just across China.


CPC Officials Prosecuted for Gambling – China's discipline watchdog issued a circular to report six gambling cases involving Communist Party of China (CPC) officials. The officials were found gambling in majiang and card games. They have all received punishment, with some removed from posts, the circular from the CPC Central Commission for Discipline Inspection said. The six cases were exposed in Chongqing and Tianjin municipality, Jiangxi, Hubei and Jiangsu provinces, and Ningxia Hui Autonomous Region. CPC discipline forbids officials from gambling and those against discipline should be punished severely, the circular said.

Article HERE

Takeaway: CPC prosecuting ANY form of gambling, including majiang, not just casino gambling. 


Philippine Gaming Expansion – Cristino Naguiat, chairman state-run Philippine Amusement and Gaming Corp (Pagcor), said it would be unlikely for the regulator to issue new licences until country President Benigno Aquino steps down in mid-2016. Mr Naguiat’s comments came as the Philippine government is assessing a concept proposal for a casino resort from Caesars.

Article HERE


Illegal WorldCup Gambers at Caesars Plead Guilty – Five people accused of operating an illegal World Cup gambling business out of luxury villas at Caesars Palace in Las Vegas have agreed to a plea deal, leaving the alleged ringleader, high-stakes poker player Wei Seng “Paul” Phua, and his son as the sole defendants in the case. Hui Tang, the general manager of a soccer club in Shenzhen, China admits that he and the others operated an illegal sports gambling business, according to the filings. He has agreed to pay a $250,000 fine as well as $250,000 in forfeiture. The three people who entered guilty pleas today were Yan Zhang, Yung Keung Fan and Herman Chung Sang Yeung, all of Hong Kong. They were sentenced to five years’ probation during which they aren’t allowed to enter the U.S., a $100,000 fine and $125,000 forfeiture each.

Article HERE


Caribbean vs. Europe Cruise Destinations – A smaller percentage of cruisers have booked Caribbean sailings for 2015, according to a forecast by Cruise Holidays International. The survey shows 50.5% of cruise bookings for next year have the Caribbean as their destination, down from 54.8% in 2014. Europe is gaining, with 12% of ocean cruises booked there next year, up from 10.4%. European river cruises account for 6.7% of bookings, up from 5.7% last year

Article HERE

Takeaway:  Europe is clearly the focus for 2015 and that's risky - higher supply growth and a suspect macro environment


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 (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN

Takeaway: Who really shops at KSS at 4am? AMZN testing EBAY-ish price model. w/o MJ, ANF brands/distribution can be re-positioned, takes #time.


Retail Callouts (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN - 12 10 chart2





AMZN, EBAY - Growth Gap Narrows, AMZN Trials New Pricing Model


Takeaway: After a noticeable divergence between AMZN and EBAY comps from ChannelAdvisor throughout the year, we saw the gap close some in November, particularly on a 2year basis.  Interestingly, this week Amazon announced a new "Make an Offer" feature where shoppers can offer a price below listed selling prices and proceed to barter with sellers.  It is being trialed in the collectibles and fine art categories, and though different than an EBAY auction, it is a clearly a competing marketplace.

Retail Callouts (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN - 12 10 chart1


KSS - Kohl’s to keep stores open Dec. 19-24



"Kohl’s Department Stores will keep its doors open for more than 100 hours straight from 6 a.m. on Friday, Dec. 19 through 6 p.m. on Christmas Eve, Wednesday, Dec. 24."


Takeaway:  Kohl's did this same marathon session last year, staying open from 6am Friday Dec. 20 to 6pm Dec. 24.  This year they are adding an extra day likely just due to the calendar shift.  We think that this is more of a cost event than it is a revenue event. The fact is that KSS needs to pay employees 2-3x hourly wages to work in the middle of the night, and we don't think that the market for buying $20 sweaters at 4am is particularly large. If KSS were confident in its merchandising and growth plan for this holiday, staying open all night wouldn't be part of the equation.


ANF - CEO Mike Jeffries retiring, effective immediately



Takeaway: This was probably the most anticipated CEO departure in all of retail. While it's great that the Board is now much higher quality and ANF can be run like a real company, the reality is that investors are still left with Abercrombie and Hollister -- brands that simply don't have the cache that they used to, or need to. There will likely be a time to load up on this name. But it will be when the brands, product, and distribution are re-positioned. That takes #time.



COST - 1Q15 Earnings

Retail Callouts (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN - 12 10 cahrt3


VRA - 3Q15 Earnings

Retail Callouts (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN - 12 10 chart4


FRAN - 3Q14 Earnings

Retail Callouts (12/10): KSS, AMZN, EBAY, LULU, ANF, COST, VRA, FRAN - 12 10 chart5





LULU - Lululemon's Innovative New Store Design



ANF - "Mr. Jeffries’s departure doesn’t open up the possibility of a sale of the company."



AMZN - Amazon-owned Twitch buys eSports agency GoodGame



AMZN - Workers at Amazon Warehouses Won't Get Paid for Waiting in Security Lines



Keith's Macro Notebook 12/10: Asia | FTSE | Sentiment


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

Contributor Call: Get Long $CTO Says Harvard Financial Analysts Club "Stock Pitch" Winners

Hedgeye CEO Keith McCullough talks with two members of the Harvard Financial Analysts Club (HFAC) who had the winning idea in a Stock Pitch Contest co-hosted by Harvard University and Seeking Alpha. Kevin Li and David Reading walk through their long thesis on Consolidated-Tomoka Land Co. (CTO) and field questions from Keith.

Contributor Call is a video partnership between Hedgeye and Seeking Alpha.

Subscribe to Hedgeye TV on YouTube for more exclusive video content.

This is the opinion of Kevin Li, David Reading, Carlos Xu and Elaine Dai (HFAC team) and does not necessarily reflect the opinion of Hedgeye Risk Management. Investors should always form their own opinions as to the credibility of any company's forward financial guidance. The contributors make no representation or warranties that their forward-looking statements or opinions on forward earnings is correct, and their view should not be deemed more reliable than CTO's own guidance.


Takeaway: We highlight the ongoing deterioration in global growth and how that is perpetuating a continued rally in [safe] USD-denominated assets.


Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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



Global #GrowthSlowing Continues: As you are probably well aware, we’re not huge proponents of survey data; often times surveys can be incongruent with actually recorded rate-of-change data for key economic indicators like real GDP. That said, there is some merit to following monthly PMI data – to the critical extent it is done so appropriately.


What we mean by “appropriately” is accounting for variations (read: “noise”) in the monthly PMI readings. A simple 3MMA to transform the data into a smoothed trend dramatically tightens the correlation between both ISM Manufacturing PMI and ISM Non-Manufacturing PMI and the YoY growth rate of real GDP.


Specifically, when smoothed, the change in ISM Manufacturing PMI can be said to explain 60% of the delta in real GDP growth vs. only 37% on a raw basis (trailing 15Y). Those figures are 83% and 70%, respectively, for ISM Non-Manufacturing PMI.



Source: Bloomberg L.P.



Source: Bloomberg L.P.


You’ll note the dramatically tighter correlation for the non-manufacturing data. This is simply because the services sector is a much, much larger component of GDP in most mature economies. In fact, given manufacturing’s relatively miniscule share of U.S. GDP (~10-12%) we remain perplexed as to why the ISM Manufacturing PMI data is so widely followed and anchored upon as a barometer of U.S. economic health. It’s impact as an indicator is hideously overstated relative to the strength of its signal. But I digress…


Amalgamating the two readings on a smoothed, economy-weighted basis is ultimately the most appropriate way to extract a meaningful signal from PMI survey data.


As you can see in the chart below, this measure is over three times more statistically significant in determining the marginal rate of change in real GDP. The r² of 0.83 compares to an r² of 0.37 for the raw Manufacturing PMI data – which is ironically the one the Consensus Macro community anchors on the most!



Source: Bloomberg L.P.


In the charts below, we show economy-weighted Markit PMI data for the world and its eight largest economies, opting for the Markit PMI series over the ISM series because it is:


  1. Comparable across economies (same survey format for every country);
  2. More robust in the sense that is anchors more heavily on actual operating results vs. confidence/expectations; and
  3. Consistently released 1-2 weeks earlier than the ISM data.


What you’ll quickly note is that global growth continues to slow on both sequential and trending basis. The only exceptions are sequential (i.e. NOT trending) accelerations in India (which is now on the other side of a tightening cycle), Japan (which is crawling from the depths of [but still in] recession) and the U.K.




















Perhaps more shocking to anyone naval gazing at the performance of large-cap U.S. equities is the fact that these trends continue to be appropriately priced across the global macro universe.


Looking to our Tactical Asset Class Rotation Model (TACRM), we see that on a trailing 3M average basis 37% of asset class, country, sector and/or style factor ETF exposures have a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading of < -1x, which implies a clear trend of negative VWAP momentum across multiple durations. That’s roughly the highest reading since July of 2012 and actually the highest reading since November of 2011.


Moving along, at the primary asset class level we see that only DM Equities and Cash – which is comprised simply of U.S. dollars and the VIX – currently have more ETFs exhibiting a clear trend of positive VWAP momentum across multiple durations (i.e. VAMDMI reading > +1x) than those exhibiting a clear trend of negative VWAP momentum across multiple durations.




In fact, DM Equities is currently the only primary only asset class with more positive VAMDMI readings than negative ones, thanks mostly to the strong performance of large-cap U.S. equities and Japan. European equities remain an obvious drag.






Given that both the fundamental data and quantitative signals suggest global capital allocators in search of positive absolute returns can really only buy U.S. dollar-denominated assets and Japanese equities (on a hedged basis), we totally understand why the S&P 500 keeps making higher-highs in the context of our #Quad4 theme.


That’s certainly not to say #Quad4 hasn’t worked! In fact, we’d argue what’s driving the top quartile of performance in the active management space in 2H15 is, in fact, our #Quad4 theme, which calls for an allocation to slow-growth, yield-chasing in lieu of commodity producers and servicers in the domestic equity market and for an allocation to relative safety over high yield/junk in the domestic fixed income market.



Source: Bloomberg L.P. (indexed to our 8/5 presentation titled, “ARE YOU PREPARED FOR QUAD #4?”)



Source: Bloomberg L.P. (indexed to our 8/5 presentation titled, “ARE YOU PREPARED FOR QUAD #4?”)


If all you do is buy the SPY with leverage, then clearly you have little need for our global macro overlay. But to the extent you are actually looking to both outperform and preserve capital, we hope you have found and continue to find our investment ideas helpful.


***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: Party Hard? (12/8)


#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.


Draghi Didn’t Deliver the “Drugs”! (12/4)


#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: “Hedge Fund Hotel” Edition (Part II) (12/8)


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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


Client Talking Points


Big #divergences continue to manifest across Asian Equity markets – KOSPI down another -1.3% overnight to -3.3% year-to-date and it remains bearish TREND @Hedgeye. The bounces in India and the Hang Seng were quite weak; Thailand (straight down in December) down another full 1% #GlobalGrowthSlowing.


The FTSE got hammered yesterday and doesn’t have much of a bounce this morning either – its obviously more Energy weighted than the DAX is, so you have a #divergence here of bearish FTSE/bullish DAX, as the weakest (most illiquid) European Equity markets (Greece and Portugal) continue to crash this morning (-23% and -21% year-to-date, respectively).


Sentiment (U.S. Equities) – the spread in the weekly II Bull/Bear survey is one of the few that backtests as a relevant contrarian indicator, and the Bears finally bounced off all-time lows this week (to a whopping 14.8% from 13.8%, where it bottomed at NOV end); Bull/Bear Spread is -14% less bullish than where it was 2 weeks ago at +3670 bps wide to the Bull side.

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


Reiterating the SELL calls on everything Oil, Energy, Copper, etc #Deflation



Hardships often prepare ordinary people for an extraordinary destiny.

-C.S. Lewis


Amazon is now on the list of companies receiving $5 million in tax credits for creating jobs in New York, Amazon must now create 500 jobs.

Daily Trading Ranges

20 Proprietary Risk Ranges

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