LEISURE LETTER (12/12/2014)



  • Dec 14: City of Dreams Manila Opening
  • Dec 17:  Upstate NY Casino Decision
  • Dec 19:  Hedgeye Cruise Pricing Survey (Wave #1)
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

NCLH – A crewmember from Oceania Cruises' Insignia remains in a hospital in St Lucia after a fire onboard which claimed the lives of three others. Oceania announced it will give all 656 passengers 100% refunds as well as a 50% credit toward a future Oceania Cruise voyage. Insignia was on a 10-night cruise which departed San Juan on December 7 and was scheduled to arrive in Miami on December 17.


Article HERE

Takeaway:  Not much media coverage over this unfortunate incident. Can luxury cruising brush aside another ship incident? We will see any kind of pricing impact in our pricing survey next week.



CZR – Caesars Entertainment Corp. is expected to miss a $224 million interest payment owed to bondholders as the company prepares to file Chapter 11 bankruptcy on its largest operating division next month.  The move is another step as the casino giant seeks to restructure its gaming industry-high $22.8 billion debt. Caesars has been in debt reduction talks with banks and creditors since September. The discussions center primarily around Caesars Entertainment Operation Co., which controls about 80% of the overall debt and is running out of cash to meet those obligations. Sources said a framework to a restructuring agreement has been reached, which includes a prepackaged bankruptcy covering CEOC and moving the casinos controlled by CEOC into a real estate investment trust.


Article HERE


Other CZR developments:

  • The First Lien Bank Lenders believe they had reached an oral agreement with the company. That oral agreement in principle, however, was contingent on, among other things, the company reaching an economic deal with respect to a Restructuring acceptable to the First Lien Bank Lenders with certain beneficial holders of CEOC's 11.25% senior secured notes due 2017, CEOC's 8.5% senior secured notes due 2020 and CEOC's 9% senior secured notes due 2020.
  • The First Lien Bank Lenders understand that, at the time of this press release, the company has not reached an agreement with the First Lien Bondholders on the terms of a Restructuring that are acceptable to the First Lien Bank Lenders, nor has the company negotiated the details of the definitive documentation relating to such Restructuring or resolved all of the substantive issues with the First Lien Bank Lenders.
  • The agreement:
    • Structurally, CEOC would be restructured as a real estate investment trust with an operating company and a property company
    • In addition, a subsidiary of PropCo would own all of the assets of Caesars Palace Las Vegas
    • In connection with the REIT structure, pursuant to two separate leases, one for CPLV and one for all other properties owned by PropCo, OpCo would lease all the properties owned directly or indirectly by PropCo and pay rent to PropCo.
    • The beneficial holders of CEOC's senior secured credit facilities would receive a 100% recovery based on principal outstanding
    • The beneficial holders of CEOC's first lien bond debt would receive a 93.8% recovery based on principal outstanding
    • The beneficial holders of CEOC's second lien and unsecured bond debt would receive an amount of equity directly or indirectly in PropCo or OpCo equal to the value of the unencumbered assets
    • CEC contemplates raising capital from third parties to finance its funding obligations by issuing $150M in convertible debt with a variable strike price of no more than $14 per share
    • Term sheets (including the terms and conditions set forth therein) have not been negotiated with, or agreed to by, the First Lien Bank Lenders.

Takeaway: We remain very skeptical of CZR's sponsored REIT. Such a REIT would be single tenant focused but likely with significantly higher leverage. Expect the negotiation process to be contentious and protracted.


27.HK–  Chairman of Galaxy, Francis Lui, says the Group’s phase II project will be unveiled during the first half of next year as scheduled, that the exact date of the opening of Phase II will be announced in January, Mr. Lui also revealed that the Group is to hire some 7,000 to 8,000 employees for the Phase II operation.


Galaxy will begin construction on its Galaxy Hengqin Island Resort in 2015 with work completed in three phases over seven to eight years. The Hengqin Resort will feature Maldives-style leisure resorts to supplement the high-end, high-density entertainment projects in Macau that the Group is creating.


Article HERE

Takeaway: We await the phase 2 date in January. 


3918.HK – NagaCorp Limited's Board of Director's made a decision “in principle” to utilize NagaCorp’s current share repurchase mandate approved at the company’s last annual general meeting, in April. The board has set no specific limitations on the size, timing or price of repurchases. The filing pointed out there is no assurance the company will make any repurchases at all.

Article HERE

Takeaway: With capital needed to fund the development of the integrated resort casino in Vladivostok, we are skeptical NagaCorp will repurchase any shares.


PENN – Penn National Gaming Inc. is critical of the state legislature, after the Ohio Senate passed an amendment requiring the gaming operator to pay half of the $500,000 owed to Austintown Township and the city of Dayton for three years. The $500,000 annual payments are supposed to be paid by Dec. 31 and are to be used 50-50 for infrastructure and capital improvements and general-fund use. That is the same set up as the two $1 million payments Austintown already received, which went toward resurfacing roads and paying off a communications system debt.

Article HERE


H – announced today that the Company's Board of Directors authorized the repurchase of up to an additional $400 million of the Company's common stock. As of December 11, 2014, the Company had approximately $465 million available under its share repurchase authorization (including the $400 million authorized yesterday).

Takeaway: This is a $206m expansion of the repurchase availability as of 3Q 2014.


PEB – announced that it has acquired Union Station Hotel, Autograph Collection for $52.3 million.  In 2015, PEB forecasts that the hotel will generate earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $4.5 to $5.0M and net operating income after capital reserves (“NOI”) of $3.8 to $4.3M. The property will maintain its association with Marriott’s Autograph Collection and will be operated by Sage Hospitality, who also operates PEB's The Nines in Portland. 

Article HERE

Takeaway: The likelihood of a follow-on equity issuance increased with this announcement.  Pebblebrook held about $119 million in cash on 9/30/14, then raised about $146 million in late October when it issued 3.68 million shares of its common stock. During this quarter, PEB acquired the Palomar Los Angeles and Westin Colonnade Coral Gables for a combined $138 million, the company will spend $52.3 million on the Union Station and is under contract to purchase a full service hotel in Boston for $261 million. PEB has about $300 million of capacity on its corporate revolver. 


Insider Transactions:

RCL – Director Arne Alexander Wilhelmsen sold 50,236 shares of Royal Caribbean Cruises on Thursday, December 11 at an average price of $79.05 and now directly owns 2,470 shares of the company’s stock.



CPC Disciplinary Watchdog In The House – The Communist Party of China's (CPC's) disciplinary watchdog will establish resident offices in four CPC central organs to intensify anti-graft work. It is the first time the CPC Central Commission for Discipline Inspection (CCDI) has sent resident supervisors to the CPC Central Committee's General Office, Organization Department, Publicity Department and United Front Work Department, and the National People's Congress, the National Committee of the Chinese People's Political Consultative Conference, and the General Office of the State Council.

Article HERE

Takeaway: The Tiger hunt intensifies.


Las Vegas Master Planned Home Building Restarts – Developers of Skye Canyon, a 9,000-home community planned at U.S. Highway 95 and Fort Apache Road, announced deals with Woodside Homes and Pulte Homes on 80 acres at the 1,700-acre site. Olympia Chairman and CEO Garry Goett said at a June ground breaking that homes at Skye Canyon would have floor plans unique to the community. He also said prices at the community would range from $200,000 to $600,000.

Article HERE



China November New Loans were CNY852.7 billion vastly exceeding consensus expectations of CNY650 billion and October's CNY548.3 billion. While Chinese Bank deposits increased 9.6% year-over-year compared to 9.5% in October.


China 2015 GDP Growth Target Lowered – China's Central Economic Work Conference concluded and though not formally announced, it is widely believed, the Conference lowered China's 2015 GDP target to 7%, down 0.5% from 2014's target.  In addition, the just-concluded Central Economic Work Conference, for the first time, systematically articulates the meaning of "New Norm" theory. "New norm" is a phrase used by President Xi Jinping several times recently, reflecting the leadership's drive to wean the economy from dependence on infrastructure investment and exports. One of the cores of the theory is to let the economy adapt to a slower growth, as top policymakers have expressed many times that the economy cannot maintain its previous high-speed growth.


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.


Olympia Chairman and CEO Garry Goett said at a June ground breaking that homes at Skye Canyon would have floor plans unique to the community. He also said prices at the community would range from $200,000 to $600,000.

The Hedgeye Daily Outlook

TODAY’S S&P 500 SET-UP – December 12, 2014

As we look at today's setup for the S&P 500, the range is 26 points or 1.29% downside to 2009 and 1.11% upside to 2058.                                                                                                                               



The Hedgeye Daily Outlook - chart1 levels


The Hedgeye Daily Outlook - chart2 sectors




The Hedgeye Daily Outlook - chart3 sentiment




  • YIELD CURVE: 2.43 from 2.42
  • VIX closed at 20.08 1 day percent change of 8.36%


The Hedgeye Daily Outlook - chart4 commodities



The Hedgeye Daily Outlook - chart5 FX



The Hedgeye Daily Outlook - chart6 1 day


The Hedgeye Daily Outlook - chart7 YTD




The Hedgeye Daily Outlook - chart8 europe




The Hedgeye Daily Outlook - chart9 asia




The Hedgeye Daily Outlook - chart10 ME


The Hedgeye Macro Team

CHART OF THE DAY: Headwind: Unemployment's Tail

CHART OF THE DAY: Headwind: Unemployment's Tail - 12.12 2


Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.


In Chart of the Day below, we compare the U.S. unemployment rate with the Eurozone unemployment rate going back to September 2010, which very pointedly highlights that the U.S. has seen a marked employment recovery, while Europe has not.  In effect, the European recovery remains a lot more slack, which will help amplify deflationary pressures.


The other key takeaway from the chart is the unemployment rate for people 25 or younger in the Eurozone.  This rate is over 22% and climbing.   So again like Japan, Europe has a longer term demographic challenge.  In Japan, of course, it is the aging population, but in Europe it is the creation of a lost generation -- a generation that is grossly underemployed and unproductive.

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The Japanese Road

“L’enfer est plein de bonnes volontes et desirs (the road to hell is paved with good intentions).”

-Saint Bernard of Clairvaux


I’ve been in London all week grinding away at client meetings with my colleagues and decided to treat myself to a nice dinner last night so I went to NOBU.  Now of course a small town Canadian lad like me eating at NOBU in London may indeed be the best sign that we are in an asset class bubble, but that aside, as I was eating my raw fish last night, it made me really think about the increasing parallels between the European and Japanese economies.


On our proprietary economic model, the U.S. has some chance of bouncing out of Quad 4 in Q1 2015, even if briefly, but not so much for Europe.   The Europeans will be solidly mired in this decelerating growth and disinflation environment for much of 2015 based on our current projections.   As the real time economic data increasingly reflects this, it will likely give ECB President Draghi the cover he needs to go full on Japanese style monetary intervention.


In the chart directly below, we show the U.S. 10-year yield versus the French and German 10-year yields.   No surprise given the collapse in these yields, the question of what is going on in the European sovereign debt market has been a big point of discussion in our meetings in London this week.  The answer is pretty simple:  the bond market is basically front running decelerating growth and deflation and the stark reality that the ECB is likely to put Europe on the Japanese path to economic perdition.


The Japanese Road - V. Japanese Style Road to Zero


The quote at the beginning of this note effectively sums up the mindset of many global central bankers.  They believe they have the best of intentions, but don’t truly understand the path they are setting economies on.  


There are actually a number of psychological studies that validate this old maxim.  In fact Professor Theodore Powers from the University of Massachusetts concluded the following in a study entitled “Implementation Intentions, Perfectionism and Goal Progress: Perhaps the Road to Hell is Paved with Good Intentions”:


“The results of both studies revealed a significant backfire effect of the implementation intentions on goal progress for participants high on a particular dimension of perfectionism.”


So yes indeed, it seems the road to failure, if not hell, is paved with good intentions.


Back to the Global Macro Grind...


Staying on Europe for a second, one of the most glaring structural challenges we see at the moment is employment.  In Chart of the Day below, we compare the U.S. unemployment rate with the Eurozone unemployment rate going back to September 2010, which very pointedly highlights that the U.S. has seen a marked employment recovery, while Europe has not.  In effect, the European recovery remains a lot more slack, which will help amplify deflationary pressures.


The other key takeaway from the chart is the unemployment rate for people 25 or younger in the Eurozone.  This rate is over 22% and climbing.   So again like Japan, Europe has a longer term demographic challenge.  In Japan, of course, it is the aging population, but in Europe it is the creation of a lost generation -- a generation that is grossly underemployed and unproductive.


In aggregate, there are 5.5 million people 25 and younger that are unemployed in Europe.  To put that in context, it is roughly the population of Denmark.  The numbers in some of the southern European countries are even more staggering.  In Spain and Greece this cohort is 50% unemployed; in Italy it is 41% and in Portugal 36%.


Most social psychologists agree that the longer term issue with an inability to find a job when first entering the work force is a “scarring” effect.  This lack of confidence or belief in oneself can, and does, lead to long term unemployment and under earning that can last decades.   Because of this, the future in many parts of Europe does look extremely bleak.


Luckily for southern Europeans, their futures still aren't as bleak as Russia’s at $60 oil.  For those that haven’t been watching, the Russian stock market is down-23% in the last month and now down -44% for the year-to-date.    While perhaps there is now some value to be found in Russian stocks, the reality is that Russian economy is at risk of a major recession if oil stays at current prices.


Based on our math, the Russian economy shrinks by more than 1.25% for every $10 drop in the price of oil.  So in aggregate, if oil stays at current levels the Russian economy can be expected to shrink 6 – 7% next year.  When combined with a current inflation rate of +10%, you can easily see why one might be better off being young and unemployed in Spain!


Staying on the topic of oil, and to the benefit of the Russians, our commodities analyst Ben Ryan actually made the case for a bounce in oil in the short term.  As he wrote:


“While we have been in front of the downside risk in oil in Q4, the expectation for lower prices (from here) is certainly becoming a psychological and consensus expectation, which we will fade when the time comes. The expectation for future volatility is blown-out. The commitments of traders report from the CFTC shows that the sum of aggregate positions in futures and options markets is between 1-2 standard deviations shorter than it has been over the last year. As a contra-indicator should work, the longest market positioning of 2014 was at the June highs in WTI.


We have a simple back-test model that tracks 60-day price performance in oil markets once contract positioning becomes +/- 1 standard deviation extended over different trailing durations. The result is that market positioning that chases price is a very obvious indicator to fade.”


With headlines now claiming OPEC is dead and traders leaning bearishly, there likely is reversion to the mean trade in oil waiting somewhere in the shadows.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.12-2.24%

RUT 1151-1172

VIX 14.56-22.71

YEN 116.88-121.55

Oil (WTI) 58.41-64.72

Gold 1185-1236 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Japanese Road - 12.12 2

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Macro Tryptophan

This note was originally published at 8am on November 28, 2014 for Hedgeye subscribers.

“I wish you [turkey] didn’t have to die, but a bunch of white people put on sweaters.”

- Peter Griffin, Family Guy


Tryptophan – the amino acid in turkey responsible for the Thanksgiving post-gluttony coma - has to cross over the blood brain barrier in order to elicit its stuporous effects. And it can only do that in the presence of sufficient amounts of insulin/carbohydrates.


Without digressing into the underlying (paradoxical) physiological mechanics, the relevant peri-Thanksgiving takeaway is that if you only eat turkey & no carbs alongside it, you won’t get tired.


You can weigh the psycho-social cost-benefit of that biochemical reality for yourself as you ferret through the leftover’s fridge.


Back to the Global Macro Grind….


To attempt to crosswalk that holiday anecdote over the relevancy barrier to the investment space, the tryptophan paradox could be viewed similarly to the de-couplers fallacy.


Sure, you could go to Thanksgiving dinner and just eat some turkey and nothing else, but I’d probably only make that bet…with someone else’s stomach.


The U.S. could ramp into full, escape velocity de-coupling mode while the balance of the global economy harmoniously converges to a state of disinflation and decelerating growth but, right here, we’d probably only get long that improbability via high-beta, early cycle exposure…with someone else’s money.


The first chart of the day below is our global macro summary table which consolidates global estimate trends for growth and inflation.


I know you can’t really see the table detail but that’s not really necessary here - one need only observe the ubiquitous red, which represents negative growth and inflation estimate revisions, to see the global transition to Quad 4 manifesting in real-time.


Oil’s expedited descent to sub-$70 and the massive underperformance in the XLE are acute examples of the stuporous deflationary realities of Quad #4 as the duo of disinflation and decelerating growth remains the scourge of energy assets and inflationary leverage.


Macro Tryptophan  - EL chart1


Given the pervasive, negative revision trends and the re-crescendo of the currency wars and central bank interventionism, both the market and policy makers are discretely acknowledging the deceleration in growth.


Extending the logic chain, an investor overweight and long of high growth (global) equities would then seem to fall into two broad categories:


Wrong: in terms of a fundamental forecast (why would one be levered long into slowing growth?)

Having & Eating Cake: Long under the premise that if growth accelerates you’ll be along for the ride and if it slows equities will (again) get juiced by a global “central bank put”


Given the frequency and magnitude of policy intervention over the last 5+ years and the near-Pavlovian, positive response in market prices, copping to strategy number 2 is somewhat defensible as it amounts to “playing the game that’s in front of you” and not the one you think you should be playing.


The binary nature and exogenous dependency (i.e. the fulcrum thesis driver being completely external to economic or company fundamentals) of that strategy, however, kind of divorces it from true “investing” in an organic sense. It’s also akin to Nassim Taleb’s Turkey problem.


To review Taleb’s popular probability parable:


“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race…On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”


It doesn’t take a lot of imagination to extend that metaphor to the equity market farm and envisage who’s the turkey and who’s the farmer.


Anyhow, getting back to the domestic decoupling…..


Inclusive of the crush of pre-holiday data on Wednesday, decelerating growth appears to be the emergent main course for 4Q.


Initial Claims deteriorated for a 3rd week. Peak improvement in claims has been a consistently solid lead indicator of the economic cycle. Are we pushing past peak?

Durable and Capital Goods spending softened (again). We expect the ISM/mfg data to soften alongside declining export demand, shifting seasonals, and middling domestic capex

Household Spending and Income saw tens of billions of dollars of income and savings revised away.


To delve into the last point a bit deeper.


Estimates for personal income were revised for the April-to-September period and the adjustments were remarkable as total disposable personal income saw some $200+ billion (SAAR) shaved away vs. prior estimates.


Alongside a meaningful downward revision to the savings rate in recent months, a net effect of the revision was a complete shift in the trajectory of salary and wage growth.


Whereas, prior to revision, the slope of aggregate wage growth in 2Q/3Q was one of acceleration, after the revision, it shifts to one of flat-to-modest deceleration.


Specifically, private sector salaries and wages were initially reported to be growing +6.1%, +6.0%, +5.9% over the July-to-September period. With the revision, those growth rates were marked down to +5.0%, +4.9%, +4.9%, respectively.


So, prior to revision, wage income was accelerating to a new cycle high alongside higher highs in savings. Thus, the capacity for incremental consumption growth continued to improve even if increased savings was muting the translation to actual spending growth.


The step function revision lower in both wage growth and the savings rate constrain the upside for consumption growth relative to that prior to the revision.


As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.


As we distilled it in our institutional note on Friday:


If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).


Macro forecasting can be complex and confounding but, every once in a while, it’s worth re-remembering that the strength and prospects for an economy boil down to some simple and very common sense realities.


To close the holiday Friday with some meditative macro invocation,


Grant me the serenity to accept a global entre into Quad #4.

The insight to understand the lagged benefit of lower energy prices.

And the wisdom to know (& time) the difference.


Christian B. Drake

U.S. Macro Analyst


Macro Tryptophan  - EL Chart2

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