LEISURE LETTER (12/15/2014)

Tickers:  MGM, PENN, WYNN, RCL


  • Dec 17:  Upstate NY Casino Decision
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

Chinese President Xi dates confirmed – Chinese President Xi Jinping is scheduled to attend a gathering in the Macao Special Administrative Region (SAR) on Dec. 19-20 for the 15th anniversary of Macao's return to the motherland, authorities said on Sunday.  Experts believe Xi's tour is expected to enhance cooperation between Macao and the mainland and guarantee that the great cause of "one country, two systems" can be passed on by generations to come.

Article HERE

Takeaway: We expect awful GGR numbers this coming week as high profile gamblers would not want to be seen in Macau during Xi's visit. 


MGM – There are major rumblings that The Light Group (TLG) reportedly has been booted from MGM Resorts properties in Las Vegas. While TLG still oversees, for the time being, Light nightclub and Daylight dayclub at Mandalay Bay, gone are its operating roles at 1 OAK in the Mirage, the Bank in Bellagio, Deuce Lounge, Gold Lounge and the new Alibi Lounge in Aria and more. A high-ranking MGM Resorts executive has ordered the move after recent sexual-harassment allegations and has decreed that the Hakkasan Group take over management.

Article HERE

Takeaway: We understand Hakkasan will now manage 20 Light Group venues in a transition that began more than two weeks ago.


PENN – The former Argosy Sioux City's operator has asked the Iowa Supreme Court to overturn a lower court ruling that upheld a series of state regulatory decisions that led to the gambling boat being replaced by the Hard Rock Hotel & Casino Sioux City. The Argosy operator, Belle of Sioux City, a subsidiary of Penn National Gaming Co., filed its notice of appeal with the Supreme Court on Friday. The notice sets in motion a lengthy appeal process that legal experts say could take more than a year to resolve.

Article HERE

Takeaway: When will shareholders begin to take notice PENN is spending shareholder capital on appeal after appeal after appeal, in hope of a sympathetic ear?


WYNN – Somerville filed a lawsuit last week against the state Gaming Commission, asking a state court judge to void the Wynn license. The city argues regulators should have disqualified the company or at least required it to abandon its proposed site after it became public that a convicted felon had a financial interest in the land deal, a violation of state law. Meanwhile, the gambling commission's staff last week disclosed it is conducting an inquiry after the Wall Street Journal reported that the IRS's Criminal Investigation Division requested information on Wynn's clients, domestic and overseas marketing offices and internal controls. The newspaper said federal authorities are probing whether the Las Vegas-based gambling giant violated money laundering laws.

Article HERE


RCL – announced it had refinanced its deal in place for Brilliance of the Seas by terminating the lease and buying the ship outright for $275 million. Royal Caribbean leased the ship when it was built back in July 2002 under a 25-year operating lease.  The move today eliminates that lease obligation by purchasing the ship. Royal Caribbean funded the purchase through drawings under their revolving credit facilities.  Royal Caribbean also indicated they will not recognize any gain or loss in connection with this refinancing deal.

Article HERE


RCL – Royal Caribbean is informing passengers set to embark on this week's Freedom of the Seas cruise that the ship, "is currently experiencing a small restriction on her top speed." As a result of the speed reduction, the ship will have to change the Eastern Caribbean itinerary.  The ship will skip a port call at the company's private island of CocoCay and reduce the time the ship will spend in St. Maarten. There is no word on what caused the propulsion problems.  Freedom of the Seas is scheduled for a dry dock session in January 2015. Royal Caribbean is also giving all passengers an undisclosed amount of onboard credit.  A letter with the credit amount will be delivered to each stateroom.

Article HERE


Neptune's Cheung More Details – As Beijing's crackdown on corruption continues, top figures in Macau's casino junket sector are coming under scrutiny ahead of a visit to the city later this week by President Xi Jinping. After a week in which the starkest warnings yet were delivered by senior mainland figures that Macau must move away from its over-reliance on gaming revenues, it has emerged that Hong Kong police have frozen the assets of key casino junket operator Cheung Chi-tai.  Cheung - who was alleged to be a triad member during the money-laundering trial of Carson Yeung Ka-sing, the former owner of soccer club Birmingham City - is wanted for questioning by detectives in Hong Kong investigating offences under the Organised and Serious Crimes Ordinance. Cheung's name has also appeared in court documents in Las Vegas in an ongoing illegal bookmaking case there with strong links to Macau and Hong Kong. A photocopy of Cheung's passport was found by the FBI during a raid in July on three luxury Caesars Palace villas, believed by federal authorities to be the headquarters for an illegal multibillion-dollar World Cup betting scheme. The passport copy was labelled under the file name "HK Boss".

Article HERE


Macau Protests To Increase – The New Macau Association (ANM) is seeking to organize a demonstration next Saturday advocating for universal suffrage. The city is commemorating the 15th anniversary of its handover to China on Saturday, and Chinese president Xi Jinping is scheduled to visit. The association has already filed a request with the Public Security Police to organize the protest, but has not yet received a reply. The New Macau Association has been advocating for the implementation of universal suffrage in the next Chief Executive elections in 2019.

Article HERE

Takeaway: Unlike the protests in Hong Kong, we expect any public protests in Macau to be very small and quietly kept out of the news and away from President Xi.


Macau Smoking Violations – From January through the end of November, In 2014, the majority of people smoking in prohibited areas were males (6,730) accounting for 92.9% of the 7,247 infractions, while females accounted for 7.1% of the infractions (517 cases). Macau residents accounted for 61.1%, while tourists accounted for 35.4% and non-residents accounted for 3.5%.
The majority of breaches of the tobacco control law occurred in cyber cafés with a total of 1,300 cases (17.9%), video game parlors 1,282 (17.6%), followed by parks/public gardens and other leisure places 847 occurrences (11.6%).
 In relation to the smoking ban inside casinos, it is worth noting that in October the law was tightened, as it is now prohibited to smoke on mass market gaming floors.
 From January 1, 2015 the more restrictive tobacco control law will be applied to bars, dance halls and sauna parlors, where smoking will be completely prohibited. Breaching this law will result in a MOP400 fine.

Article HERE


Cypress Casino Gaming – Last Wednesday, the Cypriot government approved casino legislation to regulate the establishment, operation, supervision and control of casinos for the first time in Cyprus. Thirteen potential investors have shown keen interest according to sources familiar with the project, including Las Vegas heavyweight Caesars and international resort operator Kerzner.
Other potential investors showing interest come from Greece, the Czech Republic, Atlantic City and Macau.

Article HERE


Saipan Integrated Resort Viability Questioned – Gaming industry analysts have raised doubts about the proposed $7.1 billion investment by Imperial Pacific in Saipan’s first large-scale integrated resort. The company was granted a 25-year license to build and operate a casino on the Northern Marianas island in August, with an option to extend for a further 15 years. The following month it more than doubled its budget to $7.1 billion, with plans for 4,200 hotel rooms and 1,600 gaming tables.

Article HERE

Takeaway: Since Day 1, we have been outspoken critics of Saipan as visitation and airlift does not support the hotel room count. 


Revel Tribulations – A bankruptcy court judge on Friday voided the proposed sale of the former Revel Casino Hotel in Atlantic City to a Canadian firm. Judge Gloria Burns granted a request by Revel Entertainment to cancel the $110 million. The judge scheduled a hearing for Jan. 5 to consider Revel’s request to award the sale of the casino to Straub.
Article HERE

Takeaway: Glenn Straub gets his opportunity to buy Revel.


Connecticut Casinos Redux – In an attempt to fend off new competition from the currently under development properties in Everett, Springfield, and Plainville, Foxwoods is re-inventing itself.  For the reinvention of Foxwoods, CEO Rappaport looks to modern-day Las Vegas, where successful resorts now make more money on nongambling amenities, including rooms, restaurants, and nightclubs, than they do on profits from slots and table games. Foxwoods still makes about 80% of its money on the games but he wants to grow nongambling revenue and make the resort “stickier” by adding attractions to encourage guests to come more often and stay longer. The average stay at Foxwoods is 1.4 days, he said, less than half the four-day average in Las Vegas.

Article HERE

Takeaway: Unlike Las Vegas, gamblers across the Northeast do not need to spend the night due to their close drive-in proximity.


FBI Investigates Russia Nationals On Slot Machine Fraud – Four Russian nationals have been indicted on charges of conspiring to travel to the United States to cheat on a certain type of slot machine in casinos there. The defendants are accused of conspiring to cheat at casinos in Missouri, California and Illinois using an electronic device that communicates with a foreign server, allowing them to predict the behavior of the Aristocrat Mark VI slot machine game.

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.


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


  • The WHEAT, SOYBEANS, AND SILVER markets experienced the most BULLISH relative positioning changes week-over-week
  • The SUGAR, COTTON, AND COFFEE markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 cftc


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The SUGAR, CORN, AND LEAN HOGS markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, COCOA, AND ORANGE JUICE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - SPOT 2ND MONT VF


3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The SUGAR, BRENT CRUDE OIL, AND COTTON markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, AND COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1yr basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 open interest         


Ben Ryan



Takeaway: Macau posted the worst comp in almost 2 years.


The latest numbers from Macau continue to reach new weekly lows in 2014. While this was expected given the forthcoming visit by the Chinese President this Friday/Saturday, estimates will continue to be revised lower until the bleeding stops. 


We remain below the Street for Q4 and 2015 for all the operators. The good news is that the Street is finally cutting estimates but the bad news is that the Street is still not low enough. 


Please see more details in our note: CLICK HERE

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Takeaway: The Athletic Black Book-call details and time change. Hedgeye Retail Idea List (LULU, ZQK, RL, WSM, WMT). PETM pods justify multiple.

The Athletic Black Book (***Please note date and time change)


On Thursday, December 18 at 1:00pm EST, Hedgeye's Retail Team will be hosting a call to review our next Black Book, which will be focused on the Athletic footwear and apparel space.  


Specific names include Nike (NKE), Adidas (ADDYY), UnderArmour (UA), Foot Locker (FL), Hibbett (HIBB), Dick's Sporting Goods (DKS), and Finish Line (FINL) - which collectively offer up a good mix of longs and shorts.

Retail Callouts (12/15): ATHLETIC BLACK BOOK, IDEA LIST, PETM, LULU, ZQK, RL, WSM, WMT - 12 15 chart2


Call Details

Toll Free Number:

Toll Number:

Password: 13597073

Materials: CLICK HERE




Retail Callouts (12/15): ATHLETIC BLACK BOOK, IDEA LIST, PETM, LULU, ZQK, RL, WSM, WMT - 12 15 chart1B


We made the following changes to our idea list this week.

  • LULU: Still on our Best Idea list, but the stock is up 35%, and the reality is that the management team has really done little to deserve it. We're taking it down a couple of notches on our list below RL and NKE for now. We should be seeing better growth in the business as LULU laps its product and PR gaffes from last year. We still think that there will be big changes at the company, which will likely come after the new CFO starts (within 3 months). We rarely put so much stock in one individual, but for several reasons, we think it makes sense with LULU. See our note LULU - Long, But On A Short Leash from last week for more details.
  • ZQK off of our Long Bench.  We've been holding out hope that what once appeared to be a rock star management team would start to deliver, and that a $2 stock would prove to be a great call option. But the reality is that this team can't get it together. Not worth our time.
  • RL: moved it two notches higher on our idea list. No change in the model, but the risk/reward relative to other names on the long sheet is looking better.
  • WSM: moved two notches higher on our Short Bench, as we're getting that much closer to the point where RH will begin to compete with WSM in kitchens. Perhaps not a negative earnings event for WSM immediately, but it won't help the multiple.
  • WMT: Off our Short Bench. No reason other than the fact that it has been on our bench for most of 2H14. We don't see a company-specific reason to press this one, and with oil in a free fall, it only helps WMT.




Retail Callouts (12/15): ATHLETIC BLACK BOOK, IDEA LIST, PETM, LULU, ZQK, RL, WSM, WMT - 12 13 chart3





PETM - Consortium led by BC Partners to Acquire PetSmart for $83.00 per Share in Cash



Takeaway: Nothing unexpected here given all the activism over the past year, and the fact that the stock spiked to the high-$70s in mid-November. What's interesting is that the take-out is about 9x EBITDA, which at face value looks cheap compared to other bids like what we've seen at FDO -- a lesser quality company but with bids as high as 12x EBITDA.   That said, PETM is one of the select few retailers that never put up a negative annual comp. But it's on track to break that trend this year -- with negative comps in 2 of the three quarters-to-date. At the same time peak productivity is rolling over, the company is sitting at peak Gross Margins, trough SG&A margins, and obviously peak EBIT mgns. With that context, the 9x EBITDA multiple seems a lot more fair.




H&M - November Sales +10% vs Consensus  +7%


AMZN, AAPL - Apple Heads to Court Monday in E-Book Appeal



DG, FDO, DLTR - Delayed merger vote is all about the almighty ‘Dollar’



AMZN - Expands Delivery Options; Introduces Amazon Pickup Points for Customers Across Canada



Jim Wiggett Named Chief Executive Officer of bebe stores, inc.



Labor Board Rules to Speed Union Elections


Hedgeye Morning Macro Call with CEO Keith McCullough: This is Why We're Not Going To Be In Barron's

On this morning’s institutional Macro Call, Keith urged you to steer clear of the Russell 2000, the Barron’s Forecasters, and  Johnny Manziel.


***This is a complimentary peek behind-the-macro-scenes of our daily Morning Macro Call for institutional subscribers.***


European Banking Monitor: Financials and Sovereigns Widen

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaway:


Continuing to highlight Russia, the country's Sberbank CDS continue to drastically widen (+64 bps WoW, +204 bps MoM).  The ruble continued to fall alongside the drop in oil prices last week, even with Russia's central bank decision to lift its key interest rate.


Greece re-entered the risk spotlight with banks CDS widening by more than +200 bps; the country's snap presidential election rekindled investor worries about the country's recovery.


European Financial CDS - Swaps mostly widened in Europe last week.  The average move was a drastic +14.8%.  The only two institutions whose CDS tightened were Portugal's Banco Espirito Santo and the UK's HBOS.  HBOS' swaps tightened by only -1 bps.  Banco Espiroto Santo's swaps continued to tighten after the December 4 news that the bank was nearing a sale of some of its parts.


Greek bank swaps blew out last week, with CDS widening +216 bps on average, on the announcement of a snap presidential election.  The announcement sparked fresh investor fears over how long-lasting and/or effective Greek fiscal reform will be.


European Banking Monitor: Financials and Sovereigns Widen  - chart1 financial CDS


Sovereign CDS – Sovereign swaps widened across the board last week. Spanish sovereign swaps widened by 26.8% (22 bps to 105), while Portuguese swaps widened by 37 bps.  The global theme last week was derisking as the Global Dow fell -4.43% and CDS nearly universally widened. 


European Banking Monitor: Financials and Sovereigns Widen  - chart2 sovereign CDS


European Banking Monitor: Financials and Sovereigns Widen  - chart3 sovereign CDS


European Banking Monitor: Financials and Sovereigns Widen  - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 9 bps.


European Banking Monitor: Financials and Sovereigns Widen  - chart5 euribor OIS spread


Matthew Hedrick 



Ben Ryan






Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.