As Hedgeye CEO Keith McCullough has said on more than one occasion, "risk happens slowly at first, then all at once." Keep your head up out there.
Editor's note: In case you missed it, Abercrombie and Fitch CEO Mike Jeffries is out effective immediately. Here's the company press release. Hedgeye Retail Sector Head Brian McGough's Quick Take on ANF developments and the 70-year-old CEO's departure follows below.
QUICK Take FROM BRIAN MCGOUGH:
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 come a time to load up on this name. But that day will be when the brands, product, and distribution are re-positioned. That's going to take time.
The EUR/USD is getting a bid on breaking news from the FT on a leaked draft of the communiqué for next week’s EU Summit (DEC 18/19). The draft (reposted below) would suggest that:
- The European Council seeks greater coordination (which is to say agreement) with all member states and policy heads on economic policy, before “new” policy is issued
- The meeting to discuss “agreement” is not planned until the February (12/13) Summit and could be pushed out to as far as June
Whether or not Draghi and the ECB can legally act as a lone wolf in issuing policy is still not completely understood, yet this communiqué signals to us an even higher probability that the ECB does not issue sovereign QE when it next meets in January. This should support the EUR/USD (see our quantitative levels below).
Remember that both ECB President Draghi and his VP Constancio targeted the potential for QE policy in the first quarter of 2015. (Also see our recent note Draghi Didn’t Deliver the “Drugs”!)
We suspect that the Bank will be testing the waters, certainly politically as Germany has raised a giant red flag against such a QE move, while it assesses: 1) the deterioration in economic fundamentals and 2) the inability of its concurrent programs (TLTRO, covered bond and ABS purchases) to support or inflect existing depressed conditions, as it seeks to attain greater economic policy coordination across all relevant parties.
Closer coordination of economic policies is essential to ensure the smooth functioning of the Economic and Monetary Union. Work on the development of concrete mechanisms for stronger economic policy coordination, convergence and solidarity is being taken forward. Heads of State or Government will exchange views on these matters at their formal meeting in February. The President of the Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup and the President of the European Central Bank, will report at the latest to the June 2015 European Council.
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CALL TO ACTION
The recent enforcement of the transit visa should adversely impact Mass revenues. While difficult to forecast with precision, a 5-10% impact seems a reasonable estimation. We’ve seen reports that the impact will be immaterial but we disagree with some basic assumptions in that bullish analysis. Whether strict enforcement is temporary or long lasting – we see merits in the argument for both time frames – the impact is likely to dampen estimates and sentiment further here in December. Thus, we reiterate our negative thesis on Macau stocks.
Please see more details in our note: CLICK HERE
Tickers: GTK.IM, MPEL, MGM, PENN, GENS.SI
- 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.
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.
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.”
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.
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.
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."
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.
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.
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.
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
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.
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.
EVENTS TO WATCH
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.
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.
HERE ARE SIGMAS FOR TODAY'S EARNINGS
COST - 1Q15 Earnings
VRA - 3Q15 Earnings
FRAN - 3Q14 Earnings
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
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