The epic crash in oil continues with crude down over -40% since June.
Takeaway: We are adding YUM to Investing Ideas.
Note: The excerpt below was written earlier this morning by Hedgeye CEO Keith McCullough. Stay tuned for more details from our Restaurants sector head Howard Penney.
In staying with the process, another Macro Exposure we want to be adding to (on down days, oversold signals, etc.) is Big Cap Liquidity (vs. Small Cap Illiquidity, in Russell 2000 #bubble terms, on the short side).
From a bottom-up perspective, one of our Research Team's Best Ideas (Institutional Research longs and shorts) on the LONG side right now is Howard Penney's bullish view of Yum Brands. And, from a top-down factoring perspective, the other thing I like (at a price) are consumer companies whose cost structure will be the recipient of commodity #deflation.
On YUM specifically, Howard thinks there are three ways you can win on the long side:
- The Company is vulnerable to activism
- Opportunity for a transformational transaction (for the better part of the past two years, management has been asked about a potential spinoff of the China business).
- We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation.
Buy red, sell green.
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POSITIONS: 6 LONGS, 2 SHORTS
If nothing else, watching 2014 macro markets (not just SPY!) and all of the storytelling embedded within their weekly moves is a crash course in #behavioral economics.
That said, with both growth and inflation expectations slowing (that’s why our Best Macro Idea remains long the Long Bond), the question remains as to when they attack the SP500’s intermediate-term TREND line (like they did in October).
My answer? Not yet.
The main reason for that answer isn’t some divine survey – it’s my #process. And, across all 3 of its core risk management durations, here are the levels that matter to me most:
- Immediate-term TRADE resistance = 2065
- Immediate-term TRADE support = 2040
- Intermediate-term TREND support = 1998
In other words, as they test and try that 2040 line, I expect volatility to get immediate-term TRADE overbought. If that line holds (on a closing basis) probability rises that SPY bounces. If that line breaks, probability rises that SPY retests 1998 TREND support.
As I outlined in my Early Look this morning, “Bayesian Answers”, that’s my probability-weighing #process and I’m sticking to it. I only know what the market tells me – beyond that I read every #history that I can find, just to remind me what very little I know.
Sell green, buy red.
Tickers: MPEL, H, HLT, LHO, NCLH
- Dec 9: Hedgeye Client Holiday Cocktails Cellar Bar @ Bryant Park Hotel
- Dec 14: City of Dreams Manila Opening
- Dec 17: Upstate NY Casino Decision
- Dec 20: Trump Taj Mahal Closing
Today's Headline Story
China's "Tigers & Flies Crackdown" Continues – President Xi Jinping vows to continue to seek, find and discipline CPC members who are NOT dutiful and well behaved and live a life free of corruption. Xi also vowed to make no exceptions when it comes to Party discipline and law and to give no leniency, no matter who is involved. A majority of these "tigers," a popular term for high-ranking corrupt officials, were senior provincial officials and chief officials of provincial capitals. Discipline inspectors have also tightened their grasp on low-ranking corrupt officials, who have been dubbed "flies."
Takeaway: No end in sight to the corruption crackdown
27.HK Galaxy – The Fook Lam Moon Cantonese restaurant chain will open a high-end Chinese restaurant in the second phase of Galaxy Macau next May. The Hong Kong-based restaurant operator charges diners an average cover charge of at least HK$1,000 (US$129)
Takeaway: Looking more likely that Phase 2 will open before May Labor Day
GENS – Genting Singapore today repurchased 12.2 million shares (38% of today's trading volume) for S$13 million. Cumulative shares repurchased year-to-date = 143,561,000 or 1.2% of the outstanding shares. Following today's share repurchase, the total shares outstanding = 12,104,575,298.
MPEL – Lawrence Ho, CEO of MPEL, said, "The core market of Macau is China and the Chinese economy is not doing that well. I think all of these factors are understandable. But long term, as a company, we’re very confident about the long term. We just need to live through the short term."
Takeaway: We still think the China economy is impacting Macau more than believed in the investment community and Mr. Ho's comments seem to back up that assertion. Slot and grind mass revenue growth has gone negative after all.
LANDING INT – Mainland China real estate developer Landing International Development Ltd said it is in negotiations to acquire a casino licence in a HKSE filing on Monday.
H – announced the sale of the 644-room Hyatt Regency Vancouver to an affiliate of InnVest for approximately $123 million or $190,000 per key. The hotel will continue to operate as a Hyatt Regency hotel. The Hyatt Regency Vancouver was built in 1973 and underwent a major renovation in 2012.
Takeaway: This is a very disappointing sale in terms of price per key for Hyatt for a recognized, upper-upscale property in a great location. Deferred capex the likely culprit.
HLT – Hilton Grand Vacations Trust I LLC, a wholly owned special purpose subsidiary of Hilton Worldwide Holdings amended its $300 million receivables loan agreement with Wells Fargo Bank Deutsche Ban and Bank of America, N.A whereby the company extended the commitment term from May 9, 2015 to December 5, 2016 and reduced the usage fee prior to the end of the commitment term from 1.25% to 1.00%.
Takeaway: A slight improvement in financing terms
LHO – announces 7.6 million share common stock offering and granted the underwriters an option to purchase up to 1,140,000 additional shares with the intended use of net proceeds to fund all or a portion of the cost of future expected hotel acquisitions, including, specifically, the acquisition of each of three hotel properties located in Los Angeles, California, Portland, Oregon and San Francisco, California for an aggregate purchase price of approximately $500 million.
Takeaway: Another REIT with a late December equity issuance to minimize current year dilution - a capital markets strategy that most lodging REITs employ year after year.
NCLH – Up to $1,000 free onboard spending money per cabin leads Norwegian Cruise Line’s wave period sales promotion. The deal covers selected cruises booked by January 7. The offer is available on “hundreds” of cruises from April 2015 to April 2016 on board 13 of Norwegian’s ships covering the Caribbean, Bermuda, Hawaii, the Panama Canal, Alaska, Northern Europe and the Mediterranean.
Takeaway: Wave promotions are in full swing. NCL tries an onboard promotion that RCL is a fan of.
China's "Fox Hunt 2014" Continues – Today, the Communist Party of China's (CPC) Central Commission for Discipline Inspection (CCDI) released a bilingual statement saying that corrupt officials who fled abroad "must be brought to justice" as they ruined the Party's ethics and discipline codes; dishonored the Party and the government; undermined social justice; and caused public discontent. People, at home or abroad, with relevant information are encouraged to pass on intelligence via a form hosted on the official Supervision Ministry/CCDI website. The page, "Anti-corruption fugitive repatriation and asset recovery", explains that it will deal with reports on CPC members and public officials who have fled abroad, transferred the proceeds of corruption offshore as well as offer advice on fugitive repatriation and asset recovery.
Singapore Campaign to Address Problem Gaming– Singapore’s National Council on Problem Gambling hired Addiction Advertising Pte Ltd as the creative agency to launch a new campaign to address problem gambling. The campaign is expected to run in the first quarter of 2015 across multimedia platforms that include broadcast, print and online.
Takeaway: Likely another headwind to Singapore GGR growth
Nassau New York OTB Coming Soon– Nassau Regional Off-Track Betting has begun negotiating a contract to purchase an unidentified property to build a mini-casino with 1,000 video slot machines and table games, according to OTB president Joseph Cairo. Nassau OTB is currently in the process of floating up to $100 million in tax-exempt bonds to buy and develop the proposed site. The state last year granted Nassau and Suffolk counties authority to build one gaming site each with up to 1,000 video lottery terminals. They include slot machines and electronic table games such as roulette, baccarat and blackjack.
Nassau expects the proposed facility to generate $19 million in 2015.
Takeaway: Nassau OTB is a true grind, locals only operation. We expect RWNY to launch new marketing strategies to reinforce its dominant position in greater NYC.
Airbnb NYC Impact – according to research shared exclusively with Hotel News Now, Airbnb accounts for approximately 5.4% of total lodging demand in NYC, 11.1% of available rooms and Airbnb's share of total annual room revenue was 2.9% for the 12 months ended April 2014. Airbnb’s total annual occupied rooms for the 12 months ending April represent 19.7% of the combined economy and midscale segments. Airbnb attracts a large segment of guests staying 30 days or more as well as small groups of five or more guests. Excluding these two market segments, Airbnb’s annual occupied rooms decreases by 23.5% when stays of more than 30 days and parties of five or more are removed from consideration.
Takeaway: AirBnB presents a significant threat to economy and midscale hotel chain segments.
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.
Deflation expectations continue rising, as prices linked to inflation expectations continue crashing. (See: Russia down another -1.9% this morning to -38.5% year-to-date).
Editor's note: This is an excerpt from Hedgeye CEO Keith McCullough's morning research. For more info on how you can subscribe to our services click here.
The domino risk of deflation from Oil to Energy Stocks and Bonds doesn’t stop there – Policies to Inflate have dominated headlines for half a decade.
The Oil crash clocked in at -42% (from June!) then bounced right off that $62.21 oversold level we gave you yesterday. This dynamic and non-linear situation continues with a refreshed risk range of $61.27-68.02/barrel.
Energy stock/bond bulls need to bounce well beyond the top-end of that range to get back to breakeven.
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